SOUTHFIELD, Mich., Oct. 28 /PRNewswire-FirstCall/ -- First
Mercury Financial Corporation (NYSE: FMR) ("First Mercury" or
the "Company") today announced results for the third quarter ended
September 30, 2010.
Highlights for the third quarter 2010 include:
- Book value per share of $16.99
- Net loss of $2.0 million, or
$(0.11) per diluted share
- Operating net loss of $6.9
million, or $(0.39) per
diluted share
- Net investment income increase of 10.7 percent
Written and Earned Premium
For the three months ended September 30,
2010, gross written premiums were $83.8 million, a 2.5 percent increase from the
gross written premiums during the same period in 2009. For
the nine months ended September 30,
2010, gross written premiums were $251.7 million, a 3.9 percent increase from the
gross written premiums during the same period in 2009.
Net earned premiums during the three months ended September 30, 2010 were $49.2 million, a 4.4 percent decrease from the
same period of 2009. Net earned premiums during the nine
months ended September 30, 2010 were
$152.4 million, a 2.0 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
September 30, 2010. There were
$3.3 million of gross written and net
earned premiums from assumed retroactive reinsurance transactions
during the nine months ended September 30,
2010.
Commissions and Fees
Commissions and fees during the three months ended September 30, 2010 were $0.1 million, a 99.5 percent decrease from the
same period of 2009. Commissions and fees during the nine
months ended September 30, 2010 were
$15.7 million, a 34.4 percent
decrease from the same period of 2009. During the three and
nine months ended September 30, 2010,
the Company recorded a net reduction in accrued profit sharing
commissions of $5.9 million, of which
$6.9 million was a decrease to
commissions and fees revenue with an offsetting $1.0 million decrease in underwriting, agency and
other expenses, due to the unfavorable development in prior years'
net loss and loss adjustment expense reserves recorded during the
three months ended September 30, 2010
discussed below.
Investments
Cash and investments were $785.4
million at September 30, 2010.
The Company recorded $12.7
million of pretax net unrealized gains on its available for
sale investment portfolio during the three months ended
September 30, 2010. For the
nine months ended September 30, 2010,
pretax net unrealized gains on its available for sale investment
portfolio were $24.8 million.
The investment portfolio's taxable equivalent net total
returns for the three and nine months ended September 30, 2010 were 3.5 and 8.0 percent,
respectively. The annualized taxable equivalent yields on
total investments (net of investment expenses) were 5.1 percent and
5.5 percent at September 30, 2010 and
2009, respectively.
Losses and Loss Adjustment Expenses
During the three and nine months ended September 30, 2010, there was $11.4 million of unfavorable development of prior
years' net loss and loss adjustment expense reserves due to adverse
claims development principally in the Company's primary general
liability and professional liability lines of business. For
the three and nine months ended September
30, 2009, there were $1.3
million and $5.7 million,
respectively, of favorable development of prior years' net loss and
loss adjustment expense reserves.
Underwriting, Agency and Other Expenses
During the three months ended September
30, 2010, the Company's GAAP underwriting expense ratio was
50.8 percent compared to 33.6 percent for the same period of 2009.
During the nine months ended September
30, 2010, the Company's GAAP underwriting expense ratio was
43.0 percent compared to 31.6 percent for the same period of 2009.
For the three and nine months ended September 30, 2010, the impact on the GAAP
underwriting expense ratio related to the reductions in accrued
profit sharing commissions recorded during the third quarter of
2010 noted above were 11.9 and 3.9 percentage points, respectively.
In addition, the GAAP underwriting expense ratio for the nine
months ended September 30, 2010
includes 3.3 percentage points related to a restructuring charge
recorded during the first quarter of 2010.
Capital Management
The Company paid a cash dividend of $0.025 per share on September 30, 2010. This represents the
Company's sixth 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 $56.9 million of capital
returned to shareholders since August of 2008.
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 (loss) and operating net income (loss) 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 (loss) consists of net income (loss)
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 (loss) and net income (loss) per share are the GAAP
financial measures that are most directly comparable to operating
net income (loss) and operating net income (loss) 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.
Financial Tables Follow...
