First Mercury Financial Corporation Announces Fourth Quarter and Year End 2009 Financial Results
Company Declares $2.00 per Share Special Cash Dividend
SOUTHFIELD, Mich., Feb. 22 /PRNewswire-FirstCall/ -- First Mercury Financial Corporation (NYSE: FMR) ("First Mercury" or the "Company") today announced results for the fourth quarter and year ended 2009.
Highlights for the fourth quarter 2009 include:
- Gross written premium growth of 22.9 percent
- Net earned premium growth of 40.2 percent
- Commission and fee income growth of 58.7 percent
- Net investment income growth of 37.2 percent
- Net income of $8.4 million, or $0.48 per diluted share
- Operating net income of $6.8 million, or $0.39 per diluted share
- Book value per share of $18.40, an increase of 25.4 percent from December 31, 2008
- Tangible book value per share of $15.49, an increase of 31.4 percent from December 31, 2008
- Annualized return on average stockholders' equity of 10.8 percent
- Third consecutive quarterly dividend of $0.025 per share
"We are pleased with our solid underwriting results and strong investment performance for the quarter and full year," said Richard H. Smith, Chairman, President and Chief Executive Officer. "Our underwriting discipline, conservative investment philosophy and effective capital management combined to deliver a return on average stockholders' equity of 15.3 percent for the year ended December 31, 2009 and a compound annual growth in book value per share of 22.6 percent for the three year period ended December 31, 2009. This positioned us to declare a $2.00 per share special cash dividend," continued Smith. "We believe the Company's capital position after the dividend will support our growth strategy and permit us to build on our demonstrated track record of success," Smith concluded.
Written and Earned Premium
For the three months ended December 31, 2009, gross written premiums were $102.2 million, a 22.9 percent increase from the gross written premiums during the same period in 2008. For the year ended December 31, 2009, gross written premiums were $344.4 million, a 7.2 percent increase from the gross written premiums during the same period in 2008. The increase in gross written premiums for the three months and the year ended December 31, 2009 was due to an assumed retroactive reinsurance transaction consummated during the three months ended December 31, 2009. This reinsurance transaction, whereby the Company entered into a loss portfolio transfer for the claims for the self-insured retention for a large U.S. homebuilder, generated $25.3 million of gross written premium for the Specialty platform.
Net earned premiums during the three months ended December 31, 2009 were $76.5 million, a 40.2 percent increase from the same period of 2008. For the year ended December 31, 2009, net earned premiums were $232.0 million, a 19.7 percent increase from the same period in 2008. The increase in net earned premiums for the three months and year ended December 31, 2009 was primarily due to the aforementioned assumed retroactive reinsurance transaction, which was both written and fully earned in the same period.
Commissions and Fees
Commissions and fees during the three months ended December 31, 2009 were $8.1 million, a 58.7 percent increase from the same period of 2008. For the year ended December 31, 2009, commissions and fees were $32.0 million, a 52.5 percent increase from the same period of 2008. The increase for the three months ended December 31, 2009 compared to the same period of 2008 is primarily due to $2.3 million of negative profit sharing commissions recorded during the three months ended December 31, 2008 and due to an increase in commissions and fees related to our insurance services business for the three months ended December 31, 2009. The increase for the year ended December 31, 2009 compared to the same period of 2008 is primarily due to $4.1 million of negative profit sharing commissions recorded during the year ended December 31, 2008, an increase in AMC commissions and fees of $5.1 million including a previously disclosed, non-recurring contingent commission adjustment for $1.3 million, and an increase of $1.7 million from our workers compensation services business for the year ended December 31, 2009.
Investments
The Company recorded $0.2 million of pretax net unrealized gains on its available for sale investment portfolio during the three months ended December 31, 2009. The Company recorded $32.7 million of pretax net unrealized gains on its available for sale investment portfolio during the year ended December 31, 2009. The investment portfolio's taxable equivalent total return was 1.8 percent for the three months ended December 31, 2009 and 16.1 percent for the year ended December 31, 2009.
