First Acceptance Corporation Reports Operating Results for the Third Quarter and Nine Months Ended March 31, 2008

First Acceptance Corporation (NYSE: FAC) today reported its financial results for the third quarter and nine months ended March 31, 2008. Operating Results Revenues for the three months ended March 31, 2008 were $84.0 million, compared with $92.0 million in the same period last year. Net income for the three months ended March 31, 2008 was $0.8 million, or $0.02 per share on a diluted basis, compared with net income of $3.1 million, or $0.06 per share on a diluted basis, for the three months ended March 31, 2007. Revenues for the nine months ended March 31, 2008 were $253.5 million, compared with $255.4 million for the nine months ended March 31, 2007. Net loss for the nine months ended March 31, 2008 was $9.1 million, or $(0.19) per share on a diluted basis, compared with net income of $7.3 million, or $0.15 per share on a diluted basis, for the nine months ended March 31, 2007. The results for the nine months ended March 31, 2008 include an increase in our valuation allowance for the deferred tax asset of $11.6 million, or $0.24 per share on a diluted basis. After considering the recent declines in premiums written, premiums earned and policies in force, we assessed the realization of our net operating loss ("NOL”) carryforwards, which comprises the majority of our deferred tax asset. We concluded at December 31, 2007 that it was appropriate to increase our valuation allowance for the deferred tax asset related to the NOL carryforwards that expire in fiscal years 2008 and 2009. As in our prior assessments, we considered our historical and expected taxable income to determine the sufficiency of our valuation allowance. We remain optimistic about the Company’s future outlook and expect to generate taxable income sufficient to realize our remaining net deferred tax asset. However, our evaluation includes multiple assumptions and estimates that may change over time. If future taxable income is less than current projections, an additional valuation allowance may become necessary that could have a materially adverse impact on our results of operations and financial position. Our updated evaluation at March 31, 2008 resulted in no adjustment to the valuation allowance. At March 31, 2008, the total gross deferred tax asset was $54.7 million and the valuation allowance was $37.7 million. Premiums earned decreased by $7.6 million, or 10%, to $72.2 million for the three months ended March 31, 2008 from $79.8 million for the three months ended March 31, 2007. The decrease in premiums earned was due to declines in new policies written during the quarter caused by (1) continued soft economic conditions in our markets coupled with a competitive pricing environment and (2) the closure of 44 underperforming retail locations (or "stores”) since January 2007. These declines were partially offset by premium growth in our South Carolina, Pennsylvania, and Texas markets. Premiums earned decreased by $3.1 million, or 1%, to $217.5 million for the nine months ended March 31, 2008 from $220.6 million for the same period last year. This decrease was also a result of the decrease in policies in force. At March 31, 2008, we operated 432 stores compared with 468 stores at March 31, 2007. Our total number of insured policies in force at March 31, 2008 decreased 13% to 215,857 from 247,034 at March 31, 2007. Loss and Loss Adjustment Expense Ratio. Our loss and loss adjustment expense ratio was 76.6% for the three months ended March 31, 2008 and 75.4% for the three months ended March 31, 2007. The loss and loss adjustment expense ratio was 76.9% for the nine months ended March 31, 2008 and 75.9% for the nine months ended March 31, 2007. The increase for the three months ended March 31, 2008 was primarily the result of increased frequency attributable to weather-related claims. The increase for the nine months ended March 31, 2008 was further impacted by increased severity attributable to bodily injury and property damage losses in several states. For the three and nine months ended March 31, 2008, we did not experience any significant adverse development for prior accident periods. We had previously reported that the three months ended September 30, 2006 included approximately $3.7 million (1.7% of the ratio for the nine months ended March 31, 2007) of adverse development related primarily to the estimation of the severity of losses in Florida and Texas, where we had significant growth during 2006, and Georgia, where we reduced our physical damage premium rates effective January 2006. Effective January 1, 2008, we increased our rates in Florida for bodily injury, medical payments, and uninsured motorists coverage in conjunction with the change in coverage resulting from the reinstatement of Personal Injury Protection ("PIP”) coverage. During the first quarter of 2008, we also increased rates in Illinois, Indiana and Texas. Expense Ratio. Our expense ratio for the three months ended March 31, 2008 increased to 21.6% from 19.3% for the same period in the prior fiscal year. Our expense ratio was 21.4% for the nine months ended March 31, 2008 compared with 19.3% for the nine months ended March 31, 2007. These increases were primarily the result of (i) costs associated with the closure of underperforming stores, (ii) an increased investment in our product, actuarial and information technology functions, (iii) severance and related benefit charges of $0.7 million incurred in connection with our separation with an executive officer, and (iv) the positive impact on the expense ratio during the nine months ended March 31, 2007 from the transaction service fee of $0.9 million, or 0.6%, earned through December 31, 2006 in connection with our Chicago acquisition. Overall, the combined ratio increased to 98.2% for the three months ended March 31, 2008 from 94.7% for the