We lease office space in Nashville, Tennessee for our executive offices (approximately 21,000 square feet) and for our claims and customer service center (approximately 51,000 square feet). We also lease office space in Chicago, Illinois, Tampa, Florida and Irving, Texas for our regional claims offices and in Chicago, Illinois and Houston, Texas for our regional customer service centers. Our retail locations are all leased and typically are located in storefronts in retail shopping centers, and each location typically contains less than 1,000 square feet of space.
The following table shows the changes in the number of our retail locations for the periods presented. Retail location counts are based upon the date that a location commenced writing business.
The following table presents selected financial data for our insurance operations and real estate and corporate segments for the periods presented:
Our insurance operations generate revenues from selling, servicing and underwriting non-standard personal automobile insurance policies in 12 states. We conduct our underwriting operations 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. Our insurance revenues are generated from:
fee income, including installment billing fees on policies written as well as fees for other ancillary services (principally a motor club product); and
Net income per share for the year ended June 30, 2006 included gains on sales of foreclosed real estate held for sale of $3.6 million ($0.05 per share on a diluted basis).
For the year ended June 30, 2007, premiums earned increased by $91.9 million, or 44%, to $300.7 million from $208.8 million for the year ended June 30, 2006. The increase was due primarily to the expansion of our business. Approximately 87% of the premium growth was in Florida, Texas and South Carolina, where we opened 102 locations in fiscal year 2006, and Chicago, where we acquired 72 locations in January 2006. The total number of insured policies in force at June 30, 2007 increased 13% over the same date in 2006 from 200,401 to 226,974. At June 30, 2007, we operated 462 retail locations (or “stores”), compared with 460 stores at June 30, 2006.
Investment income increased primarily as a result of the increase in the amount of invested assets. The weighted average investment yields for our fixed maturities portfolio were 5.5% and 5.6% at June 30, 2007 and 2006, respectively, with effective durations of 3.43 years and 3.83 years at June 30, 2007 and 2006, respectively. The yields for the comparable Lehman Brothers indices were 5.5% at June 30, 2007 and 2006.
The loss and loss adjustment expense ratio was 80.4% for the year ended June 30, 2007 compared with 67.5% for the same period last year. For the year ended June 30, 2007, we experienced a negative development for losses occurring in prior accident periods of approximately $3.9 million. For the premiums earned during this fiscal year, the loss and loss adjustment expense ratio was 79.2%. During fiscal 2007, we experienced significant unanticipated increases in (1) the frequency of PIP losses in Florida, (2) the severity of Bodily Injury (“BI”) losses in Florida and Georgia, and (3) the severity of Property Damage losses in Georgia and other states. The higher than anticipated severity in Georgia BI losses was somewhat driven by a higher than anticipated occurrence of large losses (losses of $10,000 or above). To a lesser extent, the increase in the loss and loss adjustment expense ratio for the current year was the result of a change in our business mix resulting from premium growth in our emerging states of Florida and Texas where we anticipated higher loss ratios.
Year Ended June 30, 2006 Compared with the Year Ended June 30, 2005
Net income per share for the year ended June 30, 2006 included gains on sales of foreclosed real estate held for sale of $3.6 million ($0.05 per share on a diluted basis) compared with gains of $0.8 million ($0.01 per share on a diluted basis) for the year ended June 30, 2005.
Revenues from insurance operations were $244.6 million for the year ended June 30, 2006, compared with $165.0 million for the year ended June 30, 2005. Income before income taxes from insurance operations was $26.5 million for the year ended June 30, 2006 compared with $25.6 million for the year ended June 30, 2005.
this increase, $38.8 million was attributable to the expansion of our business into Florida and Texas. Overall, the number of insured policies in force at June 30, 2006 increased 68% over the same date in 2005 from 119,422 to 200,401. At June 30, 2006, the number of operating retail locations (or “stores”) was 460 as compared with 248 stores at June 30, 2005.
