8-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): November 2, 2009

FIRST MERCURY FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	001-33077	38-3164336
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)

29110 Inkster Road Suite 100 Southfield, Michigan	48034
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (800) 762-6837

Not Applicable

(Former name or former address, if changed since last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02 Results of Operations and Financial Condition

On November 2, 2009, First Mercury Financial Corporation issued a press release announcing its operating results for the three and nine months ended September 30, 2009. A copy of the press release is attached as Exhibit 99.1 to this Form 8-K and incorporated herein by reference.

Item 9.01 Financial Statements and Exhibits

(d) Exhibits

99.1    Press Release dated November 2, 2009.

SIGNATURE

Pursuant to the requirements of the Securities Exchange act of 1934, as amended, the company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

	FIRST MERCURY FINANCIAL CORPORATION
DATE: November 2, 2009	BY:	/s/ John A. Marazza
		John A. Marazza
		Executive Vice President, Chief Financial Officer and Corporate Secretary

EXHIBIT INDEX

Exhibit No.		Description
	99.1	Press Release dated November 2, 2009.

EX-99.1

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, NOVEMBER 2, 2009

FIRST MERCURY FINANCIAL CORPORATION ANNOUNCES
THIRD QUARTER 2009 FINANCIAL RESULTS

SOUTHFIELD, MI — November 2, 2009 — 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.

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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.

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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.”

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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

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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...

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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	%

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First Mercury Financial Corporation
Condensed Consolidated Balance Sheets
(Unaudited)

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

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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.

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