SOURCE: Fortegra Financial

Fortegra Financial

November 12, 2012 16:15 ET

Fortegra Financial Corporation Reports Third Quarter 2012 Net Income $4.1 Million; Net Revenues Increase 8.6%

JACKSONVILLE, FL--(Marketwire - Nov 12, 2012) -  Fortegra Financial Corporation (NYSE: FRF), an insurance services company providing distribution and administration services and insurance-related products, today reported results for the third quarter ended September 30, 2012. 

  • Direct and assumed written premiums increased 6.3% year-over-year to a record $100.4 million

  • Net revenues climbed 8.6% compared to prior-year, including the impact from a change in accounting estimate

  • Third quarter net income was $4.1 million ($0.20 per diluted share) with Adjusted Net Income of $4.7 million ($0.23 per diluted share)

  • Third quarter Adjusted EBITDA was $10.9 million ($0.53 per diluted share) with Adjusted EBITDA margin of 34.9%

"I am pleased with the progress we are making at Fortegra. We continued to build strength throughout the organization not only with our current suite of products but also with the launch of additional complementary products," said Richard S. Kahlbaugh, Chairman, President and Chief Executive Officer of Fortegra. "While cross-selling and direct marketing initiatives continue, we recently conducted market tests on SnapBack, a warranty product providing glass protection to mobile devices and tablets. Based on the positive customer feedback, this confirmed SnapBack's market potential. With SnapBack and other product development initiatives underway in our business, I am confident we have the products and programs that allow us to deliver on our long term growth strategy." 

Third Quarter Results
Total revenues increased 13.8% to $64.3 million for the third quarter of 2012, compared to $56.5 million for the third quarter of 2011. Net revenues (total revenues less net losses and loss adjustment and commissions expenses) increased 8.6% to $31.3 million for the third quarter of 2012, compared to $28.8 million for the prior-year period. The change in accounting estimate recorded during the three months ended September 30, 2012 increased total revenues and net revenues by $4.0 million and $1.2 million, respectively.

Operating expenses were $20.7 million compared with $18.2 million one year ago. The 2011 acquisition of Pacific Benefits Group contributed $1.4 million of the increase.

Net income for the third quarter 2012 was $4.1 million or $0.20 per diluted share, comparable to $4.1 million, or $0.19 per diluted share in the third quarter 2011. The change in accounting estimate contributed $1.0 million during the quarter. In addition, as previously announced, the company experienced a one-time charge of $0.7 million (pre-tax) during the quarter related to the retirement of the previous debt facility.

Adjusted EBITDA for the third quarter of 2012 was $10.9 million, compared to $10.8 million for the third quarter of 2011. Adjusted EBITDA margin for the third quarter of 2012 was 34.9%, compared to 37.7% for the prior-year period.

Segment Results
Payment Protection
For the three months ended September, 2012, net revenues for the Payment Protection segment were $17.5 million, compared to $15.8 million for the prior-year period. The current period included net revenues of $1.2 million attributable to the change in accounting estimate. EBITDA for the Payment Protection segment was $7.9 million for the third quarter of 2012, compared to $7.3 million for the prior-year period. EBITDA margin for the Payment Protection segment was 45.3% for the third quarter of 2012, compared to 46.4% for the prior-year period. Direct and assumed written premiums increased 6.3% year-over-year to a record $100.4 million.

Business Process Outsourcing (BPO)
Net revenues for the BPO segment increased to $5.0 million for the third quarter of 2012, compared to $3.8 million for the third quarter of 2011, primarily attributable to the PBG acquisition. EBITDA for the BPO segment was essentially flat at $1.1 million for the third quarter of 2012 compared to the prior-year period. EBITDA margin for the BPO segment declined to 22.5% for the third quarter of 2012, compared to 29.1% for the prior-year period. The decline reflects weaker than expected margins from Pacific Benefits Group.