First
Mercury Financial Corporation
|
|
Condensed
Consolidated Statements of Income
|
|
(Unaudited)
|
|
|
|
|
Three Months
Ended
|
|
|
|
Nine Months
Ended
|
|
|
|
|
September
30,
|
|
%
|
|
September
30,
|
|
%
|
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
|
(Dollars in
thousands, except share and per share data)
|
|
Operating Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned
premiums
|
$
49,236
|
|
$
51,512
|
|
-4.4%
|
|
$
152,413
|
|
$
155,539
|
|
-2.0%
|
|
Commissions and fees
|
40
|
|
7,445
|
|
-99.5%
|
|
15,699
|
|
23,916
|
|
-34.4%
|
|
Net investment
income
|
8,349
|
|
7,540
|
|
10.7%
|
|
25,434
|
|
21,105
|
|
20.5%
|
|
Net realized gains on
investments
|
7,671
|
|
13,766
|
|
-44.3%
|
|
10,354
|
|
25,204
|
|
-58.9%
|
|
Other-than-temporary
impairment losses on investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses
|
(61)
|
|
(761)
|
|
-92.0%
|
|
(1,339)
|
|
(1,631)
|
|
-17.9%
|
|
Portion of losses
recognized in accumulated other comprehensive income
|
(50)
|
|
469
|
|
-110.7%
|
|
684
|
|
1,205
|
|
-43.2%
|
|
Net impairment losses
recognized in earnings
|
(111)
|
|
(292)
|
|
-62.0%
|
|
(655)
|
|
(426)
|
|
53.8%
|
|
Total Operating
Revenues
|
65,185
|
|
79,971
|
|
-18.5%
|
|
203,245
|
|
225,338
|
|
-9.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment
expenses, net
|
42,531
|
|
30,345
|
|
40.2%
|
|
108,114
|
|
96,301
|
|
12.3%
|
|
Amortization of deferred
acquisition expenses
|
13,269
|
|
13,960
|
|
-4.9%
|
|
40,024
|
|
40,889
|
|
-2.1%
|
|
Underwriting, agency and
other expenses
|
11,215
|
|
10,169
|
|
10.3%
|
|
35,071
|
|
28,919
|
|
21.3%
|
|
Amortization of intangible
assets
|
482
|
|
559
|
|
-13.8%
|
|
1,515
|
|
1,709
|
|
-11.4%
|
|
Restructuring
|
-
|
|
-
|
|
-
|
|
5,018
|
|
-
|
|
100.0%
|
|
Total Operating
Expenses
|
67,497
|
|
55,033
|
|
22.6%
|
|
189,742
|
|
167,818
|
|
13.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
(Loss)
|
(2,312)
|
|
24,938
|
|
-109.3%
|
|
13,503
|
|
57,520
|
|
-76.5%
|
|
Interest Expense
|
1,554
|
|
1,446
|
|
7.5%
|
|
4,483
|
|
4,278
|
|
4.8%
|
|
Change in Fair Value of
Derivative Instruments
|
-
|
|
(171)
|
|
100.0%
|
|
-
|
|
(401)
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Income
Taxes
|
(3,866)
|
|
23,663
|
|
-116.3%
|
|
9,020
|
|
53,643
|
|
-83.2%
|
|
Income Taxes
|
(1,835)
|
|
8,018
|
|
-122.9%
|
|
1,694
|
|
17,707
|
|
-90.4%
|
|
Net Income (Loss)
|
$
(2,031)
|
|
$
15,645
|
|
-113.0%
|
|
$
7,326
|
|
$
35,936
|
|
-79.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Per
Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
(0.11)
|
|
$
0.90
|
|
|
|
$
0.42
|
|
$
2.03
|
|
|
|
Diluted
|
$
(0.11)