three months ended March 31, 2007. For the nine months ended March 31, 2008, the combined ratio increased to 98.3% from 95.2% for the nine months ended March 31, 2007. About First Acceptance Corporation First Acceptance Corporation provides non-standard private passenger automobile insurance, primarily through employee-agents. At March 31, 2008, we leased and operated 432 retail offices in 12 states. Our insurance company subsidiaries are licensed to do business in 25 states. Additional information about First Acceptance Corporation can be found online at www.firstacceptancecorp.com. This press release contains forward-looking statements. These statements, which have been included in reliance on the "safe harbor" provisions of the federal securities laws, involve risks and uncertainties. Investors are hereby cautioned that these statements may be affected by important factors, including, among others, the factors set forth under the caption "Risk Factors” in our Annual Report on Form 10-K and in our other filings with the Securities and Exchange Commission. Actual operations and results may differ materially from the results discussed in the forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.   FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Operations (in thousands, except per share data) (Unaudited)     Three Months Ended March 31,   Nine Months Ended March 31, 2008   2007 2008   2007 Revenues: Premiums earned $ 72,209 $ 79,842 $ 217,496 $ 220,630 Fee income 9,311 9,852 27,596 27,675 Investment income 2,687 2,292 8,573 6,336 Other   (222 )   (3 )   (181 )   765   83,985     91,983     253,484     255,406   Costs and expenses: Losses and loss adjustment expenses 55,319 60,202 167,336 167,508 Insurance operating expenses 24,936 25,244 74,102 71,082 Other operating expenses 487 560 1,751 2,186 Stock-based compensation 310 295 988 752 Depreciation and amortization 454 404 1,202 1,192 Interest expense   1,192     445     3,822     1,275   82,698     87,150     249,201     243,995   Income before income taxes 1,287 4,833 4,283 11,411 Provision for income taxes   529     1,767     13,364     4,150 Net income (loss) $ 758   $ 3,066   $ (9,081 ) $ 7,261   Net income (loss) per share: Basic $ 0.02   $ 0.06   $ (0.19 ) $ 0.15 Diluted $ 0.02   $ 0.06   $ (0.19 ) $ 0.15   Number of shares used to calculate net income (loss) per share: Basic   47,640     47,603     47,624     47,578 Diluted   48,831     49,691     47,624     49,666     FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (in thousands, except per share data)   March 31, 2008 June 30, 2007 (Unaudited) ASSETS Fixed maturities, available-for-sale at fair value $ 190,320 $ 176,555 Cash and cash equivalents 39,473 34,161 Premiums and fees receivable, net 74,268 71,771 Receivable for securities -- 19,973 Deferred tax asset 17,000 30,936 Other assets 15,533 15,838 Deferred acquisition costs 5,114 5,166 Goodwill and identifiable intangible assets   144,455   144,492 TOTAL $ 486,163 $ 498,892   LIABILITIES AND STOCKHOLDERS' EQUITY Loss and loss adjustment expense reserves 98,343 91,446 Unearned premiums and fees 88,937 88,831 Notes payable and capitalized lease obligations 4,614 23,490 Debentures payable 41,240 41,240 Other liabilities   17,116   14,401 Total liabilities 250,250 259,408 Total stockholders' equity   235,913   239,484 TOTAL $ 486,163 $ 498,892   Book value per share $ 4.91 $ 5.03         FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES Supplemental Data (Unaudited)     GROSS PREMIUMS EARNED BY STATE   Three Months Ended March 31, Nine Months Ended March 31, 2008   2007 Change 2008   2007 Change (in thousands) Premiums earned: Georgia $ 15,237 $ 18,087 $ (2,850 ) $ 46,475 $ 52,863 $ (6,388 ) Florida 10,762 14,993 (4,231 ) 33,943 40,833 (6,890 ) Texas 8,781 8,658 123 25,524 23,555 1,969 Illinois 8,016 8,410 (394 ) 24,116 22,681 1,435 Alabama 7,209 7,845 (636 ) 21,747 22,417 (670 ) South Carolina 6,195 4,520 1,675 17,485 9,361 8,124 Tennessee 5,179 6,082 (903 ) 15,869 17,865 (1,996 ) Ohio 3,846 4,289 (443 ) 11,660 12,132 (472 ) Pennsylvania 2,606 1,961 645 7,267 4,717 2,550 Indiana 1,736 2,110 (374 ) 5,510 6,040 (530 ) Missouri 1,435 1,600 (165 ) 4,287 4,487 (200 ) Mississippi   1,207   1,287   (80 )   3,613   3,679   (66 ) Total premiums earned $ 72,209 $ 79,842 $ (7,633 ) $ 217,496 $ 220,630 $ (3,134 ) COMBINED RATIOS (INSURANCE COMPANIES)     Three Months Ended March 31, Nine Months Ended March 31, 2008   2007 2008   2007 Loss and loss adjustment expense 76.6% 75.4% 76.9% 75.9% Expense (1) 21.6% 19.3% 21.4% 19.3% Combined 98.2% 94.7% 98.3% 95.2%   (1) Insurance operating expenses are reduced by fee income from insureds and, through December 31, 2007, the transaction service fee received from the Chicago agencies whose business we acquired. POLICIES IN FORCE     Three Months Ended March 31, Nine Months Ended March 31, 2008   2007 2008   2007 Policies in force – beginning of period 203,008 217,560 226,974 200,401 Net increase (decrease) during period 12,849 29,474 (11,117) 46,633 Policies in force – end of period 215,857 247,034 215,857 247,034     FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES Supplemental Data (continued) (Unaudited)     NUMBER OF RETAIL LOCATIONS Retail location counts are based upon the date that a location commenced or ceased writing business.   Three Months Ended March 31, Nine Months Ended March 31, 2008   2007 2008   2007   Retail locations – beginning of period 440 467 462 460 Opened -- 5 2 18 Closed (8 ) (4 ) (32 ) (10 ) Retail locations – end of period 432   468   432   468   RETAIL LOCATIONS BY STATE     March 31, December 31, 2008   2007 2007   2006   Alabama 25 25 25 25 Florida 40 42 40 41 Georgia 61 63 61 63 Illinois 80 82 80 85 Indiana 19 27 22 26 Mississippi 8 8 8 8 Missouri 15 15 16 15 Ohio 29 30 29 30 Pennsylvania 19 25 19 26 South Carolina 28 28 28 26 Tennessee 20 20 20 20 Texas 88 103 92 102 Total 432 468 440 467