Brokerage
Net revenues for the Brokerage segment declined to $8.8 million for the third quarter of 2012 from $9.2 million in the prior-year period. EBITDA for the Brokerage segment fell modestly to $1.6 million for the third quarter of 2012, compared to $1.7 million for the prior-year period. EBITDA margin for the Brokerage segment declined 80 bps year over year to 17.8%. Bliss & Glennon revenues continued to outpace prior year results, while a soft reinsurance market is impacting eReinsure.

Balance Sheet
Total invested assets and cash and cash equivalents amounted to $129.2 million as of September, 2012 compared to $127.1 million as of December 31, 2011. Unearned premiums were $231.1 million as of September 30, 2012 compared to $227.9 million as of December 31, 2011. Total debt outstanding at September 30, 2012 was $106.2 million compared to $108.0 million as of December 31, 2011. Stockholder's equity increased to $137.3 million as of September, 30, 2012 compared to $127.6 million as of December 31, 2011.

During the quarter Fortegra continued to execute on its share repurchase authorization, repurchasing 147,503 shares at an average price of $8.02 per share. Since inception, the company repurchased 979,634 shares while $3.5 million remains available on the authorization. 

Conference Call Information
Fortegra's executive management will host a conference call to discuss its third quarter 2012 results tomorrow, Tuesday, November 13, 2012 at 8:30 a.m. Eastern Time. To participate in the live call, dial (877) 407-3982 within the U.S., or (201) 493-6780 for international callers. A live audio webcast will also be available on the Investors page of the company's website, http://www.fortegra.com. A replay of the call will be available beginning November 13, 2012 at 11:30 a.m. ET and ending on November 20, 2012 11:59 p.m. ET on the company's website, and by dialing (877) 870-5176 in the U.S. or (858) 384-5517 for international callers. The passcode for the replay is 402337.

Statistical Supplement
In addition, the company has provided a statistical supplement which can be accessed through the "Investor Relations" section of Fortegra's website at: http://www.fortegra.com

About Fortegra
Fortegra Financial Corporation is an insurance services company that provides distribution and administration services and insurance-related products to insurance companies, insurance brokers and agents and other financial services companies in the United States. Fortegra's brands include: Life of the South, Consecta, Bliss & Glennon (B&G), eReinsure (eRe), Auto Knight Motor Club, Continental Car Club, United Motor Club, Pacific Benefits Group (PBG), Universal Equipment Recovery Group (UERG), and South Bay Acceptance Corporation (SBAC). 

Use of Non-GAAP Financial Information
Fortegra presents certain additional financial measures related to its Business Segments that are "Non-GAAP measures" within the meaning of Regulation G under the Securities Act of 1934. Fortegra presents these Non-GAAP measures to provide investors with additional information to analyze Fortegra's performance from period to period. Management also uses these measures to assess performance for Fortegra's segments and to allocate resources in managing Fortegra's businesses. However, investors should not consider these Non-GAAP measures as a substitute for the financial information that Fortegra reports in accordance with GAAP. These Non-GAAP measures reflect subjective determinations by management, and may differ from similarly titled Non-GAAP measures presented by other companies.

In this Earnings Release, we present EBITDA and Adjusted EBITDA. These financial measures as presented in this Earnings Release are considered Non-GAAP financial measures and are not recognized terms under U.S. GAAP and should not be used as an indicator of, and are not an alternative to, net income as a measure of operating performance. EBITDA as used in this Earnings Release is net income before interest expense, income taxes, non-controlling interest, depreciation and amortization. Adjusted EBITDA as used in this Earnings Release means "Consolidated Adjusted EBITDA" which is defined under our credit facility with Well Fargo Bank, N.A., is generally consolidated net income before consolidated interest expense, consolidated amortization expense, consolidated depreciation expense and consolidated income tax expense. The other items excluded in this calculation may include if applicable, but are not limited to, specified acquisition costs, impairment of goodwill and other non-cash charges, stock-based compensation expense and unusual or non-recurring charges. The calculation below does not give effect to certain additional adjustments permitted under our credit facility, which if included, would increase the amount of Adjusted EBITDA reflected in this table. We believe presenting EBITDA and Adjusted EBITDA provides investors with a supplemental financial measure of our operating performance.

