-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OPSHSob/nx12OtvU7oq7sbTaWomUGiDkvwO26nzxOQSrYKVR8HrtIaSZ2DNxl+q1 VO/hrWMSox60Ci+/QVwxCw== 0000912057-97-017795.txt : 19970520 0000912057-97-017795.hdr.sgml : 19970520 ACCESSION NUMBER: 0000912057-97-017795 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST MERCURY FINANCIAL CORP CENTRAL INDEX KEY: 0000929186 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 383164336 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 033-83382 FILM NUMBER: 97606304 BUSINESS ADDRESS: STREET 1: 29621 NORTHWESTERN HWY STREET 2: PO BOX 5096 CITY: SOUTHFIELD STATE: MI ZIP: 48034 BUSINESS PHONE: 8103584010 MAIL ADDRESS: STREET 1: 29621 NORTHWESTERN HGWY STREET 2: PO BOX 5096 CITY: SOUTHFIELD STATE: MI ZIP: 48086 10-Q 1 10-Q =============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1997 Commission File Number 33-83382 FIRST MERCURY FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) Delaware 38-3164336 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 29621 Northwestern Highway, P.O. Box 5096 Southfield, Michigan 48086 (Address of principal executive offices) (zip code) Registrant's telephone number, including area code: (810) 358-4010 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares outstanding of the registrant's Common Stock, par value $.01, as of May 14, 1997 was 6,164.07. =============================================================================== FIRST MERCURY FINANCIAL CORPORATION INDEX ----- PART I. FINANCIAL INFORMATION Page No. -------- Item 1. Financial Statements Condensed Consolidated Balance Sheets; March 31, 1997 (Unaudited) and December 31, 1996 2 Condensed Consolidated Statements of Operations (Unaudited); Three Months Ended March 31, 1997 and 1996 3 Condensed Consolidated Statements of Stockholders' Equity (Unaudited); Three Months Ended March 31, 1997 and 1996 4 Condensed Consolidated Statements of Cash Flows (Unaudited); Three Months Ended March 31, 1997 and 1996 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Part II. OTHER INFORMATION 11 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FIRST MERCURY FINANCIAL CORPORATION Condensed Consolidated Balance Sheets
March 31, December 31, Assets 1997 1996 ------ ---- ---- (Unaudited) Investments: Debt securities available for sale, at market value $ 69,859,301 71,871,818 Preferred stocks, at market 2,747,812 2,691,194 Common stocks, at market 52,668 52,200 Short-term investments 2,797,364 1,810,340 ------------- ----------- Total investments 75,457,145 76,425,552 Cash and cash equivalents 2,223,337 3,945,289 Premiums and reinsurance balances receivable 2,771,800 2,584,644 Accrued investment income receivable 915,639 1,078,346 Other receivables 300,000 300,000 Reinsurance recoverable on unpaid losses 9,564,115 8,484,364 Prepaid reinsurance premiums 1,416,223 1,799,876 Deferred acquisition costs 759,274 691,319 Deferred federal income taxes 2,468,441 2,288,715 Federal income taxes recoverable 552,306 571,541 Fixed assets, net of accumulated depreciation 1,695,484 1,667,317 Other assets 2,285,693 2,274,410 ------------- ----------- Total assets $ 100,409,457 102,111,373 ------------- ----------- ------------- ----------- Liabilities and Stockholders' Equity ------------------------------------ Loss and loss adjustment expense reserves $ 55,005,349 55,519,174 Unearned premium reserves 5,185,618 5,656,660 Senior subordinated notes payable 9,225,000 9,225,000 Ceded reinsurance payable 66,344 87,373 Funds held under reinsurance contracts 673,097 842,295 Deferred revenue 1,991,451 2,181,975 Accounts payable and accrued expenses 2,074,474 2,080,221 ------------- ----------- Total liabilities 74,221,333 75,592,698 Minority interest 3,242 3,278 Stockholders' equity: Cumulative preferred stock, issued and outstanding 20,850 shares 209 209 Common stock, issued and outstanding 6,164.07 shares 62 62 Gross paid-in and contributed capital 3,437,372 3,437,372 Net unrealized gains (losses) on marketable securities (402,723) 183,780 Retained earnings 23,149,962 22,893,974 ------------- ----------- Total stockholders' equity 26,184,882 26,515,397 ------------- ----------- Total liabilities and stockholders' equity $ 100,409,457 102,111,373 ------------- ----------- ------------- -----------
