FMR First Mercury Financial Corp

SOUTHFIELD, Mich., Aug. 2 /PRNewswire-FirstCall/ -- First Mercury Financial Corporation (NYSE: FMR) ("First Mercury" or the "Company") today announced results for the second quarter ended June 30, 2010.

Highlights for the second quarter 2010 include:

• Book value per share of $16.75
• Net income of $4.1 million, or $0.23 per diluted share
• Operating net income of $6.2 million, or $0.35 per diluted share
• Net investment income increase of 18.0 percent
• A.M. Best revised outlook for the Company's insurance subsidiaries to positive from stable
• Announced definitive agreement to acquire Valiant Insurance Group, Inc. ("Valiant") for tangible book value as previously disclosed
• Fifth consecutive quarterly dividend of $0.025 per share

"We maintained underwriting discipline in the face of competitive market conditions while modestly increasing our gross written premiums during the quarter," said Richard H. Smith, Chairman, President and Chief Executive Officer.  "We continued to execute our diversification strategy through the acquisition of Valiant which provides us with an attractive opportunity to gain admitted licensing, expand our underwriting resources in select specialty classes of business and increase our New York presence.  We intend to retain Valiant business that is consistent with our specialty niche focus and cost structure," Smith concluded.

Written and Earned Premium

For the three months ended June 30, 2010, gross written premiums were $84.1 million, a 2.0 percent increase from the gross written premiums during the same period in 2009.  For the six months ended June 30, 2010, gross written premiums were $167.9 million, a 4.7 percent increase from the gross written premiums during the same period in 2009.

Net earned premiums during the three months ended June 30, 2010 were $51.5 million, a 0.1 percent increase from the same period of 2009.  Net earned premiums during the six months ended June 30, 2010 were $103.2 million, a 0.8 percent decrease from the same period of 2009.

There were no gross written or net earned premiums from assumed retroactive reinsurance transactions during the three months ended June 30, 2010.  There were $3.3 million of gross written and net earned premiums from assumed retroactive reinsurance transactions during the six months ended June 30, 2010.

Commissions and Fees

Commissions and fees during the three months ended June 30, 2010 were $7.9 million, a 18.0 percent decrease from the same period of 2009.  Commissions and fees during the six months ended June 30, 2010 were $15.7 million, a 4.9 percent decrease from the same period of 2009.  The decrease for the three and six months ended June 30, 2010 compared to the same periods of 2009 is primarily due to a contingent commission adjustment of $1.3 million recorded during the three and six months ended June 30, 2009 related to our insurance services business.

Investments

Cash and investments were $771.5 million at June 30, 2010.  The Company recorded $6.3 million of pretax net unrealized gains on its available for sale investment portfolio during the three months ended June 30, 2010.  For the six months ended June 30, 2010, pretax net unrealized gains on its available for sale investment portfolio were $12.1 million.  The investment portfolio's taxable equivalent net total returns for the three and six months ended June 30, 2010 were 1.9 and 4.4 percent, respectively.  The annualized taxable equivalent yield on total investments (net of investment expenses) was 5.3 percent at both June 30, 2010 and 2009.

Losses and Loss Adjustment Expenses

During the three and six months ended June 30, 2010, there was no development of prior years' loss and loss adjustment expense reserves.  For the three and six months ended June 30, 2009, there were $3.6 million and $4.4 million, respectively, of favorable development of prior years' loss and loss adjustment expense reserves.

Underwriting, Agency and Other Expenses

During the three and six months ended June 30, 2010, the Company recorded $1.1 million of acquisition-related transaction costs in underwriting, agency and other expenses.  These expenses were excluded from the calculation of the Company's GAAP underwriting expense ratio for the three and six months ended June 30, 2010.

Capital Management

As of today, the Company has not repurchased any shares under its Share Repurchase Program, which expires August 20, 2010.  The Company paid a cash dividend of $0.025 per share on June 30, 2010.  This represents the Company's fifth consecutive quarterly dividend of $0.025 per share.  As previously disclosed, the Company paid a $2.00 per share special cash dividend on March 31, 2010.  This special dividend when combined with our share repurchases in 2008 and 2009 and our regular dividends resulted in $56.5 million of capital returned to shareholders since August of 2008.

Valiant Acquisition

As previously disclosed, on July 1, 2010, the Company announced that it entered into a definitive agreement whereby its principal insurance subsidiary, First Mercury Insurance Company, will acquire Valiant, a subsidiary of Ariel Holdings, Ltd. ("Ariel"), for an amount equal to Valiant's tangible book value, which is anticipated to be approximately $55 million at closing.  Under the terms of the agreement, Ariel has agreed to provide First Mercury with full protection related to Valiant's net loss and loss adjustment expense reserves and unearned premium reserves reflected on the closing date balance sheet.  The transaction is subject to customary closing conditions and regulatory approvals and is anticipated to close in the fourth quarter of 2010.

