FIRST ACCEPTANCE CORPORATION
NOTICE OF 2024 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 7, 2024
To our Stockholders:
The 2024 annual meeting of stockholders of First Acceptance Corporation will be held Tuesday, May 7, 2024, at
10:00 a.m., Central Time at our corporate headquarters, which is located at 3813 Green Hills Village Drive,
Nashville, Tennessee 37215. Directions to the annual meeting can be obtained by contacting Investor Relations by
email through an information request at https://firstacceptance.com/investor-relations or by phone at 1-800-321-
0899. At the meeting, stockholders will vote on the following matters:
1. Election of the seven directors set forth in this proxy statement to serve until the next annual meeting of
stockholders or until their respective successors are duly elected and qualified;
2. Approval of an increase in the number of shares authorized for issuance pursuant to the First Acceptance
Corporation Employee Stock Purchase Plan;
3. Ratification of the appointment of Crowe LLP as our independent registered public accounting firm for
2024; and
4. Any other matters that may properly come before the meeting and any adjournments or postponements of
the meeting.
Stockholders of record at the close of business on March 13, 2024 are entitled to notice of and to vote at the
meeting.
Your vote is important. Please COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY
CARD as promptly as possible in the enclosed envelope in order that as many shares as possible will be represented.
By Order of the Board of Directors,
Michael J. Bodayle
Secretary
Nashville, Tennessee
March 22, 2024
Important Notice regarding the Availability of Proxy Materials
for the 2024 Annual Meeting of Stockholders to be held on May 7, 2024
First Acceptance Corporation’s Annual Report for the year ended December 31, 2023 Proxy Statement and
Proxy Card are available at
https://firstacceptance.com/investor-relations/proxy-online
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FIRST ACCEPTANCE CORPORATION
3813 GREEN HILLS VILLAGE DRIVE
NASHVILLE, TENNESSEE 37215
PROXY STATEMENT
The Board of Directors of First Acceptance Corporation (referred to herein as the “Board” or the “Board of
Directors”) is soliciting proxies to be used at the 2024 annual meeting of stockholders. This proxy statement and the
enclosed proxy card will be first mailed to stockholders on or about March 22, 2024.
ABOUT THE MEETING
What Is the Purpose of the Annual Meeting?
At our annual meeting, stockholders will vote on the matters outlined in the proxy statement. In addition, our
management will report on our performance during 2023 and respond to appropriate questions from stockholders.
Who Is Entitled to Vote?
Stockholders of record of our common stock at the close of business on the record date, March 13, 2024, are
entitled to receive notice of the annual meeting and vote the shares of common stock that they held on that date at the
meeting, or any postponement or adjournment of the meeting. Each outstanding share of our common stock entitles
its holder to cast one vote on each matter to be voted upon.
What Constitutes a Quorum?
For purposes of voting on all matters, the presence at the meeting, in person or by proxy, of the holders of a
majority of the shares of common stock outstanding on the record date will constitute a quorum. As of the record
date, 37,980,139 shares of our common stock were outstanding. Proxies received but marked as abstentions will be
included in the calculation of the number of shares considered to be present at the meeting.
How Do I Vote?
If you complete and properly sign the accompanying proxy card and return the card to us, the card will be
voted as you direct. If you are a registered stockholder and attend the meeting, you may deliver your completed proxy
card in person. "Street name" stockholders who wish to vote at the meeting will need to obtain a proxy card from the
institution that holds their shares.
Can I Change My Vote After I Return My Proxy Card?
Yes. You can revoke your proxy at any time before the final vote at the annual meeting in any of three ways:
• by submitting written notice of revocation to the Secretary;
• by submitting another proxy that is later dated and properly signed; or
• by voting in person at the meeting.
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What Are the Board's Recommendations?
Unless you give other instructions on your proxy card, the persons named as proxy holders on the proxy
card will vote in accordance with the recommendations of the Board of Directors. The Board's recommendations are
set forth below, and a description of each item is included in this proxy statement. In summary, the Board
recommends a vote:
• FOR election of each of the nominated directors;
• FOR approval of an increase in the number of shares authorized for issuance pursuant to the First
Acceptance Corporation Employee Stock Purchase Plan; AND
• FOR the ratification of the appointment of Crowe LLP as our independent registered public
accounting firm.
With respect to any other matter that properly comes before the meeting, the proxy holders will vote as
recommended by the Board of Directors or, if no recommendation is given, in their own discretion.
What Vote Is Required to Approve Each Proposal?
Election of Directors
Each of the director nominees must receive affirmative votes from a plurality of the votes cast to be elected.
This means that the seven nominees receiving the greatest number of votes will be elected as directors. Stockholders
may not cumulate votes in the election of directors.
Approval of Increase in Number of Shares Authorized for Issuance Pursuant to the First Acceptance
Corporation Employee Stock Purchase Plan
The amendment to the First Acceptance Corporation Employee Stock Purchase Plan will be ratified if the
proposal receives the affirmative vote of a majority of the votes cast on the matter. With respect to this proposal, a
properly executed proxy marked “ABSTAIN” will have the same effect as a vote against the proposal. Broker non-
votes will not affect this proposal.
Ratification of Independent Registered Public Accounting Firm
The appointment of Crowe LLP as our independent registered public accounting firm for 2024 will be
ratified if the proposal receives the affirmative vote of a majority of the votes cast on the matter. If this appointment
is not ratified by stockholders, the Audit Committee and the Board may reconsider its recommendation and
appointment, respectively. With respect to this proposal, abstentions will not be counted as votes and will have no
effect on the result of the vote.
Will My Shares Be Voted if I Do Not Sign and Return My Proxy Card?
If you are a registered stockholder and do not sign and return your proxy card, your shares will not be voted
at the annual meeting. We strongly encourage you to vote - every vote is important.
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PROPOSAL 1 – ELECTION OF DIRECTORS
At the recommendation of the Nominating and Corporate Governance Committee, the Board of Directors
has nominated and recommends to the stockholders, Rhodes R. Bobbitt, Donald J. Edwards, Jeremy B. Ford, Tom
C. Nichols, Lyndon L. Olson, Jr., Kenneth D. Russell and William A. Shipp, Jr. for election to serve as directors
until our next annual meeting of stockholders and until such time as their respective successors are duly elected and
qualified. Each of the director nominees is currently a director and was elected by the stockholders at our 2023
annual meeting of stockholders.
If any of the nominees should become unable to accept election, the persons named in the proxy may vote
for such other person or persons as may be designated by the Board of Directors. Management has no reason to
believe that any of the nominees named above will be unable to serve.
Certain information with respect to the nominees for election as directors is set forth below, including, with
respect to each director nominee, his particular experience, qualifications, attributes, and skills that qualify him to
serve as a director.
Rhodes R. Bobbitt
Director Since: 2004
(Age 78)
Business Experience: From February 1987 until his retirement in June 2004, Mr.
Bobbitt served as Managing Director and Dallas Regional Office Manager of the
Private Client Service Group – Credit Suisse First Boston and its predecessor,
Donaldson, Lufkin & Jenrette. Prior to joining Donaldson, Lufkin & Jenrette,
Mr. Bobbitt was Vice President of Security Sales in the Dallas office of Goldman
Sachs & Co. Mr. Bobbitt has executive experience in finance and investments.
Other Current Board Positions: Hilltop Holdings Inc.
Relationship to Company: Mr. Bobbitt is an Independent Director.
Donald J. Edwards
Director Since: 2002
(Age 58)
Business Experience: Mr. Edwards is the Chief Executive Officer of Flexpoint
Ford, LLC, a Chicago-based private equity firm focused on healthcare and
financial services. Prior to July 2002, Mr. Edwards served as a principal in
GTCR Golder Rauner, a Chicago-based private equity firm, for over eight years
where he was the head of the firm’s healthcare investment effort. Mr. Edwards
has experience in strategic planning, management, finance, and investments.
Other Current Board Positions: GeoVera Holdings.
Relationship to Company: Mr. Edwards is a Director.
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Tom C. Nichols
Director Since: 2005
(Age 76)
Business Experience: Mr. Nichols is currently the owner and Chief Executive
Officer of Carlile Holdings, Inc., a family investment office. He served as
Chairman and Chief Executive Officer of Carlile Bancshares, Inc. from March
2008 through its April 2017 acquisition by Independent Bancshares, Inc. for
which he served as a director until June 2020. He served as President and a
director of First United Bancorp and Chairman, President and Chief Executive
Officer of State National Bancshares, Fort Worth from October 1996 to March
2008. Mr. Nichols previously served as President of Ford Bank Group and as a
director of United New Mexico Financial Corporation. Mr. Nichols has executive
experience in strategic planning, management, and finance.
Other Current Board Positions: Hilltop Holdings Inc.
Relationship to Company: Mr. Nichols is an Independent Director.
Lyndon L. Olson
Director Since: 2004
(Age 77)
Business Experience: From 2011 until 2015, Mr. Olson served as Chairman of
Hill+Knowlton Strategies, Europe and USA, a global public relations company.
Mr. Olson served as a Senior Advisor to the Chairman of Citigroup, Inc. from
2001 until 2008. Mr. Olson served as United States Ambassador to Sweden from
1998 until 2001. From 1990 to 1998, Mr. Olson served as Chairman and Chief
Executive Officer of Travelers Insurance Group Holdings, Inc., and Associated
Madison Companies, Inc. Prior to joining Travelers, Mr. Olson served as
President of the National Group Corporation and Chief Executive Officer of its
National Group Insurance Company. Mr. Olson has executive experience in
strategic planning, management, insurance regulatory compliance and finance,
with particular emphasis on the insurance industry.
Other Current Board Positions: Scott & White Health Plan.
Relationship to Company: Mr. Olson is an Independent Director.
Jeremy B. Ford
Director Since: 2011
(Age 49)
Chairman of the Board of
Directors
Business Experience: Mr. Ford is the Chairman of the Board of Directors. He
currently serves as a director, President and Chief Executive Officer of Hilltop
Holdings Inc. (“Hilltop”), a financial holding company that owns PlainsCapital
Bank, PrimeLending (mortgage lender), and HilltopSecurities (investment bank).
Prior to joining Hilltop, he worked for Ford Financial Fund, L.P., a private equity
fund, and for Diamond A-Ford Corporation, a family limited partnership. Mr.
Ford has extensive experience in operating a public company, as well as mergers
and acquisitions.
Other Current Board Positions: Hilltop Holdings Inc.
Relationship to Company: Jeremy B. Ford is the son of Gerald J. Ford, the
Company’s former Chairman of the Board of Directors who controls
approximately 57% of our outstanding common stock.
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Kenneth D. Russell
Director Since: 2014
(Age 75)
President and Chief
Executive Officer
Business Experience: Since November 2021, Mr. Russell had served as a Special
Advisor to the Company. Upon the death of Larry Willeford in October 2022, he has
served as President and Chief Executive Officer. He previously served as the
Company's Chief Executive Officer from October 2019 through November 2021. Mr.
Russell previously served as both the Company's Interim President and Chief
Executive Officer from October 2016 until October 2019. From June 2015 to October
2016, Mr. Russell served as President, Chief Executive Officer and a director of
Mechanics Bank, an affiliate of Gerald J. Ford. Mr. Russell is a former member of the
managing board of directors for KPMG Deutsche Treuhand-Gesellschaft
Aktiengesellschaft (KPMG DTG). Prior to joining KPMG DTG, Mr. Russell was the
lead financial services partner in the US KPMG LLP's Department of Professional
Practice in New York. Prior to joining the Department of Professional Practice at
KPMG in 1993, Mr. Russell spent 20 years in KPMG's Dallas office and had
engagement responsibilities for several significant regional banking, thrift and other
financial services clients.
Other Current Board Positions:
Hilltop Holdings Inc. and Mechanics Bank
Relationship to Company: Mr. Russell is the Interim President and Chief Executive
Officer of the Company in addition to being a Director.
William A. Shipp, Jr.
Director Since: 2004
(Age 71)
Business Experience: Mr. Shipp has been a principal of W.A. Shipp, Jr. & Co., a
business and financial advisory firm, since July 1995 and has served as
Treasurer/Secretary of the Jack C. Massey Foundation since July 1999, as a
Director of the Foundation since April 2015, and as President since November
2016. From December 1983 to June 1995, Mr. Shipp served as Vice President of
Massey Investment Company, the family office of Jack C. Massey. Prior to
joining Massey Investment Company, Mr. Shipp worked for more than eight
years in various audit and tax capacities for Ernst & Young LLP. Mr. Shipp is a
certified public accountant with the CGMA designation and has experience in
accounting, finance, and investments.
Other Current Board Positions: Jack C. Massey Foundation.
Relationship to Company: Mr. Shipp is an Independent Director.
Required Vote; Recommendation of the Board
The affirmative vote of a plurality of the votes cast by the stockholders entitled to vote at the meeting is
required for the election of directors. Abstentions will be counted in determining whether there is a quorum but will
not be voted with respect to the proposal. Stockholders may not cumulate votes in the election of directors.
The Board of Directors unanimously recommends that you vote FOR each of the nominees identified
above.
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PROPOSAL 2 – APPROVAL OF THE AMENDMENT TO THE FIRST ACCEPTANCE CORORATION
EMPLOYEE STOCK PURCHASE PLAN
The Company believes that broad-based ownership of equity interests in the Company by its employees
provides a substantial motivation for superior performance by more closely aligning the economic interests of those
employees with the overall performance of the Company and the interests of the stockholders of the Company. In
order to encourage ownership of the Company's common stock by its employees, the Board of Directors and
stockholders of the Company previously approved the First Acceptance Corporation Employee Stock Purchase Plan,
as amended, which we will refer to as the "plan." The Company proposes to amend the plan to increase the number
of shares of common stock authorized for issuance under the plan from 1,00,000 to 1,300,000, to allow for future
shares to be issued. The Board of Directors has reviewed the plan and determined that, in order to encourage
continued participation in the plan by the Company’s employees, the stockholders should approve this amendment.
Required Vote; Recommendation of the Board
Approval of this proposal requires the affirmative vote of a majority of the shares represented in person or by proxy
and entitled to vote on the matter. A properly executed proxy marked "ABSTAIN" with respect to this proposal will
have the same effect as a vote against the proposal. Broker non-votes will not affect this proposal. However, as
discussed elsewhere in this proxy statement, both abstentions and broker non-votes will factor into the determination
of the existence of a quorum.
The Board of Directors recommends that you vote FOR approval of the amendment to the First Acceptance
Corporation Employee Stock Purchase Plan.
PROPOSAL 3 – RATIFICATION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Audit Committee has selected Crowe LLP (“Crowe”) to serve as our independent registered public
accounting firm for the current year, and the stockholders are requested to ratify this appointment. This will be
Crowe’s fifth year as our independent registered public accounting firm. A representative of Crowe is expected to be
present at the annual meeting, will have an opportunity to make a statement if he or she so desires and is expected to
be available to respond to appropriate questions. Stockholders should recognize that the ratification of the
appointment of Crowe does not preclude the Audit Committee from subsequently determining to change our
independent registered public accounting firm if the Audit Committee determines such action to be in the best
interests of the Company and its stockholders.
Required Vote; Recommendation of the Board
The appointment of Crowe LLP as our independent registered public accounting firm for 2024 will be
ratified if this proposal receives the affirmative vote of a majority of the votes cast on the matter. With respect to this
proposal, abstentions will not be counted as votes cast and will have no effect on the result of the vote.
The Board of Directors recommends that you vote FOR the ratification of the appointment of Crowe
LLP as the Company's independent registered public accounting firm.
OTHER MATTERS
As of the date of this proxy statement, we know of no business that will be presented for consideration at the annual
meeting other than the items referred to above. If any other matter is properly brought before the meeting for action
by stockholders, proxies in the enclosed form returned to us will be voted in accordance with the recommendation of
the Board of Directors or, in the absence of such a recommendation, in accordance with the judgment of the proxy
holder.
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ADDITIONAL INFORMATION
Stockholder Proposals for the 2025 Annual Meeting. To be eligible for inclusion in our proxy statement for the
2025 Annual Meeting of Stockholders, we must receive any stockholder proposals no later than December 8, 2024.
Requests in this regard should be addressed to:
Investor Relations
First Acceptance Corporation
3813 Green Hills Village Drive
Nashville, Tennessee 37215
1-800-321-0899
FIRST ACCEPTANCE CORPORATION
ANNUAL INFORMATION AND DISCLOSURE STATEMENT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2023
Table of Contents
Part A – General Company Information .................................................................................................................................................... 3
Part B – Share Structure ............................................................................................................................................................................. 4
Part C – Business Information ................................................................................................................................................................... 6
Part D – Management Structure and Financial Information .................................................................................................................... 12
Part E – Issuance History ......................................................................................................................................................................... 19
Part F – Exhibits ...................................................................................................................................................................................... 19
3
Part A – General Company Information
Item 1. The Exact Name of The Issuer
First Acceptance Corporation
Item 2. The Address of The Issuer’s Principal Executive Offices
Principal Executive Offices: First Acceptance Corporation
3813 Green Hills Village Drive
Nashville, TN 37215
Telephone: 615-844-2800
Web: www.firstacceptance.com
Investor Relations: Michael J. Bodayle
Vice President, Secretary & Treasurer
First Acceptance Corporation
3813 Green Hills Village Drive
Nashville, TN 37215
Email: mbodayle@firstacceptance.com
Item 3. The Jurisdiction and Date of the Issuer’s Incorporation
First Acceptance Corporation was incorporated in the state of Delaware in 1996.
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Part B – Share Structure
Item 4. The Exact Title and Class of Securities Outstanding
Class: Common Stock
CUSIP: 318457108
Trading Symbol: FACO
Item 5. Par or Stated Value and Description of the Security
A. Par or Stated Value
The Company’s outstanding securities consists solely of common stock, par value $0.01 per share.
B. Common Stock or Preferred Stock
Common Stock
Stockholders of the Company are entitled to dividends if declared by the Board of Directors. Each share of our common stock entitles
the holder thereof to one vote on all matters submitted to a vote of the stockholders. Our common stock is not subject to redemption or
future calls or assessment by First Acceptance Corporation. Holders of common stock do not have preemptive rights, or rights to convert
their common stock into other securities. In the event of a liquidation, dissolution or winding up of the affairs of First Acceptance
Corporation, holders of our common stock have the right to a ratable portion of the assets remaining after the payment of all liabilities.
All outstanding shares of our common stock are fully paid and nonassessable.
The provisions of First Acceptance Corporation’s articles of incorporation and bylaws that are summarized below may have an anti-
takeover effect and may delay, defer or prevent a tender offer or takeover attempt that a stockholder might consider to be in such
stockholder's best interests, including those attempts that might result in a premium over the market price for the shares held by
stockholders:
• the requirement that only stockholders owning at least one-third of the outstanding shares of our common stock may call a
special stockholders’ meeting; and
• the requirement that stockholders owning at least two-thirds of the outstanding shares of our common stock must approve
any amendment to our certificate of incorporation provisions concerning the ability to call special stockholders’ meetings.
Under our certificate of incorporation, we may issue shares of preferred stock on terms that are unfavorable to the holders of our
common stock. The issuance of shares of preferred stock could also prevent or inhibit a third party from acquiring us. The existence of
these provisions could depress the price of our common stock, could delay or prevent a takeover attempt or could prevent attempts to
replace or remove incumbent management.
Item 6. The Number of Shares or Total Amount of the Securities Outstanding for Each Class of Securities Authorized
Common Shares
December 31, 2023
December 31, 2022
Number of Shares Authorized
75,000,000
75,000,000
Number of Shares Outstanding
38,264,718
37,867,980
Freely Tradeable Shares (Public Float)
10,711,656
10,144,257
Total Number of Stockholders of Record
237
235
Preferred Shares
December 31, 2023
December 31, 2022
Number of Shares Authorized
10,000,000
10,000,000
Number of Shares Outstanding
—
—
Freely Tradeable Shares (Public Float)
—
—
Total Number of Stockholders of Record
—
—
The Company has more than 50 beneficial stockholders of record owning at least 100 shares.
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Item 7. The Name and Address of the Transfer Agent
Computershare is registered as a transfer agent under the Exchange Act.
Shawn P. Sharp, Assistant Vice President and Relationship Manager
Computershare – Client Services
1325 Remington Blvd.
Bolingbrook, IL 60490
502-551-9319
Shawn.Sharp@computershare.com
6
Part C – Business Information
Item 8. The Nature of the Issuer’s Business
A. Business Development (During the Last Three Years)
1. The form of organization of the issuer.
We are a Delaware corporation.
2. The year that the issuer (or any predecessor) was organized.
We were organized in 1996.
3. The issuer’s fiscal year end date.
Our fiscal year end date is December 31.
4. Whether the issuer (or any predecessor) has been in bankruptcy, receivership or any similar proceeding.
We have not been in any bankruptcy, receivership, or any similar proceeding.
5. Any material reclassification, merger, consolidation, or purchase or sale of a significant amount of assets.
We have not had any reclassification, merger, consolidation, or purchase or sale of a significant amount of assets other than
the sale of our insurance agency operations effective December 1, 2023, as detailed in Part F, Item 18, Number 7, and
discussed throughout this document.
6. Any default of the terms of any note, loan, lease, or other indebtedness or financing arrangement requiring the issuer
to make payments.
We have not had any default of the terms of any note, loan, lease, or other indebtedness or financing arrangement.
7. Any change of control.
We have not had a change in control.
8. Any increase of 10% or more of the same class of outstanding equity securities.
There has not been an increase of 10% or more in any class of outstanding equity securities.
9. Any past, pending or anticipated stock split, stock dividend, recapitalization, merger, acquisition, spin-off, or
reorganization.
We do not have any past, pending or anticipated stock split, stock dividend, recapitalization, merger, acquisition, spin-off, or
reorganization.
10. Any delisting of the issuer’s securities by any securities exchange or deletion from the OTC Bulletin Board.
Effective April 9, 2018, we voluntarily terminated our listing with the New York Stock Exchange and began trading on the
OTCQX Marketplace.
11. Any current, past, pending or threatened legal proceedings or administrative actions either by or against the issuer
that could have a material effect on the issuer’s business, financial condition, or operations and any current, past or
pending trading suspensions by a securities regulator. State the names of the principal parties, the nature and current
status of the matters, and the amounts involved.
Please see the section entitled “Litigation” in Note 14 of our consolidated financial statements which are attached to this
report.
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B. Business of Issuer
1. The issuer’s primary and secondary SIC codes.
Our primary SIC Code is 6331.
2. If the issuer has never conducted operations, is in the development stage, or is currently conducting operations.
We are currently conducting operations.
3. Whether the issuer has at any time been a “shell company.”
We are not, and never have been, a shell company.
4. The names of any parent, subsidiary, or affiliate of the issuer, and its business purpose, its method of operation, its
ownership, and whether it is included in the financial statements attached to this disclosure statement.