See accompanying notes to condensed consolidated financial statements. 2 FIRST MERCURY FINANCIAL CORPORATION Condensed Consolidated Statements of Operations (Unaudited) Three Months Ended March 31, --------------------- 1997 1996 ---- ---- Net earned premiums $ 2,305,692 7,895,647 Net investment income 1,153,657 1,395,713 Realized gains (losses) on the sale of investments 124,294 152,691 Miscellaneous income 269,719 16,255 ----------- ----------- Total revenues and other income 3,853,362 9,460,306 ----------- ----------- Losses and loss adjustment expenses, net 1,733,503 7,507,634 Amortization of deferred acquisition expenses 457,853 1,817,273 Other underwriting expenses 986,319 959,071 Interest expense 278,120 298,607 ----------- ----------- Total expenses 3,455,795 10,582,585 ----------- ----------- Income(loss) before federal income taxes 397,567 (1,122,279) Federal income taxes (benefit) 141,578 (245,725) Net income $ 255,989 (876,554) ----------- ----------- ----------- ----------- Per-share earnings $ 41.53 (142.20) ----------- ----------- ----------- ----------- See accompanying notes to condensed consolidated financial statements. 3 FIRST MERCURY FINANCIAL CORPORATION Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
Net Unrealized Gross Paid-in Gains (Losses), Preferred Common and Contributed Net of Federal Retained Stock Stock Capital Income Taxes Earnings Total ----- ----- ------- ------------ -------- ----- Balance at December 31, 1995 $ 209 62 3,474,872 1,270,614 21,655,479 26,401,236 Net income - - - - (876,554) (876,554) Change in market values of marketable investment securities - - - (956,745) - (956,745) ------ ---- --------- --------- ---------- ---------- Balance at March 31, 1996 $ 209 62 3,474,872 313,869 20,778,925 24,567,937 ------ ---- --------- --------- ---------- ---------- ------ ---- --------- --------- ---------- ---------- Balance at December 31, 1996 $ 209 62 3,437,372 183,780 22,893,973 26,515,396 Net income - - - - 255,989 255,989 Change in market values of marketable investment securities - - - (586,503) - (586,503) ------ ---- --------- --------- ---------- ---------- Balance at March 31, 1997 $ 209 62 3,437,372 (402,723) 23,149,962 26,184,882 ------ ---- --------- --------- ---------- ---------- ------ ---- --------- --------- ---------- ----------
See accompanying notes to condensed consolidated financial statements. 4 FIRST MERCURY FINANCIAL CORPORATION Condensed Consolidated Statements of Cash Flows (Unaudited) Three Months Ended March 31, --------------------- 1997 1996 ---- ---- Net cash used in operating activities $(1,606,324) 630,675 Cash flows from investing activities: Cost of short-term investments acquired (9,981,794) (7,120,787) Proceeds from disposals of short-term investments 8,994,771 8,833,284 Cost of debt securities acquired (5,869,496) (9,832,281) Proceeds from maturities of debt securities 3,852,675 1,116,267 Proceeds from debt securities sold 3,284,770 6,742,422 Cost of equity securities acquired (305,770) (395,411) Proceeds from equity securities sold 286,022 1,090,211 Other, net (101,806) (164,178) ----------- ----------- Net cash used in investing activities 159,372 269,527 ----------- ----------- Interest payments on senior subordinated notes (275,000) (275,000) ----------- ----------- Net decrease in cash and cash equivalents (1,721,952) 625,202 Cash and cash equivalents at beginning of period 3,945,289 2,336,140 ----------- ----------- Cash and cash equivalents at end of period $ 2,223,337 2,961,342 ----------- ----------- ----------- ----------- 5 FIRST MERCURY FINANCIAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. The accompanying unaudited condensed consolidated financial statements of First Mercury Financial Corporation and subsidiaries (the "Company") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. In management's opinion, all adjustments, consisting of normal recurring adjustments, which are necessary for a fair presentation of financial position and results of operations, have been made. It is recommended that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes related thereto included in the December 31, 1996 annual report on Form 10-K. The results of operations for the three month period ended March 31, 1997, are not necessarily indicative of the results to be expected for the full year. 2. Per share earnings are computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS First Mercury Financial Corporation ("Mercury") is an insurance holding company incorporated in Delaware in December 1993 and engaged, through its subsidiaries, in the underwriting of specialty commercial lines and non-standard automobile insurance for individuals. Mercury's subsidiaries are First Mercury Insurance Company ("FMIC"), an Illinois property and casualty insurance company and successor to First Mercury Syndicate, Inc. (the "Syndicate"), All Nation Insurance Company ("All Nation") and its wholly owned subsidiary, National Family Insurance Corporation, in Liquidation ("National Family"), both Minnesota property and casualty insurance companies. Mercury and its subsidiaries are referred to herein as the "Company." National Family has been