The components of Valiant's existing underwriting platform to be retained by First Mercury include primary and excess casualty, professional and management liability and marine classes of business.  In the twelve months following the closing of the transaction, First Mercury anticipates that Valiant will write approximately $50 to $60 million of gross written premiums and expects Valiant to operate at a net GAAP underwriting expense ratio that is consistent with the Company's overall net GAAP underwriting expense ratio.  Consistent with past practice, First Mercury will prudently use reinsurance on these newer lines of business.  If the transaction closes in the fourth quarter of 2010, the Company anticipates recognizing a gain from the transaction with a corresponding increase in book value per share of between $0.56 and $0.73, based on the shares outstanding as of June 30, 2010, related to the value of Valiant's insurance company licenses and tax net operating loss carry-forwards.  First Mercury does not expect the transaction to have a material effect on 2010 earnings and expects the transaction to be modestly accretive to earnings in 2011.

Other

The Company recorded a pretax restructuring charge during the first quarter of 2010 of $5.0 million, or 4.9 percentage points of the expense ratio for the six months ended June 30, 2010.  There was no restructuring charge recorded during the three months ended June 30, 2010.

Conference Call Details

The Company will host a conference call on August 3, 2010 at 11:00 a.m. Eastern Time to discuss second quarter results.  The call can be accessed live by dialing 877-407-0789 or by visiting the Company's website at www.firstmercury.com.

Investors may access a replay by dialing 877-870-5176, entering conference ID# 353967, which will be available through August 10, 2010.  The webcast replay will also be archived in the "Investor Relations" section of the Company's website.

About First Mercury Financial Corporation

First Mercury Financial Corporation provides insurance products and services primarily to the specialty commercial insurance markets, focusing on niche and underserved segments where we believe that we have underwriting expertise and other competitive advantages.  During the Company's 37 years of underwriting risks, First Mercury has developed the underwriting expertise and cost-efficient infrastructure which has enabled us to effectively underwrite such risks.  Our risk-taking subsidiaries offer insurance products through our distribution subsidiaries: CoverX®, FM Emerald and AMC, which are recognized brands among insurance producers.

Non-GAAP Financial Measures

Operating net income and operating net income per share are non-GAAP financial measures, and management believes that investors' understanding of core operating performance is enhanced by First Mercury's disclosure of these financial measures.  Operating net income consists of net income adjusted to exclude the impact of net realized gains (losses) on investments, other-than-temporary impairment losses on investments, the change in fair value of derivative instruments, restructuring charges, acquisition-related transaction costs, and taxes related to these adjustments.  Definitions of these items may not be comparable to the definitions used by other companies.  Net income and net income per share are the GAAP financial measures that are most directly comparable to operating net income and operating net income per share.

Safe Harbor Statement

This release contains forward-looking statements that relate to future periods and includes statements regarding our anticipated performance.  Generally, the words "anticipates," "believes," "expects," "intends," "estimates," "projects," "plans" and similar expressions identify forward-looking statements. 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 any future results, performance or achievements expressed or implied by these forward-looking statements. These risks, uncertainties and other important factors include, among others: recent and future events and circumstances impacting financial, stock, and capital markets, and the responses to such events by governments and the financial communities; the impact of catastrophic events and the occurrence of significant severe weather conditions on our operating results; our ability to maintain or the lowering or loss of one of our financial or claims-paying ratings; our actual incurred losses exceeding our loss and loss adjustment expense reserves; the failure of reinsurers to meet their obligations; our estimates for accrued profit sharing commissions are based on loss ratio performance and could be adversely impacted if the underlying loss ratios deteriorate; our inability to obtain reinsurance coverage at reasonable prices; the failure of any loss limitations or exclusions or changes in claims or coverage; our ability to successfully integrate acquisitions that we make; our ability to realize anticipated benefits from acquisitions; our lack of long-term operating history in certain specialty classes of insurance; our ability to acquire and retain additional underwriting expertise and capacity; the concentration of our insurance business in relatively few specialty classes; the increasingly competitive property and casualty marketplace; fluctuations and uncertainty within the excess and surplus lines insurance industry; the extensive regulations to which our business is subject and our failure to comply with these regulations; our ability to maintain our risk-based capital at levels required by regulatory authorities; our inability to realize our investment objectives; an economic downturn or other economic conditions adversely affecting our financial position; and the risks identified in our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K.  Given these uncertainties, you are cautioned not to place undue reliance on these forward-looking statements.  We assume no obligation to update or revise them or provide reasons why actual results may differ.

The Company uses the Investor Relations page of its website at www.firstmercury.com to make information available to its investors and the public.

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SOURCE First Mercury Financial Corporation