S-1/A

As filed with the Securities and Exchange Commission on August 23, 2006

Registration No. 333-134573

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Amendment No. 2

to

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

First Mercury Financial Corporation

(Exact Name of Registrant as Specified in its Charter)

Delaware	6331	38-3164336
(State or Other Jurisdiction of Incorporation or Organization)	(Primary Standard Industrial Classification Code Number) 29621 Northwestern Highway Southfield, Michigan 48034 (800) 762-6837	(IRS Employer Identification No.)

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Richard Smith

President and Chief Executive Officer

First Mercury Financial Corporation

29621 Northwestern Highway

Southfield, Michigan 48034

(800) 762-6837

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies To:

Scott M. Williams
Heidi J. Steele
Eric Orsic
McDermott Will & Emery LLP
227 West Monroe Street
Chicago, Illinois 60606
(312) 372-2000 Edward S. Best
Mayer, Brown, Rowe & Maw LLP
71 South Wacker Drive
Chicago, Illinois 60606
(312) 782-0600

     Approximate date of commencement of proposed sale to the public:  As soon as practicable after the effective date of this Registration Statement.

     If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box.    o

     If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

     If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

     If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

CALCULATION OF REGISTRATION FEE

	Proposed Maximum
Title of Each Class of	Aggregate	Amount of
Securities to be Registered	Offering Price(1)(2)	Registration Fee
Common Stock, par value $0.01 per share	$189,750,000	$20,304.00(3)

(1)	Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2)	Including shares of common stock, which may be purchased by the underwriters to cover over-allotments, if any.
(3)	Previously paid.

     The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED AUGUST 23, 2006

PROSPECTUS

                                    Shares

First Mercury

Financial Corporation

Common Stock

$                       per share

          We are selling           shares of our common stock. We have granted the underwriters an option to purchase up to           additional shares of common stock to cover over-allotments.

      This is the initial public offering of our common stock. Prior to this offering, no public market existed for our shares. We currently expect the initial public offering price to be between $          and $ per share. We have applied to have our common stock listed on the New York Stock Exchange under the symbol “FMR.”

       Investing in our common stock involves risks. See “Risk Factors” beginning on page 11.

       Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

	Per Share	Total
Public Offering Price	$		$
Underwriting Discount	$		$
Proceeds to the Company (before expenses)	$		$

      The underwriters expect to deliver the shares to purchasers on or about                     , 2006.

JPMorgan Keefe, Bruyette & Woods

Cochran Caronia Waller

William Blair & Company

Dowling & Partners Securities

                    , 2006

      You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any state where the offer is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus.

TABLE OF CONTENTS

	Page
Summary		1
Risk Factors		11
Cautionary Statement Regarding Forward Looking Statements		23
The Company		24
Use of Proceeds		27
Dividend Policy		28
Dilution		29
Capitalization		31
Unaudited Pro Forma Consolidated Statements of Income		32
Selected Historical Consolidated Financial and Other Data		35
Quarterly Results of Operations		38
Management’s Discussion and Analysis of Financial Condition and Results of Operations		40
Business		79
Insurance and Other Regulatory Matters		92
Management		99
Principal Stockholders		106
Certain Relationships and Related Party Transactions		108
Description of Capital Stock		111
Shares Eligible for Future Sale		116
Material U.S. Federal Income Tax Considerations for Non-U.S. Holders		118
Underwriting		121
Legal Matters		123
Experts		123
Where You Can Find More Information		123
Index to Consolidated Financial Statements		F-1
Glossary of Selected Insurance Terms		G-1
Stock Contribution Agreement
1998 Stock Compensation Plan
Registration Rights Agreement
Non-Competition and Confidentiality Agreement
Non-Competition and Confidentiality Agreement
Amendment No.1 to Non-Competition and Confidentiality Agreement
Non-Competition and Confidentiality Agreement
Employment Agreement with Richard H. Smith
Employment Agreement with William S. Weaver
Credit Agreement
Indemnification Agreement
Indemnification Agreement
Indenture
Indenture
Consent of BDO Seidman, LLP

      Until                     , 2006 (25 days after the date of this prospectus), all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

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SUMMARY

      This summary highlights information about this offering and our company, which includes First Mercury Financial Corporation, its subsidiaries and First Mercury Holdings, Inc., the holding company and sole stockholder of First Mercury Financial Corporation, which we refer to as FMFC. First Mercury Holdings, Inc., which we refer to as Holdings, was formed in connection with the notes offering and repurchase of shares of the minority stockholders, which we refer to as the Holdings Transaction, which occurred in August 2005 and is described in “The Company.” Immediately prior to the consummation of this offering, First Mercury Holdings, Inc. will be merged with and into First Mercury Financial Corporation. In this prospectus, unless the context otherwise indicates, “we,” “us,” and “our” refer to First Mercury Holdings, Inc. and its subsidiaries and, prior to the Holdings Transaction, First Mercury Financial Corporation and its subsidiaries. Because this is a summary, it may not contain all the information you should consider before investing in our common stock. You should carefully read this entire prospectus. Certain insurance terms used in this prospectus are defined in the “Glossary of Selected Insurance Terms” included herein.

Overview

      We are a provider of insurance products and services to the specialty commercial insurance markets, primarily focusing on niche and underserved segments where we believe that we have underwriting expertise and other competitive advantages. During our 33 years of underwriting security risks, we have established CoverX^® as a recognized brand among insurance agents and brokers and developed the underwriting expertise and cost-efficient infrastructure which have enabled us to underwrite such risks profitably. Over the last six years, we have leveraged our brand, expertise and infrastructure to expand into other specialty classes of business, particularly focusing on smaller accounts that receive less attention from competitors.

      As primarily an excess and surplus, or E&S, lines underwriter, our business philosophy is to generate an underwriting profit by identifying, evaluating and appropriately pricing and accepting risk using customized forms tailored for each risk. Our combined ratio, a customary measure of underwriting profitability, has averaged 69.4% over the past three years. A combined ratio is the sum of the loss ratio and the expense ratio. A combined ratio under 100% generally indicates an underwriting profit. A combined ratio over 100% generally indicates an underwriting loss. As an E&S lines underwriter, we have more flexibility than standard property and casualty insurance companies to set and adjust premium rates and customize policy forms to reflect the risks being insured. We believe this flexibility has a beneficial impact on our underwriting profitability and our combined ratio.

      In addition, through our insurance services business, which provides underwriting, claims and other insurance services to third parties, we are able to generate significant fee income that is not dependent upon our underwriting results. For our entire business, we generated an average annual return on stockholders’ equity of 28.6% over the past three calendar years.

      Our CoverX subsidiary is a licensed wholesale insurance broker that produces and underwrites all of the insurance policies for which we retain risk and receive premiums. As a wholesale insurance broker, CoverX markets our insurance policies through a nationwide network of wholesale and retail insurance brokers who then distribute these policies through retail insurance brokers. CoverX also provides underwriting services with respect to the insurance policies it markets in that it reviews the applications submitted for insurance coverage, decides whether to accept all or part of the coverage requested and determines applicable premiums. We participate in the risk on insurance policies sold through CoverX, which we refer to as policies produced by CoverX, generally by directly writing the policies through our insurance subsidiaries and then retaining all or a portion of the risk. The portion of the risk that we decide not to retain is ceded to, or assumed by, reinsurers in exchange for paying the reinsurers a proportionate amount of the premium received by us for issuing the policy. This cession is commonly referred to as reinsurance. Based on market conditions, we can retain a higher or lower amount of premiums produced by CoverX.

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      Prior to June 2004, when our insurance subsidiary’s rating was upgraded by A.M. Best Company, Inc. to “A-,” we did not directly write a significant amount of insurance policies produced by CoverX, but instead utilized fronting arrangements under which we contracted with third party insurers, or fronting insurers, to directly write the policies produced by CoverX. Under these fronting arrangements, we then controlled the cession of the insurance from the fronting insurer and either assumed most of the risk under these policies as a reinsurer or arranged for it to be ceded directly to other reinsurers. In connection with our insurance subsidiary’s rating upgrade, we were able to eliminate most of our fronting relationships by May 2005 and become the direct writer of substantially all of the policies produced by CoverX.

      Our direct and assumed written premiums grew from $48.7 million to $175.9 million from 2003 to 2005. These amounts do not include $71.5 million and $12.6 million of premiums in 2003 and 2005, respectively, that were produced and underwritten by CoverX and directly written by our fronting insurers. A discussion of how the shift from relying on fronting relationships to directly writing insurance has impacted our financial presentation and our direct and assumed written premiums is set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview.”

      We have written general liability insurance for the security industry, which includes security guards and detectives, alarm installation and service businesses, and safety equipment installation and service businesses, for 33 years. We focus on small and mid-size accounts that are often underserved by other insurance companies. For 2005 and the six months ended June 30, 2006, our direct and assumed written premiums from security classes represented 39.3% and 30.8% of our total direct and assumed written premiums. Our loss and allocated loss adjustment expense ratio on a weighted average basis for security classes has been 63.2% over the past 19 accident years and 39.0% over the past three accident years. A loss and allocated loss adjustment expense ratio consists of the total net incurred losses and allocated loss adjustment expenses related to a specified class or classes of business divided by the total net earned premium related to a specified class or classes of business over the same time period. We believe that this calculation is useful in providing information on the historical long term underwriting performance of our business from security classes and is an indicator of how an insurance company has managed its risk exposure.

      We have leveraged our nationally recognized CoverX brand, our broad distribution channels through CoverX, and our underwriting and claims expertise to expand our business into other specialty classes. For example, we have leveraged our experience in insuring the security risks of the contractors that install safety and fire suppression equipment, which often involves significant plumbing work and exposure, into the underwriting of other classes of risks for plumbing contractors. We write general liability insurance for other specialty classes primarily consisting of contractor classes of business, including roofing contractors, plumbing contractors, electrical contractors, energy contractors, and other artisan and service contractors, and, most recently, legal professional liability coverage. As part of this extension of our business, we have increased our underwriting staff and opened regional offices in Chicago, Dallas, Naples, Florida and Boston. For 2005 and the six months ended June 30, 2006, our direct and assumed written premiums from other specialty classes represented 60.7% and 69.2%, respectively, of our total direct and assumed written premiums. Our loss and allocated loss adjustment expense ratio on a weighted average basis for other specialty classes has been 39.6% over the past three accident years and 48% over the past six accident years, which represents the period in which we have expanded our business in other specialty classes. We believe this calculation is useful in providing information on the underwriting performance of business from other specialty classes for the six-year period. Because we have limited experience in these classes compared to security classes, loss and allocated loss adjustment expense ratio may not be indicative of the long term underwriting performance of our business from other specialty classes.

      Our insurance services business provides underwriting, claims and other insurance services to third parties, including insurance carriers and customers, and generated $10.5 million in commission and fee income in 2005. Most of this revenue is generated by American Risk Pooling Consultants, Inc. and its subsidiaries, which we refer to as ARPCO, through which we provide third party administration services for risk sharing pools of governmental entity risks, including underwriting, claims, loss control and reinsurance services.

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      For the year ended December 31, 2005, our operating income was $40.4 million, a 38% increase over the same period in 2004, and our net income was $22.8 million, a 29.0% increase over the over the same period in 2004. For the six months ended June 30, 2006, our operating income was $22.4 million, a 15% increase over the six months ended June 30, 2005, and our net income was $11.3 million, a 5% decrease from the same period in 2005. The changes in net income from 2004 to 2005 and from the six months ended June 30, 2006 compared to the corresponding period in 2005 were not proportional to the respective changes in operating income due to interest expense incurred after August 17, 2005 on the $65 million in senior notes issued to finance the purchase of FMFC shares. As of June 30, 2006, we had total assets of $419.4 million and stockholders’ equity of $74.5 million.

Competitive Strengths

      The following competitive strengths drive our ability to execute our business plan and growth strategy:

•  Recognized Brand and Nationwide Distribution Platform. Our CoverX brand has been well-known among insurance brokers and agents for over 30 years. Brokers and agents have depended upon us to provide a consistent insurance market since 1973 for security guards and detectives, alarm installation and service businesses and safety equipment installation and service businesses. We have developed relationships with numerous brokers nationwide, and produced business from approximately 1,000 different brokers in 2005. Throughout our history, we have successfully leveraged our brand and broker distribution network to enter into other specialty classes of business.

•  Proprietary Data and Underwriting Expertise. Recognizing the importance of the collection of claims and loss information, we have developed and maintained an extensive database of underwriting and claims information that we believe is unmatched by our competitors and which includes over 20 years of loss information. We believe our database and underwriting expertise allow us to price the risks that we insure more appropriately than our competitors. We also enhance our historical risk database by using our knowledge to draft extensively customized forms which precisely define the exposures that we insure.

•  Opportunistic Business Model. Because CoverX controls a broad policy distribution network through its relationships with brokers and possesses significant underwriting expertise, we have the ability to selectively increase or decrease the underwriting exposure we retain based upon the pricing environment and how the exposure fits with our underwriting and capital management criteria. We have the ability to offset lower net written premiums by generating higher fee income by either underwriting through CoverX on behalf of third party insurance carriers or ceding more risk to reinsurers.

•  Cost-Efficient Operating Structure. We believe that our cost-efficient operating structure allows us to focus on underserved, small accounts more profitably than our competitors. We streamlined our underwriting and claims processes to create a paperless interactive process that requires significantly less administration. While the premiums generated from insurance policies produced by CoverX increased from $28.1 million in 2000 to $188.5 million in 2005, our total employees over that same period only increased from 110 to 132.

•  Significant Commission and Fee Income Earnings. We have demonstrated the ability to generate non-risk bearing commissions and fees that provide a significant recurring source of income, and as a result, our revenue and net income are less dependent upon our underwriting results.

•  Proven Leadership and Highly Experienced Employees. Our management team, led by our President and Chief Executive Officer, Richard H. Smith, has an average of over 25 years of insurance experience. Additionally, both our underwriters and our senior claims personnel average over 20 years of experience in the insurance industry.

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Business Challenges

      We face the following challenges in conducting our business:

•  Our Continued Success is Dependent Upon Our Ability to Maintain Our Third Party Ratings to Continue to Engage in Direct Insurance Writing. Any downgrade in the rating that First Mercury Insurance Company receives from A.M. Best Company could prevent us from engaging in direct insurance writing or being able to obtain adequate reinsurance on competitive terms, which could lead to decreased revenue and earnings.

•  We Need to Maintain Adequate Reserves. Our actual incurred losses may exceed the loss and loss adjustment expense reserves we maintain, which could have a material adverse effect on our results of operations and financial condition.

•  We Bear Credit Risk With Respect to Our Reinsurers. We continue to have primary liability on risks we cede to reinsurers. If any of these reinsurers fails to pay us on a timely basis or at all, we could experience losses.

•  Our Continued Success is Dependent Upon Our Ability to Obtain Reinsurance on Favorable Terms. We use significant amounts of reinsurance to manage our exposure to market and insurance risks and to enable us to write policies in excess of the level that our capital supports. Without adequate levels of appropriately priced reinsurance, the level of premiums we can underwrite could be materially reduced.

•  A Substantial Portion of Our Business is Concentrated in the Security Industry. Our direct and assumed written premiums from security classes represented 39.3% and 30.8% of our total premiums produced in 2005 and the six months ended June 30, 2006, respectively. As a result, any adverse changes in the security insurance market could reduce our premiums.

•  We Operate in a Highly Competitive Market. It is difficult to attract and retain business in the highly competitive market in which we operate. As a result of this intense competition, prevailing conditions relating to price, coverage and capacity can change very rapidly and we might not be able to effectively compete.

Strategy

      We intend to grow our business while enhancing underwriting profitability and maximizing capital efficiency by executing the following strategies:

•  Profitably Underwrite. We will continue to focus on generating an underwriting profit in each of our classes, regardless of market conditions. Our average combined ratio for the last three years was 69.4%, comprised of an average loss ratio of 51.4% and an average expense ratio of 18.0%. Our ability to achieve similar underwriting results in the future depends on numerous factors discussed in the “Risk Factors” section and elsewhere in this prospectus, many of which are outside of our control.

•  Opportunistically Grow. We plan to opportunistically grow our business in markets where we can use our expertise to generate consistent profits. Our ability to opportunistically grow our business may be impeded by factors such as our vulnerability to adverse events affecting our existing lines, the ability to acquire and retain additional underwriting expertise, and the ability to attract and retain business in the competitive environment in which we operate. Our growth strategy includes the following:

•  Selectively Retain More of the Premiums Generated from Insurance Policies Produced by CoverX. In 2005, our insurance subsidiaries retained 56% of the premiums generated from insurance policies produced by CoverX, either by directly writing these premiums or by assuming these premiums under our fronting arrangements. The remaining portion, or 44%, of these premiums were ceded to reinsurers through quota share and excess of loss reinsurance or retained by the

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	issuing fronting carriers. We intend to continue to selectively retain more of these premiums and to use quota share and other reinsurance arrangements.
•	Selectively Expand Geographically and into Complementary Classes of General Liability Insurance. We strategically provide general liability insurance to certain targeted niche market segments where we believe our experience and infrastructure give us a competitive advantage. We believe there are numerous opportunities to expand our existing general liability product offerings both geographically and into complementary classes of specialty insurance. We intend to identify additional classes of risks that are related to our existing insurance products where we can leverage our experience and data to profitably expand.
•	Enter into Additional Niche Markets and Other Specialty Commercial Lines of Business. We plan to leverage our brand recognition, extensive distribution network, and underwriting expertise to enter into new E&S lines or admitted markets in which we believe we can capitalize on our underwriting and claims platform. We intend to expand into these markets and other lines organically, as well as by making acquisitions and hiring teams of experienced underwriters.
•	Actively Pursue Opportunities for Commission and Fee Income Growth. To the extent we have more market opportunities than we choose to underwrite on our own balance sheet, we plan to pursue and leverage these opportunities to generate commission and fee income by providing our distribution, underwriting and claims services to third party carriers or insureds.

•  Continue to Focus on Opportunistic Business Model. We intend to selectively increase or decrease the underwriting exposure we retain based upon the pricing environment and how the exposure fits with our underwriting and capital management criteria. The efficient deployment of our capital, in part, requires that we appropriately anticipate the amount of premiums that we will write and retain. Changes in the amount of premiums that we write or retain may cause our financial results to be less comparable from period to period.

•  Efficiently Deploy Capital. To the extent the pursuit of the growth opportunities listed above require capital that is in excess of our internally generated capital, we may raise additional capital in the form of debt or equity in order to pursue these opportunities. We have no current specific plans to raise additional capital and do not intend to raise or retain more capital than we believe we can profitably deploy in a reasonable time frame. Maintaining at least an “A-” rating from A.M. Best is critical to us, and will be a principal consideration in our decisions regarding capital as well as our underwriting, reinsurance and investment practices.

Corporate History

      CoverX was founded in 1973 as an underwriter and broker of specialty commercial insurance products with a specific concentration on the security market. In 1985, our founding shareholder formed the predecessor of First Mercury Insurance Company, which we refer to as FMIC, to become the reinsurer of business produced by CoverX and fronted by other insurance companies. In June 2004, we raised $40 million from the issuance of convertible preferred stock to an entity controlled by Glencoe Capital, LLC, which we refer to as Glencoe. Glencoe is controlled by David S. Evans, its Chairman. The convertible preferred stock issuance enabled FMIC to obtain an “A-” rating from A.M. Best and reduce its reliance on fronting carriers. In August 2005, we completed a transaction after which Glencoe became our controlling shareholder. This transaction was financed by the issuance of $65 million aggregate principal amount of Senior Floating Rate Notes due 2012, which we refer to as the senior notes.

      Our principal executive offices are located at 29621 Northwestern Highway, Southfield, Michigan 48034 and our telephone number at that address is (800) 762-6837. Our website is located at http://www.coverx.com. The information on our website is not part of this prospectus.

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THE OFFERING

Common stock offered by us	shares
Common stock outstanding after this offering	shares
Over-allotment option	We have granted the underwriters an option to purchase up to                      shares of common stock to cover over- allotments.
Proposed NYSE symbol	FMR
Use of proceeds	We estimate that our net proceeds from this offering will be approximately $           million. We intend to use the net proceeds from this offering as follows:
	• approximately $           million to repay all of our outstanding senior notes issued in August 2005;
	• approximately $           million to pay amounts due under our convertible preferred stock in connection with this offering, which will also be converted into                      shares of common stock upon the completion of this offering;
	• approximately $           million to repurchase                      shares of our common stock held by Glencoe following conversion of our convertible preferred stock (which may be increased to $           million and                      shares if the over-allotment option is exercised in full)(1); and
	• the balance of approximately $           million to make contributions to the capital of our insurance subsidiaries and for other general corporate purposes, including the repurchase of additional shares of common stock held by Glencoe.
Dividend policy	Our board of directors does not intend to declare cash dividends for the foreseeable future on our common stock.
Risk factors	See “Risk Factors” beginning on page 11 and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock.

(1)  Unless we specifically state otherwise, the information in this prospectus:

•  assumes that the underwriters will not exercise their over-allotment option to purchase up to an additional                      shares from us;

•  includes                      shares of our common stock to be issued upon conversion of our convertible preferred stock upon completion of this offering, and excludes, in the number of shares of common stock to be outstanding after this offering, options to purchase                      shares of common stock issuable upon the exercise of stock options outstanding as of                     , 2006 and an additional                      shares of common stock which are reserved for issuance under our incentive compensation plan;

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•  reflects a      -for-     stock split of our common stock and the conversion of our convertible preferred stock into an aggregate of                      shares of common stock which will occur immediately prior to the closing of this offering; and

•  does not reflect our obligation to repurchase up to $           million or                 shares of our common stock held by Glencoe that we intend to repurchase with a portion of the net proceeds from the offering and the overallotment option, if exercised. If the over-allotment option is not exercised in full, we intend to use amounts available under our credit facility to fund any remaining amounts necessary to satisfy this repurchase obligation.

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SUMMARY HISTORICAL AND UNAUDITED PRO FORMA

CONSOLIDATED FINANCIAL AND OTHER DATA

      The table shown below presents our summary historical and unaudited pro forma consolidated financial and other data for the years ended December 31, 2005, 2004 and 2003 and the six months ended June 30, 2006 and 2005. The summary historical and unaudited pro forma consolidated financial and other data presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Selected Historical Consolidated Financial and Other Data,” “Capitalization” and the consolidated annual and interim financial statements and accompanying notes included elsewhere in this prospectus. The summary historical and unaudited pro forma consolidated financial and other data included below and elsewhere in this prospectus are not necessarily indicative of future performance.

      On August 17, 2005, we completed a transaction in which we formed Holdings to purchase shares of FMFC common stock from certain FMFC stockholders and to exchange shares and options with the remaining stockholders of FMFC. As a result of this transaction, which we refer to as the Holdings Transaction, Glencoe became the majority stockholder of Holdings and Holdings became the controlling stockholder of FMFC. The purchase and exchange of shares was financed by the issuance of $65 million aggregate principal amount of senior notes by Holdings. As a result of this acquisition and resulting purchase accounting adjustments the results of operations for periods prior to August 17, 2005 are not comparable to periods subsequent to that date. Immediately prior to the completion of this offering, Holdings will be merged into FMFC and the senior notes will be repaid in full with a portion of the net proceeds from this offering.

      The summary historical and consolidated financial and other data presented below for the two years ended December 31, 2004 and 2003 (Predecessor) have been derived from the audited consolidated financial statements of our predecessor included elsewhere in this prospectus. The summary historical and consolidated financial and other data for the six months ended June 30, 2005 (Predecessor) have been derived from the unaudited condensed consolidated financial statements of our predecessor included elsewhere in this prospectus. The information presented for the year ended December 31, 2005 reflects the pro forma combined results of the predecessor and the successor companies as it relates to the Holdings Transaction. The pro forma information presented below for the year ended December 31, 2005 and the six months ended June 30, 2006 reflect certain pro forma adjustments to exclude the impact of interest expense, the amortization of debt issuance costs, and federal tax benefits arising from the senior notes that will be repaid in full with the proceeds of this offering. See “Unaudited Pro Forma Consolidated Statements of Income.”

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	Pro Forma			Predecessor			Pro Forma			Predecessor
	Six Months			Six Months			Year			Year			Year
	Ended			Ended			Ended			Ended			Ended
	June 30,			June 30,			December 31,			December 31,			December 31,
	2006			2005			2005			2004(1)			2003
	($ in thousands, except for share data)
Income Statement Data:
Direct and assumed written premiums	$	113,242		$	83,616		$	175,896		$	92,066		$	48,735
Net written premiums		53,937			56,358			105,701			72,895			48,469
Net earned premiums		56,857			44,356			97,722			61,291			40,338
Commissions and fees		8,763			10,341			26,076			33,730			33,489
Net investment income		4,271			3,221			6,718			4,619			3,983
Net realized gains (losses) on investments		(482	)		(74	)		220			(120	)		813
Total operating revenues		69,409			57,844			130,736			99,520			78,623
Losses and loss adjustment expenses, net		29,962			21,244			55,094			26,854			21,732
Amortization of deferred acquisition expenses		9,092			9,873			20,630			15,713			11,995
Amortization of intangible assets		583			583			1,166			632			—
Underwriting, agency and other operating expenses		7,379			6,587			13,470			26,953			29,923
Total operating expenses		47,016			38,287			90,360			70,152			63,650
Operating income		22,362			19,557			40,376			29,368			14,973
Interest expense		884			1,211			2,279			1,697			965
Income taxes		7,607			6,465			13,754			10,006			3,288
Net income	$	14,257		$	11,917		$	24,908		$	17,735		$	10,977
Earnings Per Share Data:
Basic — historical	$	2,729.71		$	755.57		$	4,786.44		$	1,220.39		$	874.56
Diluted — historical		1,070.07			544.98			1,912.98			972.30			843.93
Diluted — as adjusted(2)
Weighted average shares outstanding basic — historical		4,557.9934			13,552.6747			4,482.2113			13,017.6589			12,551.4250
Weighted average shares outstanding diluted — historical		13,323.4363			21,866.3722			13,020.5457			18,240.2670			13,006.9543
Weighted average shares outstanding diluted — as adjusted(2)
GAAP Underwriting Ratios:
Loss ratio(3)		52.7	%		47.9	%		56.4	%		43.8	%		53.9	%
Expense ratio(4)		19.1	%		20.1	%		14.3	%		18.9	%		20.9	%
Combined ratio(5)		71.8	%		68.0	%		70.7	%		62.7	%		74.8	%

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	As of June 30, 2006
	Actual		As adjusted(6)
	($ in thousands)
Balance Sheet Data:
Total investments	$	223,166
Total assets		419,427
Loss and loss adjustment expense reserves		150,940	$	150,940
Unearned premium reserves(7)		95,368		95,368
Long-term debt		85,620		20,620
Total stockholders’ equity		74,451

(1)	Includes the operations of ARPCO from the date of acquisition of ARPCO in June 2004.
(2)	Earnings per share — diluted as adjusted and weighted average shares outstanding diluted — as adjusted give effect to the conversion of all outstanding shares of our convertible preferred, including shares representing dividends in arrears on our convertible preferred stock through the respective balance sheet date presented, and to reflect a      -for-     stock split of our common stock, each of which will occur on or prior to the completion of this offering. Upon conversion of the convertible preferred stock, the only significant difference between basic and diluted earnings per share will relate to the treatment of options.
(3)	Loss ratio is defined as the ratio of incurred losses and loss adjustment expenses to net earned premiums.
(4)	Expense ratio is defined as the ratio of (i) the amortization of deferred acquisition expenses plus other operating expenses, less expenses related to insurance services operations, less commissions and fee income related to underwriting operations to (ii) net earned premiums.
(5)	A combined ratio is the sum of the loss ratio and the expense ratio. A combined ratio under 100% generally indicates an underwriting profit. A combined ratio over 100% generally indicates an underwriting loss.
(6)	As adjusted for the sale of                      shares of our common stock in this offering at an assumed initial offering price to the public of $          per share (the mid-point of the range on the front cover page of this prospectus), after deducting the underwriting discounts and estimated offering expenses payable by us, the application of the net proceeds from this offering as set forth in “Use of Proceeds,” including the repurchase of all outstanding senior notes, the payment due under our convertible preferred stock in connection with this offering, the conversion of our convertible preferred stock into common stock upon the completion of this offering and the repurchase of shares of common stock held by Glencoe.
(7)	Unearned premium reserves are reserves established for the portion of premiums that is allocable to the unexpired portion of the policy term.

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RISK FACTORS

      An investment in our common stock involves a number of risks. Before making an investment in our common stock, you should carefully consider the following risks, as well as the other information contained in this prospectus, including our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Additional risks and uncertainties not currently known to us, or risks that we currently deem immaterial, may also impair our business operations. Any of the risks described below could result in a significant or material adverse effect on our financial condition or our results of operations. As a result, the trading price of our common stock could decline and you may lose all or part of your investment.

Risks Relating to Our Business

Any downgrade in the A.M. Best rating of FMIC would prevent us from successfully engaging in direct insurance writing or obtaining adequate reinsurance on competitive terms, which would lead to a decrease in revenue and net income.

