Q4 2024 Quarterly Report (OTC Markets)

FIRST ACCEPTANCE CORPORATION

2024 ANNUAL REPORT

FIRST ACCEPTANCE CORPORATION

TABLE OF CONTENTS

Our Marketplace ........................................................................................................................................................................................ 3

Stock Market Information .......................................................................................................................................................................... 4

Selected Financial Data.............................................................................................................................................................................. 5

Consolidated Balance Sheets ................................................................................................................................................................ 6

Consolidated Statements of Operations ................................................................................................................................................ 7

Consolidated Statements of Stockholders’ Equity................................................................................................................................ 8

Consolidated Statements of Cash Flows............................................................................................................................................... 9

Notes to Consolidated Financial Statements ...................................................................................................................................... 10

Report of Independent Auditors ............................................................................................................................................................... 31

Management’s Discussion and Analysis of Financial Condition and Results of Operations................................................................... 34

Risk Factors ............................................................................................................................................................................................. 46

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.

The following map presents the percentage of premiums earned by state for the year ended December 31, 2024:

3

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, 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

Year Ended December 31, 2024:

First Quarter $ 2.85 $ 1.97

Second Quarter $ 4.10 $ 2.64

Third Quarter $ 4.03 $ 3.06

Fourth Quarter $ 3.69 $ 2.95

The closing price of our common stock on March 3, 2025 was $3.13.

Holders

According to the records of our transfer agent, there were 225 registered holders of record of our common stock on February 28

2025, including record holders such as banks and brokerage firms who hold shares for beneficial holders, and 38,108,651 shares of our

common stock were outstanding.

Dividends

There were no dividends paid in 2024, 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.

4

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, 2024, and 2023 and for the years ended December 31, 2024, 2023,

and 2022 from our consolidated financial statements included in this report. We derived our selected historical consolidated financial

data as of December 31, 2022, 2021 and 2020 and for the years ended December 31, 2021, and 2020 from our consolidated financial

statements which are not included in this report. The results for past periods are not necessarily indicative of the results expected for

any future period.

Year Ended December 31,

2024 2023 2022 2021 2020

(in thousands, except per share data)

Premiums earned $ 491,782 $ 397,171 $ 230,529 $ 209,043 $ 206,825

Commission and fee income 14,290 55,068 53,012 51,664 47,448

Billing fees and service charges 34,050 25,003 15,931 13,365 13,123

Investment income 18,350 8,654 3,895 3,638 3,203

Net other gains (losses) 955 74,680 (1,071) 7,537 (1,019)

559,427 560,576 302,296 285,247 269,580

Losses and loss adjustment expenses 361,765 276,461 181,260 154,849 133,777

Operating expenses 157,131 177,601 136,150 128,348 116,507

Other expenses 977 780 931 809 786

Stock-based compensation 940 338 280 242 277

Depreciation and amortization of identifiable intangible

assets 1,294 2,545 3,322 1,896 2,216

Interest expense 3,902 3,818 2,386 1,684 2,378

526,009 461,543 324,329 287,828 255,941

Income (loss) before income taxes 33,418 99,033 (22,033) (2,581) 13,639

Provision (benefit) for income taxes 7,127 25,121 (4,545) (1,353) 3,221

Net Income (loss) $ 26,291 $ 73,912 $ (17,488) $ (1,228) $ 10,418

Net income (loss) per basic shares $ 0.69 $ 1.94 $ (0.46) $ (0.03) $ 0.27

Net income (loss) per diluted shares $ 0.67 $ 1.92 $ (0.46) $ (0.03) $ 0.27

Year Ended December 31,

2024 2023 2022 2021 2020

Cash and invested assets $ 407,818 $ 318,964 $ 176,834 $ 197,746 $ 218,686

Total assets 680,388 557,424 355,939 322,648 340,954

Loss and loss adjustment expense reserves 240,447 165,346 107,100 93,278 91,788

Debentures payable 40,666 40,621 40,575 40,530 40,484

Total liabilities 510,827 415,576 290,417 229,751 229,268

Total stockholders' equity 169,561 141,848 65,522 92,897 111,686

Book value per common share $ 4.44 $ 3.71 $ 1.73 $ 2.44 $ 2.93

5

Consolidated Financial Statements

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

December 31,

2024 2023

ASSETS

Investments in fixed maturities, available-for-sale at fair value (amortized cost of

$304,547 and $200,544, respectively) $ 298,064 $ 192,885

Investments in equity securities at fair value (cost of $14,114 and $9,125, respectively) 16,115 10,660

Cash, cash equivalents, and restricted cash equivalents 85,917 109,780

Premiums and fees receivable, net of allowance of $431 and

$491, respectively 155,458 149,764

Consideration receivable from sale of insurance agency, at fair value (Note 17) 26,734 59,825

Deferred tax assets, net 2,767 —

Other investments 7,722 5,639

Other assets 22,656 9,977

Operating lease right-of-use assets 4,381 5,020

Reinsurance recoverables 28,572 —

Prepaid reinsurance premiums 28,552 —

Property and equipment and identifiable intangible assets, net 3,450 4,422

Deferred acquisition costs — 9,452

TOTAL ASSETS $ 680,388 $ 557,424

LIABILITIES AND STOCKHOLDERS’ EQUITY

Loss and loss adjustment expense reserves $ 240,447 $ 165,346

Unearned premiums and fees 168,129 164,479

Debentures payable 40,666 40,621

Operating lease liabilities 4,734 5,401

Deferred tax liability, net — 4,558

Income taxes payable 3,152 5,733

Deferred ceding commissions, net 2,207 —

Amounts due to reinsurers 26,710 —

Other liabilities 24,782 29,438

Total liabilities 510,827 415,576

Preferred stock, $.01 par value, 10,000 shares authorized, no shares issued or outstanding — —

Common stock, $.01 par value, 75,000 shares authorized; 38,191 and 38,265 issued and

outstanding, respectively 381 382

Additional paid-in capital 456,804 456,309

Accumulated other comprehensive loss, net of tax of $(2,543) and $(2,790), respectively (3,941) (4,869)

Accumulated deficit (283,683) (309,974)

