We use the services of an independent investment manager to manage our fixed investment portfolio. The investment manager conducts, in accordance with the Company’s 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, and guidelines as to asset allocation, duration and credit quality. The portfolio is compared with a customized Lehman Brothers index. We do not invest in equity securities. Management and the Investment Committee meet regularly to review the performance of the portfolio and compliance with the Company’s investment guidelines, including the approval of all purchase and sale transactions.
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 an off-balance sheet arrangement.
If we determine that the value of an investment is other-than-temporarily impaired, the impairment would be charged against income, a new cost basis for the security would be established and the amount of the impairment would be amortized through income over the remaining life of the security. Our evaluations during the year ended June 30, 2008 resulted in other-than-temporary impairment charges totaling $1.4 million related to certain non-agency CMOs in our investment portfolio. Due to the deterioration in liquidity in the credit markets during calendar 2008, yields on certain non-agency CMOs declined below projected book yields requiring the impairment under the guidance set forth in EITF 99-20. Other than the decline in the yields of these securities resulting from changes in prepayment assumptions, the underlying assets of these securities continue to perform within expectations.
Effective July 1, 2005, the Company adopted Statement of Financial Accounting Standards No. 123 (Revised), Share Based Payment (“SFAS No. 123R”). SFAS No. 123R 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. Regarding the adoption of SFAS No. 123R, there was no effect on net income (loss) and net income (loss) per share for the years ended June 30, 2008, 2007 and 2006 since all stock options issued under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, were fully vested prior to July 1, 2004.
The weighted average estimated fair value of stock options granted during the years ended June 30, 2008 and 2007 was $1.90 and $6.27, respectively. There were no options granted during the year ended June 30, 2006. As of June 30, 2008, the weighted average remaining contractual life of options outstanding and exercisable/vested is approximately 5.9 years and 4.8 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 2008, 2007 and 2006 was $12.2 million, $11.6 million and $8.1 million, respectively. Future minimum lease payments under these agreements follow (in thousands).
Management believes that the favorable changes in the estimates of unpaid loss and loss adjustment expenses of $1.4 million and $1.5 million for the years ended June 30, 2008 and 2006, respectively, were primarily a result of the inherent uncertainty in the estimation process and were not the result of any individual factor.
In June 2007, First Acceptance Statutory Trust I (“FAST I”), a wholly-owned unconsolidated subsidiary trust of the Company, issued 40,000 shares of preferred securities at $1,000 per share to outside investors and 1,240 shares of common securities to the Company, also at $1,000 per share. The sole assets of FAST I are $41.2 million of junior subordinated debentures issued by the Company. The debentures will mature on July 30, 2037 and are redeemable by the Company in whole or in part beginning on July 30, 2012, at which time the preferred securities are callable. The debentures pay a fixed rate of 9.277% until July 30, 2012, after which the rate becomes variable (LIBOR plus 375 basis points).
The Company has also agreed upon preliminary settlement terms with the plaintiffs in the Alabama litigation. The preliminary settlement terms provide for benefits to the Alabama plaintiffs substantially similar to the benefits to be paid to the Georgia plaintiffs, and a payment of $2.5 million in fees and expenses for the attorneys for the Alabama plaintiffs. The settlement of the Alabama litigation is subject to the negotiation of a definitive settlement agreement and approval of the settlement agreement by the applicable courts.