First Mercury Financial (FMR) 8-K First Mercury Financial Corporation Announces Third Quarter 2008 Financial Results

Exhibit 99.1

FOR FURTHER INFORMATION:

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

FOR IMMEDIATE RELEASE
WEDNESDAY, OCTOBER 29, 2008

FIRST MERCURY FINANCIAL CORPORATION ANNOUNCES
THIRD QUARTER 2008 FINANCIAL RESULTS

SOUTHFIELD, MI — October 29, 2008 — First Mercury Financial Corporation (NYSE: FMR) (“First Mercury” or the “Company”) today announced results for the third quarter and nine months ended September 30, 2008.

Highlights for the quarter include:

• Premiums produced growth of 16.2 percent

• Net income of $0.1 million, or $0.01 per diluted share

• Operating net income of $7.4 million, or $0.39 per diluted share

• Net investment income growth of 27.8 percent

• Combined ratio of 86.3 percent

• Book value per share of $14.30

• Repurchase of 224,535 shares of common stock for $3.2 million at an average cost of $14.35 per share

“We are pleased with our growth in premiums produced of 16.2 percent for the quarter and 14.1 percent year to date,” said Richard H. Smith, chairman and chief executive officer. “We believe our conservative investment philosophy minimized the impact of the ongoing financial market turmoil on our balance sheet. Additionally, we are pleased with our operating results, in particular, the continued increase in production from FM Emerald and the positive contribution to operating income from AMC, which we acquired this February,” added Smith.

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Net income for the third quarter 2008 was $0.1 million compared to $11.0 million for the same period of 2007. Net income for the first nine months of 2008 was $38.5 million compared to $31.5 million for the same period of 2007. Operating net income for the third quarter 2008 was $7.4 million compared to $9.5 million for the same period of 2007. Operating net income for the first nine months of 2008 was $23.5 million compared to $27.4 million for the same period of 2007.

For the three months ended September 30, 2008, premiums produced were $77.0 million, a 16.2 percent increase from premiums produced during the same period in 2007. For the nine months ended September 30, 2008, premiums produced were $238.1 million, a 14.1 percent increase from premiums produced during the same period in 2007. Premiums produced consists of all of the premiums underwritten by the Company’s underwriting platforms including CoverX^®, First Mercury’s licensed wholesale insurance broker, for which the Company takes underwriting risk.

For the three months ended September 30, 2008, gross written premiums were $77.0 million, a 16.2 percent increase from the gross written premiums during the same period in 2007. For the nine months ended September 30, 2008, gross written premiums were $238.1 million, a 16.6 percent increase from the gross written premiums during the same period in 2007.

Net investment income earned during the three months ended September 30, 2008 was $5.6 million, up 27.8 percent from the same period of 2007. Net investment income earned during the nine months ended September 30, 2008 was $15.6 million, up 35.7 percent from the same period of 2007.

Net realized losses on investments during the three months ended September 30, 2008 were $10.6 million compared to net realized gains on investments of $0.4 million during the same period of 2007. Net realized losses on investments during the nine months ended September 30, 2008 were $12.4 million compared to a net realized gain on investments of $1.1 million during the same period of 2007. The net realized losses for the three months ended September 30, 2008 included mark-to-market adjustments of $6.2 million on the Company’s convertible securities portfolio and high yield convertible fund, and $3.5 million of other-than-temporary impairments on various fixed maturity investments in Lehman Brothers, Washington Mutual, AIG, and National City, and a preferred equity holding of Freddie Mac. The net realized losses for the nine months ended September 30, 2008 included mark-to-market adjustments of $8.3 million on the Company’s convertible securities portfolio and high yield convertible fund, and $3.7 million of other-than-temporary impairments including the impairments recorded during the third quarter described above.

Total operating revenues for the three months ended September 30, 2008 increased 1.5 percent to $48.8 million compared to $48.1 million for the same period of 2007. Total operating revenues for the nine months ended September 30, 2008 increased 6.7 percent to $158.3 million compared to $148.4 million for the same period of 2007.