First Acceptance Corporation owns and operates three insurance company subsidiaries: First Acceptance Insurance Company,
Inc. (“FAIC”), First Acceptance Insurance Company of Georgia, Inc. (“FAIC-GA) and First Acceptance Insurance Company
of Tennessee, Inc. (“FAIC-TN”) and had one wholly-owned insurance agency subsidiary: Acceptance Insurance Agency of
Tennessee, Inc. (“AITN”), which was sold effective December 1, 2023. We also have other subsidiaries that individually and
collectively are not material. These entities are all included in the consolidated financial statements attached to this disclosure
statement.
We also own an unconsolidated subsidiary trust, First Acceptance Statutory Trust I (“FAST I”) that in June 2007 issued
debentures to outside investors on behalf of First Acceptance Corporation.
5. The effect of existing or probable governmental regulations on the business.
Insurance Company Regulation. Our insurance company subsidiaries are regulated by governmental agencies in the states in
which we conduct business and by various federal statutes and regulations. These state regulations vary by jurisdiction but,
among other matters, usually involve:
• regulating premium rates and forms;
• setting minimum solvency standards;
• setting capital and surplus requirements;
• licensing companies, agents and, in some states, claims adjusters;
• setting requirements for and limiting the types and amounts of investments;
• establishing requirements for the filing of annual statements and other financial reports;
• conducting periodic statutory examinations of the affairs of insurance companies;
• requiring prior approval of changes in control and of certain transactions with affiliates;
• limiting the amount of dividends that may be paid without prior regulatory approval; and
• setting standards for advertising and other market conduct activities.
Required Licensing. We operate under licenses issued by various state insurance authorities. Such licenses may be of perpetual
duration or periodically renewable, provided we continue to meet applicable regulatory requirements. The licenses govern,
among other things, the types of insurance coverages and products that may be offered in the licensing state. Such licenses are
typically issued only after an appropriate application is filed and prescribed criteria are met. All our licenses are in good
standing.
As required by our current operations, we hold managing general agency licenses in Texas and Florida. In addition, business
that was written through other third-party insurance carriers required our agency operations to hold agency or broker licenses
8
in those states. To expand into a new state or offer a new line of insurance or other new product, we must apply for and obtain
the appropriate licenses.
Insurance Holding Company Regulation. We operate as an insurance holding company system and are subject to regulation in
the jurisdictions in which our insurance company subsidiaries conduct business. These regulations require that each insurance
company in the holding company system register with the insurance department of its state of domicile and furnish information
concerning the operations of companies in the holding company system which may materially affect the operations,
management or financial condition of the insurers in the holding company domiciled in that state. We have three insurance
company subsidiaries that are organized and domiciled under the insurance statutes of Texas, Georgia and Tennessee. The
insurance laws in each of these states similarly provide that all transactions among members of a holding company system be
done at arm’s length and shown to be fair and reasonable to the regulated insurer. Transactions between insurance company
subsidiaries and their parents and affiliates typically must be disclosed to the state regulators, and any material or extraordinary
transaction requires prior approval of the applicable state insurance regulator. A change of control of a domestic insurer or of
any controlling person requires the prior approval of the state insurance regulator. In general, any person who acquires 10% or
more of the outstanding voting securities of the insurer or its parent company is deemed by statute to have acquired control of
the domestic insurer.
Restrictions on Paying Dividends. We may in the future rely on dividends from our insurance company subsidiaries to meet
corporate cash requirements. State insurance regulatory authorities require insurance companies to maintain specified levels of
statutory capital and surplus. The amount of an insurer’s capital and surplus following payment of any dividends must be
reasonable in relation to the insurer’s outstanding liabilities and adequate to meet its financial needs. Prior approval from state
insurance regulatory authorities is generally required in order for an insurance company to declare and pay extraordinary
dividends. The payment of ordinary dividends is limited by the amount of capital and surplus available to the insurer, as
determined in accordance with state statutory accounting practices and other applicable limitations. State insurance regulatory
authorities that have jurisdiction over the payment of dividends by our insurance company subsidiaries may in the future adopt
statutory provisions more restrictive than those currently in effect. See Note 15 to our consolidated financial statements for a
discussion of the current ability of our insurance company subsidiaries to pay dividends.
Regulation of Rates and Policy Forms. Most states in which our insurance company subsidiaries operate have insurance laws
that require insurance companies to file premium rate schedules and policy or coverage forms for review and approval. In many
cases, such rates and policy forms must be approved prior to use. State insurance regulators have broad discretion in judging
whether an insurer’s rates are adequate, not excessive and not unfairly discriminatory. Generally, property and casualty insurers
are unable to implement rate increases until they show that the costs associated with providing such coverage have increased.
The speed at which an insurer can change rates in response to competition or increasing costs depends, in part, on the method
by which the applicable state’s rating laws are administered. There are three basic rate administration systems: (i) the insurer
must file and obtain regulatory approval of the new rate before using it; (ii) the insurer may file the new rate and begin using
the new rate during regulatory review; or (iii) the insurer may begin using the new rate and file it in a specified period of time
for regulatory review. Under all three rating systems, the state insurance regulators have the authority to disapprove the rate
subsequent to its filing. Thus, insurers who begin using new rates before the rates are approved may be required to issue
premium refunds or credits to policyholders if the new rates are ultimately deemed excessive and disapproved by the applicable
state insurance authorities.
Investment Regulation. Our insurance company subsidiaries are subject to state laws and regulations that require diversification
of their investment portfolios and limitations on the amount of investments in certain categories. Failure to comply with these
laws and regulations would cause non-conforming investments to be treated as non-admitted assets for purposes of measuring
statutory surplus and, in some instances, would require divestiture. If a non-conforming asset is treated as a non-admitted asset,
it would lower the affected subsidiary’s surplus and thus, its ability to write additional premiums and pay dividends.
Restrictions on Cancellation, Non-Renewal or Withdrawal. Many states have laws and regulations that limit an insurer’s ability
to exit a market. For example, certain states limit an automobile insurer’s ability to cancel or not renew policies. Some states
prohibit an insurer from withdrawing one or more lines of business from the state, except pursuant to a plan approved by the
state insurance department. The state insurance department may disapprove a plan that may lead to market disruption. Laws
and regulations that limit cancellations and non-renewals and that subject business withdrawals to prior approval requirements
may restrict an insurer’s ability to exit unprofitable markets.
Privacy Regulations. The Gramm-Leach-Bliley Act protects consumers from the unauthorized dissemination of certain
nonpublic personal information. In addition, most states have implemented additional regulations to address privacy issues.
These laws and regulations apply to all financial institutions, including insurance companies, and require us to maintain
9
appropriate procedures for managing and protecting certain nonpublic personal information of our customers and to fully
disclose our privacy practices to our customers. We may also be exposed to future privacy laws and regulations, which could
impose additional costs and impact our results of operations or financial condition.
Licensing of Our Employee-Agents and Claims Adjusters. Prior to the sale of AITN, all our employees who sold, solicited or
negotiated insurance were licensed, as required, by the state in which they worked, for the applicable line or lines of insurance
they offer. In certain states in which we operate, our insurance claims adjusters are also required to be licensed and are subject
to annual continuing education requirements.
Unfair Claims Practices. Generally, insurance companies, adjusting companies and individual claims adjusters are prohibited
by state statutes from engaging in unfair claims practices which could indicate a general business practice. We set business
conduct policies and conduct regular training to ensure that our employee-adjusters and other claims personnel are aware of
these prohibitions, and we require them to conduct their activities in compliance with these statutes.
Financial Reporting. We are required to file quarterly and annual financial reports with states utilizing statutory accounting
practices that are different from U.S. generally accepted accounting principles, which generally reflect our insurance company
subsidiaries on a going concern basis. The statutory accounting practices used by state regulators, in keeping with the intent to
assure policyholder protection, are generally based on a liquidation concept. For statutory financial information on our
insurance company subsidiaries, see Note 15 to our consolidated financial statements which are attached to this report.
Periodic Financial and Market Conduct Examinations. The state insurance departments that have jurisdiction over our
insurance company subsidiaries conduct on-site visits and examinations of the insurers’ affairs, especially as to their financial
condition, ability to fulfill their obligations to policyholders, market conduct, claims practices and compliance with other laws
and applicable regulations. Generally, these examinations are conducted every five years. If circumstances dictate, regulators
are authorized to conduct special or target examinations of insurers, insurance agencies and insurance adjusting companies to
address particular concerns or issues. The results of these examinations can give rise to regulatory orders requiring remedial,
injunctive, or other corrective action on the part of the company that is the subject of the examination. Our three insurance
companies have been examined for financial condition through December 31, 2020 by their respective states of domicile. FAIC
has been the subject of various limited scope market conduct examinations.
Risk-Based Capital. In order to enhance the regulation of insurer solvency, the National Association of Insurance
Commissioners, or “NAIC,” has adopted a formula and model law to implement risk-based capital, or “RBC,” requirements
designed to assess the minimum amount of statutory capital that an insurance company needs to support its overall business
operations and to ensure that it has an acceptably low expectation of becoming financially impaired. RBC is used to set capital
requirements based on the size and degree of risk taken by the insurer and considering various risk factors such as asset risk,
credit risk, underwriting risk, interest rate risk and other relevant business risks. The NAIC model law provides for increasing
levels of regulatory intervention as the ratio of an insurer’s total adjusted capital decreases relative to its RBC, culminating
with mandatory control of the operations of the insurer by the domiciliary insurance department at the so-called mandatory
control level. This calculation is performed on a calendar year basis, and at December 31, 2023, each of our insurance
companies maintained an RBC level that was in excess of an amount that would require any corrective actions on their part.
6. An estimate of the amount spent during each of the last two fiscal years on research and development activities, and, if
applicable, the extent to which the cost of such activities is borne directly by customers.
We have not spent any material amounts during the last two fiscal years on research and development activities.
7. Costs and effects of compliance with environmental laws (federal, state, and local).
Based on our environmental assessments, we believe that any compliance costs associated with environmental laws and
regulations or any remediation of affected properties are not material, and that any future compliance costs would not have a
material adverse effect on our business, financial position, results of operations, or cash flows.
8. The number of total employees and number of full-time employees.
At December 31, 2023, the Company had 633 full time employees.
10
Item 9. The Nature of Products or Services Offered
A. Principal products or services, and their markets.
Our core business involved offering automobile insurance policies categorized as “non-standard” to individuals based primarily
on their inability or unwillingness to obtain insurance coverage from standard carriers due to various factors, including their
payment history or need for monthly payment plans, failure to maintain continuous insurance coverage or driving record. We
believed that a majority of our customers seek non-standard insurance due to flexible payment terms and positive customer
service experience, including dependable and direct interaction through our retail locations. These policies were written both
through our insurance companies and third-party carriers.
Our employee-agents primarily sold non-standard personal automobile insurance products that were underwritten by us and
through third-party carriers for which we received a commission. We also offered a variety of additional commissionable
products, and, in most states, our employee-agents also sold (and continue to sell) an insurance product providing personal
property and liability coverage for renters that were underwritten by us. Through December 1, 2023, our 288 retail locations,
were also 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 sold our products through selected retail locations owned and
operated by independent agents.
On December 1, 2023, the Company sold AITN, the Company’s retail sales agency operations subsidiary, which maintained
retail locations in 13 states, and whose operations generated revenue from selling non-standard personal automobile insurance
products and related products in 15 states. Following this transaction, we operate solely through independent agents. We are
also licensed as an insurance company in 11 states where we do not conduct any underwriting operations.
Our employee-agents primarily sold non-standard personal automobile insurance products that were underwritten by us and
through third-party carriers for which we received a commission. We also offered a variety of additional commissionable
products, and, in most states, our employee-agents also sold (and continue to sell) an insurance product providing personal
property and liability coverage for renters that were underwritten by us. Through December 1, 2023, our 288 retail locations,
were also 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 sold our products through selected retail locations owned and
operated by independent agents.
As an insurance company, we are a servicer and underwriter of non-standard personal automobile insurance.
We offer customers automobile insurance with low down payments, competitive monthly payments and a high level of personal
service. This strategy makes it easier for our customers to obtain automobile insurance, which is legally mandated in the states
in which we currently operate. Currently, our policy life expectancy is lower than that of standard personal automobile insurance
providers due to the payment patterns of our customers. However, we accept customers seeking insurance who have previously
terminated coverage provided by us without imposing any additional requirements on such customers. Our business model and
systems allow us to issue policies efficiently and, when necessary, cancel them to minimize the potential for credit loss while
adhering to regulatory cancellation notice requirements.
In addition to a low-down payment and competitive monthly rates, we offered customers valuable face-to-face contact and
speed of service as many of our customers preferred not to purchase a new automobile insurance policy over the phone or
through the internet. The majority of our customers made their payments through our retail locations. For many of our
customers, our employee-agents were not only the face of the Company, but also the preferred interface for buying insurance.
B. Distribution methods of the products or services.
Following the December 1, 2023 sale of our insurance agency operations, we now solely distribute our products through
independent agents.
C. Status of any publicly announced new product or service.
We have not publicly announced any new product or service.
11
D. Competitive business conditions, the issuer’s competitive position in the industry, and methods of competition.
The non-standard personal automobile insurance business is highly competitive. Our primary competition comes not only from
national companies or their subsidiaries, but also from non-standard insurers and independent agents that operate only in
specific regions or states. We compete against other insurance companies and independent agents that market insurance on
behalf of a number of insurers. We compete with these other insurers on factors such as initial down payment, availability of
monthly payment plans, price, customer service and claims service.
E. Sources and availability of raw materials and the names of principal suppliers.
We do not use raw materials.
F. Dependence on one or a few major customers.
For the year ended December 31, 2023, 25% of insurance company operating revenues resulted from insurance policies
produced by a single independent agent who is engaged in a technology driven method of delivering insurance through an
app that is commonly referred to as “Insurtech.” In 2024, it is anticipated that the buyer of AITN will produce the majority
of insurance company operating revenues.
G. Patents, trademarks, licenses, franchises, concessions, royalty agreements or labor contracts, including their duration.
The Company maintains trademarks related to our trade names and logos. We do not have any patents, franchises, concessions,
royalty agreements, or labor contracts. See Item 8 B.5. for information regarding our required licenses.
H. The need for any government approval of principal products or services and the status of any requested government
approvals.
Insurance products are required to be reviewed and approved by insurance regulators in the various states in which we conduct
business. Variations on certain products may occur on a state-by-state basis based on the laws or regulations of a given state.
From time-to-time, we do seek to add new products and modify existing products, but the Company is not currently awaiting
any approval that materially impacts our ability to conduct business.
Item 10. The Nature and Extent of the Issuer’s Facilities
We lease office space in two separate facilities (a total of approximately 80,000 square feet) in Nashville, Tennessee for our corporate
office and customer service, claims, and data center. We also lease office space for a regional claims office in Tampa, Florida. Through
December 1, 2023. our 288 retail locations were all leased and were typically located in storefronts in retail shopping centers.
12
Part D – Management Structure and Financial Information
Item 11. The Name of the Chief Executive Officer, Members of the Board of Directors, as well as Control Persons
A. Officers and Directors
Kenneth D. Russell
President and Chief Executive Officer and Director Since 2014
(Age 75)
Business Experience: Since November 2021, Mr. Russell had served as a
Special Advisor to the Company. Upon the death of Larry Willeford in October
2022, he has served as President and Chief Executive Officer. He previously
served as the Company's Chief Executive Officer from October 2019 through
November 2021. Mr. Russell previously served as both the Company's Interim
President and Chief Executive Officer from October 2016 until October 2019.
From June 2015 to October 2016, Mr. Russell served as President, Chief
Executive Officer and a director of Mechanics Bank, an affiliate of Gerald J.
Ford. Mr. Russell is a former member of the managing board of directors for
KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft (KPMG DTG). Prior
to joining KPMG DTG, Mr. Russell was the lead financial services partner in the
US KPMG LLP's Department of Professional Practice in New York. Prior to
joining the Department of Professional Practice at KPMG in 1993, Mr. Russell
spent 20 years in KPMG's Dallas office and had engagement responsibilities for
several significant regional banking, thrift, and other financial services clients.
Other Current Board Positions: Hilltop Holdings Inc. and Mechanics Bank
Relationship to Company: Mr. Russell is the President and Chief Executive
Officer of the Company.
Brian Dickman
Executive Vice President and Chief Financial Officer
(Age 50)
Business Experience: Mr. Dickman has been the Company’s Executive Vice
President and Chief Financial Officer since December 2019. From 2011 to 2019,
Mr. Dickman was Director – Financial Analysis and Strategy for Direct General
Insurance.
Other Current Board Positions: None
Relationship to Company: Mr. Dickman is the Executive Vice President and
Chief Financial Officer of the Company.
Rhodes R. Bobbitt
Director Since: 2004
(Age 78)
Business Experience: From February 1987 until his retirement in June 2004, Mr.
Bobbitt served as Managing Director and Dallas Regional Office Manager of the
Private Client Service Group – Credit Suisse First Boston and its predecessor,
Donaldson, Lufkin & Jenrette. Prior to joining Donaldson, Lufkin & Jenrette,
Mr. Bobbitt was Vice President of Security Sales in the Dallas office of Goldman
Sachs & Co. Mr. Bobbitt has executive experience in finance and investments.
Other Current Board Positions: Hilltop Holdings Inc.
Relationship to Company: Mr. Bobbitt is an Independent Director.
13
Donald J. Edwards
Director Since: 2002
(Age 58)
Business Experience: Mr. Edwards is the Chief Executive Officer of Flexpoint
Ford, LLC, a Chicago-based private equity firm focused on healthcare and
financial services. Prior to July 2002, Mr. Edwards served as a principal in
GTCR Golder Rauner, a Chicago-based private equity firm, for over eight years
where he was the head of the firm’s healthcare investment effort. Mr. Edwards
has experience in strategic planning, management, finance, and investments.
Other Current Board Positions: GeoVera Holdings.
Relationship to Company: Mr. Edwards is a Director.
Gerald J. Ford
Principal Shareholder
(Age 79)
Business Experience: Gerald J. Ford is the Chairman of the Board of Hilltop
Holdings Inc. and the Co-Managing Partner of Ford Financial Fund II, L.P. and
Ford Financial Fund III. LP., private equity funds. He was Chairman of the
Board of Directors and a director of the Company until 2011.
Other Current Board Positions: Hilltop Holdings Inc., and Mechanics Bank.
Relationship to Company: Gerald J. Ford controls approximately 57% of our
outstanding common stock and is the father of Jeremy B. Ford, the Chairman of
our Board of Directors.
Jeremy B. Ford
Director Since: 2011
(Age 49)
Chairman of the Board of
Directors
Business Experience: Mr. Ford is the Chairman of the Board of Directors. He
currently serves as a director, President, and Chief Executive Officer of Hilltop
Holdings Inc. (“Hilltop”), a financial holding company that owns PlainsCapital
Bank, PrimeLending (mortgage lender), and HilltopSecurities. Prior to joining
Hilltop, he worked for Ford Financial Fund, L.P., a private equity fund, and for
Diamond A-Ford Corporation, a family limited partnership. Mr. Ford has
extensive experience in operating a public company, as well as mergers and
acquisitions.
Other Current Board Positions: Hilltop Holdings Inc.
Relationship to Company: Jeremy B. Ford is the Chairman of the Board of
Directors. He also is the son of Gerald J. Ford who controls approximately 57%
of our outstanding common stock.
14
Tom C. Nichols
Director Since: 2005
(Age 76)
Business Experience: Mr. Nichols is currently the owner and Chief Executive
Officer of Carlile Holdings, Inc., a family investment office. He served as
Chairman and Chief Executive Officer of Carlile Bancshares, Inc. from March
2008 through its April 2017 acquisition by Independent Bancshares, Inc. for
which he served as a director. He served as President and a director of First
United Bancorp and Chairman, President and Chief Executive Officer of State
National Bancshares, Fort Worth from October 1996 to March 2008. Mr. Nichols
previously served as President of Ford Bank Group and as a director of United
New Mexico Financial Corporation. Mr. Nichols has executive experience in
strategic planning, management, and finance.
Other Current Board Positions: Hilltop Holdings, Inc.
Relationship to Company: Mr. Nichols is an Independent Director.
Lyndon L. Olson
Director Since: 2004
(Age 77)
Business Experience: From 2011 until 2015, Mr. Olson served as Chairman of
Hill+Knowlton Strategies, Europe and USA, a global public relations company.
Mr. Olson served as a Senior Advisor to the Chairman of Citigroup, Inc. from
2001 until 2008. Mr. Olson served as United States Ambassador to Sweden from
1998 until 2001. From 1990 to 1998, Mr. Olson served as Chairman and Chief
Executive Officer of Travelers Insurance Group Holdings, Inc. and Associated
Madison Companies, Inc. Prior to joining Travelers, Mr. Olson served as
President of the National Group Corporation and Chief Executive Officer of its
National Group Insurance Company. Mr. Olson has executive experience in
strategic planning, management, insurance regulatory compliance and finance,
with particular emphasis on the insurance industry.
Other Current Board Positions: Scott & White Health Plan.
Relationship to Company: Mr. Olson is an Independent Director.
William A. Shipp, Jr.
Director Since: 2004
(Age 71)
Business Experience: Mr. Shipp has been a principal of W.A. Shipp, Jr. & Co., a
business and financial advisory firm, since July 1995 and has served as
Treasurer/Secretary of the Jack C. Massey Foundation since July 1999, as a
Director of the Foundation since April 2015, and as President since November
2016. From December 1983 to June 1995, Mr. Shipp served as Vice President of
Massey Investment Company, the family office of Jack C Massey. Prior to
joining Massey Investment Company, Mr. Shipp worked for more than eight
years in various audit and tax capacities for Ernst & Young LLP. Mr. Shipp is a
certified public accountant with the CGMA designation and has experience in
accounting, finance, and investments.
Other Current Board Positions: Jack C. Massey Foundation.
Relationship to Company: Mr. Shipp is an Independent Director.
The business address of our directors and executive officers is 3813 Green Hills Village Drive, Nashville, TN 37215. The address of
Gerald J. Ford is 6565 Hillcrest Avenue, Suite 600, Dallas, TX 75205.
15
2023 Compensation of Executive Officers
The following table summarizes information with respect to the compensation paid to our executive officers in 2023.
Stock
Awards
Name and Principal Position
Salary ($)
Bonus ($)
($) (1)
Total ($)
Kenneth D. Russell
(2)
400,000
35,000
582,820
1,071,820
Interim President and Chief Executive
Officer
Brian Dickman
(3)
302,713
147,850
385,380
835,943
Executive Vice President and
Chief Financial Officer
(1) Represents the aggregate grant date fair value of restricted stock units granted computed in accordance with FASB ASC 718. Aggregate compensation
expense is equal to the grant date fair value based on the closing stock price on the date of grant.
(2) Mr. Russell also serves in various capacities for affiliates of Gerald J, Ford, our principal stockholder. The salary amounts represent reimbursements by the
Company to Mr. Russell’s current employer, Diamond-A Administration Company, at an annual rate of $400,000.
(3) Mr. Dickman’s current annual salary is $305,000.
2023 Director Compensation
Each director receives an annual retainer of $20,000, payable in equal, quarterly installments. The Chairman of the Audit
Committee of the Board of Directors receives an additional annual retainer of $5,000, payable in equal, quarterly installments.