Total stockholders’ equity 169,561 141,848

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 680,388 $ 557,424

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,

2024 2023 2022

Premiums earned $ 491,782 $ 397,171 $ 230,529

Commission and fee income 14,290 55,068 53,012

Billing fees and service charges 34,050 25,003 15,931

Investment income 18,350 8,654 3,895

Gain on sale of insurance agency (Note 17) — 73,034 —

Net gains (losses) on investments 955 1,646 (1,071)

Total revenues 559,427 560,576 302,296

Losses and loss adjustment expenses 361,765 276,461 181,260

Insurance operating expenses 157,131 177,601 136,150

Other expenses 977 780 931

Stock-based compensation 940 338 280

Depreciation and amortization 1,294 2,545 3,322

Interest expense 3,902 3,818 2,386

Total costs and expenses 526,009 461,543 324,329

Income (loss) before income taxes 33,418 99,033 (22,033)

Provision (benefit) for income taxes 7,127 25,121 (4,545)

Net income (loss) $ 26,291 $ 73,912 $ (17,488)

Basic $ 0.69 $ 1.94 $ (0.46)

Diluted $ 0.67 $ 1.92 $ (0.46)

Number of shares used to calculate net income (loss) per share:

Basic 38,128 38,086 37,795

Diluted 39,095 38,409 37,795

Reconciliation of net income (loss) to comprehensive income (loss):

Net income (loss) $ 26,291 $ 73,912 $ (17,488)

Unrealized change in investments arising during the period, net of tax expense

(benefit) of $247, $530 and $(2,532), respectively 928 1,993 (9,525)

("OTTI") on investments, included in net income (loss) 100 — 115

Comprehensive income (loss) $ 27,319 $ 75,905 $ (26,898)

Net realized gains on sales and redemptions 582 500 789

Net unrealized gains (losses) on equity securities, includes $804, $511 and $(723) of

reclassification for realized gains and losses, respectively 466 1,146 (1,677)

Other-than-temporary impairment ("OTTI") of fixed maturities, available for sale (93) — (183)

Net gains (losses) on investments and foreclosed real estate held for sale $ 955 $ 1,646 $ (1,071)

See notes to consolidated financial statements.

7

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

Accumulated

Additional other Total

Shares Amount capital income (loss) deficit equity

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 benefit 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

Net income — — — — 26,291 26.291

Net unrealized change on investments

(net of tax expense of $247) — — — 928 — 928

Stock-based compensation 31 — 940 — — 940

Issuance of shares under Employee

Stock Purchase Plan 74 1 189 — — 190

Vested restricted stock units 106 1 — — — 1

Retirement of treasury stock (285) (3) (634) — (637)

Balances at December 31, 2024 38,191 $ 381 $ 456,804 $ (3,941) $ (283,683) $ 169,561

See notes to consolidated financial statements.

8

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Year Ended December 31,

2024 2023 2022

Net income (loss) $ 26,291 $ 73,912 $ (17,488)

Adjustments to reconcile net income (loss) to cash provided by (used in)

operating activities:

Unrealized (gains) losses on equity securities (466) (1,146) 1,677

Depreciation and amortization 1,294 2,545 3,322

Accretion of present value discount of sales consideration receivable (3,159) (301) —

Stock-based compensation 940 338 280

Deferred income taxes (7,579) 18,214 (4,519)

Investment (income) loss from limited partnership investments (598) (691) 171

Realized gains on sales and redemptions of investments (582) (500) (789)

Gain on sale of insurance agency (Note 17) — (73,034) —

Other 110 (294) (256)

Premiums, fees, and commission receivable (5,750) (55,370) (39,218)

Loss and loss adjustment expense reserves 75,101 58,246 13,822

Unearned premiums and fees 3,650 60,545 39,439

Reinsurance recoverables (28,572) — —

Prepaid insurance premiums (28,552) — —

Other assets (12,679) (382) (387)

Income taxes payable (2,581) — —

Deferred ceding commissions, net of deferred acquisition costs 11,659 (2,390) (4,028)

Amount due to reinsurers 26,710 — —

Other liabilities (3,146) 3,010 4,073

Other 24 1,579 195

Net cash provided by (used in) operating activities 52,115 84,281 (3,706)

Purchases of investments (141,529) (94,814) (41,483)

Maturities and redemptions of investments 30,997 14,889 31,398

Sales of investments 2,067 2,664 5,253

Purchase of other investments (2,109) — —

Distributions from other investments 624 877 1,193

Capital expenditures and acquisition of identifiable intangible assets (322) (1,339) (4,211)

Receivable/payable for securities (1,510) — —

Net proceeds from sale of insurance agency — 54,067 —

Collections on consideration receivable from sale of insurance agency 36,250 — —

Loss on abandonment of property and equipment — — 627

Net cash used in investing activities (75,532) (23,656) (7,406)

Purchase of treasury stock (637) — (736)

Net proceeds from employee issuance of common stock 191 116 113

Taxes remitted in relation to employee restricted stock units exercised — (33) (19)

Net cash (used in) provided by financing activities (446) 83 (642)

Net change in cash, cash equivalents, and restricted cash equivalents (23,863) 60,708 (11,754)

Cash, cash equivalents, and restricted cash equivalents, beginning of period 109,780 49,072 60,826

Cash, cash equivalents, and restricted cash equivalents, end of period $ 85,917 $ 109,780 $ 49,072

See notes to consolidated financial statements.

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FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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. Through December 1, 2023, the Company generated revenue from selling non-standard personal automobile

insurance products and related products in 15 states. Subsequently, the Company now solely offers its products through independent

agents in these 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 through 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, 2024, two individual independent agents produced 46% and 35% of premiums earned.

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, 2025, 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 consist of mutual funds. 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.

10

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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.

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 recorded 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.

Realized gains and losses on sales and redemptions of securities are computed based on specific identification.

Cash, Cash Equivalents, and Restricted Cash Equivalents

Cash, cash equivalents, and restricted cash equivalents in connection with reinsurance contracts and deposits with state

insurance regulators, consist of 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, 2024, and December 31,

2023, the Company had restricted cash equivalents of $9.4 million and $5.5 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”). 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 any corresponding unrealized appreciation or depreciation would

be 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 and fees receivable are recorded net of an estimated allowance for uncollectible

amounts.

Prior to December 1, 2023, 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 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

11

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

consideration that will be received for which a significant reversal of revenue was not probable. As a result of the sale of the Insurance

Agency, the Company no longer receives commission and fee income from third-party insurance companies and the sale of ancillary

products. The Company does, however, continue to receive managing general agency fees on premiums written in certain states.