      Third party rating agencies periodically assess and rate the claims-paying ability of insurers based on criteria established by the rating agencies. In June 2004, FMIC received an “A-” rating (the fourth highest of fifteen ratings) with a stable outlook from A.M. Best Company, Inc., or A.M. Best, a rating agency and publisher for the insurance industry. This rating is not a recommendation to buy, sell or hold our securities but is viewed by insurance consumers and intermediaries as a key indicator of the financial strength and quality of an insurer. FMIC currently has the lowest rating necessary to compete in our targeted markets as a direct insurance writer because an “A-” rating or higher is required by many insurance brokers, agents and policyholders when obtaining insurance and by many insurance companies that reinsure portions of our policies.

      Our A.M. Best rating is based on a variety of factors, many of which are outside of our control. These factors include our business profile and the statutory surplus of our insurance subsidiaries, which is adversely affected by underwriting losses and dividends paid by them to us. Other factors include balance sheet strength (including capital adequacy and loss and loss adjustment expense reserve adequacy) and operating performance. Any downgrade of our ratings could cause our current and future brokers and agents, retail brokers and insureds to choose other, more highly rated, competitors and increase the cost or reduce the availability of reinsurance to us. Without at least an “A-” A.M. Best rating for FMIC, we could not competitively engage in direct insurance writing, but instead would be heavily dependent on fronting carriers to underwrite premiums. These fronting arrangements would require us to pay significant fees, which could then cause our earnings to decline. Moreover, we may not be able to enter into fronting arrangements on acceptable terms, which would impair our ability to operate our business.

Our actual incurred losses may be greater than our loss and loss adjustment expense reserves, which could have a material adverse effect on our financial condition or our results of operations.

      We are liable for losses and loss adjustment expenses under the terms of the insurance policies issued directly by us and under those for which we assume reinsurance obligations. As a result, if we fail to accurately assess the risk associated with the business that we insure, our loss reserves may be inadequate to cover our actual losses. In many cases, several years may elapse between the occurrence of an insured loss, the reporting of the loss to us and our payment of the loss. In addition, our policies generally do not provide limits on defense costs, which could increase our liability exposure under our policies.

      We establish loss and loss adjustment expense reserves with respect to reported and unreported claims incurred as of the end of each period. Our loss and loss adjustment expense reserves were $61.7 million, $68.7 million and $113.9 million at December 31, 2003, 2004 and 2005, respectively, and $150.9 million at June 30, 2006, all of which are gross of ceded loss and loss adjustment expense reserves. These reserves do

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not represent an exact measurement of liability, but are our estimates based upon various factors, including:

•  actuarial projections of what we, at a given time, expect to be the cost of the ultimate settlement and administration of claims reflecting facts and circumstances then known;

•  estimates of future trends in claims severity and frequency;

•  assessment of asserted theories of liability; and

•  analysis of other factors, such as variables in claims handling procedures, economic factors and judicial and legislative trends and actions.

      Most or all of these factors are not directly or precisely quantifiable, particularly on a prospective basis, and are subject to a significant degree of variability over time. For example, insurers have been held liable for large awards of punitive damages, which generally are not reserved for. In many cases, estimates are made more difficult by significant reporting lags between the occurrence of the insured event and the time it is actually reported to the insurer and additional lags between the time of reporting and final settlement of claims. Accordingly, the ultimate liability may be more or less than the current estimate. While we set our reserves based on our assessment of the insurance risk assumed, as we have expanded into new specialty classes of business, we do not have extensive proprietary loss data for other specialty classes to use to develop reserves. Instead, we must rely on industry loss information, which may not reflect our actual claims results. As a result, our continued expansion into new specialty classes may make it more difficult to ensure that our actual losses are within our loss reserves.

      If any of our reserves should prove to be inadequate, we will be required to increase reserves, resulting in a reduction in our net income and stockholders’ equity in the period in which the deficiency is identified. In addition, future loss experience substantially in excess of established reserves could also have a material adverse effect on future earnings and liquidity as well as our financial strength rating.

      Under generally accepted accounting principles, or GAAP, we are only permitted to establish loss and loss adjustment expense reserves for losses that have occurred on or before the financial statement date. Case reserves and incurred but not reported, or IBNR, reserves contemplate these obligations. No contingency reserve allowances are established to account for future loss occurrences. Losses arising from future events will be estimated and recognized at the time the losses are incurred and could be substantial.

We bear credit risk with respect to our reinsurers, and if any reinsurer fails to pay us, or fails to pay us on a timely basis, we could experience losses.

      Reinsurance is a practice whereby one insurer, called the reinsurer, agrees to indemnify another insurer, called the ceding insurer, for all or part of the potential liability arising from one or more insurance policies issued by the ceding insurer. Although reinsurance makes the reinsurer liable to us to the extent of the risk transferred or ceded to the reinsurer, this arrangement does not relieve us of our primary liability to our policyholders. Moreover, our primary liability for losses and loss adjustment expenses under the insurance policies that we underwrite will increase as our business shifts from relying on fronting arrangements to our direct writing of insurance. At December 31, 2005 and June 30, 2006, we had $49.2 million and $94.8 million, respectively, of reinsurance recoverables. We expect our recoverables from reinsurers will increase as we increase the insurance that we directly write instead of using a fronting relationship. Under fronting arrangements, policies produced by our CoverX subsidiary were directly written by third party insurers, and a portion of the risk under these policies was assumed by us or other reinsurers for a portion of the related premium. With the elimination of most of our fronting relationships in May 2005, we became the direct writer of substantially all of the policies produced by us, and as a result, our premiums ceded to reinsurers has increased from 2003 to 2005. Most of our reinsurance recoverables are from four reinsurers, consisting of subsidiaries of ACE Limited, GE Reinsurance, Platinum Underwriters Reinsurance, Inc. and W.R. Berkley Corp. At December 31, 2005, the balances from ACE Limited, GE Reinsurance, and W.R. Berkley Corp. were $34.9 million, $10.7 million, and $2.5 million, respectively. There were no reinsurance recoverables due from Platinum Underwriters

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Reinsurance, Inc. at December 31, 2005. At June 30, 2006, the balances from ACE Limited, GE Reinsurance, Platinum Underwriters Reinsurance, Inc. and W.R. Berkley Corp. were $68.0 million, $16.0 million, $5.0 million and $1.7 million, respectively. Although we believe that we have high internal standards for reinsurers with whom we place reinsurance, we cannot assure you that our reinsurers will pay reinsurance claims on a timely basis or at all. If reinsurers are unwilling or unable to pay us amounts due under reinsurance contracts, we will incur unexpected losses and our cash flow will be adversely affected, which would have a material adverse effect on our financial condition and operating results.

We may not be able to obtain adequate reinsurance coverage or reinsurance on acceptable terms.

      We use significant amounts of reinsurance to manage our exposure to market and insurance risks and to enable us to write policies in excess of the level that our capital supports. The availability and cost of reinsurance are subject to prevailing market conditions, both in terms of price and available capacity, which can affect our business volume and profitability. Without adequate levels of appropriately priced reinsurance, the level of premiums we can underwrite could be materially reduced. The reinsurance market has changed dramatically over the past few years as a result of a number of factors, including inadequate pricing, poor underwriting and the significant losses incurred as a consequence of the terrorist attacks on September 11, 2001. As a result, reinsurers have exited some lines of business, reduced available capacity and implemented provisions in their contracts designed to reduce their exposure to loss. In addition, the historical results of reinsurance programs and the availability of capital also affect the availability of reinsurance. Our reinsurance facilities generally are subject to annual renewal and are from three reinsurers. We cannot provide any assurance that we will be able to maintain our current reinsurance facilities or that we will be able to obtain other reinsurance facilities in adequate amounts and at favorable rates.

The failure of any of the loss limitations or exclusions we employ or changes in other claim or coverage issues could have a material adverse effect on our financial condition or our results of operations.

      Various provisions of our policies, such as loss limitations, exclusions from coverage or choice of forum, which have been negotiated to limit our risks, may not be enforceable in the manner we intend. At the present time, we employ a variety of endorsements to our policies in an attempt to limit exposure to known risks. As industry practices and legal, social and other conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues may adversely affect our business by either extending coverage beyond our underwriting intent or by increasing the size or number of claims. Recent examples of emerging claims and coverage issues include increases in the number and size of claims relating to construction defects, which often present complex coverage and damage valuation questions. The effects of these and other unforeseen emerging claim and coverage issues are difficult to predict and could harm our business.

      In addition, we craft our insurance policy language to limit our exposure to expanding theories of legal liability such as those which have given rise to claims for lead paint, asbestos, mold and construction defects. Many of the policies we issue also include conditions requiring the prompt reporting of claims to us and our right to decline coverage in the event of a violation of that condition, as well as limitations restricting the period during which a policyholder may bring a breach of contract or other claim against our company, which in many cases is shorter than the statutory limitations for such claims in the states in which we write business. It is possible that a court or regulatory authority could nullify or void an exclusion or that legislation could be enacted which modifies or bars the use of such endorsements and limitations in a way that would adversely affect our loss experience, which could have a material adverse effect on our financial condition or results of operations. In some instances, these changes may not become apparent until some time after we have issued insurance policies that are affected by the changes. As a result, we may not know the full extent of liability under our insurance contracts for many years after a contract is issued.

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The lack of long-term operating history and proprietary data on claims results for relatively new specialty classes may cause our future results to be less predictable.

      Since 2000, we have expanded our focus on new classes of the specialty insurance market, which we refer to as other specialty classes, in addition to our long-standing business for security classes. Other specialty classes represented 24.2% of our premiums produced in 2000 and 61.0% of our premiums produced in 2005. As a result of this expansion, we have a more limited operating and financial history available for other specialty classes when compared to our data for security classes. This may adversely impact our ability to adequately price the insurance we write to reflect the risk assumed and to exclude risks that generate large or frequent claims and to establish appropriate loss reserves. For example, in 2005, we increased our reserves applicable to other specialty classes by approximately $6.2 million, principally as a result of using updated industry loss development factors in the calculations of ultimate expected losses and reserves on those classes that we believed were more closely aligned with our classifications and coverage limits and actual emerging experience. Because we rely more heavily on industry data in calculating reserves for other specialty classes than we do for security classes, we may need to further adjust our reserve estimates for other specialty classes in the future, which could materially adversely affect our operating results.

Our growth may be dependent upon our successful acquisition and retention of additional underwriting expertise.

      Our operating results and future growth depend, in part, on the acquisition and successful retention of underwriting expertise. We rely on a small number of underwriters in the other specialty classes for which we write policies. For example, we significantly expanded our business into other specialty classes in 2000 by hiring three senior underwriters and we introduced legal professional liability coverage by contracting with one underwriter who operates in Boston. In addition, we intend to continue to expand into other specialty classes through the acquisition of key underwriting personnel. While we intend to continue to search for suitable candidates to augment and supplement our underwriting expertise in existing and additional classes of specialty insurance, we may not be successful in identifying, hiring and retaining candidates. If we are successful in identifying candidates, there can be no assurance that we will be able to hire and retain them or, if they are hired and retained, that they will be successful in enhancing our business or generating an underwriting profit.

We may require additional capital in the future, which may not be available or may be available only on unfavorable terms.

      Our future capital requirements, especially those of our insurance subsidiaries, depend on many factors, including our ability to write new business successfully and to establish premium rates and reserves at levels sufficient to cover losses and loss adjustment expenses. We may need to raise additional funds to the extent that the funds generated by this offering and our cash flows are insufficient to fund future operating requirements, support growth and maintain our A.M. Best rating. Many factors will affect our capital needs, including our growth and profitability, our claims experience, and the availability of reinsurance, as well as possible acquisition opportunities, market disruptions and other unforeseeable developments. If we have to raise additional capital, equity or debt financing may not be available or may be available only on terms, amounts or time periods that are not favorable to us. Equity financings could be dilutive to our existing stockholders and debt financings could subject us to covenants that restrict our ability to operate our business freely. If we cannot obtain adequate capital on favorable terms or at all, our business, financial condition or results of operations could be materially adversely affected.

Our business could be adversely affected by the loss of one or more key employees.

      We are substantially dependent on a small number of key employees at our operating companies, in particular Richard Smith, our President and Chief Executive Officer, and our key underwriting employees. We believe that the experience and reputation in the insurance industry of Mr. Smith and our key underwriting employees are important factors in our ability to attract new business. Our success has been,

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and will continue to be, dependent on our ability to retain the services of our existing key employees and to attract and retain additional qualified personnel in the future. As we continue to grow, we will need to recruit and retain additional qualified management personnel, but we may be unsuccessful in doing so. The loss of the services of Mr. Smith or any other key employee, or the inability to identify, hire and retain other highly qualified personnel in the future, could adversely affect the quality and profitability of our operations.

Our insurance business is concentrated in relatively few specialty classes.

      Premiums produced for security classes represented 39.3% and 30.8% of our total direct and assumed written premiums in 2005 and the six months ended June 30, 2006, respectively. As a result, any changes in the security insurance market, such as changes in business, economic or regulatory conditions or changes in federal or state law or legal precedents, could adversely impact our ability to write insurance for this market. For example, any legal outcome or other incident could have the effect of increasing insurance claims in the security insurance market which could adversely impact our operating results.

The loss of one or more of our top wholesale brokers could have a material adverse effect on our financial condition or our results of operations.

      For security classes, we generate business from traditional E&S lines insurance wholesalers and specialists that focus on security guards and detectives, alarm installation and service businesses and safety equipment installation and service businesses. These wholesalers and specialists are not under any contractual obligation to provide us business. Our top five wholesale brokers represented 26% of the premiums produced from security classes. For other specialty classes, we generate business from traditional E&S lines insurance wholesalers who have a presence in the other specialty classes we underwrite. Our top five wholesale brokers represented 27% of the premiums produced from other specialty classes in 2005. In certain other specialty classes, we rely on a small number of agents to generate the insurance that we underwrite. For example, substantially all of our legal professional liability coverage is generated by one agent. The loss of one or more of our top wholesale brokers for security classes or other specialty classes could have a material adverse effect on our financial condition or our results of operations.

We operate in a highly competitive environment, which makes it more difficult for us to attract and retain business.

      The insurance industry in general and the markets in which we compete are highly competitive and we believe that they will remain so for the foreseeable future. We face competition from several companies, which include insurance companies, reinsurance companies, underwriting agencies, program managers and captive insurance companies. As a result of this intense competition, prevailing conditions relating to price, coverage and capacity can change very rapidly. Many of our competitors are larger and have greater financial, marketing and management resources than we do and may be perceived as providing greater security to policyholders. There are low barriers to entry in the E&S lines insurance market, which is the primary market in which we operate, and competition in this market is fragmented and not dominated by one or more competitors. Competition in the E&S lines insurance industry is based on many factors, including price, policy terms and conditions, ratings by insurance agencies, overall financial strength of the insurer, services offered, reputation, agent and broker compensation and experience. We may face increased competition in the future in the insurance markets in which we operate, and any such increased competition could have a material adverse effect on us.

      Several E&S lines insurers and industry groups and associations currently offer alternative forms of risk protection in addition to traditional insurance products. These alternative products, including large deductible programs and various forms of self-insurance that use captive insurance companies and risk retention groups, have been instituted to allow for better control of risk management and costs. We cannot predict how continued growth in alternative forms of risk protection will affect our future operations.

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Results in the insurance industry, and specifically the E&S lines insurance market, are subject to fluctuations and uncertainty which may adversely affect our ability to write policies.

      Historically, the financial performance of the property and casualty insurance industry has fluctuated in cyclical periods of price competition and excess underwriting capacity (known as a soft market) followed by periods of high premium rates and shortages of underwriting capacity (known as a hard market). Although an individual insurance company’s financial performance is dependent on its own specific business characteristics, the profitability of most property and casualty insurance companies tends to follow this cyclical market pattern. Further, this cyclical market pattern can be more pronounced in the E&S lines market than in the standard insurance market due to greater flexibility in the E&S lines market to adjust rates to match market conditions. When the standard insurance market hardens, the E&S lines market hardens even more than the standard insurance market. During these hard market conditions, the standard insurance market writes less insurance and more customers must resort to the E&S lines market for insurance. As a result, the E&S lines market can grow more rapidly than the standard insurance market. Similarly, when conditions begin to soften, many customers that were previously driven into the E&S lines market may return to the standard insurance market, exacerbating the effects of rate decreases in the E&S lines market.

      Beginning in 2000 and accelerating in 2001, the property and casualty insurance industry experienced a hard market reflecting increasing rates, more restrictive coverage terms and more conservative risk selection. We believe that this trend continued through 2003. During 2004 and early 2005, we believe that these trends slowed and that the current insurance market has become more competitive in terms of pricing and policy terms and conditions. We are currently experiencing some downward pricing pressure. Because this cyclicality is due in large part to the actions of our competitors and general economic factors, we cannot predict the timing or duration of changes in the market cycle. These cyclical patterns have caused our revenues and net income to fluctuate and are expected to do so in the future.

We are subject to extensive regulation, which may adversely affect our ability to achieve our business objectives. In addition, if we fail to comply with these regulations, we may be subject to penalties, including fines and suspensions, which may adversely affect our financial condition and results of operations.

      Our insurance subsidiaries are subject to extensive regulation, primarily by insurance regulators in Illinois and Minnesota, the states in which our two insurance company subsidiaries are domiciled and, to a lesser degree, the other jurisdictions in which we operate. Most insurance regulations are designed to protect the interests of insurance policyholders, as opposed to the interests of the insurance companies or their shareholders. These insurance regulations generally are administered by a department of insurance in each state and relate to, among other things, licensing, authorizations to write E&S lines of business, capital and surplus requirements, rate and form approvals, investment and underwriting limitations, affiliate transactions (which includes the review of services, tax sharing and other agreements with affiliates that can be a source of cash flow to us, other than dividends which are specifically regulated by law), dividend limitations, changes in control, solvency and a variety of other financial and non-financial aspects of our business. Significant changes in these laws and regulations could further limit our discretion to operate our business as we deem appropriate or make it more expensive to conduct our business. State insurance departments also conduct periodic examinations of the affairs of insurance companies and require the filing of annual and other reports relating to financial condition, holding company issues and other matters. These regulatory requirements may adversely affect our ability to achieve some or all of our business objectives.

      In addition, regulatory authorities have broad discretion to deny or revoke licenses or approvals for various reasons, including the violation of regulations. In instances where there is uncertainty as to the applicability of regulations, we follow practices based on our interpretations of regulations or practices that we believe generally to be followed by the insurance industry. These practices may turn out to be different from the interpretations of regulatory authorities. If we do not have the requisite licenses and approvals or do not comply with applicable regulatory requirements, insurance regulatory authorities could preclude or

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temporarily suspend us from carrying on some or all of our activities or otherwise penalize us. These actions could adversely affect our ability to operate our business. Further, changes in the level of regulation of the insurance industry and changes in laws or regulations themselves or their interpretations by regulatory authorities could adversely affect our ability to operate our business.

If we have insufficient risk-based capital, our ability to conduct our business could be adversely affected.

      The National Association of Insurance Commissioners, or NAIC, has adopted a system to test the adequacy of statutory capital, known as “risk-based capital.” This system establishes the minimum amount of risk-based capital necessary for a company to support its overall business operations. It identifies property and casualty insurers that may be inadequately capitalized by looking at certain inherent risks of each insurer’s assets and liabilities and its mix of net written premiums. Insurers falling below a calculated threshold may be subject to varying degrees of regulatory action, including supervision, rehabilitation or liquidation. Failure to maintain our risk-based capital at the required levels could adversely affect the ability of our insurance subsidiaries to maintain regulatory authority to conduct our business.

If our IRIS ratios are outside the usual range, our business could be adversely affected.

      Insurance Regulatory Information System, or IRIS, ratios are part of a collection of analytical tools designed to provide state insurance regulators with an integrated approach to screening and analyzing the financial condition of insurance companies operating in their respective states. As of December 31, 2005, FMIC had IRIS ratios outside the usual range in four of the IRIS tests. An insurance company may become subject to increased scrutiny when four or more of its IRIS ratios fall outside the range deemed usual by the NAIC. The nature of increased regulatory scrutiny resulting from IRIS ratios that are outside the usual range is subject to the judgment of the applicable state insurance department, but generally will result in accelerated review of annual and quarterly filings. Depending on the nature and severity of the underlying cause of the IRIS ratios being outside the usual range, increased regulatory scrutiny could range from increased but informal regulatory oversight to placing a company under regulatory control. Because FMIC had four ratios outside the usual range, we could become subject to greater scrutiny and oversight by regulatory authorities. See “Insurance and Other Regulatory Matters.”

If we are unable to realize our investment objectives, our financial condition may be adversely affected.

      Our operating results depend in part on the performance of our investment portfolio. The primary goals of our investment portfolio are to:

•  accumulate and preserve capital;

•  assure proper levels of liquidity;

•  optimize total after tax return subject to acceptable risk levels;

•  provide an acceptable and stable level of current income; and

•  approximate duration match between our investments and our liabilities.

      The ability to achieve our investment objectives is affected by general economic conditions that are beyond our control. General economic conditions can adversely affect the markets for interest rate-sensitive securities, including the extent and timing of investor participation in such markets, the level and volatility of interest rates and, consequently, the value of fixed income securities. Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. General economic conditions, stock market conditions and many other factors can also adversely affect the equities markets and, consequently, the value of the equity securities we own. We may not be able to realize our investment objectives, which could reduce our net income significantly.

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Our directors, executive officers and principal stockholders will own a large percentage of our common stock after this offering, which will allow them to control substantially all matters requiring stockholder approval.

      Our directors, executive officers and principal stockholders will beneficially own           % of our outstanding common stock (including options exercisable within 60 days) immediately following completion of this offering, including           % and           % owned by Glencoe and Jerome Shaw, respectively, following completion of this offering. This does not take into account shares of common stock that may be purchased by certain of our directors, executive officers and principal stockholders or related parties in this offering. Accordingly, these directors, executive officers and principal stockholders will have substantial influence, if they act as a group, over the election of directors and the outcome of other corporate actions requiring stockholder approval and could seek to arrange a sale of our company at a time or under conditions that are not favorable to our other stockholders. These stockholders may also delay or prevent a change of control, even if such a change of control would benefit our other stockholders, if they act as a group. This significant concentration of stock ownership may adversely affect the trading price of our common stock due to investors’ perception that conflicts of interest may exist or arise.

We rely on our information technology and telecommunication systems, and the failure of these systems could adversely affect our business.

      Our business is highly dependent on the successful and uninterrupted functioning of our information technology and telecommunications systems. We rely on these systems to process new and renewal business, provide customer service, make claims payments, facilitate collections and cancellations and to share data across our organization. These systems also enable us to perform actuarial and other modeling functions necessary for underwriting and rate development. The failure of these systems, or the termination of a third party software license on which any of these systems is based, could interrupt our operations or materially impact our ability to evaluate and write new business. Because our information technology and telecommunications systems interface with and depend on third party systems, we could experience service denials if demand for such services exceeds capacity or such third party systems fail or experience interruptions. If sustained or repeated, a system failure or service denial could result in a deterioration of our ability to write and process new and renewal business and provide customer service or compromise our ability to pay claims in a timely manner.

Our third party governmental entities risk-sharing pooling administration business is concentrated among a limited number of pools and the termination of any single contract for this business could significantly reduce the profitability of this business.

      Since June 2004, we have owned and managed a third party governmental entities risk-sharing pooling administration business through ARPCO. Each pool is composed of public entity members (such as cities, townships, counties, etc.) that have joined together by means of an intergovernmental contract to pool their insurance risk and provide related insurance services to its members. The pooling is authorized by state statute or as noted in the enabling legislation. Pooling provides a risk sharing alternative to the traditional purchase of commercial insurance. The governmental risk-sharing pools that we provide services for are located in the Midwest. ARPCO currently has multi-year contracts with five risk-sharing pools and the termination or non-renewal of any single contract for this business would significantly reduce the profitability of this business.

Risks Related to this Offering and the Common Stock

A market for our shares may never develop.

      Before this offering, there was no public trading market for our common stock, and we cannot assure you that one will develop or be sustained after this offering. If a market does not develop or is not sustained, it may be difficult for you to sell your common stock at an attractive price or at all. We cannot predict the prices at which our common stock will trade. The initial public offering price for our common

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stock will be determined through our negotiations with the representatives of the underwriters and may not bear any relationship to the market price at which it will trade after this offering or to any other established criteria of our value. It is possible that in some future quarter our operating results may be below the expectations of public market analysts and investors and, as a result of these and other factors, the price of our common stock may decline.

The price of our shares of common stock may be volatile.

      The trading price of shares of our common stock following this offering may fluctuate substantially. The price of the shares of our common stock that will prevail in the market after this offering may be higher or lower than the price you pay, depending on many factors, some of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose part or all of your investment in shares of our common stock. Factors that could cause fluctuations include, but are not limited to, the following:

•  price and volume fluctuations in the overall stock market from time to time;

•  significant volatility in the market price and trading volume of insurers’ securities;

•  actual or anticipated changes in our earnings or fluctuations in our operating results or in the expectations of securities analysts;

•  general economic conditions and trends;

•  losses in our insured portfolio;

•  sales of large blocks of shares of our common stock; or

•  departures of key personnel.

Our results of operations and revenues may fluctuate as a result of many factors, including cyclical changes in the insurance industry, which may cause the price of our shares to decline.

      The results of operations of companies in the insurance industry historically have been subject to significant fluctuations and uncertainties. Our profitability can be affected significantly by:

•  the differences between actual and expected losses that we cannot reasonably anticipate using historical loss data and other identifiable factors at the time we price our products;

•  volatile and unpredictable developments, including man-made, weather-related and other natural catastrophes or terrorist attacks, or court grants of large awards for particular damages;

•  changes in the amount of loss reserves resulting from new types of claims and new or changing judicial interpretations relating to the scope of insurers’ liabilities; and

•  fluctuations in equity markets, interest rates, credit risk and foreign currency exposure, inflationary pressures and other changes in the investment environment, which affect returns on invested assets and may impact the ultimate payout of losses.

      In addition, the demand for the types of insurance we will offer can vary significantly, rising as the overall level of economic activity increases and falling as that activity decreases, causing our revenues to fluctuate. These fluctuations in results of operations and revenues may cause the price of our securities to be volatile.

Purchasers in this offering will suffer immediate dilution.

      If you purchase shares of common stock in this offering, the value of your shares based on our actual book value will immediately be less than the offering price you paid. This reduction in the value of your equity is known as “dilution.” Based on the net tangible book value of our common stock, your shares will be worth $                    less per share than the price you would pay in this offering ($                    per share if

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the over-allotment option is exercised in full). In addition, if we raise additional funding by issuing more equity securities, the newly issued shares will further dilute your percentage ownership of our shares and also may reduce the value of your equity.

If a substantial number of our shares of common stock become available for sale and are sold in a short period of time, the market price of our shares of common stock could decline.

      If our existing stockholders sell substantial amounts of our shares of common stock in the public market following this offering, the market price of our shares of common stock could decrease significantly. The perception in the public market that our existing stockholders might sell our shares of common stock could also depress our market price. We will also grant options to directors and employees to purchase                     shares at the completion of this offering. Upon completion of this offering we will have                     shares of our common stock outstanding.

      Our directors and executive officers will be subject to agreements with the underwriters that restrict their ability to transfer their shares for a period of 180 days from the date of this prospectus, subject to a few exceptions. However, the underwriters may waive these restrictions and allow these stockholders to sell their shares at any time. After all of these agreements expire, an aggregate of                     additional shares will be eligible for sale. The market price of our shares of common stock may drop significantly when the restrictions on resale by our existing stockholders lapse. A decline in the price of shares of our common stock might impede our ability to raise capital through the issuance of additional shares of our common stock or other equity securities.

We do not currently intend to pay cash dividends on our common stock to our stockholders and any determination to pay cash dividends in the future will be at the discretion of our board of directors.

      We currently intend to retain any profits to provide capacity to write insurance and to accumulate reserves and surplus for the payment of claims. Our board of directors does not intend to declare cash dividends in the foreseeable future. Any determination to pay dividends to our stockholders in the future will be at the discretion of our board of directors and will depend on our results of operations, financial condition and other factors deemed relevant by our board of directors. Consequently, it is uncertain when, if ever, we will declare dividends to our stockholders. If we do not pay dividends, investors will only obtain a return on their investment if the value of our shares of common stock appreciates.

      We conduct substantially all of our operations through our subsidiaries. Our status as a holding company and a legal entity separate and distinct from our subsidiaries affects our ability to pay dividends and make other payments. Our principal source of funds is dividends and other payments from our subsidiaries. Therefore, our ability to pay dividends depends largely on our subsidiaries’ earnings and operating capital requirements and is subject to the regulatory, contractual, rating agency and other constraints of our subsidiaries, including the effect of any such dividends or distributions on the A.M. Best rating or other ratings of our insurance subsidiaries. Our two insurance subsidiaries are limited by regulation in their ability to pay dividends. For example, during 2006, FMIC and ANIC may pay in the aggregate dividends to FMFC of up to $9.7 million without regulatory approval. In addition, the terms of our subsidiaries’ borrowing arrangements may limit their ability to provide liquidity to FMFC.