In addition to the financial covenant requirements under our credit facility, management uses EBITDA and Adjusted EBITDA as financial measures of operating performance for planning purposes, which may include, but are not limited to, the preparation of budgets and projections, the determination of bonus compensation for executive officers, the analysis of the allocation of resources and the evaluation of the effectiveness of business strategies. Although we use EBITDA and Adjusted EBITDA as financial measures to assess the operating performance of our business, both measures have significant limitations as analytical tools because they exclude certain material expenses. For example, they do not include interest expense and the payment of income taxes, which are both a necessary element of our costs and operations. Since we use property and equipment to generate service revenues, depreciation expense is a necessary element of our costs. In addition, the omission of amortization expense associated with our intangible assets further limits the usefulness of this financial measure. Management believes the inclusion of the adjustments to EBITDA and Adjusted EBITDA are appropriate to provide additional information to investors about certain material non-cash items and about unusual items that we do not expect to continue at the same level in the future. Because EBITDA and Adjusted EBITDA do not account for these expenses, its utility as a financial measure of our operating performance has material limitations. Due to these limitations, management does not view EBITDA and Adjusted EBITDA in isolation or as a primary financial performance measure.

We believe EBITDA and Adjusted EBITDA are frequently used by securities analysts, investors and other interested parties in the evaluation of similar companies in similar industries and to measure the company's ability to service its debt and other cash needs. Because the definitions of EBITDA and Adjusted EBITDA (or similar financial measures) may vary among companies and industries, they may not be comparable to other similarly titled financial measures used by other companies.

Forward-Looking Statements
This press release may contain forward-looking statements within the meaning of the Private Securities Litigation Act of 1995. Such statements are subject to risks and uncertainties. All statements other than statements of historical fact included in this press release are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as "anticipate," "estimate," "expect," "project,'' "plan," "intend," "believe," "may," "should," "can have," "likely" and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events.

The forward-looking statements contained in this press release are based on assumptions that we have made in light of our industry experience and our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. As you read this press release, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties (some of which are beyond our control) and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual financial results and cause them to differ materially from those anticipated in the forward-looking statements. We believe these factors include, but are not limited to, those described under Item 1A. - "Risk Factors" in Fortegra's most current Annual Report on Form 10-K and most current Quarterly Report on Form 10-Q. Should one or more of these risks or uncertainties materialize, or should any of these assumptions prove incorrect, our actual results may vary in material respects from those projected in these forward-looking statements.

Any forward-looking statement made by us in this press release speaks only as of the date on which we make it. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

Further information concerning Fortegra and its business, including factors that potentially could materially affect Fortegra's financial results, is contained in Fortegra's filings with the SEC, which are available free of charge at the SEC's website at http://www.sec.gov and from Fortegra's website in the "Investor Relations" section under "SEC Filings" at http://www.fortegra.com.

   
   
FORTEGRA FINANCIAL CORPORATION  
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)  
(All Amounts in Thousands Except Share and Per Share Amounts)  
                       
    For the Three Months Ended   For the Nine Months Ended  
    September 30, 2012     September 30, 2011   September 30, 2012     September 30, 2011  
Revenues:                              
  Service and administrative fees   $ 10,056     $ 10,125   $ 28,790     $ 28,041  
  Brokerage commissions and fees     8,411       8,611     27,295       25,686  
  Ceding commission     11,122       7,027     25,396       21,428  
  Net investment income     744       801     2,219       2,636  
  Net realized (losses) gains on the sale of investments     (16 )     1,196     (6 )     2,423  
  Net earned premium     33,893       28,673     97,770       84,646  
  Other income     52       18     172       138  
Total revenues     64,262       56,451     181,636       164,998  
  Net losses and loss adjustment expenses     11,430       9,714     32,272       28,338  
  Commissions     21,548       17,926     61,479       53,766  
Net Revenues     31,284       28,811     87,885       82,894  
                               