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 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, from a third-party entity on the sales of ancillary

insurance products and from managing general agency fees on insurance contracts issued by the Insurance Companies. 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 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 such services were not identified as a separate performance obligation.

Additionally, 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. Managing general agency fees are related to the insurance contracts issued by the Insurance

Companies and are recognized on a pro-rata basis over the respective terms of the contracts.

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 was not 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, 2024 and 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, 2024 and 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 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 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. 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 are completed at the time these services are performed which is also when the amounts are billed and recognized as revenue

and all costs have been incurred.

As of December 31, 2024, 2023 and 2022, the Company had no contract assets, contract liabilities, or capitalized costs to obtain

or fulfill a contract, associated with revenues from contracts with customers.

12

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Reinsurance

In the normal course of business, the Company seeks to reduce its loss exposure by reinsuring certain risks with a reinsurer.

Reinsurance is accounted for in accordance with FASB ASC 944, “Financial Services - Insurance.” Ceded premium is expensed over

the period that coverage is provided. Prepaid reinsurance premiums are calculated on a daily pro-rata basis for the unexpired terms

of the related policies in force. Amounts recoverable for losses and loss adjustment expenses from the reinsurer are estimated in a

manner consistent with the reinsured policies. As these estimates change, any adjustment is recorded in the current period. The

Company evaluates the financial strength of its reinsurer and continually monitors their financial condition through periodic review of

their credit quality.

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.

A valuation allowance for 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 occur.

The Company accounts for income tax uncertainties under the provisions of FASB ASC 740, “Income Taxes.” At December 31,

2024, the Company recognized an additional liability for deferred state taxes for unrecognized tax benefits of $1.3 million. The

Company does not believe it is reasonably possible that unrecognized tax benefits will 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 2017. These tax years are open due to the creation and utilization of net operating loss carryforwards.

Property and Equipment and Identifiable Intangible Assets

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 expensed as incurred.

Identifiable intangible assets were initially recorded at their estimated fair values at their dates of acquisition. Identifiable

intangible assets with an indefinite life, (state insurance licenses) were 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.

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 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 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.

Deferred Acquisition Costs and Deferred Ceding Commissions

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. Deferred acquisition costs are presented

net of deferred ceding commissions from reinsurance. These net 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 part of deferred acquisition costs. Amortization expense

for the years ended December 31, 2024, 2023 and 2022 was $27.2 million, $24.4 million, and $14.4 million, respectively, and is

included within operating expenses in the accompanying consolidated statements of operations. At December 31, 2024, deferred

ceding commissions of $9.3 million are presented net of $7.1 million of deferred acquisition costs.

13

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 recognized 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

not reported. Management believes 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 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.

In November 2024, the FASB issued ASU 2024-03, Income Statement – Reporting Comprehensive Income – Expense

Disaggregation Disclosures (Topic 220). This standard requires disclosure of specific information about costs and expenses. ASU

2024-03 is effective for fiscal years beginning after December 15, 2026 and interim reporting periods beginning after December 15,

2027. The Company is currently evaluating the potential effect the updated standard will have on its consolidated financial statements.

Supplemental Cash Flow Information

During the years ended December 31, 2024 and 2023, the Company paid $17.5 million and $0.9 million in income taxes,

respectively. During the year ended December 31, 2022 the Company did not collect or pay any income taxes. During the years ended

December 31, 2024, 2023 and 2022, the Company paid $3.8 million, $3.7 million, and $2.0 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.

14

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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.

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 acquired state insurance licenses, the Company used the market

approach.

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, 2024 December 31, 2023

Carrying Fair Carrying Fair

Value Value Value Value

Cash, cash equivalents, and restricted cash equivalents $ 85,917 $ 85,917 $ 109,780 $ 109,780

Investments in fixed maturities, available-for-sale 298,064 298,064 192,885 192,885

Investment in equity securities 16,115 16,115 10,660 10,660

Other investments 7,722 7,722 5,639 5,639

Debentures payable 40,666 34,496 40,621 31,135

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 and fees 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.

15

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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, 2024 Total (Level 1) (Level 2) (Level 3) (NAV)

Fixed maturities, available-for-sale:

U.S. government and agencies $ 33,499 $ 33,499 $ — $ — $ —

Political subdivisions 2,949 — 2,949 — —

Revenue and assessment 20,004 — 20,004 — —

Corporate bonds 116,375 — 116,375 — —

Asset-backed securities 56,113 — 56,113 — —

Agency backed 66,972 — 66,972 — —

Non-agency backed – residential 1,220 — 1,220 — —

Non-agency backed – commercial 932 — 932 — —

Total fixed maturities, available-for-sale 298,064 33,499 264,565 — —

Mutual funds 16,115 16,115 — — —

Total equity securities 314,179 49,614 — — —

Other investments 7,722 — — 1,989 5,733

Total $ 321,901 $ 49,614 $ 264,565 $ 1,989 $ 5,733

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 — —

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 — —

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

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.

16

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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, 2024, and

December 31, 2023 (in thousands).

Gross Gross

Amortized Unrealized Unrealized Fair

December 31, 2024 Cost Gains Losses Value

Fixed maturities, available-for-sale:

U.S. government and agencies $ 33,550 $ 76 $ (127) $ 33,499

Political subdivisions 3,010 4 (65) 2,949

Revenue and assessment 20,165 33 (194) 20,004

Corporate bonds 116,670 516 (811) 116,375

Asset-backed securities 55,924 280 (91) 56,113

Agency backed 73,591 261 (6,880) 66,972

Non-agency backed – residential 704 516 — 1,220

Non-agency backed – commercial 933 — (1) 932

Total fixed maturities, available-for-sale $ 304,547 $ 1,686 $ (8,169) $ 298,064

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

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

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, 2024 Gains Losses Losses Securities

One year or less $ 8,805 $ 18,638 $ — $ 27,443

After one through five years 107,062 67,019 — 174,081

After five through ten years 12,693 12,183 — 24,876

After ten years 756 1,785 — 2,541

No single maturity date 13,462 55,661 — 69,123

$ 142,778 $ 155,286 $ — $ 298,064

17

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The fair value and gross unrealized losses of investments in fixed maturities for the years ended December 31, 2024, and 2023,