Directors also receive a fee of $2,000 for each Board of Directors meeting attended and $1,000 for each Board committee meeting
attended. In addition, directors receive an award pursuant to the Amended and Restated First Acceptance Corporation 2002 Long
Term Incentive Plan of 1,000 shares of common stock on the date of each annual meeting of our stockholders.
The following table summarizes information with respect to the compensation paid to the members of our Board in 2023.
Fees Earned
or Paid in
Stock
Name
Cash ($)
Awards ($) (1)
Total ($)
William A. Shipp, Jr.
41,000
810
41,810
Rhodes R. Bobbitt
37,000
810
37,810
Kenneth D. Russell
36,000
810
36,810
Tom C. Nichols
33,000
810
33,810
Jeremy B. Ford
33,000
810
33,810
Lyndon L. Olson, Jr.
30,000
810
30,810
Donald J. Edwards
30,000
810
30,810
(1) Represents the proportionate amount of the total value of stock awards to directors recognized as an expense during 2023 for financial accounting purposes
under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 718-20, Compensation – Stock Compensation,
disregarding for this purpose estimated forfeitures relating to service-based vesting conditions. Compensation expense is equal to the grant date fair value of
the stock awards using the closing price for the Company’s common stock on the New York Stock Exchange on the date of grant ($0.81).
16
Beneficial Ownership of Directors and Officers
The following table shows the amount of our common stock beneficially owned as of December 31, 2023 by our current
directors and our named executive officers.
Outstanding
Percent of
Name
Shares (1)
Class
Jeremy B. Ford
2,806,552
(2)
7.3%
Kenneth D. Russell
1,082,919
2.8%
Rhodes R. Bobbitt
876,240
2.3%
Donald J. Edwards
537,666
1.4%
Tom C. Nichols
123,000
*
Lyndon L. Olson, Jr.
68,000
*
William A. Shipp, Jr.
44,501
*
Brian Dickman
24,676
*
* Represents less than 1% of our outstanding common stock.
(1) The number of shares shown includes shares that are individually or jointly owned, as well as shares over which the individual has either
sole or shared investment or voting authority.
(2) Excludes shares beneficially owned by Hunter’s Glen (See Beneficial Ownership of Control Persons table.). Mr. Jeremy B. Ford is the
beneficiary of a trust that owns approximately 46% of Hunter’s Glen. Mr. Jeremy B. Ford disclaims beneficial ownership of the shares
owned by Hunter’s Glen, except to the extent of his pecuniary interest therein.
B. Legal/Disciplinary History
In the last five years, none of our officers, directors or control persons have been the subject of any of the following:
1. A conviction in a criminal proceeding or named as a defendant in a pending criminal proceeding (excluding traffic
violations and other minor offenses);
2. The entry of an order, judgment, or decree, not subsequently reversed, suspended, or vacated, by a court of competent
jurisdiction that permanently or temporarily enjoined, barred, suspended or otherwise limited such person’s involvement
in any type of business, securities, commodities, or banking activities;
3. A finding or judgment by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission,
the Commodity Futures Trading Commission, or a state securities regulator of a violation of federal or state securities or
commodities law, which finding, or judgment has not been reversed, suspended, or vacated; or
4. The entry of an order by a self-regulatory organization that permanently or temporarily barred, suspended, or otherwise
limited such person’s involvement in any type of business or security activities.
C. Disclosure of Family Relationships
Jeremy B. Ford, Chairman of the Board, is the son of Gerald J. Ford, the Company’s former Chairman of the Board of Directors
who controls approximately 57% of our outstanding common stock.
D. Disclosure of Related Party Transactions
The Company also operates under standard agreements for Treasury and Custodial Services with a bank indirectly owned 24%
by Gerald J. Ford. The fees under these agreements for the year ended December 31, 2023 were $141 thousand.
E. Disclosure of Conflicts of Interest
There are no conflicts of interest with regards to our executive officers and directors.
17
Item 12. Financial Information for the Issuer’s Most Recent Fiscal Period
Our audited consolidated financial statements for the year ended December 31, 2023, were filed separately through the OTC
Disclosure and News Service, are available at www.otcmarkets.com and incorporated herein by reference.
Item 13. Similar Financial Information for Such Part of the Two Preceding Fiscal Years as the Issuer or its Predecessor Has
Been in Existence
Our audited consolidated financial statements for the year ended December 31, 2023, are incorporated herein by reference
and available through the OTC Disclosure and News Service, or at www.otcmarkets.com. Prior to April 9, 2018, the
Company traded on the New York Stock Exchange. The Annual Report on Form 10-K for the year ended December 31, 2017
was previously filed by the Company with the Securities and Exchange Commission and is incorporated herein by reference.
Item 14. Beneficial Owners
Beneficial Ownership of Control Persons
Amount and
Nature of
Beneficial
Percent of
Name and Address of Beneficial Owner
Ownership
Class (1)
Gerald J. Ford (2)
6565 Hillcrest Avenue, Suite 600
Dallas, Texas 75205
21,851,599
57.1%
Jeremy B. Ford
3813 Green Hills Village Drive
Nashville, Tennessee 37215
2,806,552
7.3%
(1) Based on 38,264,718 shares of common stock outstanding on December 31, 2023.
(2) Includes 19,019,653 shares owned through Hunter's Glen/Ford Ltd. ("Hunter's Glen") and 2,268,218 shares owned through Turtle Creek
Revocable Trust ("Turtle Creek Trust"). Because Mr. Ford is one of two general partners of Hunter's Glen and the sole stockholder of Ford
Diamond Corporation, a Texas corporation and the other general partner of Hunter's Glen, Mr. Ford is considered the beneficial owner of
the shares that Hunter's Glen owns. Since Mr. Ford is trustee of Turtle Creek Trust, Mr. Ford is considered the beneficial owner of the
shares that Turtle Creek Trust owns.
We are not aware of any additional beneficial stockholders owning 5% or more of our Common Stock. It is possible that there are one
or more additional beneficial holders of a significant percentage of our Common Stock, however the federal securities laws do not
require a beneficial stockholder of 5% or more of our Common Stock to disclose that information publicly or to the Company. The
table above is based on the best information available to the Company.
18
Item 15. The Name, Address, Telephone Number, and Email Address of Each of the Following Outside Providers that Advise
the Issuer on Matters Relating to Operations, Business Development and Disclosure
Our securities counsel is:
Corey G. Prestidge
Hilltop Holdings Inc.
6565 Hillcrest Avenue
Dallas, TX 75205
(214) 855-2177
Our auditor is:
Crowe LLP
720 Cool Springs Boulevard
Suite 600
Franklin, TN 37067
(615) 360-5500
Preparation of our consolidated financial statements is the responsibility of the Company. Crowe LLP is responsible for
conducting an audit of the consolidated financial statements in accordance with auditing standards generally accepted in the
United States of America, with the objective of expressing an opinion as to whether the presentation of the consolidated
financial statements conforms with accounting principles generally accepted in the United States of America (GAAP). Crowe
LLP has confirmed to us that the firm is licensed to practice public accounting in the states in which we conduct our business.
Crowe LLP is registered with the PCAOB.
Item 16. Management’s Discussion and Analysis or Plan of Operation
A. Plan of Operation
This item is not applicable as we have had revenue in each of the last two fiscal years.
B. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our Management’s Discussion and Analysis of Financial Condition and Results of Operation for each of the last two fiscal
years are incorporated by reference to our Annual Report filed separately through the OTC Disclosure and News Service,
available at www.otcmarkets.com.
C. Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
19
Part E – Issuance History
Item 17. List of Securities Offerings and Shares Issued for Services in the Past Two Years
We have had no securities offerings or shares issued for services during the past two fiscal years, or since December 31, 2023.
Part F – Exhibits
Item 18. Material Contracts
1. Amended and Restated First Acceptance Corporation 2002 Long Term Incentive Plan, was filed as Exhibit 10.1 of the
Company’s Current Report on Form 8-K dated November 23, 2009 and is incorporated herein by reference.
2. Second Amended and Restated First Acceptance Corporation Employee Stock Purchase Plan, was filed in the Company’s
Report on Form 10-K dated December 31, 2017 as Exhibit 10.4 and is incorporated herein by reference.
3. Form of Indemnification Agreement between the Company and each of the Company’s directors and executive officers, was
filed in the Company’s Report on Form 10-K dated December 31, 2012 as Exhibit 10.6 and is incorporated herein by
reference.
4. Junior Subordinated Indenture, dated June 15, 2007, between First Acceptance Corporation and Wilmington Trust Company,
was filed as Exhibit 99.2 in the Company’s June 18, 2007 Report on Form 8-K and is incorporated herein by reference.
5. Guarantee Agreement, dated June 15, 2007, between First Acceptance Corporation and Wilmington Trust Company, was
filed as Exhibit 99.3 in the Company’s June 18, 2007 Report on Form 8-K and is incorporated herein by reference.
6. Amended and Restated Trust Agreement, dated June 15, 2007, among First Acceptance Corporation, Wilmington Trust
Company and the Administrative Trustees Named Therein, was filed as Exhibit 99.4 in the Company’s June 18, 2007 Report
on Form 8-K and is incorporated herein by reference.
7. On December 1, 2023, the Company entered into a Securities Purchase Agreement with Alliant Insurance Services
(“Alliant”) to sell 100% of its issued and outstanding shares of capital stock of its wholly-owned subsidiary, Acceptance
Insurance Agency of Tennessee, Inc., for net cash consideration of up to $120 million which included $55 million paid at
closing and $20 million held in escrow which will be released monthly from March 2024 through December 2024. The
Company is eligible to receive additional contingent consideration of $15 million (held in escrow), $10 million, and $20
million on December 1, 2024, 2025 and 2026, respectively, based upon achievement of certain annual premium production
targets. The agreement provides that the Company would receive its additional contingent consideration in its entirety should
the buyer fail to submit applications within the applicable underwriting guidelines of the Insurance Companies, provided that
the Company has not breached any of its agreements with the buyer. The agreement also provides that any contingent
consideration payments to the Company would be used to maintain $100 million of capital and surplus in the Insurance
Companies. The Company also on this date entered into a Producer Agreement with certain insurance agency affiliates of
Alliant to operate as independent agents of the Company with terms effective through December 31, 2026.
Item 19. Articles of Incorporation and Bylaws
The Articles of Incorporation, as Restated in 2004, were filed as Exhibit 3.1 to the Company’s Report on Form 8-K dated May 3, 2004
and incorporated herein by reference. The Bylaws as Amended and Restated November 7, 2007, were filed as Exhibit 3.2 to the
Company’s Report on Form 8-K dated November 7, 2007 and are incorporated herein by reference.
Item 20. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
In 2023, the Company repurchased 55,594 shares from employees to cover payroll withholding taxes in connection with the vesting of
restricted stock units.
20
Item 21. Issuer’s Certifications
I, Kenneth D. Russell, Chief Executive Officer, certify that:
1. I have reviewed this annual disclosure statement of First Acceptance Corporation;
2. Based on my knowledge, this disclosure statement does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this disclosure statement; and
3. Based on my knowledge, the financial statements, and other financial information includes or incorporated by reference in
this disclosure statement, fairly present in all material respects the financial condition, results of operations and cash flows of
the issuer as of, and for, the periods presented in this disclosure statement.
Date: March 5, 2024
/s/ Kenneth D. Russell
Kenneth D. Russell
Chief Executive Officer
I, Brian Dickman, Executive Vice President and Chief Financial Officer, certify that:
1. I have reviewed this annual disclosure statement of First Acceptance Corporation;
2. Based on my knowledge, this disclosure statement does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this disclosure statement; and
3. Based on my knowledge, the financial statements, and other financial information includes or incorporated by reference in
this disclosure statement, fairly present in all material respects the financial condition, results of operations and cash flows of
the issuer as of, and for, the periods presented in this disclosure statement.
Date: March 5, 2024
/s/ Brian Dickman
Brian Dickman
Executive Vice President and Chief Financial Officer
[
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FIRST ACCEPTANCE CORPORATION
2023 ANNUAL REPORT
FIRST ACCEPTANCE CORPORATION
TABLE OF CONTENTS
Our Marketplace ........................................................................................................................................................................................ 3
Stock Market Information .......................................................................................................................................................................... 3
Selected Financial Data .............................................................................................................................................................................. 4
Consolidated Financial Statements:
Consolidated Balance Sheets ................................................................................................................................................................ 5
Consolidated Statements of Operations ................................................................................................................................................ 6
Consolidated Statements of Stockholders’ Equity ................................................................................................................................ 7
Consolidated Statements of Cash Flows ............................................................................................................................................... 8
Notes to Consolidated Financial Statements ........................................................................................................................................ 9
Report of Independent Auditors ............................................................................................................................................................... 30
Management’s Discussion and Analysis of Financial Condition and Results of Operations ................................................................... 33
Risk Factors ............................................................................................................................................................................................. 45
3
Our Marketplace
Prior to the December 1, 2023 sale of our insurance agency operations, we primarily sold non-standard personal automobile
insurance through retail locations staffed with employee-agents. We also completed sales over the phone through our call center and
through a consumer-based website and mobile platform. Through December 1, 2023, we operated under an “Agency Model” in 15
states where we sold both our own underwritten insurance policies and those issued by third-party insurers for which we earned
commissions. We now solely offer our own underwritten insurance policies through independent agents in these 15 states, and we are
also licensed to write insurance in 11 other states that are not currently utilized.
Stock Market Information
Since April 9, 2018, our common stock has been listed on the OTCQX market under the symbol “FACO.” Prior to this date, our
common stock traded on the New York Stock Exchange under the symbol “FAC.” The following table sets forth quarterly high and
low sales prices for our common stock for the periods indicated. All price quotations represent prices between dealers, without
accounting for retail mark-ups, mark-downs, or commissions, and may not represent actual transactions.
Price Range
High
Low
Year Ended December 31, 2022:
First Quarter
$
2.18
$
1.78
Second Quarter
$
1.98
$
1.59
Third Quarter
$
1.67
$
1.28
Fourth Quarter
$
1.55
$
0.71
Year Ended December 31, 2023:
First Quarter
$
0.95
$
0.70
Second Quarter
$
1.25
$
0.76
Third Quarter
$
1.30
$
0.85
Fourth Quarter
$
2.42
$
1.05
The closing price of our common stock on March 4, 2023 was $2.14.
Holders
According to the records of our transfer agent, there were 235 registered holders of record of our common stock on February 29
2024, including record holders such as banks and brokerage firms who hold shares for beneficial holders, and 37,980,139 shares of our
common stock were outstanding.
4
Dividends
On May 4, 2021, the Board of Directors declared a special cash dividend of $0.27 per common share, that was paid on June 4,
2021, to all common stockholders of record as of the close of business on May 20, 2021.
On December 6, 2021, the Board of Directors declared a special cash dividend of $0.11 per common share, that was paid on
December 21, 2021, to all common stockholders of record as of the close of business on December 16, 2021. Both dividends paid by
the Company in 2021 were non-taxable return of capital distributions to stockholders.
There were no dividends paid in 2023 or 2022. Any future determination to pay dividends will be at the discretion of our Board
of Directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements and
contractual restrictions.
Selected Financial Data
The following tables provide selected historical consolidated financial data of the Company at the dates and for the periods
indicated. In conjunction with the data provided in the following tables and in order to understand our historical consolidated financial
and operating data more fully, you should also read our “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” and our “Consolidated Financial Statements” and the accompanying notes included in this report. We derived our
selected historical consolidated financial data as of December 31, 2023, and 2022 and for the years ended December 31, 2023, 2022,
and 2021 from our consolidated financial statements included in this report. We derived our selected historical consolidated financial
data as of December 31, 2021, 2020 and 2019 and for the years ended December 31, 2020, and 2019 from our consolidated financial
statements which are not included in this report. The results for past periods are not necessarily indicative of the results to be expected
for any future period.
Year Ended December 31,
2023
2022
2021
2020
2019
Statement of Operations Data:
(in thousands, except per share data)
Revenues:
Premiums earned
$ 397,171
$ 230,529
$ 209,043
$ 206,825
$ 225,825
Commission and fee income
55,068
53,012
51,664
47,448
45,179
Billing fees and service charges
25,003
15,931
13,365
13,123
14,581
Investment income
8,654
3,895
3,638
3,203
5,706
Net other gains (losses)
74,680
(1,071)
7,537
(1,019)
1,400
560,576
302,296
285,247
269,580
292,691
Costs and expenses:
Losses and loss adjustment expenses
276,461
181,260
154,849
133,777
145,016
Operating expenses
177,601
136,150
128,348
116,507
119,657
Other expenses
780
931
809
786
857
Stock-based compensation
338
280
242
277
531
Depreciation
2,154
2,532
1,522
1,747
1,435
Amortization of identifiable intangible assets
391
790
374
469
596
Interest expense
3,818
2,386
1,684
2,378
4,884
461,543
324,329
287,828
255,941
272,976
Income (loss) before income taxes
99,033
(22,033)
(2,581)
13,639
19,715
Provision (benefit) for income taxes
25,121
(4,545)
(1,353)
3,221
4,359
Net income (loss)
$ 73,912
$ (17,488)
$ (1,228)
$ 10,418
$ 15,356
Net income (loss) per basic shares
$ 1.94
$ (0.46)
$ (0.03)
$ 0.27
$ 0.37
Net income (loss) per diluted shares
$ 1.92
$ (0.46)
$ (0.03)
$ 0.27
$ 0.37
Year Ended December 31,
2023
2022
2021
2020
2019
Balance Sheet Data:
Cash and invested assets
$
318,964
$
176,834
$
197,746
$
218,686
$
225,838
Total assets
557,424
355,939
322,648
340,954
356,411
Loss and loss adjustment expense reserves
165,346
107,100
93,278
91,788
109,193
Debentures payable and term loan
40,621
40,575
40,530
40,484
45,414
Total liabilities
415,576
290,417
229,751
229,268
255,549
Total stockholders' equity
141,848
65,522
92,897
111,686
100,862
Book value per common share
$
3.71
$
1.73
$
2.44
$
2.93
$
2.42
5
Consolidated Financial Statements
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
December 31,
2023
2022
ASSETS
Investments in fixed maturities, available-for-sale at fair value (amortized cost of
$200,544 and $123,505, respectively)
$
192,885
$
113,323
Investments in equity securities at fair value (cost of $9,125 and $9,521, respectively)
10,660
9,911
Cash, cash equivalents, restricted cash, and restricted cash equivalents
109,780
49,072
Premiums, fees, and commissions receivable, net of allowance of $491 and $375
149,764
94,278
Consideration receivable from sale of insurance agency, at fair value (Note 17)
59,825
—
Deferred tax assets, net
—
14,177
Other investments
5,639
4,528
Other assets
9,977
9,595
Operating lease right-of-use assets
5,020
14,520
Property and equipment, net
2,892
4,831
Deferred acquisition costs
9,452
7,062
Goodwill
—
28,786
Identifiable intangible assets, net
1,530
5,856
TOTAL ASSETS
$
557,424
$
355,939
LIABILITIES AND STOCKHOLDERS’ EQUITY
Loss and loss adjustment expense reserves
$
165,346
$
107,100
Unearned premiums and fees
164,479
103,934
Debentures payable
40,621
40,575
Operating lease liabilities
5,401
14,724
Deferred tax liability, net
4,558
—
Payable for securities
1,510
—
Accrued expenses
10,023
8,522
Income taxes payable
5,733
—
Other liabilities
17,905
15,562
Total liabilities
415,576
290,417
Stockholders’ equity:
Preferred stock, $.01 par value, 10,000 shares authorized, no shares issued or outstanding
—
—
Common stock, $.01 par value, 75,000 shares authorized; 38,265 and 37,868 issued and
outstanding, respectively
382
379
Additional paid-in capital
456,309
455,891
Accumulated other comprehensive loss, net of tax of $(2,790) and $(3,319), respectively
(4,869)
(6,862)
Accumulated deficit
(309,974)
(383,886)
Total stockholders’ equity
141,848
65,522
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
557,424
$
355,939
See notes to consolidated financial statements.
6
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended December 31,
2023
2022
2021
Revenues:
Premiums earned
$
397,171
$
230,529
$
209,043
Commission and fee income
55,068
53,012
51,664
Billing fees and service charges
25,003
15,931
13,365
Investment income
8,654
3,895
3,638
Gain on sale of insurance agency (Note 17)
73,034
—
—
Net gains (losses) on investments and foreclosed real estate held for sale
1,646
(1,071)
7,537
Total revenues
560,576
302,296
285,247
Costs and expenses:
Losses and loss adjustment expenses
276,461
181,260
154,849
Insurance operating expenses
177,601
136,150
128,348
Other expenses
780
931
809
Stock-based compensation
338
280
242
Depreciation
2,154
2,532
1,522
Amortization of identifiable intangible assets
391
790
374
Interest expense
3,818
2,386
1,684
Total costs and expenses
461,543
324,329
287,828
Income (loss) before income taxes
99,033
(22,033)
(2,581)
Provision (benefit) for income taxes
25,121
(4,545)
(1,353)
Net income (loss)
$
73,912
$
(17,488)
$
(1,228)
Net income (loss) per share:
Basic
$
1.94
$
(0.46)
$
(0.03)
Diluted
$
1.92
$
(0.46)
$
(0.03)
Number of shares used to calculate net income (loss) per share:
Basic
38,086
37,795
38,151
Diluted
38,409
37,795
38,151
Reconciliation of net income (loss) to comprehensive income (loss):
Net income (loss)
$
73,912
$
(17,488)
$
(1,228)
Unrealized change in investments arising during the period, net of tax expense
(benefit) of $530, $(2,532) and $(664), respectively
1,993
(9,525)
(2,499)
Reclassification of net realized losses and other-than-temporary impairment
("OTTI") on investments, included in net income (loss)
—
115
10
Comprehensive income (loss)
$
75,905
$
(26,898)
$
(3,717)
Detail of net gains (losses) on investments and foreclosed real estate held for sale:
Net realized gains on sales and redemptions
500
789
6,143
Net unrealized gains (losses) on equity securities, includes $511, $(723) and $726 of
reclassification for realized gains and losses, respectively
1,146
(1,677)
728
Net gain on foreclosed real estate held for sale
—
—
666
Other-than-temporary impairment ("OTTI") of fixed maturities, available for sale
—
(183)
—
Net gains (losses) on investments and foreclosed real estate held for sale
$
1,646
$
(1,071)
$
7,537
See notes to consolidated financial statements.
