-----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, FiSHkvJKSim4T3ADatnlViulW9aO7q2fhkF3ybDGi1UPKplqXkvsTUXGlS5rKTqa wk5Ga8USeKAKB58ZqEUykA== 0001047469-97-004782.txt : 19971117 0001047469-97-004782.hdr.sgml : 19971117 ACCESSION NUMBER: 0001047469-97-004782 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 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: SEC FILE NUMBER: 033-83382 FILM NUMBER: 97719207 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 September 30, 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: (248) 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 November 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; September 30, 1997 (Unaudited) and December 31, 1996 2 Condensed Consolidated Statements of Operations (Unaudited); Three Months and Nine Months Ended September 30, 1997 and 1996 3 Condensed Consolidated Statements of Stockholders' Equity (Unaudited); Nine Months Ended September 30, 1997 and 1996 4 Condensed Consolidated Statements of Cash Flows (Unaudited); Nine Months Ended September 30, 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 13 PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS FIRST MERCURY FINANCIAL CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31, ASSETS 1997 1996 ---- ---- (Unaudited) Investments: Debt securities available for sale, at market value $65,579,190 71,871,818 Preferred stocks, at market 1,425,297 2,691,194 Common stocks, at market 54,180 52,200 Short-term investments 2,887,966 1,810,340 ---------- ----------- Total investments 69,946,633 76,425,552 Cash and cash equivalents 3,685,475 3,945,289 Premiums and reinsurance balances receivable 2,417,049 2,584,644 Accrued investment income receivable 915,719 1,078,346 Other receivables 300,000 300,000 Reinsurance recoverable on unpaid losses 9,513,442 8,484,364 Prepaid reinsurance premiums 820,101 1,799,876 Deferred acquisition costs 751,954 691,319 Deferred federal income taxes 1,742,057 2,288,715 Federal income taxes recoverable 810,797 571,541 Fixed assets, net of accumulated depreciation 1,785,639 1,667,317 Other assets 1,124,706 2,274,410 ---------- ----------- Total assets $93,813,572 102,111,373 ---------- ----------- ---------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Loss and loss adjustment expense reserves $48,861,979 55,519,174 Unearned premium reserves 4,740,767 5,656,660 Long-term debt 9,159,000 9,225,000 Ceded reinsurance payable 52,500 87,373 Deferred revenue 1,503,791 2,181,975 Accounts payable and accrued expenses 2,209,685 2,922,516 ---------- ----------- Total liabilities 66,527,722 75,592,698 ---------- ----------- Minority interest 2,966 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 Unrealized gains on marketable securities, net of federal income taxes 554,961 183,780 Retained earnings 23,290,280 22,893,974 ---------- ----------- Total stockholders' equity 27,282,884 26,515,397 ---------- ----------- Total liabilities and stockholders' equity $93,813,572 102,111,373 ---------- ----------- ---------- -----------
2 FIRST MERCURY FINANCIAL CORPORATION Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------- ------------------------- 1997 1996 1997 1996 ---------- ---------- ---------- ---------- Net earned premiums $2,372,490 3,639,467 6,914,041 18,116,994 Net investment income 1,106,769 1,294,354 3,521,734 4,004,187 Realized gains on the sale of investments 233,556 63,070 482,099 293,328 Gain on assignment of non-standard automobile agency contracts -- (634,814) -- 476,478 Miscellaneous income 255,229 472,952 838,136 590,592 ---------- ---------- ---------- ---------- Total revenues and other income 3,968,044 4,835,029 11,756,010 23,481,579 ---------- ---------- ---------- ---------- Losses and loss adjustment expenses, net 1,691,795 2,198,670 5,029,094 14,613,139 Amortization of deferred acquisition expenses 738,589 675,238 1,683,386 3,692,607 Other underwriting expenses 1,044,395 478,927 3,081,561 2,375,900 Interest expense 274,876 298,809 829,466 904,700 ---------- ---------- ---------- ---------- Total expenses 3,749,655 3,651,644 10,623,507 21,586,346 ---------- ---------- ---------- ---------- Income before federal income taxes 218,389 1,183,385 1,132,503 1,895,233 Federal income taxes 61,632 329,774 392,172 585,559 ---------- ---------- ---------- ---------- Net income $ 156,757 853,611 740,331 1,309,674 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Per-share earnings $ 25.43 138.48 120.10 212.47 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