A significant portion of the proceeds to us from the offering will be used to redeem our preferred stock and to pay off our senior notes and thus will not be available for us to use in expanding or investing in our business.

      We will use $                     million of the net proceeds of this offering to pay the liquidation preference on our preferred stock and to purchase shares of common stock from Glencoe upon the conversion of Glencoe’s preferred stock to common stock, which will occur automatically upon the consummation of this offering. In addition, we will use $                     million of the net proceeds of this offering to repay all of our outstanding senior notes issued in 2005. Accordingly, these proceeds will not be available for working

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capital, capital expenditures, acquisitions, use in the execution of our business strategy or other purposes. See “Use of Proceeds.”

Provisions in our certificate of incorporation and bylaws and under Delaware law could prevent or delay transactions that stockholders may favor and entrench current management.

      We are incorporated in Delaware. Our certificate of incorporation and bylaws, as well as Delaware corporate law, contain provisions that could delay or prevent a change of control or changes in our management that a stockholder might consider favorable, including a provision that authorizes our board of directors to issue preferred stock with such voting rights, dividend rates, liquidation, redemption, conversion and other rights as our board of directors may fix and without further stockholder action. The issuance of preferred stock with voting rights could make it more difficult for a third party to acquire a majority of our outstanding voting stock. This could frustrate a change in the composition of our board of directors, which could result in entrenchment of current management. Takeover attempts generally include offering stockholders a premium for their stock. Therefore, preventing a takeover attempt may cause you to lose an opportunity to sell your shares at a premium. If a change of control or change in management is delayed or prevented, the market price of our common stock could decline.

      Delaware law also prohibits a corporation from engaging in a business combination with any holder of 15% or more of its capital stock until the holder has held the stock for three years unless, among other possibilities, the board of directors approves the transaction. This provision may prevent changes in our management or corporate structure. Also, under applicable Delaware law, our board of directors is permitted to and may adopt additional anti-takeover measures in the future.

      Our bylaws provide for the division of our board of directors into three classes with staggered three year terms. The classification of our board of directors could have the effect of making it more difficult for a third party to acquire, or discourage a third party from attempting to acquire, control of us.

Our ability to implement, for the fiscal year ended December 31, 2007, the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 in a timely and satisfactory manner could cause the price of our common stock to decline.

      Section 404 of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, requires management of a reporting company to annually review, assess and disclose the effectiveness of a company’s internal control over financial reporting and to provide an attestation by independent auditors on its assessment of and the effectiveness of internal control over financial reporting. We will not be subject to the requirements of Section 404 until our fiscal year ending December 31, 2007. Investor perception that our internal controls are inadequate or that we are unable to produce accurate financial statements on a timely, consistent basis may adversely affect our stock price. Ensuring that we have adequate internal financial and accounting controls and procedures in place to help ensure that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently.

      We and our independent auditors may in the future discover areas of our internal controls that need further attention and improvement, particularly with respect to businesses that we may acquire in the future. We cannot be certain that any remedial measures we take will ensure that we implement and maintain adequate internal controls over our financial processes and reporting in the future. Implementing any appropriate changes to our internal controls may require specific compliance training of our directors, officers and employees, entail substantial costs in order to modify our existing accounting systems and take a significant period of time to complete. Such changes may not, however, be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could harm our ability to operate our business. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could harm our operating results or cause us to fail to meet our reporting obligations. If we are unable to conclude that we have effective internal controls over financial reporting, or if our independent auditors are unable to provide us with an unqualified report regarding the effectiveness of our internal controls

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over financial reporting as of December 31, 2007 and in future periods as required by Section 404, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our common stock. Failure to comply with Section 404 could potentially subject us to sanctions or investigations by the Securities and Exchange Commission, or SEC, the New York Stock Exchange or other regulatory authorities. In addition, upon completion of this offering, we will be required under the Securities Exchange Act of 1934 to maintain disclosure controls and procedures and internal control over financial reporting. Moreover, it may cost us more than we expect to comply with these control- and procedure-related requirements.

We will incur increased costs as a result of being a public company.

      As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. We will incur costs associated with our public company reporting requirements. We also anticipate that we will incur costs associated with corporate governance requirements, including requirements under Sarbanes-Oxley, as well as rules implemented by the SEC and the New York Stock Exchange. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. We also expect that being a public company will make it more expensive for us to hire directors and to obtain director and officer liability insurance. We may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. Further, we may need to hire additional accounting, financial and compliance staff with appropriate public company experience and technical accounting knowledge. We cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. Any of these expenses could harm our business, operating results and financial condition.

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CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS

      This prospectus 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:

•  our ability to maintain, and the effects of any 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 to us;

•  our inability to obtain reinsurance coverage at reasonable prices;

•  the failure of any of the loss limitations or exclusions we employ or changes in other claim or coverage issues;

•  our lack of long-term operating history in certain classes of our specialty general liability business;

•  our ability to acquire and retain additional underwriting expertise and capacity;

•  our ability to obtain additional capital on terms favorable to us;

•  the loss of one or more key employees;

•  the concentration of our insurance business in relatively few specialty classes;

•  the loss of one or more of our top wholesale brokers;

•  the highly competitive environment in which we operate our business;

•  fluctuations and uncertainty of results 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 resulting in penalties, fines and suspensions;

•  our ability to maintain our risk-based capital at levels required by regulatory authorities;

•  our compliance with Insurance Regulatory Information System, or IRIS, ratios;

•  our inability to realize our investment objectives;

•  the control our directors, executive officers and principal stockholders will have over our corporate actions following completion of this offering as a result of their ownership of a significant percentage of our common stock;

•  the business disruption caused by any failure of our information technology or telecommunications systems; and

•  the concentration of our third party governmental entities risk-sharing pooling administration business among a limited number of pools.

      Although we believe that these statements are based upon reasonable assumptions, we can give no assurance that our goals will be achieved. Given these uncertainties, prospective investors are cautioned not to place undue reliance on these forward-looking statements. These forward-looking statements are made as of the date of this prospectus. Except as required by law, we assume no obligation to update or revise them or provide reasons why actual results may differ.

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THE COMPANY

      First Mercury Financial Corporation is a wholly owned subsidiary of First Mercury Holdings, Inc., or Holdings, which is a holding company with no operations or assets other than its interest in FMFC and the issuance of the senior notes. Immediately prior to the completion of this offering, Holdings will be merged into FMFC, with FMFC being the surviving company. After giving effect to the merger, the following sets forth our corporate structure:

Description

      CoverX is our licensed wholesale insurance broker which produces and underwrites all of the insurance policies for which we retain risk and receive premiums. CoverX also provides marketing, underwriting and policy administration services on business insured by a limited number of third party insurance carriers in exchange for commissions and fee revenue. CoverX also receives commissions on business insured by FMIC and ceded via quota share reinsurance arrangements to third party reinsurers. CoverX has a recognized brand name among the wholesale insurance industry and works with approximately 1,000 brokers and agents to produce business for FMIC.

      FMIC is our insurance company that provides insurance, or writes policies, directly for CoverX customers. FMIC also provides claims handling and adjustment services generally on all business produced by CoverX, for both itself and other insurance companies issuing CoverX underwritten business.

      ANIC is our insurance company that provides reinsurance for business generated by CoverX. Although ANIC is licensed as an admitted carrier in 15 states, it currently does not write its own insurance. We refer to FMIC and ANIC as our insurance subsidiaries.

      ARPCO was acquired by us in June 2004 from an affiliate. ARPCO provides third party administration services for risk sharing pools of governmental entity risks, including underwriting, claims, loss control and reinsurance services. ARPCO is solely a fee-based business and receives fees for these services and also receives commissions on excess per occurrence insurance placed in the commercial market with third party companies on behalf of the pools.

History

      CoverX was founded in 1973 as an underwriter and broker of specialty commercial insurance business, including a specific concentration on the security market, and has continuously operated in this capacity since that time. The premiums underwritten by CoverX were originally placed with various third party insurance carriers. In 1985, recognizing a developing hard market in the P&C insurance industry, in

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which premium rates were increasing and underwriting capacity was decreasing, our founding shareholder led a group of investors in the formation of First Mercury Syndicate, Inc., or FMS, as a syndicate on the Illinois Insurance Exchange, which we refer to as the Exchange. Through FMS, we had access to broad state E&S lines authorizations and were able to retain the majority of the underwriting risk on the business produced by CoverX.

      In 1986, in an additional reaction to the hard market, our founding shareholder formed a separately owned business providing underwriting, claims, reinsurance placement and other third party administration services to public entity risk pools through ARPCO.

      In 1996, seeking other risk bearing alternatives to the Exchange, FMIC was formed and FMS subsequently withdrew from the Exchange and merged into FMIC in June 1996. Due to the fact that FMIC did not have broad E&S lines authorizations and initially received an A.M. Best rating of “B++,” we began to underwrite the business through the use of fronting carriers, which provided access to broad E&S lines authorizations and an A.M. Best rating of “A-” or above in exchange for a fee. FMIC retained the majority of the underwriting risk by serving as the primary reinsurer for the business produced by CoverX and written through the fronting carriers.

      Anticipating another hardening P&C insurance market, in 2000 we began offering general liability insurance for other specialty classes besides security classes, which involved opening regional underwriting offices and hiring experienced underwriters. Each of these underwriters had in excess of 20 years of insurance industry experience and contacts that allowed them to quickly write a significant amount of profitable premium. As this premium for other specialty classes and our premium for security classes began to grow at a pace that exceeded our growth in capital, we began purchasing quota share reinsurance from third party reinsurers that assumed premium directly from our fronting carriers. Quota share reinsurance was also provided by our affiliate, ANIC, which had overlapping controlling shareholders with FMFC. ANIC had no operations of its own and, in December 2003, became a direct subsidiary of FMFC.

      We continued to rely primarily on third party fronting arrangements with respect to business we underwrote through 2004. Under these fronting arrangements, policies produced by us were directly written by third party insurers, and a portion of the risk under these policies was assumed by us or other reinsurers for a portion of the related premium under the policy. The fronting insurer received from us or other reinsurers fees for providing fronting services and ceding commissions related to the premiums assumed by us and other reinsurers. In June 2004, an entity controlled by Glencoe invested $40 million in us with its purchase of $40 million of our convertible preferred stock. A portion of the proceeds from this investment were contributed to the statutory surplus of FMIC which led to an upgrade of FMIC’s A.M. Best rating to “A-” and also enabled FMIC to more easily expand its state E&S lines authorizations. This upgrade allowed us to directly write the business produced by CoverX and allowed us to reduce our reliance on fronting arrangements. Following a transition period, our existing fronting arrangements and related assumed reinsurance contracts were terminated effective May 1, 2005, and we currently only utilize fronting arrangements when they serve our business goals. As a result of these changes in our consolidated business model, our results of operations commencing in July 2004 and thereafter, while based principally upon the same premiums produced, will differ from earlier periods in the areas of earned premium, commissions, assumed and ceded reinsurance, loss, loss adjustment and underwriting expenses, and net income. Additionally, in connection with the Glencoe investment, a portion of the proceeds were also used to acquire ARPCO in June 2004 from an affiliate, which provides us with a consistent source of fee income that is not dependent on our underwriting results.

      In 2005, we continued to expand our business through the opening of an underwriting office in Boston and the hiring of an experienced underwriter to lead the office. We also expanded our market segments by beginning to underwrite legal professional liability coverage through an arrangement with an experienced underwriter in Boston.

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Holdings Transaction

      On August 17, 2005, we completed a transaction in which we formed Holdings to purchase shares of FMFC common stock from certain FMFC stockholders, and to exchange shares and options with other stockholders of FMFC. As a result of that transaction, Glencoe became the majority stockholder of Holdings and Holdings owned approximately 96% of FMFC. On December 29, 2005, Holdings became the sole stockholder of FMFC. The purchase and exchange of shares was financed by the issuance of $65 million aggregate principal amount of senior notes by Holdings. Immediately prior to the completion of this offering, Holdings will be merged into FMFC and the senior notes will be repaid in full with a portion of the net proceeds from this offering.

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USE OF PROCEEDS

      We estimate that our net proceeds from the sale of the shares of common stock in this offering will be approximately $           million, based on the sale of                      shares of our common stock at $                    per share (the midpoint of the price range set forth on the cover page of this prospectus), after deducting the underwriting discounts and estimated offering expenses. If the over-allotment option is exercised in full, we will receive additional net proceeds of approximately $                    , which will be used to repurchase shares of our common stock held by Glencoe.

      We intend to use the net proceeds from this offering as follows:

•  approximately $           million to repay all of our outstanding indebtedness under our senior notes issued in August 2005, which we refer to as the senior notes. The senior notes bear interest at a rate per annum, reset quarterly, equal to LIBOR plus 8% and may be redeemed by us after August 15, 2006 for a redemption price equal to 105% of the aggregate principal amount of the senior notes plus accrued and unpaid interest to the redemption date;

•  approximately $           million to pay amounts due under our convertible preferred stock in connection with this offering, which will also be converted into                      shares of common stock upon the completion of this offering; the shares carry a cumulative 8% dividend, payable in kind, upon the completion of this offering;

•  approximately $          million to repurchase                      shares of our common stock held by Glencoe following conversion of our convertible preferred stock; and

•  the balance of approximately $            million to make contributions to the capital of our insurance subsidiaries and for other general corporate purposes, including the repurchase of additional shares of common stock held by Glencoe.

      Following specific applications of the net proceeds, we plan to invest the remaining net proceeds in marketable securities.

      We have agreed to repurchase an additional $                     or                      shares of our common stock held by Glencoe with net proceeds from the offering and the over-allotment option. If the over-allotment option is not exercised in full, we intend to use a portion of the net proceeds from the offering along with amounts available under our credit facility to satisfy this additional repurchase obligation.

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DIVIDEND POLICY

      Our board of directors does not intend to declare cash dividends on our common stock in the foreseeable future. Any determination to pay dividends to our stockholders in the future will be at the discretion of our board of directors and will depend upon our results of operations, financial condition and other factors deemed relevant by our board of directors. Holdings has not paid any cash dividends since its formation. FMFC paid a dividend of $7 million to Holdings in May 2006.

      We conduct substantially all of our operations through our subsidiaries. Our status as a holding company and a legal entity separate and distinct from our subsidiaries affects our ability to pay dividends and make other payments. Our principal sources of funds are dividends and other payments from our subsidiaries. Therefore our ability to pay dividends depends largely upon our subsidiaries’ earnings and operating capital requirements and is subject to the regulatory, contractual, rating agency and other constraints of our subsidiaries, including the effect of any such dividends or distributions on the A.M. Best or other ratings of our insurance subsidiaries. Our two insurance subsidiaries are limited by regulation in their ability to pay dividends. For example, during 2006, FMIC and ANIC may pay in the aggregate dividends to FMFC of up to $9.7 million without regulatory approval. In addition, the terms of our subsidiaries’ other borrowing arrangements may limit their ability to provide liquidity to us. See sections, “Risk Factors — Risks Related to this Offering and the Common Stock — We do not currently intend to pay cash dividends to our stockholders and any determination to pay cash dividends in the future will be at the discretion of our board of directors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity.”

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DILUTION

      Our net tangible book value as of June 30, 2006 is presented on a pro forma basis, assuming the conversion of all of our outstanding shares of our convertible preferred stock into                      shares of common stock. As of June 30, 2006, our pro forma net tangible book value was $           million, or $                    per share of common stock. Our pro forma net tangible book value per share represents the amount of our total tangible assets less total liabilities divided by the number of shares of common stock outstanding. After giving effect to the issuance of                      shares of our common stock at an assumed initial public offering price of $                    per share (the midpoint of the price range set forth on the cover page of this prospectus) and the application of the estimated net proceeds therefrom as described in “Use of Proceeds,” and after deducting estimated underwriting discounts and our estimated offering expenses and assuming that the underwriters’ over-allotment option is not exercised, our pro forma net tangible book value as of June 30, 2006 would have been $           million, or $                    per share of common stock. This amount represents an immediate increase of $                    per share to the existing stockholders and an immediate dilution of $                    per share issued to the new investors purchasing shares offered hereby at the assumed public offering price.

      The following table illustrates this per share dilution:

Assumed initial public offering price per share of common stock			$
	Historical net tangible book value per share as of June 30, 2006	$
	Increase attributable to the conversion of outstanding preferred stock	$
	Pro forma net tangible book value per share before this offering	$
	Increase per share attributable to this offering	$
Pro forma and as adjusted net tangible book value per share after this offering			$
Dilution per share to new investors after this offering			$

      The following table sets forth, as of June 30, 2006, the number of shares of our common stock issued (assuming the conversion of our convertible preferred stock into                      shares of common stock), the total consideration paid and the average price per share paid by (i) all of our existing stockholders, and (ii) our new investors, after giving effect to the issuance of                      shares of common stock in this offering at an assumed initial public offering price (before deducting estimated underwriting discounts and our estimated offering expenses) of $                    per share (the midpoint of the price range set forth on the cover page of this prospectus).

      A $1.00 increase (decrease) in the initial public offering price of $                    per share would increase (decrease) our pro forma, as adjusted net tangible book value by $           million, the pro forma, as adjusted net tangible book value per share after this offering by $                     per share, and the dilution per share to new investors by $                     per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and estimated offering expenses payable by us.

		Shares Purchased				Total Consideration				Average
										Price Per
		Number	Percent			Amount	Percent			Share
Existing stockholders					%	$			%	$
New investors					%				%
	Total			100	%	$		100	%	$

      Each $1.00 increase (decrease) in the initial public offering price of $                     per share would increase (decrease) total consideration paid by new investors and total consideration paid by all stockholders by $           million, assuming the number of shares offered by us, as set forth on the cover page

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of this prospectus, remains the same, and before deducting the underwriting discounts and estimated offering expenses payable by us.

      If the underwriters’ over-allotment option is exercised in full, the following will occur:

•  the percentage of shares of common stock held by existing stockholders will decrease to approximately           % of the total number of shares of common stock outstanding after this offering; and

•  the number of shares held by new investors will increase to                     , or approximately           %, of the total number of shares of common stock outstanding after this offering.

      The table does not give effect to the exercise of any options outstanding as of June 30, 2006. As of June 30, 2006, there were options outstanding to purchase                      shares of common stock at a weighted average exercise price of $                     per share. To the extent any of these options are exercised, there will be further dilution to new investors.

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CAPITALIZATION

      The following table sets forth our capitalization as of June 30, 2006 on an actual basis and as adjusted to give effect to (i) this offering and the use of net proceeds from this offering, based upon an assumed initial public offering price of $          per share (the midpoint of the price range set forth on the cover page of this prospectus), after deducting underwriting discounts and estimated offering expenses we must pay and assuming that the underwriters’ over-allotment option is not exercised, and (ii) the merger of Holdings into FMFC immediately prior to the completion of this offering as described in “The Company.”

      This table should be read in conjunction with the consolidated financial statements and the accompanying notes appearing elsewhere in this prospectus.

		As of June 30, 2006
		Actual(1)			As Adjusted(2)
		($ in thousands, except for
		share and per share amounts)
Long-term debt:
	Senior notes	$	65,000		$	—
	Junior subordinated debentures		20,620			20,620
Total long-term debt			85,620			20,620
Stockholders’ equity:
	Common stock, $0.01 par value per share: 59,600 shares authorized and            shares issued and outstanding, actual, and            shares authorized and            shares issued and outstanding, as adjusted(2)(3)		0.045
	Series A Convertible Preferred Stock, $0.01 par value per share: 400 shares authorized, issued and outstanding, actual, and            shares authorized,                  issued and outstanding, as adjusted(2)		0.004			—
Additional paid-in capital:			59,142
Retained earnings			18,057
Accumulated other comprehensive loss			(2,748	)		(2,748	)
	Total stockholders’ equity		74,451
Total capitalization		$	160,071		$

1)	Reflects the capitalization of Holdings, which is the holding company and the sole stockholder of FMFC. Immediately prior to the completion of this offering, Holdings will be merged into FMFC.
2)	As adjusted for the sale of                      shares of our common stock in this offering at an assumed initial offering price to the public of $          per share (the mid-point of the range on the front cover page of this prospectus), after deducting the underwriting discounts and estimated offering expenses payable by us, the application of the net proceeds from this offering as set forth in “Use of Proceeds,” including the repurchase of all outstanding senior notes, the payment due under our convertible preferred stock in connection with this offering, the conversion of our convertible preferred stock into common stock upon the completion of this offering and the repurchase of shares of common stock held by Glencoe.
3)	Excludes options to purchase                      shares of common stock issuable upon the exercise of stock options outstanding as of                     , 2006 and an additional                      shares of common stock which are reserved and available for issuance under our incentive compensation plan.

      Reflects a      -for-     split of our common stock and the conversion of our preferred stock into an aggregate of                      shares of common stock which will occur immediately prior to the closing of this offering.

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UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME

      The unaudited pro forma consolidated statement of income set forth below should be read in conjunction with the information contained in “Summary Historical and Unaudited Pro Forma Consolidated Financial and Other Data,” “Selected Historical Consolidated Financial and Other Data,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes thereto appearing elsewhere in this prospectus.

      On August 17, 2005, we completed a transaction in which we formed Holdings to purchase shares of FMFC common stock from certain FMFC stockholders, and to exchange shares and options with the remaining stockholders of FMFC. As a result of this transaction, which we refer to as the Holdings Transaction, Glencoe became the majority stockholder of Holdings and Holdings became the controlling stockholder of FMFC. The purchase and exchange of shares was financed by the issuance of $65 million aggregate principal amount of senior notes by Holdings. As a result of this acquisition and resulting purchase accounting adjustments, the results of operations for periods prior to August 17, 2005 are not comparable to periods subsequent to that date. Immediately prior to the completion of this offering, Holdings will be merged into FMFC and the senior notes will be repaid in full with a portion of the net proceeds from this offering.

      The following unaudited pro forma consolidated income statement has been prepared to combine the historical results of the predecessor and successor periods, and to give effect to, as of the beginning of 2005, (i) the acquisition including the issuance of the senior notes and (ii) the application of a portion of the net proceeds from this offering to repay all of the senior notes. The unaudited pro forma consolidated income statement includes (excludes) the impact of interest expense and the amortization of debt issuance costs arising from the issuance (repayment) of the senior notes. The pro forma adjustments also include the income tax effect of the unaudited pro forma adjustments. The “Sub-total” column represents the combination of the predecessor and successor periods and the pro forma adjustments for the Holdings Transaction including the issuance of the senior notes. The “Pro Forma Year Ended December 31, 2005” column represents the combination of the “Sub-total” column and the unaudited pro forma adjustments for the application of a portion of the proceeds from this offering, as if they were used to repay all of the senior notes on the first day of the period presented.

      The unaudited pro forma consolidated statement of income is presented for illustrative purposes only and is not necessarily indicative of the results of operations that would have actually been reported had the Holdings Transaction and the repayment of the senior notes occurred on the dates specified above, nor are they necessarily indicative of the results of operations.

Reconciliation unaudited pro forma consolidated financial

and operating data for the year ended December 31, 2005

	Predecessor			Successor
	January 1,			August 17,		Pro Forma				Pro Forma			Pro Forma
	2005 to			2005 to		Adjustments for				Adjustments for			Year Ended
	August 16,			December 31,		Holdings				Repayment of			December 31,
	2005			2005		Transaction		Sub-Total		the Senior Notes			2005
	($ in thousands)
Income Statement Data:
Direct and assumed written premiums	$	104,856		$	71,040		—	$	175,896		—		$	175,896
Net written premiums		68,473			37,228		—		105,701		—			105,701
Net earned premiums		57,576			40,146		—		97,722		—			97,722
Commissions and fees		13,649			12,427		—		26,076		—			26,076
Net investment income		4,119			2,629		—		6,748	$	(30	)(2a)		6,718
Net realized gains (losses) on investments		(58	)		278		—		220		—			220

32

	Predecessor		Successor
	January 1,		August 17,		Pro Forma					Pro Forma			Pro Forma
	2005 to		2005 to		Adjustments for					Adjustments for			Year Ended
	August 16,		December 31,		Holdings					Repayment of			December 31,
	2005		2005		Transaction			Sub-Total		the Senior Notes			2005
	($ in thousands)
Total operating revenues		75,286		55,480		—			130,833		(30	)		130,736
Losses and loss adjustment expenses, net		28,072		27,022		—			55,094		—			55,094
Amortization of deferred acquisition expenses		12,676		7,954		—			20,630		—			20,630
Amortization of intangible assets		732		434		—			1,166		—			1,166
Underwriting, agency and other operating expenses		7,758		5,712		—			13,470		—			13,470
Total operating expenses		49,238		41,122		—			90,360		—			90,360
Operating income		26,048		14,358		40,406			40,473		(30	)		40,376
Interest expense		1,519		3,980		5,302	(1a)		10,801		(8,522	)(2b)		2,279
Income taxes		8,636		4,001		(1,855	)(1b)		10,781		2,972	(2c)		13,754
Net income		16,123		6,712		(3,447	)		19,388		5,520			24,908

(1)  Represents adjustment of the following as if the Holdings Transaction and issuance of the $65 million of senior notes occurred as of January 1, 2005:

(a)  Represents an adjustment for additional interest expense during the predecessor period at three month LIBOR plus 8% (12% for the period) and additional amortization on the $4.8 million in debt issuance costs that are being amortized over the seven year term of the loans. The pro forma adjustment is as follows:

Interest expense:
Additional interest expense to reflect a full-year of expense	$	4,872
Additional amortization of debt issuance costs to reflect a full-year of expense		430
Pro forma adjustment	$	5,302

(b)  Represents the tax effect based on the statutory rate of 35% on pro forma adjustment (1)(b).

(2)  Represents the adjustment as of January 1, 2005 for the use of proceeds from this offering to repay the $65 million aggregate principal amount of senior notes:

(a)

Represents an adjustment to eliminate historical interest earned on the proceeds that remained after issuance of senior notes.

(b)

Represents an adjustment to eliminate historical interest expense that was incurred during the successor period at three month LIBOR plus 8% (12.16% for the period), eliminate the historical amortization recorded during the successor period on the $4.8 million in debt issuance costs that are being amortized over the seven year term of the senior notes, and eliminate pro forma adjustment (2)(b). The pro forma adjustment is as follows:

Interest expense:
Eliminate pro forma adjustment(2)(b)	$	(5,302	)
Eliminate historical interest expense		(2,964	)
Eliminate historical amortization of debt issuance costs		(256	)
Pro forma adjustment	$	(8,522	)

33

(c)  Represents the tax effect based on the statutory rate of 35% on pro forma adjustments (2)(a) and (2)(b).

Reconciliation six months ended June 30, 2006 actual to

unaudited pro forma consolidated financial and operating data

      The following table sets forth the reconciliation of the unaudited pro forma adjusted information presented for the six months ended June 30, 2006 in the “Summary Historical And Unaudited Pro Forma Consolidated Financial and Other Data” with our actual historical consolidated financial and other data for that period. The unaudited pro forma adjusted information assumes the application of the net proceeds from this offering were used to repay the senior notes on the first day of the period presented. The pro forma adjusted information excludes the impact of interest expense, the amortization of debt issuance costs and related income tax effects arising from the issuance of the notes.

	Successor			Pro Forma
	Six Months			Adjustments For			Pro Forma Six
	Ended			Repayment of the			Months Ended
Income Statement Data:	June 30, 2006			Senior Notes			June 30, 2006
Direct and assumed written premiums	$	113,242			—		$	113,242
Net written premiums		53,937			—			53,937
Net earned premiums		56,857			—			56,857
Commissions and fees		8,763			—			8,763
Net investment income		4,271		$	(31	)(1a)		4,240
Net realized losses on investments		(482	)		—			(482	)
Total operating revenues		69,409			(31	)		69,378
Losses and loss adjustment expenses, net		29,962			—			29,962
Amortization of deferred acquisition costs		9,092			—			9,092
Amortization of intangible assets		583			—			583
Other operating expenses		7,379			—			7,379
Total operating expenses		47,016			—			47,016
Operating income		22,393			(31	)		22,362
Interest expense		5,395			(4,511	)(1b)		884
Income taxes		6,039			1,568	(1c)		7,607
Net income		11,345			2,912			14,257

(1)  Represents the adjustment as of January 1, 2006 for the use of a portion of the net proceeds from this offering to repurchased the $65 million aggregate principal amount of senior notes:

(a)	Represents an adjustment to eliminate historical interest earned on the proceeds that remained after issuance of the senior notes and purchase of shares from certain FMFC stockholders.
(b)	Represents an adjustment to eliminate historical interest expense that was incurred at LIBOR plus 8% (12.83% for the period) and the historical amortization of $4.8 million in debt issuance costs that were being amortized over the seven year term of the senior notes. The pro forma adjustment is as follows:

Interest expense: Eliminate historical interest expense	$	(4,169	)
Eliminate historical amortization of debt issuance costs		(342	)
Pro forma adjustment	$	(4,511	)

(c)  Represents the tax effect based on the statutory rate of 35% on pro forma adjustments (1)(b) and (1)(c).