Losses and Loss Adjustment Expenses
During the three months ended December 31, 2009, there was no net development of prior years' loss and loss adjustment expense reserves. For the year ended December 31, 2009, there was $5.7 million, or $0.21 per diluted share, net of taxes, of favorable development of prior years' loss and loss adjustment expense reserves. For the three months ended December 31, 2008, there was no net development of prior years' loss and loss adjustment expense reserves. For the year ended December 31, 2008, there was $4.8 million of favorable development of prior years' loss and loss adjustment expense reserves.
The higher than anticipated property losses the Company experienced during the second quarter of 2009 did not recur during the third and fourth quarters of 2009. The Company's property underwriting results for the year ended December 31, 2009 include the previously disclosed $2.4 million, or $0.09 per diluted share, net of taxes, of storm losses and $5.2 million, or $0.19 per diluted share, net of taxes, of higher than expected commercial property fires and other losses and loss adjustment expenses recorded during the second quarter of 2009. The Company recorded net losses from Hurricane Ike of $2.9 million and $0.4 million of reinstatement premium expense during the year ended December 31, 2008.
Capital Management
During the year ended December 31, 2009, the Company repurchased 801,423 shares of common stock for $10.5 million at an average cost of $13.09 per share. As previously disclosed, the Company fulfilled 100 percent of the authorization under the Company's August 2008 Share Repurchase Program, and on August 20, 2009, the Company's Board of Directors approved a new Share Repurchase Program to repurchase up to 1,000,000 shares of outstanding common stock through August 20, 2010. As of December 31, 2009, the Company has not repurchased any shares under the new authorization. The Company views this repurchase program as an attractive use of excess capital given current market conditions. The Company paid a quarterly cash dividend of $0.025 per share on December 31, 2009. This represents the Company's third consecutive quarterly dividend. On February 22, 2010, the Company's Board of Directors declared a one-time, special cash dividend of $2.00 per share and a regular quarterly cash dividend of $0.025 per share, both to be paid March 31, 2010 to shareholders of record at the close of business on March 15, 2010. The special dividend will be funded in part from borrowings under the Company's credit agreement. The Company has obtained a waiver from its lender through May 1, 2010 to permit the payment of the dividend. The Company is negotiating with its lender to amend its credit agreement so that the dividend payment will not result in a violation of the credit agreement once the waiver period expires and anticipates completing such amendment prior to the expiration of the waiver period.
Other
The Company will record a pretax restructuring charge during the first quarter of 2010 of up to $4.5 million related to a reduction in staffing levels and elimination of other expenses across the organization. The Company anticipates realizing pretax annual savings of approximately $4.5 million as a result of these actions.
Conference Call Details
The Company will host a conference call on February 23, 2010 at 11:00 a.m. Eastern Time to discuss fourth quarter and year end 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 877-660-6853, entering account #3055 and conference code 344450, which will be available through March 2, 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 36 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, income from discontinued operations, 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 reduced 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 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 Twelve Months Ended
