FACO First Acceptance Corporation (QX)

First Acceptance Corporation (NYSE:FAC) today reported its financial results for the quarter and year ended December 31, 2015.

Operating Results

Revenues for the three months ended December 31, 2015 increased 30% to $88.5 million from $67.9 million in the same period in the prior year. Revenues for the year ended December 31, 2015 increased 26% to $331.9 million from $263.2 million in the same period in the prior year. 

Income before income taxes for the three months ended December 31, 2015 was $0.5 million, compared with income before income taxes of $3.1 million for the three months ended December 31, 2014. Net income for the three months ended December 31, 2015 was $0.3 million, compared with net income of $22.0 million for the three months ended December 31, 2014.

Loss before income taxes for year ended December 31, 2015 was $2.6 million, compared with income before income taxes of $9.7 million for the year ended December 31, 2014. Net loss for the year ended December 31, 2015 was $1.9 million, compared with net income of $28.1 million for the year ended December 31, 2014.

The results for both the three months and year ended December 31, 2014 included a decrease in the deferred tax asset valuation allowance of $22.4 million.

Excluding litigation settlement costs of $3.7 million and Titan acquisition and integration costs of $1.6 million, for the year ended December 31, 2015, income before income taxes was $2.7 million.

Joe Borbely, President and CEO, commented, “Our quarterly revenue growth of 30% over last year and emphasis on cost containment produced record low expense ratios for both the quarter (14.9%) and year (17.8%). These efforts contributed to both a profitable quarter and year (after excluding non-recurring items) despite only slight improvement in the recent elevated claims frequency. The newly-acquired Titan retail stores were rebranded to “Acceptance” during the quarter, and we look forward to maximizing their potential by introducing Acceptance products in 2016. We also remain optimistic that our recent pricing and underwriting actions will positively impact our loss ratio in the coming year.”

Premiums, Commissions and Fee Income. Premiums earned increased by $13.3 million, or 24%, to $69.6 million for the three months ended December 31, 2015, from $56.3 million for the three months ended December 31, 2014. For the year ended December 31, 2015 premiums earned increased by $48.7 million, or 22%, to $267.0 million from $218.3 million for the year ended December 31, 2014. These improvements were primarily due to higher average premiums and an increase in the number of policies in force.

Commission and fee income increased by $7.2 million, or 69%, to $17.6 million for the three months ended December 31, 2015, from $10.4 million for the three months ended December 31, 2014. Commission and fee income increased by $20.2 million, or 51%, to $59.9 million for the year ended December 31, 2015, from $39.7 million for the year ended December 31, 2014. For the three months and year ended December 31, 2015, revenue from the Titan retail locations acquired on July 1, 2015 accounted for $5.6 million and $12.6 million, respectively, of this increase. The remaining increase in commission and fee income was 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 84.4% for the three months ended December 31, 2015, compared with 74.5% for the three months ended December 31, 2014. The loss ratio was 82.0% for the year ended December 31, 2015, compared with 73.9% for the year ended December 31, 2014. We experienced favorable development related to prior periods of $0.1 million for the three months ended December 31, 2015, compared with $2.6 million for the three months ended December 31, 2014. For the year ended December 31, 2015, we experienced unfavorable development related to prior periods of $0.8 million, compared with favorable development of $4.9 million for the year ended December 31, 2014. The unfavorable loss development for the year ended December 31, 2015 was largely the result of an increase in bodily injury loss adjustment expenses (primarily outside legal costs) driven by the overall increase in claim frequency.

Excluding the development related to prior periods for the three months ended December 31, 2015 and 2014, the loss ratios were 88.5% and 79.2%, respectively. Excluding the development related to prior fiscal years, the loss ratios for the years ended December 31, 2015 and 2014 were 81.7% and 76.1%, respectively. These year-over-year increases in the loss ratio were primarily due to higher than expected claim frequency and severity across multiple coverages principally in property damage liability and collision claims. 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 14.9% for the three months ended December 31, 2015, compared with 20.8% for the three months ended December 31, 2014. The expense ratio was 17.8% for the year ended December 31, 2015, compared with 22.7% for the year ended December 31, 2014. 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 the Company’s efforts on cost containment.