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

      The table shown below presents our selected historical consolidated financial and other data for the five years ended December 31, 2005 and the six months ended June 30, 2006 and 2005, which have been derived from our audited consolidated financial statements and unaudited condensed interim consolidated financial statements which appear elsewhere in our prospectus. The summary historical consolidated financial data presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Capitalization” and the “Summary Selected Historical and Unaudited Pro Forma Consolidated Financial and Other Data” and the consolidated annual and interim financial statements and accompanying notes included elsewhere in this prospectus.

      On August 17, 2005, we completed a transaction in which we formed Holdings to purchase shares of FMFC common stock from certain FMFC stockholders, and to exchange shares and options with the remaining stockholders of FMFC. As a result of this transaction, Glencoe became the majority stockholder of Holdings and Holdings became the controlling stockholder of FMFC. The purchase and exchange of shares was financed by the issuance of $65 million aggregate principal amount of senior rate notes by Holdings. As a result of this acquisition and resulting purchase accounting adjustments, the results of operations for periods prior to August 17, 2005 are not comparable to periods subsequent to that date. Immediately prior to the completion of this offering, Holdings will be merged into FMFC and the senior notes will be repaid in full with a portion of the net proceeds from this offering.

      The selected historical consolidated financial and other data presented below for each of the years in the four-year period ended December 31, 2004 (Predecessor), for the period from January 1, 2005 through August 16, 2005 (Predecessor), and for the period from August 17, 2005 through December 31, 2005 (Successor) have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary historical consolidated financial and other data for each of the six month periods ended June 30, 2005 (Predecessor) and June 30, 2006 (Successor) have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. The operating results for the six months ended June 30, 2006 are not necessarily indicative of the results of our operations for the full year 2006 or any future periods.

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	Successor			Predecessor			Successor
									Predecessor
	Six Months			Six Months			August 17,
	Ended			Ended			2005 to		January 1, 2005			Year Ended			Year Ended		Year Ended		Year Ended
	June 30,			June 30,			December 31,		to August 16,			December 31,			December 31,		December 31,		December 31,
	2006			2005			2005		2005			2004(1)			2003		2002		2001
	($ in thousands, except for share and per share data)
Income Statement Data:
Direct and assumed written premiums	$	113,242		$	83,616		$	71,040	$	104,856		$	92,066		$	48,735	$	49,255	$	40,326
Net written premiums		53,937			56,358			37,228		68,473			72,895			48,469		41,968		37,436
Net earned premiums		56,857			44,356			40,146		57,576			61,291			40,338		39,981		35,847
Commissions and fees		8,763			10,341			12,427		13,649			33,730			33,489		20,793		12,895
Net investment income		4,271			3,221			2,629		4,119			4,619			3,983		4,426		3,864
Net realized gains (losses) on investments		(482	)		(74	)		278		(58	)		(120	)		813		435		330
Total operating revenues		69,409			57,844			55,480		75,286			99,520			78,623		65,634		52,936
Losses and loss adjustment expenses, net		29,962			21,244			27,022		28,072			26,854			21,732		23,832		23,918
Amortization of deferred acquisition expenses		9,092			9,873			7,954		12,676			15,713			11,995		13,350		12,290
Amortization of intangible assets		583			583			434		732			632			—		—		—
Underwriting, agency, and other operating expenses		7,379			6,587			5,712		7,758			26,953			29,923		22,134		15,395
Total operating expenses		47,016			38,287			41,122		49,238			70,152			63,650		59,316		51,603
Operating income		22,393			19,557			14,358		26,048			29,368			14,973		6,318		1,333
Interest expense		5,395			1,211			3,980		1,519			1,697			965		821		985
Income taxes		6,039			6,465			4,001		8,636			10,006			3,288		761		100
Net income		11,345			11,917			6,712		16,123			17,735			10,977		4,702		(240	)
Balance Sheet Data:
Total investments		223,166			203,249			211,025		202,013			171,659			114,901		91,125		76,711
Total assets		419,427			313,749			365,597		321,863			253,965			159,011		128,515		108,413
Loss and loss adjustment expense reserves		150,940			84,842			113,864		92,153			68,699			61,727		59,449		48,143
Unearned premium reserves(2)		95,368			76,629			84,476		77,778			52,484			24,423		15,624		13,076
Long-term debt		85,620			27,535			85,620		27,832			29,535			17,754		13,000		13,559
Total stockholders’ equity		74,451			102,983			64,327		106,908			91,630			36,340		27,411		22,037
Earnings Per Share Data:
Basic — historical	$	2,090.90		$	755.57		$	1,200.94	$	1,032.86		$	1,220.39		$	874.56	$	374.62	$	(19.12	)
Diluted — historical	$	851.53		$	544.98		$	515.49	$	742.22		$	972.30		$	843.93	$	373.44	$	(19.12	)
Diluted — as adjusted(3)
Weighted average shares outstanding basic-historical		4,557.9934			13,552.6747			4,482.2113		13,552.6747			13,017.6589			12,551.4250		12,551.4250		12,551.4250
Weighted average shares outstanding diluted — historical		13,323.4363			21,866.3722			13,020.5457		21,722.8065			18,240.2670			13,006.9543		12,590.9072		12,551.4250
Weighted average shares outstanding diluted-as adjusted(3)

36

	Successor			Predecessor			Successor
										Predecessor
	Six Months			Six Months			August 17,
	Ended			Ended			2005 to			January 1, 2005			Year Ended			Year Ended			Year Ended			Year Ended
	June 30,			June 30,			December 31,			to August 16,			December 31,			December 31,			December 31,			December 31,
	2006			2005			2005			2005			2004(1)			2003			2002			2001
	($ in thousands, except for share and per share data)
GAAP Underwriting Ratios:
Loss ratio(4)		52.7	%		47.9	%		67.3	%		48.8	%		43.8	%		53.9	%		59.6	%		66.7	%
Expense ratio(5)		19.1	%		20.1	%		8.7	%		18.3	%		18.9	%		20.9	%		36.7	%		41.3	%
Combined ratio(6)		71.8	%		68.0	%		76.0	%		67.1	%		62.7	%		74.8	%		96.3	%		108.0	%
Other Data:
Annual return on average stockholders’ equity		32.7	%		24.5	%		29.0	%		20.6	%		27.7	%		34.4	%		19.0	%		(1.1	)%
Debt to total capitalization ratio		53.5	%		21.1	%		57.1	%		20.7	%		24.4	%		32.8	%		32.2	%		38.1	%

(1)	Includes ARPCO’s operations from the date of the acquisition of ARPCO in June 2004.
(2)	Unearned premium reserves are established for the portion of premiums that is allocable to the unexpired portion of the policy term.
(3)	Earnings per share — diluted as adjusted and weighted average shares outstanding diluted — as adjusted give effect to the conversion of all outstanding shares of our convertible preferred, including shares representing dividends in arrears on our convertible preferred stock through the respective balance sheet date presented, and to reflect a           -for-           stock split of our common stock, each of which will occur on or prior to the completion of this offering. Upon conversion of the convertible preferred stock, the only significant difference between basic and diluted earnings per share will relate to the treatment of options.
(4)	Loss ratio is defined as the ratio of incurred losses and loss adjustment expenses to net earned premiums.
(5)	Expense ratio is defined as the ratio of (i) the amortization of deferred acquisition expenses plus other operating expenses, less expenses related to insurance services operations, less commissions and fee income related to underwriting operations to (ii) net earned premiums.
(6)	Combined ratio is the sum of the loss ratio and the expense ratio.

37

QUARTERLY RESULTS OF OPERATIONS

      The following table sets forth selected unaudited quarterly consolidated income statement and operations data for our most recent eight fiscal quarters during the two year period ended June 30, 2006. The information for each of these quarters has been prepared on the same basis as the audited consolidated financial statements included elsewhere in this prospectus and, in the opinion of management, includes all adjustments necessary for the fair presentation of the results of operations for these periods. This data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Capitalization” and the “Selected Historical Consolidated Financial and Other Data” and the consolidated financial statements and related notes included elsewhere in this prospectus. These quarterly operating results are not necessarily indicative of our operating results for the full fiscal years or for any future period.

      On August 17, 2005, we completed a transaction in which we formed Holdings to purchase shares of FMFC common stock from certain FMFC stockholders, and to exchange shares and options with the remaining stockholders of FMFC. As a result of this transaction, Glencoe became the majority stockholder of Holdings and Holdings became the controlling stockholder of FMFC. The purchase and exchange of shares was financed by the issuance of $65 million aggregate principal amount of senior rate notes by Holdings. As a result of this acquisition and resulting purchase accounting adjustments, the results of operations for periods prior to August 17, 2005 are not comparable to periods subsequent to that date. Immediately prior to the completion of this offering, Holdings will be merged into FMFC and the senior notes will be repaid with a portion of the net proceeds from this offering. The quarterly data for the three months ended September 30, 2005 reflects the combined results of the predecessor and successor of the aforementioned transaction for that period.

Selected Quarterly Data

	Successor									Combined			Predecessor
	Q2 2006			Q1 2006			Q4 2005			Q3 2005			Q2 2005			Q1 2005			Q4 2004			Q3 2004
	($ in thousands)
Income Statement Data(1):
Net earned premiums	$	28,328		$	28,529		$	27,489		$	25,877		$	23,907		$	20,449		$	17,458		$	15,730
Commissions and fees		4,319			4,444			9,260			6,476			5,123			5,218			4,683			7,966
Net investment income		2,121			2,150			1,758			1,769			1,751			1,470			1,152			1,174
Net realized gains (losses) on investments		(329	)		(153	)		262			33			(3	)		(72	)		(202	)		13
Total operating revenues		34,439			34,970			38,769			34,155			30,778			27,065			23,091			24,883
Losses and loss adjustment expenses, net		15,055			14,907			20,485			13,365			12,056			9,188			7,182			6,665
Amortization of deferred acquisition expenses		4,198			4,894			5,271			5,486			5,080			4,793			4,280			4,749
Amortization of intangible assets		291			292			291			292			291			292			257			375
Underwriting, agency and other operating expenses		3,169			4,210			2,307			4,578			2,219			4,367			2,488			4,111
Operating income		11,726			10,667			10,415			10,434			11,132			8,425			8,884			8,983
Interest expense		2,747			2,648			2,613			1,675			612			599			589			527
Income taxes		3,170			2,869			3,000			3,172			3,456			3,009			3,191			2,901
Net income		5,966			5,379			4,949			5,969			6,801			5,116			5,103			5,556
GAAP Underwriting Ratios(1):
Loss ratio(2)		53.1	%		52.3	%		74.5	%		51.6	%		50.4	%		44.9	%		41.1	%		42.4	%
Expense ratio(3)		15.6	%		22.5	%		(4.0	)%		24.1	%		14.9	%		25.8	%		16.0	%		14.7	%
Combined ratio(4)		68.7	%		74.8	%		70.5	%		75.8	%		65.3	%		70.7	%		57.1	%		57.1	%

38

(1)	Includes the operations of ARPCO from the date of acquisition of ARPCO in June 2004.
(2)	Loss ratio is defined as the ratio of incurred losses and loss adjustment expenses to net earned premiums.
(3)	Expense ratio is defined as the ratio of (i) the amortization of deferred acquisition expenses plus other operating expenses, less expenses related to insurance services operations, less commissions and fee income related to underwriting operations to (ii) net earned premiums.
(4)	Combined ratio is the sum of the loss ratio and the expense ratio.

39

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

      The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the related notes included elsewhere in this prospectus. The discussion and analysis below includes certain forward-looking statements that are subject to risks, uncertainties and other factors described in “Cautionary Statement Regarding Forward-Looking Information” and “Risk Factors” and elsewhere in this prospectus that could cause actual results to differ materially from those expressed in, or implied by, those forward-looking statements.

Overview

      We are a provider of insurance products and services to the specialty commercial insurance markets, primarily focusing on niche and underserved segments where we believe that we have underwriting expertise and other competitive advantages. During our 33 years of underwriting security risks, we have established CoverX^® as a recognized brand among insurance agents and brokers and developed the underwriting expertise and cost-efficient infrastructure which have enabled us to underwrite such risks profitably. Over the last six years, we have leveraged our brand, expertise and infrastructure to expand into other specialty classes of business, particularly focusing on smaller accounts that receive less attention from competitors.

      As primarily an E&S lines underwriter, our core principle is to generate underwriting profit by identifying, evaluating and appropriately pricing and accepting risk using customized forms tailored for each policy. Our combined ratio, a measure of underwriting profitability, has averaged 69.4% over the past 3 years. In addition, through our insurance services business, which provides underwriting, claims and other insurance services to third parties, we are able to generate significant fee income that is not dependent upon our underwriting results. For our entire business, we generated an average annual return on stockholders’ equity of 28.6% over the past three years.

      FMFC is a holding company for our operating subsidiaries. Our operations are conducted with the goal of producing overall profits by strategically balancing underwriting profits from our insurance subsidiaries with the commissions and fee income generated by our non-insurance subsidiaries. FMFC’s principal operating subsidiaries are CoverX, FMIC, ANIC and ARPCO.

      CoverX produces and underwrites all of the insurance policies for which we retain risk and receive premiums. As a wholesale insurance broker, CoverX markets our insurance policies through a nationwide network of wholesale and retail insurance brokers who then distribute these policies through retail insurance brokers. CoverX also provides underwriting services with respect to the insurance policies it markets in that it reviews the applications submitted for insurance coverage, decides whether to accept all or part of the coverage requested and determines applicable premiums. CoverX receives commissions from affiliated insurance companies, reinsurers, and non-affiliated insurers as well as policy fees from wholesale and retail insurance brokers. The commission and fee income earned by CoverX is less dependent on the underwriting results of our insurance subsidiaries and thus provides diversification to our revenue stream. Over the past three years, the premiums generated from insurance policies sold through CoverX, which we refer to as premiums produced, has increased from $120.2 million to $188.5 million.

      FMIC and ANIC are our two insurance subsidiaries. FMIC writes substantially all the policies produced by CoverX. ANIC provides quota share reinsurance to FMIC. Prior to the change in business model discussed below, FMIC and ANIC primarily provided quota share reinsurance to third party insurance companies that issued policies to CoverX customers under fronting arrangements. FMIC also provides claims handling and adjustment services for policies produced by CoverX and directly written by third parties.

      ARPCO, which we acquired from an affiliate in June 2004, provides third party administrative services for risk sharing pools of governmental entity risks, including underwriting, claims, loss control and reinsurance services. ARPCO is solely a fee-based business and receives fees for these services and

40

commissions on excess per occurrence insurance placed in the commercial market with third party companies on behalf of the pools.

Holdings Transaction

      On August 17, 2005, we completed a transaction in which we formed Holdings to purchase shares of FMFC common stock from certain FMFC stockholders and to exchange shares and options with the remaining stockholders of FMFC. As a result of this transaction, Glencoe became the majority stockholder of Holdings and Holdings became the controlling stockholder of FMFC. The purchase and exchange of shares was financed by the issuance of $65 million aggregate principal amount of senior notes by Holdings. Immediately prior to the completion of this offering, Holdings will be merged into FMFC, and the senior notes will be repaid in full with a portion of the net proceeds from this offering.

      As a result of the acquisition and resulting purchase accounting adjustments, the results of operations for periods prior to August 17, 2005 are not comparable to periods subsequent to that date. Our fiscal 2005 results discussed below 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 2004 because it would not be meaningful to discuss the partial period from January 1, 2005 through August 16, 2005 (Predecessor) separately from the period from August 17, 2005 to December 31, 2005 (Successor) when comparing 2005 operating results to 2004 operating results.

Change in Business Model

      In June 2004, an investment by Glencoe along with additional cash from FMFC, increased FMIC’s statutory surplus by $26 million. As a result of this capital infusion, A.M. Best raised FMIC’s financial strength rating to “A–,” and beginning in July 2004, FMIC began directly writing the majority of new and renewal policies produced by CoverX.

      Prior to June 2004 and our insurance subsidiary’s rating upgrade with A.M. Best Company, Inc. to “A-,” we did not directly write a significant amount of insurance produced by CoverX through our insurance subsidiaries, but instead utilized fronting arrangements under which we contracted with third party insurers, or fronting insurers, to directly write the policies underwritten and produced by CoverX. Under these fronting arrangements, policies produced by CoverX were directly written by third party insurers, which are commonly referred to as fronting insurers. Under these fronting arrangements, we controlled the cession of the insurance from the fronting insurer and either assumed most of the risk under these policies as a reinsurer or arranged for it to be ceded to other reinsurers. We paid the fronting insurers a fee for this arrangement and were required to maintain collateral grant trusts to cover losses and loss adjustment expenses and unearned premiums. We entered into fronting arrangements because our customers require an A.M. Best rating of “A-” or greater and FMIC’s A.M. Best rating was “B+” prior to the $26 million increase in its statutory surplus. By utilizing fronting arrangements, we were able to use the availability, capacity and rating status of the fronting insurers to market insurance. With our insurance subsidiary’s rating upgrade, we were able to eliminate most of our fronting relationships by May 2005 and become the direct writer of substantially all of the policies produced by CoverX. We currently only use fronting arrangements when they serve our business purpose and CoverX has continued to provide broker and general agent services to third party insurers although we do not expect revenues generated from such services to be significant.

      As a result of our shift from the fronting model to the direct writing model, fees we paid to fronting insurers and a portion of our administrative expenses related to interacting with fronting insurers were eliminated, which has reduced our expenses. As a result of the decrease in fronting and administrative expenses, the shift to the direct writing model has increased our profitability. We are no longer subject to the underwriting and claims oversight of fronting insurers nor are we required to fund collateral grantor

41

trust accounts. In addition, we are not dependent on the availability, capacity or rating status of fronting insurers.

      This change in our business model impacted our operating results and the comparability of 2005 to 2004 and 2004 to 2003 operating results in several ways, including the following:

•  Direct, Assumed and Ceded Written Premiums: The elimination of the fronting arrangement resulted in an increase in our direct written premiums because we no longer relied on fronting insurers to directly write insurance that we then reinsured or placed with other reinsurers. The increase in our direct written premiums resulted in a corresponding decrease in our assumed written premiums, and an increase in our ceded written premiums from 2003 to 2005.

•  Net Written and Earned Premiums: The change in business model did not have a significant impact on our net written or earned premiums.

•  Insurance Underwriting Commissions: Under the fronting model, we received fixed rate commission income on all premiums produced by CoverX for fronting insurers, as well as profit sharing commission income on all premiums produced that were retained by fronting insurers or ceded to third party insurers. Under the direct writing model, we do not report commission income on premiums written by our insurance subsidiaries because they are eliminated for consolidated financial statement purposes. The change in our business model therefore resulted in a decrease of our insurance underwriting commission income from 2003 to 2005.

•  Assumed Reinsurance Commission Expense: Under the fronting model, other operating expenses included fixed commissions incurred under assumed reinsurance agreements with the fronting insurers, and, in some cases, profit sharing expense incurred related to assumed reinsurance agreements. The fronting fees charged to us by the fronting insurers were added to the commission expenses incurred or were deducted from the fixed commissions earned by CoverX. The change in our business model therefore resulted in a decrease of our assumed reinsurance commission expense from 2003 to 2005.

•  Ceded Reinsurance Commissions: Under the direct writing model, we earn ceding commissions on insurance risks ceded from FMIC to third party insurers under reinsurance treaties and earn ceded profit sharing commissions on ceded reinsurance. Under the fronting model, these ceding commissions were paid to the fronting insurer by the reinsurers who received the corresponding premiums. Both of these items are reported as an offset to our other operating expenses. The change in our business model resulted in an increase in our ceded reinsurance commissions from 2003 to 2005.

      Our discussion and analysis of financial condition and results of operations should be read with an understanding of this change in our business model.

Premiums Produced

      We use the operational measure “premiums produced” to identify premiums generated from insurance policies sold through CoverX on insurance policies that it produces and underwrites on behalf of FMIC and under fronting relationships. Premiums produced includes both our direct written premiums and premiums directly written by our fronting insurers, all of which are produced and underwritten by CoverX. Although the premiums billed by CoverX under fronting relationships are directly written by the fronting insurer, we control the ultimate placement of those premiums, by either assuming the premiums by our insurance subsidiaries or arranging for the premiums to be ceded to third party reinsurers. The operational measure “premiums produced” is used by our management, reinsurers, creditors and rating agencies as a meaningful measure of the dollar growth of our underwriting operations because it represents the premiums that we control by directly writing insurance and by our fronting relationships. It is also a key indicator of our insurance underwriting operations’ revenues, and is the basis for broker commission expense calculations in our consolidated income statement. We generate direct and net earned premium income from premiums directly written by our insurance subsidiaries, and generate commission income,

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profit sharing commission income and assumed written and earned premiums from premiums directly written by third party insurance companies. We believe that premiums produced is an important operational measure of our insurance underwriting operations, and refer to it in the following discussion and analysis of financial condition and results of our operations.

Critical Accounting Policies

Use of Estimates

      In preparing our consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the consolidated financial statements, and revenues and expenses reported for the periods then ended. Actual results may differ from those estimates. Material estimates that are susceptible to significant change in the near term relate primarily to the determination of the reserves for losses and loss adjustment expenses and the recoverability of deferred tax assets.

Loss and Loss Adjustment Expense Reserves

      The reserves for losses and loss adjustment expenses represent our estimated ultimate costs of all reported and unreported losses and loss adjustment expenses incurred and unpaid at the balance sheet date. Our reserves reflect our estimates at a given time of amounts that we expect to pay for losses that have been reported, which are referred to as Case reserves, and losses that have been incurred but not reported and the expected development of losses and allocated loss adjustment expenses on open reported cases, which are referred to as IBNR reserves. We do not discount the reserves for losses and loss adjustment expenses.

      We allocate the applicable portion of our estimated loss and loss adjustment expense reserves to amounts recoverable from reinsurers under ceded reinsurance contracts and report those amounts separately from our loss and loss adjustment expense reserves as an asset on our balance sheet.

      The estimation of ultimate liability for losses and loss adjustment expenses is an inherently uncertain process. Our loss and loss adjustment expense reserves do not represent an exact measurement of liability, but are our estimates based upon various factors, including:

•  actuarial projections of what we, at a given time, expect to be the cost of the ultimate settlement and administration of claims reflecting facts and circumstances then known;

•  estimates of future trends in claims severity and frequency;

•  assessment of asserted theories of liability; and

•  analysis of other factors, such as variables in claims handling procedures, economic factors, and judicial and legislative trends and actions.

      Most or all of these factors are not directly or precisely quantifiable, particularly on a prospective basis, and are subject to a significant degree of variability over time. In addition, the establishment of loss and loss adjustment expense reserves makes no provision for the broadening of coverage by legislative action or judicial interpretation or for the extraordinary future emergence of new types of losses not sufficiently represented in our historical experience or which cannot yet be quantified. Accordingly, the ultimate liability may be more or less than the current estimate. The effects of changes in the estimated reserves are included in the results of operations in the period in which the estimate is revised.

      Our reserves consist entirely of reserves for liability losses, consistent with the coverages provided for in the insurance policies directly written or assumed by the Company under reinsurance contracts. In many cases, several years may elapse between the occurrence of an insured loss, the reporting of the loss to us and our payment of the loss. The estimation of ultimate liability for losses and loss adjustment expenses is an inherently uncertain process, requiring the use of informed estimates and judgments. Our loss and loss adjustment expense reserves do not represent an exact measurement of liability, but are estimates.

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Although we believe that our reserve estimates are reasonable, it is possible that our actual loss experience may not conform to our assumptions and may, in fact, vary significantly from our assumptions. Accordingly, the ultimate settlement of losses and the related loss adjustment expenses may vary significantly from the estimates included in our financial statements. We continually review our estimates and adjust them as we believe appropriate as our experience develops or new information becomes known to us. Such adjustments are included in current operations.

      When a claim is reported to us, our claims department completes a case-basis valuation and establishes a case reserve for the estimated amount of the ultimate payment as soon as practicable after receiving notice of a claim and after it has sufficient information to form a judgment about the probable ultimate losses and loss adjustment expenses associated with that claim.

      We take into consideration the facts and circumstances for each claim filed as then known by our claims department, as well as actuarial estimates of aggregate unpaid losses and loss expenses based on our experience and industry data, and expected future trends in loss costs. The amount of unpaid losses and loss adjustment expense for reported claims, which we refer to as case reserves, is based primarily upon a claim by claim evaluation of coverage, including an evaluation of the following factors:

•  the type of loss;

•  the severity of injury or damage;

•  our knowledge of the circumstances surrounding the claim;

•  jurisdiction of the occurrence;

•  policy provisions related to the claim;

•  expenses intended to cover the ultimate cost of settling claims, including investigation and defense of lawsuits resulting from such claims, costs of outside adjusters and experts, and all other expenses which are identified to the case; and

•  any other information considered pertinent to estimating the indemnity and expense exposure presented by the claim.

      Our claims department updates their case-basis valuations continuously to incorporate new information. We also use actuarial analyses to estimate both the costs of losses and allocated loss adjustment expenses that have been incurred but not reported to us and the expected development of costs of losses and loss adjustment expenses on open reported cases.

      We determine IBNR reserve estimates separately for our security classes and for our other specialty classes, since we have extensive historical experience data on the security classes and limited historical experience data for our other specialty classes. For security classes, our IBNR reserve estimates are determined using our actual historical loss and loss adjustment expense experience and reporting patterns from our loss and loss adjustment expense database which covers the last 21 years. For other specialty classes, for which we have six years or less of historical data in our database, our estimates give significant weight to industry loss and loss adjustment expense costs and industry reporting patterns applicable to our classes, from industry sources including actuarial circulars published by Insurance Services Offices (ISO) in combination with our actual paid and incurred loss and loss adjustment expenses. Our estimates also include estimates of future trends that may affect the frequency of claims and changes in the average cost of potential future claims.

      We also estimate bulk reserves for our unallocated loss adjustment expenses not specifically identified to a particular claim, namely our internal claims department salaries and associated general overhead and administrative expenses associated with the adjustment and processing of claims. These estimates, which are referred to as ULAE reserves, are based on internal cost studies and analyses reflecting the relationship of unallocated loss adjustment expenses paid to actual paid and incurred losses. We select factors that are applied to Case reserves and to IBNR reserve estimates in order to estimate the amount of unallocated loss reserves applicable to estimated loss reserves at the balance sheet date.

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      Our reserves for losses and loss adjustment expenses at June 30, 2006 and at December 31, 2005, 2004, and 2003, gross and net of ceded reinsurance were as follows:

Gross and Net of Reinsurance Reserves

				December 31
		June 30,
		2006		2005		2004		2003
Gross
	Case reserves	$	42,223	$	36,200	$	27,929	$	29,378
	IBNR and ULAE reserves		108,717		77,664		40,770		32,349
	Total reserves	$	150,940	$	113,864	$	68,699	$	61,727
Net of reinsurance
	Case reserves	$	35,137	$	32,874	$	26,544	$	28,031
	IBNR and ULAE reserves		73,453		59,121		36,502		28,613
	Total	$	108,590	$	91,995	$	63,046	$	56,644

      We utilize accepted actuarial methods to arrive at our loss and loss adjustment expense IBNR reserve estimates. The determination of our best estimate of ultimate loss and loss adjustment expenses and IBNR reserves requires significant actuarial analysis and judgment, both in application of these methods and in the use of the results of these methods. The principal methods we use include:

•  The Loss Development Method - based on paid and reported losses and loss adjustment expenses and loss and loss adjustment expense reporting and payment and reporting patterns;

•  The Bornhuetter-Ferguson Method - based on paid and reported losses and loss adjustment expenses, expected loss and loss adjustment expense ratios, and loss and loss adjustment expense reporting and payment and reporting patterns; and

•  The Expected Loss Ratio Method - based on historical or industry experience, adjusted for changes in premium rates, coverage restrictions and estimated loss cost trends.

      Our estimates for security classes and other specialty classes give different weight to each of these methods based upon the amount of historical experience data we have and our judgments as to what method we believe will result in the most accurate estimate. The application of each method for security classes and other specialty classes may change in the future if we determine a different emphasis for each method would result in more accurate estimates.

      We apply these methods to net paid and incurred loss and loss adjustment expense and net earned premium information after ceding reinsurance to determine ultimate net loss and loss adjustment expense and net IBNR reserves. Since our ceded reinsurance is principally on a quota share basis, we determine our ceded IBNR reserves based on the ultimate net loss and loss adjustment expense ratios determined in the estimation of our net IBNR reserves. Ceded case reserves are allocated based on monthly or quarterly reinsurance settlement reports prepared in accordance with the reporting and settlement terms of the ceded reinsurance contracts.