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The combined ratio for the three months ended September 30, 2008 was 86.3 percent compared to 72.5 percent for the same period of 2007. The combined ratio for the three months ended September 30, 2008 includes a loss ratio of 56.1 percent and an expense ratio of 30.2 percent. These compare to a loss ratio of 50.7 percent and an expense ratio of 21.8 percent for the comparable period in 2007. The combined ratio for the nine months ended September 30, 2008 was 82.0 percent compared to 73.4 percent for the same period of 2007. The combined ratio for the nine months ended September 30, 2008 includes a loss ratio of 55.1 percent and an expense ratio of 26.9 percent. These compare to a loss ratio of 51.9 percent and an expense ratio of 21.5 percent for the comparable period in 2007. As previously disclosed, the Company recorded net losses from Hurricane Ike of $2.9 million and $0.4 million of reinstatement premium expense during the three months ended September 30, 2008. 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. For the three and nine months ended September 30, 2007, there was $1.4 million and $2.3 million, respectively, of favorable development of prior years’ loss and loss adjustment expense reserves.

During the three months ended September 30, 2008, the Company implemented a share repurchase plan and repurchased 224,535 shares of common stock for $3.2 million at an average cost of $14.35 per share. As of September 30, 2008, the Company has 1,275,465 shares of remaining capacity under the 1.5 million share repurchase program approved during the quarter, which expires on August 18, 2009.

“We believe that we are well positioned despite the economic and financial market instability,” said Smith. Smith added, “With a strong balance sheet and a commitment to underwriting discipline, we plan to continue to prudently manage our capital and opportunistically invest in underwriting assets in order to permit us to benefit from the eventual turn in the property and casualty market cycle.” Smith concluded, “Based on current market conditions, we reiterate our guidance for premiums produced growth in the range of 10 to 20 percent for the full year 2008.”

Conference Call Details

The Company will host a conference call on October 30, 2008 at 11:00 a.m. Eastern Time to discuss third quarter results. The call can be accessed live by dialing 800-545-9704 or by visiting the Company’s website atwww.firstmercury.com.

Investors may access a replay by dialing 888-203-1112, passcode 3350924, which will be available through November 6, 2008. 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 35 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.

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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, the change in fair value of derivative instruments, income (loss) 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 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.

For more information on the Company, please visit the Company’s website atwww.firstmercury.com

Financial Tables Follow...

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
	(Dollars in thousands, except share and per share data)
Operating Revenue
Net earned premiums	$	49,092		$	41,155		$	139,222		$	129,655
Commissions and fees		4,757			2,226			15,896			6,143
Net investment income		5,571			4,359			15,635			11,523
Net realized gains (losses) on investments		(10,604	)		355			(12,415	)		1,117
Total Operating Revenues		48,816			48,095			158,338			148,438
Operating Expenses
Losses and loss adjustment expenses, net		27,537			20,886			76,713			67,328
Amortization of deferred acquisition expenses		10,798			7,570			28,107			23,866
Underwriting, agency and other expenses		8,999			3,841			26,599			11,148
Amortization of intangible assets		553			166			1,466			500
Total Operating Expenses		47,887			32,463			132,885			102,842
Operating Income		929			15,632			25,453			45,596
Interest Expense		1,440			1,054			4,380			3,022
Change in Fair Value of Derivative Instruments		(64	)		295			110			275
Income (Loss) from Continuing Operations Before Income Taxes		(447	)		14,283			20,963			42,299
Income Taxes		(948	)		4,752			5,592			14,352
Income from Continuing Operations		501			9,531			15,371			27,947
Income (Loss) from Discontinued Operations, Net of Income Taxes		(447	)		1,515			23,106			3,570
Net Income	$	54		$	11,046		$	38,477		$	31,517
Basic Net Income Per Share:
Income from Continuing Operations	$	0.03		$	0.53		$	0.84		$	1.59
Income (Loss) from Discontinued Operations		(0.02	)		0.08			1.27			0.20
Total	$	0.01		$	0.61		$	2.11		$	1.79
Diluted Net Income Per Share:
Income from Continuing Operations	$	0.03		$	0.51		$	0.82		$	1.52
Income (Loss) from Discontinued Operations		(0.02	)		0.08			1.23			0.19
Total	$	0.01		$	0.59		$	2.05		$	1.71
Weighted Average Shares Outstanding:
Basic		18,206,904			18,036,168			18,190,915			17,601,271
Diluted		18,726,246			18,867,107			18,778,070			18,440,128
GAAP Underwriting Ratios:
Loss ratio		56.1	%		50.7	%		55.1	%		51.9	%
Expense ratio		30.2	%		21.8	%		26.9	%		21.5	%
Combined ratio		86.3	%		72.5	%		82.0	%		73.4	%

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First Mercury Financial Corporation
Condensed Consolidated Balance Sheets
(Unaudited)