7
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
Common Stock
Additional
paid-in
Accumulated
other
comprehensive
Accumulated
Total
stockholders'
Shares
Amount
capital
income (loss)
deficit
equity
Balances at December 31, 2020
38,135
$
381
$
456,815
$
5,162
$
(350,672)
$
111,686
Net loss
—
—
—
—
(1,228)
(1,228)
Net unrealized change on investments (net
of tax benefit of $664)
—
—
—
(2,499)
—
(2,499)
Stock-based compensation
5
—
242
—
—
242
Issuance of shares under Employee
Stock Purchase Plan
84
1
137
—
—
138
Vested restricted stock units, net of
repurchases
182
2
(70)
—
—
(68)
Retirement of treasury stock
(400)
(4)
(872)
—
—
(876)
Dividends paid
—
—
—
—
(14,498)
(14,498)
Balances at December 31, 2021
38,006
$
380
$
456,252
$
2,663
$
(366,398)
$
92,897
Net loss
—
—
—
—
(17,488)
(17,488)
Net unrealized change on investments (net
of tax benefit of $2,532)
—
—
—
(9,525)
—
(9,525)
Stock-based compensation
5
—
280
—
—
280
Issuance of shares under Employee
Stock Purchase Plan
110
1
112
—
—
113
Vested restricted stock units, net of
repurchases
117
2
(21)
—
—
(19)
Retirement of treasury stock
(370)
(4)
(732)
—
—
(736)
Balances at December 31, 2022
37,868
$
379
$
455,891
$
(6,862)
$
(383,886)
$
65,522
Net income
—
—
—
—
73,912
73,912
Net unrealized change on investments (net
of tax expense of $530)
—
—
—
1,993
—
1,993
Stock-based compensation
7
—
338
—
—
338
Issuance of shares under Employee
Stock Purchase Plan
149
2
114
—
—
116
Vested restricted stock units, net of
repurchases
241
1
(34)
—
—
(33)
Balances at December 31, 2023
38,265
$
382
$
456,309
$
(4,869)
$
(309,974)
$
141,848
See notes to consolidated financial statements.
8
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
2023
2022
2021
Cash flows from operating activities:
Net income (loss)
$
73,912
$
(17,488)
$
(1,228)
Adjustments to reconcile net income (loss) to cash provided by (used in)
operating activities:
Unrealized (gains) losses on equity securities
(1,146)
1,677
(728)
Depreciation
2,154
2,532
1,522
Amortization of identifiable intangible assets
391
790
374
Stock-based compensation
338
280
242
Deferred income taxes
18,214
(4,519)
(1,421)
Investment (income) loss from limited partnership investments
(691)
171
(859)
Realized gains on sales and redemptions of investments
(500)
(789)
(6,143)
Net gain on foreclosed real estate held for sale
—
—
(666)
Gain on sale of insurance agency (Note 17)
(73,034)
—
—
Other
(294)
(439)
621
Change in:
Premiums, fees, and commission receivable
(55,370)
(39,218)
308
Deferred acquisition costs
(2,390)
(4,028)
(36)
Loss and loss adjustment expense reserves
58,246
13,822
1,490
Unearned premiums and fees
60,545
39,439
(1,107)
Other assets
(382)
(387)
(220)
Accrued expenses
(3,125)
996
2,186
Other liabilities
6,135
3,077
(1,132)
Other
1,278
195
199
Net cash provided by (used in) operating activities
84,281
(3,889)
(6,598)
Cash flows from investing activities:
Purchases of investments
(94,814)
(41,483)
(8,796)
Maturities and redemptions of investments
14,889
31,398
31,785
Sales of investments
2,664
5,253
13,926
Distributions from other investments
877
1,193
514
Capital expenditures
(1,339)
(4,188)
(2,365)
Acquisition of identifiable intangible assets
—
(23)
(1,494)
Net proceeds from sale of insurance agency
54,067
—
—
Proceeds from sale of foreclosed real estate held for sale
—
—
910
Loss on abandonment of property and equipment
—
627
—
Net cash (used in) provided by investing activities
(23,656)
(7,223)
34,480
Cash flows from financing activities:
Purchase of treasury stock
—
(736)
(876)
Dividends paid
—
—
(14,498)
Net proceeds from employee issuance of common stock
116
113
70
Taxes remitted in relation to employee restricted stock units exercised
(33)
(19)
—
Net cash provided by (used in) financing activities
83
(642)
(15,304)
Net change in cash, cash equivalents, restricted cash and restricted cash
equivalents
60,708
(11,754)
12,578
Cash, cash equivalents, restricted cash, and restricted cash equivalents, beginning
of period
49,072
60,826
48,248
Cash, cash equivalents, restricted cash, and restricted cash equivalents, end of
period
$
109,780
$
49,072
$
60,826
See notes to consolidated financial statements.
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9
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 have included the selling, servicing, and underwriting of non-standard personal automobile insurance and
related products. In 2023 and 2022, the Company generated revenue from selling non-standard personal automobile insurance
products and related products in 15 states. The Company issues policies of insurance through a subsidiary First Acceptance Insurance
Company, Inc., and its subsidiaries: First Acceptance Insurance Company of Georgia, Inc. and First Acceptance Insurance Company
of Tennessee, Inc. (collectively, the “Insurance Companies”) and had operated as an insurance agency though another subsidiary,
Acceptance Insurance Agency of Tennessee, Inc. (“the Insurance Agency”), which was sold effective December 1, 2023 (see Note
17).
For the year ended December 31, 2023, 25% of insurance company operating revenues resulted from insurance policies
produced by a single independent agent.
Basis of Consolidation and Reporting
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. The accounts of
First Acceptance Statutory Trust I (“FAST I”) are not consolidated since it does not meet the requirements for consolidation of FASB
ASC 810, “Consolidation” (see Note 10). Management evaluates the Company’s investment in FAST I on an ongoing basis and
continues to conclude that, while FAST I continues to be a variable interest entity, the Company is not the primary beneficiary and
therefore, FAST I is not included in the Company’s consolidated financial statements. These financial statements have been prepared
in conformity with U.S. generally accepted accounting principles (“GAAP”). All intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP 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.
Subsequent Events
In connection with the preparation of these consolidated financial statements, the Company has evaluated subsequent events
through March 4, 2024, which is the date the consolidated financial statements were available to be issued.
Investments
Investments in fixed maturities, available-for-sale at fair value, include bonds with fixed principal payment schedules and
mortgage-backed and asset-backed securities which are amortized using the retrospective method. These securities are carried at fair
value with the corresponding unrealized appreciation or depreciation, net of deferred income taxes, reported in other comprehensive
income (loss).
Investments in equity securities at fair value, include mutual funds and preferred stocks. These securities are carried at fair
value, and the corresponding unrealized appreciation or depreciation is reported in net income (loss).
Premiums and discounts on collateralized mortgage obligations (“CMOs”) are amortized over a period based on estimated
future principal payments, including prepayments, with premiums amortized through the earliest call date if applicable. 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.
Previously, the Company accounted for other than temporary impairments (“OTTI”) for available-for-sale fixed maturities using the
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10
provisions of FASB ASC 320 related to recognition of other than temporary impairments on investments. Amendments from the
adoption of ASU 2016-13 have been implemented. For available-for-sale fixed maturities in an unrealized loss position, the Company
first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of the
amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written
down to fair value through income. For available-for-sale fixed maturities that do not meet the aforementioned criteria, the Company
evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management
considers the extent to which fair value is less than amortized cost, any changes to the rating of the maturity by a rating agency, and
adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the
present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the maturity. If the
present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for
credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any
impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income (loss).
Management reviews investments in fixed maturities, available-for-sale for credit losses on a quarterly basis. Changes in the
allowance for credit losses are recoded as credit loss expense (or reversal). Losses are charged against the allowance when
management believes the uncollectibility of an available-for-sale fixed maturity is confirmed or when either of the criteria regarding
intent or requirement to sell is met. No impairments for available-for-sale fixed maturities were recorded in 2023 and 2022.
Realized gains and losses on sales and redemptions of securities are computed based on specific identification.
Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents
Cash, cash equivalents, and restricted cash in connection with reinsurance contracts and deposits with state insurance regulators,
consist of bank demand deposits and other highly liquid investments and are stated at cost which approximates fair value. All
investments with maturities of three months or less at the date of purchase are considered cash equivalents. On December 31, 2023,
and December 31, 2022, the Company had restricted cash equivalents of $5.5 million and $5.0 million, respectively.
Other Investments
Other investments consist of limited partnership interests and an investment in the common stock of a real estate investment
trust (“REIT”). A previous investment in an REIT was sold in 2021. Limited partnership interests are recorded at net asset value
which approximates fair value. Valuations are based upon the GAAP financial statements of the partnerships which are required to be
audited annually.
The common stock of the REIT is recorded at a fair value and the corresponding unrealized appreciation or depreciation is
reported in net income (loss). Since the common stock of the REIT has no readily determinable fair value, it is measured at cost, less
any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar
investment of the same issuer.
The change in net asset value of limited partnership interests is recorded in investment income in the consolidated statements of
operations.
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, with the amounts to be earned in the future recorded as unearned premiums on the consolidated balance sheets. Written
premiums are recorded as of the effective date of the policies for the full policy premium, although most policyholders elect to pay on
a monthly installment basis. Premiums and fees are generally collected in advance of providing risk coverage, minimizing the
Company’s exposure to credit risk. Premiums receivable are recorded net of an estimated allowance for uncollectible amounts.
Commission and fee income of the Insurance Agency included commissions paid by third-party insurance carriers which were
earned upon the effective date of bound coverage, less an estimated allowance for returned commissions based upon historical
experience, since no performance obligation remained in these arrangements after coverage was bound and the control of the
underlying insurance policy transferred to the third-party carrier. Commission and fee income also included commissions paid by a
third-party entity on the sale of ancillary insurance products that were earned on a pro-rata basis over the life of the underlying
contracts, since the Company maintained the control of the contract with the customer and has a contractual performance obligation
for these contracts. In calculating such commission and fee income, the Company estimated the amount of consideration that will be
received for which a significant reversal of revenue was not probable.
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
11
Billing fees and service charges include installment billing fees and other charges by the Insurance Companies that are
recognized when billed which is the time at which the related services have been performed and costs incurred.
The Company's revenue from contracts with customers that were in scope of Topic 606 “Revenue from Contracts with
Customers”, comprise the commissions and fee income line item in its consolidated financial statements. This amount represents
amounts that the Insurance Agency received from third-party insurance carriers and from a third-party entity on the sales of ancillary
insurance products. Also, in scope, is the billing fees and service charges line item which represents various fees related to insurance
contracts issued by the Insurance Companies.
The primary performance obligation of the Insurance Agency in return for the commission income from the third-party insurers
was to complete the sale of the policy and deliver the control of the policy to the insurer at the policy effective date. In addition, the
Insurance Agency may have provided administrative services to the insurer or the policyholder subsequent to the sale of the policy as
needed, including processing of endorsements, collection of premiums, and answering general questions concerning the policyholder's
account. The administrative services and the costs to perform such services were deemed immaterial in the context of the contract and
to the Company's consolidated financial statements, and hence, such services were not identified as a separate performance obligation
and the costs to perform such services were not accrued at the time of the sale of the policy but were expensed as incurred as part of
the overall operating expenses.
The total revenue from the sale of a policy was recognized upon the effective date of bound coverage when the sale was
complete as all the material aspects of the performance obligation were satisfied and the insurer was deemed to obtain control of the
insurance policy at that time. Any commission income considered to be variable is constrained such that the revenue was recognized
only to the extent that it is probable that there will not be a significant reversal of that revenue. Any commission income not received
when the sale was complete was recognized as commission income receivable, which was included in premiums, fees, and
commissions receivable in the Company's consolidated balance sheets. The commission income receivable as of December 31, 2022
was approximately $2.8 million. Due to the sale of the Insurance Agency (Note 17), there was no commission income receivable as of
December 31, 2023.
A refund liability was recorded for the expected amount of the commission income that had to be returned to the insurers based
on estimated policy cancellations. The refund liability was computed for the entire portfolio of contracts as a practical expedient,
rather than for each contract or performance obligation. The estimated policy cancellations and the resulting refund liability were
computed using the expected value method based on all relevant information, including historical experience. The refund liability,
which is included in other liabilities in the Company's consolidated balance sheets, was $1.5 million at December 31, 2022. Due to the
sale of the Insurance Agency (Note 17), there was no refund liability as of December 31, 2023.
The primary performance obligation of the Insurance Agency in return for the fee income from a third-party entity on the sales
of ancillary insurance products was to complete the sale of the contract. However, the Insurance Agency maintained the control of the
contract with the customer throughout its term providing recurring administrative services to the third-party entity and to the customer
subsequent to the sale of the contract, including the monthly billing and collection of premiums. These services were considered
separate performance obligations and as a result the fee income was recognized monthly from the third-party entity on a pro-rata basis
over the contract terms which were generally for six months, and the costs to perform the required services were recognized as
incurred.
The primary performance obligations of the Insurance Companies for the billing fees and service charges related to insurance
contracts is completed at the time these services are performed which is also the time at which the amounts are billed and recognized
as revenue and all costs have been incurred.
As of December 31, 2023, 2022 and 2021, the Company had no contract assets, contract liabilities, or capitalized costs to obtain
or fulfill a contract, associated with revenues from contracts with customers.
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.
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12
A valuation allowance for the deferred taxes is established based upon management’s estimate of whether it is more likely than
not that the Company would not realize tax benefits in future periods to the full extent available. Changes in the valuation allowance
are recognized in income during the period in which the circumstances that cause such a change in management’s estimate to 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 as of December 31, 2023, and
2022. The Company does not believe it is reasonably possible that unrecognized tax benefits would materially change in the next
twelve months. 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 2016. These tax years are open due to the creation and utilization of net operating loss carryforwards.
Property and Equipment
Property and equipment are initially recorded at cost. Depreciation is provided over the estimated useful lives of the assets
(generally ranging from three to five years) using the straight-line method. Leasehold improvements are amortized over the shorter of
the lives of the respective leases or the service lives of the improvements. Repairs and maintenance are charged to expense as
incurred.
Deferred Acquisition Costs
Deferred acquisition costs include premium taxes, commissions paid to independent agents, and other variable underwriting and
direct sales costs incurred in connection with writing successful new and renewal business. These costs are deferred and amortized
over the policy period in which the related premiums are earned, to the extent that such costs are deemed recoverable from future
unearned premiums and anticipated investment income. Advertising costs are expensed when incurred and are not a part of deferred
acquisition costs. Amortization expense for the years ended December 31, 2023, 2022 and 2021 was $24.4 million, $14.4 million, and
$10.0 million, respectively, and is included within operating expenses in the accompanying consolidated statements of operations.
Goodwill and Identifiable Intangible Assets
Goodwill and identifiable intangible assets were initially recorded at their estimated fair values at their dates of acquisition.
Identifiable intangible assets with an indefinite life, (trade name and state insurance licenses) are not amortized for financial statement
purposes while those with a definite life (policy renewal rights, customer relationships, and software licenses) are amortized in
proportion to projected policy expirations or life of the asset. As of December 31, 2023, and 2022, identifiable intangible assets were
$1.5 million and $5.9 million, respectively, stated net of accumulated amortization expense of $1.7 million and $6.3 million,
respectively. Amortization expense will be $0.1 million over the next three succeeding fiscal years.
The Company performed required annual impairment tests of its goodwill and identifiable intangible assets as of October 1 of
each year. In the event that facts and circumstances indicate that goodwill or identifiable intangible assets may be impaired, an interim
impairment test would be required. For goodwill impairment analysis purposes, the Company considered the Titan Agencies acquired
in 2015 to be a separate reporting unit. All goodwill and identifiable intangible assets associated with the Insurance Agency were
charged against the gain on the sale of the Insurance Agency in 2023 (Note 17), in the amount of $28.8 million and $4.0 million,
respectively.
The Company follows the accounting guidelines, which allows companies to waive comparing the fair value of goodwill and
intangible assets to their carrying amounts in assessing the recoverability of these assets if, based on qualitative factors, it is more
likely than not that the fair value of the goodwill and intangible assets is greater than their carrying amounts. Based on the review of
the relevant factors, the Company did not indicate any impairment analysis was necessary.
Sale of Insurance Agency Subsidiary
In accordance with ASC 810-10-40-5, in connection with the sale of the Insurance Agency (Note 17), the Company has
recognized a net asset from the buyer equal to the fair value of the future net contingent consideration to be received as of the date of
the sale. The Company has also elected to recognize any increases in the carrying amount of this asset using the gain contingency
guidance in ASC 450-30 and recognize any impairments based on the guidance in ASC 450-20-25-2.
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
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13
not reported. Management believes that the loss and loss adjustment reserves are adequate to cover the ultimate associated liability.
However, such estimates may be more or less than the amount ultimately paid when the claims are finally settled.
Evaluation of Going Concern
Conformity with GAAP requires the Company to evaluate whether there are conditions and events that raise substantial doubt
about the Company’s ability to continue as a going concern within one year after the financial statements are issued. Management’s
evaluation determined that the Company does not have substantial doubt continuing one year after these consolidated financial
statements were issued.
Recent Accounting Pronouncements
Accounting Pronouncements Adopted
As of January 1, 2023, the Company adopted ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326)” which
requires financial assets measured at amortized cost to be presented at the net amount expected to be collected. The allowance for
credit losses is based on relevant information, including historical experience, current conditions, and reasonable and supportable
forecasts that affect the collectability of the reported amount. The increases and decreases in the credit loss are reflected as a
component of net income (loss). The adoption of this pronouncement and the changes in methods used to recognize OTTI had no
impact on the 2023 consolidated financial statements.
Accounting Pronouncements Issued But Not Yet Adopted
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures,
which provides for expanded disclosures primarily related to income taxes paid and the rate reconciliation. The amendments are
effective prospectively for annual periods beginning after December 15, 2024, and early adoption and retrospective application are
permitted. The Company is currently evaluating the impact of this ASU on its Consolidated Financial Statements.
Supplemental Cash Flow Information
During the year ended December 31, 2023, the Company paid $0.9 million in income taxes. During the years ended
December 31, 2022 and 2021, the Company did not collect or pay any income taxes. During the years ended December 31, 2023,
2022 and 2021, the Company paid $3.7 million, $2.0 million, and $1.7 million in interest, respectively.
Basic and Diluted Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss) available to common stockholders 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 stockholders by the weighted average number of such common shares and dilutive share equivalents. Dilutive share
equivalents may result from the assumed exercise of restricted stock units 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 Company’s view
of market assumptions in the absence of observable market information. All assets and liabilities that are carried at fair value are
classified and disclosed in one of the following categories:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Quoted market prices for similar assets or liabilities in active markets; quoted prices by independent pricing services
for identical or similar assets or liabilities in markets that are not active; and valuations, using models or other
valuation techniques, that use observable market data. All significant inputs are observable, or derived from
observable information in the marketplace, or are supported by observable levels at which transactions are executed
in the marketplace.
Level 3 - Instruments that use non-binding broker quotes, observable information from limited private transactions or model
driven valuations that do not have observable market data.
NAV - Calculated net asset value (“NAV”) based on an ownership interest to which a proportionate share of net assets is
attributed.
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
14
The Company categorizes valuation methods used in both its identifiable intangible assets initial measurement and impairment
tests as Level 3. To determine the fair value of acquired trademarks and trade names, the Company used the relief-from-royalty
method, which requires the Company to estimate the future revenue for the related brands, the appropriate royalty rate, and the
weighted average cost of capital. To determine the fair value of the acquired policy renewal rights and customer relationships, the
Company used an “excess earnings” method that relied on projected future net cash flows and included key assumptions for the
customer retention and renewal rates. The data used in these methods was not observable in the market.
Fair Value of Financial Instruments
The carrying values and fair values of certain of the Company’s financial instruments were as follows (in thousands).
December 31, 2023
December 31, 2022
Carrying
Fair
Carrying
Fair
Value
Value
Value
Value
Assets:
Cash, cash equivalents, and restricted cash
$
109,780
$
109,780
$
49,072
$
49,072
Investments in fixed maturities, available-for-sale
192,885
192,885
113,323
113,323
Investment in equity securities
10,660
10,660
9,911
9,911
Other investments
5,639
5,639
4,528
4,528
Liabilities:
Debentures payable
40,621
31,135
40,575
22,448
The fair values as presented represent the Company’s best estimates and may not be substantiated by comparisons to
independent markets. The fair value of the debentures payable is categorized as Level 3, since it was based on current market rates
offered for debt with similar risks and maturities, an unobservable input categorized as Level 3. Carrying values of certain financial
instruments, such as premiums, fees, and commissions 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 Company’s underlying value.
The following tables present the fair-value measurements for each major category of assets that are measured on a recurring
basis (in thousands). Certain other investments are carried at the Company’s proportionate share net asset value which approximates
fair value.
Fair Value Measurements Using
Quoted Prices
Significant
in Active
Other
Significant
Proportionate
Markets for
Observable
Unobservable
Share of
Identical Assets
Inputs
Inputs
Net Assets
December 31, 2023
Total
(Level 1)
(Level 2)
(Level 3)
(NAV)
Fixed maturities, available-for-sale:
U.S. government and agencies
$
19,336
$
19,336
$
—
$
—
$
—
Political subdivisions
2,931
—
2,931
—
—
Revenue and assessment
18,794
—
18,794
—
—
Corporate bonds
77,423
—
77,423
—
—
Asset-backed securities
35,145
—
35,145
—
—
Collateralized mortgage obligations:
Agency backed
37,036
—
37,036
—
—
Non-agency backed – residential
1,226
—
1,226
—
—
Non-agency backed – commercial
994
—
994
—
—
Total fixed maturities, available-for-sale
192,885
19,336
173,549
—
—
Equity securities:
Mutual funds
10,660
10,660
—
—
—
Total equity securities
10,660
10,660
—
—
—
Other investments
5,639
—
—
1,089
4,550
Total
$
209,184
$
29,996
$
173,549
$
1,089
$
4,550
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
15
Fair Value Measurements Using
Quoted Prices
Significant
in Active
Other
Significant
Proportionate
Markets for
Observable
Unobservable
Share of
Identical Assets
Inputs
Inputs
Net Assets
December 31, 2022
Total
(Level 1)
(Level 2)
(Level 3)
(NAV)
Fixed maturities, available-for-sale:
U.S. government and agencies
$
8,682
$
8,682
$
—
$
—
$
—
Political subdivisions
3,774
—
3,774
—
—
Revenue and assessment
9,450
—
9,450
—
—
Corporate bonds
35,468
—
35,468
—
—
Asset-backed securities
11,763
—
11,763
—
—
Collateralized mortgage obligations:
Agency backed
41,951
—
41,951
—
—
Non-agency backed – residential
1,218
—
1,218
—
—
Non-agency backed – commercial
1,017
—
1,017
—
—
Total fixed maturities, available-for-sale
113,323
8,682
104,641
—
—
Equity securities:
Mutual funds
9,911
9,911
—
—
—
Total equity securities
9,911
9,911
—
—
—
Other investments
4,528
—
—
—
4,528
Total
$
127,762
$
18,593
$
104,641
$
—
$
4,528
The fair values of the Company’s 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 and are obtained from a single independent pricing service. The
Company has not made any adjustments to the prices obtained from the independent pricing source.
The Company has reviewed the pricing techniques and methodologies of the independent pricing service 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 makes inquiries with the pricing service when considered necessary about material changes or the absence of
expected changes to understand the underlying factors and inputs and to validate the reasonableness of the pricing. Likewise, the
Company reviews the Level 3 valuations to understand the underlying factors and inputs and to validate the reasonableness of the
pricing.
3. Investments
The following tables summarize the Company’s investments in fixed maturities for the years ended December 31, 2023, and
December 31, 2022 (in thousands).
