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. The Company writes non-standard personal automobile insurance in 12 states and is licensed as an insurer in 13 additional states. The Company issues 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).
Change in Fiscal Year
On November 15, 2011, the Companys Board of Directors approved a change in the Companys fiscal year end from June 30
to December 31, effective December 31, 2011. Unless otherwise noted, all references to years or fiscal refer to the twelve-month fiscal year, which prior to July 1, 2011 ended on June 30. As a result of
this change, the consolidated financial statements include the Companys financial results for the six month transition period of July 1, 2011 to December 31, 2011.
The following table presents certain comparative transition period financial information (in thousands, except per
share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended
December 31,
|
|
|
Six Months
Ended
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
(unaudited)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
185,644
|
|
|
$
|
167,224
|
|
|
$
|
80,637
|
|
|
$
|
86,454
|
|
Commission and fee income
|
|
|
32,574
|
|
|
|
29,911
|
|
|
|
14,769
|
|
|
|
14,341
|
|
Investment income
|
|
|
6,599
|
|
|
|
8,064
|
|
|
|
3,930
|
|
|
|
4,261
|
|
Net realized gains (losses) on investments, available-for-sale
|
|
|
3,242
|
|
|
|
(161
|
)
|
|
|
(232
|
)
|
|
|
(256
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
228,059
|
|
|
|
205,038
|
|
|
|
99,104
|
|
|
|
104,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
148,223
|
|
|
|
129,525
|
|
|
|
65,753
|
|
|
|
65,395
|
|
Insurance operating expenses
|
|
|
82,127
|
|
|
|
79,075
|
|
|
|
38,154
|
|
|
|
36,896
|
|
Other operating expenses
|
|
|
922
|
|
|
|
1,181
|
|
|
|
494
|
|
|
|
678
|
|
Stock-based compensation
|
|
|
604
|
|
|
|
804
|
|
|
|
171
|
|
|
|
365
|
|
Depreciation and amortization
|
|
|
2,203
|
|
|
|
1,415
|
|
|
|
751
|
|
|
|
941
|
|
Interest expense
|
|
|
3,025
|
|
|
|
3,928
|
|
|
|
1,980
|
|
|
|
1,982
|
|
Goodwill impairment
|
|
|
|
|
|
|
73,524
|
|
|
|
21,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
237,104
|
|
|
|
289,452
|
|
|
|
128,393
|
|
|
|
106,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(9,045
|
)
|
|
|
(84,414
|
)
|
|
|
(29,289
|
)
|
|
|
(1,457
|
)
|
Provision (benefit) for income taxes
|
|
|
(5
|
)
|
|
|
105
|
|
|
|
148
|
|
|
|
241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(9,040
|
)
|
|
$
|
(84,519
|
)
|
|
$
|
(29,437
|
)
|
|
$
|
(1,698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.22
|
)
|
|
$
|
(1.76
|
)
|
|
$
|
(0.62
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Basis of Consolidation and Reporting
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries which are all wholly owned.
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. Certain reclassifications have been made to the prior
years consolidated financial statements to conform with the current year presentation.
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
the investment in the mutual fund are carried at fair value with the corresponding unrealized appreciation or depreciation, net of deferred income taxes, reported in other comprehensive 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.
In accordance with the provisions of
Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 320-10,
Investments Debt and Equity Securities
(FASB ASC 320-10). 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 must separate other-than-temporary impairments (OTTI) into
the following two components: (i) the amount related to credit losses (charged against income) and (ii) the amount related to all other factors (recorded in other comprehensive income). The credit-related portion of an OTTI is measured by
comparing a securitys 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 sell 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. As a result of the adoption of this pronouncement, the cumulative effect resulted in an
adjustment in fiscal year 2009 of $0.6 million to reclassify the non-credit component of previously recognized impairments from accumulated deficit to accumulated other comprehensive loss.
Realized gains and losses on sales and redemptions of securities are computed based on specific identification.
48
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Cash and Cash Equivalents
Cash and cash equivalents consist of bank demand deposits and highly-liquid investments. All investments with maturities of three months
or less at the date of purchase are considered cash equivalents.
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 Companys 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 and
commissions and fees from ancillary products recognized on a pro-rata basis over the respective terms of the contracts.
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 tax asset is established based upon managements 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
managements estimate occur.
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 unrecognized tax benefits at December 31, 2012 and 2011. 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 2008.
Advertising Costs
Advertising costs are expensed when incurred. Advertising expense for the year ended December 31, 2012, the six months ended
December 31, 2011 and the years ended June 30, 2011 and 2010 was $5.0 million, $2.4 million, $6.9 million and $8.3 million, respectively, and are included within insurance operating expenses in the accompanying consolidated statements of
operations and comprehensive income (loss). At December 31, 2011, prepaid advertising costs, which are included within other assets in the accompanying consolidated balance sheets, was $0.3 million. There were no prepaid advertising costs at
December 31, 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 seven 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.
49
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 $0.8 million at December 31, 2012 and 2011 are included within other assets in the accompanying consolidated balance sheets.
Deferred Acquisition Costs
Deferred acquisition costs include premium taxes and other variable underwriting and direct sales costs incurred in connection with
writing 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.
Amortization expense for the year ended December 31, 2012, the six months ended December 31, 2011 and the years ended June 30, 2011 and 2010 was $11.4 million, $5.5 million, $12.8 million and $13.8 million, respectively, and are
included within insurance operating expenses in the accompanying consolidated statements of operations and comprehensive income (loss).
Goodwill and Other Identifiable Intangible Assets
Goodwill and other identifiable intangible assets are attributable to the Companys insurance operations and
were initially recorded at their estimated fair values at the date of acquisition. Goodwill and other intangible assets, primarily comprised of trade names, having an indefinite useful life are not amortized for financial statement purposes. The
Company performs required annual impairment tests of its goodwill and intangible assets as of June 30
th
of each fiscal year. In the event that facts and circumstances indicate that the goodwill and other identifiable intangible assets may be impaired, an interim impairment test would be required.
Intangible assets with finite lives have been fully amortized over their useful lives.
The goodwill impairment test is a
two-step process that requires management to make judgments in determining what assumptions to use in the calculation. The first step of the process consists of estimating the fair value of each reporting unit based on valuation techniques,
including a discounted cash flow model using revenue and profit forecasts and recent industry transaction and trading multiples of the Companys peers, and comparing those estimated fair values with the carrying values of the assets and
liabilities of the reporting unit, which includes the allocated goodwill. If the estimated fair value is less than the carrying value, a second step is performed to compute the amount of the impairment, if any, by determining an implied fair
value of goodwill. The determination of the implied fair value of goodwill of a reporting unit requires the Company to allocate the estimated fair value of the reporting unit to the assets and liabilities of the reporting unit. Any
unallocated fair value represents the implied fair value of goodwill, which is compared to its corresponding carrying value.
The Company recorded non-cash, pre-tax goodwill impairment charges in fiscal years 2009 and 2011 and the six months ended December 31, 2011 of $68.0 million, $50.9 million and $21.1 million,
respectively. These charges were primarily as a result of the adverse impact of the difficult economic conditions on the Companys customers and business and the resulting decline in the Companys share price during the fourth quarter of
fiscal year 2009, unfavorable industry transaction multiples and trading trends during fiscal 2011 and the adverse impact of operating losses, the decline in the Companys common stock trading prices, and the negotiated price of separate stock
transactions with former executive officers that represented a significant percentage of the Companys shares outstanding during the second quarter of the six months ended December 31, 2011. These goodwill impairment charges resulted in no
remaining goodwill on the Companys consolidated balance sheet at December 31, 2011 and did not have a materially adverse impact on the continuing operations, liquidity, or statutory surplus of the Company.
Indefinite-lived intangible assets primarily consist of acquired trademarks and trade names. In measuring the fair value for these
intangible assets, the Company utilizes the relief-from-royalty method. This method assumes that trademarks and trade names have value to the extent that their owner is relieved of the obligation to pay royalties for the benefits received from them.
This method requires the Company to estimate the future revenue for
50
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
the related brands, the appropriate royalty rate and the weighted average cost of capital. As a result of decisions made by management during the fourth quarter of fiscal year 2011 regarding
entity-wide branding initiatives, the Company recognized a non-cash, pre-tax impairment charge of $1.6 million related to trade name intangible assets. This non-cash impairment charge did not have a materially adverse impact on the continuing
operations, liquidity, or statutory surplus of the Company.