      For security classes where we have many years of historical experience data, we perform semi-annual analyses of the payment and reporting patterns of losses and loss adjustment expenses as well as reported and closed claims by accident year for security guard, alarm, and safety equipment sub-classes. We have generally relied primarily on the Loss Development Method in calculating ultimate losses and loss adjustment expenses for the more mature accident years, applying our historical loss and loss adjustment expense reporting patterns to paid and incurred losses and loss adjustment expenses reported to date by accident year to estimate ultimate loss and loss adjustment expense and IBNR reserves. Our reserve estimates for the more recent, less mature accident years have relied more on the Bornhuetter-Ferguson Method to calculate expected loss and loss adjustment expense ratios. Although we have calculated the

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results from the Expected Loss Ratio Method for the less mature years, we have not relied significantly on this method due to the more meaningful results of the other methods we have used for security classes.

      During 2005 the Company experienced approximately $12.8 million in net prior accident year development in its security classes, primarily in accident years 2000-2002, principally in the safety equipment sub-class. The prior year reserve development occurred due to new information which emerged during 2005 on a small number of high severity cases, causing increased net Case reserve valuations or loss and loss adjustment expense payments of $7.4 million that were not anticipated in our prior years’ IBNR reserve estimates. This development was inconsistent with our historical loss and loss and loss adjustment expense reporting patterns. As a result, we also increased net IBNR reserves by $5.4 million in the affected accident years, and sub-classes, and we increased the expected loss and loss adjustment expense ratios and the reporting patterns used in our reserve estimates for subsequent accident years in those sub-classes. The impact of these increases on our more recent accident years’ IBNR reserves are mitigated somewhat by the purchase of excess reinsurance coverage for high severity cases that is in place beginning in June 2004, but was not in place during most of the accident year periods experiencing development on prior year reserves. In addition, our security classes were completely re-underwritten during 2001 and 2002, and large rate increases and extensive use of restrictive and exclusionary coverage policy forms were subsequently implemented, resulting in significant reductions in claims frequency and in reported incurred loss and loss adjustment expense ratios for subsequent accident years. See “— Fiscal Year 2005 Compared to Fiscal Year 2004” “— Losses and Loss Adjustment Expenses”.

      For other specialty classes, we have relied more on the Bornhuetter-Ferguson Method in calculating our semi-annual reserve estimates. Although we use the Loss Development Method, we have not relied significantly on it as we are still building our experience database for other specialty classes. We have also used the Expected Loss Ratio Method, which we have developed from industry loss cost information, adjusted for changes in premium rates, coverage restrictions, and estimated loss cost trends. We have six years or less of historical experience of losses and loss adjustment expenses for other specialty classes, so we have relied on industry reporting patterns included in actuarial circulars published by Insurance Services Offices (“ISO”) by sub-class groupings that are consistent with our class profiles within our other specialty classes.

      From 2000 through 2004, our reserve estimates for other specialty classes utilized industry loss and loss adjustment expense reporting pattern information that was included in actuarial circulars available from ISO in 2000. New, updated ISO industry loss and loss adjustment expense reporting pattern information became available during 2005 which was more detailed for each of the sub-class groupings within other specialty classes. The new industry information reflected higher and slower loss reporting patterns than the industry information that was previously available. This was due to a number of factors, including more recent data, additional data from different sources and more detailed segmentation of the data. We have compared the new industry reporting pattern information to our actual loss experience and have determined that the new information more closely aligns with our emerging experience, coverage class groupings and limits profiles for other specialty classes. As a result, in the fourth quarter of 2005, we adopted usage of the new industry loss reporting pattern information in our reserve estimates for all accident years, resulting in increases in prior years’ reserves, and in higher 2005 and later accident year reserve estimates. This change in loss reporting pattern assumptions resulted in the majority of the $6.2 million in prior accident year development that occurred in specialty classes during 2005. See “— Fiscal Year 2005 Compared to Fiscal Year 2004” “— Losses and Loss Adjustment Expenses”.

      Our reserve analysis determines an actuarial point estimate rather than a range of reserve estimates. We do not compute estimated ranges of loss reserves. Because of the inherent variability in liability losses, point estimates using appropriate actuarial methods and reasonable assumptions provide the best estimate of reserves.

      We review loss and loss adjustment expense reserves on a regular basis. We supplement this internal review by engaging an independent actuary. The same independent actuary has conducted semi-annual external analyses for us for the past 12 years. The independent actuary also provides the annual reserve

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certification in accordance with insurance regulatory requirements. The carried reserves reflect management’s best estimate of the outstanding losses and loss adjustment expense liabilities. Management arrived at this estimate after reviewing both the internal and external analyses.

      During the first six months of an accident year, for both security classes and other specialty classes, we used the Expected Loss Ratio Method based on the previous year end estimates for the previous accident year, adjusted for estimated changes in premium rates, coverage restrictions and estimated loss cost trends. We monitor emerging loss experience monthly and make adjustments to the current accident year expected loss ratio as we believe appropriate. Throughout the year we also compare actual emerging loss development on prior accident years to expected loss development included in our prior accident years’ loss reserve estimates and make quarterly interim adjustments to prior years’ reserve estimates during interim reporting periods as we believe appropriate.

      Our loss and loss adjustment expense reserves do not represent an exact measurement of liability, but are estimates. Although we believe that our reserve estimates are reasonable, it is possible that our actual loss experience may not conform to our assumptions. The most significant assumptions affecting our IBNR reserve estimates are expected loss and loss adjustment expense ratios, and expected loss and loss adjustment expense reporting patterns. These vary by underwriting class, sub-classes, and accident years, and are subject to uncertainty and variability with respect to any individual accident year and sub-class. Generally, the reserves for the most recent accident years depend heavily on both assumptions. The most recent accident years are characterized by more unreported losses and less information available for settling claims, and have more inherent uncertainty than the reserve estimates for more mature accident years. The more mature accident years depend more on expected loss and loss expense reporting patterns.

      The following sensitivity analysis represents reasonably likely levels of variability in these assumptions in the aggregate. Individual classes and sub-classes and accident years have different degrees of variability in both assumptions and it is not reasonably likely that each assumption for each sub-class and accident year would vary in the same direction and to the same extent in the same reporting period. We believe the most meaningful approach to the sensitivity analysis is to vary the ultimate loss and loss adjustment expense estimates that result from application of the assumptions. We apply this approach on an accident year basis, reflecting the reasonably likely differences in variability by level of maturity of the underlying loss experience for each accident year, using variability factors of plus or minus 10% for the most recent accident year, 5% for the preceding accident year, and 2.5% for the second preceding accident year. There is minimal expected variability for accident years at four or more years’ maturity.

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      The following table includes net ultimate loss and loss adjustment expense amounts by accident year from our statutory filing for our insurance subsidiaries for the year ended December 31, 2005, which are equal to the net ultimate loss and loss adjustment expense amounts by accident year included in our loss and loss adjustment expense reserve estimates in the consolidated financial statements at December 31, 2005. The use of net of ceded reinsurance amounts is most meaningful since the vast majority of our ceded reinsurance is on a quota share basis. We have applied the sensitivity factors to each accident year amount and have calculated the amount of potential net reserve change and the impact on 2005 reported pre-tax income and on net income and stockholders’ equity at December 31, 2005. We do not believe it is appropriate to sum the illustrated amounts as it is not reasonably likely that each accident year’s reserve estimate assumptions will vary simultaneously in the same direction to the full extent of the sensitivity factor.

									Potential
	Ultimate Loss			December 31, 2005		Potential			Impact on 2005
	and LAE			Ultimate Losses		Impact on 2005			Net Income and
	Sensitivity			and LAE Net of		Pre-Tax			December 31, 2005
	Factor			Ceded Reinsurance		Income			Stockholder’s Equity
	(Dollars in thousands)
Increased Ultimate Losses & LAE
Accident Year 2005		10.00	%	$	36,105	$	(3,611	)	$	(2,347	)
Accident Year 2004		5.00	%	$	24,326	$	(1,216	)	$	(791	)
Accident Year 2003		2.50	%	$	16,472	$	(412	)	$	(268	)
Decreased Ultimate Losses & LAE
Accident Year 2005		(10.00	)%	$	36,105	$	3,611		$	2,347
Accident Year 2004		(5.00	)%	$	24,326	$	1,216		$	791
Accident Year 2003		(2.50	)%	$	16,472	$	412		$	268

Revenue Recognition

      Premiums. Premiums are recognized as earned using the daily pro rata method over the terms of the policies. When premium rates increase, the effect of those increases will not immediately affect earned premium. Rather, those increases will be recognized ratably over the period of coverage. Unearned premiums represent the portion of premiums written that relate to the unexpired terms of policies-in-force. As policies expire, we audit those policies comparing the estimated premium rating units that were used to set the initial premium to the actual premiums rating units for the period and adjust the premiums accordingly. Premium adjustments identified as a result of these audits are recognized as earned when identified.

      Commissions and Fees. Wholesale agency commissions and fee income from unaffiliated companies are earned at the effective date of the related insurance policies produced or as services are provided under the terms of the administrative and service provider contracts. Related commissions to retail agencies are concurrently expensed at the effective date of the related insurance policies produced. Profit sharing commissions due from certain insurance companies, based on losses and loss adjustment expense experience, are earned when determined and communicated by the applicable insurance company.

Investments

      Our marketable investment securities, including money market accounts held in our investment portfolio, are classified as available-for-sale and, as a result, are reported at market value. A decline in the market value of any security below cost that is deemed other than temporary is charged to earnings and results in the establishment of a new cost basis for the security. In most cases, declines in market value that are deemed temporary are excluded from earnings and reported as a separate component of stockholders’ equity, net of the related taxes, until realized. The exception of this rule relates to investments with embedded derivatives, primarily convertible debt securities.

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      Premiums and discounts are amortized or accreted over the life of the related debt security as an adjustment to yield using the effective-interest method. Dividend and interest income are recognized when earned. Realized gains and losses are included in earnings and are derived using the specific identification method for determining the cost of securities sold.

Deferred Policy Acquisition Costs

      Policy acquisition costs related to direct and assumed premiums consist of commissions, underwriting, policy issuance, and other costs that vary with and are primarily related to the production of new and renewal business, and are deferred, subject to ultimate recoverability, and expensed over the period in which the related premiums are earned. Investment income is included in the calculation of ultimate recoverability.

Goodwill and Other Intangible Assets

      We perform an annual impairment test for goodwill. Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” requires us to compare the fair value of the reporting unit to its carrying amount on an annual basis, or earlier if triggering events occur, to determine if there is potential goodwill impairment. Fair values for goodwill are determined based on discounted cash flows, market multiples or appraised values as appropriate. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill within the reporting unit is less than its carrying value.

      In accordance with SFAS No. 142, intangible assets that are not subject to amortization shall be tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test shall consist of a comparison of the fair value of an intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess.

      In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets,” the carrying value of long-lived assets, including amortizable intangibles and property and equipment, are evaluated whenever events or changes in circumstances indicate that a potential impairment has occurred relative to a given asset or assets. Impairment is deemed to have occurred if projected undiscounted cash flows associated with an asset are less than the carrying value of the asset. The estimated cash flows include management’s assumptions of cash inflows and outflows directly resulting from the use of that asset in operations. The amount of the impairment loss recognized is equal to the excess of the carrying value of the asset over its then estimated fair value.

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Results of Operations

Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005

      The following table summarizes our results for the six months ended June 30, 2006 and 2005:

		Six Months Ended
		June 30,
		2006			2005			Change
		($ in thousands)
Operating revenues
	Net earned premiums	$	56,857		$	44,356			28	%
	Commissions and fees		8,763			10,341			(15	)
	Net investment income		4,271			3,221			33
	Net realized losses on investments		(482	)		(74	)		551
Total operating revenues			69,409			57,844			20
Operating expenses
	Losses and loss adjustment expenses, net		29,962			21,244			41
	Amortization of intangible assets		583			583			—
	Other operating expenses		16,471			16,460			0
Total operating expenses			47,016			38,287			23
Operating income			22,393			19,557			15
Interest expense			5,009			1,175			326
Income before income taxes			17,384			18,382			(5	)
Income taxes			6,039			6,465			(7	)
Net income		$	11,345		$	11,917			(5	)%
Loss ratio			52.7	%		47.9	%		4.8 points
Expense ratio			19.1	%		20.1	%		(1.0 points	)
Combined ratio			71.8	%		68.0	%		3.8 points

Premiums Produced

      Premiums produced, which consists of all of the premiums billed by CoverX, for the six months ended June 30, 2006 were $119.1 million, a $28.9 million or 32% increase over $90.2 million in premiums produced during the six months ended June 30, 2005. This growth was primarily attributable to $23.8 million in net new business, including expansion in the Northeast, the addition of a legal professional liability program and continued growth in existing markets, as well as to $5.1 million in increased premiums on the audit of expiring policies.

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Operating Revenue

      Net Earned Premiums

	Six Months Ended
	June 30,
	2006			2005			Change
	($ in thousands)
Written premiums
Direct	$	110,980		$	79,308			40	%
Assumed		2,262			4,308			(48	)
Ceded		(59,305	)		(27,258	)		118
Net written premiums	$	53,937		$	56,358			(4	)%
Earned premiums Direct	$	100,372		$	45,787			119	%
Assumed		1,615			14,009			(88	)
Ceded		(45,876	)		(16,287	)		182
Earned but unbilled premiums		746			847			(12	)
Net earned premiums	$	56,857		$	44,356			28	%

      Direct written premiums increased $31.7 million or 40%. Direct earned premiums increased $54.6 million in the six months ended June 30, 2006, or 119%, compared to the six months ended June 30, 2005. The increases in direct written premiums and direct earned premiums were due primarily to the change in our business model as a result of which we ceased relying on fronting arrangements under which we assumed insurance from fronting insurers and instead began to write substantially all of the new and renewal policies produced by CoverX. Direct earned premiums increased at a higher rate than direct written premiums because as of June 30, 2006, we had the benefit of a full year of direct written premiums with minimal fronting. As of June 30, 2005, while the change in business model had been in effect for a full year, the first six months after the change was more of a gradual shift away from fronting towards directly writing policies and as such, there were lower volumes of policies to be earned as of June 30, 2005.

      Assumed written premiums decreased $2.0 million, or 48%, and assumed earned premiums decreased $12.4 million or 88%. These decreases were consistent with the change in our business model as a result of which we ceased relying on fronting arrangements under which we assumed insurance from fronting insurers and instead began to directly write substantially all of our premiums produced.

      Ceded written premiums increased $32.0 million, or 118%, and ceded earned premiums increased $29.6 million, or 182%, in the six months ended June 30, 2006 compared to the six months ended June 30, 2005. This was due to the increase in premiums produced as well as elections to increase premiums ceded under our current quota share arrangement by 10% (to 40%) in July 2005 and by 10% (to 50%) in January 2006. The time lag between ceded premium being written and ceded premium being earned resulted in a more substantial increase in the ceded earned premium.

      Commissions and Fees

	Six Months
	Ended June 30,
	2006		2005		Change
	($ in thousands)
Insurance underwriting commissions and fees	$	3,044	$	5,306		(43	)%
Insurance services commissions and fees		5,719		5,035		14
Total commissions and fees	$	8,763	$	10,341		(15	)%

      Insurance underwriting commissions and fees decreased $2.3 million or 43% from the six months ended June 30, 2005 to the six months ended June 30, 2006. This was primarily the result of the change

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in our business model, which resulted in an increase in direct written premiums as a percentage of premiums produced, and insurance underwriting commissions and fees decreased. This decline was offset by the impact of the increase in premiums produced. Insurance services commissions and fees, which were principally ARPCO income and not related to premiums produced, increased $0.7 million, or 14%. The major components of that increase included approximately $0.3 million in increased management fees due to increased membership and approximately $0.1 million in increased claims handling and service fees.

      Net Investment Income and Realized Losses on Investments. During the six months ended June 30, 2006, net investment income earned was $4.3 million, a $1.1 million, or 33%, increase from $3.2 million reported in the six months ended June 30, 2005 primarily due to the increase in invested assets over the period. At June 30, 2006, invested assets were $223.1 million, a $19.9 million or 10% increase over $203.2 million of invested assets at June 30, 2005 due to increases in net written premiums. Net investment income earned continued to benefit from higher reinvestment rates as proceeds from maturing bonds were reinvested at currently higher interest rates. The annualized investment yield (net of investment expenses) was 3.7% and 3.3% at June 30, 2006 and June 30, 2005, respectively. The increase was the result of the general increase in market interest rates offset by increased allocation to municipal securities.

      During the six months ended June 30, 2006 realized capital losses were $0.5 million, a $0.4 million increase over the net realized capital losses of $0.1 million during the six months ended June 30, 2005. During the six months ended June 30, 2006, we reduced our exposure to corporate bonds while increasing our exposure to municipal bonds and asset backed securities. In addition, we shifted our allocation within the municipal sector to capitalize on opportunities to enhance after tax income. In addition, the 2006 realized losses were impacted by other-than temporary impairments of $0.2 million. Most of this other-than temporary impairment was the result of one asset backed position that experienced deteriorating credit fundamentals.

Operating Expenses

      Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses incurred during the six months ended June 30, 2006 increased by approximately $8.7 million, or 41%, over the six months ended June 30, 2005. This increase was primarily due to the growth in net earned exposures, which was reflected in the approximately 28% increase in net earned premiums and an increase in the accident year loss and loss adjustment expense ratio. In addition, loss and loss adjustment expense reserve development in the 2000 and 2002 accident years, offset somewhat by favorable development on unallocated loss adjustment expense reserves, was approximately $1.0 million. The development on accident year 2000 and 2002 reserves was concentrated primarily in the safety equipment class and in the run-off public officials class, a very small class of policies that was discontinued in 2003, as a result of obtaining new information on several high severity cases.

      The increase in the accident year loss and loss adjustment expense ratio was primarily related to the adoption of updated industry loss development pattern assumptions in our reserve estimates for other specialty classes during the fourth quarter of 2005, changes in the mix of classes of earned exposures, increased loss and loss adjustment expense cost trends, and increased premium rate competition. See “— Reconciliation of Unpaid Loss and Loss Adjustment Expenses” for further detail.

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      Other Operating Expenses

	Six Months Ended
	June 30,
	2006			2005			Change
	($ in thousands)
Amortization of deferred acquisition costs	$	9,092		$	9,873			(8	)%
Ceded reinsurance commissions		(17,962	)		(6,924	)		159
Other underwriting and operating expenses		25,341			13,511			88
Other operating expenses	$	16,471		$	16,460			0	%

      During the six months ended June 30, 2006, other operating expenses were consistent from the six months ended June 30, 2005. Amortization of acquisition expenses decreased by $0.8 million or 8% as a result of the growth in net earned premiums, more than offset by a decline in the rate of acquisition expenses on premiums. Ceded reinsurance commissions increased $11.0 million or 159%. This was due to the increase in direct written premiums and ceded premiums, as well as our election to increase premiums ceded under our quota share arrangement by 10% (to 40%) in July 2005 and by 10% (to 50%) in January 2006. Other underwriting and operating expenses, which consist of commissions, other acquisition costs, and general and underwriting expenses, net of acquisition cost deferrals, increased by $11.8 million. Insurance underwriting commissions increased by $3.6 million, and other acquisition costs and general and underwriting expenses increased by $2.4 million. In addition, the aforementioned increase in ceding commissions caused deferrals of acquisition costs to decline by $5.8 million.

      Interest Expense

		Six Months Ended
		June 30,
		2006		2005		Change
		($ in thousands)
Senior notes		$	4,169	$	—		100	%
Junior subordinated debentures			510		658		(22	)%
Other			330		517		(36	)%
	Total interest expense	$	5,009	$	1,175		326	%

      Interest expense increased $3.8 million, or 32.6%, from the six months ended June 30, 2005 to the six months ended June 30, 2006. This was principally the result of the issuance of $65 million in senior notes in August 2005. This increase was offset by our redemption of a $5.0 million promissory note, $1.9 million of subordinated notes and the cancellation of our bank credit facility. Interest expense on our $20.6 million cumulative principal amount of floating rate junior subordinated debentures, and carry interest rates of the three month LIBOR plus 3.75% and plus 4.0%, respectively, included the change in fair value of the interest rate swap on the junior subordinated debentures as discussed in “— Liquidity and Capital Resources.”

      Income taxes. Our effective tax rates of approximately 34.7% for the six months ended June 30, 2006 and 35.2% for the six months ended June 30, 2005 differed from the statutory tax rate of 35.0% principally due to tax exempt interest on the tax exempt portion of our investment portfolio, state income taxes and non-deductible expenses.

Fiscal Year 2005 Compared to Fiscal Year 2004

      As a result of the acquisition and resulting purchase accounting adjustments, the results of operations for periods prior to August 17, 2005 are not comparable to periods subsequent to that date. Our fiscal 2005 results discussed below 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

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meaningful way to discuss our operating results for 2005 when comparing them to our operating results of 2004 because it would not be meaningful to discuss the partial period from January 1, 2005 through August 16, 2005 (Predecessor) separately from the period from August 17, 2005 to December 31, 2005 (Successor) when comparing 2005 operating results to 2004 operating results.

      The following table summarizes our results for years 2005 and 2004.

		Year Ended
		December 31,
		2005			2004			Change
		($ in thousands)
Operating revenues
	Net earned premiums	$	97,722		$	61,291			59	%
	Commissions and fees		26,076			33,730			(23	)
	Net investment income		6,748			4,619			46
	Net realized gains (losses) on investments		220			(120	)		(283	)
Total operating revenues			130,766			99,520			31
Operating expenses
	Losses and loss adjustment expenses, net		55,094			26,854			105
	Amortization of intangible assets		1,166			632			84
	Other operating expenses		34,100			42,666			(20	)
Total operating expenses			90,360			70,152			29
Operating income			40,406			29,368			38
Interest expense			4,934			1,627			203
Income before income taxes			35,472			27,741			28
Income taxes			12,637			10,006			26
Net income		$	22,835		$	17,735			29	%
Loss ratio			56.4	%		43.8	%		12.6 points
Expense ratio			14.3	%		18.9	%	(4.6) points
Combined ratio			70.7	%		62.7	%		8.0 points

Premiums Produced

      Premiums produced for 2005 were $188.5 million, a $41.6 million or 28% increase over the $146.9 million in premiums produced in 2004. This growth was primarily attributable to:

•  Approximately $24.5 million increase in premiums produced from other specialty classes underwriting operations in the Northeast that began in the six months ended June 30, 2005;

•  $11.2 million increase from premiums produced for other specialty classes in established markets, primarily from growth in renewals and audit premiums on expiring policies; and

•  $5.9 million increase from premiums produced for security classes, both new business and renewals and audit premiums on expiring policies.

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Operating revenue

      Net Earned Premiums

		Year Ended
		December 31,
		2005			2004			Change
		($ in thousands)
Written premiums
	Direct	$	168,223		$	53,121			217	%
	Assumed		7,673			38,945			(80	)
	Ceded		(70,195	)		(19,171	)		266
Net written premiums		$	105,701		$	72,895			45	%
Earned premiums
	Direct	$	126,525		$	12,510			911	%
	Assumed		17,742			51,496			(66	)
	Ceded		(48,571	)		(4,279	)		1,035
Earned but unbilled premiums			2,026			1,564			30
Net earned premiums		$	97,722		$	61,291			59	%

      Direct written premiums increased $115.1 million, or 217%, and direct earned premiums increased $114.0 million, or 911%, in 2005 over 2004 primarily due to the change in our business model in June 2004 as a result of which we ceased relying on fronting arrangements under which we assumed insurance from fronting insurers and instead began to directly write substantially all of our premiums produced.

      Assumed written premiums decreased $31.3 million, or 80%, and assumed earned premiums decreased $33.8 million or 66%. These decreases were consistent with the change in our business model as a result of which we ceased relying on fronting arrangements under which we assumed insurance from fronting insurers and instead began to directly write substantially all of our premiums produced.

      Ceded written premiums increased $51.0 million, or 266%, and ceded earned premiums increased $44.3 million, or 1,035%, in 2005 over 2004. This was due to the increase in direct written premiums and a decision to increase premiums ceded under the current quota share arrangement from 30% to 40% in July 2005. The time lag between ceded premium being written and ceded premium being earned resulted in a more substantial increase in the ceded earned premium.

      Commissions and Fees

	Year Ended
	December 31,
	2005		2004		Change
	($ in thousands)
Insurance underwriting commissions and fees	$	15,578	$	28,831		(46	)%
Insurance services commissions and fees		10,498		4,899		114
Total commissions and fees	$	26,076	$	33,730		(23	)%

      Insurance underwriting commissions and fees decreased $13.3 million, or 46%, from 2004 to 2005, primarily as a result of the change in business model, which resulted in an increase in direct written premiums as a percentage of premiums produced and a decrease in third party commissions and fees. This decline was offset by the impact of the increase in premiums produced. Insurance services commissions and fees, which was principally ARPCO income and not related to premiums produced, increased $5.6 million, or 114%, in 2005 over 2004. Due to the acquisition of ARPCO in June 2004, only a half year of ARPCO income was included in the 2004 results.

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      Net Investment Income and Realized Gains (Losses) on Investments. For 2005, net investment income earned increased $2.1 million, or 46%, from 2004 primarily due to the increase in invested assets over the period. As of December 31, 2005, invested assets were $211.0 million, a $39.3 million or 23% increase over $171.7 million of invested assets as of December 31, 2004 primarily due to increases in net written premiums. The increase in interest rates of approximately 1% in the intermediate part of the yield curve also contributed to the increased level of investment income. The annualized investment yield (net of investment expenses) on average total investments was 3.5% and 3.2% for the 2005 and 2004, respectively. The increase was the result of the general increase in market rates offset by increased allocation to municipal securities.

      For 2005, realized capital gains were $0.2 million versus realized capital losses of $0.1 million for 2004. These portfolio gains were driven by the sale of several convertible securities which occurred in an effort to manage the overall risk of the convertible exposure. In addition, throughout the year, we continued to reduce treasury and corporate bond exposure in favor of what we believe to be a more compelling value in the municipal and asset backed sectors.

Operating Expenses

      Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses incurred during 2005 increased by approximately $28.2 million, or 105%, over 2004. This increase was due both to the growth in net earned exposures, which was reflected in the approximately 59% increase in net earned premiums and due to the 12.6 percentage point higher loss ratio during 2005 compared to 2004. The increase in loss ratio was due principally to a $19.0 million increase in losses and loss adjustment expenses related to prior accident years. Approximately $12.8 million of the prior accident year development occurred in the security classes, especially in the safety equipment class for the 2000 to 2002 accident years, because we experienced unusually large increases in severity on a small number of reported claims, and also increased our incurred but not reported loss reserve estimates as a result of increasing our assumptions for expected severity of losses. See “— Reconciliation of Unpaid Loss and Loss Adjustment Expenses.”

      Approximately $6.2 million of the prior accident year development occurred in other specialty classes primarily due to the adoption of new industry loss development pattern assumptions that became available during 2005. From 2000 through 2004 our reserve estimates for other specialty classes utilized industry development pattern information that was available in 2000. New industry development pattern information became available during 2005. This new industry information reflected higher and more slowly developing loss patterns than the previously available industry information. This was due to a number of factors, including more recent data and more detailed segmentation in the data. We compared the new industry information to our actual loss experience and determined that the updated information aligned more closely with our emerging loss experience, coverage class groupings and limits profiles for other specialty classes. See “— Reconciliation of Unpaid Loss and Loss Adjustment Expenses” for further detail. As a result, we adopted usage of the new industry loss development pattern assumptions in our reserve estimates for all accident years during the fourth quarter of 2005, resulting in increases in prior years’ reserves, and in higher 2005 accident year reserve estimates than had been estimated in 2004 for the 2004 accident year.

      Other Operating Expenses

	Year Ended
	December 31,
	2005			2004			Change
	($ in thousands)
Amortization of deferred acquisition costs	$	20,630		$	15,713			31	%
Ceded reinsurance commissions		(18,551	)		(4,643	)		300
Other underwriting and operating expenses		32,021			31,596			1
Other operating expenses	$	34,100		$	42,666			(20	)%

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      During 2005, other operating expenses declined by $8.6 million, or 20%, from 2004. Amortization of acquisition expenses increased by $4.9 million, or 31%, as a result of the growth in net earned premiums slightly offset by a decline in the rate of acquisition expenses on premiums as a result of reduced fronting insurer fees. Ceded reinsurance commissions increased $13.9 million or 300% in 2005 over 2004. This was due to the increase in direct written premiums and ceded premiums under our change in business model, as well as our decision in July 2005 to increase premiums ceded under our quota share arrangement by 10% (to 40%). Other underwriting and operating expenses remained relatively constant on a net basis year over year. Included in other underwriting and operating expenses was:

•  Increased CoverX commissions paid to brokers of $6.2 million;

•  Decreased assumed reinsurance commissions of $10.1 million and an increase in the deferral portion of acquisition expenses of $3.2 million, which were consistent with the change in our business model;

•  Increased insurance services expenses of $1.5 million due to the inclusion of a full year of results after the June 2004 acquisition of ARPCO; and

•  Increased general underwriting and operating expenses of $6.0 million due to primarily to increased compensation expenses.

