First Mercury Financial Corporation Announces Third Quarter 2009 Financial Results

First Mercury Financial Corporation Announces Third Quarter 2009 Financial
Results

SOUTHFIELD, Mich., Nov. 2 /PRNewswire-FirstCall/ -- First Mercury Financial
Corporation (NYSE: FMR) ("First Mercury" or the "Company") today announced
results for the third quarter and nine months ended September 30, 2009.

Highlights for the third quarter 2009 include:

-- Gross written premium growth of 6.2 percent
-- Net income of $15.6 million, or $0.89 per diluted share
-- Operating net income of $6.8 million, or $0.39 per diluted share
-- Book value per share of $17.90, an increase of 22.0 percent from
December 31, 2008
-- Commission and fee income growth of 56.5 percent
-- Net investment income growth of 35.3 percent
-- Repurchase of 413,665 shares of common stock for $5.4 million at an
average cost of $13.06 per share
-- Authorization of a new Share Repurchase Program for up to 1,000,000
shares

-- Second consecutive quarterly dividend of $0.025 per share

"We are pleased with another solid quarter," said Richard H. Smith, Chairman,
President and Chief Executive Officer. "Our new initiatives resulted in gross
written premium growth of 6.2 percent, while we maintained underwriting
discipline as demonstrated by our underwriting results. Our continued
positive investment performance and underwriting results contributed to a 22.0
percent increase in book value per share to $17.90 since year end," continued
Smith.

Net income for the third quarter of 2009 was $15.6 million compared to $0.1
million for the same period of 2008. Net income for the first nine months of
2009 was $35.9 million compared to $38.5 million for the same period of 2008.
Net income for the nine months ended September 30, 2008 included $23.1 million
of income from discontinued operations, which includes a gain on the sale of
ARPCO of $20.9 million. Operating net income for the third quarter of 2009
was $6.8 million compared to $7.4 million for the same period of 2008.
Operating net income for the first nine months of 2009 was $19.6 million
compared to $23.5 million for the same period of 2008.

For the three months ended September 30, 2009, gross written premiums were
$81.8 million, a 6.2 percent increase from the gross written premiums during
the same period in 2008. For the nine months ended September 30, 2009, gross
written premiums were $242.2 million, a 1.7 percent increase from the gross
written premiums during the same period in 2008.

Net earned premiums during the three months ended September 30, 2009 were
$51.5 million, a 4.9 percent increase from the same period of 2008. For the
nine months ended September 30, 2009, net earned premiums were $155.5 million,
a 11.7 percent increase from the same period in 2008.

Net investment income earned during the three months ended September 30, 2009
was $7.5 million, up 35.3 percent from the same period of 2008. Net
investment income earned during the nine months ended September 30, 2009 was
$21.1 million, up 35.0 percent from the same period of 2008.

Net realized gains on investments during the three months ended September 30,
2009 were $13.8 million compared to net realized losses on investments of $7.1
million during the same period of 2008. Net realized gains on investments
during the nine months ended September 30, 2009 were $25.2 million compared to
net realized losses on investments of $8.7 million during the same period of
2008. The net realized gains for the three and nine months ended September
30, 2009 included mark-to-market adjustments of $12.4 million and $21.1
million, respectively, on the Company's convertible securities portfolio, high
yield convertible fund and structured finance fund. Other-than-temporary
impairment losses on investments during the three months ended September 30,
2009 were $0.3 million compared to other-than-temporary impairment losses on
investments of $3.5 million during the same period of 2008.
Other-than-temporary impairment losses on investments during the nine months
ended September 30, 2009 were $0.4 million compared to other-than-temporary
impairment losses on investments of $3.7 million during the same period of
2008. In addition, the Company recorded $18.2 million of pretax net
unrealized gains on its available for sale investment portfolio during the
three months ended September 30, 2009. The Company recorded $32.5 million of
pretax net unrealized gains on its available for sale investment portfolio
during the nine months ended September 30, 2009.

Total operating revenues for the three months ended September 30, 2009
increased 63.8 percent to $80.0 million compared to $48.8 million for the same
period of 2008. Total operating revenues for the nine months ended September
30, 2009 increased 42.3 percent to $225.3 million compared to $158.3 million
for the same period of 2008.

The combined ratio for the three months ended September 30, 2009 was 92.5
percent compared to 86.3 percent for the same period of 2008. The combined
ratio for the three months ended September 30, 2009 includes a loss ratio of
58.9 percent and an expense ratio of 33.6 percent. These compare to a loss
ratio of 56.1 percent and an expense ratio of 30.2 percent for the comparable
period in 2008. The combined ratio for the nine months ended September 30,
2009 was 93.5 percent compared to 82.0 percent for the same period of 2008.
The combined ratio for the nine months ended September 30, 2009 includes a
loss ratio of 61.9 percent and an expense ratio of 31.6 percent. These
compare to a loss ratio of 55.1 percent and an expense ratio of 26.9 percent
for the comparable period in 2008.