	September 30,			December 31,
	2008			2007
	(Unaudited)
ASSETS	(Dollars in thousands,
	except share and per share data)
Investments
Debt securities	$	464,960		$	402,418
Equity securities and other		19,463			4,529
Short-term		49,799			52,341
Total Investments		534,222			459,288
Cash and cash equivalents		22,595			18,432
Premiums and reinsurance balances receivable		52,109			38,278
Accrued investment income		4,835			4,481
Accrued profit sharing commissions		9,570			14,220
Reinsurance recoverable on paid and unpaid losses		133,325			96,995
Prepaid reinsurance premiums		48,484			52,718
Deferred acquisition costs		24,330			14,257
Intangible assets, net of accumulated amortization		39,924			36,651
Goodwill		25,483			—
Deferred federal income taxes		1,877			—
Other assets		15,484			11,964
Total Assets	$	912,238		$	747,284
LIABILITIES AND STOCKHOLDERS’ EQUITY
Loss and loss adjustment expense reserves	$	356,250		$	272,365
Unearned premium reserves		141,709			123,469
Long-term debt		67,013			67,013
Funds held under reinsurance treaties		45,556			35,799
Premiums payable to insurance companies		24,176			2,163
Reinsurance payable on paid losses		722			3,958
Deferred federal income taxes		—			217
Accounts payable, accrued expenses, and other liabilities		17,760			12,920
Total Liabilities		653,186			517,904
Stockholders’ Equity
Common stock, $0.01 par value; authorized 100,000,000 shares; issued and outstanding 18,121,317 and 17,972,353 shares		181			180
Paid-in-capital		165,949			165,836
Accumulated other comprehensive income (loss)		(7,243	)		1,177
Retained earnings		100,664			62,187
Treasury stock; 33,600 and 0 shares		(499	)		—
Total Stockholders’ Equity		259,052			229,380
Total Liabilities and Stockholders’ Equity	$	912,238		$	747,284
Book Value Per Share	$	14.30		$	12.76

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First Mercury Financial Corporation
Summary Financial Data

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
	(Dollars in thousands)						(Dollars in thousands)
Premiums Produced:
Security	$	15,004		$	15,405		$	49,864		$	50,034
Specialty		33,566			35,538			111,000			123,205
Contract Underwriting		15,247			15,265			47,084			35,485
FM Emerald		11,294			—			25,268			—
AUIC		1,845			—			4,895			—
Premiums produced	$	76,956		$	66,208		$	238,111		$	208,724
Gross Written Premiums:
Security	$	15,004		$	15,613		$	49,864		$	50,070
Specialty		33,566			35,304			111,000			123,621
Contract Underwriting		15,290			15,357			47,092			30,501
FM Emerald		11,294			—			25,268			—
AUIC		1,845			—			4,895			—
Gross written premiums	$	76,999		$	66,274		$	238,119		$	204,192
Net Written Premiums:
Security	$	10,405		$	9,018		$	35,985		$	28,190
Specialty		23,922			20,334			82,332			71,618
Contract Underwriting		7,929			6,126			27,276			14,207
FM Emerald		5,445			—			9,803			—
AUIC		1,845			—			4,895			—
Net written premiums	$	49,546		$	35,478		$	160,291		$	114,015
Commissions and Fees:
Insurance underwriting commissions and fees	$	(619	)	$	2,226		$	2,136		$	6,143
Insurance services commissions and fees		5,376			—			13,760			—
Total commissions and fees	$	4,757		$	2,226		$	15,896		$	6,143
Cash and Cash Equivalents:
Net cash provided by operating activities — continuing operations	$	33,089		$	25,376		$	91,712		$	105,335
Net cash provided by (used in) operating activities — discontinued operations		(447	)		2,103			1,928			3,855
Net cash used in investing activities — continuing operations		(27,614	)		(24,927	)		(128,185	)		(126,151	)
Net cash provided by investing activities — discontinued operations		—			—			41,830			—
Net cash provided by (used in) financiing activities		(3,223	)		20,619			(3,122	)		32,868
Net increase in cash and cash equivalents	$	1,805		$	23,171		$	4,163		$	15,907
Operating Net Income: (1)
Net Income	$	54		$	11,046		$	38,477		$	31,517
Adjust for Net realized gains and losses on investments, net of tax		6,893			(231	)		8,070			(726	)
Adjust for Change in fair value of derivative instruments, net of tax		(42	)		192			72			179
Adjust for Discontinued operations, net of tax		447			(1,515	)		(23,106	)		(3,570	)
Operating net income	$	7,352		$	9,492		$	23,513		$	27,400
Operating Net Income Per Share: (1)
Diluted	$	0.39		$	0.50		$	1.25		$	1.49

FOOTNOTES

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

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