      Interest Expense

		Year Ended
		December 31,
		2005		2004		Change
		($ in thousands)
Senior notes		$	3,220	$	0		N/M
Junior subordinated debentures			942		660		43	%
Other			773		967		(20	)
	Total interest expense	$	4,935	$	1,627		203	%

      Interest expense increased $3.3 million, or 203%, from 2004 to 2005. The increase was principally attributable to interest on the senior notes issued in August 2005 and a full year of interest on the $20.6 million junior subordinated debentures offset by a reduction in other debt. Interest expense on the junior subordinated debentures included the change in fair value of the interest rate swap on the junior subordinated debentures as discussed in “Liquidity and Capital Resources.”

      Income Taxes. Our effective tax rate of approximately 35.6% for 2005 differed from the statutory tax rate of 35% principally due to tax exempt interest on the tax exempt portion of our investment portfolio and state income taxes. Our effective tax rate of 36.1% for 2004 differed from the statutory rate of 35.0% principally due to a lower tax exempt investment portfolio and state income taxes.

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Fiscal 2004 Compared to Fiscal 2003

      The following table summarizes our results for the years ended December 31, 2004 and 2003:

		Year Ended
		December 31,
		2004			2003			Change
		($ in thousands)
Operating revenues
	Net earned premiums	$	61,291		$	40,338			52	%
	Commissions and fees		33,730			33,489			1
	Net investment income		4,619			3,983			16
	Net realized gains (losses) on investments		(120	)		813			(115	)
Total operating revenues			99,520			78,623			27
Operating expenses
	Losses and loss adjustment expenses, net		26,854			21,732			24
	Amortization of intangible assets		632			—			N/M
	Other operating expenses		42,666			41,918			2
Total operating expenses			70,152			63,650			10
Operating income			29,368			14,973			96
Interest expense			1,627			708			130
Income before income taxes			27,741			14,264			94
Income taxes			10,006			3,288			204
Net income		$	17,735		$	10,977			62	%
Loss ratio			43.8	%		53.9	%		(10.1) points
Expense ratio			18.9	%		20.9	%		(2.0) points
Combined ratio			62.7	%		74.8	%		(12.1) points

Premiums Produced

      Premiums produced for 2004 were $146.9 million, a $26.7 million, or 22%, increase over the $120.2 million in premiums produced in 2003. This increase was primarily due to increased premium rates, renewals and audit premiums on expiring policies.

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Operating Revenue

      Net Earned Premiums

		Year Ended
		December 31,
		2004			2003			Change
		($ in thousands)
Written premiums
	Direct	$	53,121		$	1,131			4,597	%
	Assumed		38,945			47,604			(18	)
	Ceded		(19,171	)		(266	)		7,107
Net written premiums		$	72,895		$	48,469			50	%
Earned premiums
	Direct	$	12,510		$	1,117			1,020	%
	Assumed		51,496			39,436			31
	Ceded		(4,279	)		(883	)		385
	Earned but unbilled premiums		1,564			668			134
Net earned premiums		$	61,291		$	40,338			52	%

      Direct written premiums increased $52.0 million, or 4,597%, and direct earned premiums increased $11.4 million or 1,020% in 2004 compared to 2003. These increases were primarily the result of the change in our business model in June 2004, as a result of which we ceased relying on fronting arrangements under which we assumed insurance from fronting insurers and instead began to directly write substantially all of our premiums produced.

      Assumed written premiums decreased $8.7 million, or 18%. This decrease was consistent with the change in our business model as a result of which we ceased relying on fronting arrangements under which we assumed insurance from fronting insurers and instead began to directly write substantially all of our premiums produced. Assumed earned premiums increased $12.1 million or 31%. The time lag between written and earned premiums was the primary reason for the disparity between the decrease in assumed written premiums and the increase in assumed earned premiums.

      Ceded written premiums increased $18.9 million, or 7,107%, and ceded earned premiums increased $3.4 million, or 385%, in 2004 compared to 2003. These increases were primarily the result of the change in business model in June 2004, under which we began to cede 30% of the premiums produced under third party reinsurance agreements.

      Commissions and Fees

	Year Ended
	December 31,
	2004		2003		Change
	($ in thousands)
Insurance underwriting commissions and fees	$	28,831	$	33,489		(14	)%
Insurance services commissions and fees		4,899		0		N/M
Total commissions and fees	$	33,730	$	33,489		1	%

      Insurance underwriting commissions and fees decreased $4.7 million, or 14%, from 2003 to 2004. This was primarily the result of the change in our business model, under which direct written premiums as a percentage of premiums produced increased, and third party commissions and fees decreased. This decline was offset in part by the impact of the increase in premiums produced. Insurance services commissions and fees, which were principally ARPCO income and not related to premiums produced, increased $4.9 million in 2004 compared with 2003, due to the acquisition of ARPCO in June 2004.

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      Net Investment Income and Realized Gains (losses) on Investments. For 2004, net investment income earned was $4.6 million, a $0.6 million or approximately 16.0% increase over $4.0 million reported for 2003. This increase primarily was due to the increase in invested assets in 2004 due to increased net written premium. The gain in investment income earned on a percentage basis trailed the increase on a percentage basis for invested assets due to several factors including deployment of funds in municipal bonds, lower yielding convertible securities, and cash balances which were higher than normal as new investment managers were selected. The annualized investment yield (net of investment expenses) on average total investments was 3.2% and 3.9% for 2004 and 2003, respectively. The decrease was the result of more short-term investments for a portion of the year due to the investment made by Glencoe in our company and a decrease in the return on preferred stock investments.

      For 2004, realized capital losses were $0.1 million, a $0.9 million difference from the realized capital gains of $0.8 million for 2003. The realized losses were driven by the sale of taxable securities in favor of tax advantaged instruments.

     Operating Expenses

      Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses incurred during 2004 increased by approximately $5.1 million or 24% over 2003. This increase was due to the growth in net earned exposures, which was reflected in the approximately 52% increase in net earned premiums offset by the 10.1 percentage point lower loss ratio during 2004 compared to 2003. The decrease in the loss ratio was due principally to the favorable benefits of the re-underwriting and improvement in underwriting standards in our security industry classes during 2001 to 2002 as well as due to large rate increases and significant changes in coverage restrictions and endorsements that have been implemented during 2002 to 2004. During 2004, we experienced a $1.7 million increase in incurred losses and loss adjustment expenses related to prior accident years, compared to a $1.5 million increase during 2003. In each year, the unfavorable development pertained to 2001 and previous accident years before increased rates and more efficient underwriting practices were realized.

      Other Operating Expenses

	Year Ended
	December 31,
	2004			2003			Change
	($ in thousands)
Amortization of deferred acquisition costs	$	15,713		$	11,995			31	%
Ceded reinsurance commissions		(4,643	)		(94	)		4,839
Other underwriting and operating expenses		31,596			30,017			5
Other operating expenses	$	42,666		$	41,918			2	%

      During 2004, other operating expenses increased by $0.7 million, or 2%, from 2003. Amortization of acquisition expenses increased by $3.7 million, or 31%, as a result of the growth in net earned premiums, somewhat offset by a decline in the rate of acquisition expenses on premiums due to reduced third party insurer issuing fees. Ceded reinsurance commissions increased $4.5 million, or 4,839%, from 2003 to 2004. This was due to the increase in direct written premiums, and ceded premiums under our change in business model. Other underwriting and operating expenses increased slightly on a net basis year over year. Included in other underwriting and operating expenses was:

•  increased CoverX commissions paid to brokers of $3.8 million;

•  decreased assumed reinsurance commissions of $3.1 million, which was consistent with the change in our business model;

•  increased deferred acquisition expense of $4.4 million;

•  increased insurance services expenses of $1.9 million due to the acquisition of ARPCO in June 2004; and

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•  increased general underwriting and operating expenses of $3.3 million due to certain costs associated with the ARPCO acquisition and activities related to the change in business model.

      Interest expense

	Year Ended
	December 31,
	2004		2003		Change
	($ in thousands)
Junior subordinated debentures		660		—		100	%
Other		967		708		37
Total interest expense	$	1,627	$	708		130	%

      Interest expense increased $0.9 million, or 130%, from 2003 to 2004. The increase was primarily attributable to interest on the $20.6 million junior subordinated debentures issued in 2004. Interest expense on the junior subordinated debentures included the change in fair value of the interest rate swap on the junior subordinated debentures as discussed in “— Liquidity and Capital Resources.”

      Income taxes. The 2004 effective income tax rate of 36.1% differed from the statutory tax rate of 35% principally due to tax exempt interest on the tax exempt portion of our investment portfolio and state income taxes. The 2003 effective income tax rate of 23.1% differed from the statutory tax rate of 35% primarily due to the release of a valuation allowance on deferred tax assets associated with loss carry-forwards generated by ANIC. This release became recognizable upon ANIC’s return to profitable operations after several years of losses related to its discontinued personal lines, auto and commercial multi-peril business.

Liquidity and Capital Resources

Sources and Uses of Funds

      FMFC. FMFC is a holding company with all of its operations being conducted by its subsidiaries. Accordingly, FMFC has continuing cash needs for administrative expenses, the payment of principal and interest on debt, and taxes. Funds to meet these obligations come primarily from management and administrative fees from all of our subsidiaries, and dividends from our non-insurance subsidiaries.

      Insurance Subsidiaries. The primary sources of our insurance subsidiaries’ cash are net written premiums, claims handling fees, amounts earned from investments and the sale or maturity of invested assets. Additionally, FMFC has in the past and may in the future contribute capital to its insurance subsidiaries. FMFC contributed $26 million and $3.5 million to FMIC in 2004 and 2005, respectively, and $1 million to ANIC in 2004.

      The primary uses of our insurance subsidiaries’ cash include the payment of claims and related adjustment expenses, underwriting fees and commissions and taxes and making investments. Because the payment of individual claims cannot be predicted with certainty, our insurance subsidiaries rely on our paid claims history and industry data in determining the expected payout of claims and estimated loss reserves. To the extent that FMIC and ANIC have an unanticipated shortfall in cash, they may either liquidate securities held in their investment portfolios or obtain capital from FMFC. However, given the cash generated by our insurance subsidiaries’ operations and the relatively short duration of their investment portfolios, we do not currently foresee any such shortfall.

      No dividends were paid to FMFC by our insurance subsidiaries during the six months ended June 30, 2006 or the years ended 2005, 2004 or 2003. Our insurance subsidiaries retained all of their earnings in order to support the increase of their written premiums, and we expect this retention of earnings to continue. Our insurance subsidiaries are restricted by statute as to the amount of dividends that they may pay without the prior approval of their domiciliary state insurance departments. Based on the policyholders’ surplus and the net income of our insurance subsidiaries as of December 31, 2005, FMIC and ANIC may

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pay dividends in 2006, if declared, of up to $9.7 million without regulatory approval. See “Insurance and Other Regulatory Matters.”

      Non-insurance Subsidiaries. The primary sources of our non-insurance subsidiaries’ cash are commissions and fees, policy fees, administrative fees and claims handling and loss control fees. The primary uses of our non-insurance subsidiaries’ cash are commissions paid to brokers, operating expenses, taxes and dividends paid to FMFC. There are generally no restrictions on the payment of dividends by our non-insurance subsidiaries.

Cash Flows

      Our sources of funds have consisted primarily of net written premiums, commissions and fees, investment income and proceeds from the issuance of preferred stock and debt. We use operating cash primarily to pay operating expenses and losses and loss adjustment expenses and for purchasing investments. A summary of our cash flows is as follows:

	Six Months Ended
							Year Ended December 31,
	June 30,			June 30,
	2006			2005			2005			2004			2003
	($ in thousands)
Cash and cash equivalents provided by (used in):
Operating activities	$	32,058		$	38,100		$	52,192		$	28,909		$	20,853
Investing activities		(20,657	)		(32,558	)		(99,224	)		(78,213	)		(23,847	)
Financing activities		243			(2,000	)		51,357			49,613			3,054
Change in cash and cash equivalents	$	11,644		$	3,542		$	4,325		$	310		$	60

      Net cash provided by operating activities for the six months ended June 30, 2006 and 2005 was primarily from cash received on net written premiums, less cash disbursed for operating expenses and losses and loss adjustment expenses. The $6.0 million decrease in net cash provided by operating activities for the six months ended June 30, 2006 compared to the six months ended June 30, 2005 was primarily due to the decrease in collected premiums and commissions as a result of the increase in premiums ceded under our quota share arrangement by 10% (to 40%) in July 2005 and by 10% (to 50%) in January 2006.

      For 2005, 2004, and 2003, net cash provided by operating activities totaled $52.2 million, $28.9 million and $20.9 million, respectively, due primarily to cash received on net written premiums less cash disbursed for operating expenses and losses and loss adjustment expenses. The increase in cash provided by operating activities reflected the increase in net written premiums during that three year period. The increase in 2005 was also a result of the change in our business model as 2005 was the first full year that we no longer relied on a fronting arrangement but instead wrote substantially all of our premiums produced and ceded to third party reinsurers a portion of those premiums, thus generating higher cash flows.

      Net cash used in investing activities for the six months ended June 30, 2006 and 2005 primarily resulted from our net investment in short-term, debt and equity securities. The $11.9 million decrease in net cash used in investing activities for the six months ended June 30, 2006 compared to the six months ended June 30, 2005 was principally a result of the Holdings Transaction described previously and lower cash from operations available to be invested.

      For 2005, net cash used in investing activities totaled $99.2 million resulting primarily from our investment of operating cash flows and cash payments in connection with the notes offering and the repurchase of shares of our minority stockholders, which we refer to as the Holdings Transaction. For 2004, net cash used in investing activities totaled $78.2 million resulting primarily from our net investment of operating cash flows, our investment of cash received from the issuance of debt and convertible

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preferred stock and the acquisition of the ARPCO Group. For 2003, net cash used in investing activities totaled $23.8 million primarily resulting from our net investment of operating cash flows. The increase in 2005 from 2004 was primarily due to the cash used in the Holdings Transaction offset by the timing of the maturities and the related re-investment of short-term and debt securities. The increase in 2004 from 2003 was primarily due to the increase in net earned premiums which were used to purchase investment securities and the acquisition of ARPCO.

      The $51.4 million of net cash provided by financing activities for the year ended December 31, 2005 was primarily the result of the issuance of $65 million aggregate principal amount of senior notes in August 2005, offset by the repayment of $2.0 million of bank debt, a $5 million promissory note and $1.9 million of subordinated capital notes. During 2004, net cash provided by financing operations was $49.6 million and included $36.2 million of net proceeds from the issuance of convertible preferred stock, $20.6 million of net proceeds from the issuance of junior subordinated debentures, the issuance of a $5 million promissory note and $1.7 million of cash received upon exercise of stock options. Net cash provided by financing activities in 2004 was offset in part by the $13.8 million repayment under a revolving credit facility and other debt payments. During 2003, cash provided by financing activities totaled $3.1 million and consisted primarily of borrowings on a three-year term loan.

      Based on historical trends, market conditions, and our business plans, we believe that our existing resources and sources of funds will be sufficient to meet our liquidity needs in the foreseeable future. Because economic, market and regulatory conditions may change, however, there can be no assurances that our funds will be sufficient to meet our liquidity needs. In addition, competition, pricing, the frequency and severity of losses, and interest rates could significantly affect our short-term and long-term liquidity needs.

Long-term debt

      Senior Notes. We have $65 million aggregate principal amount of senior notes outstanding, which were issued by Holdings in August 2005 in connection with the Holdings Transaction. The senior notes mature on August 15, 2012, and bear interest at an annual rate, reset quarterly, equal to the three month LIBOR plus 8% (13.17% for the three month period that includes June 30, 2006). Interest is payable quarterly with $4.1 million of interest paid during the six months ended June 30, 2006 and $1.1 million of interest accrued as of June 30, 2006. A portion of the net proceeds from this offering will be used to repay all of the amounts owed under the senior notes.

      Junior Subordinated Debentures. We also have $20.6 million cumulative principal amount of floating rate junior subordinated debentures outstanding. The debentures were issued in connection with the issuance of trust preferred stock by our wholly-owned, nonconsolidated trusts. Cumulative interest on the cumulative principal amount of the debentures is payable quarterly in arrears at a variable annual rate, reset quarterly, equal to the three month LIBOR plus 3.75% and the three month LIBOR plus 4.00% with respect to $8.2 million and $12.4 million principal amount of the debentures, respectively. For the three month period that includes June 30, 2006, the three month LIBOR rate was 5.17%. We may defer the payment of interest for up to 20 consecutive quarterly periods; however, no such deferral has been made.

      Credit Facility. In May 2006, we executed a $10 million unsecured credit agreement which can be used for borrowings and letters of credit. Borrowings under the credit agreement bear interest, at our option, at the greater of the prime rate minus one-half percent or the federal rate plus one-half percent; the applicable margin plus LIBOR divided by one minus the stated maximum rate; or, a rate negotiated between us and the lender. The obligations under the credit agreement are guaranteed by our material non-insurance subsidiaries. The termination date under the credit agreement is June 30, 2010. The credit agreement contains certain customary covenants, which among other things, restrict our ability to incur indebtedness, grant liens, make investments and sell assets. The terms of the credit agreement require us to satisfy the following financial covenants:

•  Leverage Ratio: maintain a leverage ratio of no greater than (i) 0.35 to 1.0 at any time from and including January 1, 2006 to and including December 31, 2006; (ii) 0.325 to 1.0 at any time from

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	and including January 1, 2007 to and including December 31, 2007; (iii) 0.30 to 1.0 at any time from and including January 1, 2008 and thereafter. This leverage ratio is in effect only after the completion of this offering.
•	Fixed Charge Coverage Ratio: maintain a fixed charge coverage ratio of not less than 4.0 to 1.0 as determined quarterly.
•	Risk-Based Capital: maintain total adjusted capital for FMIC and any future insurance subsidiaries (on a combined basis, but excluding ANIC), as determined as of the end of each fiscal year, of greater than 162.5%.
•	Rating Agency Covenant: maintain an A.M. Best rating of FMIC or any future insurance subsidiary (excluding ANIC) of not less than “B++” at any time.
•	Surplus Covenant: maintain “surplus as regards policyholders” (calculated in accordance with Statutory Accounting Principles), as determined as of the end of any fiscal quarter of FMIC, ANIC or any future insurance subsidiary (on a combined basis) to be greater than the sum of: (i) $57,500,000; plus (ii) 25% of our net income for each succeeding fiscal year ended on or after December 31, 2007, provided, if net income is negative, such number will be zero; plus (iii) 50% of the net proceeds to us from the issuance of any capital stock that would be considered as such “surplus as regards policyholders.” However, after the consummation of this offering, the amount set forth in (i) shall be reset by the lender to an amount equal to 85% of such “surplus as regards policyholders,” after giving effect such public offering.

We are not required to comply with these covenants until we borrow under the credit agreement. As of the date of this prospectus, there were no borrowings outstanding under the credit agreement.

      Derivative Financial Instruments. Financial derivatives are used as part of the overall asset and liability risk management process. We use certain derivative instruments that do not qualify for hedge accounting treatment under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities.” These derivatives are classified as other assets and other liabilities and marked to market on the income statement. While we do not seek generally accepted accounting principles hedge accounting treatment of the assets that these instruments are hedging, the economic purpose of these instruments is to manage the risk inherent in existing exposures to interest rate risk. The fair value of these interest rate swaps was $816,000 at June 30, 2006.

      We have entered into two interest rate swap agreements with a combined notional amount of $20 million in order to reduce our exposure to interest rate fluctuations with respect to our junior subordinated debentures. Under these agreements, we pay interest at a fixed rate of 4.12%, and receive interest at a variable rate equal to three month LIBOR until the agreements expire in August 2009. At June 30, 2006, we had minimal exposure to credit loss on the interest rate swap.

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Contractual Obligations and Commitments

      The following table illustrates our contractual obligations and commercial commitments as of December 31, 2005:

					One Year to
			Less Than		Less Than		Three Years to		More Than
	Total		One Year		Three Years		Five Years		Five Years
	($ in thousands)
Contractual payments by period:
Long term debt	$	85,620	$	—	$	—	$	—	$	85,620
Interest on long term debt		101,540		9,676		19,353		19,403		53,108
Operating lease obligations		624		260		250		114		—
Reserve for losses and loss adjustment expenses		113,864		35,298		44,407		20,495		13,664
Total	$	301,648	$	45,234	$	64,009	$	40,012	$	152,392

      The reserve for losses and loss adjustment expenses payment due by period in the table above are based on the reserve of loss and loss adjustment expenses as of December 31, 2005 and actuarial estimates of expected payout patterns by type of business. As a result, our calculation of the reserve of loss and loss adjustment expenses payment due by period is subject to the same uncertainties associated with determining the level of the reserve of loss and loss adjustment expenses and to the additional uncertainties arising from the difficulty in predicting when claims, including claims that have not yet been incurred but not reported to us, will be paid. Actual payments of losses and loss adjustment expenses by period will vary, perhaps materially, from the above table to the extent that current estimates of the reserve for loss and loss adjustment expenses vary from actual ultimate claims amounts and as a result of variations between expected and actual payout patterns. See “Risk Factors” for a discussion of the uncertainties associated with estimating the reserve for loss and loss adjustment expenses.

      The above table includes all interest payments through the stated maturity of the related long-term debt. Variable rate interest obligations are estimated based on interest rates in effect at December 31, 2005, and, as applicable, the variable rate interest included the effects of our interest rate swaps through the expiration of those swap agreements.

      Immediately prior to the consummation of this offering, Holdings will be merged into FMFC and the senior notes will be repaid with a portion of the net proceeds from this offering. See “Use of Proceeds.”

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Cash and Invested Assets

      Our cash and invested assets consist of fixed maturity securities, convertible securities, and cash and cash equivalents. At June 30, 2006, our investments had a market value of $223.2 million and consisted of the following investments:

		June 30, 2006
		Market Value		% of Portfolio
		($ in thousands)
Money Market Funds		$	8,677		3.9%
Treasury Securities			14,707		6.6%
Agency Securities			4,998		2.2%
Corp/ Preferred			22,672		10.2%
Municipal Bonds			107,835		48.3%
Asset backed Securities			28,989		13.0%
Mortgages			17,452		7.8%
Convertible Securities			16,967		7.6%
Other			869		0.4%
	Total	$	223,166		100.0%

      The following table shows the composition of the investment portfolio by remaining time to maturity at June 30, 2006. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Additionally, the expected maturities of our investments in putable bonds fluctuate inversely with interest rates and therefore may also differ from contractual maturities.

		% of Total
Average Life		Investments
Less than one year			14.0%
One to two years			11.9%
Two to three years			14.3%
Three to four years			22.0%
Four to five years			19.4%
Five to seven years			11.5%
More than seven years			6.9%
	Total		100.0%

      The primary goals of our investment portfolio are to:

•  accumulate and preserve capital;

•  assure proper levels of liquidity;

•  optimize total after tax return subject to acceptable risk levels;

•  provide an acceptable and stable level of current income; and

•  approximate duration match between investments and our liabilities.

      In keeping with these goals, we maintain an investment portfolio consisting primarily of high grade fixed income securities. Our investment policy is developed by the investment committee of the board of directors and is designed to comply with the regulatory investment requirements and restrictions to which our insurance subsidiaries are subject.

      We have structured our investment policy to manage the various risks inherent in achieving our objectives. Credit-related risk is addressed by limiting minimum weighted-average portfolio credit quality

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to AA. Per issue credit limits have been set to limit exposure to single issue credit events. With the exception of convertible securities, which according to our investment policy may comprise up to 20% of our portfolio, all investments must be rated investment grade at the time of purchase with no more than 30% of the aggregate portfolio held in BBB rated securities. In addition, the convertible sector of the portfolio must maintain a weighted average credit quality of investment grade. Interest rate risk or duration risk management was tied to the duration of the liability reserves. The effective duration of the portfolio as of June 30, 2006 is approximately 3.0 years and the tax-effected duration was 2.6 years. The shorter tax-effected duration reflects the significant portion of the portfolio in municipal securities. Our weighted average duration of our loss and loss adjustment expense reserves was approximately 2.2 years at December 31, 2005. The annualized investment yield (net of investment expenses) on average total investments was 3.5% and 3.2% for the 2005 and 2004, respectively. The increase was the result of the general increase in market rates offset by increased allocation to municipal securities. Our investment policy establishes diversification requirements across various fixed income sectors including governments, agencies, mortgage and asset backed securities, corporate bonds, preferred stocks, municipal bonds and convertible securities. Although our investment policy allows for investments in equity securities, we have virtually no current exposure nor have any current plans to add exposure to equities. Convertible securities are utilized as a means of achieving equity exposure with lower long-term volatility than the broad equity market while having the added benefit of being treated as bonds from a statutory perspective.

      We utilize a variety of investment managers, each with its own specialty. Each of these managers has authority and discretion to buy and sell securities subject to guidelines established by our investment committee. Management monitors the investment managers as well as our investment results with the assistance of an investment advisor that has been advising us since early 1990. Our investment advisor is independent of our investment managers and the funds in which we invest. Each manager is measured against a customized benchmark on a monthly basis. Investment performance and market conditions are continually monitored. The investment committee reviews our investment results quarterly.

      The majority of our portfolio consists of AAA or AA rated securities with a Standard and Poor’s weighted average credit quality for our aggregate fixed income portfolio of AA+ at June 30, 2006. The majority of the investments rated BBB and below are convertible securities and were rated higher at the time of purchase. Consistent with our investment policy, we review any security if it falls below BBB- and assess whether it should be held or sold. The following table shows the ratings distribution of our fixed income portfolio as of June 30, 2006 as a percentage of total market value.

S&P Rating		% of Total Investments
AAA			74.1%
AA			9.7%
A			7.8%
BBB			6.0%
BB			1.2%
B			0.3%
C			0.2%
NR			0.7%
	Total		100.0%

      Cash and cash equivalents of $20.0 million at June 30, 2006 consisted of cash on hand as well as all short-term investments with a maturity date of three months or less from the date of purchase. The large increase at June 30, 2006 over year-end was the result of the month-end consolidation of cash in the sweep account occurring after the daily bank sweep from cash into short-term investments.

      At December 31, 2005 the unrealized loss positions of our portfolio totaled $3.0 million. This represents approximately 1.4% of year-end invested assets of $211.0 million. This unrealized loss position was the result of the continual increase in short term and intermediate term interest rates that has taken

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place over the past approximately 2 years. These unrealized losses have persisted due to the continued tightening by the Federal Reserve resulting in a significant increase in interest rates of approximately 250 basis points in 2 to 3 year securities over the past 24 months. These losses are substantially all a result of bond prices dropping due to the general increase in interest rates and not credit related circumstances. We have viewed these market value declines as being temporary in nature. Our portfolio is relatively short as the duration of the portfolio is approximately 2.5 years. We expect to hold the majority of these temporarily impaired securities until maturity should interest rate not decline from current levels. In light of our significant growth over the past 24 months, liquidity needs from the portfolio are inconsequential. As a result, we would not expect to have to liquidate temporarily impaired securities to pay claims or for any other purposes. There have been certain instances over the past year, where due to market based opportunities; we have elected to sell a small portion of the portfolio. These situations were unique and infrequent occurrences and in our opinion, do not reflect an indication that we do not have the intent and ability to hold these securities until they mature or recover in value.

      Below is a table that illustrates the unrecognized impairment loss by sector. The substantial rise in interest rates was the primary factor leading to impairment. All asset sectors were affected by the overall increase in rates as can be seen from the table below. In addition to the general level of rates, we also look at a variety of other factors such as direction of credit spreads for an individual issue as well as the magnitude of specific securities that have declined below amortized cost.

Unrecognized Impairment Loss by Sector

	Amount of Impairment
Sector	at December 31, 2005
	($ in thousands)
Debt Securities
U.S. government securities	$	(361	)
Government agency mortgage-backed securities	$	(86	)
Government agency obligations	$	(49	)
Collateralized mortgage obligations and other asset-backed securities	$	(407	)
Obligations of states and political subdivisions	$	(704	)
Corporate bonds	$	(585	)
Total Debt Securities	$	(2,192	)
Preferred stocks	$	(768	)
Total	$	(2,960	)

      The most significant risk or uncertainty inherent in our assessment methodology is that the current credit rating of a particular issue changes over time. If the rating agencies should change their rating on a particular security in our portfolio, it could lead to a reclassification of that specific issue. The vast majority of our unrecognized impairment losses are investment grade and “AAA” rated. Should the credit quality of individual issues decline for whatever reason then it would lead us to reconsider the classification of that particular security. Within the non-investment grade sector, we continue to monitor the particular status of each issue. Should prospects for any one issue deteriorate, we would potentially alter our classification of that particular issue.

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      The table below illustrates the breakdown by investment grade and non investment grade unrealized loss as well as the duration that these sectors have been trading below amortized cost. The average duration of the impairment has been 6 to 12 months. The average unrealized loss as a percent of amortized cost is 2.2% of the portfolio.

