10-Q 1 a10q9302012.htm 10-Q 10Q 9.30.2012


        

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2012           OR
 
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ____ to ____

Commission file number 001-35009
Fortegra Financial Corporation
(Exact name of Registrant as specified in its charter)

Delaware
 
58-1461399
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
10151 Deerwood Park Boulevard, Building 100, Suite 330 Jacksonville, FL
 
32256
(Address of principal executive offices)
 
(Zip Code)
 
 
 
Registrant's telephone number, including area code:
 
(866)-961-9529


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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o     Accelerated filer o Non-accelerated filer x Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x

The number of outstanding shares of the registrant's Common Stock, $0.01 par value, outstanding as of October 31, 2012 was 19,657,152.





FORTEGRA FINANCIAL CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED
September 30, 2012

TABLE OF CONTENTS


PART I - FINANCIAL INFORMATION
Page Number
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II - OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
Item 5.
 
 
 
Item 6
 
 
 
 
 
 
 
Exhibit Index


1


PART I. FINANCIAL INFORMATION


Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q ("Form 10-Q") to "Fortegra Financial," "Fortegra," "we," "us," "the Company" or similar terms refer to Fortegra Financial Corporation and its subsidiaries.

FORWARD-LOOKING STATEMENTS
 This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which are made in reliance upon the protection provided by such act for forward-looking statements. Such statements are subject to risks and uncertainties. All statements other than statements of historical fact included in this Form 10-Q 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," "will," "likely" and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating results or financial performance or other events.

The forward-looking statements contained in this Form 10-Q 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 Form 10-Q, 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 Part I, ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and Part II, ITEM 1A. RISK FACTORS. Should one or more of these risks or uncertainties materialize, or should any of these assumptions prove incorrect, our actual results may vary materially from those projected in these forward-looking statements.

Any forward-looking statement made by us in this Form 10-Q 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.

This Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2011 ("Annual Report") along with the Company's other filings with the Securities and Exchange Commission ("SEC").





2


ITEM 1. FINANCIAL STATEMENTS

FORTEGRA FINANCIAL CORPORATION
 CONSOLIDATED BALANCE SHEETS (Unaudited)
(All Amounts in Thousands Except Share and Per Share Amounts)

 
September 30, 2012
 
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

 
$
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

 
1,219

Short-term investments
970

 
1,070

Total investments
117,888

 
95,798

Cash and cash equivalents
11,284

 
31,339

Restricted cash
21,232

 
14,180

Accrued investment income
1,115

 
929

Notes receivable, net
4,281

 
3,603

Accounts and premiums receivable, net
25,056

 
20,172

Other receivables
15,708

 
9,103

Reinsurance receivables
197,184

 
194,740

Deferred acquisition costs
56,903

 
55,467

Property and equipment, net
17,227

 
14,666

Goodwill
104,668

 
104,500

Other intangibles, net
50,803

 
54,410

Other assets
6,452

 
6,070

Total assets
$
629,801

 
$
604,977

 
 
 
 
Liabilities:
 
 
 
Unpaid claims
$
32,041

 
$
32,583

Unearned premiums
231,114

 
227,929

Policyholder account balances
26,223

 
28,040

Accrued expenses, accounts payable, income taxes and other liabilities
51,785

 
35,446

Deferred revenue
19,164

 
20,781

Note payable
71,168

 
73,000

Preferred trust securities
35,000

 
35,000

Deferred income taxes, net
26,023

 
24,614

Total liabilities
492,518

 
477,393

Commitments and Contingencies (Note 16)

 

 
 
 
 
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

 
206

Treasury stock, at cost; 1,024,212 shares and 516,132 shares at September 30, 2012 and December 31, 2011, respectively
(6,651
)
 
(2,728
)
Additional paid-in capital
97,095

 
96,199

Accumulated other comprehensive loss, net of tax
(673
)
 
(1,754
)
Retained earnings
46,725

 
35,150

Stockholders' equity before non-controlling interest
136,703

 
127,073

Non-controlling interest
580

 
511

Total stockholders' equity
137,283

 
127,584

Total liabilities and stockholders' equity
$
629,801

 
$
604,977



See accompanying notes to these consolidated financial statements.

3


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

 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Net losses and loss adjustment expenses
11,430

 
9,714

 
32,272

 
28,338

Commissions
21,548

 
17,926

 
61,479

 
53,766

Personnel costs
12,708

 
10,945

 
36,467

 
33,365

Other operating expenses
7,959

 
7,267

 
21,635

 
23,779

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
57,668

 
50,119

 
163,479

 
151,298

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

















See accompanying notes to these consolidated financial statements.