The higher than anticipated property losses the Company experienced during the
three months ended June 30, 2009 did not recur during the three months ended
September 30, 2009. The Company's property underwriting results for the nine
months ended September 30, 2009 include the previously disclosed $2.4 million,
or $0.09 per diluted share, net of taxes, of storm losses and $5.2 million, or
$0.19 per diluted share, net of taxes, of higher than expected commercial
property fires and other losses and loss adjustment expenses recorded during
the second quarter of 2009. During the three and nine months ended September
30, 2008, the Company recorded $2.9 million of net losses from Hurricane Ike.

During the three months ended September 30, 2009, there was $1.3 million, or
$0.05 per diluted share, net of taxes, of favorable development of prior
years' loss and loss adjustment expense reserves. For the nine months ended
September 30, 2009, there was $5.7 million, or $0.21 per diluted share, net of
taxes, of favorable development of prior years' loss and loss adjustment
expense reserves. For the three and nine months ended September 30, 2008,
there was $4.8 million of favorable development of prior years' loss and loss
adjustment expense reserves.

During the three months ended September 30, 2009, the Company repurchased
413,665 shares of common stock for $5.4 million at an average cost of $13.06
per share. During the nine months ended September 30, 2009, the Company
repurchased 801,423 shares of common stock for $10.5 million at an average
cost of $13.09 per share. The Company fulfilled 100 percent of the
authorization under the Company's August 2008 Share Repurchase Program. On
August 20, 2009, the Company's Board of Directors approved a new Share
Repurchase Program to repurchase up to 1,000,000 shares of outstanding common
stock through August 20, 2010. As of September 30, 2009, the Company has not
repurchased any shares under the new authorization.

The Company paid a quarterly cash dividend of $0.025 per share on September
30, 2009. This represents the Company's second consecutive quarterly dividend.

Smith concluded, "We believe we have good visibility on the fourth quarter
given the normalizing of our property results. As such, we are narrowing the
range of our guidance of operating net income per diluted share from between
$1.30 to $1.60 to between $1.45 to $1.55 for the full year 2009."

Conference Call Details
The Company will host a conference call on November 3, 2009 at 11:00 a.m.
Eastern Time to discuss third quarter results. The call can be accessed live
by dialing 888-219-1420 or by visiting the Company's website at
www.firstmercury.com.

Investors may access a replay by dialing 888-203-1112, passcode 5117848, which
will be available through November 10, 2009. The webcast replay will also be
archived in the "Investor Relations" section of the Company's website.

About First Mercury Financial Corporation
First Mercury Financial Corporation provides insurance products and services
primarily to the specialty commercial insurance markets, focusing on niche and
underserved segments where we believe that we have underwriting expertise and
other competitive advantages. During the Company's 36 years of underwriting
risks, First Mercury has developed the underwriting expertise and
cost-efficient infrastructure which has enabled us to effectively underwrite
such risks. Our risk-taking subsidiaries offer insurance products through our
distribution subsidiaries: CoverX®, FM Emerald and AMC, which are recognized
brands among insurance producers.

Non-GAAP Financial Measures
Operating net income and operating net income per share are non-GAAP financial
measures, and management believes that investors' understanding of core
operating performance is enhanced by First Mercury's disclosure of these
financial measures. Operating net income consists of net income adjusted to
exclude the impact of net realized gains (losses) on investments,
other-than-temporary impairment losses on investments, the change in fair
value of derivative instruments, income from discontinued operations, and
taxes related to these adjustments. Definitions of these items may not be
comparable to the definitions used by other companies. Net income and net
income per share are the GAAP financial measures that are most directly
comparable to operating net income and operating net income per share.