in liquidation under the oversight of the Ramsey County District Court in Minnesota since December 1996. Prior to the liquidation order, National Family was in rehabilitation for over 30 years. The Company became affiliated with National Family upon its purchase of All Nation in 1992. Under generally accepted accounting principles, because All Nation lacks voting control over National Family, the financial statements of National Family are not consolidated with the financial statements of the Company. Prior to its withdrawal from the Illinois Insurance Exchange ("IIE") in December 1996, the Syndicate operated as an underwriting member of the IIE. Under the eligibility of the IIE, the Syndicate wrote general liability insurance, allied property and auto physical damage coverage in 44 states, the District of Columbia, and the U.S. Virgin Islands. On June 28, 1996, the Syndicate formed FMIC as an Illinois property and casualty insurance subsidiary with an initial capitalization of $5 million and a subsequent $15 million contribution to surplus. The formation of FMIC, a licensed Illinois insurer, provided the Syndicate with an affiliated company in which to potentially place coverages offered by the Syndicate and in which to reinsure certain of the Syndicate's outstanding liabilities. Under a loss portfolio transfer, on June 28, 1996, the Syndicate transferred approximately $35 million in loss and loss adjustment expense reserves and corresponding assets to FMIC. In conjunction with the formation of FMIC and the loss portfolio transfer, on July 8, 1996, the Syndicate notified the IIE of its intention to withdraw from the IIE. On November 7, 1996, the Syndicate and the IIE executed a withdrawal agreement. Subsequent to the Syndicate's withdrawal, the Syndicate was merged into FMIC on December 16, 1996. As of March 31, 1997, FMIC was an admitted carrier only in the state of Illinois. As a result, FMIC and Empire Indemnity Insurance Company ("Empire") entered into a quota share reinsurance arrangement effective July 18, 1996 whereby Empire writes on a direct basis the coverages previously offered by the Syndicate and cedes 50 percent of such business to FMIC. On May 1, 1996, an agreement was entered into between Mercury, All Nation, Allstate Insurance Company ("Allstate") and its wholly owned subsidiary, Deerbrook Insurance Company ("Deerbrook"), for the assignment of All Nation's independent agent contracts to Deerbrook and the ceding of associated prospective premium to Allstate on the agency-produced non-standard automobile business of All Nation. The agreement also included a three year non-compete clause and various financial guarantees by Mercury. Under the agreement, All Nation continues to write agency non-standard automobile coverages and cedes 100 percent of the written business to Allstate under a quota share reinsurance agreement for a period of up to two years, as Deerbrook is taking over the direct writing and servicing responsibility from All Nation on a state-by-state basis over the two-year period. In addition, All Nation provides underwriting and administrative services for the ceded business on a percentage of premiums basis for an initial period of up to 7 two years. The agreements do not include All Nation's direct response non-standard automobile business or agency-produced non-standard automobile business written prior to May 1, 1996. RESULTS OF OPERATIONS The following table reflects revenues of the Company for the three month periods ended March 31, 1997 and 1996: Quarter ended March 31, -------------------------------------- 1997 1996 ------------------ ---------------- Amount Percent Amount Percent ------- ------- ------ ------- (Dollars in thousands) NET PREMIUMS EARNED: Specialty commercial lines: Security, fire and alarm......... $1,617 70.2% $2,098 26.6% Police........................... 19 0.8 292 3.7 Public officials................. 93 4.0 186 2.4 Other............................ 369 16.0 307 3.9 Non-standard automobile lines: Agency personal auto liability... 0 0.0 3,567 45.2 Direct personal auto liability... 134 5.8 212 2.7 Agency personal auto physical damage.......................... 0 0.0 1,083 13.7 Direct personal auto physical damage.......................... 