4


FORTEGRA FINANCIAL CORPORATION
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (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
Net income
$
4,110

 
$
4,072

 
$
11,575

 
$
9,024

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized gains (losses) on available-for-sale securities
 
 
 
 
 
 
 
Unrealized holding gains arising during the period
1,432

 
720

 
2,666

 
1,165

Related tax (expense) benefit
(501
)
 
(252
)
 
(933
)
 
(454
)
Less: reclassification of losses (gains) included in net income
16

 
(1,196
)
 
6

 
(2,423
)
Related tax (expense) benefit
(6
)
 
419

 
(2
)
 
848

Unrealized gains (losses) on available-for-sale securities, net of tax
941

 
(309
)
 
1,737

 
(864
)
 
 
 
 
 
 
 
 
Interest rate swap
 
 
 
 
 
 
 
Unrealized loss on interest rate swap
(159
)
 
(2,030
)
 
(915
)
 
(3,300
)
Related tax benefit
55

 
710

 
320

 
1,155

Add: reclassification of losses included in net income
(39
)
 

 
(83
)
 

Related tax expense
15

 

 
29

 

Unrealized loss on interest rate swap, net of tax
(128
)
 
(1,320
)
 
(649
)
 
(2,145
)
Other comprehensive income (loss) income before non-controlling interest, net of tax
813

 
(1,629
)
 
1,088

 
(3,009
)
Less: comprehensive income attributable to non-controlling interest
6

 

 
7

 
4

Other comprehensive income (loss)
807

 
(1,629
)
 
1,081

 
(3,013
)
Comprehensive income
$
4,917

 
$
2,443

 
$
12,656

 
$
6,011





























See accompanying notes to these consolidated financial statements.

5


FORTEGRA FINANCIAL CORPORATION
 
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
(All Amounts in Thousands Except Share Amounts)




 
Common Stock
 
Treasury Stock
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings
 
Non-controlling Interest
 
Total Stockholders' Equity
Balance, December 31, 2011, as previously reported
20,561,328

 
$
206

 
(516,132
)
 
$
(2,728
)
 
$
96,199

 
$
(1,754
)
 
$
39,822

 
$
532

 
$
132,277

Cumulative effect of adjustment resulting from new accounting guidance

 

 

 

 

 

 
(4,672
)
 
(21
)
 
(4,693
)
Balance, December 31, 2011, restated
20,561,328

 
206

 
(516,132
)
 
(2,728
)
 
96,199

 
(1,754
)
 
35,150

 
511

 
127,584

Net income

 

 

 

 

 

 
11,575

 
62

 
11,637

Other comprehensive income

 

 

 

 

 
1,081

 

 
7

 
1,088

Stock-based compensation
90,519

 
1

 

 

 
710

 

 

 

 
711

Shares issued for the Employee Stock Purchase Plan
29,405

 

 

 

 
167

 
 
 
 
 
 
 
167

Treasury stock purchased

 

 
(508,080
)
 
(3,923
)
 

 

 

 

 
(3,923
)
Options exercised, net of forfeitures

 

 

 

 
19

 

 

 

 
19

Balance, September 30, 2012
20,681,252

 
$
207

 
(1,024,212
)
 
$
(6,651
)
 
$
97,095

 
$
(673
)
 
$
46,725

 
$
580

 
$
137,283























See accompanying notes to these consolidated financial statements.

6


FORTEGRA FINANCIAL CORPORATION
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(All Amounts in Thousands)

 
For the Nine Months Ended
 
September 30, 2012
 
September 30, 2011
Operating Activities
 
 
 
Net income
$
11,575

 
$
9,024

Adjustments to reconcile net income to net cash flows provided by operating activities:
 
 
 
Change in deferred policy acquisition costs
(1,437
)
 
3,369

Depreciation and amortization
6,359

 
5,711

Deferred income tax expense
822

 
2,704

Net realized loss (gains) on the sale of investments
6

 
(2,423
)
Loss on sale of subsidiary

 
477

Stock-based compensation expense
711

 
615

Amortization of premiums and accretion of discounts on investments
932

 
408

Non-controlling interest
62

 
(171
)
Changes in operating assets and liabilities, net of the effects of acquisitions and dispositions:


 

Accrued investment income
(186
)
 
39

Accounts and premiums receivable, net
(4,884
)
 
(5,300
)
Other receivables
(6,605
)
 
8,152

Reinsurance receivables
(2,444
)
 
(527
)
Other assets
(382
)
 
559

Unpaid claims
(542
)
 
(2,296
)
Unearned premiums
3,185

 
6,558

Policyholder account balances
(1,817
)
 

Accrued expenses, accounts payable, income taxes and other liabilities
15,340

 
(20,964
)
Deferred revenue
(1,617
)
 
(5,595
)
Net cash flows provided by operating activities
19,078

 
340

Investing activities
 
 
 
Proceeds from maturities, calls and prepayments of available-for-sale investments
8,052

 
7,418

Proceeds from sales of available-for-sale investments
4,980

 
33,663

Proceeds from maturities of short term investments
100

 
100

Purchases of available-for-sale investments
(33,484
)
 
(37,859
)
Purchases of property and equipment
(5,174
)
 
(5,411
)
Net paid for acquisitions of subsidiaries, net of cash received
(308
)
 
(40,611
)
Sale of subsidiary, net of cash paid

 
(153
)
Net (issuance) proceeds from notes receivable
(678
)
 
24

Change in restricted cash
(7,052
)
 
6,043

Net cash flows used in investing activities
(33,564
)
 
(36,786
)
Financing activities
 
 
 
Payments on notes payable
(126,200
)
 
(64,263
)
Proceeds from notes payable
124,368

 
91,550

Payments for initial public offering costs

 
(827
)
Payments on redeemable preferred stock

 
(10,940
)
Net proceeds from exercise of stock options
19

 
651

Purchase of treasury stock
(3,923
)
 

Net proceeds received from stock issued in the Employee Stock Purchase Plan
167

 

Net cash flows (used in) provided by financing activities
(5,569
)
 
16,171

Net decrease in cash and cash equivalents
(20,055
)
 
(20,275
)
Cash and cash equivalents, beginning of period
31,339

 
43,389

Cash and cash equivalents, end of period
$
11,284

 
$
23,114



See accompanying notes to these consolidated financial statements.