Combined Ratio. The combined ratio increased to 99.3% for the three months ended December 31, 2015 from 95.3% for the three months ended December 31, 2014. For the year ended December 31, 2015, the combined ratio increased to 99.8% from 96.6% for the year ended December 31, 2014.

Titan Acquisition

Effective July 1, 2015, we acquired 83 Titan Insurance retail locations, principally in California (48), but also in Texas (12), Arizona (10), Florida (4), Nevada (4) and New Mexico (5), which were previously owned and operated by Nationwide. These agencies, which are now rebranded under our Acceptance Insurance name, sell private passenger non-standard automobile insurance through both Nationwide and other unrelated insurance companies for which our revenues are in the form of commission and fee income.

Going forward, we plan to develop our own products for California, Arizona, Nevada and New Mexico, and introduce our current Texas and Florida products into stores in those states. We have applied for an insurance company license in California and are already licensed in the three other states where we do not currently write business. These new products are not expected to be available until sometime in 2016, and California is subject to the approval of our insurance company license application by the California Department of Insurance.

Revenues and income before income taxes of the acquired retail locations included in our results for the year ended December 31, 2015 were $12.6 million and $0.2 million (excluding acquisition and integration-related costs), respectively.

Next Release of Financial Results

We currently plan to report our financial results for the three months ending March 31, 2016 on May 10, 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 12 additional states. Non-standard personal automobile insurance is made available to individuals because of their inability or unwillingness to obtain standard insurance coverage due to various factors, including payment history, payment preference, failure in the past to maintain continuous insurance coverage or driving record and/or vehicle type.

At December 31, 2015, we leased and operated 440 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 Income (in thousands, except per share data)

		Three Months Ended								Year Ended
		December 31,								December 31,
		2015				2014				2015				2014
Revenues:
Premiums earned		$	69,564			$	56,344			$	266,987			$	218,315
Commission and fee income			17,640				10,410				59,892				39,733
Investment income			1,329				1,187				5,024				5,123
Net realized gains (losses) on investments, available-for-sale			2				(13	)			(11	)			23
			88,535				67,928				331,892				263,194
Costs and expenses:
Losses and loss adjustment expenses			58,727				41,979				219,031				161,302
Insurance operating expenses			27,215				21,589				105,254				87,328
Other operating expenses			245				274				1,126				996
Litigation settlement			32				81				3,677				187
Stock-based compensation			35				34				144				185
Depreciation			527				464				1,751				1,767
Amortization of identifiable intangibles assets			253				—				514				—
Interest expense			1,043				431				2,967				1,706
			88,077				64,852				334,464				253,471
Income (loss) before income taxes			458				3,076				(2,572	)			9,723
Provision (benefit) for income taxes			171				(18,892	)			(642	)			(18,345	)
Net income (loss)		$	287			$	21,968			$	(1,930	)		$	28,068
Net income (loss) per share:
Basic		$	0.01			$	0.54			$	(0.05	)		$	0.68
Diluted		$	0.01			$	0.53			$	(0.05	)		$	0.68
Number of shares used to calculate net income (loss) per share:
Basic			41,041				40,997				41,030				40,985
Diluted			41,375				41,294				41,030				41,283

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (in thousands, except per share data)