|
|
$
0.89
|
|
|
|
$
0.41
|
|
$
1.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares
Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
17,469,803
|
|
17,144,077
|
|
|
|
17,343,255
|
|
17,537,754
|
|
|
|
Diluted
|
17,469,803
|
|
17,486,020
|
|
|
|
17,435,544
|
|
17,877,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP Underwriting
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
86.4%
|
|
58.9%
|
|
27.5 Pts.
|
|
70.9%
|
|
61.9%
|
|
9.0 Pts.
|
|
Expense ratio
|
50.8%
|
|
33.6%
|
|
17.2 Pts.
|
|
43.0%
|
|
31.6%
|
|
11.4 Pts.
|
|
Combined ratio
|
137.2%
|
|
92.5%
|
|
44.7 Pts.
|
|
113.9%
|
|
93.5%
|
|
20.4 Pts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Mercury Financial Corporation
|
|
Condensed
Consolidated Balance Sheets
|
|
(Unaudited)
|
|
|
|
|
September
30,
|
|
December
31,
|
|
|
2010
|
|
2009
|
|
ASSETS
|
(Dollars in
thousands,
except share and per share
data)
|
|
|
|
|
|
|
Investments
|
|
|
|
|
Debt securities
|
$
688,556
|
|
$
648,522
|
|
Equity securities and
other
|
42,328
|
|
38,752
|
|
Short-term
|
40,710
|
|
12,216
|
|
Total Investments
|
771,594
|
|
699,490
|
|
Cash and cash
equivalents
|
13,771
|
|
14,275
|
|
Premiums and reinsurance
balances receivable
|
48,576
|
|
78,544
|
|
Accrued investment
income
|
6,220
|
|
6,248
|
|
Accrued profit sharing
commissions
|
8,903
|
|
14,661
|
|
Reinsurance recoverable on
paid and unpaid losses
|
216,003
|
|
172,711
|
|
Prepaid reinsurance
premiums
|
63,072
|
|
57,374
|
|
Deferred acquisition
costs
|
24,197
|
|
25,654
|
|
Intangible assets, net of
accumulated amortization
|
35,590
|
|
37,104
|
|
Goodwill
|
25,483
|
|
25,483
|
|
Other assets
|
44,421
|
|
26,049
|
|
Total Assets
|
$
1,257,830
|
|
$
1,157,593
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment
expense reserves
|
$
566,886
|
|
$
488,444
|
|
Unearned premium
reserves
|
149,491
|
|
146,773
|
|
Long-term debt
|
67,013
|
|
67,013
|
|
Line of credit
|
30,000
|
|
4,000
|
|
Funds held under
reinsurance treaties
|
80,409
|
|
71,661
|
|
Premiums payable to
insurance companies
|
29,767
|
|
31,167
|
|
Reinsurance payable on
paid losses
|
1,221
|
|
958
|
|
Deferred federal income
taxes
|
17,821
|
|
13,844
|
|
Accounts payable, accrued
expenses, and other liabilities
|
13,523
|
|
17,649
|
|
Total Liabilities
|
956,131
|
|
841,509
|
|
Stockholders'
Equity
|
|
|
|
|
Common stock, $0.01 par
value; authorized 100,000,000 shares; issued
|
|
|
|
|
and
outstanding 17,752,360 and
17,181,106 shares
|
178
|
|
172
|
|
Paid-in-capital
|
157,535
|
|
154,417
|
|
Accumulated other
comprehensive income
|
28,020
|
|
16,256
|
|
Retained
earnings
|
117,814
|
|
147,087
|
|
Treasury stock; 134,500
shares
|
(1,848)
|
|
(1,848)
|
|
Total Stockholders'
Equity
|
301,699
|
|
316,084
|
|
Total Liabilities and
Stockholders' Equity
|
$
1,257,830
|
|
$
1,157,593
|
|
|
|
|
|
|
Book Value Per
Share
|
$
16.99
|
|
$
18.40
|
|
Tangible Book Value Per
Share
|
$
14.24
|
|
$
15.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Mercury Financial Corporation
|
|
Summary
Financial Data
|
|
|
|
|
|
Three Months
Ended
|
|
Nine Months
Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
(Dollars in
thousands, except per share data)
|
|
Gross Written
Premiums:
|
|
|
|
|
|
|
|
|
|
Primary general
liability
|
|
$
48,886
|
|
$
51,054
|
|
$
151,872
|
|
$
157,953
|
|
Excess/Umbrella
casualty
|
|
11,845
|
|
8,414
|
|
33,961
|
|
25,568
|
|
Professional
liability
|
|
11,646
|
|
11,631
|
|
29,535
|
|
27,303
|
|
Commercial property
|
|
9,197
|
|
8,498
|
|
25,807
|
|
24,846
|
|
Other
|
|
2,275
|
|
2,211
|
|
10,541
|
|
6,537
|
|
Gross written
premiums
|
|
$
83,849
|
|
$
81,808
|
|
$
251,716
|
|
$
242,207
|
|
|
|
|
|
|
|
|
|
|
|
Net Written