7

FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)


Nature of Operations

Fortegra Financial Corporation (Traded on the New York Stock Exchange under the symbol: FRF), including its subsidiaries ("Fortegra" or the "Company"), is a diversified insurance services company headquartered in Jacksonville, Florida that provides distribution and administration services on a wholesale basis to insurance companies, insurance brokers and agents and other financial services companies primarily in the United States. In 2008, the Company changed its name from Life of the South Corporation to Fortegra Financial Corporation. The Company was incorporated in 1981 in the State of Georgia and re-incorporated in the State of Delaware in 2010. Most of the Company's business is generated through networks of small to mid-sized community and regional banks, small loan companies and automobile dealerships. The Consolidated Financial Statements include the Company and its majority-owned and controlled subsidiaries, including:
LOTS Intermediate Co. ("LOTS IM")
Bliss and Glennon, Inc. ("B&G")
CRC Reassurance Company, Ltd. ("CRC")
Insurance Company of the South ("ICOTS")
Life of the South Insurance Company ("LOTS") and its subsidiary, Bankers Life of Louisiana ("Bankers Life")
LOTS Reassurance Company ("LOTS RE")
LOTSolutions, Inc.
Lyndon Southern Insurance Company ("Lyndon Southern")
Southern Financial Life Insurance Company ("SFLAC")
South Bay Acceptance Corporation ("South Bay")
Continental Car Club, Inc. ("Continental")
United Motor Club of America, Inc. ("United")
Auto Knight Motor Club, Inc. ("Auto Knight")
eReinsure.com, Inc. ("eReinsure")
Pacific Benefits Group Northwest, LLC ("PBG")
Magna Insurance Company ("Magna")

The Company operates in three business segments: (i) Payment Protection, (ii) Business Process Outsourcing ("BPO") and (iii) Brokerage. Payment Protection specializes in protecting lenders and their consumers from death, disability or other events that could otherwise impair their ability to repay a debt and also offers warranty and service contracts and motor club solutions. BPO provides an assortment of administrative services tailored to insurance and other financial services companies through a virtual insurance company platform. Brokerage uses a pure wholesale sell-through model to sell specialty casualty and surplus lines insurance and also provides web-hosted applications used by insurers, reinsurers and reinsurance brokers for the global reinsurance market.

1. Basis of Presentation

The accompanying unaudited interim Consolidated Financial Statements of Fortegra have been prepared in conformity with generally accepted accounting principles in the United States of America ("U.S. GAAP") promulgated by the Financial Accounting Standards Board ("FASB"), Accounting Standards Codification ("ASC" or "the guidance") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements and should be read in conjunction with the Company's Annual Report.

The interim financial statements in this Form 10-Q have not been audited. In the opinion of management, the accompanying unaudited interim financial information reflects all adjustments, including normal recurring adjustments and the adjustments for the retrospective adoption of the new accounting guidance for Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts as described in Note 3, necessary to present fairly Fortegra's financial position, results of operations and other comprehensive income for each of the interim periods presented. The results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the full year ending on December 31, 2012.

2. Summary of Significant Accounting Policies

Fortegra's interim Consolidated Financial Statements as of September 30, 2012 and 2011 are unaudited and have been prepared following the significant accounting policies disclosed in Note 2 of the Notes to the Consolidated Financial Statements of the Company's Annual Report, except as discussed in Note 3 of this Form 10-Q for the adoption of the new guidance on Accounting

8

FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)

for Costs Associated with Acquiring or Renewing Insurance Contracts effective January 1, 2012.

Principles of Consolidation
The unaudited Consolidated Financial Statements include the accounts of Fortegra Financial Corporation and its majority-owned and controlled subsidiaries. All material intercompany account balances and transactions have been eliminated. The third-party ownership of 15% of the common stock of SFLAC has been reflected as non-controlling interest on the Consolidated Balance Sheets. Income (loss) attributable to SFLAC's minority shareholders has been reflected on the Consolidated Statements of Income as income (loss) attributable to non-controlling interest and on the Consolidated Statements of Comprehensive Income as comprehensive income (loss) attributable to non-controlling interest.

Comprehensive Income (Loss)
Comprehensive income (loss) includes both net income and other items of comprehensive income comprised of unrealized gains and losses on investment securities classified as available-for-sale and unrealized gains and losses on the interest rate swap.

Use of Estimates
Preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications
Certain items in prior financial statements have been reclassified to conform to the current presentation, which had no material impact on net income, comprehensive income or loss, net cash provided by operating activities or stockholders' equity, except as disclosed in Note 3.

Change in Accounting Estimate - Unearned Premium Reserves for the Payment Protection Segment
Prior to the three months ended September 30, 2012, the Company's method of estimating unearned premium reserves in relation to the loss patterns and the related recognition of income for certain types of credit property and vendor single interest payment protection products was based on the pro-rata method.  The use of the pro-rata method was based on the best information available at the time the Company's financial statements were prepared.