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
December 31, 2023
Cost
Gains
Losses
Value
Fixed maturities, available-for-sale:
U.S. government and agencies
$
19,298
$
91
$
(53)
$
19,336
Political subdivisions
3,047
8
(124)
2,931
Revenue and assessment
18,891
83
(180)
18,794
Corporate bonds
78,098
575
(1,250)
77,423
Asset-backed securities
35,199
168
(222)
35,145
Collateralized mortgage obligations:
Agency backed
44,188
6
(7,158)
37,036
Non-agency backed – residential
806
467
(47)
1,226
Non-agency backed – commercial
1,017
—
(23)
994
Total fixed maturities, available-for-sale
$
200,544
$
1,398
$
(9,057)
$
192,885
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
16
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
December 31, 2022
Cost
Gains
Losses
Value
Fixed maturities, available-for-sale:
U.S. government and agencies
$
8,796
$
11
$
(125)
$
8,682
Political subdivisions
4,024
—
(250)
3,774
Revenue and assessment
9,679
5
(234)
9,450
Corporate bonds
37,410
6
(1,948)
35,468
Asset-backed securities
11,965
118
(320)
11,763
Collateralized mortgage obligations:
Agency backed
49,799
—
(7,848)
41,951
Non-agency backed – residential
815
419
(16)
1,218
Non-agency backed – commercial
1,017
—
—
1,017
Total fixed maturities, available-for-sale
$
123,505
$
559
$
(10,741)
$
113,323
The following table sets forth the scheduled maturities of the Company’s fixed maturities based on their fair values (in
thousands). Actual maturities may differ from contractual maturities because certain securities may be called or prepaid by the issuers.
Securities
Securities
Securities
with No
All
with
with
Unrealized
Fixed
Unrealized
Unrealized
Gains or
Maturity
December 31, 2023
Gains
Losses
Losses
Securities
One year or less
$
300
$
16,888
$
—
$
17,188
After one through five years
61,180
51,879
1,504
114,563
After five through ten years
13,197
6,116
—
19,313
After ten years
751
1,814
—
2,565
No single maturity date
1,087
38,169
—
39,256
$
76,515
$
114,866
$
1,504
$
192,885
The fair value and gross unrealized losses of investments in fixed maturities for the years ended December 31, 2023, and 2022,
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, 2023
Fair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
Total
Gross
Losses
Fixed maturities, available-for-sale:
U.S. government and agencies
$
5,588
$
(12)
$
4,659
$
(41)
$
(53)
Political subdivisions
—
—
2,415
(124)
(124)
Revenue and assessment
6,360
(59)
3,668
(121)
(180)
Corporate bonds
7,338
(27)
32,984
(1,223)
(1,250)
Asset-backed securities
8,612
(54)
5,073
(168)
(222)
Collateralized mortgage obligations:
Agency backed
—
—
36,848
(7,158)
(7,158)
Non-agency backed – residential
327
(47)
—
—
(47)
Non-agency backed – commercial
994
(23)
—
—
(23)
Total fixed maturities, available-for-sale
$
29,219
$
(222)
$
85,647
$
(8,835)
$
(9,057)
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17
Less than 12 months
12 months or longer
December 31, 2022
Fair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
Total
Gross
Losses
Fixed maturities, available-for-sale:
U.S. government and agencies
$
4,563
$
(125)
$
—
$
—
$
(125)
Political subdivisions
1,358
(33)
2,416
(217)
(250)
Revenue and assessment
7,337
(138)
951
(96)
(234)
Corporate bonds
33,459
(1,879)
979
(69)
(1,948)
Asset-backed securities
10,116
(320)
—
—
(320)
Collateralized mortgage obligations:
Agency backed
16,972
(1,766)
24,940
(6,082)
(7,848)
Non-agency backed – residential
147
(16)
—
—
(16)
Total fixed maturities, available-for-sale
$
73,952
$
(4,277)
$
29,286
$
(6,464)
$
(10,741)
The following table reflects the number of fixed maturities with gross unrealized gains and losses. Gross unrealized losses are
further segregated by the length of time that individual securities have been in a continuous unrealized loss position.
Gross Unrealized Losses
Less than
Greater
Gross
or equal to
than 12
Unrealized
At:
12 months
months
Gains
December 31, 2023
46
61
115
December 31, 2022
64
17
17
The following table reflects the fair value and gross unrealized losses of those fixed maturities 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).
Number
Gross
Gross Unrealized Losses
of
Fair
Unrealized
at December 31, 2023:
Securities
Value
Losses
Less than or equal to 10%
49
$
58,928
$
(2,363)
Greater than 10%
12
26,719
(6,472)
61
$
85,647
$
(8,835)
Number
Gross
Gross Unrealized Losses
of
Fair
Unrealized
at December 31, 2022:
Securities
Value
Losses
Less than or equal to 10%
5
$
3,557
$
(289)
Greater than 10%
12
25,730
(6,175)
17
$
29,287
$
6,464
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
18
The following tables set forth the amount of gross unrealized losses by current severity (as compared to amortized cost) and
length of time that individual securities have been in a continuous unrealized loss position (in thousands).
Fair Value of
Securities with
Length of
Gross
Gross
Severity of Gross Unrealized Losses
Gross Unrealized Losses
Unrealized
Unrealized
Less
5% to
Greater
at December 31, 2023:
Losses
Losses
than 5%
10%
than 10%
Less than or equal to:
Three months
$
3,564
$
(26)
$
(16)
$
—
$
(10)
Six months
2,706
(33)
(33)
—
—
Nine months
20,724
(114)
(110)
—
(4)
Twelve months
2,225
(49)
(12)
—
(37)
Greater than twelve months
85,647
(8,826)
(1,129)
(1,234)
(6,463)
Total
$
114,866
$
(9,048)
$
(1,300)
$
(1,234)
$
(6,514)
Fair Value of
Securities with
Length of
Gross
Gross
Severity of Gross Unrealized Losses
Gross Unrealized Losses
Unrealized
Unrealized
Less
5% to
Greater
at December 31, 2022:
Losses
Losses
than 5%
10%
than 10%
Less than or equal to:
Three months
$
1,177
$
(6)
$
(6)
$
—
$
—
Six months
7,732
(112)
(112)
—
—
Nine months
17,193
(991)
(303)
—
(688)
Twelve months
47,850
(3,168)
(406)
(2,746)
(16)
Greater than twelve months
29,286
(6,464)
—
(289)
(6,175)
Total
$
103,238
$
(10,741)
$
(827)
$
(3,035)
$
(6,879)
Other Investments
Other investments consist of the common stock of an REIT and limited partnership interests in two funds that invest in (i)
undervalued international publicly-traded equities and (ii) a pre-identified pool of select buyout private equity funds. These
investments have redemption and transfer restrictions. The Company does not intend to sell any of these investments, and it is more
likely than not that the Company will not be required to sell them before the expiration of such restrictions. As of December 31, 2023,
the Company had unfunded commitments of $1.4 million with three of these investments.
Included in realized gains on investments in 2021 was the sale of our other investment in the common stock of a REIT upon their
acquisition by a third party. As a result of their acquisition, the Company received total proceeds of $10.4 million and recognized a
realized gain of $6.4 million, of which $0.7 million had previously been recognized as an unrealized gain on this investment.
Restrictions
As of December 31, 2023, fixed maturities and cash equivalents with a fair value and amortized cost of $6.6 million were on
deposit with various insurance departments as a requirement of doing business in those states. Cash equivalents with a fair value and
amortized cost of $5.5 million were on deposit with other insurance companies as collateral for assumed reinsurance contracts.
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
19
Investment Income and Net Realized Gains and Losses
The major categories of investment income follow (in thousands).
Year Ended December 31,
2023
2022
2021
Fixed maturities, available-for-sale
$
4,874
$
3,646
$
2,633
Equity securities
475
396
539
Income (loss) from other investments
773
(171)
859
Cash and cash equivalents
3,069
549
107
Investment expenses
(537)
(525)
(500)
Accretion income
301
—
—
$
8,654
$
3,895
$
3,638
The components of net realized and unrealized gains (losses) on investments follow (in thousands).
Year Ended December 31,
2023
2022
2021
Unrealized gain (loss) on equity securities
$
1,146
$
(1,677)
$
728
Gain on foreclosed real estate held for sale
—
—
666
Realized gains
511
1,163
6,405
Realized losses
(11)
(557)
(262)
$
1,646
$
(1,071)
$
7,537
Realized gains and losses on sales and redemptions are computed based on specific identification.
Other-Than-Temporary Impairment
The Company separates OTTI into the following two components: (i) the amount related to credit losses, which is recognized in
the consolidated statement of operations and (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 security’s amortized cost to the present value of its
current expected cash flows discounted at its effective yield prior to the impairment charge.
The determination of whether unrealized losses are “other-than-temporary” requires judgment based on subjective as well as
objective factors. The Company routinely monitors its investment portfolio for changes in fair value that might indicate potential
impairments and performs detailed reviews on such securities. Changes in fair value are evaluated to determine the extent to which
such changes are attributable to (i) fundamental factors specific to the issuer or (ii) market-related factors such as interest rates or
sector declines.
Securities with declines attributable to issuer-specific fundamentals are reviewed to identify all available evidence to estimate
the potential for impairment. Resources used include agency ratings and historical financial data included in filings with the 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.
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
20
The Company recognized OTTI charges in net income (loss) of $183 thousand relating to three non-agency backed CMOs for
the year ended December 31, 2022. There were no OTTI charges in 2023 and 2021.
The following is a progression of the credit-related portion of OTTI on investments owned as of December 31, 2023, 2022, and
2021 (in thousands).
Year Ended December 31,
2023
2022
2021
Beginning balance
$
(1,589)
$
(1,443)
$
(1,728)
Additional credit impairments on previously impaired
securities
—
(183)
—
Reductions for securities deemed worthless and realized
—
37
285
$
(1,589)
$
(1,589)
$
(1,443)
The Company believes that the remaining securities having unrealized losses as of December 31, 2023, were impacted by
changes in interest rates and are not other-than-temporarily impaired. The Company also does not intend to sell any of these securities,
and it is more likely than not that the Company will not be required to sell any of these securities before the recovery of their
amortized cost basis.
4. Reinsurance Premiums
Total premiums written and earned are summarized as follows (in thousands).
Year Ended December 31,
2023
2022
2021
Written
Earned
Written
Earned
Written
Earned
Direct
$
447,987
$
390,632
$
268,581
$
229,435
$
206,313
$
207,252
Assumed
9,087
6,539
1,048
1,094
1,637
1,791
Total
$
457,074
$
397,171
$
269,629
$
230,529
$ 207,950
$
209,043
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.
5. Stock-Based Compensation Plans
Employee Stock-Based Incentive Plan
The Company has issued restricted stock units to employees and common stock to 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”. As of December 31, 2023, there were 4,426,354 shares remaining available for
issuance under the Plan.
The following table summarizes restricted stock units that the Compensation Committee of the Board of Directors of the
Company awarded to executive officers (in thousands, except weighted average information). Such restricted stock units typically vest
with an equal number of shares of common stock deliverable upon the third anniversary of the dates of grants. Compensation expense
related to the units was calculated based upon the closing market prices of the common stock on the dates of grants and is recorded on
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
21
a straight-line basis over the vesting period. Expected future compensation related to the issuance of restricted stock units is $2.1
million, which will be amortized through December 2026.
Number of
Restricted
Stock Units
Weighted Average
Grant-Date Fair
Value per Share
Non-vested at December 31, 2020
584
$
0.84
Granted
155
1.99
Vested
(182)
1.06
Forfeited
(34)
1.07
Non-vested at December 31, 2021
523
1.09
Granted
165
2.08
Vested
(127)
1.18
Forfeited
(40)
1.73
Non-vested at December 31, 2022
521
1.32
Granted
1,281
1.70
Vested
(240)
0.74
Forfeited
(113)
0.89
Non-vested at December 31, 2023
1,449
$
1.79
Employee Stock Purchase Plan
The Company’s Board of Directors adopted the First Acceptance Corporation Employee Stock Purchase Plan (“ESPP”)
whereby eligible employees may purchase shares of the Company’s common stock at a price equal to the lower of the closing market
price on the first or last trading day of a six-month period. ESPP participants can authorize payroll deductions, administered through
an independent plan custodian, of up to 15% of their salary to purchase semi-annually (June 30 and December 31) up to $25,000 of
the Company’s common stock during each calendar year. The Company’s Board of Directors may at any time amend the ESPP in any
respect, including termination of the ESPP, without notice to the employees. The Company has reserved 1,300,000 shares of common
stock for issuance under the ESPP and as of December 31, 2023, 286,074 shares remain available for issuance. Employees purchased
approximately 149,000, 110,000, and 84,000 shares during the years ended December 31, 2023, 2022 and 2021, respectively.
Compensation expense attributable to subscriptions to purchase shares under the ESPP was $25 thousand, $18 thousand, and $27
thousand for the years ended December 31, 2023, 2022 and 2021, respectively.
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, matches 100% of the first 3% of an employee’s salary plus 50% of the next 2% up to the maximum allowed by
the Internal Revenue Code. The Company’s contributions to the 401k Plan for the years ended December 31, 2023, 2022 and 2021
were $1.7 million, $1.8 million, and $1.6 million, respectively, and are included within operating expenses in the accompanying
consolidated statements of operations.
7. Property and Equipment
The components of property and equipment are as follows (in thousands).
Year Ended December 31,
2023
2022
Furniture and equipment
$
15,049
$
21,816
Leasehold improvements
3,131
8,305
18,180
30,121
Less: Accumulated depreciation
(15,288)
(25,290)
Property and equipment, net
$
2,892
$
4,831
Depreciation expense related to property and equipment was $2.2 million, $2.5 million, and $1.5 million for the years ended
December 31, 2023, 2022 and 2021, respectively.
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
22
8. Lease and Service Contract Commitments
The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use
(“ROU”) assets and lease liabilities on our consolidated balance sheets. The Company does not have any finance leases.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the
Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at
commencement date based on the present value of lease payments over the lease term. As the Company’s leases do not provide an
implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in
determining the present value of lease payments. Lease terms may include options to extend the lease when it is reasonably certain
that the option will be exercised. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
The Company has operating leases, which include retail stores (sold effective December 1, 2023), corporate offices, and certain
equipment. The leases have remaining lease terms of five years to nine years. Operating lease cost and cash flows for each of the years
ended December 31, 2023 were $8.7 million and $8.9 million, respectively. Both operating lease cost and cash flows for each of the
years ended December 31, 2022 and 2021 were $8.2 million, and $7.4 million, respectively.
Supplemental balance sheet information related to leases was as follows (in thousands):
Year Ended December 31,
2023
2022
Operating lease right-of-use assets
$
$ 5,020
$
$ 14,520
Operating lease liabilities
5,401
14,724
Weighted average remaining lease term
3.90 years
4.36 years
Weighted average discount rate
6.8%
6.5%
Maturities of operating lease liabilities were as follows as of December 31, 2023 (in thousands):
For the Year Ended December 31,
Amount
2024
$
970
2025
979
2026
989
2027
1,000
2028
784
Thereafter
2,038
Total lease payments
$
6,760
Less imputed interest
(1,359)
Total
$
5,401
Note 9. Losses and Loss Adjustment Expenses Incurred and Paid
The Company underwrites primarily a single product in the form of a non-standard personal automobile policy. Although this
product can vary in terms of its coverages (liability and physical damage), disaggregation by these coverages is not considered
meaningful due to the relative immateriality of the physical damage component which is only approximately 6% of the ending liability
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
23
for unpaid losses and loss adjustment expenses (“LAE”). Additionally, the amount of renters’ coverage sold as an optional product is
likewise immaterial. Information regarding the reserve for unpaid losses and LAE is as follows (in thousands).
Year Ended December 31,
2023
2022
2021
Liability for unpaid losses and LAE at beginning of year, gross
$
107,100
$
93,278
$
91,788
Reinsurance balances receivable
(97)
(90)
(254)
Liability for unpaid losses and LAE at beginning of year, net
107,003
93,188
91,534
Add: Provision for losses and LAE:
Current year
274,747
176,444
156,409
Prior year
1,714
4,816
(1,560)
Net losses and LAE incurred
276,461
181,260
154,849
Less: Losses and LAE paid:
Current year
141,424
101,118
95,709
Prior year
76,696
66,327
57,486
Net losses and LAE paid
218,120
167,445
153,195
Liability for unpaid losses and LAE at end of year, net
165,344
107,003
93,188
Reinsurance balances receivable
2
97
90
Liability for unpaid losses and LAE at end of year, gross
$
165,346
$
107,100
$
93,278
The unfavorable development of $1.7 million for the year ending December 31, 2023 was primarily attributable to higher-
than-expected collision losses in the 2022 accident year.
The unfavorable development of $4.8 million for the year ending December 31, 2022 was primarily attributable to higher-
than-expected loss severity on third-party physical damage losses for the fourth quarter of 2021. This increased severity was primarily
due to the continuing inflationary and supply chain economic conditions that led to increased used car prices and higher vehicle repair
costs.
The favorable development of $1.6 million for the year ended December 31, 2021 was primarily attributable to improved bodily
injury severity in recent accident periods.
The information that follows about incurred and paid claims development for the 2014 to 2022 years, and the average annual
percentage payout of incurred claims by age as of December 31, 2023, is presented as required unaudited supplementary information.
Incurred losses and loss adjustment expenses, net of reinsurance, by accident year are as follows (in thousands).
Incurred losses and loss adjustment expenses, net of reinsurance
For the years ended December 31,
(Unaudited)
Accident
year
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2014
$
166,179
$
165,991
$
171,827
$
171,372
$
170,996
$
170,962
$
171,056
$
171,150
$
171,282
$
171,292
2015
218,186
240,428
240,389
239,181
239,896
240,179
240,378
240,478
240,614
2016
278,366
275,768
272,000
269,026
269,159
270,515
270,497
271,176
2017
223,066
212,134
206,784
206,659
207,193
207,213
207,053
2018
196,023
179,060
178,172
179,381
179,394
179,539
2019
170,434
166,600
165,052
164,781
164,251
2020
138,014
134,543
133,602
132,672
2021
156,437
162,147
160,487
2022
176,444
180,431
2023
274,747
Total
$
1,982,262
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
24
Cumulative paid losses and loss adjustment expenses, net of reinsurance, by accident year are as follows (in thousands).
Cumulative paid losses and loss adjustment expenses, net of reinsurance
For the years ended December 31,
(Unaudited)
Accident
year
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2014
$
98,437
$
144,943
$
162,702
$
167,973
$
169,807
$
170,559
$
170,913
$
171,077
$
171,274
$
171,294
2015
129,216
208,533
227,388
234,264
237,665
239,191
239,951
240,395
240,569
2016
163,792
238,657
258,190
264,474
267,019
268,912
270,045
271,025
2017
120,673
183,609
197,573
202,766
205,280
206,438
206,844
2018
105,877
157,360
169,662
174,891
177,592
178,860
2019
99,966
147,341
157,245
161,272
162,851
2020
81,479
118,400
126,511
129,669
2021
93,715
144,198
153,327
2022
101,118
161,069
2023
141,424
Total
$
1,816,930
All outstanding reserves for unpaid losses and LAE prior to 2014, net of reinsurance
14
Total outstanding reserves for unpaid losses and LAE, net of reinsurance
$
165,346
The total of incurred but not reported liabilities plus expected development on reported claims and the cumulative number of reported
claims are as follows (dollars in thousands, except for cumulative number of reported claims). The Company uses claim counts to
measure claim frequency information. Total reported claims on a cumulative basis include both open claims and claims that have been
closed with or without payment, with multi-individual occurrences counted as separate claims. Open claims with only LAE reserves
are excluded from the cumulative number of reported claims below.
Accident
year
Incurred losses and LAE,
net of reinsurance
Total of incurred but not
reported liabilities plus
expected development on
reported claims
Cumulative number of
reported claims
2014
$
171,292
$
(2)
85,395
2015
240,614
(15)
110,069
2016
271,176
4
118,636
2017
207,053
72
89,823
2018
179,539
302
78,424
2019
164,251
985
68,863
2020
132,672
2,028
54,542
2021
160,487
4,823
61,232
2022
180,431
13,520
62,463
2023
274,747
86,360
92,846
The average historical annual percentage payout of incurred losses by age, net of reinsurance is as follows. The amounts
reflected below represent the average length of time between the occurrence of a loss and its payment.
(Unaudited)
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
Non-standard auto
58.5%
29.2%
7.3%
2.7%
1.2%
0.6%
0.3%
0.1%
0.1%
0.0
%
10. Debentures Payable
In June 2007, First Acceptance Statutory Trust I (“FAST I”), an unconsolidated subsidiary trust of the Company, issued 40,000
shares of preferred securities at $1,000 per share to outside investors and 1,240 shares of common securities to the Company, also at
$1,000 per share. FAST I used the proceeds from the sale of the preferred securities to purchase $41.2 million of junior subordinated
debentures from the Company. The sole assets of FAST I are $41.2 million of junior subordinated debentures issued by the Company.
The debentures will mature on July 30, 2037 and are currently redeemable by the Company in whole or in part and the preferred
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
25
securities are callable. The debentures paid a fixed rate of 9.277% until July 30, 2012, after which the rate became variable (Currently
three-Month CME term SOFR plus the spread adjustment of 0.2161 percent, resetting quarterly). The interest rate related to the
debentures ranged from 8.165% to 9.402% during 2023. In January 2024, the interest rate reset to 9.329% through April 2024.
The obligations of the Company under the junior subordinated debentures represent full and unconditional guarantees by the
Company of FAST I’s obligations for the preferred securities. Dividends on the preferred securities are cumulative, payable quarterly
in arrears and are deferrable at the Company’s option for up to five years. The dividends on these securities, which have not been
deferred, are the same as the interest on the debentures. The Company cannot pay dividends on its common stock during such
deferments.
The debentures are classified as debentures payable in the Company’s consolidated balance sheets and the interest paid on these
debentures is classified as interest expense in the consolidated statements of operations. As of December 31, 2023, the unamortized
debt discount and issuance costs of $0.6 million are being amortized to interest expense over the term of the debentures.
On March 15, 2022, the Adjustable Interest Rate (LIBOR) Act was signed into law. Under this Act, on the first London banking
day after June 30, 2023, three month CME term SOFR (as defined in the final regulations), as adjusted to the spread adjustment
(0.26161 percent), became the benchmark replacement for the Three-Month LIBOR. This change was accounted for as a continuation
of the current arrangement.
As of December 31, 2023, the Company was in compliance with the covenants related to the debentures payable. Such
borrowing is not an obligation of the Company’s regulated insurance company subsidiaries. The Company believes that it has
sufficient liquidity outside the Company’s regulated insurance company subsidiaries to meet its current obligations in the foreseeable
future, including the payment of interest on this borrowing.
11. Income Taxes
The provision (benefit) for income taxes consisted of the following (in thousands).
Year Ended December 31,
2023
2022
2021
Federal:
Current
$
5,627
$
—
$
—
Deferred
15,855
(4,673)
(959)
21,482
(4,673)
(959)
State:
Current
1,280
(26)
68
Deferred
2,359
154
(462)
3,639
128
(394)
$
25,121
$
(4,545)
$
(1,353)
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
26
The provision (benefit) for income taxes differs from the amounts computed by applying the statutory federal corporate tax rate
of 21% for the years ended December 31, 2023, 2022 and 2021 to income (loss) before income taxes as a result of the following (in
thousands).