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

Gross Gross Total

Unrealized Unrealized Gross

December 31, 2024 Fair Value Losses Fair Value Losses Losses

Fixed maturities, available-for-sale:

U.S. government and agencies $ 14,852 $ (121) $ 1,010 $ (6) $ (127)

Political subdivisions 432 (10) 2,000 (55) (65)

Revenue and assessment 5,559 (76) 7,623 (118) (194)

Corporate bonds 30,213 (189) 26,458 (622) (811)

Asset-backed securities 10,648 (54) 3,039 (37) (91)

Agency backed 21,246 (400) 31,818 (6,480) (6,880)

Non-agency backed – commercial — — 919 (1) (1)

Total fixed maturities, available-for-sale $ 82,950 $ (850) $ 72,867 $ (7,319) $ (8,169)

Less than 12 months 12 months or longer

Gross Gross Total

Unrealized Unrealized Gross

December 31, 2023 Fair Value Losses Fair Value Losses 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)

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)

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

12 months months Gains

December 31, 2024 79 61 165

December 31, 2023 46 61 115

18

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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, 2024: Securities Value Losses

Less than or equal to 10% 49 $ 48,760 $ (1,454)

Greater than 10% 12 24,107 (5,865)

61 $ 72,867 $ (7,319)

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)

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, 2024: Losses Losses than 5% 10% than 10%

Three months $ 81,233 $ (755) $ (708) $ (47) $ —

Six months 1,717 (95) (35) (60) —

Greater than twelve months 72,867 (7,319) (867) (587) (5,865)

Total $ 155,817 $ (8,169) $ (1,610) $ (694) $ (5,865)

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%

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)

Other Investments

Other investments consist of the common stock of a REIT and limited partnership interests in four funds that invest in (i)

undervalued international publicly-traded equities (ii) a pre-identified pool of select buyout private equity funds and (iii) middle-

market infrastructure equity and equity-like investments and (iv) secondary fund investments in private equity. 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, 2024, the Company

had unfunded commitments of $6.2 million with four of these investments.

19

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Restrictions

As of December 31, 2024 and 2023, fixed maturities and cash equivalents with a fair value and amortized cost of $6.7 million

and $6.6 million, respectively, were on deposit with various insurance departments as a requirement of doing business in those states.

As of December 31, 2024, cash equivalents with a fair value and amortized cost of $7.6 million were on deposit with other insurance

companies as collateral for assumed reinsurance contracts.

Investment Income and Net Realized Gains and Losses

The major categories of investment income follow (in thousands).

Year Ended December 31,

2024 2023 2022

Fixed maturities, available-for-sale $ 10,511 $ 4,874 $ 3,646

Equity securities 595 557 396

Income (loss) from other investments 598 691 (171)

Cash and cash equivalents 4,077 2,768 549

Investment expenses (590) (537) (525)

Accretion income 3,159 301 —

$ 18,350 $ 8,654 $ 3,895

The components of net realized and unrealized gains (losses) on investments follow (in thousands).

Year Ended December 31,

2024 2023 2022

Unrealized gain (loss) on equity securities $ 466 $ 1,146 $ (1,677)

Realized gains 588 511 1,163

Realized losses (99) (11) (557)

$ 955 $ 1,646 $ (1,071)

Realized gains and losses on sales and redemptions are computed based on specific identification.

(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.

20

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Company recognized OTTI charges in net income (loss) of $93 thousand and $183 thousand relating to three non-agency

backed CMOs for the years ended December 31, 2024 and December 31, 2022, respectively. There were no OTTI charges in 2023.

The Company believes that the remaining securities having unrealized losses as of December 31, 2024, 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. Premiums and Reinsurance

Total premiums written and earned are summarized as follows (in thousands).

Year Ended December 31,

2024 2023 2022

Written Earned Written Earned Written Earned

Direct $ 527,625 $ 524,623 $ 447,987 $ 390,632 $ 268,581 $ 229,435

Assumed 15,063 14,520 9,087 6,539 1,048 1,094

Ceded (75,914) (47,361) — — — —

Total $ 466,774 $ 491,782 $ 457,074 $ 397,171 $ 269,629 $ 230,529

Effective July 1, 2024, the Company utilizes quota-share reinsurance with an unaffiliated reinsurer to reinsure a portion of the

business produced by its second largest independent agent which utilizes a technology-driven method of distribution. The reinsurance

covers 50% of both the business in force as of July 1, 2024 and new and renewal business after this date through June 30, 2025, up to a

combined total of $137.5 million of ceded premiums written. Although the reinsurance agreement contractually obligates the reinsurer to

reimburse the Company for their share of losses, it does not discharge the primary liability of the Company, which remains contingently

liable in the event the reinsurer is unable to meet their contractual obligations.

program with a county mutual insurance company and assumed by the Company through 100% quota-share reinsurance.

At December 31, 2024, the Company had unsecured aggregate reinsurance receivables of $28.6 million.

For the year ended December 31, 2024, ceded losses and loss adjustment expenses (“LAE”) incurred was $33.0 million.

5. Stock-Based Compensation Plans

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, 2024, there were 4,239,540 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

21

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

a straight-line basis over the vesting period. Expected future compensation related to the issuance of restricted stock units is $0.3

million, which will be amortized through March 2027.

Number of Weighted Average

Stock Units Value per Share

Granted 165 2.08

Vested (127) 1.18

Forfeited (40) 1.73

Granted 1,281 1.70

Vested (240) 0.74

Forfeited (113) 0.89

Granted 156 2.15

Vested (106) 1.99

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, 2024, 212,097 shares remain available for issuance. Employees purchased

approximately 74,000, 149,000, and 110,000 shares during the years ended December 31, 2024, 2023 and 2022, respectively.

Compensation expense attributable to subscriptions to purchase shares under the ESPP was $12 thousand, $25 thousand, and $18

thousand for the years ended December 31, 2024, 2023 and 2022, 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, match 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, 2024, 2023 and 2022 were

$1.1 million, $1.7 million, and $1.8 million, respectively, and are included within operating expenses in the accompanying

consolidated statements of operations.

7. Property and Equipment and Identifiable Intangible Assets

The components of property and equipment and identifiable intangible assets are as follows (in thousands).