During the past two years the Company has increased the volume of business related to these product types, thereby increasing the volume of policy and claims data specific to the Company's product types. During the three months ended September 30, 2012, the Company determined it had accumulated a sufficient volume of policy and claims data to be able to perform an actuarial analysis in order to determine the preferable estimation approach. As a result of the analysis of the recently collected additional data, the Company has gained better insight into its product loss patterns and can provide improved judgment and estimation to more accurately calculate the unearned premium reserves and the associated recognition of income. Upon completion of the analysis, Management determined that the Rule of 78s applied on a daily basis provides a more accurate representation of historical loss patterns and the recognition of the related income; as such, the estimation method was changed. The change in approach has been accounted for as a change in accounting estimate that is effected by a change in accounting principle and is justifiable in that it is the preferable approach for income recognition based on the Company's actuarial study.  This change in accounting estimate was applied prospectively in accordance with ASC 250-10-45-18. Summarized below is the effect of the change in accounting estimate on the Consolidated Statement of Income for the following periods:


9

FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)

 
For the Three and Nine Months Ended

September 30, 2012
Revenues:
 
Net earned premium
$
1,845

Ceding commission
2,135

Net increase to total revenues from the change in accounting estimate
3,980

Expenses:
 
Commissions
2,739

Other operating expenses
(268
)
Net increase to total expenses from the change in accounting estimate
2,471

Net increase to income before income taxes from the change in accounting estimate
1,509

Income taxes
533

Net increase to net income from the change in accounting estimate
$
976

 
 
Increase to earnings per share from the change in accounting estimate:
 
Basic
$
0.05

Diluted
$
0.05


Immaterial Correction of Prior Period Errors
Prior to the filing of the Company’s Form 10-Q for the three months ended September 30, 2012, the Company identified errors related to the purchase accounting adjustments for the April 2009 acquisition of B&G and the 2011 acquisition of Auto Knight. As a result, the Company’s historical balances for goodwill, property and equipment and deferred taxes were incorrectly reported in prior period filings for the years ending December 31, 2009, 2010 and 2011, respectively. Management evaluated the materiality of the errors from a qualitative and quantitative perspective and concluded that the errors were immaterial to each of the prior periods noted above.

As a result, in this Form 10-Q, the Consolidated Balance Sheet data as of December 31, 2011 has been revised to reflect the correction of the error associated with the Auto Knight acquisition. This correction increased goodwill by $0.6 million and increased deferred income tax liabilities by $0.6 million.

In addition, the Consolidated Balance Sheet data as of December 31, 2009 has been revised to reflect the correction of the error associated with the B&G acquisition. This correction increased goodwill by $0.4 million, decreased deferred income tax liabilities by $0.3 million and decreased property and equipment by $0.7 million. The revised financial data will be reflected in future filings containing Consolidated Balance Sheet information for the year ending December 31, 2009.

Subsequent Events
The Company reviewed all material subsequent events that occurred up to the date the Company's Consolidated Financial Statements were issued to determine whether any event required recognition or disclosure in the financial statements and/or disclosure in the notes thereto. For more information, please see the note, "Subsequent Events."

3. Recent Accounting Standards

Recently Adopted Accounting Pronouncements
In June 2011, the FASB issued Accounting Standards Update ("ASU") No. 2011-05, Comprehensive Income (Topic 820), which changes the presentation of comprehensive income. These changes give an entity the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements; the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity was eliminated. This guidance became effective for the Company on January 1, 2012 and only requires a change in the format of the presentation of comprehensive income. The adoption of this guidance did not impact the Company’s consolidated financial position, results of operations or cash flows.

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards ("IFRS"), which provides a consistent definition of

10

FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)

fair value and ensures that the fair value measurement and disclosure requirements are similar between U.S. GAAP and IFRS. The guidance changes certain fair value measurement principles and expands the disclosure requirements particularly for Level 3 fair value measurements. The guidance became effective for the Company beginning January 1, 2012 and is to be applied prospectively. The adoption of this guidance, which primarily relates to disclosure, did not impact the Company’s consolidated financial position, results of operations or cash flows.

In October 2010, the FASB issued ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts, which updates the accounting for deferred acquisition costs. This guidance modifies the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new and renewal insurance contracts. The amendments in this guidance specify that the costs are limited to incremental direct costs that result directly from successful contract transactions and would not have been incurred by the insurance entity had the contract transactions not occurred. These costs must be directly related to underwriting, policy issuance and processing, medical and inspection reports and sales force contract selling. The amendments also specify that advertising costs are only included as deferred acquisition costs if the direct-response advertising criteria are met. ASU 2010-26 is effective for interim and annual reporting periods beginning after December 15, 2011. The Company retrospectively adopted the new standard on January 1, 2012. As of January 1, 2011, the beginning of the earliest period presented, the cumulative effect of the adjustment recorded to adopt this guidance resulted in decreases of $6.4 million to deferred acquisition costs, $2.3 million to deferred income taxes and $4.2 million to retained earnings. The following tables present the effect of the retrospective adoption on the Company's Consolidated Financial Statement line items for prior periods:
 
December 31, 2011
Consolidated Balance Sheets
As Previously Reported (1)
 
Effect of the Change
 
As Restated
Assets
 
 
 
 
 
Deferred acquisition costs
$
62,687

 
$
(7,220
)
 
$
55,467

Total assets
$
612,197

 
$
(7,220
)
 
$
604,977

 
 
 
 
 
 
Liabilities
 
 


 
 
Deferred income taxes
$
27,141

 
$
(2,527
)
 
$
24,614

Total Liabilities
479,920

 
(2,527
)
 
477,393

Stockholders' Equity
 
 


 
 
Retained earnings
39,822

 
(4,672
)
 
35,150

Non-controlling interest
532

 
(21
)
 
511

Total Stockholders' Equity
132,277

 
(4,693
)
 
127,584

Total Liabilities and Stockholders' Equity
$
612,197

 
(7,220
)
 
$
604,977

 
 
 
 
 
 
(1) - Includes the business acquisition valuation measurement period adjustments described in Notes 6, 7 and 8.