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 -- -- -- -- 1,309,674 1,309,674 Dividends paid to preferred stockholders -- -- -- -- (344,025) (344,025) Change in market values of marketable investment securities -- -- -- (1,381,502) -- (1,381,502) ---- -- --------- --------- ---------- ---------- Balance at September 30, 1996 $209 62 3,474,872 (110,888) 22,621,128 25,985,383 ---- -- --------- --------- ---------- ---------- ---- -- --------- --------- ---------- ---------- Balance at December 31, 1996 $209 62 3,437,372 183,780 22,893,974 26,515,397 Net income -- -- -- -- 740,331 740,331 Dividends paid to preferred stockholders -- -- -- -- (344,025) (344,025) Change in market values of -- -- marketable investment securities -- -- -- 371,181 -- 371,181 ---- -- --------- --------- ---------- ---------- Balance at September 30, 1997 $209 62 3,437,372 554,961 23,290,280 27,282,884 ---- -- --------- --------- ---------- ---------- ---- -- --------- --------- ---------- ----------
4 FIRST MERCURY FINANCIAL CORPORATION Condensed Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, -------------------------- 1997 1996 ----------- ----------- Net cash used in operating activities $(6,022,020) (578,786) ----------- ----------- Cash flows from investing activities: Cost of short-term investments acquired (22,617,550) (24,609,445) Proceeds from disposals of short-term investments 21,539,924 24,163,486 Cost of debt securities acquired (14,876,513) (12,588,095) Proceeds from maturities of debt securities 12,986,635 6,398,360 Proceeds from debt securities sold 8,877,465 10,299,246 Cost of equity securities acquired (658,930) (868,078) Proceeds from equity securities sold 2,188,420 1,288,984 Other, net (508,220) (470,204) ----------- ----------- Net cash provided by investing activities 6,931,231 3,614,254 ----------- ----------- Cash flows used in financing activities: Interest payments on senior subordinated notes (825,000) (825,000) Dividends paid to preferred stockholders (344,025) (344,025) ----------- ----------- Net cash used in financing activities (1,169,025) (1,169,025) ----------- ----------- Net increase (decrease) in cash and cash equivalents (259,814) 1,866,443 Cash and cash equivalents at beginning of period 3,945,289 2,336,140 ----------- ----------- Cash and cash equivalents at end of period $3,685,475 4,202,583 ----------- ----------- ----------- ----------- 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 nine month period ended September 30, 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. 3. Certain reclassifications have been made to the 1996 consolidated financial statements in order to conform to the 1997 presentation. 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 ("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 and is not liable for National Family's debts, 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. Due to its withdrawal from the IIE, the Syndicate lost its ability to write direct premium under the eligibility of the IIE. As a result, FMIC has aggressively applied for eligibility to write premiums in many states. As of September 30, 1997, FMIC is eligible to write direct premium in 23 states, primarily on a surplus lines basis. In the interim, FMIC and Empire Fire and Marine Insurance Company and Empire Indemnity Company ("Empire") entered into a quota share reinsurance agreement 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 7 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 provided underwriting and administrative services for the ceded business on a percentage of premiums basis until May 1997. The agreements do not include All Nation's agency-produced non-standard automobile business written prior to May 1, 1996 or its direct response non-standard automobile business. RESULTS OF OPERATIONS The following table reflects revenues of the Company for the three month and nine month periods ended September 30, 1997 and 1996:
Three Months Ended September 30, Nine Months Ended September 30, 1997 1996 1997 1996 ---- ---- ---- ---- Amount Percent Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- ------ ------- (Dollars in Thousands) Net Premiums Earned: Specialty commercial lines: Security, fire and alarm $1,437 60.6% 2,158 59.3% $4,546 65.8% 6,347 35.0% Police 0 0.0 146 4.0 19 0.3 654 3.6 Public officials 52 2.2 145 4.0 216 3.1 501 2.8 Other 616 26.0 331 9.1 1,346 19.5 844 4.7 Non-standard automobile lines: Agency auto liability 0 0.0 400 11.0 1 0.0 6,782 37.4 Direct auto liability 167 7.0 171 4.7 490 7.1 566 3.1 Agency auto physical damage 0 0.0 176 4.8 10 0.1 2,028 11.2 Direct auto physical damage 100 4.2 112 3.1 286 4.1 395 2.2 ------ ------- ------ ------- ------ ------- ------ ------- Total net premiums earned $2,372 100.0% $3,639 100.0% $6,914 100.0% $18,117 100.0% ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ -------