	% of Total			Total Amortized					Average Unrealized Loss		Average Duration
	Amortized Cost			Cost		Total Loss			as % of Amortized Cost		of Impairment
	($ in thousands)
Non Investment Grade		2.4	%	$	3,345	$	(596	)		(17.8)%		6-12 Months
Investment Grade		97.6	%	$	133,030	$	(2,364	)		(1.8)%		6-12 Months
Total		100.0	%	$	136,375	$	(2,960	)		(2.2)%		6-12 Months

      For those securities trading at a loss, approximately 2.5% of the securities are non investment grade. In general we view these issues as having a reasonable probability of recovering full value. These issues are continually monitored and may be classified in the future as being other than temporarily impaired. The balances, or 97.9% of those securities trading at a loss, are investment grade. The majority of these securities are “AAA” or “AA” rated.

      The largest concentration of temporarily impaired securities is in the corporate bonds and preferred stock sector combined at approximately 46% of the total loss. These securities in general are highly rated and have been affected primarily by the current interest rate environment. The next highest concentration of temporarily impaired securities is obligation of states and political subdivision at 24%. These issues have been affected as well by the overall level of interest rates. The next highest concentration of temporarily impaired securities is collateralized mortgage obligations and other asset backed securities which represent 14% of the total of temporarily impaired securities followed by US government securities at 12%. These losses are due to the rise in rates as well.

      For 2005 and the first six months of 2006, we sold approximately $44.5 million and $29.9 million of market value of securities, respectively, which were trading below amortized cost while recording a realized loss of $0.6 million and $0.7 million, respectively. This loss represented 1.3% for 2005 and 2.4% for the first six months of 2006 of the amortized cost of the positions. We sold Treasury issues to purchase other securities. We also sold some isolated positions of corporate, convertible and municipal bonds. These sales were unique opportunities to sell specific positions due to changing market conditions. These situations were exceptions to our general assertion regarding our ability and intent to hold securities with unrealized losses until they mature or recover in value. This position is further supported by the insignificant losses as a percentage of amortized cost for the respective periods.

Deferred Policy Acquisition Costs

      We defer a portion of the costs of acquiring insurance business, primarily commissions and certain policy underwriting and issuance costs, which vary with and are primarily related to the production of insurance business. For the six months ended June 30, 2006, $5.5 million of the costs were deferred. Deferred policy acquisition costs totaled $6.1 million, or 13.5% of unearned premiums (net of reinsurance), at June 30, 2006.

Loss and Loss Adjustment Expense Reserves

      Losses and loss adjustment expenses. We maintain reserves to cover our estimated ultimate losses under all insurance policies that we write and our loss adjustment expenses relating to the investigation and settlement of policy claims. The reserves for losses and loss adjustment expenses represent our estimated ultimate costs of all reported and unreported losses and loss adjustment expenses incurred and unpaid at the balance sheet date. Our reserves reflect our estimates at a given time of amounts that we expect to pay for losses that have been reported, which are referred to as case reserves, and losses that have been incurred but not reported and the expected development of losses and allocated loss adjustment expenses on open reported cases, which are referred to as IBNR reserves. In evaluating whether the

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reserves are reasonable for unpaid losses and loss adjustment expenses, it is necessary to project future losses and loss adjustment expense payments. Our reserves are carried at the total estimate for ultimate expected losses and loss adjustment expenses. We do not discount the reserves for losses and loss adjustment expenses.

      Our reserves consist entirely of reserves for liability losses, consistent with the coverages provided for in the insurance policies directly written or assumed by us under reinsurance contracts. In many cases, several years may elapse between the occurrence of an insured loss, the reporting of the loss to us and our payment of the loss. The estimation of ultimate liability for losses and loss adjustment expenses is an inherently uncertain process, requiring the use of informed estimates and judgments. Our loss and loss adjustment expense reserves do not represent an exact measurement of liability, but are estimates. Although we believe that our reserve estimates are reasonable, it is possible that our actual loss experience may not conform to our assumptions and may, in fact, vary significantly from our assumptions. Accordingly, the ultimate settlement of losses and the related loss adjustment expenses may vary significantly from the estimates included in our financial statements. We continually review our estimates and adjust them as we believe appropriate as our experience develops or new information becomes known to us. Such adjustments are included in current results of operations. For a further discussion of how we determine our loss and loss adjustment expense reserves and the uncertainty surrounding those estimates, see “— Critical Accounting Policies — Loss and Loss Adjustment Expense Reserves”.

Reconciliation of Unpaid Losses and Loss Adjustment Expenses

      We establish a reserve for both reported and unreported covered losses, which includes estimates of both future payments of losses and related loss adjustment expenses. The following table represents changes in our aggregate reserves during 2005, 2004 and 2003:

		2005		2004		2003
		($ in thousands)
Balance, January 1		$	68,699	$	61,727	$	59,449
	Less reinsurance recoverables		5,653		5,083		4,942
Net balance, January 1			63,046		56,644		54,507
Incurred related to
	Current year		36,052		25,157		20,218
	Prior years		19,042		1,697		1,514
Total incurred			55,094		26,854		21,732
Paid related to
	Current year		2,119		498		841
	Prior years		24,026		19,954		18,754
Total paid			26,145		20,452		19,595
Net balance, December 31			91,995		63,046		56,644
	Plus reinsurance recoverables		21,869		5,653		5,083
Balance, December 31		$	113,864	$	68,699	$	61,727

      During 2005, we experienced adverse development in the loss and loss adjustment expense reserves for accident years 2000 through 2002, with respect to policies written for security classes, especially in the safety equipment installation and service class. The prior year reserve development occurred due to new information which emerged during 2005 on a small number of complex high severity cases, causing increased net case reserve valuations or loss and loss adjustment expense payments of $7.4 million that were not anticipated in our prior years’ IBNR reserve estimates. This development was inconsistent with our historical loss and loss and loss adjustment expense reporting patterns. Our historic reporting patterns

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for this class generally reflect minimal development beyond the fourth year of maturity. The loss development on policies written during 1999 to 2001 has been volatile, and more slowly developing, compared to expectations based on our historic loss emergence patterns that are associated with the same classes of policies. The overall loss experience on these policies has been significantly worse than our insurance subsidiaries’ historic experience on policies written both before and after this period. In response to the adverse loss development, we have increased our reserves applicable to prior accident years for security classes by approximately $12.8 million.

      Our loss experience on policies that we wrote for the safety equipment installation and service class during 1999 to 2001 has been significantly worse than on policies written for other security classes, with an average loss and loss adjustment expense ratio of over 175% during those accident years. We have written the safety equipment class throughout our history on a profitable basis, and we expanded our writings in this class dramatically from 1999 through 2001, primarily through writing new policies for former customers of several competitors who exited the property casualty markets during that period. Our underwriters relied on loss history data provided by the former competitors and increased premium rates accordingly on these policies, and we expected the new policies to be profitable.

      While we increased the prices on new policies from those charged by the previous insurers, the historical loss information we used to underwrite some of the new policies was based on information provided by previous insurers who left the market, and much of that information was later found to be inaccurate or incomplete. In retrospect, premium rates for new policies written for the safety equipment installation and service class during this period ultimately proved to be inadequate. The impact of the inadequate premium rates was compounded by our growth in the safety equipment installation and service class during that period. In reaction to the observed deterioration in the loss experience of the safety equipment installation and service class, we implemented a number of changes in both the safety equipment installation and service class and other security classes, many of these changes coincided with and were facilitated by the “hard market” conditions that emerged during this period, and include the following:

•  Extensive re-underwriting of policies during 2001 and 2002;

•  Adoption of more stringent underwriting standards;

•  De-emphasis of unprofitable markets;

•  Increased premium rates from 2002 to 2005;

•  Implementation of many coverage exclusions, restrictions, endorsements, and higher deductibles in 2002 and 2003;

•  Implementation of improved audit premium and deductible procedures and controls; and

•  Beginning in June 2004, our purchase of excess reinsurance so that we reduced our net per occurrence losses and loss adjustment expense retention by 50%.

As a result of these actions, net incurred losses and loss adjustment expenses and the net incurred loss ratios and frequency of losses for the 2003 to 2005 accident years on policies written for security classes have improved significantly in comparison to the 1999 to 2002 accident years, which resulted in overall improved calendar year loss ratios from 2003 through 2005.

      In addition, we increased our reserves applicable to policies written for other specialty classes by approximately $6.2 million, principally as a result of using updated industry loss development factors, which became available to us during 2005, in the calculations of ultimate expected losses and reserves on those classes. These updated factors indicate that losses are expected to emerge more slowly than what was reflected in the previous industry development factors that we used. We began writing for other specialty classes in 2000 and have six years or less of our own historical loss experience for these classes. Consequently, we have relied significantly on industry development factors in our reserve estimates. As our

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historical experience increases, we will be able to give more weight to our own experience and reduce the amount of weight given to industry experience in our reserve estimates.

      From 2000 through 2004, we had used an earlier set of available industry development factors from a study published in 2000 for other specialty classes. We adopted the industry development factors that became available during 2005 because they reflected more recent industry experience, were separated into losses and loss adjustment expenses and in more class and coverage limit segments that aligned more closely with our classifications and coverage limits, and were more closely aligned with our actual emerging experience. The increases and decreases in incurred losses related to prior accident years, as reflected in the preceding table for 2004 and 2003, primarily resulted from differences in actual versus expected loss development.

      Loss Development. Below is a table showing the development of our reserves for unpaid losses and loss adjustment expenses for us for report years 1995 through 2005. The table portrays the changes in the loss and loss adjustment expenses reserves in subsequent years relative to the prior loss estimates based on experience as of the end of each succeeding year, on a GAAP basis.

      The first line of the table shows, for the years indicated, the net reserve liability including the reserve for incurred but not reported losses as originally estimated. For example, as of December 31, 1995 it was estimated that $53.0 million would be a sufficient reserve to settle all claims not already settled that had occurred prior to December 31, 1995, whether reported or unreported to our insurance subsidiaries.

      The next section of the table sets forth the re-estimates in later years of incurred losses, including payments, for the years indicated. For example, as reflected in that section of the table, the original reserve of $53.0 million was re-estimated to be $43.6 million at December 31, 2005. The increase/decrease from the original estimate would generally be a combination of factors, including:

•  reserves being settled for amounts different from the amounts originally estimated;

•  reserves being increased or decreased for individual claims that remain open as more information becomes known about those individual claims; and

•  more or fewer claims being reported after December 31, 1995 than had been reported before that date.

      The “cumulative redundancy (deficiency)” represents, as of December 31, 2005, the difference between the latest re-estimated liability and the reserves as originally estimated. A redundancy means that the original estimate was higher than the current estimate for reserves; a deficiency means that the current estimate is higher than the original estimate for reserves. For example, because the reserves established as of December 31, 1995 at $53.0 million were reestablished at December 31, 2005 at $43.6 million, it was re-estimated that the reserves which were established as of December 31, 1995 included a $9.4 million redundancy.

      The next section of the table shows, by year, the cumulative amounts of losses and loss adjustment expenses paid as of the end of each succeeding year. For example, with respect to the net losses and loss expense reserve of $53.0 million as of December 31, 1995 by December 31, 2005 (ten years later) $43.6 million actually had been paid in settlement of the claims which pertain to the reserve as of December 31, 1995.

      Information with respect to the cumulative development of gross reserves (that is, without deduction for reinsurance ceded) also appears at the bottom portion of the table.

      ANIC’s reserves averaged approximately 13% of our total reserves for each year in the ten year period ended December 31, 2005. From 1995 through 2001, ANIC’s reserves were primarily applicable to ANIC’s non-standard personal auto and commercial multi-peril business lines, which were discontinued in 2001. Beginning in 2002, ANIC’s reserves were derived primarily from its assumed quota share of a portion of the premiums produced by CoverX.

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Analysis of Unpaid Loss and Loss Adjustment Expense Development

	Year Ended December 31,
	1995		1996		1997		1998		1999		2000			2001			2002			2003			2004			2005
Net reserve for unpaid losses and loss adjustment expenses	$	53,010	$	48,018	$	37,714	$	32,023	$	31,561	$	34,498		$	46,617		$	54,507		$	56,644		$	63,046		$	91,995
Net reserves re-estimated At December 31:
One year later		55,368		47,044		33,364		27,286		27,926		34,677			47,744			56,023			58,342			82,087
Two years later		54,273		43,286		28,801		21,363		26,967		35,789			52,212			61,968			78,214
Three years later		51,647		38,796		22,877		19,030		27,932		37,774			59,665			81,339
Four years later		46,848		33,224		21,824		19,367		28,108		40,026			73,785
Five years later		44,507		32,447		22,148		18,892		28,770		45,470
Six years later		43,913		32,953		21,482		18,917		30,219
Seven years later		44,230		32,275		21,677		19,605
Eight years later		43,621		32,330		22,255
Nine years later		43,687		32,290
Ten years later		43,634
Cumulative redundancy (deficiency) on net reserves		9,376		15,728		15,459		12,418		1,342		(10,972	)		(27,168	)		(26,832	)		(21,570	)		(19,041	)
Cumulative amount of net liability paid through December 31:
One year later		20,016		15,064		8,224		5,810		7,855		9,791			13,999			18,757			19,955			24,025
Two years later		31,684		22,564		12,975		10,737		14,063		19,060			30,603			37,249			40,487
Three years later		36,548		26,186		16,435		13,303		19,856		27,724			43,950			55,262
Four years later		38,826		28,455		18,198		15,918		24,039		33,839			56,471
Five years later		40,958		29,685		19,886		17,382		26,900		38,525
Six years later		41,884		31,024		20,657		18,198		28,328
Seven years later		42,672		31,627		21,223		18,583
Eight years later		43,091		31,984		21,584
Nine years later		43,410		32,183
Ten years later		43,595
Gross reserves — end of year		56,564		56,308		45,221		37,653		36,083		36,150			48,143			59,449			61,727			68,699			113,864
Reinsurance recoverable on unpaid losses		3,554		8,290		7,507		5,630		4,522		1,652			1,526			4,942			5,083			5,653			21,869
Net reserves — end of year		53,010		48,018		37,714		32,023		31,561		34,498			46,617			54,507			56,644			63,046			91,995
Gross reserves — re-estimated At 12/31/05		46,138		39,459		29,555		27,054		34,950		48,925			78,258			88,300			85,163			90,311
Reinsurance recoverable on unpaid losses — re-estimated at 12/31/05		2,504		7,169		7,300		7,449		4,731		3,455			4,473			6,961			6,949			8,224
Net reserves — re-estimated At 12/31/05		43,634		32,290		22,255		19,605		30,219		45,470			73,785			81,339			78,214			82,087
Cumulative redundancy (deficiency) on gross reserves		10,426		16,849		15,666		10,599		1,133		(12,775	)		(30,115	)		(28,851	)		(23,436	)		(21,612	)

      Factors contributing to the reserve development in the preceding table are as follows:

      From 1995 through 1998, our insurance subsidiaries experienced significant favorable development of their reserves, reflecting redundancies in all years. This development was significantly influenced by the police and public officials classes of business which FMIC’s predecessor organization, First Mercury Syndicate (“FMS”) began writing in 1991, and FMIC stopped writing in 1996. Early reported losses and loss adjustment expense emergence in those classes was worse than industry experience, and estimated

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ultimate losses and loss adjustment expenses and related reserves were based on a continuation of the adverse trend and use of industry development factors. In addition, FMS’s loss and loss adjustment experience data only went back to FMS’s formation in 1985, so greater weight was given to industry data compared to our claims experience in establishing IBNR. As our policies in the accident years matured, the loss trends moderated and ultimate losses and loss adjustment expenses emerged lower than the industry data indications.

      From 2000 through 2004, the reserves gave greater weight to loss development patterns from our historical experience through 1998, and were adjusted for differences between actual and expected development as developments emerged. During 2005, a significant amount of adverse development occurred related to accident years 2000 through 2002, and our insurance subsidiaries increased their reserves accordingly. See “— Reconciliation of Unpaid Loss and Loss Adjustment Expenses.” In addition, we increased our reserves applicable to other specialty classes, principally as a result of using updated industry loss development factors, which became available during 2005, in the calculations of ultimate expected losses and reserves on other specialty classes. Because the loss table above is prepared on a reported year basis, the $19.0 million and $21.6 million in unfavorable net reserve and gross reserve development, respectively, during 2005 on the December 31, 2004 net and gross reported reserves appears in the applicable reported year that coincides with the related accident years affected and is repeated in each subsequent year through 2005.

      For policies written from the middle of 2002 through the present, historical experience for security classes has improved due to the underwriting initiatives taken in response to the deterioration in loss experience for the 1999 through 2001 accident years, especially in the safety equipment installation and service class. See “— Reconciliation of Unpaid Loss and Loss Adjustment Expenses.”

Reinsurance

      Our insurance subsidiaries cede insurance risk to reinsurers to diversify their risks and limit their maximum loss arising from large or unusually hazardous risks or catastrophic events. Additionally, our insurance subsidiaries use reinsurance in order to limit the amount of capital needed to support their operations and to facilitate growth. Reinsurance involves a primary insurance company transferring, or ceding, a portion of its premium and losses in order to control its exposure. The ceding of liability to a reinsurer does not relieve the obligation of the primary insurer to the policyholder. The primary insurer remains liable for the entire loss if the reinsurer fails to meet its obligations under the reinsurance agreement.

      In June 2004, following the investment in our convertible preferred stock by Glencoe, FMFC contributed additional capital to FMIC, resulting in an increase in FMIC’s statutory surplus of $26 million. Shortly thereafter, A.M. Best raised FMIC’s financial strength rating to “A-” and size rating to “VII,” thus qualifying it to be the direct writer of substantially all of the premiums produced by CoverX. On May 1, 2005, the prior assumed reinsurance contracts terminated. By December 31, 2005, substantially all premiums produced were written directly by FMIC.

      FMIC entered into ceding reinsurance contracts effective June 2004, ceding per occurrence coverages in excess of $500,000 per risk, and ceding 39% of its net retention to an unaffiliated reinsurer (30%) and to ANIC (9%), increasing the combined net retention of our insurance subsidiaries to 70% of the first $500,000 per occurrence. We increased the premiums ceded under quota share agreement with an unaffiliated reinsurer to 40% in July 2005 and 50% in January 2006.

      We have historically adjusted our level of quota share reinsurance based on our premiums produced and our level of capitalization, as well as our risk appetite for a particular type of business. We believe that the current reinsurance market for the lines of business that we insure is stable in both capacity and pricing. In addition, we do not anticipate structural changes to our reinsurance strategies, but rather will continue to adjust our level of quota share and excess of loss reinsurance based on our premiums produced, level of capitalization and risk appetite. As a result, we believe that we will continue to be able

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to execute our reinsurance strategies on a basis consistent with our historical and current reinsurance structures.

      The following table illustrates our direct written premiums and ceded for the six months ended June 30, 2006 and 2005 and for the years ended December 31, 2005, 2004 and 2003:

	Direct Written Premiums and Premiums Ceded
	Six Months						Year Ended
	Ended June 30,						December 31,
	2006			2005			2005			2004			2003
	($ in thousands)
Direct written premiums	$	110,980		$	79,308		$	168,223		$	53,121		$	1,131
Ceded written premiums		(59,305	)		(27,258	)		(70,195	)		(19,171	)		(266	)
Net written premiums		51,675			52,050			98,028			33,950			865
Ceded written premiums as percentage of direct written premiums		53.4	%		34.4	%		41.7	%		36.1	%		23.5	%

      The following table illustrates the effect of our reinsurance ceded strategies on our results of operations:

	Six Months				Year Ended
	Ended June 30,				December 31,
	2006		2005		2005		2004		2003
	($ in millions)
Ceded written premiums	$	59,305	$	27,258	$	70,195	$	19,171	$	266
Ceded premiums earned		45,876		16,287		48,571		4,279		883
Losses and loss adjustment expenses ceded		23,979		9,016		20,962		2,261		1,566
Ceding commissions		14,350		5,165		14,805		1,036		312

      Our net cash flows relating to ceded reinsurance activities (premiums paid less losses recovered and ceding commissions received) were approximately $43.0 million net cash paid for the six months ended June 30, 2006 compared to net cash paid of $20.3 million for the six months ended June 30, 2005. We paid approximately $48.4 million relating to reinsurance ceded activities for the year ended December 31, 2005 compared to $12.8 million and $(1.6) million, respectively, for the years ended December 31, 2004 and 2003.

      The assuming reinsurer is obligated to indemnify the ceding company to the extent of the coverage ceded. The inability to recover amounts due from reinsurers could result in significant losses to us. To protect us from reinsurance recoverable losses, FMIC seeks to enter into reinsurance agreements with financially strong reinsurers. Our senior executives evaluate the credit risk of each reinsurer before entering into a contract and monitor the financial strength of the reinsurer. On June 30, 2006, all reinsurance contracts to which we were a party, except one, were with companies with A.M. Best ratings of “A-” or better. We have not recorded a reserve against the reinsurance balance recoverable from Alea North America Insurance Company, rated NR-4 (company request) by A.M. Best, because it is not currently payable. In addition, ceded reinsurance contracts contain trigger clauses through which FMIC can initiate cancellation including immediate return of all ceded unearned premiums at its option, or which result in immediate collateralization of ceded reserves by the assuming company in the event of a financial strength rating downgrade, thus limiting credit exposure. On June 30, 2006, there was no allowance for uncollectible reinsurance, as all reinsurance balances were current and there were no disputes with reinsurers.

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      On June 30, 2006 and December 31, 2005, FMFC had a net amount of recoverables from reinsurers of $94.8 million and $49.2 million, respectively, on a consolidated basis. The following is a summary of our insurance subsidiaries’ net reinsurance recoverables by reinsurer:

      Net Reinsurance Recoverables.

				Net Amount		Net Amount
				Recoverable as of		Recoverable as of
		A.M. Best Rating		June 30, 2006		December 31, 2005
				($ in thousands)
ACE Property & Casualty Insurance Company			A+	$	68,012	$	34,900
Alea North America Insurance Company			NR-4		142		176
Platinum Underwriters Reinsurance, Inc.			A		4,959		—
Berkley Insurance Company			A		1,662		2,514
GE Reinsurance Corp.			A		16,048		10,699
Other			(1)		3,974		882
	Total			$	94,797	$	49,171

(1)  All other reinsurers carry an A.M. Best rating of “A” and above

      The reinsurance market moves in pricing cycles which are correlated with the primary insurance market. Thus, after experiencing adverse reserve development due to inadequate pricing during the soft market, the amount of capacity in the reinsurance market has decreased. This has in turn placed upward pressure on reinsurance prices and restricted terms.

Recent Accounting Pronouncements

      In December 2004, Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 123(R), “Share-Based Payment,” which is a revision of SFAS No. 123, “Accounting for Stock-based Compensation.” SFAS No. 123(R) eliminates the option of accounting for share-based payments using the intrinsic value method and making only pro forma disclosures of the impact on earnings of the cost of stock options and other share-based awards measured using a fair value approach. SFAS No. 123(R) will require that companies measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award (i.e., the requisite service period) which is usually equal to the vesting period. SFAS No. 123(R) is effective starting January 1, 2006 for calendar-year public companies. We have evaluated the impact of adopting SFAS No. 123(R) and have determined there will be no impact on our financial statements for options granted prior to the adoption of SFAS No. 123(R) because all outstanding stock options are fully vested. During the six months ended June 30, 2006, we granted 99 options to certain employees. These options were accounted for in accordance with SFAS No. 123(R). The application of SFAS No. 123(R) to these options did not have a material effect on our financial statements.

      In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections, a replacement of Accounting Principles Board Opinion (APB) No. 20, Accounting Changes and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements.” This Statement requires retrospective application to prior periods’ financial statements of a change in accounting principle. It applies both to voluntary changes and to changes required by an accounting pronouncement if the pronouncement does not include specific transition provisions. APB 20 previously required that most voluntary changes in accounting principles be recognized by recording the cumulative effect of a change in accounting principle. SFAS 154 is effective for fiscal years beginning after December 15, 2005. We do not expect the adoption to have a material effect on our financial statements.

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      In November 2005, the FASB issued Staff Position (“FSP”) Nos. FAS 115-1 and FAS 124-1. “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investment.” This FSP addresses the determination as to when an investment is considered impaired, whether the impairment is other than temporary, and the measurement of an impairment loss. This FSP also included accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP Nos. FAS 115-1 and FAS 124-1 are effective for reporting periods beginning after December 15, 2005; however, the disclosure requirements are already in effect. The adoption of this FSP is not expected to have a material effect on our results of operations or financial condition.

      In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments.” Under current GAAP, an entity that holds a financial instrument with an embedded derivative must bifurcate the financial instrument, resulting in the host and the embedded derivative being accounted for separately. SFAS No. 155 permits, but does not require, entities to account for financial instruments with an embedded derivative at fair value thus negating the need to bifurcate the instrument between its host and the embedded derivative. SFAS No. 155 is effective for fiscal periods beginning after September 15, 2006. We do not expect that SFAS No. 155 will have a material impact on our consolidated financial statements.

      In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets.” SFAS No. 156 amends FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” to require that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. SFAS No. 156 permits, but does not require, the subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value. An entity that uses derivative instruments to mitigate the risks inherent in servicing assets and servicing liabilities is required to account for those derivative instruments at fair value. SFAS No. 156 is effective for fiscal periods beginning after September 15, 2006. We do not expect that SFAS No. 156 will have a material impact on our consolidated financial statements.

      In June 2006, the FASB issued FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes, an Interpretation of SFAS No. 109” (“FIN 48”). This statement clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS 109, “Accounting for Income Taxes.” This Interpretation prescribes a recognition threshold and measurement attribute for the financial statements recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The provisions of FIN 48 are effective for fiscal years ending after December 15, 2006. The Company does not expect the adoption of this pronouncement to have a significant impact on its financial statements.

Quantitative and Qualitative Disclosures about Market Risk

      Market risk is the potential economic loss principally arising from adverse changes in the fair value of financial instruments. The major components of market risk affecting us are credit risk and interest rate risk.

Credit Risk

      Credit risk is the potential economic loss principally arising from adverse changes in the financial condition of a specific debt issuer or a reinsurer.

      We address the risk associated with debt issuers by investing in fixed maturity securities that are investment grade, which are those securities rated “BBB–” or higher by Standard & Poor’s. We monitor the financial condition of all of the issuers of fixed maturity securities in our portfolio. Our outside investment managers assist us in this process. We utilize a variety of tools and analysis to as part of this process. If a security rated “BBB–” or higher by Standard & Poor’s at the time that we purchase it and is then downgraded below “BBB–” while we hold it, we evaluate the security for impairment, and after

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discussing the security with our investment advisors, we make a decision to either dispose of the security or continue to hold it. Finally, we employ stringent diversification rules that limit our credit exposure to any single issuer or business sector.

      We address the risk associated with reinsurers by generally targeting reinsurers with A.M. Best financial strength ratings of “A-” or better. In an effort to minimize our exposure to the insolvency of our reinsurers, we evaluate the acceptability and review the financial condition of each reinsurer annually. In addition, we continually monitor rating downgrades involving any of our reinsurers. At June 30, 2006, all but one insignificant reinsurance contract was with companies with A.M. Best ratings of “A-” or better.

Interest Rate Risk

      Interest rate risk is the risk that we may incur economic losses due to adverse changes in interest rates. The primary market risk to the investment portfolio is interest rate risk associated with investments in fixed maturity securities. Fluctuations in interest rates have a direct impact on the market valuation of these securities. We manage our exposure to interest rate risk through an asset and liability matching process. In the management of this risk, the characteristics of duration, credit and variability of cash flows are critical elements. These risks are assessed regularly and balanced within the context of our liability and capital position. Our outside investment managers assist us in this process. Our senior notes bear interest at an annual rate, reset quarterly, equal to LIBOR plus 8%. A portion of the net proceeds from this offering will be used to repay all of the amounts owed under the senior notes. We also have $20.6 million cumulative principal amount of floating rate junior subordinated debentures outstanding. We have entered into interest rate swap agreements through 2009 with a combined notional amount of $20 million in order to fix the interest rate on this debt, thereby reducing our exposure to interest rate fluctuations with respect to our debentures.

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BUSINESS

      We are a provider of insurance products and services to the specialty commercial insurance markets, primarily focusing on niche and underserved segments where we believe that we have underwriting expertise and other competitive advantages. During our 33 years of underwriting security risks, we have established CoverX^® as a recognized brand among insurance agents and brokers and developed the underwriting expertise and cost-efficient infrastructure which have enabled us to underwrite such risks profitably. Over the last six years, we have leveraged our brand, expertise and infrastructure to expand into other specialty classes of business, particularly focusing on smaller accounts that receive less attention from competitors.

      As primarily an excess and surplus, or E&S, lines underwriter, our business philosophy is to generate an underwriting profit by identifying, evaluating and appropriately pricing and accepting risk using customized forms tailored for each risk. Our combined ratio, a customary measure of underwriting profitability, has averaged 69.4% over the past three years. A combined ratio is the sum of the loss ratio and the expense ratio. A combined ratio under 100% generally indicates an underwriting profit. A combined ratio over 100% generally indicates an underwriting loss. As an E&S lines underwriter, we have more flexibility than standard property and casualty insurance companies to set and adjust premium rates and customize policy forms to reflect the risks being insured. We believe this flexibility has a beneficial impact on our underwriting profitability and our combined ratio.