December 31, December 31,
------------ % ------------ %
2009 2008 Change 2009 2008 Change
---- ---- ------ ---- ---- ------
(Dollars in thousands, except share and per share data)
Operating
Revenue
Net earned
premiums $76,463 $54,522 40.2% $232,002 $193,744 19.7%
Commissions and
fees 8,082 5,093 58.7% 31,998 20,989 52.5%
Net investment
income 8,227 5,997 37.2% 29,332 21,633 35.6%
Net realized
gains (losses)
on investments 2,802 (7,875) 135.6% 28,006 (16,589) 268.8%
Other-than-
temporary
impairment
losses on
investments (243) (396) -38.6% (669) (4,098) -83.7%
---- ---- ---- ------
Total Operating
Revenues 95,331 57,341 66.3% 320,669 215,679 48.7%
------ ------ ------- -------
Operating
Expenses
Losses and loss
adjustment
expenses, net 52,049 31,127 67.2% 148,349 107,840 37.6%
Amortization of
deferred
acquisition
expenses 13,721 13,057 5.1% 54,610 41,164 32.7%
Underwriting,
agency and
other expenses 15,933 7,756 105.4% 44,852 34,355 30.6%
Amortization of
intangible
assets 538 572 -5.9% 2,247 2,038 10.3%
--- --- ----- -----
Total Operating
Expenses 82,241 52,512 56.6% 250,058 185,397 34.9%
------ ------ ------- -------
Operating Income 13,090 4,829 171.1% 70,611 30,282 133.2%
Interest Expense 1,404 1,440 -2.5% 5,683 5,820 -2.4%
Change in Fair
Value of
Derivative
Instruments - 202 -100.0% (401) 312 -228.5%
--- --- ---- ---
Income from
Continuing
Operations
Before
Income Taxes 11,686 3,187 266.7% 65,329 24,150 170.5%
Income Taxes 3,259 823 296.0% 20,966 6,414 226.9%
----- --- ------ -----
Income from
Continuing
Operations 8,427 2,364 256.5% 44,363 17,736 150.1%
Income from
Discontinued
Operations,
Net of Income
Taxes - - - - 23,105 -100.0%
--- --- --- ------
Net Income $8,427 $2,364 256.5% $44,363 $40,841 8.6%
====== ====== ======= =======
Basic Net Income
Per Share:
Income from
Continuing
Operations $0.49 $0.13 $2.53 $0.98
Income from
Discontinued
Operations - - - 1.27
--- --- --- ----
Total $0.49 $0.13 $2.53 $2.25
===== ===== ===== =====
Diluted Net
Income Per
Share:
Income from
Continuing
Operations $0.48 $0.13 $2.48 $0.95
Income from
Discontinued
Operations - - - 1.23
--- --- --- ----
Total $0.48 $0.13 $2.48 $2.18
===== ===== ===== =====
Weighted Average
Shares
Outstanding:
Basic 17,020,903 17,944,321 17,407,510 18,129,386
========== ========== ========== ==========
Diluted 17,356,634 18,357,259 17,746,613 18,674,689
========== ========== ========== ==========
GAAP
Underwriting
Ratios:
Loss ratio 68.1% 57.1% 11.0 63.9% 55.7% 8.2
Pts. Pts.
Expense ratio 29.7% 30.7% -1.0 31.0% 28.0% 3.0
---- ---- ---- ---- ---- ---
Pts. Pts.
Combined ratio 97.8% 87.8% 10.0 94.9% 83.7% 11.2
==== ==== ==== ==== ==== ====
Pts. Pts.
First Mercury Financial Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
December December
31, 31,
2009 2008
---- ----
ASSETS (Dollars in thousands,
except share and per share data)
Investments
Debt securities $648,522 $495,799
Equity securities and other 38,752 15,089
Short-term 12,216 32,142
------ ------
Total Investments 699,490 543,030
Cash and cash equivalents 14,275 31,833
Premiums and reinsurance balances
receivable 78,544 56,398
Accrued investment income 6,248 5,400
Accrued profit sharing commissions 14,661 11,315
Reinsurance recoverable on paid and
unpaid losses 172,711 135,617
Prepaid reinsurance premiums 57,374 48,921
Deferred acquisition costs 25,654 27,369
Intangible assets, net of accumulated
amortization 37,104 39,351
Goodwill 25,483 25,483
Deferred federal income taxes - 2,161
Other assets 26,049 16,775
------ ------
Total Assets $1,157,593 $943,653
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Loss and loss adjustment expense
reserves $488,444 $372,721
Unearned premium reserves 146,773 147,849
Long-term debt 67,013 67,013
Funds held under reinsurance treaties 71,661 49,419
