First Mercury Financial (FMR) 8-K First Mercury Financial Corporation Announces Fourth Quarter and Year End 2006 Financial Results

FOR FURTHER INFORMATION:

AT FIRST MERCURY FINANCIAL:	AT FINANCIAL RELATIONS BOARD:
Bill Kindorf	Leslie Loyet
VP – Corporate Development	Vice President
(248) 358-4010	(312) 640-6672
bkindorf@firstmercury.com	lloyet@frbir.com

FOR IMMEDIATE RELEASE
THURSDAY, FEBRUARY 22, 2007

FIRST MERCURY FINANCIAL CORPORATION ANNOUNCES
FOURTH QUARTER AND YEAR END 2006 FINANCIAL RESULTS

SOUTHFIELD, MI – February 22, 2007 – First Mercury Financial Corporation (NYSE: FMR) (“First Mercury” or the “Company”) today announced results for the fourth quarter and year ended December 31, 2006.

Highlights for the fourth quarter 2006 versus fourth quarter 2005 include:

• Pro forma net income increased 39.9% to $8.7 million

• Pro forma diluted net income per share of $0.48 per share

• Combined ratio of 61.7% compared to 70.5% in 2005

• Initial public offering (“IPO”) generated net proceeds of approximately $174.0 million and increased stockholders’ equity to $172.7 million compared to $83.5 million at September 30, 2006

• Completion of a $25.0 million Trust Preferred Securities offering

Highlights for the year ended December 31, 2006 versus the year ended December 31, 2005 include:

• Pro forma net income increased 26.2% to $31.4 million

• Pro forma diluted net income per share of $2.27 per share

• Combined ratio of 67.7% compared to 70.7% in 2005

• Premiums produced increased 22.1% to $230.1 million

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“We are pleased with our record pro forma net income for the quarter and full year’’ said Richard H. Smith, chairman and chief executive officer. “Additionally, now that we have completed our IPO and Trust Preferred Securities offering, we believe that we have adequate capital in our insurance subsidiaries to focus on a number of attractive business development opportunities.”

For the three months ended December 31, 2006, premiums produced were $57.6 million, a 9.2 percent increase from premiums produced during the same period in 2005. For the year ended December 31, 2006, premiums produced were $230.1 million, a 22.1 percent increase over premiums produced during the same period in 2005. Premiums produced consists of all of the premiums billed by CoverX®, First Mercury’s licensed wholesale insurance broker, which produces and underwrites all of the Company’s business.

First Mercury’s combined ratio for the three months ended December 31, 2006 was 61.7 percent compared with 70.5 percent for the same period in 2005. The Company’s combined ratio was 67.7 percent for the year ended December 31, 2006 compared with 70.7 percent for the same period in 2005.

Net investment income earned during the three months ended December 31, 2006 was $3.0 million, up 70.3 percent from the same period of 2005. Net investment income earned for the year ended December 31, 2006 was $9.7 million, a 43.9 percent increase over the same period in 2005.

Pro forma net income for the fourth quarter 2006 was $8.7 million compared to $6.2 million for the same period of 2005, an increase of 39.9 percent from the fourth quarter of 2005. Pro forma net income for the twelve months ended December 31, 2006 was $31.4 million compared to $24.9 million, an increase of 26.2 percent from the same period in 2005. Pro forma net income represents net income excluding the impact of interest expense, amortization of debt issuance costs, write-off of remaining debt issuance costs in the fourth quarter of 2006, and prepayment penalty in the fourth quarter of 2006, all net of tax, on senior notes which were issued in August 2005 and repaid in October 2006 with proceeds from First Mercury’s IPO, which we refer to as senior notes expenses.

Due to the senior notes expenses described above, net income for the fourth quarter 2006 decreased 27.3 percent to $3.6 million compared to $5.0 million for the same period in 2005. Net income for the year ended December 31, 2006 decreased 4.2 percent to $21.9 million compared to $22.8 million for the same period in 2005.

Smith concluded, “Considering the positive momentum we have in our underwriting operations and in our non-risk bearing business following our IPO, we reiterate our guidance for anticipated annual revenue growth in excess of 20 percent for 2007 and we expect to deliver a return on average stockholders’ equity for 2007 in excess of 20 percent.”