The Companys evaluation includes multiple assumptions that
may change over time. If future discounted cash flows become less than those projected by the Company, further identifiable intangible assets impairment charges may become necessary that could have a materially adverse impact on the Companys
results of operations in the period in which the write-off occurs.
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.
Recent Accounting Pronouncements
In October 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-26,
Accounting for Costs Associated with
Acquiring or Renewing Insurance Contracts (a consensus of the FASB Emerging Issues Task Force) (Topic 944)
, which clarifies what costs should be deferred by insurance companies when issuing or renewing insurance contracts. This guidance is
effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2011. The Company adopted this standard on a prospective basis on January 1, 2012 and, in connection therewith, recognized
additional expense of $0.4 million over the first six months of 2012, consistent with the Companys insurance policy terms and estimated deferred acquisition costs amortization period.
In May 2011, the FASB issued ASU No. 2011-04,
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in
U.S. GAAP and IFRSs
, which amends certain measurement and disclosure requirements related to fair value measurements to improve consistency with international reporting standards. The Company adopted the provisions of this guidance in the
quarter ended March 31, 2012. The adoption of this guidance did not have an impact on the Companys financial position or results of operations.
In June 2011, the FASB issued ASU No. 2011-05,
Presentation of Comprehensive Income
, which requires a company to present components of net income and other comprehensive income in one
continuous statement or in two separate, but consecutive statements. There are no changes to the components that are recognized in net income or other comprehensive income under current GAAP. The Company adopted the provisions of this guidance in
the quarter ended March 31, 2012. The adoption of this guidance did not have an impact on the Companys financial position or results of operations, other than the presentation thereof.
In September 2011, the FASB issued ASU 2011-08,
Intangibles Goodwill and Other (Topic 350)
, which allows
companies to waive comparing the fair value of a reporting unit to its carrying amount in assessing the recoverability of goodwill if, based on qualitative factors, it is more likely than not that the fair value of a reporting unit is greater than
its carrying amount. The Company adopted the provisions of this guidance in the quarter ended March 31, 2012. The adoption of this guidance did not have an impact on the Companys financial position or results of operations.
In July 2012, the FASB issued ASU 2012-02,
Intangibles Goodwill and Other (Topic 350)
, which allows
companies to waive comparing the fair value of indefinite-lived 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
indefinite-lived intangible assets is greater than their carrying amounts. The Company early adopted the provisions of this guidance in the quarter ended June 30, 2012. The adoption of this guidance did not have an impact on the
Companys financial position or results of operations.
51
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Supplemental Cash Flow Information
During the year ended December 31, 2012, the six months ended December 31, 2011 and the years ended June 30, 2011 and 2010,
the Company paid $0.2 million, $0.1 million, $0.3 million and $0.7 million, respectively, in income taxes and $3.0 million, $2.0 million, $3.9 million and $3.9 million, respectively, in interest.
Basic and Diluted Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average
number of common shares, while diluted net income (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of such common shares and dilutive share equivalents. Dilutive share
equivalents result from the assumed exercise of employee stock options and vesting of restricted common stock and are calculated using the treasury stock method.
2. Fair Value
Fair value is the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. Fair value measurements are generally based upon observable and unobservable inputs. Observable inputs are based on market data from independent sources, while unobservable inputs
reflect the Companys view of market assumptions in the absence of observable market information. All assets and liabilities that are carried at fair value are classified and disclosed in one of the following categories:
|
Level 1
|
Quoted prices in active markets for identical assets or liabilities.
|
|
Level 2
|
Quoted market prices for similar assets or liabilities in active markets; quoted prices by independent pricing services for identical or similar assets or liabilities
in markets that are not active; and valuations, using models or other valuation techniques, that use observable market data. All significant inputs are observable, or derived from observable information in the marketplace, or are supported by
observable levels at which transactions are executed in the market place.
|
|
Level 3
|
Instruments that use non-binding broker quotes or model driven valuations that do not have observable market data.
|
The Company categorizes valuation methods used in its goodwill and intangible assets impairment tests as Level 3. The Company used a
discounted cash flow model and recent market transactions to estimate the fair value of the reporting unit as a part of its goodwill impairment analysis. The Companys discounted cash flow analysis utilizes comprehensive cash flow projections,
as well as assumptions based on risks and market data to the extent available. 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.
Fair Value of
Financial Instruments
The carrying values and fair values of certain of the Companys financial instruments were
as follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments, available-for-sale
|
|
$
|
139,046
|
|
|
$
|
139,046
|
|
|
$
|
172,825
|
|
|
$
|
172,825
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debentures payable
|
|
|
40,261
|
|
|
|
12,723
|
|
|
|
40,221
|
|
|
|
14,868
|
|
52
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The fair values as presented represent the Companys best estimates and may not be
substantiated by comparisons to independent markets. The fair value of the debentures payable was based on current market rates offered for debt with similar risks and maturities. 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 does not
purport to represent the Companys underlying value.
The Company holds available-for-sale investments, which are carried
at fair value. The following tables present the fair-value measurements for each major category of assets that are measured on a recurring basis (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
December 31, 2012
|
|
Total
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
Fixed maturities, available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
12,110
|
|
|
$
|
12,110
|
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
4,111
|
|
|
|
|
|
|
|
4,111
|
|
|
|
|
|
Political subdivisions
|
|
|
790
|
|
|
|
|
|
|
|
790
|
|
|
|
|
|
Revenue and assessment
|
|
|
17,996
|
|
|
|
|
|
|
|
17,996
|
|
|
|
|
|
Corporate bonds
|
|
|
71,537
|
|
|
|
|
|
|
|
71,537
|
|
|
|
|
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed
|
|
|
11,870
|
|
|
|
|
|
|
|
11,870
|
|
|
|
|
|
Non-agency backed residential
|
|
|
5,472
|
|
|
|
|
|
|
|
5,472
|
|
|
|
|
|
Non-agency backed commercial
|
|
|
5,109
|
|
|
|
|
|
|
|
5,109
|
|
|
|
|
|
Redeemable preferred stock
|
|
|
1,718
|
|
|
|
1,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities, available-for-sale
|
|
|
130,713
|
|
|
|
13,828
|
|
|
|
116,885
|
|
|
|
|
|
Investment in mutual fund, available-for-sale
|
|
|
8,333
|
|
|
|
8,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments, available-for-sale
|
|
|
139,046
|
|
|
|
22,161
|
|
|
|
116,885
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
59,104
|
|
|
|
59,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
198,150
|
|
|
$
|
81,265
|
|
|
$
|
116,885
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
December 31, 2011
|
|
Total
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
Fixed maturities, available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
25,528
|
|
|
$
|
25,528
|
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
6,387
|
|
|
|
|
|
|
|
6,387
|
|
|
|
|
|
Political subdivisions
|
|
|
781
|
|
|
|
|
|
|
|
781
|
|
|
|
|
|
Revenue and assessment
|
|
|
25,432
|
|
|
|
|
|
|
|
25,432
|
|
|
|
|
|
Corporate bonds
|
|
|
77,297
|
|
|
|
|
|
|
|
77,297
|
|
|
|
|
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed
|
|
|
18,133
|
|
|
|
|
|
|
|
18,133
|
|
|
|
|
|
Non-agency backed residential
|
|
|
5,429
|
|
|
|
|
|
|
|
5,429
|
|
|
|
|
|
Non-agency backed commercial
|
|
|
6,125
|
|
|
|
|
|
|
|
6,125
|
|
|
|
|
|
Redeemable preferred stock
|
|
|
169
|
|
|
|
169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities, available-for-sale
|
|
|
165,281
|
|
|
|
25,697
|
|
|
|
139,584
|
|
|
|
|
|
Investment in mutual fund, available-for-sale
|
|
|
7,544
|
|
|
|
7,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments, available-for-sale
|
|
|
172,825
|
|
|
|
33,241
|
|
|
|
139,584
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
23,751
|
|
|
|
23,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
196,576
|
|
|
$
|
56,992
|
|
|
$
|
139,584
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair values of the Companys investments are determined by management after taking into consideration
available sources of data. All of the portfolio valuations classified as Level 1 or Level 2 in the above tables are priced exclusively by utilizing the services of independent pricing sources using observable market data. The Level 2 classified
security valuations are obtained from a single independent pricing service. There were no transfers between Level 1 and Level 2 for year ended December 31, 2012, the six months ended December 31, 2011 and the year ended June 30, 2011.
The Companys policy is to recognize transfers between levels at the end of the reporting period. The Company has not made any adjustments to the prices obtained from the independent pricing sources.