Insurance operating expenses increased 52% to $75.8 million for the year ended June 30, 2006 from $49.9 million for the year ended June 30, 2005. This increase was primarily due to the addition of new retail locations (including those acquired in Chicago) and expenses, such as advertising, employee-agent compensation, rent and premium taxes that vary along with the increase in net premiums earned.
Income before income taxes from real estate and corporate for the year ended June 30, 2006 was $0.6 million versus a loss before income taxes of $1.6 million for the year ended June 30, 2005. The year ended June 30, 2006 included gains on the sales of foreclosed real estate held for sale of $3.6 million compared with $0.8 million for the year ended June 30, 2005. Investment income declined from $1.1 million for the year ended June 30, 2005 to $0.8 million for the year ended June 30, 2006 primarily due to a reduction in the amount of invested assets.
Other operating expenses primarily include other general corporate overhead expenses. During the year ended June 30, 2006, we incurred severance costs of $0.4 million in connection with the resignation of a former executive officer. In addition, for the year ended June 30, 2006, we incurred $0.9 million of interest expense in connection with borrowings related to the Chicago acquisition.
Our primary sources of funds are premiums, fee income and investment income. Our primary uses of funds are the payment of claims and operating expenses. Operating activities for the year ended June 30, 2007 provided $36.7 million of cash, compared with $52.9 million provided in the same period in fiscal 2006. Net cash used by investing activities for the year ended June 30, 2007 was $75.5 million, compared with $70.8 million in the same period in fiscal 2006. Both periods reflect net additions to our investment portfolio as a result of the increase in net premiums earned. During the year ended June 30, 2007, we sold fixed maturity investments of $45.9 million that were subsequently reinvested. These sales and reinvestments were primarily related to weekly auction-rate securities that were reinvested longer term and portfolio changes made in order to help obtain premium tax credits in certain states. In December 2006, we borrowed $5.0 million from our revolving credit facility and used the proceeds to increase the statutory capital and surplus of our insurance company subsidiaries. We repaid this amount in July 2007.
During the year ended June 30, 2007, we increased the statutory capital and surplus of the insurance company subsidiaries by a total of $44.7 million to support additional premium writings. Of this capital contribution, $2.7 million came from funds our holding company received from our insurance company subsidiaries through an intercompany tax allocation agreement under which the holding company was reimbursed for current tax benefits utilized through the recognition of tax net operating loss carryforwards. The balance of the capital contribution came from $7.0 million of unrestricted cash, $5.0 million from the borrowing under the revolving credit facility and $30.0 million from the proceeds of trust preferred securities sold by one of our subsidiaries in June 2007. At June 30, 2007, we had $10.4 million available in unrestricted cash and investments outside of the insurance company subsidiaries. Of these funds, in July 2007, we used $5.0 million to pay down the revolving credit facility and $2.2 million to pay scheduled quarterly payments of principal and interest on our debt. Future debt payments will be serviced by the additional unrestricted cash from the sources described in the next paragraph.
We are part of an insurance holding company system with substantially all of our operations conducted by our insurance company subsidiaries. Accordingly, the holding company will only receive cash from operating activities as a result of investment income and the ultimate liquidation of our foreclosed real estate held for sale. It will also receive dividends from non-insurance company subsidiaries that sell ancillary products to our insureds. Cash could be made available through loans from financial institutions, the sale of securities, and dividends from our insurance company subsidiaries. In addition, as a result of our tax net operating loss carryforwards, taxable income generated by the insurance company subsidiaries will provide cash to the holding company through an intercompany tax allocation agreement through which the insurance company subsidiaries reimburse the holding company for current tax benefits utilized through recognition of the net operating loss carryforwards.