11

FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)

 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30, 2011
 
September 30, 2011
Consolidated Statements of Income
As Previously Reported
 
Effect of the Change
 
As Restated
 
As Previously Reported
 
Effect of the Change
 
As Restated
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Total Revenues
$
56,451

 
$

 
$
56,451

 
$
164,998

 
$

 
$
164,998

Expenses:
 
 
 
 
 
 
 
 
 
 
 
Net losses and loss adjustment expenses
9,714

 

 
9,714

 
28,338

 

 
28,338

Commissions
17,926

 

 
17,926

 
53,766

 

 
53,766

Personnel costs
10,945

 

 
10,945

 
33,365

 

 
33,365

Other operating expenses
7,171

 
96

 
7,267

 
23,331

 
448

 
23,779

Depreciation
886

 

 
886

 
2,283

 

 
2,283

Amortization of intangibles
998

 

 
998

 
3,428

 

 
3,428

Interest expense
1,906

 

 
1,906

 
5,862

 

 
5,862

Loss on sale of subsidiary
477

 
 
 
477

 
477

 
 
 
477

Total expenses
50,023

 
96

 
50,119

 
150,850

 
448

 
151,298

Income before income taxes and non-controlling interest
6,428

 
(96
)
 
6,332

 
14,148

 
(448
)
 
13,700

Income taxes
2,292

 
(33
)
 
2,259

 
5,003

 
(156
)
 
4,847

Income before non-controlling interest
4,136

 
(63
)
 
4,073

 
9,145

 
(292
)
 
8,853

Less: net (loss) income attributable to non-controlling interest
1

 

 
1

 
(171
)
 

 
(171
)
Net income
$
4,135

 
$
(63
)
 
$
4,072

 
$
9,316

 
$
(292
)
 
$
9,024

 
 
 
 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
 
 
 
Basic
$
0.20

 
$

 
$
0.20

 
$
0.46

 
$
(0.02
)
 
$
0.44

Diluted
$
0.19

 
$

 
$
0.19

 
$
0.44

 
$
(0.02
)
 
$
0.42


Recently Issued Accounting Pronouncements
In July 2012, the FASB issued ASU No. 2012-02, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. The ASU permits entities to perform an optional qualitative assessment for determining whether it is more likely than not that an indefinite-lived intangible asset is impaired. The guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Company is evaluating the impact of the ASU; however, it is not expected to have a significant impact on the Company's consolidated financial position, results of operations or cash flows.

In December 2011, the FASB issued ASU No. 2011-11, Disclosures About Offsetting Assets and Liabilities. This standard requires the disclosure of both gross and net information about instruments and transactions eligible for offset in the statement of financial position, as well as instruments and transactions subject to an agreement similar to a master netting arrangement. In addition, the standard requires disclosure of collateral received and posted in connection with master netting agreements or similar arrangements. The new requirements are effective for the Company beginning on January 1, 2013. As the provisions of ASU No. 2011-11 only impact the disclosure requirements related to the offsetting of assets and liabilities, the Company does not expect a significant impact on its consolidated financial position, results of operations or cash flows as a result of adoption of these new requirements.

4. Earnings Per Share

Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding adjusted to include the effect of potentially dilutive common shares, which includes outstanding stock options and non-vested restricted stock awards, using the treasury stock method. Potentially dilutive common shares for which the exercise price was greater than the average market price of common shares are excluded from the computation of diluted earnings per share, as the effect would be anti-dilutive.

12

FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)

Earnings per share is calculated as follows:
For the Three Months Ended
 
For the Nine Months Ended
 
September 30, 2012
 
September 30, 2011
 
September 30, 2012
 
September 30, 2011
Numerator for both basic and diluted earnings per share:
 
 
 
 
 
 
 
Net income
$
4,110

 
$
4,072

 
$
11,575

 
$
9,024

Denominator:
 
 
 
 
 
 
 
Total average basic common shares outstanding
19,531,694

 
20,404,441

 
19,705,105

 
20,355,057

Effect of dilutive stock options and restricted stock awards
931,544

 
809,924

 
914,979

 
1,020,127

Total average diluted common shares outstanding
20,463,238

 
21,214,365

 
20,620,084

 
21,375,184

 
 
 
 
 
 
 
 
Earnings per share-basic
$
0.21

 
$
0.20

 
$
0.59

 
$
0.44

Earnings per share-diluted
$
0.20

 
$
0.19

 
$
0.56

 
$
0.42

 
 
 
 
 
 
 
 
Weighted average anti-dilutive common shares
567,995

 
512,298

 
431,446

 
283,762


5. Variable Interest Entities

The Company's investments in less than majority-owned companies in which it has the ability to exercise significant influence over operating and financial policies are accounted for using the equity method except when they qualify as Variable Interest Entities ("VIEs") and the Company is the primary beneficiary, in which case the investments are consolidated in accordance with ASC 810, "Consolidation." Investments that do not meet the above criteria are accounted for under the cost method.