74 3.2 151 1.8 ------ ----- ------ ----- Total net premiums earned........... $2,306 100.0% $7,896 100.0% ------ ----- ------ ----- ------ ----- ------ ----- NET PREMIUMS EARNED Net premiums earned for the three months ended March 31, 1997 declined 70.8% to $2.3 million from $7.9 million for the year earlier period. The Company's specialty commercial lines, security, fire, alarm, police, public official and miscellaneous commercial coverages, experienced a decline in net premiums earned of 27.2% to $2.1 million for the three months ended March 31, 1997 as compared to $2.9 million for the three months ended March 31, 1996. This decrease occurred principally due to the quota share reinsurance arrangement entered into with Empire and the Company's decision to non-renew a substantial amount of the police business in the first quarter of 1996. Due to the sale of All Nation's independent agent contracts to Deerbrook effective May 1, 1996, net premiums earned for private passenger non-standard automobile coverages decreased 95.9% in the first quarter of 1997 to $208,000 from $5.0 million for the three months ended March 31, 1996. NET INVESTMENT INCOME AND REALIZED INVESTMENT GAINS (LOSSES) Net investment income decreased approximately $242,000 to $1.2 million for the three months ended March 31, 1997 as compared to $1.4 million for the three months ended March 31, 1996. 8 The decrease resulted from a decline in the Company's average invested assets due to the reduction in premium revenues at All Nation under the quota share reinsurance agreement with Allstate. For the three months ended March 31, 1997, the Company realized a net gain on the sale of investments of $124,000 versus a net gain of $153,000 for the same period in the prior year. At March 31, 1997, the unrealized loss on investments available for sale, net of tax, was $403,000 in comparison to a $184,000 unrealized gain as of December 31, 1996. The market value of the Company's portfolio has been adversely affected by the increase in interest rates during the first quarter of 1997. LOSS AND LOSS ADJUSTMENT EXPENSES Loss and loss adjustment expenses incurred decreased 76.9% to $1.7 million for the quarter ended March 31, 1997 from $7.5 million for the year earlier period. The loss and loss adjustment expense ratio for private passenger automobile coverages decreased to 50.2% for the three months ended March 31, 1997 as compared to 103.3% for the three months ended March 31, 1996. The decrease resulted primarily from favorable development in the runoff of the agent-produced non-standard automobile reserves. Within the specialty commercial lines, the loss and loss adjustment expense ratio increased marginally to 77.4% for the three months ended March 31, 1997 versus 76.7% for the comparable period in the preceding year. The increase resulted from severity experienced in the Company's commercial multi-peril business during the first quarter of 1997. AMORTIZATION OF DEFERRED ACQUISITION COSTS AND OTHER UNDERWRITING EXPENSES, INTEREST EXPENSE AND MISCELLANEOUS INCOME (EXPENSE) Amortization of deferred acquisition costs and other underwriting expenses represent the Company's costs to generate premium volume. For the first quarter of 1997, acquisition costs and other underwriting expenses declined approximately 48.0% to $1.4 million for the three months ended March 31, 1997 as compared to $2.8 million for the same period in the preceding year. The Company's underwriting expense ratio increased to 52.9% for the quarter ended March 31, 1997 in comparison to 36.0% for the quarter ended March 31, 1996. The increase in the expense ratio principally occurred due to the decline in net premiums written in the first quarter of 1997 in comparison to the Company's fixed costs of its insurance operations. The Company incurred $278,000 and $299,000 of interest expense related to the $10 million senior subordinated notes during the three months ended March 31, 1997 and 1996, respectively. The decrease in interest expense resulted from the Company's repurchase of $775,000 of its own senior subordinated notes during 1996. The Company realized $270,000 of miscellaneous income in the first quarter of 1997 as compared to $16,000 in the first quarter of 1996 primarily due to the recognition of approximately $241,000 of revenue under the non-compete and service contract agreements with Allstate. No revenue was recognized under these agreements in the three months ended March 31, 1996. FEDERAL INCOME TAXES The effective tax rate for the three months ended March 31, 1997 of 35.6% differs from the 9 federal tax rate of 34% primarily due to non-deductible expenses such as officers' life insurance. NET INCOME (LOSS) The Company recognized pre-tax net income of $398,000 for the three months ended March 31, 1997 as compared to a pre-tax net loss of $1.1 million for the three months ended March 31, 1996. The 1997 income includes approximately $241,000 recognized under the non-compete clause and the service contract of the agreement with Allstate. Excluding these amounts, the Company would have recognized pre-tax net income of $157,000. The improvement in results from the first quarter of 1996 in comparison