Safe Harbor Statement
This release contains forward-looking statements that relate to future periods
and includes statements regarding our anticipated performance. Generally, the
words "anticipates," "believes," "expects," "intends," "estimates,"
"projects," "plans" and similar expressions identify forward-looking
statements. These forward-looking statements involve known and unknown risks,
uncertainties and other important factors that could cause our actual results,
performance or achievements or industry results to differ materially from any
future results, performance or achievements expressed or implied by these
forward-looking statements. These risks, uncertainties and other important
factors include, among others: recent and future events and circumstances
impacting financial, stock, and capital markets, and the responses to such
events by governments and the financial communities; the impact of
catastrophic events and the occurrence of significant severe weather
conditions on our operating results; our ability to maintain or the lowering
or loss of one of our financial or claims-paying ratings; our actual incurred
losses exceeding our loss and loss adjustment expense reserves; the failure of
reinsurers to meet their obligations; our estimates for accrued profit sharing
commissions are based on loss ratio performance and could be reduced if the
underlying loss ratios deteriorate; our inability to obtain reinsurance
coverage at reasonable prices; the failure of any loss limitations or
exclusions or changes in claims or coverage; our lack of long-term operating
history in certain specialty classes of insurance; our ability to acquire and
retain additional underwriting expertise and capacity; the concentration of
our insurance business in relatively few specialty classes; the increasingly
competitive property and casualty marketplace; fluctuations and uncertainty
within the excess and surplus lines insurance industry; the extensive
regulations to which our business is subject and our failure to comply with
these regulations; our ability to maintain our risk-based capital at levels
required by regulatory authorities; our inability to realize our investment
objectives; an economic downturn or other economic conditions adversely
affecting our financial position; and the risks identified in our filings with
the Securities and Exchange Commission, including our Annual Report on Form
10-K. Given these uncertainties, you are cautioned not to place undue
reliance on these forward-looking statements. We assume no obligation to
update or revise them or provide reasons why actual results may differ.

The Company uses the Investor Relations page of its website at
www.firstmercury.com to make information available to its investors and the
public.

Financial Tables Follow...

First Mercury Financial Corporation
Condensed Consolidated Statements of Income
(Unaudited)

Three Months Ended Nine Months Ended
September 30, September 30,
---------------- ----------------
2009 2008 2009 2008
---- ---- ---- ----
(Dollars in thousands, except share and per share data)

Operating Revenue
Net earned premiums $51,512 $49,092 $155,539 $139,222
Commissions and fees 7,445 4,757 23,916 15,896
Net investment income 7,540 5,571 21,105 15,635
Net realized gains
(losses) on investments 13,766 (7,128) 25,204 (8,714)
Other-than-temporary
impairment losses on
investments (292) (3,476) (426) (3,701)
---- ------ ---- ------
Total Operating Revenues 79,971 48,816 225,338 158,338
------ ------ ------- -------

Operating Expenses
Losses and loss adjustment
expenses, net 30,345 27,537 96,301 76,713
Amortization of deferred
acquisition expenses 13,960 10,798 40,889 28,107
Underwriting, agency and
other expenses 10,169 8,999 28,919 26,599
Amortization of
intangible assets 559 553 1,709 1,466
--- --- ----- -----
Total Operating Expenses 55,033 47,887 167,818 132,885
------ ------ ------- -------

Operating Income 24,938 929 57,520 25,453
Interest Expense 1,446 1,440 4,278 4,380
Change in Fair Value of
Derivative Instruments (171) (64) (401) 110
---- --- ---- ---
Income (Loss) from
Continuing Operations
Before Income Taxes 23,663 (447) 53,643 20,963
Income Taxes 8,018 (948) 17,707 5,592
----- ---- ------ -----
Income from Continuing
Operations 15,645 501 35,936 15,371
Income (Loss) from
Discontinued Operations,
Net of Income Taxes - (447) - 23,106
--- ---- --- ------
Net Income $15,645 $54 $35,936 $38,477
======= === ======= =======

Basic Net Income Per Share:
Income from Continuing
Operations $0.90 $0.03 $2.03 $0.84
Income (Loss) from
Discontinued Operations - (0.02) - 1.27
--- ----- --- ----
Total $0.90 $0.01 $2.03 $2.11
===== ===== ===== =====

Diluted Net Income Per Share:
Income from Continuing
Operations $0.89 $0.03 $1.99 $0.82
Income (Loss) from
Discontinued Operations - (0.02) - 1.23
--- ----- --- ----
Total $0.89 $0.01 $1.99 $2.05
===== ===== ===== =====

Weighted Average Shares
Outstanding:
Basic 17,144,077 18,206,904 17,537,754 18,190,915
========== ========== ========== ==========
Diluted 17,486,020 18,726,246 17,877,126 18,778,070
========== ========== ========== ==========

GAAP Underwriting Ratios:
Loss ratio 58.9% 56.1% 61.9% 55.1%
Expense ratio 33.6% 30.2% 31.6% 26.9%
---- ---- ---- ----
Combined ratio 92.5% 86.3% 93.5% 82.0%
==== ==== ==== ====

First Mercury Financial Corporation
Condensed Consolidated Balance Sheets
(Unaudited)

September 30, December 31,
2009 2008
---- ----
ASSETS (Dollars in thousands, except
share and per share data)

