First Mercury Financial (FMR) 8-K First Mercury Financial Corporation Announces Fourth Quarter and Year End 2009 Financial Results

Exhibit 99.1

FOR FURTHER INFORMATION:

AT FIRST MERCURY FINANCIAL CORPORATION:
Edward A. LaFramboise
Vice President — Finance
(248) 213-0406
elaframboise@firstmercury.com

FOR IMMEDIATE RELEASE
MONDAY, FEBRUARY 22, 2010

FIRST MERCURY FINANCIAL CORPORATION ANNOUNCES
FOURTH QUARTER AND YEAR END 2009 FINANCIAL RESULTS

Company Declares $2.00 per Share Special Cash Dividend

SOUTHFIELD, MI – February 22, 2010 – First Mercury Financial Corporation (NYSE: FMR) (“First Mercury” or the “Company”) today announced results for the fourth quarter and year ended 2009.

Highlights for the fourth quarter 2009 include:

• Gross written premium growth of 22.9 percent

• Net earned premium growth of 40.2 percent

• Commission and fee income growth of 58.7 percent

• Net investment income growth of 37.2 percent

• Net income of $8.4 million, or $0.48 per diluted share

• Operating net income of $6.8 million, or $0.39 per diluted share

• Book value per share of $18.40, an increase of 25.4 percent from December 31, 2008

• Tangible book value per share of $15.49, an increase of 31.4 percent from December 31, 2008

• Annualized return on average stockholders’ equity of 10.8 percent

• Third consecutive quarterly dividend of $0.025 per share

“We are pleased with our solid underwriting results and strong investment performance for the quarter and full year,” said Richard H. Smith, Chairman, President and Chief Executive Officer. “Our underwriting discipline, conservative investment philosophy and effective capital management combined to deliver a return on average stockholders’ equity of 15.3 percent for the year ended December 31, 2009 and a compound annual growth in book value per share of 22.6 percent for the three year period ended December 31, 2009. This positioned us to declare a $2.00 per share special cash dividend,” continued Smith. “We believe the Company’s capital position after the dividend will support our growth strategy and permit us to build on our demonstrated track record of success,” Smith concluded.

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Written and Earned Premium

For the three months ended December 31, 2009, gross written premiums were $102.2 million, a 22.9 percent increase from the gross written premiums during the same period in 2008. For the year ended December 31, 2009, gross written premiums were $344.4 million, a 7.2 percent increase from the gross written premiums during the same period in 2008. The increase in gross written premiums for the three months and the year ended December 31, 2009 was due to an assumed retroactive reinsurance transaction consummated during the three months ended December 31, 2009. This reinsurance transaction, whereby the Company entered into a loss portfolio transfer for the claims for the self-insured retention for a large U.S. homebuilder, generated $25.3 million of gross written premium for the Specialty platform.

Net earned premiums during the three months ended December 31, 2009 were $76.5 million, a 40.2 percent increase from the same period of 2008. For the year ended December 31, 2009, net earned premiums were $232.0 million, a 19.7 percent increase from the same period in 2008. The increase in net earned premiums for the three months and year ended December 31, 2009 was primarily due to the aforementioned assumed retroactive reinsurance transaction, which was both written and fully earned in the same period.

Commissions and Fees

Commissions and fees during the three months ended December 31, 2009 were $8.1 million, a 58.7 percent increase from the same period of 2008. For the year ended December 31, 2009, commissions and fees were $32.0 million, a 52.5 percent increase from the same period of 2008. The increase for the three months ended December 31, 2009 compared to the same period of 2008 is primarily due to $2.3 million of negative profit sharing commissions recorded during the three months ended December 31, 2008 and due to an increase in commissions and fees related to our insurance services business for the three months ended December 31, 2009. The increase for the year ended December 31, 2009 compared to the same period of 2008 is primarily due to $4.1 million of negative profit sharing commissions recorded during the year ended December 31, 2008, an increase in AMC commissions and fees of $5.1 million including a previously disclosed, non-recurring contingent commission adjustment for $1.3 million, and an increase of $1.7 million from our workers compensation services business for the year ended December 31, 2009.