Year Ended December 31,

2024 2023

Furniture, equipment and software $ 14,233 $ 15,049

Leasehold improvements 3,101 3,131

Identifiable intangible assets 1,560 1,560

17,334 18,180

Accumulated depreciation (15,444) (15,318)

Property and equipment and identifiable intangible assets, net $ 3,450 $ 4,422

22

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Depreciation and amortization expense was $1.3 million, $2.5 million, and $3.3 million for the years ended December 31, 2024,

2023 and 2022, respectively.

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 corporate offices and certain equipment. The leases have remaining lease

terms of four years to seven years. Operating lease costs for each of the years ended December 31, 2024, 2023 and 2022 were $1.2

million, $1.3 million and $8.2 million, respectively. Cash flows for each of the years ended December 31, 2024, 2023 and 2022 were

$1.2 million, $1.5 million, and $7.4 million, respectively.

Supplemental balance sheet information related to leases was as follows (in thousands):

Year Ended December 31,

2024 2023

Operating lease liabilities 4,734 5,401

Weighted average remaining lease term 5.86 years 6.65 years

Weighted average discount rate 6.50% 6.50%

Maturities of operating lease liabilities were as follows as of December 31, 2024 (in thousands):

For the Year Ended December 31, Amount

2025 $ 975

2026 985

2027 996

2028 780

2029 639

Thereafter 1,385

Total lease payments $ 5,760

Less imputed interest (1,026)

Total $ 4,734

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 less than 1% of the

23

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

ending liability for unpaid losses and loss adjustment expenses (“LAE”). Additionally, the amount of renters’ coverage sold as an

optional product is immaterial. Information regarding the reserve for unpaid losses and LAE is as follows (in thousands).

Year Ended December 31,

2024 2023 2022

Liability for unpaid losses and LAE at beginning of year, gross $ 165,346 $ 107,100 $ 93,278

Reinsurance balances receivable (2) (97) (90)

Liability for unpaid losses and LAE at beginning of year, net 165,344 107,003 93,188

Provision for losses and LAE:

Current year 348,482 274,747 176,444

Prior year 13,283 1,714 4,816

Net losses and LAE incurred 361,765 276,461 181,260

Losses and LAE paid:

Current year 180,023 141,424 101,118

Prior year 129,986 76,696 66,327

Net losses and LAE paid 310,009 218,120 167,445

Liability for unpaid losses and LAE at end of year, net 217,100 165,344 107,003

Reinsurance balances receivable 23,347 2 97

Liability for unpaid losses and LAE at end of year, gross $ 240,447 $ 165,346 $ 107,100

The unfavorable development of $13.3 million for the year ending December 31, 2024 was primarily attributable to higher-

than-expected property damage and bodily injury losses in the 2023 accident year.

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 information that follows about incurred and paid claims development for the 2015 to 2023 years, and the average annual

percentage payout of incurred claims by age as of December 31, 2024, 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 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

2015 $ 218,186 $ 240,428 $ 240,389 $ 239,181 $ 239,896 $ 240,179 $ 240,378 $ 240,478 $ 240,614 $ 240,608

2016 278,366 275,768 272,000 269,026 269,159 270,515 270,497 271,176 271,185

2017 233,066 212,134 206,784 206,659 207,193 207,213 207,053 207,113

2018 196,023 179,060 178,172 179,381 179,394 179,539 179,512

2019 170,434 166,600 165,052 164,781 164,251 164,106

2020 138,014 134,543 133,602 132,672 132,406

2021 156,437 162,147 160,487 159,920

2022 176,444 180,431 182,989

2023 274,382 285,979

2024 348,482

Total $ 2,172,300

24

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

2015 $ 129,216 $ 208,533 $ 227,388 $ 234,264 $ 237,665 $ 239,191 $ 239,951 $ 240,395 $ 240,569 $ 240,576

2016 163,792 238,657 258,190 264,474 267,019 268,912 270,045 271,025 271,094

2017 120,673 183,609 197,573 202,766 205,280 206,438 206,844 207,042

2018 105,877 157,360 169,662 174,891 177,592 178,860 179,299

2019 99,966 147,341 157,245 161,272 162,851 163,670

2020 81,479 118,400 126,511 129,669 131,168

2021 95,715 144,198 153,327 156,820

2022 101,118 161,069 175,477

2023 141,061 250,037

2024 180,023

Total $ 1,955,206

All outstanding reserves for unpaid losses and LAE prior to 2015, net of reinsurance 23,353

Total outstanding reserves for unpaid losses and LAE, net of reinsurance $ 240,447

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.

Total of incurred but not

reported liabilities plus

Accident Incurred losses and LAE, net expected development on Cumulative number of

year of reinsurance reported claims reported claims

2015 $ 240,608 $ 1 110,070

2016 271,185 4 118,637

2017 207,113 14 89,824

2018 179,512 55 78,429

2019 164,106 227 68,886

2020 132,406 653 54,567

2021 159,920 1,707 61,288

2022 182,989 5,006 62,736

2023 285,979 27,441 99,930

2024 348,482 119,237 117,049

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 57.6% 29.9% 6.6% 2.6% 1.2% 0.6% 0.3% 0.3% 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

25

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 for the year ended December 31, 2024, ranged from 8.601% to 9.402%. In January 2025, the interest rate reset to 8.299%

through April 2025.

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, 2024, 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, 2024, 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,

2024 2023 2022

Current $ 13,505 $ 5,627 $ —

Deferred (6,692) 15,855 (4,673)

6,813 21,482 (4,673)

Current 1,218 1,280 (26)

Deferred (904) 2,359 154

314 3,639 128

$ 7,127 $ 25,121 $ (4,545)

26

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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, 2024, 2023 and 2022 to income (loss) before income taxes as a result of the following (in

thousands).