The Company has reviewed the pricing techniques and methodologies of the independent pricing service for Level 2 investments and believes
that its policies adequately consider market activity, either based on specific transactions for the security valued or based on modeling of securities with similar credit quality, duration, yield and structure that were recently traded. The Company
monitored security-specific valuation trends and has made inquiries with the pricing service about material changes or the absence of expected changes to understand the underlying factors and inputs and to validate the reasonableness of the pricing.
54
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Based on the above categorization, there were no Level 3 classified security valuations
at December 31, 2012 and 2011 and June 30, 2011 and 2010, nor any transfers into or out of Level 3 during these periods. The following table represents the quantitative disclosure for those assets classified as Level 3 during the year
ended June 30, 2010 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
Using
Significant Unobservable Inputs (Level 3)
|
|
|
|
|
|
|
Collateralized mortgage
obligations
|
|
|
|
|
|
|
Corporate
bonds
|
|
|
Non-agency
backed
residential
|
|
|
Non-agency
backed
commercial
|
|
|
Total
|
|
Balance at July 1, 2009
|
|
$
|
|
|
|
$
|
1,930
|
|
|
$
|
707
|
|
|
$
|
2,637
|
|
Total gains or losses (realized or unrealized):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in other comprehensive income
|
|
|
|
|
|
|
421
|
|
|
|
242
|
|
|
|
663
|
|
Transfers into Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers out of Level 3
(a)
|
|
|
|
|
|
|
(2,351
|
)
|
|
|
(949
|
)
|
|
|
(3,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2010
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Transferred from Level 3 to Level 2 as observable market data became available during the period presented due to the increase in market activity for these securities.
|
3. Investments
Investments, Available-for-Sale
The following tables summarize the Companys investment securities (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
U.S. government and agencies
|
|
$
|
11,202
|
|
|
$
|
908
|
|
|
$
|
|
|
|
$
|
12,110
|
|
State
|
|
|
3,994
|
|
|
|
117
|
|
|
|
|
|
|
|
4,111
|
|
Political subdivisions
|
|
|
753
|
|
|
|
37
|
|
|
|
|
|
|
|
790
|
|
Revenue and assessment
|
|
|
16,449
|
|
|
|
1,553
|
|
|
|
(6
|
)
|
|
|
17,996
|
|
Corporate bonds
|
|
|
68,114
|
|
|
|
3,669
|
|
|
|
(246
|
)
|
|
|
71,537
|
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed
|
|
|
11,079
|
|
|
|
791
|
|
|
|
|
|
|
|
11,870
|
|
Non-agency backed residential
|
|
|
5,098
|
|
|
|
472
|
|
|
|
(98
|
)
|
|
|
5,472
|
|
Non-agency backed commercial
|
|
|
4,652
|
|
|
|
457
|
|
|
|
|
|
|
|
5,109
|
|
Redeemable preferred stock
|
|
|
1,500
|
|
|
|
218
|
|
|
|
|
|
|
|
1,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities, available-for-sale
|
|
|
122,841
|
|
|
|
8,222
|
|
|
|
(350
|
)
|
|
|
130,713
|
|
Investment in mutual fund, available-for-sale
|
|
|
7,501
|
|
|
|
832
|
|
|
|
|
|
|
|
8,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
130,342
|
|
|
$
|
9,054
|
|
|
$
|
(350
|
)
|
|
$
|
139,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
U.S. government and agencies
|
|
$
|
24,178
|
|
|
$
|
1,350
|
|
|
$
|
|
|
|
$
|
25,528
|
|
State
|
|
|
6,099
|
|
|
|
288
|
|
|
|
|
|
|
|
6,387
|
|
Political subdivisions
|
|
|
754
|
|
|
|
27
|
|
|
|
|
|
|
|
781
|
|
Revenue and assessment
|
|
|
24,130
|
|
|
|
1,302
|
|
|
|
|
|
|
|
25,432
|
|
Corporate bonds
|
|
|
71,392
|
|
|
|
6,113
|
|
|
|
(208
|
)
|
|
|
77,297
|
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed
|
|
|
16,953
|
|
|
|
1,180
|
|
|
|
|
|
|
|
18,133
|
|
Non-agency backed residential
|
|
|
5,530
|
|
|
|
66
|
|
|
|
(167
|
)
|
|
|
5,429
|
|
Non-agency backed commercial
|
|
|
5,862
|
|
|
|
275
|
|
|
|
(12
|
)
|
|
|
6,125
|
|
Redeemable preferred stock
|
|
|
176
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities, available-for-sale
|
|
|
155,074
|
|
|
|
10,601
|
|
|
|
(394
|
)
|
|
|
165,281
|
|
Investment in mutual fund, available-for-sale
|
|
|
7,501
|
|
|
|
43
|
|
|
|
|
|
|
|
7,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
162,575
|
|
|
$
|
10,644
|
|
|
$
|
(394
|
)
|
|
$
|
172,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables set forth the scheduled maturities of the Companys 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
Securities
with
Unrealized
Gains
|
|
|
Securities
with
Unrealized
Losses
|
|
|
Securities
with No
Unrealized
Gains or
Losses
|
|
|
All
Fixed
Maturity
Securities
|
|
One year or less
|
|
$
|
9,380
|
|
|
$
|
|
|
|
$
|
5
|
|
|
$
|
9,385
|
|
After one through five years
|
|
|
34,460
|
|
|
|
11,518
|
|
|
|
|
|
|
|
45,978
|
|
After five through ten years
|
|
|
25,230
|
|
|
|
15,181
|
|
|
|
|
|
|
|
40,411
|
|
After ten years
|
|
|
10,770
|
|
|
|
|
|
|
|
|
|
|
|
10,770
|
|
No single maturity date
|
|
|
23,833
|
|
|
|
336
|
|
|
|
|
|
|
|
24,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
103,673
|
|
|
$
|
27,035
|
|
|
$
|
5
|
|
|
$
|
130,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
Securities
with
Unrealized
Gains
|
|
|
Securities
with
Unrealized
Losses
|
|
|
Securities
with No
Unrealized
Gains or
Losses
|
|
|
All
Fixed
Maturity
Securities
|
|
One year or less
|
|
$
|
15,801
|
|
|
$
|
2,506
|
|
|
$
|
955
|
|
|
$
|
19,262
|
|
After one through five years
|
|
|
61,511
|
|
|
|
|
|
|
|
|
|
|
|
61,511
|
|
After five through ten years
|
|
|
42,997
|
|
|
|
689
|
|
|
|
|
|
|
|
43,686
|
|
After ten years
|
|
|
7,860
|
|
|
|
3,106
|
|
|
|
|
|
|
|
10,966
|
|
No single maturity date
|
|
|
26,623
|
|
|
|
2,168
|
|
|
|
1,065
|
|
|
|
29,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
154,792
|
|
|
$
|
8,469
|
|
|
$
|
2,020
|
|
|
$
|
165,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
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, 2012
|
|
Fair
Value
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Gross
Unrealized
Losses
|
|
|
Total
Gross
Unrealized
Losses
|
|
U.S. government and agencies
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Political subdivisions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue and assessment
|
|
|
702
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
Corporate bonds
|
|
|
25,997
|
|
|
|
(246
|
)
|
|
|
|
|
|
|
|
|
|
|
(246
|
)
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency backed residential
|
|
|
124
|
|
|
|
(20
|
)
|
|
|
212
|
|
|
|
(78
|
)
|
|
|
(98
|
)
|
Non-agency backed commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities, available-for-sale
|
|
|
26,823
|
|
|
|
(272
|
)
|
|
|
212
|
|
|
|
(78
|
)
|
|
|
(350
|
)
|
Investment in mutual fund, available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
26,823
|
|
|
$
|
(272
|
)
|
|
$
|
212
|
|
|
$
|
(78
|
)
|
|
$
|
(350
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
|
12 months or longer
|
|
|
|
|
December 31, 2011
|
|
Fair
Value
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Gross
Unrealized
Losses
|
|
|
Total
Gross
Unrealized
Losses
|
|
U.S. government and agencies
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Political subdivisions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue and assessment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
4,451
|
|
|
|
(174
|
)
|
|
|
1,849
|
|
|
|
(34
|
)
|
|
|
(208
|
)
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency backed residential
|
|
|
898
|
|
|
|
(11
|
)
|
|
|
614
|
|
|
|
(156
|
)
|
|
|
(167
|
)
|
Non-agency backed commercial
|
|
|
|
|
|
|
|
|
|
|
488
|
|
|
|
(12
|
)
|
|
|
(12
|
)
|
Redeemable preferred stock
|
|
|
169
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities, available-for-sale
|
|
|
5,518
|
|
|
|
(192
|
)
|
|
|
2,951
|
|
|
|
(202
|
)
|
|
|
(394
|
)
|
Investment in mutual fund, available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,518
|
|
|
$
|
(192
|
)
|
|
$
|
2,951
|
|
|
$
|
(202
|
)
|
|
$
|
(394
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table reflects the number of fixed maturity securities with gross unrealized gains and losses. Gross
unrealized losses are further segregated by the length of time that individual securities have been in a continuous unrealized loss position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Unrealized Losses
|
|
|
Gross
Unrealized
Gains
|
|
At:
|
|
Less than
or equal to
12 months
|
|
|
Greater
than 12
months
|
|
|
December 31, 2012
|
|
|
13
|
|
|
|
1
|
|
|
|
108
|
|
December 31, 2011
|
|
|
7
|
|
|
|
4
|
|
|
|
139
|
|
57
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following tables reflect the fair value and gross unrealized losses of those fixed
maturity securities in a continuous unrealized loss position for greater than 12 months. Gross unrealized losses are further segregated by the percentage of amortized cost (in thousands, except number of securities).