State insurance laws limit the amount of dividends that may be paid from our insurance company subsidiaries. These limitations relate to statutory capital and surplus and net income. In addition, the National Association of Insurance Commissioners Model Act for risk-based capital (“RBC”) provides formulas to determine 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. A low RBC ratio would prevent an insurance company from paying dividends. Statutory guidelines suggest that the insurance company subsidiaries should not exceed a ratio of net premiums written to statutory capital and surplus of 3-to-1. We believe that our insurance company subsidiaries have sufficient financial resources available to support their net premium writings in both the short-term and the reasonably foreseeable future.
In connection with the Chicago acquisition, we entered into, and borrowed under, a credit agreement with two banks consisting of a $5.0 million revolving facility and a $25.0 million term loan facility, both maturing on June 30, 2010. Through September 13, 2007, both facilities bore interest at LIBOR plus 175 basis points per annum. We entered into an interest rate swap agreement on January 17, 2006 that fixed the interest rate on the term loan facility at 6.63% through June 30, 2010. At June 30, 2007, the swap, which qualifies as a cash flow hedge, had a fair value of $0.1 million and is included within other assets and accumulated other comprehensive loss. Payments/receipts associated with the swap are reported in the statement of operations as a part of interest expense. The term loan facility is due in equal quarterly installments through June 30, 2010. Both facilities are secured by the common stock and certain assets of our non-regulated subsidiaries. For the year ended June 30, 2007, we incurred $1.7 million of interest expense in connection with the noted credit agreement. At June 30, 2007, the unpaid balance due under the facilities was $23.1 million.
We use off-balance sheet arrangements (e.g., operating leases) where the economics and sound business principles warrant their use. Refer to “Trust Preferred Securities” section above regarding a new off-balance sheet arrangement.
At June 30, 2007, we were not in compliance with financial covenants in the credit agreement regarding a minimum fixed charge coverage ratio and a maximum combined ratio. Our lenders waived this non-compliance as of June 30, 2007 and we entered into an amendment to the credit agreement dated September 13, 2007. The amended terms have less restrictive financial covenants, increased the interest rate we pay by 75 basis points and require us to make a prepayment of at least $6.0 million in principal before December 31, 2007. In addition, the availability under the revolving credit facility was permanently reduced from $5.0 million to $2.0 million.
We are directly liable for loss and loss adjustment expenses under the terms of the insurance policies that our insurance company subsidiaries underwrite. Each of the insurance company subsidiaries establishes a reserve for all of its unpaid losses and loss adjustment expenses, including case and IBNR reserves, and estimates for the cost to settle the claims. We estimate our IBNR reserves by estimating our ultimate unpaid 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 internal actuarial staff continually monitors these estimates on a state and coverage level. We utilized our internal 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. Accordingly, the actual losses and loss adjustment expenses may differ materially from the estimates we have recorded. See “Business - Loss and Loss Adjustment Expense Reserves” for additional information.
Goodwill and identifiable intangible assets. Our acquisitions have resulted in goodwill of $138.1 million. Goodwill represents the excess of the purchase price over the fair value of the net assets acquired. The acquisitions also resulted in other identifiable intangible assets with a current book value of $6.4 million. As required by SFAS No. 142, Goodwill and Other Intangible Assets, we perform an annual impairment test of goodwill and identifiable intangible assets. If impairment indicators exist between the annual testing periods, management will perform an interim impairment test. Should either an annual or interim impairment test determine that the fair value is below the carrying value, a write-down of these assets will be required. At June 30, 2007, impairment tests were performed and in management’s opinion, no impairment exists.
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements made in the 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 statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may include, among other things:
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.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and the cash flows of First Acceptance Corporation and subsidiaries for the year ended June 30, 2005, in conformity with U.S. generally accepted accounting principles.
First Acceptance Corporation (the “Company”) is a holding company based in Nashville, Tennessee with operating subsidiaries whose primary operations include the selling, servicing and underwriting of non-standard personal automobile insurance. The Company writes non-standard personal automobile insurance in 12 states and is licensed as an insurer in 13 additional states. Business is written through three wholly-owned subsidiaries, First Acceptance Insurance Company, Inc., First Acceptance Insurance Company of Georgia, Inc. and First Acceptance Insurance Company of Tennessee, Inc. (the “Insurance Companies”). The Company has limited activities related to its attempts to market and dispose of remaining foreclosed real estate held for sale.