Year Ended December 31,
2023
2021
2021
Provision (benefit) for income taxes at statutory rate
$
20,798
$
(4,627)
$
(542)
Tax effect of:
Tax-exempt investment income
(19)
(32)
(56)
Change in the valuation allowance for deferred tax assets
allocated to federal income taxes
—
31
(307)
Stock-based compensation
(38)
(16)
(38)
State income taxes, net of federal income tax benefit
and state valuation allowance
3,369
133
(409)
Section 453A interest on installment sale of insurance
agency
996
—
—
Other items
15
(34)
(1)
$
25,121
$
(4,545)
$
(1,353)
The tax effects of temporary differences that give rise to the net deferred tax assets and liabilities are presented below (in thousands).
Year Ended December 31,
2023
2022
Deferred tax assets:
Net operating loss carryforwards
$
1,732
$
13,123
Stock-based compensation
110
95
Unearned premiums and loss and loss adjustment expense reserves
8,174
5,270
Accrued expenses and other nondeductible items
1,277
1,088
Net unrealized change on investments in fixed maturities
1,608
2,138
Operating lease liabilities
1,134
3,092
Other
1,035
1,507
15,070
26,313
Deferred tax liabilities:
Deferred acquisition costs
(1,985)
(1,483)
Identifiable intangible assets
(375)
(1,200)
Loss reserve discounting transition adjustment
(170)
(255)
Net unrealized change on investments in equity securities
(322)
(82)
Goodwill and identifiable intangible assets
—
(3,132)
Operating lease right-of-use assets
(1,054)
(3,049)
Deferred gain on installment sale of insurance agency
(9,788)
—
Other
(3,813)
(253)
(17,507)
(9,454)
Total net deferred tax (liability) asset
(2,437)
16,859
Less: Valuation allowance
(2,121)
(2,682)
Net deferred tax (liability) asset
$
(4,558)
$
14,177
ASC Topic 740, Income Taxes, establishes procedures to measure deferred tax assets and liabilities and assess whether a
valuation allowance relative to existing deferred tax assets is necessary. Management assesses the likelihood of realization of the
Company’s deferred tax assets and the need for a valuation allowance with respect to those assets based on the weight of available
positive and negative evidence. As of December 31, 2023 and December 31, 2022, management determined that a valuation allowance
of $2.1 million and $2.7 million, respectively, was necessary relative to certain state taxes net operating loss carryforwards and OTTI
which are not expected to be realized. Management also determined at December 31, 2023 and December 31, 2022 that it is more
likely than not that the results of future operations will generate sufficient taxable income to realize the remaining deferred tax assets
not covered by this valuation allowance.
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
27
The deferred tax asset ("DTA") valuation allowance may be adjusted in future periods if management determines that it is more
likely than not that some portion or all of the DTA will not be realized or previously recognized valuation allowance should be
released. In the event the DTA valuation allowance is adjusted, the Company would record an income tax expense for the adjustment.
12. Net Income (Loss) Per Share
Basic EPS are computed using the weighted average number of shares outstanding. Diluted EPS are computed using the
weighted average number of shares outstanding adjusted for the incremental shares attributed to outstanding restricted stock units.
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,
2023
2022
2021
Net income (loss)
$
73,912
$
(17,488)
$
(1,228)
Weighted average common basic shares
38,086
37,795
38,151
Effect of dilutive securities
323
—
—
Weighted average common dilutive shares
38,409
37,795
38,151
Basic net income (loss) per share
$
1.94
$
(0.46)
$
(0.03)
Diluted net income (loss) per share
$
1.92
$
(0.46)
$
(0.03)
For the year ended December 31, 2023 the computations of diluted net income per share included all outstanding financial
instruments with a right to purchase or convert into common stock.
For the years ended December 31, 2022 and 2021, the computation of diluted net loss per share did not include the dilutive
effect of 246 thousand and 292 thousand shares from restricted stock units since their inclusion would have been anti-dilutive.
13. Concentrations of Credit Risk
As of December 31, 2023, the Company had certain concentrations of credit risk with several financial institutions in the form
of cash, cash equivalents, and restricted cash, which amounted to $109.8 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 directly with its policyholders, and to a lesser extent, through independently owned
insurance agencies who write non-standard personal automobile insurance policies on behalf of the Company. Direct policyholders
make payments directly to the Company. Balances due from policyholders are generally secured by the related unearned premium.
The Company 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.
At December 31, 2023, the Company had total gross consideration receivable of $65.0 million from the sale of the Insurance
Agency, of which $35.0 million is held in escrow (Note 17).
14. 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 Company’s business. The Company continually evaluates potential liabilities and reserves for litigation of these types using the
criteria established by FASB ASC 450, “Contingencies” (“FASB ASC 450”). Pursuant to FASB ASC 450, reserves for a loss may
only be recognized if the likelihood of occurrence is probable and the amount can be reasonably estimated. If a loss, while not
probable, is judged to be reasonably possible, management will disclose, if it can be estimated, a possible range of losses or state that
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
28
an estimate cannot be made. Management evaluates each legal action and records reserves for losses as warranted by establishing a
reserve in its consolidated balance sheets in loss and loss adjustment expense reserves for bad faith claims and in other liabilities for
other lawsuits. Amounts incurred are recorded in the Company’s consolidated statements of operations in losses and LAE for bad faith
claims and in operating expenses for other lawsuits unless otherwise disclosed.
15. Statutory Financial Information and Accounting Policies
The Company has three insurance company subsidiaries that are organized and domiciled under the insurance statutes of Texas,
Georgia, and Tennessee. The insurance company subsidiaries operate under licenses issued by various state insurance authorities.
Such licenses may be of perpetual duration or periodically renewable, provided the insurance company subsidiaries continue to meet
applicable regulatory requirements.
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.
As of December 31, 2023, and 2022, on a consolidated statutory basis, the capital and surplus of the Insurance Companies was
$121.0 million and $61.8 million, respectively. For the years ended December 31, 2023, 2022 and 2021, consolidated statutory net
income (loss) of the Insurance Companies was $14.9 million, $(19.5) million, and $1.6 million, respectively.
The maximum amount of dividends which can be paid within a 12-month period by the lead insurance company, 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 as of December 31
st
of the next preceding year or net income for the year.
In addition, dividends may only be paid from unassigned surplus and an insurance company’s remaining surplus must be both
reasonable in relation to its outstanding liabilities and adequate to meet its financial needs. The dividend limitation for FAIC in 2024 is
$12.1 million.
The National Association of Insurance Commissioners (“NAIC”) Model Act for risk-based capital provides formulas to
determine each December 31 on an annual basis the amount of statutory capital and surplus that an insurance company needs to ensure
that it has an acceptable expectation of not becoming financially impaired. Failure to meet applicable minimum risk-based capital
requirements could subject our insurance company subsidiaries to further examination or corrective action imposed by state
regulators, including limitations on their writing of additional business, state supervision or even liquidation. Risk-based capital
calculations are only made as of each December 31, and the three insurance company subsidiaries were each above the minimum
regulatory company action levels as of December 31, 2023. Failure to maintain an adequate RBC could subject the Insurance
Companies to regulatory action and could restrict the payment of dividends. There are also statutory guidelines that suggest that on an
annual calendar year basis an insurance company should not exceed a ratio of net premiums written to statutory capital and surplus of
3-to-1. For the year ended December 31, 2023, each insurance company subsidiary was within this guideline.
16. Related Parties
The Company operates under standard agreements for Treasury and Custodial Services with a bank indirectly owned 24% by
Gerald J. Ford, the Company’s controlling stockholder. The fees under these agreements for the years ended December 31, 2023, 2022
and 2021 were $141 thousand, $131 thousand, and $119 thousand, respectively.
17. Sale of Insurance Agency Subsidiary
On December 1, 2023, the Company entered into a securities purchase agreement with the buyer to sell 100% of its issued and
outstanding shares of capital stock of its' wholly-owned subsidiary, the Insurance Agency, for net cash consideration of up to $120
million which included $55 million paid at closing and $20 million held in escrow which will be released monthly from March 2024
through December 2024. The Company is eligible to receive additional contingent consideration of $15 million (held in escrow), $10
million, and $20 million on December 1, 2024, 2025 and 2026, respectively, based upon achievement of certain annual premium
production targets.
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
29
The Company has recognized a gain of $73.0 million on this sale, which includes future contingent consideration of $38.9
million, recorded at fair value, utilizing a discounted cash flow approach.
The purchase agreement provides that the Company would receive its additional contingent consideration in its entirety should
the buyer fail to submit applications within the applicable underwriting guidelines of the Insurance Companies, provided that the
Company has not breached any of its agreements with the buyer. The agreement also provides that the Company maintain $100
million of capital and surplus in the Insurance Companies through December 31, 2026. As of December 31, 2023 and March 4, 2023,
the Company is not in breach of contract.
The Insurance Agency was the retail sales agency operation of the Company, and principally sold non-standard automobile
insurance and related products through employee-agents operating from 288 leased retail locations in 13 states. The insurance sold by
the Insurance Agency was underwritten and serviced by the Insurance Companies and through third-party carriers for which received
a commission. The purchase agreement provides that, effective December 1, 2023, the buyer, will operate as an independent agent for
the Insurance Companies’ non-standard automobile insurance products written through the Insurance Agency. Following this
transaction, the Insurance Companies currently sells non-standard personal automobile insurance written solely through independent
agents, including the buyer.
Crowe LLP
Independent Member Crowe
Global
(Continued)
1.
INDEPENDENT AUDITOR’S REPORT
To the Board of Directors and Stockholder of
First Acceptance Corporation
Opinion
We have audited the consolidated financial statements of First Acceptance Corporation (the Company),
which comprise the consolidated balance sheets as of December 31, 2023 and 2022, and the related
consolidated statements of operations, changes in stockholder’s equity, and cash flows for the three-year
period ended December 31, 2023 and the related notes to the consolidated financial statements.
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects,
the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations
and its cash flows for the three-year period ended December 31, 2023 in accordance with accounting
principles generally accepted in the United States of America.
Basis for Opinion
We conducted our audits in accordance with auditing standards generally accepted in the United States of
America (GAAS). Our responsibilities under those standards are further described in the Auditor’s
Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are
required to be independent of the Company and to meet our other ethical responsibilities, in accordance
with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have
obtained is sufficient and appropriate to provide a basis for our audit opinion.
Responsibilities of Management for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial
statements in accordance with accounting principles generally accepted in the United States of America,
and for the design, implementation, and maintenance of internal control relevant to the preparation and fair
presentation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, management is required to evaluate whether there are
conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability
to continue as a going concern for one year from the date the consolidated financial statements are
available to be issued.
(Continued)
2.
Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as
a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report
that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance
and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a
material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud
is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions,
misrepresentations, or the override of internal control. Misstatements are considered material if there is a
substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a
reasonable user based on the consolidated financial statements.
In performing an audit in accordance with GAAS, we:
• Exercise professional judgment and maintain professional skepticism throughout the audit.
• Identify and assess the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error, and design and perform audit procedures responsive to those
risks. Such procedures include examining, on a test basis, evidence regarding the amounts
and disclosures in the consolidated financial statements.
• Obtain an understanding of internal control relevant to the audit in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control. Accordingly, no such opinion is
expressed.
• Evaluate the appropriateness of accounting policies used and the reasonableness of significant
accounting estimates made by management, as well as evaluate the overall presentation of
the consolidated financial statements.
• Conclude whether, in our judgment, there are conditions or events, considered in the
aggregate, that raise substantial doubt about the Company’s ability to continue as a going
concern for a reasonable period of time.
We are required to communicate with those charged with governance regarding, among other matters, the
planned scope and timing of the audit, significant audit findings, and certain internal control-related matters
that we identified during the audit.
Required Supplementary Information
Accounting principles generally accepted in the United States of America require that the claims
development information for periods prior to 2022 and average annual percentage payout of incurred claims
information, included within Note 9, be presented to supplement the basic consolidated financial
statements. Such information is the responsibility of management and, although not a part of the basic
consolidated financial statements, is required by the Financial Accounting Standards Board, who considers
it to be an essential part of financial reporting for placing the basic consolidated financial statements in an
appropriate operational, economic, or historical context. We have applied certain limited procedures to the
required supplementary information in accordance with auditing standards generally accepted in the United
States of America, which consisted of inquiries of management about the methods of preparing the
information and comparing the information for consistency with management’s responses to our inquiries,
the basic consolidated financial statements, and other knowledge we obtained during our audit of the basic
consolidated financial statements. We do not express an opinion or provide any assurance on the
information because the limited procedures do not provide us with sufficient evidence to express an opinion
or provide any assurance.
3.
Other Information
Management is responsible for the other information included in the management’s discussion and
analysis. The other information comprises the information included in the management’s discussion and
analysis but does not include the consolidated financial statements and our auditor’s report thereon. Our
opinion on the consolidated financial statements does not cover the other information, and we do not
express an opinion or any form of assurance thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other
information and consider whether a material inconsistency exists between the other information and the
consolidated financial statements, or the other information otherwise appears to be materially misstated. If,
based on the work performed, we conclude that an uncorrected material misstatement of the other
information exists, we are required to describe it in our report.
Crowe LLP
West Hartford, Connecticut
March 4, 2024
33
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our consolidated financial statements and accompanying notes
included in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results
could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those
discussed below and elsewhere in this report, particularly under the caption “Risk Factors.”
Forward-Looking Statements
This report contains forward-looking statements. All statements made in this report, other than statements of historical fact, are
forward-looking statements. You can identify these statements from our use of the words “may,” “should,” “could,” “potential,”
“continue,” “plan,” “forecast,” “estimate,” “project,” “believe,” “intent,” “anticipate,” “expect,” “target,” “is likely,” “will,” or the
negative of these terms and similar expressions. These forward-looking statements may include, among other things, statements and
assumptions relating to:
• the accuracy and adequacy of our loss reserving methodologies;
• income (loss), income (loss) per share and other financial performance measures;
• the anticipated effects on our results of operations or financial condition from recent and expected economic
developments;
• the financial condition of, and other issues relating to the strength of and liquidity available to, issuers of securities held in
our investment portfolio;
• and our business and growth strategies.
We believe that our expectations are based on reasonable assumptions. However, these forward-looking statements involve
known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements,
or industry results to differ materially from our expectations of future results, performance or achievements expressed or implied by
these forward-looking statements. In addition, our past results of operations do not necessarily indicate our future results. We discuss
these and other uncertainties in the “Risk Factors” section, as well as other sections, of this report.
You should not place undue reliance on any forward-looking statements. These statements speak only as of the date of this
report. Except as otherwise required by applicable laws, we undertake no obligation to publicly update or revise any forward-looking
statements or the risk factors described in this report, whether as a result of new information, future events, changed circumstances or
any other reason after the date of this report.
34
General
Through December 1, 2023. we owned and operated “Acceptance Insurance,” an insurance agency headquartered in Nashville,
Tennessee. We operated under an “Agency Model” and sold insurance and related products underwritten and serviced by our own
insurance companies, known as the First Acceptance Insurance Group, (“Acceptance business”) and through third-party carriers for
which we received a commission (“3PC business”).
Acceptance Insurance primarily sold non-standard personal automobile insurance through our own insurance companies and
third-party carriers. Non-standard personal automobile insurance is sought after by individuals because of their inability or
unwillingness to obtain standard insurance coverage due to various factors including their payment preference, failure to have
maintained continuous insurance coverage, or their driving record. We also offered a variety of other commissionable third-party
products such as roadside assistance and in most states, we also sold (and continue to sell) an insurance product for renters that we
underwrite.
Through December 1, 2023, Acceptance Insurance leased and operated 288 retail locations staffed with employee-agents. In
addition to these retail locations, we previously completed sales over the phone through employee-agents in our call center or over the
internet through our consumer-based website and mobile platform.
Effective with the sale of Acceptance Insurance, the Company has changed the primary distribution of its premiums written
from the fixed cost of Company-operated retail locations staffed by employee-agents to the variable cost of a new independent agency
relationship with the buyer. Through a production agreement with the buyer, the source of the premiums written through the former
retail channel will continue in the future through this new independent agent relationship, in addition to anticipated production through
other existing retail locations of the buyer. The buyer is eligible to receive contingent bonus commission payments of $3.3 million on
each of February 1, 2025, 2026 and 2027, based on annual production targets. The Company, however, will no longer receive
commission and fee income from the sale of insurance policies from third party carriers through its former retail locations.
Subsequent to December 1, 2023, we now solely offer our own underwritten insurance policies through independent agents in
15 states, and we are also licensed to write insurance in 11 other states that are not currently utilized.
For the year ended December 31, 2023, 25% of insurance company operating revenues resulted from insurance policies
produced by a single independent agent who is engaged in a technology driven method of delivering insurance through a web and
mobile site application. In 2024, it is anticipated that the buyer of Acceptance Insurance will produce the majority of insurance
company operating revenues.
Sale of Insurance Agency Subsidiary
On December 1, 2023, the Company sold its wholly owned subsidiary, Acceptance Insurance Agency of Tennessee, Inc. (“the
Insurance Agency”) for cash consideration of up to $120.0 million which included $55 million paid at closing and $20.0 million held
in escrow which will be released monthly from March 2024 through December 2024. The Company is eligible to receive additional
contingent consideration of $15.0 million, $10.0 million, and $20.0 million, on December 1, 2024, 2025 and 2026, respectively, based
upon achievement of certain annual premium production targets.
The Company has recognized a gain of $73.0 million on this sale, which includes future contingent consideration of $38.9
million, recorded at fair value, utilizing a discounted cash flow approach.
The purchase agreement provides that the Company would receive its additional contingent consideration in its entirety
should the buyer fail to submit applications within the applicable underwriting guidelines of the Company, provided that the Company
has not breached any of its agreements with the buyer. The agreement also provides that the Company will maintain $100 million of
capital and surplus in the insurance companies through December 31, 2026.
The Insurance Agency, the Company’s retail sales agency operations subsidiary, principally sold non-standard automobile
insurance and related products through employee-agents operating from 288 leased retail locations in 13 states. The insurance sold by
the Insurance Agency was underwritten and serviced by our insurance companies and through third-party carriers for which it received
a commission. The purchase agreement provides that, effective December 1, 2023, the buyer, will operate as an independent agent for
our insurance companies’ non-standard automobile insurance products written through the Insurance Agency. Following this
transaction, our insurance companies will sell non-standard personal automobile insurance written solely through independent agents,
including the buyer.
35
Consolidated Results of Operations
Overview
Our insurance operations generated revenues from selling non-standard personal automobile insurance products and related
products. We currently conduct our servicing and underwriting operations in 15 states through three insurance company subsidiaries:
First Acceptance Insurance Company, Inc., First Acceptance Insurance Company of Georgia, Inc. and First Acceptance Insurance
Company of Tennessee, Inc., and through December 1, 2023, as an insurance agency through Acceptance Insurance Agency of
Tennessee, Inc ("the Insurance Agency"). Our revenues were primarily generated from:
• premiums earned, including policy and renewal fees, from sales of policies written and assumed by our insurance
company subsidiaries;
• commission and fee income, including agency fees and commissions and fees for other ancillary products and policies
sold on behalf of third-party insurance carriers (through December 1, 2023);
• billing fees and service charges on policies written and assumed by our insurance company subsidiaries; and
• investment income earned on the invested assets of the insurance company subsidiaries.
The following table presents premiums earned by state (in thousands). Premiums earned are presented in the state in which the
underlying insured risk of the related Acceptance business is located.
Year Ended December 31,
2023
2022
2021
Georgia
$
112,098
$
57,671
$
53,813
Florida
96,657
41,699
32,815
Alabama
34,815
34,635
35,588
California
24,758
11,891
4,334
Tennessee
24,153
19,815
19,718
South Carolina
23,013
9,035
8,725
Arizona
17,598
6,482
3,879
Pennsylvania
15,782
9,135
8,843
Ohio
14,708
12,045
12,639
Texas
13,531
8,410
8,850
Indiana
8,392
7,606
8,058
Mississippi
6,156
5,631
5,819
Illinois
5,094
6,052
5,480
Virginia
314
328
386
Missouri
102
94
96
$
397,171
$
230,529
$
209,043
Our insurance companies present a combined ratio as a measure of our overall underwriting profitability. The components of the
combined ratio are as follows.
Loss Ratio - Loss ratio is the ratio (expressed as a percentage) of losses and loss adjustment expenses incurred to premiums
earned and is a basic element of underwriting profitability. We calculate this ratio based on all direct and assumed premiums earned,
net of ceded reinsurance.
Expense Ratio - Expense ratio is the ratio (expressed as a percentage) of insurance company operating expenses (including
depreciation and amortization) to net premiums earned. Insurance company operating expenses are reduced by billing fees and service
charges from insureds. This is a measurement that illustrates relative management efficiency in administering our insurance
companies.
Combined Ratio - Combined ratio is the sum of the loss ratio and the expense ratio. If the combined ratio is at or above 100%,
we cannot be profitable without sufficient investment income.
36
The following table presents our loss, expense, and combined ratios for our insurance companies:
Year Ended December 31,
2023
2022
2021
Loss
69.6%
78.7%
74.2%
Expense
27.6%
30.6%
29.3%
Combined
97.2%
109.3%
103.5%
Investments
We use the services of an independent investment manager to help oversee the management of our investment portfolio. The
investment manager, in concert with our Chief Investment Officer, conducts, in accordance with our investment policy, all of the
investment purchases and sales for our insurance company subsidiaries. Our investment policy has been established by the Investment
Committee of our Board of Directors and specifically addresses overall investment goals and objectives, authorized investments,
prohibited securities, restrictions on sales and guidelines as to asset allocation, duration, and credit quality. Management and the
Investment Committee meet quarterly with our investment manager and Chief Investment Officer to review the performance of the
portfolio and compliance with our investment guidelines.
The invested assets of the insurance company subsidiaries consist substantially of marketable, investment grade debt securities,
and include U.S. government securities, municipal bonds, corporate bonds, mutual funds, asset-backed securities, and collateralized
mortgage obligations (“CMOs”), in addition to other investment alternatives made into limited partnership interests and a real estate
investment trust. Investment income is comprised primarily of interest earned on these securities, net of related investment expenses.
Although investments are generally purchased with the intention to hold them until maturity, realized gains and losses could occur as
changes are made to our holdings based upon changes in interest rates or the credit quality of specific securities.
The value of our consolidated fixed maturities, available-for-sale portfolio was $192.9 million as of December 31, 2023 and
consisted of fixed maturity securities carried at fair value with unrealized gains and losses reported as a separate component of
stockholders’ equity. As of December 31, 2023, we had gross unrealized gains of $1.4 million and gross unrealized losses of $9.1
million in our consolidated investments in fixed maturities, available-for-sale portfolio.