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Unrealized Losses
at December 31, 2012:
|
|
Number
of
Securities
|
|
|
Fair
Value
|
|
|
Gross
Unrealized
Losses
|
|
Less than or equal to 10%
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
Greater than 10%
|
|
|
1
|
|
|
|
212
|
|
|
|
(78
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
$
|
212
|
|
|
$
|
(78
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Unrealized Losses
at December 31, 2011:
|
|
Number
of
Securities
|
|
|
Fair
Value
|
|
|
Gross
Unrealized
Losses
|
|
Less than or equal to 10%
|
|
|
3
|
|
|
$
|
2,760
|
|
|
$
|
(92
|
)
|
Greater than 10%
|
|
|
1
|
|
|
|
191
|
|
|
|
(110
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
$
|
2,951
|
|
|
$
|
(202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables set forth the amount of gross unrealized losses by current severity (as compared to amortized
cost) and length of time that individual securities have been in a continuous unrealized loss position (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of
Securities with
Gross
Unrealized
Losses
|
|
|
|
|
|
Severity of Gross Unrealized Losses
|
|
Length of
Gross Unrealized Losses
at December 31, 2012:
|
|
|
Gross
Unrealized
Losses
|
|
|
Less
than 5%
|
|
|
5% to
10%
|
|
|
Greater
than 10%
|
|
Less than or equal to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
|
|
$
|
26,121
|
|
|
$
|
(266
|
)
|
|
$
|
(246
|
)
|
|
$
|
|
|
|
$
|
(20
|
)
|
Six months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months
|
|
|
702
|
|
|
|
(6
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
Greater than twelve months
|
|
|
212
|
|
|
|
(78
|
)
|
|
|
|
|
|
|
|
|
|
|
(78
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
27,035
|
|
|
$
|
(350
|
)
|
|
$
|
(252
|
)
|
|
$
|
|
|
|
$
|
(98
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of
Securities with
Gross
Unrealized
Losses
|
|
|
|
|
|
Severity of Gross Unrealized Losses
|
|
Length of
Gross Unrealized Losses
at December 31, 2011:
|
|
|
Gross
Unrealized
Losses
|
|
|
Less
than 5%
|
|
|
5% to
10%
|
|
|
Greater
than 10%
|
|
Less than or equal to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
|
|
$
|
2,506
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Six months
|
|
|
1,945
|
|
|
|
(174
|
)
|
|
|
|
|
|
|
(174
|
)
|
|
|
|
|
Nine months
|
|
|
898
|
|
|
|
(11
|
)
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
Twelve months
|
|
|
169
|
|
|
|
(7
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
Greater than twelve months
|
|
|
2,951
|
|
|
|
(202
|
)
|
|
|
(45
|
)
|
|
|
(47
|
)
|
|
|
(110
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,469
|
|
|
$
|
(394
|
)
|
|
$
|
(63
|
)
|
|
$
|
(221
|
)
|
|
$
|
(110
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Restrictions
At December 31, 2012, fixed maturities and cash equivalents with a fair value and amortized cost of $5.9 million were on deposit with
various insurance departments as a requirement of doing business in those states. Fixed maturities and cash equivalents with a fair value and amortized cost of $9.4 million were on deposit with another insurance company as collateral for an assumed
reinsurance contract.
Investment Income and Net Realized Gains and Losses
The major categories of investment income follow (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
Six Months
Ended
December 31,
|
|
|
Year Ended June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2011
|
|
|
2010
|
|
Fixed maturities, available-for-sale
|
|
$
|
6,513
|
|
|
$
|
3,897
|
|
|
$
|
8,296
|
|
|
$
|
8,467
|
|
Investment in mutual fund, available-for-sale
|
|
|
613
|
|
|
|
290
|
|
|
|
625
|
|
|
|
|
|
Other
|
|
|
92
|
|
|
|
59
|
|
|
|
125
|
|
|
|
147
|
|
Investment expenses
|
|
|
(619
|
)
|
|
|
(316
|
)
|
|
|
(651
|
)
|
|
|
(656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,599
|
|
|
$
|
3,930
|
|
|
$
|
8,395
|
|
|
$
|
7,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of net realized gains (losses) on investments, available-for-sale at fair value follow (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
Six Months
Ended
December 31,
|
|
|
Year Ended June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2011
|
|
|
2010
|
|
Gains
|
|
$
|
3,296
|
|
|
$
|
15
|
|
|
$
|
231
|
|
|
$
|
326
|
|
Losses
|
|
|
(31
|
)
|
|
|
(120
|
)
|
|
|
(3
|
)
|
|
|
(26
|
)
|
Other-than-temporary impairment
|
|
|
(23
|
)
|
|
|
(127
|
)
|
|
|
(413
|
)
|
|
|
(983
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,242
|
|
|
$
|
(232
|
)
|
|
$
|
(185
|
)
|
|
$
|
(683
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 income (loss). The amounts of non-credit OTTI for securities still owned was $1.0 million for non-agency backed residential CMOs and $0.2 million for non-agency backed commercial CMOs at
both December 31, 2012 and 2011, and $1.1 million for non-agency backed residential CMOs and $0.2 million for non-agency backed commercial CMOs at June 30, 2011.
Other-Than-Temporary Impairment
In accordance with FASB ASC 320-10,
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 income (loss) and (ii) the amount related to all other
factors, which is recorded in other comprehensive income (loss). The credit-related portion of an OTTI is measured by comparing a securitys 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.
59
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
The number and amount of securities for which the Company has recognized OTTI charges in net income (loss) are
presented in the following tables (in thousands, except for the number of securities).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
Six Months Ended
December 31,
|
|
|
Year Ended June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2011
|
|
|
2010
|
|
|
|
Number
of
Securities
|
|
|
OTTI
|
|
|
Number
of
Securities
|
|
|
OTTI
|
|
|
Number
of
Securities
|
|
|
OTTI
|
|
|
Number
of
Securities
|
|
|
OTTI
|
|
Corporate bonds
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency backed residential
|
|
|
2
|
|
|
|
(8
|
)
|
|
|
3
|
|
|
|
(127
|
)
|
|
|
5
|
|
|
|
(119
|
)
|
|
|
10
|
|
|
|
(1,723
|
)
|
Non-agency backed commercial
|
|
|
1
|
|
|
|
(15
|
)
|
|
|
1
|
|
|
|
(12
|
)
|
|
|
5
|
|
|
|
(296
|
)
|
|
|
5
|
|
|
|
(214
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
(23
|
)
|
|
|
4
|
|
|
|
(139
|
)
|
|
|
10
|
|
|
|
(415
|
)
|
|
|
15
|
|
|
|
(1,937
|
)
|
Portion of loss recognized in accumulated other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net OTTI recognized in net income (loss)
|
|
|
|
|
|
$
|
(23
|
)
|
|
|
|
|
|
$
|
(127
|
)
|
|
|
|
|
|
$
|
(413
|
)
|
|
|
|
|
|
$
|
(983
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a progression of the credit-related portion of OTTI on investments owned at December 31, 2012 and
2011 and June 30, 2011 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
Six Months
Ended
December 31,
|
|
|
Year Ended
June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2011
|
|
Beginning balance
|
|
$
|
(3,425
|
)
|
|
$
|
(3,343
|
)
|
|
$
|
(3,301
|
)
|
Additional credit impairments on:
|
|
|
|
|
|
|
|
|
|
|
|
|
Previously impaired securities
|
|
|
(23
|
)
|
|
|
(127
|
)
|
|
|
(413
|
)
|
Securities without previous impairments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23
|
)
|
|
|
(127
|
)
|
|
|
(413
|
)
|
Reductions for securities sold (realized)
|
|
|
782
|
|
|
|
45
|
|
|
|
371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,666
|
)
|
|
$
|
(3,425
|
)
|
|
$
|
(3,343
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On a quarterly basis, the Company reviews cash flow estimates for certain non-agency backed CMOs of lesser credit
quality following the guidance of FASB ASC 325-40,
Investments Other Benefits Interests in Securitized Financial Assets
(FASB ASC 325-40). Accordingly, when changes in estimated cash flows occur due to actual or
estimated prepayment or credit loss experience, and the present value of the revised cash flows is less than the present value previously estimated, OTTI is deemed to have occurred. For non-agency backed CMOs not subject to FASB ASC 325-40, the
Company reviews quarterly projected cash flow analyses and recognizes OTTI when it determines that a loss is probable. The Company has recognized OTTI related to certain non-agency backed CMOs as the underlying cash flows have been adversely
impacted due to a reduction in prepayments from mortgage refinancing and an increase in actual and projected delinquencies in the underlying mortgages.