Investments

The Company recorded $0.2 million of pretax net unrealized gains on its available for sale investment portfolio during the three months ended December 31, 2009. The Company recorded $32.7 million of pretax net unrealized gains on its available for sale investment portfolio during the year ended December 31, 2009. The investment portfolio’s taxable equivalent total return was 1.8 percent for the three months ended December 31, 2009 and 16.1 percent for the year ended December 31, 2009.

Losses and Loss Adjustment Expenses

During the three months ended December 31, 2009, there was no net development of prior years’ loss and loss adjustment expense reserves. For the year ended December 31, 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 months ended December 31, 2008, there was no net development of prior years’ loss and loss adjustment expense reserves. For the year ended December 31, 2008, there was $4.8 million of favorable development of prior years’ loss and loss adjustment expense reserves.

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The higher than anticipated property losses the Company experienced during the second quarter of 2009 did not recur during the third and fourth quarters of 2009. The Company’s property underwriting results for the year ended December 31, 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. The Company recorded net losses from Hurricane Ike of $2.9 million and $0.4 million of reinstatement premium expense during the year ended December 31, 2008.

Capital Management

During the year ended December 31, 2009, the Company repurchased 801,423 shares of common stock for $10.5 million at an average cost of $13.09 per share. As previously disclosed, the Company fulfilled 100 percent of the authorization under the Company’s August 2008 Share Repurchase Program, and 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 December 31, 2009, the Company has not repurchased any shares under the new authorization. The Company views this repurchase program as an attractive use of excess capital given current market conditions. The Company paid a quarterly cash dividend of $0.025 per share on December 31, 2009. This represents the Company’s third consecutive quarterly dividend. On February 22, 2010, the Company’s Board of Directors declared a one-time, special cash dividend of $2.00 per share, and a regular quarterly cash dividend of $0.025 per share both to be paid March 31, 2010 to shareholders of record at the close of business on March 15, 2010. The special dividend will be funded in part from borrowings under the Company’s credit agreement. The Company has obtained a waiver from its lender through May 1, 2010 to permit the payment of the dividend. The Company is negotiating with its lender to amend its credit agreement so that the dividend payment will not result in a violation of the credit agreement once the waiver period expires and anticipates completing such amendment prior to the expiration of the waiver period.

Other

The Company will record a pre-tax restructuring charge during the first quarter of 2010 of up to $4.5 million related to a reduction in staffing levels and elimination of other expenses across the organization. The Company anticipates realizing pre-tax annual savings of approximately $4.5 million as a result of these actions.

Conference Call Details

The Company will host a conference call on February 23, 2010 at 11:00 a.m. Eastern Time to discuss fourth quarter and year end results. The call can be accessed live by dialing 877-407-0789 or by visiting the Company’s website atwww.firstmercury.com.

Investors may access a replay by dialing 877-660-6853, entering account #3055 and conference code 344450, which will be available through March 2, 2010. 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.

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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 atwww.firstmercury.com to make
information available to its investors and the public.

Financial Tables Follow...

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First Mercury Financial Corporation

Condensed Consolidated Statements of Income

(Unaudited)