to the first quarter of 1997 occurred due to the sale of the Company's unprofitable agent-produced non-standard automobile book to Deerbrook. LIQUIDITY AND CAPITAL RESOURCES Mercury is a holding company whose principal assets are its investment in the capital stock of FMIC and All Nation. Generally, Mercury is dependent upon the receipt of dividends from FMIC and All Nation to fund any necessary cash requirements, including debt service requirements. FMIC and All Nation are restricted by regulation as to the amount of dividends they may pay without regulatory approval. No dividends were paid by FMIC or All Nation to Mercury in the first quarter of 1997. Mercury also anticipates cash payments from Deerbrook of $1.2 million in 1997 for the non-compete agreement. In addition, Mercury receives annual payments from its subsidiaries when appropriate pursuant to a tax allocation agreement between Mercury and its subsidiaries. The Company believes these amounts are sufficient to meet Mercury's current cash flow requirements. The Company's subsidiaries' primary sources of cash are from premiums collected and amounts earned from the investment of this cash flow. The principal uses of funds are the payment of claims and related expenses, other operating expenses and interest expense. The Company's insurance operations utilized cash in operations of $1,606,000 during the three months ended March 31, 1997 as compared to cash generated from operations of $631,000 in the first quarter of 1996. The decreased cash flow resulted primarily from a decline in premium revenues at All Nation under the quota share reinsurance agreement with Allstate. At March 31, 1997, the insurance subsidiaries maintained cash and cash equivalents and short-term investments of $5.0 million to meet short-term payment obligations. In addition, the Company's investment portfolio is heavily weighted toward short-term fixed maturities and a portion of the portfolio could be liquidated without material adverse financial impact should further liquidity be necessary. As part of its investment strategy, and as required by debt covenants, the Company establishes a level of cash and highly liquid short- and intermediate-term securities which, combined with expected cash flow, is believed adequate to meet foreseeable payment obligations. As part of this strategy, the Company attempts to maintain an appropriate relationship between the average duration of the investment portfolio and the approximate duration of its liabilities. The weighted average maturity of the Company's fixed income portfolio as of March 31, 1997 was approximately three years. Under IIE regulations, the Syndicate maintained a $1,000,000 deposit in a Guaranty Fund Trust Account prior to its withdrawal from the IIE which required at least 50 percent of the deposit to be in cash and/or marketable securities. Under the terms of the Syndicate's withdrawal agreement with the IIE, a $1,000,000 deposit must be maintained in the Guaranty Fund Trust Account of the IIE for a period of three years from November 7, 1996. The Syndicate's withdrawal agreement also required FMIC to establish a trust fund for the payment of claims under insurance policies issued and reinsurance agreements entered into by the Syndicate. Investments held in trust for payment of Syndicate claims approximated $32.6 million at March 31, 1997. 10 FIRST MERCURY FINANCIAL CORPORATION PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company's subsidiaries are subject to routine legal proceedings in connection with their property and casualty insurance business. Neither Mercury nor any of its subsidiaries are involved in any pending or threatened legal proceedings which reasonably could be expected to have a material adverse impact on the Company's financial condition or results of operations. ITEM 2. CHANGES IN SECURITIES Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the first quarter of 1997. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. EXHIBITS Exhibit 27. Financial Data Schedule b. REPORTS ON FORM 8-K No report on Form 8-K was filed by the Registrant during the quarter ended March 31, 1997. 11 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST MERCURY FINANCIAL CORPORATION Date: May 14, 1997 By: /S/ William S. Weaver ----------------------------- William S. Weaver Chief Financial Officer (Principal Financial Officer and duly authorized to sign on behalf of the Registrant) 12 EX-27 2 FDS
7 1,000 3-MOS DEC-31-1996 MAR-31-1997 69859 0 0 2527 0 0 75457 2223 379 759 100409 0 5186 55005 0 9225 0 0 0 3438 100409 2306 1154 124 270 1733 458 986 398 142 256 0 0 0 256 41.53 41.53 47035 2680 (946) 309 3019 45441 0
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