In July 2011, the Company sold its 100% interest in Creative Investigations Recovery Group, LLC ("CIRG"). The consideration included a note receivable, included on the Consolidated Balance Sheets, with a first priority lien security interest in the assets of CIRG and other property of the buyers. The Company performed a detailed analysis of the CIRG sale transaction and determined that CIRG is considered a VIE, as defined in ASC 810, because the Company has an interest due to the note financing. The Company further determined that it is not the primary beneficiary because the Company does not have the power to direct the activities of the VIE and has no right to receive the residual returns of CIRG. Therefore, CIRG is not consolidated in the Company's results of operations. The Company's maximum exposure to loss in the VIE is limited to the outstanding balance of the note receivable, which is presented in the table below:
 
At
 
September 30, 2012
 
December 31, 2011
The Company's maximum exposure to loss in the VIE
$
1,139

 
$
1,142


6. Business Acquisitions

The values of certain assets and liabilities acquired in acquisitions are preliminary in nature, and are subject to adjustment as additional information is obtained, including, but not limited to, valuation of separately identifiable intangibles, fixed assets, deferred taxes and loss reserves. The valuations will be finalized within one year of the close of the acquisition. When the valuations are finalized, any changes to the preliminary valuation of assets acquired or liabilities assumed may result in adjustments to separately identifiable intangible assets and goodwill. A change to the acquisition date value of the identifiable net assets during the measurement period (up to one year from the acquisition date) affects the amount of the purchase price allocated to goodwill. Changes to the purchase price allocation are adjusted retrospectively in the consolidated financial statements.

During the three months ended March 31, 2012, the Company received the final valuation studies for identifiable intangible assets to determine the final valuation for the 2011 acquisition of eReinsure. In addition, during the three months ended September 30, 2012, the Company received the final valuation studies for identifiable intangible assets to determine the final valuation for the 2011 acquisition of PBG. Accordingly, the Consolidated Balance Sheet at December 31, 2011 has been retrospectively adjusted to include the effect of the measurement period adjustments as required under ASC 805, Business Combinations, ("ASC 805"). Please see the notes, "Goodwill," and "Other Intangible Assets," for more information on the retrospective measurement period adjustments made in 2012.


13

FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)

The following table presents assets acquired, liabilities assumed and goodwill recorded for the 2011 acquisitions of eReinsure and PBG based on their fair values as of the respective acquisition date and the effects of the measurement period adjustments recorded in 2012, as discussed above:
 
 
eReinsure
 
PBG
ASSETS:
 
 
 
 
Cash
 
$
3,694

 
$
38

Investments
 
1,212

 

Other receivables
 
1,828

 

Property and equipment, net
 
142

 
65

Other intangible assets, net
 
13,908

 
3,650

Other assets
 
54

 
22

Net deferred tax asset
 

 
127

LIABILITIES:
 
 
 
 
Accrued expenses and accounts payable
 
(2,801
)
 
(304
)
Commissions payable
 

 
(60
)
Deferred revenue
 
(835
)
 

Net deferred tax liability
 
(1,783
)
 

Net assets acquired
 
15,419

 
3,538

Purchase consideration (1)
 
38,931

 
7,607

Goodwill
 
$
23,512

 
$
4,069

 
 
 
 
 

(1) - Reflects a purchase price reduction of $0.3 million for the final eReinsure working capital adjustments.

7. Goodwill

During the three months ended March 31, 2012, the Company determined the final valuation for the 2011 acquisition of eReinsure, included in the Brokerage Segment. During the three months ended September 30, 2012, the Company determined the final valuation for the 2011 acquisition of PBG, included in the BPO segment. The following table shows the retrospective adjustments made to the balance of goodwill at December 31, 2011 to reflect the effect of these measurement period adjustments made in accordance with accounting requirements under ASC 805 and the adjustments made to goodwill for the immaterial error corrections under ASC 250 that are discussed in Note 2 to the Consolidated Financial Statements.
Goodwill balances by segment are as follows:
Payment Protection
 
BPO
 
 Brokerage
 
Total
Balance as originally reported at December 31, 2011
$
36,632

 
$
15,632

 
$
56,533

 
$
108,797

Prior period adjustments for the B&G acquisition for the year ending December 31, 2009 increasing goodwill (1)

 

 
383

 
383

Goodwill adjustment under ASC 250 for the Auto Knight acquisition for the year ending December 31, 2011
608

 

 

 
608

Final valuation adjustments as required under ASC 805 for eReinsure

 

 
(2,626
)
 
(2,626
)
Final valuation adjustments as required under ASC 805 for PBG

 
(2,662
)
 

 
(2,662
)
Adjusted balance at December 31, 2011
37,240

 
12,970

 
54,290

 
104,500

Goodwill acquired during 2012

 

 
168

 
168

Balance at September 30, 2012
$
37,240

 
$
12,970

 
$
54,458

 
$
104,668


(1) - Immaterial correction of an error adjustment from the year ending December 31, 2009 is shown as an adjustment to the December 31, 2011 balance since the goodwill balances from December 31, 2009 and December 31, 2010 are not being presented in this Form 10-Q.