Expenses:                              
  Personnel costs     12,503       10,746     36,020       32,825  
  Other operating expenses     7,876       7,252     21,425       23,704  
  Stock based compensation expense     288       214     657       615  
  Depreciation     871       886     2,584       2,283  
  Amortization of intangibles     1,127       998     3,775       3,428  
  Interest expense     2,025       1,906     5,267       5,862  
  Loss on sale of subsidiary     -       477     -       477  
Total expenses     24,690       22,479     69,728       69,194  
Income before income taxes and non-controlling interest     6,594       6,332     18,157       13,700  
  Income taxes     2,455       2,259     6,520       4,847  
Income before non-controlling interest     4,139       4,073     11,637       8,853  
  Less: net income (loss) attributable to non-controlling interest     29       1     62       (171 )
Net income   $ 4,110     $ 4,072   $ 11,575     $ 9,024  
                               
Earnings per share:                              
  Basic   $ 0.21     $ 0.20   $ 0.59     $ 0.44  
  Diluted   $ 0.20     $ 0.19   $ 0.56     $ 0.42  
Weighted average common shares outstanding:                              
  Basic     19,531,694       20,404,441     19,705,105       20,355,057  
  Diluted     20,463,238       21,214,365     20,620,084       21,375,184  
                                 
                                 
                                 
FORTEGRA FINANCIAL CORPORATION  
CONSOLIDATED BALANCE SHEETS (Unaudited)  
(All Amounts in Thousands Except Share and Per Share Amounts)  
                         
    September 30, 2012     June 30, 2012(1)     March 31, 2012(1)     December 31, 2011  
Assets:                                
Investments:                                
  Fixed maturity securities available-for-sale at fair value (amortized cost of $107,150 at September 30, 2012 and $92,311 at December 31, 2011)   $ 110,833     $ 88,021     $ 92,843     $ 93,509  
  Equity securities available-for-sale at fair value (cost of $5,882 at September 30, 2012 and $1,203 at December 31, 2011)     6,085       5,653       3,793       1,219  
  Short-term investments     970       970       970       1,070  
    Total investments     117,888       94,644       97,606       95,798  
Cash and cash equivalents     11,284       28,350       18,676       31,339  
Restricted cash     21,232       23,659       18,959       14,180  
Accrued investment income     1,115       985       927       929  
Notes receivable, net     4,281       3,783       3,802       3,603  
Accounts and premiums receivable, net     25,056       27,384       31,184       20,172  
Other receivables     15,708       14,505       16,798       9,103  
Reinsurance receivables     197,184       191,671       186,421       194,740  
Deferred acquisition costs     56,903       55,983       52,517       55,467  
Property and equipment, net     17,227       16,915       15,728       14,666  
Goodwill     104,668       104,668       104,500       104,500  
Other intangibles, net     50,803       51,930       52,928       54,410  
Other assets     6,452       6,702       5,836       6,070  
      Total assets   $ 629,801     $ 621,179     $ 605,882     $ 604,977  
                                 
Liabilities:                                
Unpaid claims   $ 32,041     $ 31,618     $ 32,497     $ 32,583  
Unearned premiums     231,114       228,991       221,059       227,929  
Policyholder account balances     26,223       26,942       27,565       28,040  
Accrued expenses, accounts payable, income taxes and other liabilities     51,785       49,347       42,348       35,446  
Deferred revenue     19,164       18,386       17,617       20,781  
Note payable     71,168       72,000       74,700       73,000  
Preferred trust securities     35,000       35,000       35,000       35,000  
Deferred income taxes, net     26,023       25,691       24,815       24,614  
    Total liabilities     492,518       487,975       475,601       477,393  
                                 