		December 31,
		2015				2014
ASSETS
Investments, available-for-sale at fair value (amortized cost of $128,304 and $119,119, respectively)		$	131,582			$	125,085
Cash and cash equivalents			115,587				102,429
Premiums, fees, and commissions receivable, net of allowance of $454 and $392			69,881				56,486
Deferred tax assets, net			18,301				16,521
Other investments			11,256				10,530
Other assets			6,950				5,962
Property and equipment, net			5,141				3,173
Deferred acquisition costs			5,509				3,459
Goodwill			29,429				—
Identifiable intangible assets, net			8,491				4,800
TOTAL ASSETS		$	402,127			$	328,445
LIABILITIES AND STOCKHOLDERS’ EQUITY
Loss and loss adjustment expense reserves		$	122,071			$	96,613
Unearned premiums and fees			83,426				67,942
Debentures payable			40,256				40,211
Term loan from principal stockholder			29,753				—
Accrued expenses			7,345				3,262
Other liabilities			15,606				13,453
Total liabilities			298,457				221,481
Stockholders’ equity:
Preferred stock, $.01 par value, 10,000 shares authorized			—				—
Common stock, $.01 par value, 75,000 shares authorized; 41,060 and 41,016 issued and outstanding, respectively			411				410
Additional paid-in capital			457,476				457,242
Accumulated other comprehensive income, net of tax of $62 and $923, respectively			3,491				5,090
Accumulated deficit			(357,708	)			(355,778	)
Total stockholders’ equity			103,670				106,964
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	402,127			$	328,445

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES Supplemental Data (Unaudited)

PREMIUMS EARNED BY STATE

		Three Months Ended								Year Ended
		December 31,								December 31,
		2015				2014				2015				2014
Gross premiums earned:
Georgia		$	13,668			$	10,606			$	51,287			$	40,792
Florida			10,463				8,537				41,102				33,519
Texas			9,406				7,381				35,771				28,017
Ohio			6,931				5,805				26,745				22,315
Alabama			6,278				5,423				24,611				21,717
Illinois			5,837				5,527				24,050				20,552
South Carolina			5,563				4,123				20,254				16,407
Tennessee			4,561				3,222				16,702				12,748
Pennsylvania			2,301				2,161				9,224				8,426
Indiana			2,085				1,619				7,954				6,155
Missouri			1,529				1,265				5,844				4,902
Mississippi			858				745				3,398				3,030
Virginia			185				—				417				—
Total gross premiums earned			69,665				56,414				267,359				218,580
Premiums ceded to reinsurer			(101	)			(70	)			(372	)			(265	)
Total net premiums earned		$	69,564			$	56,344			$	266,987			$	218,315

COMBINED RATIOS (INSURANCE OPERATIONS)

		Three Months Ended								Year Ended
		December 31,								December 31,
		2015				2014				2015				2014
Loss			84.4	%			74.5	%			82.0	%			73.9	%
Expense			14.9	%			20.8	%			17.8	%			22.7	%
Combined			99.3	%			95.3	%			99.8	%			96.6	%

NUMBER OF RETAIL LOCATIONS

Retail location counts are based upon the date that a location commenced or ceased writing business.

		Three Months Ended								Year Ended
		December 31,								December 31,
		2015				2014				2015				2014
Retail locations – beginning of period			438				353				356				360
Opened			3				3				8				4
Acquired			—				—				83				—
Closed			(1	)			—				(7	)			(8	)
Retail locations – end of period			440				356				440				356

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES Supplemental Data (continued) (Unaudited)

RETAIL LOCATIONS BY STATE

		December 31,												September 30,
		2015				2014				2013				2015				2014
Alabama			24				24				24				24				24
Arizona			10				—				—				10				—
California			48				—				—				48				—
Florida			39				31				30				39				31
Georgia			60				60				60				60				60
Illinois			61				60				61				58				60
Indiana			17				17				17				17				17
Mississippi			7				7				7				7				7
Missouri			9				10				11				9				10
Nevada			4				—				—				5				—
New Mexico			5				—				—				4				—
Ohio			27				27				27				27				27
Pennsylvania			14				15				16				14				15
South Carolina			24				25				25				25				25
Tennessee			23				22				19				23				19
Texas			68				58				63				68				58
Total			440				356				360				438				353

INVESTOR RELATIONS CONTACT: 
Michael J. Bodayle 
615.844.2885