60
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Companys review of non-agency backed CMOs included an analysis of available
information such as collateral quality, anticipated cash flows, credit enhancements, default rates, loss severities, the securities relative position in their respective capital structures, and credit ratings from statistical rating agencies.
The Company reviews quarterly projected cash flow analyses for each security utilizing current assumptions regarding (i) actual and anticipated delinquencies, (ii) delinquency transition-to-default rates and (iii) loss severities.
Based on its quarterly reviews, the Company determined that there had not been an adverse change in projected cash flows, except in the case of those securities for which OTTI charges have been recorded. The Company believes that the unrealized
losses on the remaining non-agency backed securities for which OTTI charges have not been recorded are not necessarily predictive of the ultimate performance of the underlying collateral. The Company does not intend to sell these securities and it
is more likely than not that the Company will not be required to sell these securities before the recovery of their amortized cost basis.
The Company believes that the remaining securities having unrealized losses at December 31, 2012 were not other-than-temporarily impaired. The Company also does not intend to sell any of these
securities and it is more likely than not that the Company will not be required to sell any of these securities before the recovery of their amortized cost basis.
4. Reinsurance
Total premiums written and earned are summarized as follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
Six Months Ended
December 31,
|
|
|
Year Ended June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2011
|
|
|
2010
|
|
|
|
Written
|
|
|
Earned
|
|
|
Written
|
|
|
Earned
|
|
|
Written
|
|
|
Earned
|
|
|
Written
|
|
|
Earned
|
|
Direct
|
|
$
|
168,990
|
|
|
$
|
164,715
|
|
|
$
|
71,325
|
|
|
$
|
71,503
|
|
|
$
|
152,356
|
|
|
$
|
153,368
|
|
|
$
|
162,150
|
|
|
$
|
167,744
|
|
Assumed
|
|
|
21,517
|
|
|
|
21,121
|
|
|
|
9,245
|
|
|
|
9,222
|
|
|
|
19,435
|
|
|
|
19,844
|
|
|
|
19,858
|
|
|
|
19,302
|
|
Ceded
|
|
|
(192
|
)
|
|
|
(192
|
)
|
|
|
(88
|
)
|
|
|
(88
|
)
|
|
|
(171
|
)
|
|
|
(171
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
190,315
|
|
|
$
|
185,644
|
|
|
$
|
80,482
|
|
|
$
|
80,637
|
|
|
$
|
171,620
|
|
|
$
|
173,041
|
|
|
$
|
182,008
|
|
|
$
|
187,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 for the year ended December 31, 2012, the six months ended
December 31, 2011 and the years ended June 30, 2011 and 2010 were 11%, 12%, 11% and 11%, respectively.
Effective
August 1, 2010, the Insurance Companies began utilizing excess-of-loss reinsurance with an unaffiliated reinsurer to limit their exposure to losses under liability coverages for policies issued with limits greater than the minimum statutory
requirements. 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, 2012, the Insurance Companies had unsecured
aggregate reinsurance receivables of $0.3 million. During the year ended December 31, 2012, ceded premiums earned and reinsurance recovered on losses and loss adjustment expenses (LAE) were both $0.2 million, respectively.
5. Stock-Based Compensation Plans
Employee Stock-Based Incentive Plan
The Company has issued stock options (Stock Option
Awards) and restricted common stock (Restricted Stock Awards) 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, 2012, there were 5,768,644 shares remaining available for issuance under the Plan. Stock Option Awards are generally granted with an
exercise price equal to or greater than the market price of the Companys stock at the date of grant. Stock Option Awards expire over five or ten years from the date of grant and vest in designated installments over four or five years through
January 2016, while the Restricted Stock Awards vest in designated installments through November 2014. Certain awards provide for accelerated vesting if there is a change in control (as defined in the Plan).
61
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
On November 17, 2009, the Companys stockholders approved a value-for-value
option exchange whereby certain outstanding stock options were exchanged for shares of restricted common stock (the Exchange). As approved by the Companys stockholders, restricted common stock issued in the Exchange vests in equal
annual installments beginning on the first anniversary of the date of the grant of the restricted stock, and no participant in the Exchange was permitted to receive restricted stock having an aggregate value greater than $150,000.
On November 18, 2009, consistent with the terms of the Exchange, the Company entered into an Option Cancellation and Restricted
Stock Award Agreement (the Agreement) with certain employees to surrender, and have the Company cancel, certain outstanding Stock Option Awards held by the employees in exchange for shares of restricted common stock having a value equal
to or less than the surrendered Stock Option Awards. The Exchange included 605,000 shares of the Companys common stock underlying Stock Option Awards that were surrendered and cancelled in exchange for 160,577 shares of restricted common
stock.
On January 31, 2012, the Compensation Committee of the Board of Directors of the Company awarded two executive
officers Stock Option Awards to purchase 750,000 and 75,000 shares of the Companys common stock at an exercise price of $1.45 per share and vest 40% and 20%, respectively, upon grant with the remainder vesting in equal installments over three
and four years, respectively. Additionally, these Stock Option Awards expire on January 31, 2017. Compensation expense related to these Stock Option Awards was $0.5 million, of which $0.3 million was amortized through December 2012 and the
remaining $0.2 million will be amortized through January 2016. The fair value of these Stock Option Awards was estimated at the grant date using the Black-Scholes option pricing model with an expected volatility of 73%, a risk-free interest rate of
0.71%, a dividend yield rate of zero, and a five-year expected term. Based on the calculation using the Black-Scholes option pricing model, the grant date fair value of options granted was $0.63 per share. Expected volatility is based on the
historical volatility in the price of the Companys common stock since April 2004. The risk-free interest rate is the five-year Treasury rate, based on the term of the options. The dividend yield assumption is based on our history and
expectation of dividend payments on common stock. The expected term represents the period of time that these Stock Option Awards are expected to remain outstanding.
Compensation expense related to Stock Option Awards is calculated under the fair value method and is recorded on a straight-line basis over the vesting period. There were no Stock Option Awards granted
during the six months ended December 31, 2011 and the years ended June 30, 2011 and 2010. At December 31, 2012, the weighted average remaining contractual life of options outstanding and exercisable/vested is approximately 4.5 years
and 4.7 years, respectively.