	Three Months Ended									Twelve Months Ended
	December 31,						%			December 31,						%
	2009			2008			Change			2009			2008			Change
	(Dollars in thousands, except share and per share data)
Operating Revenue
Net earned premiums	$	76,463		$	54,522			40.2	%	$	232,002		$	193,744			19.7	%
Commissions and fees		8,082			5,093			58.7	%		31,998			20,989			52.5	%
Net investment income		8,227			5,997			37.2	%		29,332			21,633			35.6	%
Net realized gains (losses) on investments		2,802			(7,875	)		135.6	%		28,006			(16,589	)		268.8	%
Other-than-temporary impairment losses on investments		(243	)		(396	)		-38.6	%		(669	)		(4,098	)		-83.7	%
Total Operating Revenues		95,331			57,341			66.3	%		320,669			215,679			48.7	%
Operating Expenses
Losses and loss adjustment expenses, net		52,049			31,127			67.2	%		148,349			107,840			37.6	%
Amortization of deferred acquisition expenses		13,721			13,057			5.1	%		54,610			41,164			32.7	%
Underwriting, agency and other expenses		15,933			7,756			105.4	%		44,852			34,355			30.6	%
Amortization of intangible assets		538			572			-5.9	%		2,247			2,038			10.3	%
Total Operating Expenses		82,241			52,512			56.6	%		250,058			185,397			34.9	%
Operating Income		13,090			4,829			171.1	%		70,611			30,282			133.2	%
Interest Expense		1,404			1,440			-2.5	%		5,683			5,820			-2.4	%
Change in Fair Value of Derivative Instruments		—			202			-100.0	%		(401	)		312			-228.5	%
Income from Continuing Operations Before Income Taxes		11,686			3,187			266.7	%		65,329			24,150			170.5	%
Income Taxes		3,259			823			296.0	%		20,966			6,414			226.9	%
Income from Continuing Operations		8,427			2,364			256.5	%		44,363			17,736			150.1	%
Income from Discontinued Operations, Net of Income Taxes		—			—			—			—			23,105			-100.0	%
Net Income	$	8,427		$	2,364			256.5	%	$	44,363		$	40,841			8.6	%
Basic Net Income Per Share:
Income from Continuing Operations	$	0.49		$	0.13					$	2.53		$	0.98
Income from Discontinued Operations		—			—						—			1.27
Total	$	0.49		$	0.13					$	2.53		$	2.25
Diluted Net Income Per Share:
Income from Continuing Operations	$	0.48		$	0.13					$	2.48		$	0.95
Income from Discontinued Operations		—			—						—			1.23
Total	$	0.48		$	0.13					$	2.48		$	2.18
Weighted Average Shares Outstanding:
Basic		17,020,903			17,944,321						17,407,510			18,129,386
Diluted		17,356,634			18,357,259						17,746,613			18,674,689
GAAP Underwriting Ratios:
Loss ratio		68.1	%		57.1	%	11.0		Pts.		63.9	%		55.7	%	8.2		Pts.
Expense ratio		29.7	%		30.7	%	-1.0		Pts.		31.0	%		28.0	%	3.0		Pts.
Combined ratio		97.8	%		87.8	%	10.0		Pts.		94.9	%		83.7	%	11.2		Pts.

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First Mercury Financial Corporation

Condensed Consolidated Balance Sheets

(Unaudited)

	December 31,			December 31,
	2009			2008
	(Dollars in thousands,
	except share and per share data)
ASSETS
Investments
Debt securities	$	648,522		$	495,799
Equity securities and other		38,752			15,089
Short-term		12,216			32,142
Total Investments		699,490			543,030
Cash and cash equivalents		14,275			31,833
Premiums and reinsurance balances receivable		78,544			56,398
Accrued investment income		6,248			5,400
Accrued profit sharing commissions		14,661			11,315
Reinsurance recoverable on paid and unpaid losses		172,711			135,617
Prepaid reinsurance premiums		57,374			48,921
Deferred acquisition costs		25,654			27,369
Intangible assets, net of accumulated amortization		37,104			39,351
Goodwill		25,483			25,483
Deferred federal income taxes		—			2,161
Other assets		26,049			16,775
Total Assets	$	1,157,593		$	943,653
LIABILITIES AND STOCKHOLDERS’ EQUITY
Loss and loss adjustment expense reserves	$	488,444		$	372,721
Unearned premium reserves		146,773			147,849
Long-term debt		67,013			67,013
Funds held under reinsurance treaties		71,661			49,419
Premiums payable to insurance companies		31,167			27,831
Reinsurance payable on paid losses		958			1,167
Deferred federal income taxes		13,844			—
Accounts payable, accrued expenses, and other liabilities		21,649			16,016
Total Liabilities		841,509			682,016
Stockholders’ Equity
Common stock, $0.01 par value; authorized 100,000,000 shares; issued and outstanding 17,181,106 and 17,836,337 shares		172			178
Paid-in-capital		154,417			161,957
Accumulated other comprehensive income (loss)		16,256			(3,027	)
Retained earnings		147,087			103,028
Treasury stock; 130,600 and 33,600 shares		(1,848	)		(499	)
Total Stockholders’ Equity		316,084			261,637
Total Liabilities and Stockholders’ Equity	$	1,157,593		$	943,653
Book Value Per Share	$	18.40		$	14.67
Tangible Book Value Per Share	$	15.49		$	11.79