Year Ended December 31,

2024 2023 2022

Provision (benefit) for income taxes at statutory rate $ 7,018 $ 20,798 $ (4,627)

Change in the valuation allowance for deferred tax assets

allocated to federal income taxes 19 — 31

State income taxes, net of federal income tax benefit

and state valuation allowance 58 3,369 133

Section 453A interest on installment sale of insurance

agency — 996 —

Other items 80 15 (34)

$ 7,127 $ 25,121 $ (4,545)

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,

2024 2023

State net operating loss carryforwards $ 1,804 $ 1,732

Unearned premiums and loss and loss adjustment expense reserves 7,599 8,174

Accrued expenses and other nondeductible items 1,074 1,277

Net unrealized change on investments in fixed maturities 1,362 1,608

Operating lease liabilities 994 1,134

Other 329 1,035

13,444 15,070

Deferred acquisition costs (1,492) (1,985)

Identifiable intangible assets (375) (375)

Loss reserve discounting transition adjustment (85) (170)

Net unrealized change on investments in equity securities (420) (322)

Deferred gain on installment sale of insurance agency (3,677) (9,788)

Other (1,600) (3,813)

(8,569) (17,507)

Total net deferred tax asset (liability 4,875 (2,437)

Valuation allowance (2,108) (2,121)

Net deferred tax asset (liability) $ 2,767 $ (4,558)

ASC Topic 740, Income Taxes, establishes procedures to measure deferred tax assets and liabilities and assesses 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 concerning these assets based on the weight of available

positive and negative evidence. Management determined that a valuation allowance of $2.1 million, for both December 31, 2024 and

2023, 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, 2024 and December 31, 2023 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.

27

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 will record an income tax expense for the adjustment.

The calculation of the Company’s tax liability as of December 31, 2024 includes uncertainty in the application of tax laws and

regulations in certain state jurisdictions across the Company’s operations. ASC 740 states that a tax benefit from an uncertain tax

position may be recognized when it is more likely than not that the position will be sustained. We (1) record unrecognized tax benefits

as a liability in accordance with ASC 740 and (2) adjust this liability when our judgment changes as a result of the evaluation of new

information not previously available. Because of the complexity of this uncertainty, the ultimate resolution may result in a payment

that is different from the Company’s current estimate of the unrecognized tax benefit liabilities. This difference will be reflected as an

increase or decrease to income tax expense in the period in which the new information becomes available. We believe that it is

reasonably possible that an increase of up to $1.3 million in unrecognized tax benefits related to non-recurring state tax exposures may

occur in the future.

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,

2024 2023 2022

Net income (loss) $ 26,291 $ 73,912 $ (17,488)

Weighted average common basic shares 38,128 38,086 37,795

Effect of dilutive securities 967 323 —

Weighted average common dilutive shares 39,095 38,409 37,795

Basic net income (loss) per share $ 0.69 $ 1.94 $ (0.46)

Diluted net income (loss) per share $ 0.67 $ 1.92 $ (0.46)

For the year ended December 31, 2024 and 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, 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, 2024, the Company had certain concentrations of credit risk with several financial institutions in the form

of cash, cash equivalents, and restricted cash equivalents, which amounted to $85.9 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 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 independent

agencies may 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 and contingent commission adjustments are unsecured.

At December 31, 2024 and 2023, the Company had total gross consideration receivable of $30.0 million and $65.0 million from

the sale of the Insurance Agency, respectively (Note 17).

28

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

At December 31, 2024, the Company had unsecured aggregate reinsurance receivables from a single carrier, with an AM Best

Rating of A++, of $28.6 million. The Company evaluates the financial strength of its reinsurer and continually monitors their financial

condition through periodic review of their credit quality.

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

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, 2024, and 2023, on a consolidated statutory basis, the capital and surplus of the Insurance Companies was

$166.3 million and $121.0 million, respectively. For the years ended December 31, 2024, 2023 and 2022, consolidated statutory net

income (loss) of the Insurance Companies was $25.6 million, $14.9 million, and $(19.5) 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 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 2025 is

$16.6 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, 2024. 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, 2024, each insurance company subsidiary was within this guideline.

29

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

16. Related Parties

The Company operates under standard agreements for Treasury and Custodial Services with a bank indirectly owned 25% by

Gerald J. Ford, the Company’s controlling stockholder. The fees under these agreements for the years ended December 31, 2024, 2023

and 2022 were $132 thousand, $141 thousand, and $131 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 was released monthly from March 2024

through December 2024. The Company received additional contingent consideration of $15 million in December 2024, and is eligible

to receive additional contingent consideration of $10 million and $20 million on December 1, 2025 and 2026, respectively, based upon

achievement of certain annual premium production targets. At December 31, 2024 the Company remained confident in meeting these

targets.

At December 31, 2024 and 2023, future consideration receivable from this sale of $26.7 million and $59.8 million, respectively,

is recorded at fair value, utilizing a discounted cash flow approach.

The purchase agreement provides that the Company will 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, 2024 and March 4, 2025,

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 we

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 sell non-standard personal automobile insurance written solely through independent

agents, including the buyer.

30

Crowe LLP

Independent Member Crowe Global

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, 2024 and 2023, and the related

consolidated statements of operations, changes in stockholder’s equity, and cash flows for the three-year

period ended December 31, 2024 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, 2024 and 2023, and the results of its operations

and its cash flows for the three-year period ended December 31, 2024 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 financial statements are available to be

issued.

(Continued)

1.

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 2024 and average annual percentage payout of incurred claims

information, included in 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.

(Continued)

2.

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 3, 2025

3.

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.”

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 developments or

events;

 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, (“First Acceptance business”) and through third-party carriers

for which we received a commission (“3PC business”).

First 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 Agency of Tennessee, Inc. (“the Insurance Agency”) 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 and over the internet through our consumer-based website and mobile platform.

Effective with the sale of Acceptance Insurance on December 1, 2023, 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 continues 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, no longer receives

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, 2024, two single independent agents produced 46% and 35% of premiums earned,

respectively, and as of December 31, 2024, comprised 52% and 28% of policies in-force, respectively. At December 31, 2024, we also

had approximately 553 other active independent agent locations that represent the balance of the Company’s business.

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 was being released monthly from March

2024 through December 2024. The Company received additional contingent consideration of $15 million in December 2024, and is

eligible to receive additional considerations of $10 million and $20 million on December 1, 2025, and 2026, respectively, based upon

achievement of certain annual premium production targets.

As of December 31, 2024 and 2023, future consideration receivable from this sale of $26.7 million and $59.8 million,

respectively, is 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 First Acceptance Insurance Group 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, 2024 and March 4,

2025, the Company is not in breach of contract.