                                 
Stockholders' Equity:                                
Preferred stock, par value $0.01; 10,000,000 shares authorized; none issued     -       -       -       -  
Common stock, par value $0.01; 150,000,000 shares authorized; 20,681,252 and 20,561,328 shares issued at September 30, 2012 and December 31, 2011, respectively, including shares in treasury     207       207       206       206  
Treasury stock, at cost; 1,024,212 shares and 516,132 shares at September 30, 2012 and December 31, 2011, respectively     (6,651 )     (5,468 )     (4,122 )     (2,728 )
Additional paid-in capital     97,095       96,785       96,378       96,199  
Accumulated other comprehensive loss, net of tax     (673 )     (1,480 )     (1,324 )     (1,754 )
Retained earnings     46,725       42,615       38,613       35,150  
Stockholders' equity before non-controlling interest     136,703       132,659       129,751       127,073  
Non-controlling interest     580       545       530       511  
    Total stockholders' equity     137,283       133,204       130,281       127,584  
      Total liabilities and stockholders' equity   $ 629,801     $ 621,179     $ 605,882     $ 604,977  
                                 
(1) The balance sheets for March 31, 2012 and June 30, 2012 have been recast to reflect prior period adjustments related to business combination valuation adjustments  
   
   
   
FORTEGRA FINANCIAL CORPORATION  
CONSOLIDATED STATEMENTS OF INCOME- Segments (Unaudited)  
(All Amounts in Thousands)  
                     
    For the Three Months Ended     For the Nine Months Ended  
    September 30, 2012   September 30, 2011     September 30, 2012   September 30, 2011  
Segment Net Revenue                            
  Payment Protection   $ 17,494   $ 15,770     $ 45,676   $ 43,871  
  BPO     4,951     3,833       13,565     11,088  
  Brokerage     8,839     9,208       28,644     27,935  
  Corporate     -     -       -     -  
  Segment net revenues     31,284     28,811       87,885     82,894  
  Net losses and loss adjustment expenses     11,430     9,714       32,272     28,338  
  Commissions     21,548     17,926       61,479     53,766  
    Total segment revenue     64,262     56,451       181,636     164,998  
                             
Operating Expenses                            
  Payment Protection     9,563     8,445       26,205     25,857  
  BPO     3,836     2,717       10,320     8,164  
  Brokerage     7,268     7,491       21,577     21,837  
  Corporate     -     36       -     1,763  
  Total operating expenses     20,667     18,689       58,102     57,621  
  Net losses and loss adjustment expenses     11,430     9,714       32,272     28,338  
  Commissions     21,548     17,926       61,479     53,766  
    Total operating expenses before depreciation, amortization and interest expense     53,645     46,329       151,853     139,725  
                             
EBITDA                            
  Payment Protection     7,931     7,325       19,471     18,014  
  BPO     1,115     1,116       3,245     2,924  
  Brokerage     1,571     1,717       7,067     6,098  
  Corporate     -     (36 )     -     (1,763 )
    Total EBITDA     10,617     10,122       29,783     25,273  
                             
Depreciation and amortization                            
  Payment Protection     863     927       2,577     3,204  
  BPO     494     307       1,495     824  
  Brokerage     641     650       2,287     1,683  
  Corporate     -     -       -     -  
    Total depreciation and amortization     1,998     1,884       6,359     5,711  
                             
Interest Expense                            
  Payment Protection     1,359     1,053       3,342     3,622  
  BPO     294     96       820     258  
  Brokerage     372     757       1,105     1,982  
  Corporate     -     -       -     -  
    Total interest expense     2,025     1,906       5,267     5,862  
                             
Income before income taxes and non-controlling interest                            
  Payment Protection     5,709     5,345       13,552     11,188  
  BPO     327     713       930     1,842  
  Brokerage     558     310       3,675     2,433  
  Corporate     -     (36 )     -     (1,763 )
Total income before income taxes and non-controlling interest     6,594     6,332       18,157     13,700  
  Income taxes     2,455     2,259       6,520     4,847  
  Less: net income (loss) attributable to non-controlling interest     29     1       62     (171 )
Net income   $ 4,110   $ 4,072     $ 11,575   $ 9,024  
                             