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Pro Forma Net Income and Net Income per Share Reconciliation

	Three Months Ended				Twelve Months Ended
	December 31,				December 31,
	2006 (1)		2005 (2)		2006 (1)		2005 (2)(3)(5)
	(Dollars in thousands, except per share data)
Net income:
Net income	$	3,598	$	4,950	$	21,869	$	22,835
Senior notes expenses, net of taxes		5,073		1,250		9,558		2,073
Pro Forma net income	$	8,671	$	6,200	$	31,427	$	24,908
Net Income Per Share:
Diluted Net Income Per Common Share	$	0.20	$	0.41	$	1.58
Senior notes expenses, net of taxes		0.28		0.10		0.69
Pro Forma Diluted Net Income Per Common Share	$	0.48	$	0.51	$	2.27

Conference Call Details

The company will host a conference call today at 11:00 a.m. Eastern Time to discuss fourth quarter and year end results. The call can be accessed live by dialing 877-704-5379 or by visiting First Mercury Financial Corporation’s website atwww.firstmercury.com

Investors may access a replay by dialing 888-203-1112, passcode 7427336, which will be available through March 1, 2007. 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 markets and underwrites specialty commercial insurance products, focusing on niche and underserved segments where the company has underwriting expertise and other competitive advantages.  During the company’s 33 years of underwriting risks, First Mercury has established CoverX® as a recognized brand among insurance agents and brokers. As primarily an excess and surplus (E&S) lines underwriter, First Mercury has developed the underwriting expertise and cost-efficient infrastructure which has enabled it to effectively underwrite such risks.

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

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and other important factors include, among others: 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 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; competition risk; 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; and the risks identified in our filings with the Securities and Exchange Commission, including our Registration Statement on Form S-1. 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.

For more information on the company, please visit the company’s website at
www.firstmercury.com

Financial Tables Follow...

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CONSOLIDATED STATEMENTS OF INCOME

	For the Three Months Ended December 31,
	2006			2005
	(Dollars in thousands, except per share data)
Operating Revenue
Net earned premiums	$	26,766		$	27,489
Commissions and fees		4,213			9,260
Net investment income		2,996			1,758
Net realized gains on investments		532			262
Total Operating Revenues		34,507			38,769
Operating Expenses
Losses and loss adjustment expenses, net		13,022			20,485
Amortization of deferred acquisition expenses		3,720			5,271
Underwriting, agency and other expenses		3,586			2,307
Amortization of intangible assets		395			291
Total Operating Expenses		20,723			28,354
Operating Income		13,784			10,415
Interest Expense		8,380			2,613
Change in Fair Value of Derivative Instruments		11			(147	)
Income Before Income Taxes		5,393			7,949
Income Taxes		1,795			3,000
Net Income	$	3,598		$	4,949
Net Income Per Share: (4)
Basic	$	0.23		$	0.98
Diluted	$	0.20		$	0.41
Weighted Average Shares Outstanding: (4)
Basic		14,923,960			4,148,291
Diluted		18,240,014			12,112,277
GAAP Underwriting Ratios:
Loss ratio		48.7	%		74.5	%
Expense ratio		13.0	%		(4.0	%)
Combined ratio		61.7	%		70.5	%

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	Successor			Successor			Predecessor			Combined
	For the Year			For the Period			For the Period			For the Year
	Ended			August 17 to			January 1 to			Ended
	December 31,			December 31,			August 16,			December 31,
	2006			2005			2005			2005 (3)
	(Dollars in thousands, except per share data)
Operating Revenue
Net earned premiums	$	110,570		$	40,147		$	57,575		$	97,722
Commissions and fees		16,692			12,427			13,650			26,077
Net investment income		9,713			2,630			4,118			6,748
Net realized gains (losses) on investments		517			278			(58	)		220
Total Operating Revenues		137,492			55,482			75,285			130,767
Operating Expenses
Losses and loss adjustment expenses, net		56,208			27,022			28,072			55,094
Amortization of deferred acquisition expenses		16,358			7,954			12,676			20,630
Underwriting, agency and other expenses		13,458			5,713			7,758			13,471
Amortization of intangible assets		1,270			434			732			1,166
Total Operating Expenses		87,294			41,123			49,238			90,361
Operating Income		50,198			14,359			26,047			40,406
Interest Expense		16,615			3,981			1,518			5,499
Change in Fair Value of Derivative Instruments		(40	)		(335	)		(230	)		(565	)
Income Before Income Taxes		33,623			10,713			24,759			35,472
Income Taxes		11,754			4,001			8,636			12,637
Net Income	$	21,869		$	6,712		$	16,123		$	22,835
Net Income Per Share: (4) (5)
Basic	$	2.74		$	1.30		$	1.12
Diluted	$	1.58		$	0.56		$	0.80
Weighted Average Shares Outstanding: (4) (5)
Basic		6,907,905			4,146,045			12,536,224
Diluted		13,831,649			12,044,004			20,093,596
GAAP Underwriting Ratios:
Loss ratio		50.8	%		67.3	%		48.8	%		56.4	%
Expense ratio		16.9	%		8.7	%		18.3	%		14.3	%
Combined ratio		67.7	%		76.0	%		67.1	%		70.7	%

