First Mercury Financial Corporation Announces Third Quarter 2010 Financial Results
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, |
|||
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. |
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SOURCE First Mercury Financial Corporation
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