<PAGE>
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.
<PAGE>
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
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
FIRST MERCURY FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1997 1996
---- ----
(Unaudited)
<S> <C> <C>
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
---------- -----------
---------- -----------
</TABLE>
2
<PAGE>
FIRST MERCURY FINANCIAL CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
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
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
3
<PAGE>
FIRST MERCURY FINANCIAL CORPORATION
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Net Unrealized
Gross Paid-in Gains (Losses),
Preferred Common and Contributed Net of Federal Retained
Stock Stock Capital Income Taxes Earnings Total
----- ----- ------- ------------ -------- -----
<S> <C> <C> <C> <C> <C> <C>
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
---- -- --------- --------- ---------- ----------
---- -- --------- --------- ---------- ----------
</TABLE>
4
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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%
------ ------- ------ ------- ------ ------- ------ -------
------ ------- ------ ------- ------ ------- ------ -------
</TABLE>
8
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 65,579
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,479
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 74,659
<CASH> 3,685
<RECOVER-REINSURE> 3
<DEFERRED-ACQUISITION> 752
<TOTAL-ASSETS> 93,814
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 4,741
<POLICY-OTHER> 48,862
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 9,159
0
0
<COMMON> 0
<OTHER-SE> 3,437
<TOTAL-LIABILITY-AND-EQUITY> 93,814
6,914
<INVESTMENT-INCOME> 4,004
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</TABLE>