Premiums payable to insurance
companies 31,167 27,831
Reinsurance payable on paid losses 958 1,167
Deferred federal income taxes 13,844 -
Accounts payable, accrued expenses,
and other liabilities 21,649 16,016
------ ------
Total Liabilities 841,509 682,016
------- -------
Stockholders' Equity
Common stock, $0.01 par value;
authorized 100,000,000 shares; issued
and outstanding 17,181,106 and
17,836,337 shares 172 178
Paid-in-capital 154,417 161,957
Accumulated other comprehensive income
(loss) 16,256 (3,027)
Retained earnings 147,087 103,028
Treasury stock; 130,600 and 33,600
shares (1,848) (499)
------ ----
Total Stockholders' Equity 316,084 261,637
------- -------
Total Liabilities and Stockholders'
Equity $1,157,593 $943,653
========== ========
Book Value Per Share $18.40 $14.67
====== ======
Tangible Book Value Per Share $15.49 $11.79
====== ======
First Mercury Financial Corporation
Summary Financial Data
Three Months Ended Twelve Months Ended
December 31, December 31,
------------ ------------
2009 2008 2009 2008
---- ---- ---- ----
(Dollars in thousands,
except per share data)
Gross Written Premiums:
Security $12,627 $16,788 $56,462 $66,652
Specialty 55,590 31,041 146,477 142,041
Contract Underwriting 17,403 16,682 66,148 63,774
FM Emerald 13,138 16,874 56,751 42,142
Other 3,453 1,772 18,580 6,667
----- ----- ------ -----
Gross written premiums $102,211 $83,157 $344,418 $321,276
======== ======= ======== ========
Net Written Premiums:
Security $7,968 $11,902 $36,314 $47,887
Specialty 45,395 23,135 105,219 105,467
Contract Underwriting 12,880 15,601 45,046 42,877
FM Emerald 5,901 7,250 24,759 17,053
Other 2,769 1,772 13,167 6,667
----- ----- ------ -----
Net written premiums $74,913 $59,660 $224,505 $219,951
======= ======= ======== ========
Commissions and Fees:
Insurance underwriting
commissions and fees $1,511 $(818) $5,501 $1,318
Insurance services commissions
and fees 6,571 5,911 26,497 19,671
----- ----- ------ ------
Total commissions and fees $8,082 $5,093 $31,998 $20,989
====== ====== ======= =======
Cash and Cash Equivalents:
Net cash provided by operating
activities -continuing
operations $20,272 $23,055 $86,878 $114,768
Net cash provided by operating
activities -discontinued
operations - - - 1,928
Net cash used in investing
activities -continuing
operations (22,790) (10,386) (95,303) (138,571)
Net cash provided by investing
activities -discontinued
operations - - - 41,830
Net cash provided by (used in)
financing activities 588 (3,431) (9,133) (6,554)
--- ------ ------ ------
Net increase (decrease) in
cash and cash equivalents $(1,930) $9,238 $(17,558) $13,401
======= ====== ======== =======
Return on Equity: (1)
Net income 10.8% 3.6% 15.3% 16.6%
Operating net income 8.7% 12.1% 9.1% 12.8%
Operating Net Income: (3)
Net income $8,427 $2,364 $44,363 $40,841
Adjust for Net realized gains
and losses on investments,
net of tax (1,821) 5,118 (18,204) 10,783
Adjust for Other-than-
temporary impairment losses
on investments,
net of tax 158 258 435 2,664
Adjust for Change in fair
value of derivative
instruments, net of tax - 131 (261) 203
Adjust for Discontinued
operations, net of tax - - - (23,105)
--- --- --- -------
Operating net income $6,764 $7,871 $26,333 $31,386
====== ====== ======= =======
Operating Net Income Per
Share: (3)
Diluted $0.39 $0.43 $1.47 $1.68
===== ===== ===== =====
Tangible Stockholders' Equity:
(2)
Total stockholders' equity $316,084 $261,637
Intangible assets, net (37,104) (39,351)
Deferred tax liability -
intangible assets, net 12,613 13,399
Goodwill (25,483) (25,483)
------- -------
Tangible stockholders' equity $266,110 $210,202
======== ========
(1) Return on equity represents net income and operating net income
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.
SOURCE First Mercury Financial Corporation
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