Investments
Debt securities $631,033 $495,799
Equity securities and other 32,224 15,089
Short-term 10,754 32,142
------ ------
Total Investments 674,011 543,030
Cash and cash equivalents 16,205 31,833
Premiums and reinsurance balances receivable 52,468 56,398
Accrued investment income 5,940 5,400
Accrued profit sharing commissions 13,841 11,315
Reinsurance recoverable on paid and
unpaid losses 167,802 135,617
Prepaid reinsurance premiums 59,784 48,921
Deferred acquisition costs 26,310 27,369
Intangible assets, net of accumulated
amortization 37,642 39,351
Goodwill 25,483 25,483
Deferred federal income taxes - 2,161
Other assets 23,771 16,775
------ ------
Total Assets $1,103,257 $943,653
========== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Loss and loss adjustment expense reserves $448,265 $372,721
Unearned premium reserves 150,655 147,849
Long-term debt 67,013 67,013
Funds held under reinsurance treaties 67,093 49,419
Premiums payable to insurance companies 31,363 27,831
Reinsurance payable on paid losses 1,179 1,167
Deferred federal income taxes 14,504 -
Accounts payable, accrued expenses, and
other liabilities 15,713 16,016
------ ------
Total Liabilities 795,785 682,016
------- -------
Stockholders' Equity
Common stock, $0.01 par value; authorized
100,000,000 shares; issued and outstanding
17,174,906 and 17,836,337 shares 172 178
Paid-in-capital 153,752 161,957
Accumulated other comprehensive income (loss) 16,306 (3,027)
Retained earnings 139,090 103,028
Treasury stock; 130,600 and 33,600 shares (1,848) (499)
------ ----
Total Stockholders' Equity 307,472 261,637
------- -------
Total Liabilities and Stockholders' Equity $1,103,257 $943,653
========== ========

Book Value Per Share $17.90 $14.67
====== ======

First Mercury Financial Corporation
Summary Financial Data

Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2009 2008 2009 2008
---- ---- ---- ----
(Dollars in thousands, except per share data)
Gross Written Premiums:
Security $14,991 $15,004 $43,835 $49,864
Specialty 30,053 33,566 90,887 111,000
Contract Underwriting 15,336 15,290 48,745 47,092
FM Emerald 13,024 11,294 43,613 25,268
Professional Liability 6,094 - 8,491 -
Hospitality 99 - 99 -
AUIC 2,211 1,845 6,537 4,895
----- ----- ----- -----
Gross written premiums $81,808 $76,999 $242,207 $238,119
======= ======= ======== ========

Net Written Premiums:
Security $9,487 $10,405 $28,346 $35,985
Specialty 19,758 23,922 59,824 82,332
Contract Underwriting 8,555 7,929 32,166 27,276
FM Emerald 3,898 5,445 18,858 9,803
Professional Liability 2,349 - 3,794 -
Hospitality 67 - 67 -
AUIC 2,211 1,845 6,537 4,895
----- ----- ----- -----
Net written premiums $46,325 $49,546 $149,592 $160,291
======= ======= ======== ========

Commissions and Fees:
Insurance underwriting
commissions and fees $1,272 $(619) $3,989 $2,136
Insurance services
commissions and fees 6,173 5,376 19,927 13,760
----- ----- ------ ------
Total commissions and fees $7,445 $4,757 $23,916 $15,896
====== ====== ======= =======

Cash and Cash Equivalents:
Net cash provided by
operating activities -
continuing operations $7,531 $33,089 $66,606 $91,712
Net cash provided by (used
in) operating activities -
discontinued operations - (447) - 1,928
Net cash used in investing
activities - continuing
operations (11,507) (27,614) (72,513) (128,185)
Net cash provided by
investing activities -
discontinued operations - - - 41,830
Net cash used in financing
activities (3,393) (3,223) (9,721) (3,122)
------ ------ ------ ------
Net increase (decrease) in
cash and cash equivalents $(7,369) $1,805 $(15,628) $4,163
======= ====== ========= ======

Operating Net Income: (1)
Net Income $15,645 $54 $35,936 $38,477
Adjust for Net realized
gains and losses on
investments, net of tax (8,948) 4,633 (16,383) 5,664
Adjust for Other-than-temporary
impairment losses on
investments, net of tax 190 2,260 277 2,406
Adjust for Change in fair
value of derivative
instruments, net of tax (111) (42) (261) 72
Adjust for Discontinued
operations, net of tax - 447 - (23,106)
--- --- --- -------
Operating net income $6,776 $7,352 $19,569 $23,513
====== ====== ======= =======

Operating Net Income Per
Share: (1)
Diluted $0.39 $0.39 $1.09 $1.25
===== ===== ===== =====

FOOTNOTES
(1) See discussion of use of non-GAAP financial measures above.

SOURCE First Mercury Financial Corporation

Edward A. LaFramboise, Vice President - Finance of First Mercury Financial
Corporation, +1-248-213-0406, elaframboise@firstmercury.com