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CONSOLIDATED BALANCE SHEETS

	December 31,
	2006			2005 (6)
	(Dollars in thousands, except per share data)
ASSETS
Investments
Debt securities	$	260,323		$	182,680
Equity securities and other		3,184			3,333
Short-term		34,334			25,012
Total Investments		297,841			211,025
Cash and cash equivalents		14,335			8,400
Premiums and reinsurance balances receivable		46,090			17,574
Accrued investment income		2,931			2,094
Accrued profit sharing commissions		7,735			9,607
Reinsurance recoverable on paid and unpaid losses		69,437			22,483
Prepaid reinsurance premiums		10,377			36,880
Deferred acquisition costs		18,452			9,700
Deferred federal income taxes		—			5,271
Debt issuance costs, net of amortization		—			4,536
Intangible assets, net of accumulated amortization		37,878			30,645
Receivable — stockholders and related entity		62			2,249
Other assets		7,795			5,133
Total Assets	$	512,933		$	365,597
LIABILITIES AND STOCKHOLDERS’ EQUITY
Loss and loss adjustment expense reserves	$	191,013		$	113,864
Unearned premium reserves		91,803			84,476
Senior notes		—			65,000
Long-term debt		46,394			20,620
Shareholder rights payable		—			5,049
Deferred federal income taxes		1,642			—
Premiums payable to insurance companies		728			3,175
Reinsurance payable on paid losses		2,877			5,425
Accounts payable, accrued expenses, and other liabilities		5,738			3,661
Total Liabilities		340,195			301,270
Stockholders’ Equity (4)
Convertible preferred stock, Series A voting, $0.01 par value; authorized 10,000,000 shares; issued and outstanding 0 and 400 shares		—			—
Common stock, $0.01 par value; authorized 100,000,000 shares; issued and outstanding 17,330,831 and 4,178,454 shares		174			42
Paid-in-capital		153,600			58,857
Accumulated other comprehensive loss		(761	)		(1,284	)
Retained earnings		20,323			6,712
Treasury stock		(598	)		—
Total Stockholders’ Equity		172,738			64,327
Total Liabilities and Stockholders’ Equity	$	512,933		$	365,597

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FOOTNOTES

(1) Pro Forma net income for the three and twelve months ended December 31, 2006 represents net income excluding the impact of interest expense, amortization of debt issuance costs, write-off of remaining debt issuance costs, and prepayment penalty, all net of tax, on senior notes which were issued in August 2005 and repaid in October 2006.

(2) Pro Forma net income for the three and twelve months ended December 31, 2005 represents net income excluding the impact of interest expense and amortization of debt issuance costs, both net of tax, on senior notes which were issued in August 2005 and repaid in October 2006.

(3) The Combined amounts for the twelve months ended December 31, 2005 represent the mathematical addition of the historical results for (i) the predecessor period from January 1, 2005 through August 16, 2005, and (ii) the successor period from August 17, 2005 through December 31, 2005. This approach is not consistent with generally accepted accounting principles and yields results that are not comparable on a period-to-period basis. However, we believe it is the most meaningful way to discuss our operating results for 2005 when comparing them to our operating results for 2006.

(4) Reflects 925 to 1 stock split that occurred on October 16, 2006 for all periods presented.

(5) Net income per share and shares outstanding are not provided for the Combined twelve months ended December 31, 2005 due to the Company’s purchase and exchange of shares on August 17, 2005.

(6) First Mercury Holdings, Inc. was merged into First Mercury Financial Corporation on October 16, 2006. Reflects amounts applicable to First Mercury Holdings, Inc. and Consolidated Subsidiaries at December 31, 2005.

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