Fixed maturities, available-for-sale, include bonds with fixed principal payment schedules and loan-backed securities which are amortized using the retrospective method. These securities are carried at market value with the corresponding unrealized appreciation or depreciation, net of deferred income taxes, reported in other comprehensive income or loss. Market values are obtained from a recognized pricing service.
Realized gains and losses on sales of securities are computed based on specific identification and are included within other revenues.
Loss and loss adjustment expense reserves are undiscounted and represent case-basis estimates of reported losses and estimates based on certain actuarial assumptions regarding the past experience of reported losses, including an estimate of losses incurred but not reported (“IBNR”). Management believes that the losses and loss adjustment reserves are adequate to cover the ultimate liability. However, such estimate may be more or less than the amount ultimately paid when the claims are finally settled.
Effective July 1, 2005, the Company adopted Statement of Financial Accounting Standards No. 123 (Revised), Share Based Payment (“SFAS No. 123(R)”). SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. Prior to July 1, 2003, the Company followed the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), to account for its stock option activity in the financial statements. Effective July 1, 2003, the Company adopted the prospective method provisions of SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, and uses the fair value method for expensing stock-based compensation on a straight-line basis over the vesting period. Regarding the adoption of SFAS No. 123(R), there was no effect on net income and net income per share for the years ended June 30, 2007, 2006 and 2005 since all stock options issued under APB No. 25 were fully vested prior to July 1, 2004.
In July 2006, Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109 (“FIN 48”), was issued. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, as well as providing guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact that the adoption of FIN 48 will have on future consolidated financial statements.
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this statement does not require any new fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for the fiscal year, including financial statements for an interim period within that fiscal year. The Company has not evaluated the requirements of SFAS 157 and has not yet determined if SFAS 157 will have a material impact on future consolidated financial statements.
During the years ended June 30, 2007, 2006 and 2005, the Company paid $807, $927 and $1,775, respectively, in income taxes and $1,663, $586 and $233, respectively, in interest.
Basic net income (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares, while diluted net income (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of such common shares and dilutive share equivalents. Dilutive share equivalents result from the assumed conversion of employee stock options and are calculated using the treasury stock method.
The following table summarizes the estimated fair values of the assets acquired at the date of acquisition.
Pro forma financial information has not been presented for this acquisition since the nature of the revenue-producing activity of this business has changed from a retail insurance agency to the underwriting results of an insurance company. The results of the operations of the business acquired are included in the Company’s statements of operations beginning on January 12, 2006, the date of acquisition.
For the years ended June 30, 2007, 2006 and 2005, amortization related to all identifiable intangible assets was $415, $612 and $930, respectively. At June 30, 2007, the remaining identifiable intangible assets subject to amortization were all related to the Chicago acquisition. Amortization expense for the year ended June 30, 2008 will be $50, which represents the remaining balance subject to amortization.
Net realized capital gains (losses) on investments, which are included in other revenues within the consolidated statements of operations, from fixed maturities available-for-sale follow:
The fair value and gross unrealized losses of fixed maturities, available-for-sale, by length of time that individual securities have been in a continuous unrealized loss position follows:
The Company also has assumed private-passenger non-standard automobile insurance premiums from other insurance companies produced by the managing general agency subsidiaries in Alabama and Texas.
The percentages of premiums assumed to net premiums written for the years ended June 30, 2007, 2006 and 2005 were 6%, 9% and 16%, respectively.
The Company has issued stock options to employees under its 2002 Long Term Incentive Plan (the “Plan”). At June 30, 2007, there were 3,337 shares remaining available for issuance under the Plan. Option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant. The options expire over ten years and generally vest equally in annual installments over four or five years. Certain option awards provide for accelerated vesting if there is a change in control (as defined in the Plan).
