OREANDA-NEWS. May 11, 2016. First Acceptance Corporation (NYSE:FAC) today reported its financial results for the three months ended March 31, 2016.

Operating Results

Revenues for the three months ended March 31, 2016 increased 29% to \\$96.9 million from \\$75.1 million in the same period in the prior year.

Loss before income taxes for the three months ended March 31, 2016 was \\$8.4 million, compared with income before income taxes of \\$0.8 million for the three months ended March 31, 2015. Net loss for the three months ended March 31, 2016 was \\$5.5 million, compared with net income of \\$0.5 million for the three months ended March 31, 2015. Basic and diluted net loss per share were \\$0.13 for the three months ended March 31, 2016, compared with basic and diluted net income per share of \\$0.01 for the same period in the prior year.

For the three months ended March 31, 2016, income before income taxes excluding unfavorable prior period loss development of \\$10.3 million was \\$1.9 million. For the three months ended March 31, 2015, loss before income taxes excluding favorable prior period loss development of \\$1.1 million was \\$0.3 million.

Joe Borbely, President and CEO, commented, “Recent industry results leave no doubt that a paradigm shift has occurred for automobile insurance. Like other carriers, we have been challenged by the unprecedented claims frequency causing us to dig deeper in updating our products to improve profitability. We are responding to this shift by re-evaluating our claims handling processes as well as improving our products to improve profitability. Despite the unfavorable loss development, our continued cost containment efforts and a slightly-improved loss ratio did result in a profitable accident-basis quarter. I was also pleased with the profitable results of the agency operations of the former Titan stores and the receipt of a California license for our insurance company. We are cautiously moving forward on all fronts in these challenging times.”

Premiums, Commissions and Fee Income. Premiums earned increased by \\$13.8 million, or 22%, to \\$76.4 million for the three months ended March 31, 2016, from \\$62.6 million for the three months ended March 31, 2015. This improvement was primarily due to higher average premiums and an increase in the number of policies in force.

Commission and fee income increased by \\$8.3 million, or 73%, to \\$19.6 million for the three months ended March 31, 2016, from \\$11.3 million for the three months ended March 31, 2015. Revenue from the former Titan retail locations acquired on July 1, 2015 contributed towards this increase. Commission and fee income also increased as a result of higher fee income related to commissionable ancillary products sold through our previously-existing retail locations and the increase in the number of policies in force.

Loss Ratio. The loss ratio was 96.1% for the three months ended March 31, 2016, compared with 76.6% for the three months ended March 31, 2015. We experienced unfavorable development related to prior periods of \\$10.3 million (which increased the loss ratio by 13.5%) for the three months ended March 31, 2016, compared with favorable development of \\$1.1 million for the three months ended March 31, 2015. The unfavorable development for the three months ended March 31, 2016 was the result of an increase in losses across all major coverages and over multiple prior accident periods. The primary causes of the unfavorable development were a sharp increase in bodily injury severity and a greater than usual amount of subsequent payments on previously closed claims. 

Excluding the development related to prior periods for the three months ended March 31, 2016 and 2015, the loss ratios were 82.6% and 78.4%, respectively. The year-over-year increase in the loss ratio was primarily due to higher than expected claim frequency and severity across all major coverages. We believe that an increase in the number of miles driven by insured drivers as a result of lower gas prices and a favorable economy has been a contributing factor to an industry-wide increase in frequency. In response, the Company has continued to implement aggressive rate and underwriting actions as warranted at a state and coverage level.

Expense Ratio. The expense ratio was 14.3% for the three months ended March 31, 2016, compared with 22.7% for the three months ended March 31, 2015. The year-over-year decrease in the expense ratio was primarily due to the increase in premiums earned which resulted in a lower percentage of fixed expenses in our retail operations (such as rent and base salary) and our ongoing efforts on cost containment.

Combined Ratio. The combined ratio increased to 110.4% for the three months ended March 31, 2016 from 99.3% for the three months ended March 31, 2015.

Titan Acquisition

Effective July 1, 2015, we acquired certain assets of Titan Insurance Services, Inc. and Titan Auto Insurance of New Mexico, Inc. (the “Titan Agencies”). These 83 retail locations, which are now rebranded under our Acceptance Insurance name, sell private passenger non-standard automobile insurance policies for unrelated insurance companies for which our revenues are in the form of commission and fee income. We are currently developing our own products for California, Arizona, Nevada and New Mexico, and introducing our current Texas and Florida products into stores in those states. The California product is expected to be available in May 2016.

Next Release of Financial Results

We currently plan to report our financial results for the three months ending June 30, 2016 on August 9, 2016.

About First Acceptance Corporation

We are principally a retailer, servicer and underwriter of non-standard personal automobile insurance based in Nashville, Tennessee. Our insurance operations generate revenues from selling non-standard personal automobile insurance policies and related products in 17 states. We conduct our servicing and underwriting operations in 13 states and are licensed as an insurer in 13 additional states. Non-standard personal automobile insurance is made available to individuals because of their inability or unwillingness to obtain standard insurance coverage due to various factors, including payment history, payment preference, failure in the past to maintain continuous insurance coverage or driving record and/or vehicle type.