Premiums:
|
|
|
|
|
|
|
|
|
|
Primary general
liability
|
|
$
32,897
|
|
$
34,648
|
|
$
103,884
|
|
$
107,295
|
|
Excess/Umbrella
casualty
|
|
1,410
|
|
1,201
|
|
5,383
|
|
3,115
|
|
Professional
liability
|
|
4,373
|
|
6,832
|
|
15,009
|
|
18,862
|
|
Commercial property
|
|
2,819
|
|
1,433
|
|
15,041
|
|
13,783
|
|
Other
|
|
2,275
|
|
2,211
|
|
10,541
|
|
6,537
|
|
Net written premiums
|
|
$
43,774
|
|
$
46,325
|
|
$
149,858
|
|
$
149,592
|
|
|
|
|
|
|
|
|
|
|
|
Commissions and
Fees:
|
|
|
|
|
|
|
|
|
|
Insurance underwriting
commissions and fees
|
|
$
(5,861)
|
|
$
1,272
|
|
$
(3,072)
|
|
$
3,989
|
|
Insurance services commissions
and fees
|
|
5,901
|
|
6,173
|
|
18,771
|
|
19,927
|
|
Total commissions and
fees
|
|
$
40
|
|
$
7,445
|
|
$
15,699
|
|
$
23,916
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash
Equivalents:
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
$
12,014
|
|
$
7,144
|
|
$
66,244
|
|
$
65,269
|
|
Net cash used in investing
activities
|
|
(20,955)
|
|
(11,119)
|
|
(57,220)
|
|
(71,175)
|
|
Net cash used in financing
activities
|
|
(476)
|
|
(3,394)
|
|
(9,528)
|
|
(9,722)
|
|
Net decrease in cash and cash
equivalents
|
|
$
(9,417)
|
|
$
(7,369)
|
|
$
(504)
|
|
$
(15,628)
|
|
|
|
|
|
|
|
|
|
|
|
Return on Equity:
(1)
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
|
-2.7%
|
|
21.1%
|
|
3.2%
|
|
17.0%
|
|
Operating net income
(loss)
|
|
-9.2%
|
|
9.1%
|
|
2.4%
|
|
9.2%
|
|
|
|
|
|
|
|
|
|
|
|
Operating Net Income (Loss):
(3)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
(2,031)
|
|
$
15,645
|
|
$
7,326
|
|
$
35,936
|
|
Adjust for Net realized gains
on
|
|
|
|
|
|
|
|
|
|
investments, net of
tax
|
|
(4,987)
|
|
(8,948)
|
|
(6,730)
|
|
(16,383)
|
|
Adjust for Other-than-temporary
impairment losses
|
|
|
|
|
|
|
|
|
|
on investments, net of
tax
|
|
72
|
|
190
|
|
426
|
|
277
|
|
Adjust for Change in fair value
of derivative
|
|
|
|
|
|
|
|
|
|
instruments, net of
tax
|
|
-
|
|
(111)
|
|
-
|
|
(261)
|
|
Adjust for Restructuring, net of
tax
|
|
-
|
|
-
|
|
3,262
|
|
-
|
|
Adjust for Acquisition-related
transaction costs, net of tax
|
|
27
|
|
-
|
|
1,061
|
|
-
|
|
Operating net income
(loss)
|
|
$
(6,919)
|
|
$
6,776
|
|
$
5,345
|
|
$
19,569
|
|
|
|
|
|
|
|
|
|
|
|
Operating Net Income (Loss) Per
Share: (3)
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
(0.39)
|
|
$
0.39
|
|
$
0.30
|
|
$
1.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
December
31,
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
Tangible Stockholders' Equity:
(2)
|
|
|
|
|
|
|
|
|
|
Total stockholders'
equity
|
|
$
301,699
|
|
$
316,084
|
|
|
|
|
|
Intangible assets,
net
|
|
(35,590)
|
|
(37,104)
|
|
|
|
|
|
Deferred tax liability -
intangible assets, net
|
|
12,083
|
|
12,613
|
|
|
|
|
|
Goodwill
|
|
(25,483)
|
|
(25,483)
|
|
|
|
|
|
Tangible stockholders'
equity
|
|
$
252,709
|
|
$
266,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Return on equity represents
net income (loss) and operating net income (loss) expressed on an
annualized basis as a percentage of average stockholders’
equity.
|
|
(2) Tangible stockholders’
equity is total stockholders’ equity excluding the value of
intangible assets, net of accumulated amortization, goodwill, and
the deferred tax liability related to intangible assets.
|
|
(3) See discussion of use of
non-GAAP financial measures above. $0.9 million of the $1.1
million of acquisition-related transaction costs were not deemed
deductible for tax purposes. A tax rate of 35 percent was
used for those acquisition-related transaction costs that were tax
deductible.
|
|
|
|
|
|
|
|
|
|
|
SOURCE First Mercury Financial Corporation
Copyright . 28 PR Newswire