8. Other Intangible Assets

Other intangible assets consist of finite- and indefinite-lived intangible assets. The following table shows finite-lived other intangible assets and their respective amortization periods:


14

FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)

 
 
 
 
 
September 30, 2012
 
December 31, 2011
 
Amortization Period (Years)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Intangible assets with finite lives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer and agent relationships
5
to
15
 
$
34,720

 
$
(11,458
)
 
$
23,262

 
$
34,552

 
$
(8,724
)
 
$
25,828

Software
7
to
10
 
8,773

 
(3,114
)
 
5,659

 
8,773

 
(2,345
)
 
6,428

Present value of future profits
0.3
to
0.75
 
548

 
(548
)
 

 
548

 
(548
)
 

Non-compete agreements
1.5
to
6
 
2,958

 
(2,691
)
 
267

 
2,958

 
(2,419
)
 
539

Total finite-lived intangible assets
 
 
 
 
$
46,999

 
$
(17,811
)
 
$
29,188

 
$
46,831

 
$
(14,036
)
 
$
32,795


The following table shows the carrying amount of indefinite-lived intangible assets at :
September 30, 2012
 
December 31, 2011
Tradenames
$
21,615

 
$
21,615


During the three months ended March 31, 2012, the Company determined the final valuation for the 2011 acquisition of eReinsure. During the three months ended September 30, 2012, the Company determined the final valuation for the 2011 acquisition of PBG. The intangible assets acquired in 2012 relate to the purchase of a book of business. The following table includes the retrospective adjustments made to the balance of other intangible assets at December 31, 2011 to reflect the effect of these measurement period adjustments made in accordance with the accounting requirements under ASC 805 and the current period activity.
Balance as originally reported at December 31, 2011
$
47,022

Final valuation adjustments as required under ASC 805 for eReinsure
4,508

Final valuation adjustments as required under ASC 805 for PBG
2,880

Adjusted balance at December 31, 2011
54,410

Intangible assets acquired in 2012
168

Less:Amortization expense
3,775

September 30, 2012
$
50,803


Estimated amortization of other intangible assets for the next five years and thereafter ending December 31 is presented below:
2012 (remaining three months)
$
1,128

2013
4,490

2014
4,478

2015
4,471

2016
3,904

Thereafter
10,717

Total
$
29,188


9. Investments

The following table summarizes the Company's available-for-sale fixed maturity and equity securities:
 
September 30, 2012
Description of Security
Cost or Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Obligations of the U.S. Treasury and U.S. Government agencies
$
20,853

 
$
923

 
$
(1
)
 
$
21,775

Municipal securities
15,770

 
473

 

 
16,243

Corporate securities
69,835

 
2,336

 
(63
)
 
72,108

Mortgage-backed securities
501

 
11

 

 
512

Asset-backed securities
191

 
4

 

 
195

Total fixed maturity securities
$
107,150

 
$
3,747

 
$
(64
)
 
$
110,833

 
 
 
 
 
 
 
 
Common stock
$
99

 
$
18

 
$
(5
)
 
$
112

Preferred stock
5,783

 
190

 

 
5,973

Total equity securities
$
5,882

 
$
208

 
$
(5
)
 
$
6,085



15

FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)

 
December 31, 2011
Description of Security
Cost or Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Obligations of the U.S. Treasury and U.S. Government agencies
$
25,751

 
$
611

 
$
(2
)
 
$
26,360

Municipal securities
17,609

 
388

 
(5
)
 
17,992

Corporate securities
47,304

 
594

 
(426
)
 
47,472

Mortgage-backed securities
1,272

 
26

 

 
1,298

Asset-backed securities
375

 
12

 

 
387

Total fixed maturity securities
$
92,311

 
$
1,631

 
$
(433
)
 
$
93,509

 
 
 
 
 
 
 
 
Common stock
$
144

 
$
26

 
$
(17
)
 
$
153

Preferred stock
1,059

 
7

 

 
1,066

Total equity securities
$
1,203

 
$
33

 
$
(17
)
 
$
1,219


Pursuant to certain reinsurance agreements and statutory licensing requirements, the Company has deposited invested assets in custody accounts or insurance department safekeeping accounts. The Company is not permitted to remove invested assets from these accounts without prior approval of the contractual party or regulatory authority. The following table details the Company's restricted investments:
 
At
 
September 30, 2012
 
December 31, 2011
Fair value of restricted investments
$
19,080

 
$
18,319

 
 
 
 
Fair value of restricted investments for special deposits required by state insurance departments
$
12,375

 
$
11,618


The amortized cost and fair value of fixed maturity securities by contractual maturity are shown below. Expected maturities will differ from contractual maturities as borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
 
At
 
September 30, 2012
 
December 31, 2011
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due in one year or less
$
5,706

 
$
5,751

 
$
3,890

 
$
3,923

Due after one year through five years
57,739

 
59,580

 
51,210

 
51,839

Due after five years through ten years
26,392

 
27,423

 
23,623

 
23,973

Due after ten years
16,621

 
17,372

 
11,941

 
12,089

Mortgage-backed securities
501

 
512

 
1,272

 
1,298

Asset-backed securities
191

 
195

 
375

 
387

Total fixed maturity securities
$
107,150

 
$
110,833

 
$
92,311

 
$
93,509

The following table provides information on unrealized losses on investment securities that have been in an unrealized loss position for less than twelve months, and twelve months or greater, as of:

16

FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)

 
September 30, 2012
 
Less than Twelve Months
 
Twelve Months or Greater
 
Total
Description of Security
Fair Value
Unrealized Losses
# of Securities
 
Fair Value
Unrealized Losses
# of Securities
 
Fair Value
Unrealized Losses
# of Securities
Obligations of the U.S. Treasury and U.S. Government agencies
$
345