A summary of the activity for the Companys Stock Option Awards is presented below (in
thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Exercise
Price
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
Options outstanding at June 30, 2009
|
|
|
5,308
|
|
|
$3.00-$11.81
|
|
$
|
4.04
|
|
|
|
|
|
Exchanged and Cancelled
|
|
|
(605
|
)
|
|
$6.64-$11.81
|
|
$
|
10.69
|
|
|
|
|
|
Forfeited
|
|
|
(142
|
)
|
|
$3.10-$11.81
|
|
$
|
6.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2010
|
|
|
4,561
|
|
|
$3.00-$8.13
|
|
$
|
3.06
|
|
|
|
|
|
Forfeited
|
|
|
(61
|
)
|
|
$3.04
|
|
$
|
3.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2011 and December 31, 2011
|
|
|
4,500
|
|
|
$3.00-$8.13
|
|
$
|
3.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
825
|
|
|
$1.45
|
|
$
|
1.45
|
|
|
|
|
|
Forfeited
|
|
|
3,730
|
|
|
$3.00-$3.04
|
|
$
|
3.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2012
|
|
|
1,595
|
|
|
$3.00-$8.13
|
|
$
|
2.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable/vested at December 31, 2012
|
|
|
1,004
|
|
|
|
|
$
|
2.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A summary of the activity for the Companys Restricted Stock Awards is presented
below (in thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
Restricted
Stock
Awards
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Restricted Stock Awards outstanding at June 30, 2009
|
|
|
625
|
|
|
$
|
2.87
|
|
Granted
|
|
|
160
|
|
|
$
|
1.97
|
|
Vested
|
|
|
(309
|
)
|
|
$
|
3.01
|
|
Forfeited
|
|
|
(4
|
)
|
|
$
|
2.50
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Awards outstanding at June 30, 2010
|
|
|
472
|
|
|
$
|
2.48
|
|
Vested
|
|
|
(307
|
)
|
|
$
|
2.60
|
|
Forfeited
|
|
|
(29
|
)
|
|
$
|
2.51
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Awards outstanding at June 30, 2011
|
|
|
136
|
|
|
$
|
2.21
|
|
Vested
|
|
|
(21
|
)
|
|
$
|
2.13
|
|
Forfeited
|
|
|
(20
|
)
|
|
$
|
2.20
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Awards outstanding at December 31, 2011
|
|
|
95
|
|
|
$
|
2.23
|
|
Vested
|
|
|
(33
|
)
|
|
$
|
2.36
|
|
Forfeited
|
|
|
(1
|
)
|
|
$
|
2.50
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Awards outstanding at December 31, 2012
|
|
|
61
|
|
|
$
|
2.15
|
|
|
|
|
|
|
|
|
|
|
In the table above, the number of shares vested includes 66,867 shares surrendered by the employees to the Company for
payment of minimum tax withholding obligations. Shares of stock withheld for purposes of satisfying minimum tax withholding obligations are again available for issuance under the Plan.
There were no Restricted Stock Awards granted during the year ended December 31, 2012, the six months ended December 31, 2011
and the year ended June 30, 2011. The aggregate fair values of Restricted Stock Awards vested during the year ended December 31, 2012, the six months ended December 31, 2011 and the years ended June 30, 2011 and 2010 were $0.1
million, $44 thousand, $0.8 million and $0.9 million, respectively, at the date of vesting. Expected future compensation expense related to the issuance of Restricted Stock Awards is $0.2 million, which will be amortized through November 2014.
Employee Stock Purchase Plan
The Companys Board of Directors adopted the First Acceptance Corporation Employee Stock Purchase Plan (ESPP) whereby eligible employees may purchase shares of the Companys 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 Companys common stock during each calendar year. The Company has reserved 400,000 shares of common stock for issuance under the ESPP. Employees purchased
approximately 40,000, 18,000, 32,000 and 37,000 shares during the year ended December 31, 2012, the six months ended December 31, 2011 and the years ended June 30, 2011 and 2010, respectively. Compensation expense attributable to
subscriptions to purchase shares under the ESPP was $11,000, $2,000, $8,000 and $16,000 for the year ended December 31, 2012, the six months ended December 31, 2011 and the years ended June 30, 2011 and 2010, respectively. At
December 31, 2012, 153,200 shares remain available for issuance under the ESPP.
6. Employee Benefit Plan
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 employees salary plus 50% of the next 2%
up to the maximum allowed by the Internal Revenue Code. The Companys contributions to the 401k Plan for the year ended December 31, 2012, the six months ended December 31, 2011 and the years ended June 30, 2011 and 2010 were
$0.6 million, $0.3 million, $0.6 million and $0.5 million, respectively, and are included within insurance operating expenses in the accompanying consolidated statements of operations and comprehensive income (loss).
63
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Property and Equipment
The components of property and equipment are as follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Furniture and equipment
|
|
$
|
9,008
|
|
|
$
|
9,275
|
|
Leasehold improvements
|
|
|
4,880
|
|
|
|
3,138
|
|
Capitalized leases
|
|
|
238
|
|
|
|
826
|
|
Aircraft
|
|
|
190
|
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,316
|
|
|
|
13,429
|
|
Less: Accumulated depreciation
|
|
|
(9,660
|
)
|
|
|
(10,114
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
4,656
|
|
|
$
|
3,315
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense related to property and equipment was $2.2 million, $0.8 million, $1.6 million
and $2.0 million for the year ended December 31, 2012, the six months ended December 31, 2011 and the years ended June 30, 2011 and 2010, respectively. Included within the furniture and equipment and leasehold improvements categories
at December 31, 2012 above are capitalized assets totaling $0.1 million not yet in service. These assets are related to the Companys strategic investments in its retail stores.
8. Lease Commitments
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 year ended December 31, 2012, the six months ended December 31, 2011 and the years ended June 30, 2011 and 2010 was $9.5 million, $4.8 million, $9.9 million and $10.9
million, respectively, and are included within insurance operating expenses in the accompanying consolidated statements of operations and comprehensive income (loss). Future minimum lease payments under these agreements follow (in thousands).
|
|
|
|
|
Year Ending December 31,
|
|
Amount
|
|
2013
|
|
$
|
7,236
|
|
2014
|
|
|
4,854
|
|
2015
|
|
|
3,126
|
|
2016
|
|
|
1,021
|
|
2017
|
|
|
333
|
|
Thereafter
|
|
|
698
|
|
|
|
|
|
|
Total
|
|
$
|
17,268
|
|
|
|
|
|
|
64
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 LAE is as follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended
December 31,
2012
|
|
|
Six Months Ended
December 31,
2011
|
|
|
Year Ended June 30,
|
|
|
|
|
|
2011
|
|
|
2010
|
|
Liability for unpaid losses and LAE at beginning of period, gross
|
|
$
|
69,436
|
|
|
$
|
68,424
|
|
|
$
|
73,198
|
|
|
$
|
83,973
|
|
Reinsurance balances receivable
|
|
|
(187
|
)
|
|
|
(133
|
)
|
|
|
(46
|
)
|
|
|
(78
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability for unpaid losses and LAE at beginning of period, net
|
|
|
69,249
|
|
|
|
68,291
|
|
|
|
73,152
|
|
|
|
83,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: Provision for losses and LAE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current period
|
|
|
144,207
|
|
|
|
60,162
|
|
|
|
130,888
|
|
|
|
138,218
|
|
Prior periods
|
|
|
4,016
|
|
|
|
5,591
|
|
|
|
(1,721
|
)
|
|
|
(11,223
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and LAE incurred
|
|
|
148,223
|
|
|
|
65,753
|
|
|
|
129,167
|
|
|
|
126,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Losses and LAE paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current period
|
|
|
89,157
|
|
|
|
32,022
|
|
|
|
84,736
|
|
|
|
87,097
|
|
Prior periods
|
|
|
49,315
|
|
|
|
32,773
|
|
|
|
49,292
|
|
|
|
50,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and LAE paid
|
|
|
138,472
|
|
|
|
64,795
|
|
|
|
134,028
|
|
|
|
137,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability for unpaid losses and LAE at end of period, net
|
|
|
79,000
|
|
|
|
69,249
|
|
|
|
68,291
|
|
|
|
73,152
|
|
Reinsurance balances receivable
|
|
|
260
|
|
|
|
187
|
|
|
|
133
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability for unpaid losses and LAE at end of period, gross
|
|
$
|
79,260
|
|
|
$
|
69,436
|
|
|
$
|
68,424
|
|
|
$
|
73,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unfavorable change in the estimate of unpaid losses and loss adjustment expenses of $4.0 million for the year ended
December 31, 2012 was primarily related to the strengthening of loss and loss adjustment expense reserves. Loss development was primarily related to higher than expected severity with Florida personal injury protection claims and with Georgia
bodily injury claims in older accident periods. Loss adjustment expense development was primarily related to higher than expected legal expenses for bodily injury claims for accident years 2010 and prior. The unfavorable change in the estimate of
unpaid losses and loss adjustment expenses of $5.6 million for the six months ended December 31, 2011 was primarily related to the strengthening of loss adjustment expense reserves for prior accident periods and included amounts related to the
settlement of claims for extra-contractual damages (see Note 16). The favorable change in the estimate of unpaid losses and loss adjustment expenses of $1.7 million for the year ended June 30, 2011 was due to lower than anticipated severity of
accidents occurring during the fiscal 2009 and 2010 accident years, specifically in bodily injury coverage in Texas, Tennessee and South Carolina and physical damage coverages in Georgia, partially offset by higher loss adjustment expenses specific
to bodily injury and Florida no-fault coverages. The favorable change in the estimate of unpaid losses and loss adjustment expenses of $11.2 million for the year ended June 30, 2010 was due to lower than anticipated severity of accidents
occurring during the fiscal 2007 and 2008 accident years, primarily in bodily injury coverage in Georgia and South Carolina, an improvement in the Companys claim handling practices and a shift in business mix toward renewal policies, which
have lower loss ratios than new policies.