The value of our investment in equity securities portfolio was $10.7 million as of December 31, 2023 and consisted of
investments in mutual funds, carried at fair value with unrealized gains and losses reported as a component of net income (loss). As of
December 31, 2023, we had gross unrealized gains of $2.4 million and gross unrealized losses of $0.8 million in our investments in
equity securities portfolio.
The value of our other investments was $5.6 million as of December 31, 2023 and consisted of two limited partnership interests
carried at net asset value and a REIT at cost, which approximated fair value, with unrealized gains and losses reported as investment
income.
As of December 31, 2023, 99.4% of the fair value of our fixed maturities portfolio was rated “investment grade” (a credit rating
of AAA to BBB-) by nationally recognized statistical rating organizations. Investment grade securities generally bear lower yields and
have lower degrees of risk than those that are unrated or non-investment grade. We believe that a high-quality investment portfolio is
more likely to generate a stable and predictable investment return.
37
Year Ended December 31, 2023, Compared with the Year Ended December 31, 2022
Consolidated Results
Revenues for the year ended December 31, 2023 increased 85% to $560.6 million from $302.3 million in the prior year. Income
before income taxes for the year ended December 31, 2023, was $99.0 million, compared with loss before income taxes of $22.0
million for the year ended December 31, 2022. Net income for the year ended December 31, 2023, was $73.9 million, compared with
net loss of $17.5 million for the year ended December 31, 2022. Basic and diluted net income per share were $1.94 and $1.92 for the
year ended December 31, 2023, respectively, compared with basic and diluted net loss per share of $0.46 for the year ended
December 31, 2022.
Excluding the gain on sale of insurance agency of $73.0 million, income before income taxes for the year ended December 31,
2023 was $26.0 million compared with loss before income taxes of $22.0 million for the year ended December 31, 2022.
For the year ended December 31, 2023, we recognized unfavorable prior period loss and LAE development of $1.7 million
compared with $4.8 million for the year ended December 31, 2022.
Net income and revenues for the year ended December 31, 2023, included $1.6 million in net gains on investments compared
with $1.1 million in net losses on investments for the year ended December 31, 2022.
Premiums Earned
Premiums earned increased by $166.7 million, or 72%, to $397.2 million for the year ended December 31, 2023, from $230.5
million for the year ended December 31, 2022. This increase in premiums earned were driven significantly by the impact of recent
premium rate increases and by an increase in the Acceptance policies in-force compared to the prior year, primarily as a result of the
growth in the independent agent channel. The growth in this channel was driven by the growth and state expansion of the Company’s
largest independent agent who utilizes a technology driven method of distribution.
The average in-force premium for Acceptance policies-in-force as of December 31, 2023 has increased 10% from the same
period in the prior year and is expected to further increase as a result of the continuing impact of premium rate actions taken by the
Company in response to the increase in loss severity in the latter half of 2022.
Commission and Fee Income
Commission and fee income increased by $2.1 million, or 4%, to $55.1 million for the year ended December 31, 2023, from
$53.0 million for the year ended December 31, 2022. This increase was primarily the result of an increase in agency fee income. As a
result of the December 1, 2023 sale of the Insurance Agency, the year ended December 31, 2023 reflects only 11 months of
commission and fee income and these revenues will not continue for the Company in the future.
Billing Fees and Service Charges
Billing fees and service charges increased by $9.1 million, or 57%, to $25.0 million for the year ended December 31, 2023, from
$15.9 million for the year ended December 31, 2022. These increases were primarily the result of the increase in Acceptance business
policies-in-force compared to the prior year.
Investment Income
Investment income increased to $8.7 million during the year ended December 31, 2023, from $3.9 million during the year ended
December 31, 2022. These increases were primarily the result of higher yields on short term cash equivalents and fixed maturities as
well as improved returns on other investments, in addition to an increase in total invested assets as a result of cash provided from
operations during the year.
As of December 31, 2023, and 2022, the book yields for our fixed maturities and cash equivalents portfolio were 3.9% and
2.9%, respectively, with effective durations of 2.26 and 2.43 years, respectively. Yield has increased as the Company has taken
advantage of the increase in interest rates by investing previously uninvested cash and reinvesting portfolio maturities at higher
interest rates.
Gain on Sale of Insurance Agency
On December 1, 2023, the Company sold its Insurance Agency recognizing a gain of $73.0 million. This gain includes the
entire amount of the future contingent receivable, recorded at fair value, utilizing a discounted cash flow approach.
38
Net Gains (Losses) on Investments and Foreclosed Real Estate Held for Sale
Net gains (losses) on investments and foreclosed real estate held for sale during the year ended December 31, 2023, included a
net realized gain of $0.5 million from investments and an unrealized gain of $1.1 million on equity securities.
Net (losses) gains on investments and foreclosed real estate held for sale during the year ended December 31, 2022, included a
net realized gain of $0.8 million from investments, an unrealized loss of $1.7 million on equity securities, and an other-than-temporary
impairment of fixed maturities available for sale of $0.2 million.
Losses and Loss Adjustment Expenses
The loss ratio was 69.6% for the year ended December 31, 2023, compared with 78.7% for the year ended December 31, 2022.
We experienced unfavorable development related to prior fiscal years of $1.7 million for the year ended December 31, 2023,
compared with $4.8 million for the year ended December 31, 2022. The unfavorable loss development for the year ended December
31, 2023 was primarily attributable to higher-than-expected collision losses in the 2022 accident year. The unfavorable loss
development for the year ended December 31, 2022 was primarily attributable to higher-than-expected loss severity on third-party
physical damage losses for the fourth quarter of 2021.
Excluding the development related to prior fiscal years, the loss ratios for the years ended December 31, 2023 and 2022 were
69.2% and 76.5%, respectively. These improved loss ratios are primarily the result of the impact of recent rate increases, a moderation
of the increased severity resulting from the economic conditions that led to increased car prices and vehicle repair costs in the prior
year, and a higher percentage of liability-only policies written in 2023.
Insurance Operating Expenses
Insurance operating expenses increased year-over-year by $41.4 million, or 30%. These increases were primarily the result of
higher commissions to independent agents as a result of the increase in business written through this channel during the current year.
The insurance companies’ expense ratio was 27.6% for the year ended December 31, 2023, compared with 30.6% for the year
ended December 31, 2022.
Provision (Benefit) for Income Taxes
The provision for income taxes was $25.1 million for the year ended December 31, 2023, compared with a benefit for income
taxes of $4.5 million for the year ended December 31, 2022. The effective tax rate increased to 25.4% for the year ended
December 31, 2023, from 20.6% in the prior year, primarily as a result of the impact of state taxes resulting from the gain of the sale
on the Insurance Agency which is subject to state taxes.
Primarily, as a result of the gain on the sale of the Insurance Agency, the Company will utilize its remaining federal net
operating loss carryforwards in 2023 as well as substantially all of its remaining state net operating loss carryforwards not covered by
a valuation allowance. Such gain will be recognized as an installment sale for both federal and state tax purposes and the Company
has recorded a deferred tax liability for the portion of the gain not currently taxable.
Interest Expense
Interest expense was $3.8 million for the year ended December 31, 2023, compared with $2.4 million for year ended
December 31, 2022. Interest expense increased primarily as a result of the increase in LIBOR and the subsequent replacement SOFR
rate and may increase in the future should interest rates continue to rise. For additional information, see “Liquidity and Capital
Resources” in this report.
39
Year Ended December 31, 2022, Compared with the Year Ended December 31, 2021
Consolidated Results
Revenues for the year ended December 31, 2022, increased 6% to $302.3 million from $285.2 million in the prior year. Net loss
before income taxes for the year ended December 31, 2022, was $22.0 million, compared with $2.6 million for the year ended
December 31, 2021. Net loss for the year ended December 31, 2022, was $17.5 million, compared with $1.2 million for the year
ended December 31, 2021. Basic and diluted net loss per share was $0.46 for the year ended December 31, 2022, compared with $0.03
for the year ended December 31, 2021.
For the year ended December 31, 2022, we recognized unfavorable prior period loss and LAE development of $4.8 million
compared with favorable prior period loss and LAE development of $1.6 million for the year ended December 31, 2021.
Net loss and revenues for the year ended December 31, 2022, included $1.1 million in net losses on investments compared with
$7.5 million in net gains on investments and foreclosed real estate held for sale for the year ended December 31, 2021.
Premiums Earned
Premiums earned increased by $21.5 million, or 10%, to $230.5 million for the year ended December 31, 2022, from $209.0
million for the year ended December 31, 2021. The increase in premiums earned was driven by an increase in the Acceptance policies
in-force compared to the prior year, primarily as a result of the growth in the independent agent channel and through sales initiatives
in the retail channel.
We believe that future premiums earned will benefit from the recent favorable trends in new business production. We believe
that this increase is the result of improved staffing and local marketing efforts in our retail stores as they have battled the economic
headwinds, as well as the growth in the Company’s independent agent channel which is bringing new customers to Acceptance.
However, we also believe that these economic headwinds may present continued challenges to our future revenue growth.
The average in-force premium for Acceptance policies-in-force as of December 31, 2022 has increased 12% from the same
period in the prior year and is expected to further increase in 2023 as a result of the continuing impact of recent and pending premium
rate actions taken by the Company in response to the recent increase in loss severity further discussed under “Losses and Loss
Adjustment Expenses.”
Commission and Fee Income
Commission and fee income increased by $1.3 million, or 3%, to $53.0 million for the year ended December 31, 2022, from
$51.7 million for the year ended December 31, 2021. Decreases in the sales of ancillary products have been offset by an increase in
agency fee income.
Billing Fees and Service Charges
Billing fees and service charges increased by $2.5 million, or 19%, to $15.9 million for the year ended December 31, 2022, from
$13.4 million for the year ended December 31, 2021. This increase is primarily the result of fee increase actions taken by the
Company as well as the increase in Acceptance policies in-force compared to the prior year.
Investment Income
Investment income increased to $3.9 million during the year ended December 31, 2022, from $3.6 million during the year ended
December 31, 2021, primarily as the result of favorable yield adjustments on residential collateralized mortgage obligations and
higher yields on reinvested fixed maturities.
As of December 31, 2022, and 2021, the book yields for our fixed maturities and cash equivalents portfolio were 2.9% and
1.6%, respectively, with effective durations of 2.43 and 2.47 years, respectively. Yield has increased as the Company has taken
advantage of the increase in interest rates by investing previously uninvested cash and reinvesting portfolio maturities at higher
interest rates.
Net (Losses) Gains on Investments and Foreclosed Real Estate Held for Sale
Net (losses) gains on investments and foreclosed real estate held for sale during the year ended December 31, 2022, included a
net realized gain of $0.8 million from investments, an unrealized loss of $1.7 million on equity securities, and an other-than-temporary
impairment of fixed maturities available for sale of $0.2 million.
40
Net (losses) gains on investments and foreclosed real estate held for sale during the year ended December 31, 2021, included a
net realized gain of $6.1 million from investments, an unrealized gain of $0.7 million on equity securities, and a gain of $0.7 million
from the sale of the Company’s remaining foreclosed real estate held for sale.
Losses and Loss Adjustment Expenses
The loss ratio was 78.7% for the year ended December 31, 2022, compared with 74.2% for the year ended December 31, 2021.
We experienced unfavorable development related to prior fiscal years of $4.8 million for the year ended December 31, 2022,
compared with favorable development related to prior fiscal years of $1.6 million for the year ended December 31, 2021. The
unfavorable loss development for the year ended December 31, 2022 was primarily attributable to higher-than-expected loss severity
on third-party physical damage losses for the fourth quarter of 2021. The favorable loss development for the year ended December 31,
2021 was primarily attributable to improved bodily injury severity in previous accident years.
Excluding the development related to prior fiscal years, the loss ratios for the years ended December 31, 2022 and 2021 were
76.5% and 74.8%, respectively. The loss ratio increased due to the increase in severity levels that impacted physical damage losses.
This increased severity was primarily due to recent economic conditions that have led to increased car prices and vehicle repair costs.
Various auto insurance industry publications suggest that increased loss ratios are being experienced industry wide despite the
fact that most auto insurance carriers have taken recent rate increases. Such sources also suggest that these increased loss ratios will
continue through 2023 and as a result, carriers will seek additional rate increases. In this regard, the Company has and will continue to
seek rate increases as deemed necessary. To the contrary, recent publications have reported that automotive wholesale and retail
values have been trending lower.
We consistently employ conventional actuarial loss reserving techniques that rely upon historical loss payment patterns and
changes in exposures. Recently, the winding down of the Pandemic has impacted payment patterns causing us to modify the actuarial
techniques employed in our loss reserve analysis as of September 30, 2022, These modified reserving techniques were continued to be
utilized as of December 31, 2022.
Insurance Operating Expenses
Insurance operating expenses increased year-over-year by $7.9 million, or 6.2%. The increase in insurance operating expenses
were primarily the result of higher staffing vacancies at our retail stores and higher commissions to independent agents as a result of
the increase in business written through this channel during the current year.
The insurance companies’ expense ratio was 30.6% for the year ended December 31, 2022, compared with 29.2% for the year
ended December 31, 2021.
In response to the increase in the Company’s expense ratio, some of which is inflationary-driven, and continued pressure on the
loss costs in the market creating uncertainty around the loss ratio, the Company has enacted a comprehensive cost-containment
program, which included the closure of 14 underperforming retail locations, in an effort to reduce its expense ratio.
(Benefit) Provision for Income Taxes
The benefit for income taxes was $4.5 million for the year ended December 31, 2022, compared with $1.4 million for the year
ended December 31, 2021. The effective tax rate was 20.6% for the year ended December 31, 2022, and 52.4% in the prior year. The
prior year effective rate was impacted by the release of the valuation allowance for capital loss carryovers and a reduction in state
taxes.
In assessing our ability to realize our deferred tax asset ("DTA"), both positive and negative evidence are used to evaluate the
allowance. We placed the greatest weight on the Company’s outlook for future taxable income over the allowable time period for
realization of the DTA and concluded that it is more likely than not that the remaining DTA will be realized. Regarding the length of
time available to realize the DTA, as of December 31, 2022, the Company had $4.9 million of the DTA related to federal net operating
loss carryforwards that do not expire until 2036, $2.6 million that do not expire until 2042 and $3.1 million have no expiration date.
The DTA valuation allowance may be adjusted in future periods if management determines that it is more likely than not that some
portion or all of the DTA will not be realized. In the event the DTA valuation allowance is adjusted, we would record an income tax
expense for the adjustment.
41
Interest Expense
Interest expense was $2.4 million for the year ended December 31, 2022, compared with $1.7 million for year ended
December 31, 2021. Interest expense increased primarily as a result of the increase in LIBOR and may increase in the future should
interest rates continue to rise. For additional information, see “Liquidity and Capital Resources” in this report.
Liquidity and Capital Resources
Our primary sources of funds are premiums, billing fees and service charges, and investment income from our insurance
company subsidiaries. Through December 1, 2023, we also received commissions and fee income from our non-insurance company
subsidiaries. Our primary uses of funds are the payment of claims and operating expenses. Net cash provided by operating activities
for the year ended December 31, 2023, was $84.3 million, compared with net cash used in operating activities of $3.9 million for the
year ended December 31, 2022. This increase was primarily the result of the net income from operations for the year, an increase in
premium collections and an increase in the reserve for loss and loss adjustment expenses.
Net cash used in investing activities for the year ended December 31, 2023, was $23.7 million, compared with net cash provided
by investing activities of $7.2 million for the year ended December 31, 2022. This change was primarily the result of the $54.1 million
of net proceeds received from the sale of the Insurance Agency and an increase in the purchases of securities in the current year as the
Company has taken advantage of the increase in interest rates by investing previously uninvested cash.
Our holding company requires cash for general corporate overhead expenses and for debt service related to our debentures
payable. Following the sale of the Insurance Agency, the holding company’s primary source of unrestricted cash to meet its
obligations will be dividends from the insurance companies and the remaining proceeds to be received through 2026 from the sale of
the Insurance Agency as noted in the following paragraph. As of December 31, 2023, our holding company had adequate unrestricted
cash to meet current obligations. We also believe that these funds and the additional anticipated unrestricted cash from the sources
noted above will be sufficient to pay our future cash requirements outside of the insurance company subsidiaries.
As a result of the sale of the Insurance Agency, the Company will receive additional unrestricted cash of $20 million currently
held in escrow that will be released monthly from March 2024 through December 2024. The Company is also eligible to receive
additional maximum contingent consideration of $15 million, $10 million, and $20 million, on December 1, 2024, 2025 and 2026,
respectively, based upon achievement of certain annual production targets, the receipt of which the Company has deemed probable.
The cash from the contingent consideration payments to the Company would be unrestricted unless required by the Insurance
Companies to maintain $100 million of capital and surplus as per the purchase agreement.
The holding company has debt service requirements related to the debentures payable. The debentures are interest-only and
mature in full in July 2037. Effective July 1, 2023 with the sunset of LIBOR, the debentures now accrue interest at a variable rate
equal to an adjusted Three-Month CME term SOFR rate plus 375 basis points, which resets quarterly. The interest rate related to the
debentures for the year ended December 31, 2023 ranged from 8.165% to 9.402%. In January 2024, the interest rate reset to 9.329%
through April 2024. For additional information, see Note 10 to the Consolidated Financial Statements in this report regarding the
sunset of LIBOR.
State insurance laws limit the amount of dividends that may be paid from our insurance company subsidiaries. As of
December 31, 2023, the dividend limitation for 2024 would be $12.1 million.
We have three insurance company subsidiaries that are organized and domiciled under the insurance statutes of Texas, Georgia,
and Tennessee. Our insurance company subsidiaries also operate under licenses issued by various state insurance authorities. Such
licenses may be of perpetual duration or periodically renewable, provided we continue to meet applicable regulatory requirements.
The National Association of Insurance Commissioners (“NAIC”) Model Act for risk-based capital provides formulas to
determine each December 31 on an annual basis the amount of statutory capital and surplus that an insurance company needs to ensure
that it has an acceptable expectation of not becoming financially impaired. Failure to meet applicable risk-based capital requirements
could subject our insurance company subsidiaries to further examination or corrective action imposed by state regulators, including
limitations on their writing of additional business, state supervision or even liquidation. As of December 31, 2023, the insurance
company subsidiaries remain above the company action levels. There are also statutory guidelines that suggest that on an annual
calendar year basis an insurance company should not exceed a ratio of net premiums written to statutory capital and surplus of 3-to-1.
For the year ended December 31, 2023, each insurance company subsidiary was within this guideline.
42
We believe that existing cash and investment balances, when combined with anticipated cash flows as noted above, will be
adequate to meet our expected liquidity needs, for both the holding company and our insurance company subsidiaries, in both the
short-term and the foreseeable future.
Trust Preferred Securities
On June 15, 2007, First Acceptance Statutory Trust I (“FAST I”), our unconsolidated subsidiary trust entity, completed a private
placement whereby FAST I issued 40,000 shares of preferred securities at $1,000 per share to outside investors and 1,240 shares of
common securities to us, 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 us. The debentures will mature on July 30, 2037 and are currently redeemable by the
Company in whole or in part and the preferred securities are callable. The debentures currently pay a variable rate equal to an adjusted
Three-Month CME term SOFR rate plus 375 basis points, resetting quarterly. During 2023, the interest rate related to the debentures
ranged from 8.165% to 9.402%. The obligations of the Company under the junior subordinated debentures represent full and
unconditional guarantees by the Company of FAST I’s obligations for the preferred securities. Dividends on the preferred securities
are cumulative, payable quarterly in arrears and are deferrable at the Company’s option for up to five years. The dividends on these
securities, which have not been deferred, are the same as the interest on the debentures. The Company cannot pay dividends on its
common stock during any such deferments. FAST I does not meet the requirements for consolidation of FASB ASC 810,
“Consolidation”. See note 10 to the consolidated financial statements.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Critical Accounting Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect amounts reported in the consolidated financial statements. As more
information becomes known, these estimates and assumptions could change, thus having an impact on the amounts reported in the
future. The following is considered to be a critical accounting estimate.
Losses and Loss Adjustment Expense Reserves
Losses and loss adjustment expense reserves represent our best estimate of our ultimate liability for losses and loss adjustment
expenses relating to events that occurred prior to the end of any given accounting period but have not been paid. Months and
potentially years may elapse between the occurrence of an automobile accident covered by one of our insurance policies, the reporting
of the accident and the payment of the claim. We record a liability for estimates of losses that will be paid for accidents that have been
reported, which is referred to as case reserves. As accidents are not always reported when they occur, we estimate liabilities for
accidents that have occurred but have not been reported (“IBNR”).
We are directly liable for loss and loss adjustment expenses under the terms of the insurance policies underwritten by our
insurance company subsidiaries. Each of our insurance company subsidiaries establishes a reserve for all of its unpaid losses,
including case reserves and IBNR reserves, and estimates for the cost to settle the claims. We estimate our IBNR reserves by
estimating our ultimate liability for loss and loss adjustment expense reserves first, and then reducing that amount by the amount of
cumulative paid claims and by the amount of our case reserves. We rely primarily on historical loss experience in determining reserve
levels, on the assumption that historical loss experience provides a good indication of future loss experience. We also consider various
other factors, such as inflation, claims settlement patterns, legislative activity, and litigation trends. Our actuarial staff continually
monitors these estimates on a state and coverage level. We utilize our actuarial staff to determine appropriate reserve levels. As
experience develops or new information becomes known, we increase or decrease the level of our reserves in the period in which
changes to the estimates are determined. These estimates involve a high level of subjectivity and judgement, and accordingly, the
actual losses and loss adjustment expenses may differ materially from the estimates we have recorded.
We believe that our estimate regarding changes in loss severity is the most significant factor that can potentially impact our
IBNR reserve estimate. We believe that there is a reasonable possibility of increases or decreases in our estimated claim severities,
with the largest potential changes occurring in the most recent accident years.
43
Regarding our most recent estimate, for the year ended December 31, 2023, we experienced unfavorable development on
reserves of $1.7 million, which increased our loss and loss adjustment expense for prior accident periods. This unfavorable
development was primarily attributable to higher-than-expected collision losses in the 2022 accident year.
See Note 9 to our consolidated financial statements for additional information.
Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the potential economic loss arising from adverse changes in the fair value of financial instruments. Our
exposures to market risk relate primarily to our investment portfolio, which is exposed primarily to interest rate risk and credit risk.
The fair value of our investment portfolio is directly impacted by changes in market interest rates. Generally, the fair value of fixed-
income investments moves inversely with movements in market interest rates. Our fixed maturity portfolio is comprised of
substantially all fixed rate investments with primarily short-term and intermediate-term maturities. Likewise, the underlying
investments of our mutual fund investments and certain other investments are also fixed-income investments. This portfolio
composition allows flexibility in reacting to fluctuations of interest rates. Other investments offer additional risk through the diversity
of their underlying investments and their lack of marketability. The portfolios of our insurance company subsidiaries are managed to
achieve an adequate risk-adjusted return while maintaining sufficient liquidity to meet policyholder obligations.
Interest Rate Risk
The fair values of our fixed maturity investments fluctuate in response to changes in market interest rates. Increases and
decreases in prevailing interest rates generally translate into decreases and increases, respectively, in the fair values of those
instruments. Additionally, the fair values of interest rate sensitive instruments may be affected by the creditworthiness of the issuer,
prepayment options, relative values of alternative investments, the liquidity of the instrument, and other general market conditions.