Reinsurance

The Company has entered into a quota-share reinsurance agreement to reinsure a portion of the business produced by its second

largest independent agent which utilizes a technology-driven method of distribution. The reinsurance covers 50% of the business in

force as of July 1, 2024 and the new and renewal business written after this date through June 30, 2025, produced by this independent

agent, up to a combined total of $137.5 million of ceded premiums written. Our consolidated financial statements reflect the ceding

(i.e. reduction) of premiums and losses ceded under this agreement, as well as ceding commission income to compensate the Company

for servicing this business. The ceding commission income is adjustable based upon the loss ratio of the reinsured business. The

Company believes that this agreement provides the benefit of allowing this independent agent to expand its business beyond the

Company’s current underwriting capacity, while the Company believes it benefits financially from servicing the increased business

ceded under this agreement. The Company also believes that this agreement is prudent in managing the planned growth from a risk

management perspective.

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 and managing general agency 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 business is located.

Year Ended December 31,

2024 2023 2022

Georgia $ 156,169 $ 112,098 $ 57,671

Florida 139,889 96,657 41,699

South Carolina 42,324 23,013 9,035

Alabama 31,769 34,815 34,635

Arizona 28,217 17,598 6,482

Texas 25,011 13,531 8,410

Tennessee 24,428 24,153 19,815

California 22,898 24,758 11,891

Pennsylvania 22,690 15,782 9,135

Ohio 18,084 14,708 12,045

Illinois 10,471 5,094 6,052

Indiana 8,988 8,392 7,606

Mississippi 6,423 6,156 5,631

Virginia 1,687 314 328

Missouri 95 102 94

$ 539,143 $ 397,171 $ 230,529

Premiums ceded (47,361) — —

$ 491,782 $ 397,171 $ 230,529

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, managing general agency fees, and ceding commission income from ceded reinsurance. 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,

2024 2023 2022

Loss 73.6% 69.6% 78.7%

Expense 22.1% 27.6% 30.6%

Combined 95.7% 97.2% 109.3%

Investments

We have a Chief Investment Officer to oversee the management of our investment portfolio. The 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 a consulting investment

manager and the 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 $298.1 million as of December 31, 2024 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, 2024, we had gross unrealized gains of $1.7 million and gross unrealized losses of $8.2

million in our consolidated investments in fixed maturities, available-for-sale portfolio.

The value of our investment in equity securities portfolio was $16.1 million as of December 31, 2024 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, 2024, we had gross unrealized gains of $2.9 million and gross unrealized losses of $0.9 million in our investments in

equity securities portfolio.

The value of our other investments was $7.7 million as of December 31, 2024 and consisted of four limited partnership interests

carried at net asset value, with unrealized gains and losses reported as investment income.

As of December 31, 2024, 99.7% 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, 2024, Compared with the Year Ended December 31, 2023

Consolidated Results

Revenues for the year ended December 31, 2024 decreased to $559.4 million from $560.6 million in the prior year. Revenues

for the year ended December 31, 2024 were reduced by ceded premiums earned of $47.4 million from the new reinsurance contact

that was effective July 1, 2024 and also did not include commission and fee income from the Insurance Agency that was sold effective

December 1, 2023.

Income before income taxes for the year ended December 31, 2024, was $33.4 million, compared with $99.0 million for the

year ended December 31, 2023. Excluding the gain on sale of the insurance agency of $73.0 million, income before income taxes for

the year ended December 31, 2023 was $26.0 million compared with $33.4 million for the year ended December 31, 2024.

Net income for the year ended December 31, 2024, was $26.3 million, compared with $73.9 million for the year ended

December 31, 2023. Basic and diluted net income per share were $0.69 and $0.67 for the year ended December 31, 2024, respectively,

compared with $1.94 and $1.92 for the year ended December 31, 2023.

For the year ended December 31, 2024, we recognized unfavorable prior period loss and LAE development of $13.3 million

compared with $1.7 million for the year ended December 31, 2023. However, as a result of this development, we recognized a

reduction in commission expense of $11.8 million from a contingent commission adjustment to an independent agent.

Premiums Earned

After reinsurance, net premiums earned increased by $94.6 million, or 24%, to $491.8 million for the year ended December 31,

2024, from $397.2 million for the year ended December 31, 2023.

Before reinsurance, direct and assumed premiums earned increased by $141.9 or 35.7%, to $539.1 million from $397.2 million

for the year ended December 31,2023.

This increase in direct and assumed premiums earned was driven significantly by the impact of recent premium rate increases

and by an increase in policies in-force compared to the prior year. This increase in policies in-force was primarily driven by the

growth of an independent agent that utilizes a technology-driven method of distribution.

Commission and Fee Income

Commission and fee income decreased by $40.8 million to $14.3 million for the year ended December 31, 2024, from $55.1

million for the year ended December 31, 2023. As a result of the December 1, 2023 sale of the Insurance Agency, the Company no

longer receives commission and fee income from the sale of third-party insurance and ancillary products. The company does,

however, continue to receive managing general agency fees on premiums written by the insurance company subsidiaries in certain

states.

Billing Fees and Service Charges

Billing fees and service charges increased by $9.1 million, or 36%, to $34.1 million for the year ended December 31, 2024, from

$25.0 million for the year ended December 31, 2023. This increase is primarily the result of the increase in policies in-force compared

to the prior year.

Investment Income

Investment income increased to $18.4 million during the year ended December 31, 2024, from $8.7 million during the year

ended December 31, 2023. This increase was 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 prior year and from the December 1, 2023 sale of the Insurance Agency. Investment income for the years ended

December 31, 2024 and 2023 included $3.1 million and $0.3 million, respectively, in accretion of the discounted present value of the

consideration receivable from the sale of the Insurance Agency.

As of December 31, 2024, and 2023, the book yields for our fixed maturities and cash equivalents portfolio were 4.1% and

3.9%, respectively, with effective durations of 2.84 and 2.26 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.

38

Losses and Loss Adjustment Expenses

The loss ratio was 73.6% for the year ended December 31, 2024, compared with 69.6% for the year ended December 31,

2023. We experienced unfavorable development related to prior fiscal years of $13.3 million for the year ended December 31, 2024,

compared with $1.7 million for the year ended December 31, 2023. The unfavorable loss development for the year ended December

31, 2024 was primarily attributable to higher-than-expected property damage and bodily injury losses in the 2023 accident year. 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.