65
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. Debentures Payable
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 redeemable by
the Company in whole or in part beginning on July 30, 2012, at which time 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, resets quarterly). The interest rate related to the debentures was 4.197% for the period from August 2012 to October 2012 and 4.063% for the period from November 2012 to January 2013. In February 2013, the interest rate reset to
4.052% through April 2013.
The obligations of the Company under the junior subordinated debentures represent full and
unconditional guarantees by the Company of FAST Is obligations for the preferred securities. Dividends on the preferred securities are cumulative, payable quarterly in arrears and are deferrable at the Companys 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 deferments.
The debentures are classified as debentures payable in the Companys consolidated balance sheets and the interest paid on these
debentures is classified as interest expense in the consolidated statements of operations and comprehensive income (loss). During 2012, the Company revised its accounting for certain of the issuance costs from the original 2007 debt transaction from
deferred financing costs (included within other assets) to a debt discount (reduction of debentures payable). Accordingly, unamortized issuance costs of $1.0 million at December 31, 2011 have been reclassified to conform to the 2012
presentation. At December 31, 2012, the unamortized debt discount of $1.0 million is being amortized to interest expense over the term of the debentures.
11. Income Taxes
The provision for income taxes consisted of the following (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
Six Months
Ended
December 31,
|
|
|
Year Ended June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2011
|
|
|
2010
|
|
Federal:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(8
|
)
|
|
|
146
|
|
|
|
296
|
|
|
|
441
|
|
Deferred
|
|
|
3
|
|
|
|
2
|
|
|
|
(98
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
148
|
|
|
|
198
|
|
|
|
441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(5
|
)
|
|
$
|
148
|
|
|
$
|
198
|
|
|
$
|
441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The provision for income taxes differs from the amounts computed by applying the
statutory federal corporate tax rate of 35% to income (loss) before income taxes as a result of the following (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
Six Months
Ended
December 31,
|
|
|
Year Ended June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2011
|
|
|
2010
|
|
Provision (benefit) for income taxes at statutory rate
|
|
$
|
(3,166
|
)
|
|
$
|
(10,251
|
)
|
|
$
|
(19,804
|
)
|
|
$
|
2,618
|
|
Tax effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt investment income
|
|
|
(18
|
)
|
|
|
(2
|
)
|
|
|
(15
|
)
|
|
|
(16
|
)
|
Change in the beginning of the period balance of the valuation allowance for deferred tax assets allocated to federal income
taxes
|
|
|
580
|
|
|
|
4,670
|
|
|
|
4,761
|
|
|
|
(5,278
|
)
|
Net operating loss carryforward expirations
|
|
|
1
|
|
|
|
|
|
|
|
735
|
|
|
|
2,483
|
|
Goodwill and identifiable intangible assets
|
|
|
|
|
|
|
5,545
|
|
|
|
14,084
|
|
|
|
|
|
Stock-based compensation
|
|
|
2,552
|
|
|
|
30
|
|
|
|
248
|
|
|
|
240
|
|
State income taxes, net of federal income tax benefit and valuation allowance
|
|
|
(5
|
)
|
|
|
148
|
|
|
|
198
|
|
|
|
441
|
|
Other
|
|
|
51
|
|
|
|
8
|
|
|
|
(9
|
)
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(5
|
)
|
|
$
|
148
|
|
|
$
|
198
|
|
|
$
|
441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tax effects of temporary differences that give rise to the net deferred tax assets and liabilities are presented
below (in thousands).
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
13,091
|
|
|
$
|
8,924
|
|
Stock option compensation
|
|
|
1,704
|
|
|
|
4,334
|
|
Unearned premiums and loss and loss adjustment expense reserves
|
|
|
4,980
|
|
|
|
4,700
|
|
Goodwill and identifiable intangible assets
|
|
|
7,341
|
|
|
|
8,412
|
|
Alternative minimum tax (AMT) credit carryforwards
|
|
|
1,612
|
|
|
|
1,612
|
|
Accrued expenses and other nondeductible items
|
|
|
495
|
|
|
|
752
|
|
Other
|
|
|
3,456
|
|
|
|
3,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,679
|
|
|
|
32,038
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Deferred acquisition costs
|
|
|
(1,127
|
)
|
|
|
(1,135
|
)
|
Identifiable intangible assets
|
|
|
(1,872
|
)
|
|
|
(1,872
|
)
|
Net unrealized change on investments
|
|
|
(3,046
|
)
|
|
|
(3,588
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,045
|
)
|
|
|
(6,595
|
)
|
Total net deferred tax asset
|
|
|
26,634
|
|
|
|
25,443
|
|
Less: Valuation allowance
|
|
|
(28,413
|
)
|
|
|
(27,220
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
(1,779
|
)
|
|
$
|
(1,777
|
)
|
|
|
|
|
|
|
|
|
|
The Company had a valuation allowance of $28.4 million and $27.2 million at December 31, 2012 and 2011,
respectively, to reduce deferred tax assets to the amount that is more likely than not to be realized. The change in the total valuation allowance for the year ended December 31, 2012 was an increase of $1.2 million. For the year ended
December 31, 2012, the change in the valuation allowance included increases of $0.5 million related to the unrealized change on investments included in other comprehensive income (loss).
67
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In assessing the realization of deferred tax assets, management considered whether it
was more likely than not that some portion or all of the deferred tax assets will not be realized. The Company is required to assess whether a valuation allowance should be established against the Companys net deferred tax assets based on the
consideration of all available evidence using a more likely than not standard. In making such judgments, significant weight is given to evidence that can be objectively verified. In assessing the Companys ability to support the realizability
of its deferred tax assets, management considered both positive and negative evidence. The Company placed greater weight on historical results than on the Companys outlook for future profitability and established a deferred tax valuation
allowance at December 31, 2012 and 2011, respectively. The deferred tax valuation allowance may be adjusted in future periods if management determines that it is more likely than not that some portion or all of the deferred tax assets will be
realized. In the event the deferred tax valuation allowance is adjusted, the Company would record an income tax benefit for the adjustment.
The change in the total valuation allowance for the six months ended December 31, 2011 was an increase of $5.1 million. For the six months ended December 31, 2011, the change in the valuation
allowance included reductions of $0.3 million related to the unrealized change on investments included in other comprehensive income (loss) and increases of $0.7 million related to deferred state income taxes. The change in the total valuation
allowance for the year ended June 30, 2011 was an increase of $5.2 million. For the year ended June 30, 2011, the change in the valuation allowance included reductions of $0.3 million related to the unrealized change on investments
included in other comprehensive income (loss) and increases of $0.8 million related to deferred state income taxes. The change in the total valuation allowance for the year ended June 30, 2010 was a decrease of $8.0 million. For the year ended
June 30, 2010, the change in the valuation allowance primarily included the unrealized change on investments of $3.2 million included in other comprehensive income.
At December 31, 2012, the Company had gross state NOL carryforwards of $47.5 million that begin to expire in 2020 and AMT credit carryforwards of $1.6 million that have no expiration date. At
December 31, 2012, the Company had gross NOL carryforwards for federal income tax purposes of $37.4 million, which are available to offset future federal taxable income. On a tax-affected basis, all remaining federal and substantially all state
NOL carryforwards at December 31, 2012 have been fully reserved for through a valuation allowance. The gross federal NOL carryforwards of $37.4 million will expire in 2022 through 2032.
12. Net Income (Loss) Per Share
FASB ASC 260,
Earnings Per Share
, specifies the computation, presentation and disclosure requirements for
earnings per share (EPS). 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 income (loss) per share (in thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
Six Months
Ended
December 31,
|
|
|
Year Ended June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2011
|
|
|
2010
|
|
Net income (loss)
|
|
$
|
(9,040
|
)
|
|
$
|
(29,437
|
)
|
|
$
|
(56,780
|
)
|
|
$
|
7,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common basic shares
|
|
|
40,861
|
|
|
|
47,707
|
|
|
|
48,171
|
|
|
|
47,961
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common dilutive shares
|
|
|
40,861
|
|
|
|
47,707
|
|
|
|
48,171
|
|
|
|
48,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
(0.22
|
)
|
|
$
|
(0.62
|
)
|
|
$
|
(1.18
|
)
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
(0.22
|
)
|
|
$
|
(0.62
|
)
|
|
$
|
(1.18
|
)
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For each of the year ended December 31, 2012, the six months ended
December 31, 2011 and the year ended June 30, 2011, the computation of diluted net loss per share did not include 0.1 million shares of unvested restricted common stock as their inclusion would have been anti-dilutive. For the year
ended June 30, 2010, the computation of diluted net income per share included 0.5 million shares of unvested restricted common stock. Options to purchase 1.6 million, 4.5 million, 4.5 million and 4.6 million shares for
the year ended December 31, 2012, the six months ended December 31, 2011 and the years ended June 30, 2011 and 2010, respectively, were not included in the computation of diluted net income (loss) per share as their exercise prices
were in excess of the average stock prices for the periods presented.