A summary of the status of the Plan as of June 30, 2007, 2006 and 2005 and changes during the years then ended is presented below:
The weighted average estimated fair value of stock options granted during the years ended June 30, 2007 and 2005 was $6.27 and $4.74, respectively. There were no options granted during the year ended June 30, 2006. As of June 30, 2007, the weighted average remaining contractual life of options outstanding and exercisable/vested is approximately 6.2 years and 5.7 years, respectively.
The Company is committed under various lease agreements for office space and equipment. Certain lease agreements contain renewal options and rent escalation clauses. Rental expense for 2007, 2006 and 2005 was $11,555, $8,077 and $3,196, respectively. Future minimum lease payments under these agreements follow:
The unfavorable change in the estimate of unpaid loss and loss adjustment expenses of $3,865 for the year ended June 30, 2007 was primarily a result of the fact that the Company had limited historical loss experience in our new states for use in determining its loss reserve estimates. Such unfavorable change was primarily related to the Bodily Injury and Personal Injury Protection coverages in Florida.
Management believes that the favorable changes in the estimates of unpaid loss and loss adjustment expenses of $1,548 and $356 recognized for the years ended June 30, 2006 and 2005, respectively, were attributable to the inherent uncertainty in the estimation process and were not the result of any individual factor.
At June 30, 2007, we were not in compliance with financial covenants in the credit agreement regarding a minimum fixed charge coverage ratio and a maximum combined ratio. Our lenders waived this non-compliance as of June 30, 2007 and we entered into an amendment to the credit agreement dated September 13, 2007. The amended terms have less restrictive financial covenants, increased the interest rate we pay by 75 basis points and require us to make a prepayment of at least $6,000 in principal before December 31, 2007. In addition, the availability under the revolving credit facility was permanently reduced from $5,000 to $2,000.
In June 2007, First Acceptance Statutory Trust I (“FAST I”), a wholly-owned unconsolidated subsidiary trust of the Company, issued 40 shares of preferred securities at $1,000 per share to outside investors and 1.24 shares of common securities to the Company, also at $1,000 per share. The sole assets of FAST I are $41,240 of junior subordinated debentures issued by the Company. The debentures will mature on July 30, 2037 and are redeemable by the Company in whole or in part beginning on July 30, 2012, at which time the preferred securities are callable. The debentures pay a fixed rate of 9.277% until July 30, 2012, after which the rate becomes variable (LIBOR plus 375 basis points).
The net change in the valuation allowance for the year ended June 30, 2007 was an increase of $6,599 while the years ended June 30, 2006 and 2005 included decreases of $9,328 and $10,594, respectively. In addition, during the year ended June 30, 2007, the provision for income taxes included a $9,990 charge related to the expiration of certain net operating loss (“NOL”) carryforwards due to taxable income for the current fiscal year being less than management’s most recent estimates of current fiscal year taxable income. Prior to the acquisition of USAuto, a full valuation allowance had been established, as management believed that it was more likely than not that the Company would not realize the benefits of the loss carryforwards. However, as result of the acquisition, management reduced the valuation allowance based upon internally-prepared projected operating results. Subsequently, such projections were revised after considering the actual results for the years ended June 30, 2007, 2006 and 2005, and the allowance was further revised.
credit carryforwards of $1,232 that have no expiration date. The NOL carryforwards will expire in 2008 through 2023, as shown in the following table:
The following table sets forth the computation of basic and diluted net income (loss) per share:
At June 30, 2007, the Company had certain concentrations of credit risk with several financial institutions in the form of cash and cash equivalents, which amounted to $34,161. For purposes of evaluating credit risk, the stability of financial institutions conducting business with the Company is periodically reviewed. If the financial institutions failed to completely perform under the terms of the financial instruments, the exposure for credit loss would be the amount of the financial instruments less amounts covered by regulatory insurance.