The following table summarizes the estimated effects of hypothetical increases and decreases in interest rates resulting from
parallel shifts in market yield curves on our fixed maturities portfolio (in thousands). It is assumed that the effects are realized
immediately upon the change in interest rates. The hypothetical changes in market interest rates do not reflect what could be deemed
best or worst-case scenarios. Variations in market interest rates could produce significant changes in the timing of repayments due to
prepayment options available. For these and other reasons, actual results might differ from those reflected in the table.
Sensitivity to Instantaneous Interest Rate Changes (basis points)
(200
)
(100
)
(50
)
0
50
100
200
Fair value of fixed maturities
portfolio
$
0
$
198,519
$
195,701
$
192,885
$
190,069
$
187,254
$
181,627
The following table provides information about our fixed maturity investments as of December 31, 2023, which are sensitive to
interest rate risk. The table shows expected principal cash flows (at par value, which differs from amortized cost as a result of
premiums or discounts at the time of purchase and any expected impairment) by expected maturity date for each of the next five years
and collectively for all years thereafter (in thousands). Callable bonds and notes are included based on call date or maturity date
depending upon which date produces the most conservative yield. CMOs and sinking fund issues are included based on maturity year
adjusted for expected payment patterns. Actual cash flows may differ from those expected.
Year Ending December 31,
Securities
with
Unrealized
Gains
Securities
with
Unrealized
Losses
Securities
with No
Unrealized
Gains or
Losses
All Fixed
Maturity
Securities
2024
$ 9,935
$ 24,618
$
—
$
34,553
2025
11,913
25,186
—
37,099
2026
25,364
23,915
—
49,279
2027
7,732
1,239
750
9,721
2028
14,645
2,578
750
17,973
Thereafter
7,658
43,790
—
51,448
Total
$ 77,247
$ 121,327
$
1,500
$
200,073
Fair value
$ 76,515
$ 114,866
$
1,504
$
192,885
44
On June 15, 2007, our unconsolidated trust entity, FAST I, used the proceeds from its sale of trust preferred securities to
purchase $41.2 million of junior subordinated debentures. The debentures currently pay a variable rate equal to an adjusted Three-
Month CME term SOFR rate plus 375 basis points resetting quarterly. The interest rate related to the debentures ranged from 8.165%
to 9.402% during 2023. Interest rates on these debentures therefore will reset quarterly based on changes in the Three-Month CME
term SOFR rate. In January 2024, the interest rate reset to 9.329% through April 2024. See note 10 to the consolidated financial
statements.
Credit Risk
Credit risk is managed by diversifying our investment portfolio to avoid concentrations in any single industry group or issuer
and by limiting investments in securities with lower credit ratings. Our largest single investment, excluding U.S. government and
agency securities, is our investment in a single mutual fund with a fair value of $5.7 million, while our five largest investments totaled
$21.1 million.
The following table presents the underlying ratings of our fixed maturities portfolio by nationally recognized statistical rating
organizations as of December 31, 2023 (in thousands).
Comparable Rating
Amortized
Cost
% of
Amortized
Cost
Fair
Value
% of
Fair
Value
AAA
$
107,615
53.7%
$
100,071
51.9%
AA+, AA, AA-
27,181
13.6%
27,069
14.0%
A+, A, A-
40,600
20.2%
40,436
21.0%
BBB+, BBB, BBB-
24,325
12.1%
24,070
12.5%
Total investment grade
199,721
99.6%
191,646
99.4%
Not rated
204
0.1%
358
0.2%
BB+, BB, BB-
—
0.0%
—
0.0%
B+, B, B-
—
0.0%
—
0.0%
CCC+, CCC, CCC-
198
0.1%
484
0.2%
CC+, CC, CC-
—
0.0%
—
0.0%
C+, C, C-
17
0.0%
13
0.0%
D
404
0.2%
384
0.2%
Total non-investment grade
619
0.4%
881
0.6%
Total
$
200,544
100.0%
$
192.885
100.0%
45
Risk Factors
Investing in the Company involves risk. You should carefully consider the following risk factors, any of which could have a
significant or material adverse effect on the Company. This information should be considered together with the other information
contained in this report and in the other reports and materials filed by us with OTCQX Markets, as well as news releases publicly
disseminated by us from time to time.
Our business may be adversely affected by adverse economic conditions, current inflationary economy, and other negative
developments in the non-standard personal automobile insurance industry.
Substantially all of our revenues are now generated from underwriting non-standard personal automobile insurance policies. As
a result of our concentration in this line of business, negative developments in the economic, competitive, or regulatory conditions
affecting the non-standard personal automobile insurance industry and our customers could reduce our revenues, increase our
expenses, or otherwise have a material adverse effect on our results of operations and financial condition. Weak economic conditions,
elevated unemployment levels, and low consumer confidence in the United States tend to result in fewer customers purchasing and
maintaining non-standard personal automobile insurance policies and certain customers reducing their insurance coverage, which
adversely impacts our revenues and profitability. Developments affecting the non-standard personal automobile insurance industry
and our customers could have a greater effect on us compared with more diversified insurers that also sell other types of automobile
insurance products or write other additional lines of insurance.
In addition, auto technology advancements such as driverless cars and usage-based insurance, could materially impact our
revenues over time. However, based on the higher average age of the vehicles we currently insure for non-standard customers, we
believe that these advancements will impact us later than it will for the preferred and standard personal automobile insurance carriers.
Our underwriting results may fluctuate as a result of cyclical changes in the non-standard personal automobile insurance
industry.
The non-standard personal automobile insurance industry is cyclical in nature. Likewise, adverse economic conditions impact
our customers, and many will choose to reduce their coverage or go uninsured during a weak economy. Conversely, favorable
economic conditions may lead to lower gas prices which result in an increase in miles driven and consequently claim frequency.
Employment rates, sales of used vehicles, consumer confidence and other factors affect our customers’ purchasing habits. In the past,
the industry has also been characterized by periods of price competition and excess capacity followed by periods of high premium
rates and shortages of underwriting capacity. If new competitors enter the market, existing competitors may attempt to increase market
share by lowering rates. Given the cyclical nature of the industry and the economy, these conditions may negatively impact our
revenues and profitability.
Our loss and loss adjustment expenses may exceed our reserves, which would adversely impact our results of operations and
financial condition.
We establish reserves for the estimated amount of claims under the terms of the insurance policies underwritten by our
insurance company subsidiaries. The amount of the reserves is determined based on historical claims information and other factors.
The establishment of appropriate reserves is an inherently uncertain process due to a number of factors, including the difficulty in
predicting the frequency and severity of claims, the rate of inflation, changes in trends, ongoing interpretation of insurance policy
provisions by courts and inconsistent decisions in lawsuits regarding coverage and broader theories of liability. Any changes in claims
settlement practices can also lead to changes in loss payment patterns, which are used to estimate reserve levels. Our ability to
accurately estimate our loss and loss adjustment expense reserves may be made more difficult by changes in our business, including
entry into new markets, changes in sales practices, or changes in our customers’ purchasing habits. If our reserves prove to be
inadequate, we will be required to increase our loss reserves and the amount of any such increase would reduce our income in the
period that the deficiency is recognized. The historic development of reserves for loss and loss adjustment expenses may not
necessarily reflect future trends in the development of these amounts. Consequently, our actual losses could materially exceed our loss
reserves, which would have a material adverse effect on our results of operations and financial condition.
Our insurance company subsidiaries are subject to statutory capital and surplus requirements and other standards, and their
failure to meet these requirements or standards could subject them to regulatory actions.
Our insurance company subsidiaries are subject to RBC standards and other minimum statutory capital and surplus requirements
imposed under the laws of their respective states of domicile. The RBC standards, which are based upon the RBC Model Act adopted
by the NAIC, require our insurance company subsidiaries to annually report their results of RBC calculations to the state departments
of insurance and the NAIC.
46
Failure to meet applicable minimum RBC requirements or minimum statutory capital and surplus requirements could subject
our insurance company subsidiaries to further examination or corrective action imposed by state regulators, including limitations on
their writing of additional business, state supervision or even liquidation. Any changes in existing minimum RBC standards or
minimum statutory capital and surplus requirements may require our insurance company subsidiaries to increase their statutory capital
and surplus levels, which they may be unable to do. These calculations are performed on a calendar year basis, and as of
December 31, 2023, our insurance company subsidiaries maintained RBC levels in excess of an amount that would require any
corrective actions on their part.
Extra-contractual losses arising from bad faith claims could materially reduce our profitability.
In Florida, Georgia, and other states where we have substantial operations, the judicial climate, case law or statutory framework
are often viewed as unfavorable toward an insurer in litigation brought against it by policyholders and third-party claimants. This
tends to increase our exposure to extra-contractual losses, or monetary damages beyond policy limits, in what are known as “bad
faith” claims. Such claims may result in losses which could have a material adverse effect on our results of operations and financial
condition.
Our investment portfolio may suffer reduced returns or other-than-temporary impairment losses, which could reduce our
profitability.
Our results of operations depend, in part, on the performance of our investment portfolio. As of December 31, 2023, the
majority of our investment portfolio was invested either directly or indirectly in marketable, investment-grade debt securities and
mutual funds, and included U.S. government securities, municipal bonds, corporate bonds, asset-backed securities, and collateralized
mortgage obligations. Recent increases in interest rates have reduced the fair value of our investments below amortized cost resulting
in a net unrealized loss. Such loss is recognized in comprehensive income (loss) for debt securities and in net income (loss) for equity
securities, and in both cases, reduce our stockholders’ equity. As of December 31, 2023, the amortized cost of our fixed maturities,
available for sale investment portfolio exceeded its fair value by approximately $7.7 million. A future increase in interest rates could
further reduce the fair value of our investment portfolio.
We also have made certain “other investments” that are not readily marketable and have restrictions as to their redemption.
Defaults by third parties who fail to pay or perform obligations could reduce our investment income and could also result in
investment losses to our portfolio. See Note 3 to our consolidated financial statements regarding determination of other-than-
temporary impairment losses on investment securities and for further information about our “other investments.”
Our business is highly competitive, which may make it difficult for us to market our core products effectively and profitably.
The non-standard personal automobile insurance business is highly competitive. Our primary insurance company competition
comes not only from national insurance companies or their subsidiaries, but also from non-standard insurers and independent agents
that operate in a specific region or single state in which we also operate. Some of our competitors have substantially greater financial
and other resources than we do, and they may offer a broader range of products or competing products at lower prices and may offer
products through multiple distribution channels. Our revenues, profitability and financial condition could be materially adversely
affected if we are required to decrease or are unable to increase prices to stay competitive, or if we do not successfully retain our
current customers and attract new customers.
In addition, innovation by competitors or other market participants may increase the level of competition in the industry. This
can include product, pricing, or marketing innovations, new or improved services, technology advances, or new modes of doing
business that enhance the customer’s ability to shop and compare prices from multiple companies, among other initiatives. Our ability
to react to such advances and navigate the new competitive environment is important to our success.
Our ability to attract, develop, and retain talented employees, managers, and executives, and to maintain appropriate staffing
levels, is critical to our success.
Our success depends on our ability to attract, develop, and retain talented employees, including executives, and other key
managers. Our loss of certain key employees, or the failure to attract and develop talented new executives and managers, could have a
materially adverse effect on our business. In addition, we must forecast volume and other factors in changing business environments
with reasonable accuracy and adjust our hiring and training programs and employment levels accordingly. Our failure to recognize the
need for such adjustments, or our failure or inability to react appropriately on a timely basis, could lead either to over-staffing (which
would adversely affect our cost structure) or under-staffing (impairing our ability to service our business) in one or more locations. In
either such event, our financial results, customer relationships, and brand could be materially adversely affected.
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Pricing, claim, and coverage issues and class action litigation are continually emerging in the automobile insurance industry, and
these issues could adversely impact our revenues, profitability, or our methods of doing business.
As automobile insurance industry practices and regulatory, judicial and consumer conditions change, litigation and unexpected
and unintended issues related to claims, coverages and business practices may emerge. These issues can have an adverse effect on our
business by subjecting us to liability, changing the way we price and market our products, extending coverage beyond our underwriting
intent, requiring us to obtain additional licenses or increasing the size of claims. The effects of unforeseen emerging issues could subject
us to liability or negatively affect our revenues, profitability, or our methods of doing business. Recent economic conditions have led to
increased car prices and vehicle repair costs resulting in increased loss severity.
Our business may be adversely affected if we do not underwrite risks accurately and charge adequate rates to policyholders.
Our financial condition, cash flows, and results of operations depend on our ability to underwrite and set rates accurately for a
full spectrum of risks. The role of the pricing function is to ensure that rates are adequate to generate sufficient premium to pay losses,
loss adjustment expenses, and underwriting expenses, and to earn a profit. Pricing involves the acquisition and analysis of historical
accident, loss and credit data, and the projection of future accident trends, loss costs and expenses, and inflation trends, among other
factors, for each of our products and in many different markets. As a result, our ability to price accurately is subject to a number of
risks and uncertainties, including, without limitation:
• the availability of sufficient reliable data;
• uncertainties inherent in estimates and assumptions, generally;
• our ability to conduct a complete and accurate analysis of available data;
• our ability to timely recognize changes in trends and to predict both the severity and frequency of future losses with
reasonable accuracy, specifically, the costs of auto repair parts and labor and medical costs;
• our ability to predict changes in certain operating expenses with reasonable accuracy;
• the development, selection, and application of appropriate rating formulae or other pricing methodologies;
• our ability to innovate with new pricing strategies, and the success of those innovations;
• our ability to implement rate changes and obtain any required regulatory approvals on a timely basis;
• our ability to predict policyholder retention accurately;
• unanticipated court decisions, legislation, or regulatory action;
• the occurrence and severity of catastrophic events, such as hurricanes, hailstorms, other severe weather, and terrorist
events;
• our understanding of the impact of ongoing changes in our claim settlement practices; and
• changing driving patterns.
The realization of one or more of such risks may result in our pricing being based on inadequate or inaccurate data or
inappropriate analyses, assumptions, or methodologies, and may cause us to estimate incorrectly future changes in the frequency or
severity of claims. As a result, we could underprice risks, which would negatively affect our underwriting profit margins, or we could
overprice risks, which could reduce our volume and competitiveness. In either event, our operating results, financial condition, and
cash flows could be materially adversely affected. In addition, underpricing insurance policies over time could erode the surplus of
one or more of our insurance subsidiaries, constraining our ability to write new business.
Our results are dependent on our ability to adjust claims accurately.
We must accurately evaluate and pay claims that are made under our insurance policies. Many factors can affect our ability to
pay claims accurately, including the training, experience, and skill of our claims representatives, the extent of and our ability to
recognize fraudulent or inflated claims, the effectiveness of our management, and our ability to develop or select and implement
appropriate procedures, technologies, and systems to support our claims functions. Our failure to pay claims fairly, accurately, and in a
timely manner, or to deploy claims resources appropriately, could result in unanticipated costs to us, lead to material litigation,
undermine customer goodwill and our reputation in the marketplace, and impair our brand image and, as a result, materially adversely
affect our competitiveness, financial results, prospects, and liquidity.
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Our insurance company subsidiaries are subject to regulatory restrictions on paying dividends to our holding company.
Our holding company may in the future, rely in part, on receiving dividends from the insurance company subsidiaries to pay its
obligations. State insurance laws limit the ability of our insurance company subsidiaries to pay dividends and require our insurance
company subsidiaries to maintain specified minimum levels of statutory capital and surplus. These restrictions affect the ability of our
insurance company subsidiaries to pay dividends to our holding company and may require our subsidiaries to obtain the prior approval
of regulatory authorities, which could slow the timing of such payments or reduce the amount that can be paid. The limits on the
amount of dividends that can be paid by our insurance company subsidiaries may affect the ability of our holding company to pay its
obligations. The current dividend-paying ability of the insurance company subsidiaries is discussed in Note 15 to our consolidated
financial statements.
We rely on our information technology and communication systems, and the failure of these systems could materially adversely
affect our business.
Our business is highly dependent on proprietary and third-party integrated technology systems that enable timely and efficient
communication and data sharing among the various segments of our integrated operations. These systems are used in all our operations,
including price quotation, policy issuance, independent agent management, customer service, underwriting, claims, accounting,
communications, and the maintenance of our consumer-based website and mobile platform. We have a technical staff that develops,
maintains, and supports all elements of our technology infrastructure. However, failure by third-party vendors, disruption of power
systems or communication systems or any failure of our systems could result in deterioration in our ability to respond to customers’
requests, write and service new business, and process claims in a timely manner. We believe we have appropriate types and levels of
insurance to protect our real property, systems, and other assets. However, insurance does not provide full reimbursement for all losses,
both direct and indirect, that may result from an event affecting our information technology and communication systems.
Severe weather conditions and other catastrophes may result in an increase in the number and amount of claims filed against us.
Our business is exposed to the risk of severe weather conditions and other catastrophes. Catastrophes can be caused by various
events, including natural events, such as severe winter weather, hurricanes, tornados, windstorms, earthquakes, hailstorms,
thunderstorms and fires, and other events, such as explosions, terrorist attacks and riots. The incidence and severity of catastrophes
and severe weather conditions are inherently unpredictable. Severe weather conditions generally result in more automobile accidents
and damage, leading to an increase in the number of claims filed and/or the amount of compensation sought by claimants.
A single stockholder family has significant control over us, and their interests may differ from yours.
A single stockholder family, Gerald J. Ford, our former Chairman of the Board and his son, Jeremy B. Ford, our current
Chairman, together control approximately 64% of our outstanding common stock. Together, they have the power to control the
election and removal of our directors. They would also have significant control over other matters requiring stockholder approval,
including the approval of any major corporate transactions or proposed amendments to our certificate of incorporation. This
concentration of ownership may delay or prevent any change in control of the Company, as well as frustrate any attempts to replace or
remove current management, even when a change may be in the best interests of our other stockholders. Furthermore, their interests
may not always coincide with the interests of the Company or other stockholders.
We and our subsidiaries are subject to comprehensive regulation and supervision that may restrict our ability to earn profits.
We and our subsidiaries are subject to comprehensive regulation and supervision by the insurance departments in the states
where our subsidiaries are domiciled and where our subsidiaries sell insurance, issue policies and handle claims. Certain regulatory
restrictions and prior approval requirements may affect our subsidiaries’ ability to operate, change their operations or obtain necessary
rate adjustments in a timely manner or may increase our costs and reduce profitability.
Among other things, regulation and supervision of us and our subsidiaries extends to:
Required Licensing. We and our subsidiaries operate under licenses issued by various state insurance authorities. These licenses
govern, among other things, the types of insurance coverages and claims services that we and our subsidiaries may offer consumers in
the particular state. If a regulatory authority denies or delays granting any such license, our ability to enter new markets or offer new
products could be substantially impaired.
Transactions Between Insurance Companies and Their Affiliates. Our insurance company subsidiaries are organized and
domiciled under the insurance statutes of Texas, Georgia, and Tennessee. The insurance laws in these states provide that all
transactions among members of an insurance holding company system must be done at arm’s length and shown to be fair and
reasonable to the regulated insurer. Transactions between our insurance company subsidiaries and other subsidiaries generally must be
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disclosed to the state regulators, and prior approval of the applicable regulator generally is required before any material or
extraordinary transaction may be consummated. State regulators may refuse to approve or delay approval of such a transaction, which
may impact our ability to innovate or operate efficiently.
Regulation of Rates and Policy Forms. The insurance laws of most states in which our insurance company subsidiaries operate
require insurance companies to file premium rate schedules and policy forms for review and approval. State insurance regulators have
broad discretion in judging whether our rates are adequate, not excessive, and not unfairly discriminatory. The speed at which we can
change our rates in response to market conditions or increasing costs depends, in part, on the method by which the applicable state’s
rating laws are administered. Generally, state insurance regulators have the authority to disapprove our requested rates. If as permitted
in some states, we begin using new rates before they are approved, we may be required to issue premium refunds or credits to our
policyholders if the new rates are ultimately disapproved by the applicable state regulator. In some states, there has been pressure in
past years to reduce premium rates for automobile and other personal insurance or to limit how often an insurer may request increases
for such rates. In states where such pressure is applied, our ability to respond to market developments or increased costs in that state
may be adversely affected.
Investment Restrictions. Our insurance company subsidiaries are subject to state laws and regulations that require diversification
of their investment portfolios and that limit the amount of investments in certain categories. Failure to comply with these laws and
regulations would cause non-conforming investments to be treated as non-admitted assets for purposes of measuring statutory surplus
and, in some instances, would require divestiture. If a non-conforming asset is treated as a non-admitted asset, it would lower the
affected subsidiary’s surplus and thus, its ability to write additional premiums and pay dividends.
Restrictions on Cancellation, Non-Renewal or Withdrawal. Many states have laws and regulations that limit an insurer’s ability
to exit a market. For example, certain states limit an automobile insurer’s ability to cancel or non-renew policies. Some states prohibit
an insurer from withdrawing from one or more lines of business in the state, except pursuant to a plan approved by the state insurance
department. The state insurance department may disapprove a plan that may lead to market disruption. These laws and regulations that
limit cancellations and non-renewals and that subject business withdrawals to prior approval restrictions could limit our ability to exit
unprofitable markets or discontinue unprofitable products in the future.
Provisions in our certificate of incorporation and bylaws may prevent a takeover or a change in management that you may deem
favorable.
Our certificate of incorporation and bylaws contain the following provisions that could prevent or inhibit a third party from
acquiring us:
• the requirement that only stockholders owning at least one-third of the outstanding shares of our common stock may call a
special stockholders’ meeting; and
• the requirement that stockholders owning at least two-thirds of the outstanding shares of our common stock must approve
any amendment to our certificate of incorporation provisions concerning the ability to call special stockholders’ meetings.
Under our certificate of incorporation, we may issue shares of preferred stock on terms that are unfavorable to the holders of our
common stock. The issuance of shares of preferred stock could also prevent or inhibit a third party from acquiring us. The existence of
these provisions could depress the price of our common stock, could delay, or prevent a takeover attempt or could prevent attempts to
replace or remove incumbent management.
Our failure to prevent unauthorized access to confidential electronic information could result in a data breach that may negatively
impact our business.
We are dependent upon automated information technology processes. A portion of our business operations is conducted over the
internet which increases the risk of improper third-party attacks that could cause system failures and disruptions of operations. In
addition, any failure to maintain the security of confidential information belonging to our customers could put us at a competitive
disadvantage, result in a loss of customers’ confidence in us, and subject us to potential liabilities resulting from litigation, fines, and
penalties, which could have a material adverse effect on our results of operations and financial condition.
The payment methods that we offer also subject us to potential fraud and theft by criminals seeking to obtain unauthorized access to
or exploit weaknesses that may exist in the payment systems. Such breaches could cause interruptions to our operations, damage to our
reputation and our customers’ willingness to purchase insurance from us, and subject us to additional potential liabilities resulting
from litigation, fines, and penalties, which could have a material adverse effect on our results of operations and financial condition.
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