13. Concentrations of Credit Risk
At December 31, 2012, the Company had certain concentrations of credit risk with several financial institutions in
the form of cash and cash equivalents, which amounted to $59.1 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.
The Company primarily transacts business either directly with its policyholders or through
independently-owned insurance agencies in Tennessee who exclusively 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 requires 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, the 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 resulting from premium payments made to these agencies are unsecured.
14. Related Party Transactions
Certain of the Companys executives are covered by employment agreements covering, among other items, base
compensation, incentive-bonus determinations and payments in the event of termination or a change in control of the Company.
During the six months ended December 31, 2011, the Company repurchased an aggregate of 481,205 shares from two former executive
officers of the Company in separately negotiated transactions for an aggregate price of $0.8 million. All repurchased shares were subsequently retired.
On December 23, 2011, the Company and Stephen J. Harrison entered into a Mutual Separation and Release Agreement (Separation Agreement) that included the resignation of Stephen J.
Harrison from all positions with the Company, including as a member of the Board of Directors and the Chief Executive Officer of the Company. In connection with the Separation Agreement, on December 23, 2011, the Company repurchased 7,049,515
shares of Company common stock beneficially owned by Mr. Harrison for an aggregate price of $10.2 million, or $1.45 per share. All repurchased shares were subsequently retired.
15. Severance
During the years ended June 30, 2011 and 2010, the Company incurred charges of $1.7 million and $0.2 million,
respectively, for severance for former employees of the Company. The fiscal year 2011 charge was comprised of $1.3 million in accrued severance and benefits and $0.4 million in non-cash charges related to the vesting of certain unvested stock
options and restricted common stock. Severance and benefits charges are included in insurance operating expenses and the non-cash charges related to the vesting of stock options and restricted common stock are included within stock-based
compensation expense in the consolidated statements of operations and comprehensive income (loss). The insurance operations segment includes the accrued severance and benefits charges, and the real estate and corporate segment includes the
accelerated vesting charges.
69
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
16. Litigation
The Company is named as a defendant in various lawsuits, arising in the ordinary
course of business, generally relating to its insurance operations. All legal actions relating to claims made under insurance policies are considered by the Company in establishing its loss and loss adjustment expense reserves. The Company also
faces lawsuits from time to time that seek damages beyond policy limits, commonly known as bad faith claims, as well as class action and individual lawsuits that involve issues arising in the course of the Companys 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 Companys consolidated statements of operations and comprehensive income (loss) in losses and loss adjustment expenses for bad faith claims and in insurance
operating expenses for other lawsuits unless otherwise disclosed.
In the interest of judicial economy, in March 2012, we settled a lawsuit against our insured in which the plaintiffs
sought extra-contractual damages against one of our insurance company subsidiaries. We have not accrued any amount at December 31, 2012 for possible recoveries that may offset the costs and expenses relating to the litigation settlement. Any
such recoveries will be recorded in our operating results during the periods in which the recoveries are probable.
17. Segment Information
The Company operates in two business segments with its primary focus being the selling, servicing and underwriting of
non-standard personal automobile insurance. The real estate and corporate segment consists of the activities related to the disposition of foreclosed real estate held for sale, interest expense associated with all debt and other general corporate
overhead expenses.
The following table presents selected financial data by business segment (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
Six Months
Ended
December 31,
|
|
|
Year Ended June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2011
|
|
|
2010
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
$
|
227,966
|
|
|
$
|
99,039
|
|
|
$
|
210,618
|
|
|
$
|
223,054
|
|
Real estate and corporate
|
|
|
93
|
|
|
|
65
|
|
|
|
116
|
|
|
|
119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
$
|
228,059
|
|
|
$
|
99,104
|
|
|
$
|
210,734
|
|
|
$
|
223,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
$
|
(4,588
|
)
|
|
$
|
(26,711
|
)
|
|
$
|
(50,407
|
)
|
|
$
|
14,568
|
|
Real estate and corporate
|
|
|
(4,457
|
)
|
|
|
(2,578
|
)
|
|
|
(6,175
|
)
|
|
|
(7,087
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
$
|
(9,045
|
)
|
|
$
|
(29,289
|
)
|
|
$
|
(56,582
|
)
|
|
$
|
7,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Total assets:
|
|
|
|
|
|
|
|
|
Insurance
|
|
$
|
256,670
|
|
|
$
|
240,796
|
|
Real estate and corporate
|
|
|
5,633
|
|
|
|
15,437
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
$
|
262,303
|
|
|
$
|
256,233
|
|
|
|
|
|
|
|
|
|
|
70
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
18. 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,
2012, the RBC levels of the Insurance Companies did not subject them to any regulatory action.
At December 31, 2012 and
2011, on an unaudited consolidated statutory basis, the capital and surplus of the Insurance Companies was $89.6 million and $93.9 million, respectively. For the fiscal year ended December 31, 2012, the six months ended December 31, 2011
and the fiscal years ended June 30, 2011 and 2010, unaudited consolidated statutory net income (loss) of the Insurance Companies was $12.7 million, $(9.0) million, $(5.9) million and $5.2 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 earned surplus and
an insurance companys remaining surplus must be both reasonable in relation to its outstanding liabilities and adequate to its financial needs. At December 31, 2012, FAIC could not pay ordinary dividends to the Company without prior
regulatory approval due to a negative earned surplus position.
19. 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
|
|
|
Income (Loss)
before
Income Taxes
|
|
|
Net Income
(Loss)
|
|
|
Basic and
Diluted Net
Income (Loss)
per Share
|
|
Year Ended December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
$
|
55,079
|
|
|
$
|
175
|
|
|
$
|
96
|
|
|
$
|
0.00
|
|
September 30, 2012
|
|
|
59,568
|
|
|
|
3,378
|
|
|
|
3,279
|
|
|
|
0.08
|
|
June 30, 2012
|
|
|
57,945
|
|
|
|
(4,470
|
)
|
|
|
(4,208
|
)
|
|
|
(0.10
|
)
|
March 31, 2012
|
|
|
55,467
|
|
|
|
(8,128
|
)
|
|
|
(8,207
|
)
|
|
|
(0.20
|
)
|
Six Months Ended December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
$
|
49,135
|
|
|
$
|
(25,716
|
)
|
|
$
|
(25,749
|
)
|
|
$
|
(0.55
|
)
|
September 30, 2011
|
|
|
49,969
|
|
|
|
(3,573
|
)
|
|
|
(3,688
|
)
|
|
|
(0.08
|
)
|
Year Ended June 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011
|
|
$
|
53,134
|
|
|
$
|
(53,215
|
)
|
|
$
|
(53,474
|
)
|
|
$
|
(1.11
|
)
|
March 31, 2011
|
|
|
52,800
|
|
|
|
(1,910
|
)
|
|
|
(1,608
|
)
|
|
|
(0.03
|
)
|
December 31, 2010
|
|
|
51,677
|
|
|
|
(1,969
|
)
|
|
|
(2,090
|
)
|
|
|
(0.04
|
)
|
September 30, 2010
|
|
|
53,123
|
|
|
|
512
|
|
|
|
392
|
|
|
|
0.01
|
|
Income before income taxes for the quarter ended December 31, 2012 of $0.2 million included $4.0 million of
unfavorable development in the Companys estimate of unpaid loss and loss adjustment expenses. Loss before income taxes for the quarter ended December 31, 2011 of $25.7 million included a goodwill impairment charge of $21.1 million (see
Note 1) and $4.6 million of unfavorable development in the Companys estimate of unpaid loss and loss adjustment expenses. Loss before income taxes for the quarter ended June 30, 2011 of $53.2 million included a goodwill and intangible
assets impairment charge of $52.4 million (see Note 1) and $2.1 million of favorable development in the Companys estimate of unpaid loss and loss adjustment expenses.
71
FIRST ACCEPTANCE CORPORATION 10-K