First Mercury Financial Corporation Announces Third Quarter 2010 Financial Results

Oct 28, 2010, 17:00 ET from First Mercury Financial Corporation

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



RELATED LINKS

http://www.firstmercury.com