8 NET PREMIUMS EARNED Net premiums earned for the three months ended September 30, 1997 and the nine months ended September 30, 1997 declined 34.8% and 61.8%, respectively, in comparison to the year earlier periods. The Company's specialty commercial lines, including security, fire, alarm, police, public official and miscellaneous commercial coverages, decreased 24.3% and 26.6%, respectively, for the three months and nine months ended September 30, 1997 versus the comparable periods in 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 beginning in the first quarter of 1996. Although net premiums earned for the Company's specialty commercial lines have been declining, the Company has experienced average rate increases in excess of 10% on this book of business in the first three quarters of 1997. Effective July 1, 1997, the Company has entered into a 100 percent quota share reinsurance arrangement with Reliance Insurance Company of Illinois ("Reliance") to offer liability coverage to non-profit entities and day care facilities. In addition, the Company has been pursuing a workers' compensation program as a complementary product to the security, fire and alarm coverages currently provided. The increase in other commercial lines reflects the growth in All Nation's agency commercial multi-peril program. 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 68.9% and 91.9%, respectively, for the three and nine months ended September 30, 1997 versus the comparable periods in 1996. Net premiums earned for direct response non-standard automobile coverages have declined in 1997 due to a management decision to suspend advertising while the Company implemented rate increases for the direct response business in Iowa and Illinois in early June 1997 and August 1997, respectively. The Company began actively marketing this program in Iowa and Illinois in mid June and August, respectively. The Company continues to evaluate the effectiveness of the marketing programs. NET INVESTMENT INCOME AND REALIZED INVESTMENT GAINS (LOSSES) Net investment income decreased approximately $188,000, or 14.5%, for the three months ended September 30, 1997 as compared to the three months ended September 30, 1996. For the nine months ended September 30, 1997, net investment income decreased $482,000 or 12.0% in comparison to the same period of the preceding year. The decrease resulted from a decline in the Company's average invested assets. Invested assets were impacted by the reduction in premium revenues at both All Nation and FMIC under the quota share reinsurance agreements with Allstate and Empire, respectively. For the three months ended September 30, 1997, the Company realized a net gain on the sale of investments of $234,000 versus a net gain of $63,000 for the same period in the prior year. The Company recognized a net gain on the sale of investments of $482,000 for the nine months ended September 30, 1997 as compared to a $293,000 net gain for the comparable period in 1996. At September 30, 1997, the unrealized gain on investments available for sale, net of deferred taxes, was $555,000 in comparison to a $184,000 unrealized gain as of December 31, 1996. Changes in unrealized gains reflect the increase in fair values of available for sale debt and equity securities. Unrealized values of the underlying portfolio investments will continue to 9 be volatile as market prices of debt and equity securities fluctuate with changes in interest rates and market conditions. GAIN ON ASSIGNMENT OF AGENCY CONTRACTS The gain on the assignment of the All Nation agency contracts of $476,000 was recognized in 1996. The gain recognized represents the net present value of the related payments from Deerbrook reduced by All Nation's estimated liability for losses under the quota share reinsurance contract and costs attendant with the sale. LOSS AND LOSS ADJUSTMENT EXPENSES Loss and loss adjustment expenses incurred decreased 23.1% to $1.7 million for the three months ended September 30, 1997 from $2.2 million for the three months ended September 30, 1996. For the nine months ended September 30, 1997, loss and loss adjustment expenses incurred decreased 65.6% versus the comparable period in the preceding year, principally due to the decline in premium revenues under the quota share reinsurance agreements with Allstate and Empire. The loss and loss adjustment expense ratio for private passenger automobile coverages decreased to 70.3% for the nine months ended September 30, 1997 as compared to 83.1% for the nine months ended September 30, 1996. This decrease reflects the impact of rate increases taken in both Iowa and Illinois. Within the specialty commercial lines, the loss and loss adjustment expense ratio decreased to 63.0% for the nine months ended September 30, 1997 versus 74.7% for the comparable period in the preceding year. The 1997 loss ratio reflects a release of reserve redundancies approximating $600,000. There were no reserve redundancy releases in the first nine months of 1996. AMORTIZATION OF DEFERRED ACQUISITION COSTS, OTHER UNDERWRITING EXPENSES AND INTEREST EXPENSE