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First Mercury Financial Corporation
Summary Financial Data

	Three Months Ended						Twelve Months Ended
	December 31,						December 31,
	2009			2008			2009			2008
	(Dollars in thousands, except per share data)
Gross Written Premiums:
Security	$	12,627		$	16,788		$	56,462		$	66,652
Specialty		55,590			31,041			146,477			142,041
Contract Underwriting		17,403			16,682			66,148			63,774
FM Emerald		13,138			16,874			56,751			42,142
Other		3,453			1,772			18,580			6,667
Gross written premiums	$	102,211		$	83,157		$	344,418		$	321,276
Net Written Premiums:
Security	$	7,968		$	11,902		$	36,314		$	47,887
Specialty		45,395			23,135			105,219			105,467
Contract Underwriting		12,880			15,601			45,046			42,877
FM Emerald		5,901			7,250			24,759			17,053
Other		2,769			1,772			13,167			6,667
Net written premiums	$	74,913		$	59,660		$	224,505		$	219,951
Commissions and Fees:
Insurance underwriting commissions and fees	$	1,511		$	(818	)	$	5,501		$	1,318
Insurance services commissions and fees		6,571			5,911			26,497			19,671
Total commissions and fees	$	8,082		$	5,093		$	31,998		$	20,989
Cash and Cash Equivalents:
Net cash provided by operating activities — continuing operations	$	20,272		$	23,055		$	86,878		$	114,768
Net cash provided by operating activities — discontinued operations		—			—			—			1,928
Net cash used in investing activities — continuing operations		(22,790	)		(10,386	)		(95,303	)		(138,571	)
Net cash provided by investing activities — discontinued operations		—			—			—			41,830
Net cash provided by (used in) financing activities		588			(3,431	)		(9,133	)		(6,554	)
Net increase (decrease) in cash and cash equivalents	$	(1,930	)	$	9,238		$	(17,558	)	$	13,401
Return on Equity: (1)
Net income		10.8	%		3.6	%		15.3	%		16.6	%
Operating net income		8.7	%		12.1	%		9.1	%		12.8	%
Operating Net Income: (3)
Net income	$	8,427		$	2,364		$	44,363		$	40,841
Adjust for Net realized gains and losses on investments, net of tax		(1,821	)		5,118			(18,204	)		10,783
Adjust for Other-than-temporary impairment losses on investments, net of tax		158			258			435			2,664
Adjust for Change in fair value of derivative instruments, net of tax		—			131			(261	)		203
Adjust for Discontinued operations, net of tax		—			—			—			(23,105	)
Operating net income	$	6,764		$	7,871		$	26,333		$	31,386
Operating Net Income Per Share: (3)
Diluted	$	0.39		$	0.43		$	1.47		$	1.68
Tangible Stockholders’ Equity: (2)
Total stockholders’ equity							$	316,084		$	261,637
Intangible assets, net								(37,104	)		(39,351	)
Deferred tax liability — intangible assets, net								12,613			13,399
Goodwill								(25,483	)		(25,483	)
Tangible stockholders’ equity							$	266,110		$	210,202

(1)	Return on equity represents net income and operating net income expressed on an annualized basis as a percentage of average stockholders’ equity.
(2)	Tangible stockholders’ equity is total stockholders’ equity excluding the value of intangible assets, net of accumulated amortization, goodwill, and the deferred tax liability related to intangible assets.
(3)	See discussion of use of non-GAAP financial measures above.

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