Nashville auto insurer files plan for IPO

Direct General planning to raise $170M

Direct General Corp., the Murfreesboro Road-based substandard auto insurance company known for its frequent television advertisements, is planning to raise $170 million in an initial public offering.

The company netted $31.0 million in 2002 on revenue of $213.1 million. In the first quarter of 2003, Direct General earned $9.8 million on revenue of $69.0 million.

The company's core product is what it calls nonstandard personal automobile insurance. These are sold "to drivers who cannot obtain insurance from standard carriers due to a variety of factors, including the lack of flexible payment plans, the failure to maintain continuous coverage, age, prior accidents, driving violations, occupation and type of vehicle. In general, customers in the non-standard market have higher average premiums for a comparable amount of coverage than customers who qualify for the standard market."

Of the $69 million of first quarter revenue, $47.7 million derived from insurance premiums. The money it generates financing purchases of its policies generated $11.2 million, while commissions and fees added $8.4 million and net investment income and gains added $1.7 million. Gross revenue in the first quarter was $140.6 million. It's the 17the largest non-standard auto insurer in the nation.

Direct General was incorporated in 1991 and has acquired 10 agencies since. In January 2003, it initiated expansion into the Texas market.

The company is controlled by the Adair family. William Adair, 61, is chairman, CEO and president. He was paid $694,000 in salary and bonus last year and will have a base salary of $500,000 plus bonus going forward.

Wife Jackie Adair, 44, is executive vice president and chief operating officer. She was paid $344,000 last year and will have a base salary of $200,000 plus bonus.

Tammy Adair, 39, daughter of William and step-daughter of Jackie, is executive vice president. She will receive a $200,000 base salary plus bonus.

Barry Elkins, 42, is chief financial officer.

William Adair is listed as beneficial owner of 5.54% of the company, as is Jackie Adair. Tammy Adair has 56.85% and Elkins owns 2.63%.

Noro-Mosely Partners II, an Atlanta-based venture capital fund, is beneficial owner of 10.6% and SSM Ventures owns 10.8%. Udayan Ghose of Aries Partners is listed with a 20.3% stake.

There are 320 sales offices that distribute Direct General products, while the company itself has 272 offices.

It has an option to acquire a 42-office in Florida that it intends to execute in November. That agency generated $85.1 million in premiums in 2002.

Proceeds from the offering will be used mostly to provide capital to its insurance subsidiaries. Debts of $9 million will be repaid. The additional capital will allow the company to be at risk for a greater amount of coverage, reducing its reliance and fees paid for quota share reinsurance. The company is not at underwriting risk for ancillary types of insurance it sells.

Tennessee accounts for 17% of Direct General's gross commissions, while Florida accounts for 51%.

The company has been rated "B-" (Fair) by A.M. Best Co. It has $135.3 million of debt.

Undewriters for the proposed transaction are Keefe, Bruyette & Woods, Morgan Keegan, US Bancorp Piper Jaffray and SunTrust Robinson Humphrey. The company's law firm is Baker Donelson.