Effective May 1, 2004, the Company entered into an advisory services agreement with an entity controlled by a current director of the Company to render advisory services in connection with financings, mergers and acquisitions and other related matters involving the Company. In consideration for the advisory services to be provided, the Company will pay to the advisor a quarterly fee of $62.5 for a four-year period. The advisory agreement may be terminated by the Company if the advisor fails or refuses to perform its services pursuant to the agreement, does any act, or fails to do any act, which results in an indictment for or conviction of a felony or other similarly serious offense or upon the written agreement of the advisor. The advisor may terminate the agreement upon written consent of the Company or if the Company is in material breach of its obligations thereunder. See Note 8 to our consolidated financial statements regarding the terms of a related severance agreement and future obligations.
The fair value of financial instruments has been estimated by the Company using available market information as of June 30, 2007 and 2006, and valuation methodologies considered appropriate to the circumstances:
Investments in fixed maturities are carried at market values which are obtained from a recognized pricing service.
The fair value of the debentures payable issued on June 15, 2007 was estimated using projected cash flows, discounted at rates currently being offered for similar financial instruments and approximates their carrying value.
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 those states prepare their statutory-basis financial statements in accordance with the National Association of Insurance Commissioners (“NAIC”) Accounting Practices and Procedures Manual subject to any deviations prescribed or permitted by the insurance commissioner in each state of domicile. In addition, the Insurance Companies are required to report their risk-based capital (“RBC”) each December 31. Failure to maintain an adequate RBC could subject the Insurance Companies to regulatory action and maintaining an adequate RBC could restrict the payment of dividends. As of December 31, 2006, the RBC levels of the Insurance Companies did not subject them to any regulatory action.
preceding twelve-month period is $15,395. The amount of the dividend is further limited by the amount of FAIC’s “earned surplus” which at June 30, 2007 was $15,110.
FAIC-GA and FAIC-TN are wholly-owned subsidiaries of FAIC and the maximum amount of dividends which they can pay to FAIC, without the prior approval of the respective insurance commissioner, is limited to the greater of 10% of their statutory capital and surplus as of December 31 of the next preceding year or net income (not including realized capital gains) for the year.
Interim results are not necessarily indicative of fiscal year performance because of the impact of seasonal and short-term variations. Selected quarterly financial data for the years ended June 30, 2007 and 2006 is summarized as follows:
Net income (loss) for the fourth quarters of the years ended June 30, 2007 and 2006 reflect the impact of changes in the loss and loss adjustment expense reserves and the valuation allowance for the deferred tax asset including the effect of the expiration of certain net operating loss carryforwards.
The year ended June 30, 2007 includes an increase in the valuation allowance of $6,882 resulting from revisions in management’s estimates for the Company’s future taxable income based on the results for the then most recent fiscal year and an increase in the provision for income taxes of $9,990 due to the expiration of certain net operating loss carryforwards due to taxable income for the current fiscal year being less than management’s most recent estimates of current fiscal year taxable income. In addition, during the fourth quarter of the year ended June 30, 2007, an unfavorable change in the estimate of unpaid loss and loss adjustment expenses resulted in a current period charge of $15,589. Of this amount, $12,589 related to prior accident quarters and $3,000 related to an unanticipated increase in the loss and loss adjustment expense ratio for the current quarter.
The year ended June 30, 2006 includes a decrease in the valuation allowance of $10,540 resulting from taxable income for the 2006 fiscal year exceeding the estimates used by management in establishing the valuation allowances at June 30, 2005, in addition to revisions in management’s estimates for the Company’s future taxable income based on the results for the then most recent fiscal years.
Net loss per share recognized during the quarter ended June 30, 2007 was decreased by $0.35 on a basic and diluted basis as a result of the combined change in the valuation allowance and net operating loss carryforwards. Net income per share recognized during the quarter ended June 30, 2006 was increased by $0.22 and $0.21 on a basic and diluted basis, respectively, as a result of the change in valuation allowance.