Amortization of deferred acquisition costs and other underwriting expenses represent the Company's costs to generate premium volume. For the third quarter of 1997, acquisition costs and other underwriting expenses increased approximately 54.5% to $ 1.8 million for the three months ended September 30, 1997 as compared to $1.2 million for the same period in the preceding year. For the nine months ended September 30, 1997, acquisition and other underwriting expenses decreased 24.8% to $4.8 million, while Company's underwriting expense ratio increased to 56.2% for the nine months ended September 30, 1997 in comparison to 40.4% for the nine months ended September 30, 1996. The increase in the expense ratio principally occurred due to the decline in net premiums written in the first nine months of 1997 in comparison to the Company's fixed costs of its insurance operations. In addition, the Company incurred approximately $500,000 of expenses in 1997 for the implementation of new rate filings and marketing costs for the re-introduction of the direct response private passenger auto program and approximately $250,000 for the evaluation of potential business acquisitions. The Company realized $838,000 of miscellaneous income in the first nine of 1997 as compared to $591,000 in the first nine months of 1996 primarily due to increase in income from the non-competition agreement and somewhat offset by the reduction of service fees associated with policies sold to Deerbrook in 1996 . The Company incurred $829,000 and $904,000 of interest expense related to the $9.2 and $10.0 10 million senior subordinated notes during the nine months ended September 30, 1997 and 1996, respectively. The decrease in interest expense resulted from the Company's repurchase of $841,000 of its own senior subordinated notes during 1996 and 1997. FEDERAL INCOME TAXES The effective tax rate for the nine ended September 30, 1997 of 34.6% has increased from the effective tax rate for the first three quarters of 1996 of 30.9%. The Company has eliminated all tax-exempt interest since the first quarter of 1997. NET INCOME Pre-tax net income for the nine months ended September 30, 1997 was $1.1 million versus $1.9 million for the nine months ended September 30, 1996. Net income for the first three quarters of 1997 includes $600,000 related to the release of reserve redundancies, increase in realized investment gains of $189,000, and an increase of $500,000 in revenue under the non-compete clause. These increases were offset by $750,000 of non-recurring acquisition and other underwriting costs relating to the re-introduction of the direct response personal automobile program and evaluation of potential business acquisitions, $270,000 for the reduction of service fees associated with policies sold to Deerbrook in 1996, the gain on the assignment of All Nation's agency contracts in the amount of $476,000 recognized in 1996, and reduction of net investment income of $482,000. Pre-tax net income for the three months ended September 30, 1997 was $219,000 compared to $1.2 million for the same period in the preceding year. The decrease in pre-tax income reflects increases in 1997 in acquisition and other underwriting costs related to the re-introduction of the direct response personal automobile program, while the third quarter 1996 results reflect the impact of favorable loss experience from rate increases taken during early 1996 in the personal automobile line. 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 nine months of 1997. Mercury 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 $6,022,000 during the nine months ended September 30, 1997 as compared to $579,000 in the first three quarters of 1996. The decreased cash flow resulted primarily from a decline in premium revenues at both All Nation and FMIC under the quota share reinsurance agreements with Allstate and Empire. 11 At September 30, 1997, the insurance subsidiaries maintained cash and cash equivalents and short-term investments of $4.9 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 September 30, 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 $28.9 million at September 30, 1997. 12 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 third quarter of 1997. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. EXHIBITS 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 September 30, 1997. 13 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: November 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) 14 EX-27 2 EXHIBIT 27
7 1,000 9-MOS DEC-31-1996 SEP-30-1997 65,579 0 0 1,479 0 0 74,659 3,685 3 752 93,814 0 4,741 48,862 0 9,159 0 0 0 3,437 93,814 6,914 4,004 482 838 5,029 2,037 945 1,132 392 740 0 0 0 740 120.1 120.1 47,035 6,619 (1,590) 1,954 10,645 39,349 0
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