At March 31, 2016, we leased and operated 414 retail locations and a call center staffed with employee-agents. Our employee-agents primarily sell non-standard personal automobile insurance products underwritten by us, as well as certain commissionable ancillary products. In most states, our employee-agents also sell a complementary insurance product providing personal property and liability coverage for renters underwritten by us. In addition, retail locations in some markets offer non-standard personal automobile insurance serviced and underwritten by other third-party insurance carriers for which we receive a commission. In addition to our retail locations, we are able to complete the entire sales process over the phone via our call center or through the internet via our consumer-based website or mobile platform. On a limited basis, we also sell our products through selected retail locations operated by independent agents. Additional information about First Acceptance Corporation can be found online at www.acceptance.com. 

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

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
Consolidated Statements of (Loss) Income
(unaudited)
(in thousands, except per share data)
 
  Three Months Ended 
  March 31, 
  2016  2015 
Revenues:        
Premiums earned \\$76,407  \\$62,615 
Commission and fee income  19,581   11,348 
Investment income  962   1,145 
Net realized losses on investments, available-for-sale  (2)  (3)
   96,948   75,105 
Costs and expenses:        
Losses and loss adjustment expenses  73,419   47,934 
Insurance operating expenses  29,647   25,084 
Other operating expenses  280   323 
Litigation settlement  —   110 
Stock-based compensation  37   19 
Depreciation  651   407 
Amortization of identifiable intangibles assets  238   — 
Interest expense  1,050   424 
   105,322   74,301 
(Loss) income before income taxes  (8,374)  804 
(Benefit) provision for income taxes  (2,869)  318 
Net (loss) income \\$(5,505) \\$486 
Net (loss) income per share:        
Basic \\$(0.13) \\$0.01 
Diluted \\$(0.13) \\$0.01 
Number of shares used to calculate net (loss) income per share:        
Basic  41,060   41,016 
Diluted  41,060   41,304 
         

 

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except per share data)
 
  March 31,  December 31, 
  2016  2015 
  (Unaudited)     
ASSETS        
Investments, available-for-sale at fair value (amortized cost of \\$125,019 and \\$128,304, respectively) \\$130,898  \\$131,582 
Cash and cash equivalents  128,906   115,587 
Premiums, fees, and commissions receivable, net of allowance of \\$409 and \\$454  93,123   69,881 
Deferred tax assets, net  20,358   18,301 
Other investments  10,286   11,256 
Other assets  6,719   6,950 
Property and equipment, net  5,065   5,141 
Deferred acquisition costs  6,502   5,509 
Goodwill  29,429   29,429 
Identifiable intangible assets, net  8,253   8,491 
TOTAL ASSETS \\$439,539  \\$402,127 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
Loss and loss adjustment expense reserves \\$132,650  \\$122,071 
Unearned premiums and fees  109,757   83,426 
Debentures payable  40,268   40,256 
Term loan from principal stockholder  29,760   29,753 
Accrued expenses  7,356   7,345 
Other liabilities  19,855   15,606 
Total liabilities  339,646   298,457 
Stockholders’ equity:        
Preferred stock, \\$.01 par value, 10,000 shares authorized  —   — 
Common stock, \\$.01 par value, 75,000 shares authorized; 41,060 issued and outstanding  411   411 
Additional paid-in capital  457,513   457,476 
Accumulated other comprehensive income, net of tax of \\$973 and \\$62, respectively  5,182   3,491 
Accumulated deficit  (363,213)  (357,708)
Total stockholders’ equity  99,893   103,670 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY \\$439,539  \\$402,127 
         

 

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
Supplemental Data
(Unaudited)
 
PREMIUMS EARNED BY STATE  
 
  Three Months Ended 
  March 31, 
  2016  2015 
Gross premiums earned:        
Georgia \\$15,057  \\$11,745 
Florida  11,609   9,843 
Texas  10,617   8,363 
Ohio  7,596   6,365 
Alabama  6,764   5,956 
South Carolina  6,594   4,622 
Illinois  5,740   5,846 
Tennessee  4,881   3,619 
Pennsylvania  2,418   2,260 
Indiana  2,277   1,846 
Missouri  1,753   1,402 
Mississippi  995   815 
Virginia  214   16 
Total gross premiums earned  76,515   62,698 
Premiums ceded to reinsurer  (108)  (83)
Total net premiums earned \\$76,407  \\$62,615 
         
COMBINED RATIOS (INSURANCE OPERATIONS)   
  Three Months Ended 
  March 31, 
  2016  2015 
Loss  96.1%  76.6%
Expense  14.3%  22.7%
Combined  110.4%  99.3%
         
NUMBER OF RETAIL LOCATIONS
Retail location counts are based upon the date that a location commenced or ceased writing business.
 
  Three Months Ended 
  March 31, 
  2016  2015 
Retail locations – beginning of period  440   356 
Opened  2   — 
Closed  (28)  (1)
Retail locations – end of period  414   355 
         
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
Supplemental Data (continued)
(Unaudited)
 
RETAIL LOCATIONS BY STATE
 
  March 31,  December 31, 
  2016  2015  2015  2014 
Alabama  24   24   24   24 
Arizona  10   —   10   — 
California  48   —   48   — 
Florida  39   31   39   31 
Georgia  60   60   60   60 
Illinois  39   60   61   60 
Indiana  17   17   17   17 
Mississippi  7   7   7   7 
Missouri  9   9   9   10 
Nevada  4   —   4   — 
New Mexico  5   —   5   — 
Ohio  27   27   27   27 
Pennsylvania  14   15   14   15 
South Carolina  23   25   24   25 
Tennessee  23   22   23   22 
Texas  65   58   68   58 
Total  414   355   440   356