These development amounts represent 8.0% and 1.6%, respectively, of the total loss and loss adjustment expense reserves as of

the beginning of each year. As a result of this development, however, in 2024, we recognized a reduction in commission expense of

$11.8 million from a contingent commission adjustment to an independent agent.

Excluding the development related to prior fiscal years, the loss ratios for the years ended December 31, 2024 and 2023 were

70.9% and 69.2%, respectively. The higher loss ratio for the current year was primarily attributable to increased severity on bodily

injury losses.

Insurance Operating Expenses

Insurance operating expenses decreased year-over-year by $20.5 million, or 11.5%. Insurance operating expenses for the year

ended December 31, 2024 are net of ceding commission income of $11.5 million from the new reinsurance contract that was effective

July 1, 2024.

Following the December 1, 2023 sale of the Insurance Agency, independent agent commissions, a variable cost, are now the

largest component of insurance operating expenses and were $98.4 million for the year ended December 31, 2024. Commissions

payable to the Company’s independent agent that utilizes a technology-driven method of distribution are contingent and have been

accrued based upon the expected ultimate loss ratio of the business produced by this agent.

The insurance companies’ expense ratio was 22.1% for the year ended December 31, 2024, compared with 26.9% for the year

ended December 31, 2023.

Provision for Income Taxes

The provision for income taxes was $7.1 million for the year ended December 31, 2024, compared with $25.1 million for the

year ended December 31, 2023. The effective tax rate decreased to 21.3% for the year ended December 31, 2024, from 25.4% in the

prior year, primarily as a result of a reduction in state taxes following the gain of the sale on the Insurance Agency in the prior year

which was subject to state taxes.

In assessing our ability to realize deferred tax assets ("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. 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.

Interest Expense

Interest expense was $3.9 million for the year ended December 31, 2024, compared with $3.8 million for year ended

December 31, 2023. Interest expense increased primarily as a result of the year-over-year increase in the applicable variable interest

rate. Interest expense may increase or decrease in the future should interest rates rise or fall. For additional information, see “Liquidity

and Capital Resources” in this report.

39

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.

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.

40

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.

Liquidity and Capital Resources

Our primary sources of funds are premiums, billing fees and service charges, managing general agency fees, 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, 2024, was $52.1 million, compared with $84.3 million for the year

ended December 31, 2023. This decrease was primary the result of the new reinsurance contract commencing July 1, 2024.

Net cash used in investing activities for the year ended December 31, 2024, was $75.5 million, compared with $23.7 million for

the year ended December 31, 2023. This change was primarily the result of an increase in the purchase of securities in the current year

since the Company has taken advantage of the increase in interest rates by investing previously uninvested cash and recently generated

cash.

41

Our holding company requires cash for general corporate overhead expenses and 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 are

managing general agency fees, 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, 2024, 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 received $20 million that was withheld and released monthly from

March 2024 through December 2024. The Company also received additional contingent consideration of $15 million in December

2024. The Company is also eligible to receive additional maximum contingent consideration of $10 million, and $20 million, on

December 1, 2025 and 2026, respectively, based upon achievement of certain annual production targets. 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 September 30, 2025, ranged from 8.601% to 9.402%. In January 2025, the interest rate reset to 8.299%

through April 2025.

State insurance laws limit the amount of dividends that may be paid from our insurance company subsidiaries. As of

December 31, 2024, the ordinary dividend limitation for 2025 would be $16.6 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, 2024, 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, 2024, each insurance company subsidiary was within this guideline.

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 2024, the interest rate related to the debentures

ranged from 8.601% 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.

The Company has no off-balance sheet arrangements.

42

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 judgment, 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.

Regarding our most recent estimate, for the year ended December 31, 2024, we experienced unfavorable development on

reserves of $13.3 million, which increased our loss and loss adjustment expense for prior accident periods. This unfavorable

development was primarily attributable to higher-than-expected property damage and bodily injury losses in the 2023 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

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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 $ 307,168 $ 302,615 $ 298,064 $ 293,514 $ 288,966 $ 279,874

The following table provides information about our fixed maturity investments as of December 31, 2024, 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.

Securities Securities

with with All Fixed

Unrealized Unrealized Maturity

Year Ending December 31, Gains Losses Securities

2025 $ 18,559 $ 20,760 $ 39,319

2026 33,051 31,598 64,649

2027 26,008 6,819 32,827

2028 17,746 17,190 34,936

2029 29,161 22,040 51,201

Thereafter 15,318 65,580 80,898

Total $ 139,843 $ 163,987 $ 303,830

Fair value $ 142,778 $ 155,286 $ 298,064

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 8.601%

to 9.402% during 2024. Interest rates on these debentures therefore will reset quarterly based on changes in the Three-Month CME

term SOFR rate. In January 2025, the interest rate reset to 8.299% through April 2025. 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 $5.8 million, while our five largest investments totaled

$30.4 million.

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The following table presents the underlying ratings of our fixed maturities portfolio by nationally recognized statistical rating

organizations as of December 31, 2024 (in thousands).

% of % of

Amortized Amortized Fair Fair

Comparable Rating Cost Cost Value Value

AAA $ 173,123 56.9% $ 166,428 55.9%

AA+, AA, AA- 33,516 11.0% 33,302 11.2%

A+, A, A- 58,135 19.1% 58,166 19.5%

BBB+, BBB, BBB- 39,056 12.8% 38,935 13.1%

Total investment grade 303,830 99.8% 296,831 99.7%

Not rated 206 0.1% 398 0.1%

BB+, BB, BB- — 0.0% — 0.0%

B+, B, B- 116 0.1% 422 0.1%

CCC+, CCC, CCC- 62 0.0% 62 0.0%

CC+, CC, CC- — 0.0% — 0.0%

C+, C, C- 221 0.1% 221 0.1%

D 112 0.0% 130 0.1%

Total non-investment grade 511 0.2% 835 0.3%

Total $ 304,547 100.0% $ 298,064 100.0%

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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 they 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 several 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.

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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, 2024, 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.

profitability.

Our results of operations depend, in part, on the performance of our investment portfolio. As of December 31, 2024, 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, 2024, the amortized cost of our fixed maturities,

available for sale investment portfolio exceeded its fair value by approximately $6.5 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 the 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 65% 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

disclosed to the state regulators, and prior approval of the applicable regulator generally is required before any material or

49

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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