                             
                             
FORTEGRA FINANCIAL CORPORATION  
RECONCILIATION OF NON-GAAP FINANCIAL INFORMATION - ADJUSTED EBITDA (Unaudited)  
(All Amounts in Thousands, except for percentages)  
                         
    For the Three Months Ended     For the Nine Months Ended  
    September 30, 2012     September 30, 2011     September 30, 2012     September 30, 2011  
Net income   $ 4,110     $ 4,072     $ 11,575     $ 9,024  
  Depreciation     871       886       2,584       2,283  
  Amortization of intangibles     1,127       998       3,775       3,428  
  Interest expense     2,025       1,906       5,267       5,862  
  Income taxes     2,455       2,259       6,520       4,847  
  Net income (loss) attributable to non-controlling interest     29       1       62       (171 )
EBITDA     10,617       10,122       29,783       25,273  
    Transaction costs (a)     5       36       139       829  
    Stock-based compensation expense     288       214       657       615  
    Corporate governance study     -       -       -       248  
    Relocation expenses     -       -       -       207  
    Statutory audits     -       -       -       98  
    Loss on sale of subsidiary     -       477       -       477  
Adjusted EBITDA   $ 10,910     $ 10,849     $ 30,579     $ 27,747  
                                 
EBITDA Margin     33.9 %     35.1 %     33.9 %     30.5 %
Adjusted EBITDA Margin     34.9 %     37.7 %     34.8 %     33.5 %
                                 
(a) Represents transaction costs associated with acquisitions.  
   
   
   
FORTEGRA FINANCIAL CORPORATION
RECONCILIATION OF NON-GAAP FINANCIAL INFORMATION - NET INCOME (Unaudited)
(All Amounts in Thousands Except Share and Per Share Amounts)
                 
                 
    For the Three Months Ended   For the Nine Months Ended
    September 30, 2012   September 30, 2011   September 30, 2012   September 30, 2011
Net income   $ 4,110   $ 4,072   $ 11,575   $ 9,024
  Non-GAAP Adjustments, net of tax                        
    Transaction costs associated with acquisitions (1)     5     36     139     829
    Stock-based compensation     186     138     425     398
    Corporate governance study     -     -     -     156
    Relocation expenses     -     -     -     130
    Statutory audits     -     -     -     62
    Loss on sale of subsidiary     -     300     -     300
    Retirement of debt (2)     439     -     439     560
  Total Non-GAAP adjustments, net of tax     630     474     1,003     2,435
Net income - Non-GAAP basis   $ 4,740   $ 4,546   $ 12,578   $ 11,459
                         
GAAP Earnings per share - basic   $ 0.21   $ 0.20   $ 0.59   $ 0.44
  Non-GAAP adjustments, net of tax     0.03     0.02     0.05     0.12
Non-GAAP Earnings per common share - basic   $ 0.24   $ 0.22   $ 0.64   $ 0.56
                         
GAAP Earnings per share - diluted   $ 0.20   $ 0.19   $ 0.56   $ 0.42
  Non-GAAP adjustments, net of tax     0.03     0.02     0.05     0.12
Non-GAAP Earnings per common share - diluted   $ 0.23   $ 0.21   $ 0.61   $ 0.54
                         
Weighted average common shares outstanding:                        
  Basic     19,531,694     20,404,441     19,705,105     20,355,057
  Diluted     20,463,238     21,214,365     20,620,084     21,375,184
                         
(1) Adjustments not tax effected.
(2) Adjustments not tax effected for the 2011 periods presented. 2012 amounts represent the write off of $678 in previously capitalized transactions costs on the termination of the SunTrust Bank, N.A., revolving credit line, net of tax.

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