$
(1
)
6

 
$

$


 
$
345

$
(1
)
6

Municipal securities



 



 



Corporate securities
10,189

(29
)
11

 
167

(34
)
1

 
10,356

(63
)
12

Mortgage-backed securities



 



 



Asset-backed securities



 



 



Total fixed maturity securities
$
10,534

$
(30
)
17

 
$
167

$
(34
)
1

 
$
10,701

$
(64
)
18

 
 
 
 
 
 
 
 
 
 
 
 
Common stock
$
39

$
(5
)
2

 
$

$


 
$
39

$
(5
)
2

Preferred stock



 



 



Total equity securities
$
39

$
(5
)
2

 
$

$


 
$
39

$
(5
)
2

 
December 31, 2011
 
Less than Twelve Months
 
Twelve Months or Greater
 
Total
Description of Security
Fair Value
Unrealized Losses
# of Securities
 
Fair Value
Unrealized Losses
# of Securities
 
Fair Value
Unrealized Losses
# of Securities
Obligations of the U.S. Treasury and U.S. Government agencies
$
1,902

$
(2
)
7

 
$

$


 
$
1,902

$
(2
)
7

Municipal securities
486

(1
)
1

 
478

(4
)
1

 
964

(5
)
2

Corporate securities
16,861

(426
)
26

 



 
16,861

(426
)
26

Mortgage-backed securities



 



 



Asset-backed securities



 



 



Total fixed maturity securities
$
19,249

$
(429
)
34

 
$
478

$
(4
)
1

 
$
19,727

$
(433
)
35

 
 
 
 
 
 
 
 
 
 
 
 
Common stock
$
83

$
(17
)
5

 
$

$


 
$
83

$
(17
)
5

Preferred stock



 



 



Total equity securities
$
83

$
(17
)
5

 
$

$


 
$
83

$
(17
)
5

The Company does not intend to sell the investments that are in an unrealized loss position at September 30, 2012 and it is more likely than not that the Company will be able to hold these securities until full recovery of their amortized cost basis for fixed maturity securities or cost for equity securities. At September 30, 2012, based on management's quarterly review, the Company deemed that 1 individual equity security was other than temporarily impaired and recorded an impairment charge of $16 thousand for the three months ended September 30, 2012. For the three months and nine months ended September 30, 2011, the Company deemed that 8 individual equity securities were other than temporarily impaired and recorded an impairment charge of $0.2 million.

The following table summarizes the gross proceeds from the sale of available-for-sale investment securities:
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30, 2012
 
September 30, 2011
 
September 30, 2012
 
September 30, 2011
Gross proceeds from sales
$
503

 
$
11,143

 
$
4,980

 
$
33,663


The following table summarizes the gross realized gains and gross realized losses for both fixed maturity and equity securities and realized losses for other-than-temporary impairments for available-for-sale investment securities:
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30, 2012
 
September 30, 2011
 
September 30, 2012
 
September 30, 2011
Gross realized gains
$

 
$
1,414

 
$
22

 
$
2,663

Gross realized losses

 
(68
)
 
(12
)
 
(90
)
Total net gains from sales
$

 
$
1,346

 
$
10

 
$
2,573

Impairment write-downs (other-than-temporary impairments)
$
(16
)
 
$
(150
)
 
$
(16
)
 
$
(150
)
Total net realized investment (losses) gains
$
(16
)
 
$
1,196

 
$
(6
)
 
$
2,423



17

FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)

The following schedule details the components of net investment income:
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30, 2012
 
September 30, 2011
 
September 30, 2012
 
September 30, 2011
Fixed income securities
$
628

 
$
782

 
$
1,954

 
$
2,544

Cash on hand and on deposit
47

 
63

 
143

 
180

Common and preferred stock dividends
77

 
24

 
191

 
56

Notes receivable
75

 
34

 
201

 
123

Other income
34

 
23

 
104

 
107

Investment expenses
(117
)
 
(125
)
 
(374
)
 
(374
)
Net investment income
$
744

 
$
801

 
$
2,219

 
$
2,636


10. Reinsurance Receivables

The Company has various reinsurance agreements in place whereby the amount of risk in excess of the Company's retention is reinsured by unrelated domestic and foreign insurance companies. The Company remains liable to policyholders in the event that the assuming companies are unable to meet their obligations. The effects of reinsurance on premiums written and earned and losses and loss adjustment expenses ("LAE") incurred are presented in the tables below:
Premiums
For the Three Months Ended
 
For the Nine Months Ended
 
September 30, 2012
 
September 30, 2011
 
September 30, 2012
 
September 30, 2011
 
Written
Earned
 
Written
Earned
 
Written
Earned
 
Written
Earned
Direct and assumed
$
100,409

$
98,287

 
$
94,432

$
80,982

 
$
272,317

$
269,132

 
$
241,979

$
235,420

Ceded
(65,935
)
(64,394
)
 
(61,361
)
(52,309
)
 
(169,971
)
(171,362
)
 
(154,227
)
(150,774
)
Net
$
34,474

$
33,893

 
$
33,071

$
28,673

 
$
102,346

$
97,770

 
$
87,752

$
84,646


Losses and LAE incurred
For the Three Months Ended
 
For the Nine Months Ended
 
September 30, 2012
 
September 30, 2011
 
September 30, 2012
 
September 30, 2011
Direct and assumed
$
23,069

 
$
21,589

 
$
66,198