      In addition, through our insurance services business, which provides underwriting, claims and other insurance services to third parties, we are able to generate significant fee income that is not dependent upon our underwriting results. For our entire business, we generated an average annual return on stockholders’ equity of 28.6% over the past three calendar years.

      Our CoverX subsidiary is a licensed wholesale insurance broker that produces and underwrites all of the insurance policies for which we retain risk and receive premiums. As a wholesale insurance broker, CoverX markets our insurance policies through a nationwide network of wholesale and retail insurance brokers who then distribute these policies through retail insurance brokers. CoverX also provides underwriting services with respect to the insurance policies it markets in that it reviews the applications submitted for insurance coverage, decides whether to accept all or part of the coverage requested and determines applicable premiums. We participate in the risk on insurance policies sold through CoverX, which we refer to as policies produced by CoverX, generally by directly writing the policies through our insurance subsidiaries and then retaining all or a portion of the risk. The portion of the risk that we decide not to retain is ceded to, or assumed by, reinsurers in exchange for paying the reinsurers a proportionate amount of the premium received by us for issuing the policy. This cession is commonly referred to as reinsurance. Based on market conditions, we can retain a higher or lower amount of premiums produced by CoverX.

      Prior to June 2004, when our insurance subsidiary’s rating was upgraded by A.M. Best Company, Inc. to “A-,” we did not directly write a significant amount of insurance policies produced by CoverX, but instead utilized fronting arrangements under which we contracted with third party insurers, or fronting insurers, to directly write the policies produced by CoverX. Under these fronting arrangements, we then controlled the cession of the insurance from the fronting insurer and either assumed most of the risk under these policies as a reinsurer or arranged for it to be ceded directly to other reinsurers. In connection with our insurance subsidiary’s rating upgrade, we were able to eliminate most of our fronting relationships by May 2005 and become the direct writer of substantially all of the policies produced by CoverX.

      Our direct and assumed written premiums grew from $48.7 million to $175.9 million from 2003 to 2005. These amounts do not include $71.5 million and $12.6 million of premiums in 2003 and 2005, respectively, that were produced and underwritten by CoverX and directly written by our fronting insurers for unaffiliated insurers. A discussion of how the shift from relying on fronting relationships to directly writing insurance has impacted our financial presentation and our direct and assumed written premiums is set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview.”

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      We have written general liability insurance for the security industry, which includes security guards and detectives, alarm installation and service businesses, and safety equipment installation and service businesses, for 33 years. We focus on small and mid-size accounts that are often underserved by other insurance companies. For 2005 and the six months ended June 30, 2006, our direct and assumed written premiums from security classes was 39.3% and 30.8%, respectively, of our total direct and assumed written premiums. Our loss and allocated loss adjustment expense ratio, on a weighted average basis, for security classes has been 63.2% over the past 19 accident years and 39.0% over the past three accident years. A loss and allocated loss adjustment expense ratio consists of the total net incurred losses and allocated loss adjustment expenses related to a specified class or classes of business over a specified time period divided by the total net earned premium related to a specified class or classes of business over the same time period. We believe that this calculation is useful in providing information on the historical long term underwriting performance of our business from security classes and is an indicator of how an insurance company has managed its risk exposure.

      We have leveraged our nationally recognized CoverX brand, our broad distribution channels through CoverX, and our underwriting and claims expertise to expand our business into other specialty classes. For example, we have leveraged our experience in insuring the security risks of the contractors that install safety and fire suppression equipment, which often involves significant plumbing work and exposure, into the underwriting of other classes of risks for plumbing contractors. We write general liability insurance for other specialty classes primarily consisting of contractor classes of business, including roofing contractors, plumbing contractors, electrical contractors, energy contractors, and other artisan and service contractors, and, most recently, legal professional liability coverage. As part of this extension of our business, we have increased our underwriting staff and opened regional offices in Chicago, Dallas, Naples, Florida and Boston. For 2005 and the six months ended June 30, 2006, our direct and assumed written premiums from other specialty classes represented 60.7% and 69.2%, respectively, of our total direct and assumed written premiums. Our loss and allocated loss adjustment expense ratio, on a weighted average basis, for other specialty classes has been 39.6% over the past three accident years and 48% over the past six accident years, which represents the period in which we have expanded our business in other specialty classes. We believe this calculation is useful in providing information on the underwriting performance of business from other specialty classes for the six-year period. Because we have limited experience in these classes compared to security classes, the loss and allocated loss adjustment expense ratio may not be indicative of the long term underwriting performance of our business from other specialty classes.

      Our insurance services business provides underwriting, claims and other insurance services to third parties, including insurance carriers and customers, and generated $10.5 million in fee income in 2005. Most of this revenue is generated by ARPCO, through which we provide third party administration services for risk sharing pools of governmental entity risks, including underwriting, claims, loss control and reinsurance services.

      For the year ended December 31, 2005, our operating income was $40.4 million, a 38% increase over the same period in 2004, and our net income was $22.8 million, a 29.0% increase over the over the same period in 2004. For the six months ended June 30, 2006, our operating income was $22.4 million, a 15% increase over the six months ended June 30, 2005, and our net income was $11.3 million, a 5% decrease from the same period in 2005. The changes in net income from 2004 to 2005 and from the six months ended June 30, 2006 compared to the corresponding period in 2005 were not proportional to the respective changes in operating income due to interest expense incurred after August 17, 2005 on the $65 million in senior notes issued to finance the purchase of FMFC shares. As of June 30, 2006, we had total assets of $419.4 million and stockholders’ equity of $74.5 million.

Competitive Strengths

      The following competitive strengths drive our ability to execute our business plan and growth strategy:

•  Recognized Brand and Nationwide Distribution Platform. Our CoverX brand has been well-known among insurance brokers and agents for over 30 years. Brokers and agents have depended upon us to provide a consistent insurance market since 1973 for security guards and detectives, alarm

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	installation and service businesses and safety equipment installation and service businesses. We have developed relationships with numerous brokers nationwide, and produced business from approximately 1,000 different brokers in 2005. Throughout our history, we have successfully leveraged our brand and broker distribution network to enter into other specialty classes of business.
•	Proprietary Data and Underwriting Expertise. Recognizing the importance of the collection of claims and loss information, we have developed and maintained an extensive database of underwriting and claims information that we believe is unmatched by our competitors and which includes over 20 years of loss information. We believe our database and underwriting expertise allow us to price the risks that we insure more appropriately than our competitors. We also enhance our historical risk database by using our knowledge to draft extensively customized forms which precisely define the exposures that we insure.
•	Opportunistic Business Model. Because CoverX controls a broad policy distribution network through its relationships with brokers and possesses significant underwriting expertise, we have the ability to selectively increase or decrease the underwriting exposure we retain based upon the pricing environment and how the exposure fits with our underwriting and capital management criteria. We have the ability to offset lower net written premiums by generating higher fee income by either underwriting through CoverX on behalf of third party insurance carriers or ceding more risk to reinsurers.
•	Cost-Efficient Operating Structure. We believe that our cost-efficient operating structure allows us to focus on underserved, small accounts more profitably than our competitors. We streamlined our underwriting and claims processes to create a paperless interactive process that requires significantly less administration. While the premiums generated from insurance policies produced by CoverX increased from $28.1 million in 2000 to $188.5 million in 2005, our total employees over that same period only increased from 110 to 132.
•	Significant Commission and Fee Income Earnings. We have demonstrated the ability to generate non-risk bearing commissions and fees that provide a significant recurring source of income, and as a result, our revenue and net income are less dependent upon our underwriting results.
•	Proven Leadership and Highly Experienced Employees. Our management team, led by our President and Chief Executive Officer, Richard H. Smith, has an average of over 25 years of insurance experience. Additionally, both our underwriters and our senior claims personnel average over 20 years of experience in the insurance industry.

Business Challenges

      We face the following challenges in conducting our business:

•  Our Continued Success is Dependent Upon Our Ability to Maintain Our Third Party Ratings to Continue to Engage in Direct Insurance Writing. Any downgrade in the rating that First Mercury Insurance Company receives from A.M. Best Company could prevent us from engaging in direct insurance writing or being able to obtain adequate reinsurance on competitive terms, which could lead to decreased revenue and earnings.

•  We Need to Maintain Adequate Reserves. Our actual incurred losses may exceed the loss and loss adjustment expense reserves we maintain, which could have a material adverse effect on our results of operations and financial condition.

•  We Bear Credit Risk With Respect to Our Reinsurers. We continue to have primary liability on risks we cede to reinsurers. If any of these reinsurers fails to pay us on a timely basis or at all, we could experience losses.

•  Our Continued Success is Dependent Upon Our Ability to Obtain Reinsurance on Favorable Terms. We use significant amounts of reinsurance to manage our exposure to market and insurance risks and to enable us to write policies in excess of the level that our capital supports. Without adequate levels of appropriately priced reinsurance, the level of premiums we can underwrite could be materially reduced.

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•  A Substantial Portion of Our Business is Concentrated in the Security Industry. Our direct and assumed written premiums for security classes represented 39.3% and 30.8% of our total premiums produced in 2005 and the six months ended June 30, 2006, respectively. As a result, any adverse changes in the security insurance market could reduce our premiums.

•  We Operate in a Highly Competitive Market. It is difficult to attract and retain business in the highly competitive market in which we operate. As a result of this intense competition, prevailing conditions relating to price, coverage and capacity can change very rapidly and we might not be able to effectively compete.

Strategy

      We intend to grow our business while enhancing underwriting profitability and maximizing capital efficiency by executing the following strategies:

•  Profitably Underwrite. We will continue to focus on generating an underwriting profit in each of our classes, regardless of market conditions. Our average combined ratio for the last three years was 69.4%, comprised of an average loss ratio of 51.4% and an average expense ratio of 18.0%. Our ability to achieve similar underwriting results in the future depends on numerous factors discussed in the “Risk Factors” section and elsewhere in this prospectus, many of which are outside of our control.

•  Opportunistically Grow. We plan to opportunistically grow our business in markets where we can use our expertise to generate consistent profits. Our growth strategy includes the following:

•  Selectively Retain More of the Premiums Generated from Insurance Policies Produced by CoverX. In 2005, our insurance subsidiaries retained 56% of the premiums generated from insurance policies produced by CoverX either by directly writing these premiums or by assuming these premiums under our fronting arrangements. The remaining portion, or 44%, of these premiums were ceded to reinsurers through quota share and excess of loss reinsurance or retained by the issuing fronting carriers. We intend to continue to selectively retain more of these premiums and to use quota share and other reinsurance arrangements.

•  Selectively Expand Geographically and into Complementary Classes of General Liability Insurance. We strategically provide general liability insurance to certain targeted niche market segments where we believe our experience and infrastructure give us a competitive advantage. We believe there are numerous opportunities to expand our existing general liability product offerings both geographically and into complementary classes of specialty insurance. We intend to identify additional classes of risks that are related to our existing insurance products where we can leverage our experience and data to profitably expand.

•  Enter into Additional Niche Markets and Other Specialty Commercial Lines of Business. We plan to leverage our brand recognition, extensive distribution network, and underwriting expertise to enter into new E&S lines or admitted markets in which we believe we can capitalize on our underwriting and claims platform. We intend to expand into these markets and other lines organically, as well as by making acquisitions and hiring teams of experienced underwriters.

•  Actively Pursue Opportunities for Fee Income Growth. To the extent we have more market opportunities than we choose to underwrite on our own balance sheet, we plan to pursue and leverage these opportunities to generate fee income by providing our distribution, underwriting and claims services to third party carriers or insureds.

•  Continue to Focus on Opportunistic Business Model. We intend to selectively increase or decrease the underwriting exposure we retain based upon the pricing environment and how the exposure fits with our underwriting and capital management criteria. The efficient deployment of our capital, in part, requires that we appropriately anticipate the amount of premiums that we will write and retain. Changes in the amount of premiums that we write or retain may cause our financial results to be less comparable from period to period.

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•  Efficiently Deploy Capital. To the extent the pursuit of the growth opportunities listed above require capital that is in excess of our internally generated capital, we may raise additional capital in the form of debt or equity in order to pursue these opportunities. We have no current specific plans to raise additional capital and do not intend to raise or retain more capital than we believe we can profitably deploy in a reasonable time frame. Maintaining at least an “A-” rating from A.M. Best is critical to us, and will be a principal consideration in our decisions regarding capital as well as our underwriting, reinsurance and investment practices.

Industry Background

Overview

      We compete in the property and casualty, or P&C, insurance industry and, more specifically, the E&S lines sector of that industry which generated $33.0 billion of premium in 2004 according to A.M. Best.

Admitted Insurance Companies Compared to E&S Lines Insurance Companies

      The majority of the insurance companies in the U.S. are known as standard, or admitted, carriers. Admitted insurance carriers are often required to be licensed in each state in which they write business and to file policy forms and fixed rate plans with these states’ insurance regulatory bodies. Businesses with unique risks often cannot find coverage underwritten by admitted insurance companies because admitted insurance companies do not have the policy form or rate flexibility to properly underwrite such risks. While some businesses choose to self-insure when they cannot find acceptable insurance coverage in the standard insurance market, many look for coverage in the E&S lines market. E&S lines insurance companies need state insurance department authorization to write insurance in most of the states in which they do business, but they do not typically have to file policy forms or fixed rate plans. The E&S lines insurance market fills the insurance needs of businesses with unique risk characteristics because E&S lines insurance carriers have the policy form and rate flexibility to underwrite these risks individually.

      Competition in the E&S lines market tends to focus less on price and more on availability and quality of service. The E&S lines market is significantly affected by the conditions of the insurance market in general. During times of hard market conditions (i.e., those favorable to insurers), as rates increase and coverage terms become more restrictive, business tends to move from the admitted market back to the E&S lines market. When soft market conditions are prevalent, standard insurance carriers tend to loosen underwriting standards and seek to expand market share by moving into business lines traditionally characterized as E&S lines.

Growth and Size of the Market

      The property and casualty insurance industry has historically experienced market cycles in which pricing was more or less competitive. However, because casualty claims emerge over time, the industry does not always recognize inadequate pricing until losses emerge and as a result companies may have less capital to deploy. The 1990s was a period of particularly intense price competition. As a result, the industry suffered from inadequate premium levels, less favorable policy terms and conditions and reduced profitability. Significant industry losses began to emerge in 1998 and continued throughout 1999. By 2000, price increases and tighter contract terms were widespread as companies reacted to the frequency and severity of claims emerging from earlier in the decade and from asbestos and environmental exposures written prior to 1987.

      The trend toward higher pricing and narrower coverage accelerated in 2001 as a result of the following factors:

•  losses caused by the terrorist attacks of September 11, 2001, which resulted in one of the largest insured losses in history, estimated at $30 billion to $40 billion by A.M. Best;

•  the low interest rate environment that forced property and casualty companies to adopt more profitable underwriting practices as investment returns decreased;

•  the existence of substantial reserve deficiencies, resulting from asbestos, environmental and directors and officers liability related claims and from poor underwriting practices in the late 1990s;

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•  substantial investment losses as a result of a decline in the global equity markets and significant credit losses, with Insurance Services Offices, which we refer to as ISO, estimating that the U.S. property and casualty industry as a whole had realized and unrealized losses from the end of 2000 through the end of 2002 of $33 billion;

•  the exit or insolvency of several large insurance market participants, each of which either exited particular lines of business or significantly reduced their activities;

•  the ratings downgrades of a significant number of insurers and reinsurers; and

•  the general lack of capacity in certain specialty classes of insurance.

      We believe that these trends have slowed and that the current insurance market has become more competitive in terms of pricing and policy terms and conditions. New competitors have entered the E&S lines market, including several start-up companies and larger standard insurers.

      While the standard P&C insurance market is significantly larger than the E&S lines market in terms of total premiums written, the E&S lines market has been one of the fastest growing sectors of the P&C industry. According to A.M. Best, over the 10-year period from 1994 through 2004, the surplus lines market grew from an estimated $8.8 billion in direct premiums written to $33.0 billion, representing an increase of 275%. In contrast, the U.S. property and casualty industry grew more moderately from $263.7 billion in direct premiums written to $477.1 billion over the same time period, representing an increase of 81%. During this period, the surplus lines market as a percentage of the total property and casualty industry grew from approximately 3.3% to 6.9%.

Underwriting Operations

Security Classes

      We underwrite and provide several classes of general liability insurance for the security industry, including security guards and detectives, alarm installation and service businesses, and safety equipment installation and service businesses. In 2005, $74.2 million of our premiums produced were within security classes of specialty insurance, which represented 39% of our total premiums produced for that year.

      For security classes, we focus on underwriting for small (premiums less than $10,000) and mid-sized (premiums from $10,000 to $50,000) accounts. Approximately 55% of our premiums produced in 2005 for security classes consisted of premium sizes of $50,000 or below. In 2005, our average premium size for security classes was $9,200. Pursuing these smaller accounts helps us avoid competition from larger competitors. As of December 31, 2005, we had approximately 8,000 policies in force for security classes. The majority of these policies have policy limits of $1 million per occurrence. Although, we have reinsurance arrangements in place that would allow us to selectively underwrite policies with limits of up to $6 million per occurrence, because of our current risk tolerance, less than 5% of the policies we write for security classes have limits in excess of $1 million. Our policy limits typically do not include defense costs.

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      The map below indicates the percentage of our premiums produced for security classes by each state in 2005.

      Security guards and detectives: Approximately 41.0% of our premiums produced for security classes in 2005 consisted of coverages for security guards and detectives. Coverages are available for security guards, patrol agency personnel, armored car units, private investigators and detectives.

      Alarm installation and service businesses: Approximately 27.5% of our premiums produced for security classes in 2005 were composed of coverages for security alarm manufacturers and technicians. Coverages are available for sales, service and installation of residential and commercial alarm systems as well as alarm monitoring.

      Safety equipment installation and service businesses: Approximately 31.3% of our premiums produced for security classes in 2005 were composed of coverages for fire suppression companies. Coverages are available for sales, service and installation of fire extinguishers and sprinkler and chemical systems, both on residential and commercial systems.

Other Specialty Classes

      We have underwritten various other specialty classes of insurance at different points throughout our history. We have leveraged our core strengths used to build our business for security classes, which include our nationally recognized CoverX brand, our broad wholesale broker distribution through CoverX, and our underwriting and claims expertise to expand our business into other specialty classes. For example, we have leveraged our experience in insuring the security risks of the contractors that install safety and fire suppression equipment, which often involves significant plumbing work and exposure, into the underwriting of other classes of risks for plumbing contractors. We provide general liability insurance for other specialty classes consisting primarily of contractor classes of business, including roofing contractors, plumbing contractors, electrical contractors, energy contractors, and other artisan and service contractors, and, most recently, legal professional liability coverage. Our senior underwriters for the other specialty classes have extensive industry experience and longstanding relationships with the brokers and agents that produce the business.

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      Our underwriting policies and targets for other specialty classes are similar to our policies and targets for security classes. Our target account premium size is $50,000 and below. In 2005, we wrote approximately 5,200 policies with an average premium size of approximately $22,000. The majority of our policies for other specialty classes have coverage limits of $1 million, although we have the ability to selectively underwrite policies with limits of $6 million per occurrence. Less than 4% of our policies for other specialty classes have limits in excess of $1 million. Our policy limits typically do not include defense costs.

      The map below indicates the percentage of premiums for other specialty classes produced by CoverX in each state in 2005. Due to the historical regulatory and legal environment, we choose to underwrite very little for other specialty classes in California other than legal professional liability; however, we believe that this environment has improved, and California, as the largest E&S lines market in the country, will be an opportunity for expansion and growth.

Insurance Services Operations

      Our insurance services business provides underwriting, claims and other insurance services to third parties, including insurance carriers and customers. We generated $10.5 million in fee income in 2005 from our insurance services operations. These insurance services operations are conducted through ARPCO and CoverX.

      ARPCO has multi-year contracts with five public entity pools in four states as well as an excess reinsurance risk-sharing pool utilized by all of the public entity risk pools. Each pool is composed of public entity members (such as cities, townships, counties, etc.) that have joined together by means of an intergovernmental contract to pool their insurance risk and provide related insurance services to its members. The pooling is authorized by state statute or as noted in the enabling legislation. Pooling provides a risk sharing alternative to the traditional purchase of commercial insurance. These governmental risk-sharing pools are located in the Midwest. ARPCO provides underwriting, claims, loss control, reinsurance placement and other third party administration services to these pools. ARPCO receives fees for providing or subcontracting the underwriting, marketing, accounting, claims supervision, investing and reinsurance services from the individual pools.

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      We also utilize our underwriting expertise to provide certain underwriting services to third party insurance carriers through CoverX. We focus our efforts on classes of business whose risk or limits profile do not fit into our own insurance companies or where other insurance carriers have different risk profiles or different target rates of returns.

Distribution

      All of the insurance policies that we write or assume are distributed and underwritten through our subsidiary, CoverX. We distribute our products through a nationwide network of licensed E&S lines wholesalers as well as certain large retail agencies with a specialty in the markets that we serve. In 2005, we placed business with approximately 825 brokers and agents for security classes of general liability insurance and 360 brokers and agents for the other specialty classes.

      CoverX is well known within the security industry due to its long presence in the marketplace and, as a result, has developed significant brand awareness. Because an individual broker’s relationship is with CoverX and not the insurance companies, CoverX is able to change the insurance carrier providing the underwriting capacity without significantly affecting its revenue stream. We typically do not grant our agents and brokers any underwriting or claims authority. We have entered into a contractual relationship with one underwriter with respect to our legal professional liability insurance class. We select our agents and brokers based on industry expertise, historical performance and business strategy.

      Our longstanding presence in the security industry has enabled us to write policies within security classes from a variety of sources. We generate business from traditional E&S lines insurance wholesalers and specialists that focus on security guards and detectives, alarm installation and service businesses, and safety equipment installation and service businesses. In 2005, our top five wholesale brokers represented 26% of our premiums produced for security classes and no wholesale broker accounted for more than 10% of our premiums produced.

      We generate the majority of our business for other specialty classes from traditional E&S lines insurance wholesalers. The underwriters in our regional offices often have longstanding relationships with local and regional wholesale brokers who provide business to them. In addition, we have leveraged our CoverX brand to facilitate the development of new relationships with wholesalers in other specialty classes. In 2005, our top five wholesale brokers represented 27% of our premiums produced for other specialty classes and no wholesale broker accounted for more than 12% of our premiums produced.

      Our underwriting personnel regularly visit key agents and brokers in order to review performance and to discuss our insurance products. Additionally, we monitor the performance of the policies produced by each broker and generally will terminate the relationship with an agent or broker if the policies he or she sells produce excessive losses. We typically pay a flat commission rate of 15.0% of premium to our agents and brokers, although commissions can range from below 12.0% to 17.5%. By distributing our products through CoverX rather than a third party managing general agent, or MGA, we avoid the additional commission payments of 10.0% or more that many traditional E&S lines insurance carriers must pay to access MGAs as a distribution source. Our name recognition in the industry allows us to use this strategy without losing the opportunity to generate business. We have not entered into any contingent commission arrangements with agents or brokers.

Underwriting

      Our underwriting is an intensive process using policy applications, our proprietary information and industry data, as well as inspections, credit reports and other validation information. Our long-term success depends upon the efforts of our underwriting department to appropriately understand and underwrite risks and provide appropriate contract language to accomplish that. All submissions are reviewed by a company underwriter with expertise in the class of business being reviewed. Our policy is to review each file individually to determine whether coverage will be offered, and, if an offer is made, to determine the appropriate price, terms, endorsements and exclusions of coverage. We write most coverage as an E&S lines carrier, which provides the flexibility to match price and coverage for each individual risk. We generally do not delegate underwriting authority outside of the company; however we have entered into a

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contractual relationship with one underwriter with respect to our legal professional liability insurance class delegating such authority.

      We use industry standard policy forms customized by endorsements and exclusions that limit coverage to these risks underwritten and acceptable to us. For example, most security policies have exclusions and/or limitations for operations outside the normal duties identified by an applicant. The use of firearms might be prohibited, operations such as work in bars or nightclubs might be prohibited, or the location of operations of the policyholder may be restricted. All policies currently being written have mold, asbestos, and silica exclusions. Many policies also contain employment practices liability exclusions and professional services exclusions.

      We maintain proprietary loss cost information for security classes. In order to price policies for other specialty classes, we begin with the actuarial loss costs published by ISO. We make adjustments to pricing based on our loss experience and our knowledge of market conditions. We attempt to incorporate the unique exposures presented by each individual risk in order to price each coverage appropriately. Through our monitoring of our underwriting results, we seek to adjust prices in order to achieve a sufficient rate of return on each risk we underwrite. We have more latitude in adjusting our rates as an E&S lines insurance carrier than a standard admitted carrier. Since we typically provide coverage for risks that standard carriers have refused to cover, the demand for our products tends to be less price sensitive than standard carriers.

      An extensive information reporting process is in place for management to review all appropriate near term and longer term underwriting results. We do not have production volume requirements for our underwriters. Incentive compensation is based on multiple measures representing quality and profitability of the results.

      We have 12 underwriters that underwrite for security classes out of our headquarters in Southfield, Michigan. Our Vice President of Underwriting has led this underwriting group for the past four years and has 17 years of insurance industry experience. Our strategy is to receive a submission for as many risks for the security classes that we target as possible and generate a high quote and bind rate. In 2005, we received over 14,000 policy submissions within security classes, we quoted over 10,000 of those submissions, and bound over 8,000 policies.

      We have 12 underwriters that underwrite for other specialty classes out of our four regional underwriting offices. Our Chief Underwriting Officer-Specialty Underwriting, who joined us in January 2005 and has over 25 years of underwriting experience, leads this underwriting group. Because other specialty classes encompass a broader range of classes compared to security classes, we tend to receive submissions outside of our targeted other specialty classes and are more selective in deciding which submissions to quote. In 2005, we received over 30,000 policy submissions within other specialty classes and bound approximately 3,000 policies.

      In our insurance services business operated by ARPCO, we have three employees who provide underwriting or underwriting review services for the public entity pools that we manage. We also have two employees in CoverX providing underwriting services on behalf of third party insurance carriers.

Claims

      Our claims department consists of 21 people supporting our underwriting operations and 13 people supporting our insurance services operations. Our Chief Claims Officer has over 25 years of experience in the property and casualty industry and each of our senior claims professionals have over 10 years of experience. Since 1985, substantially all of our claims, including the claims for the years when fronting companies were utilized, have been handled by our claims department.

      Our claims policy is to aggressively investigate all potential claims and promptly evaluate claims exposure, which permits us to establish claims reserves early in the claims process. Reserves are set at an estimate of full settlement value at all times. We attempt to negotiate all claims to the earliest appropriate resolution.

      Our claims department has established authorization levels for each claims professional, based on experience, capability and knowledge of the issues. Claims files are regularly reviewed by management and

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higher exposure cases are reviewed by a broader “round-table” group, which may include underwriting representatives and/or senior management, where appropriate. We have substantial legal opinions, legal interpretation, and case experience to guide us in the development of appropriate policy language. The claims and underwriting departments frequently meet to discuss emerging trends or specific case experiences to guide those efforts. A management information and measurement process is in place to measure results and trends of the claims department. All claims operations use imaging technology to produce a paperless environment with all notes, communications and correspondence being a part of our files. Claims adjusters have complete access to the imaged underwriting files, including all policy history, to enable them to better understand coverage issues, underwriter intention, and all other documentation.

      For the security guard and detective portion of security classes, we typically receive claims related to negligence, incompetence or improper action by a security guard or detective. Alarm claims for security classes include installation errors by alarm technicians or alarm malfunctions. Claims related to safety equipment installation and service business are similar to those of the alarm program. We insure that the insured’s safety or fire suppression systems operate as represented by the insured.

      The nature of claims on policies for other specialty classes are similar to those of security classes because the general liability coverage is essentially the same. Instead of receiving claims relating to the actions of a security guard or detective, however, the claims relate to the negligence or improper action of a contractor, manufacturer, or owners, landlords and tenants or to the failure of a contractor’s “completed operations” or a manufacturer’s product to function properly.

      There were approximately 2,000 new claims reported to us during 2005, and we had a total of 1,600 pending claims as of December 31, 2005.

      The claims professionals supporting our insurance services operations provide services through ARPCO. For each of the pools which ARPCO administers, ARPCO provides oversight and claims management services over the third party administrators providing claims adjusting services for the individual pools, and in some cases ARPCO also directly provides claims adjusting services. ARPCO receives fees for these services.

Reinsurance

      We enter into reinsurance contracts to diversify our risks and limit our maximum loss arising from large or unusually hazardous risks or catastrophic events and so that, given our capital constraints, we can provide the aggregate limits that our clients require. Additionally, we use reinsurance to limit the amount of capital necessary to support our operations and to facilitate growth. Reinsurance involves a primary insurance company transferring, or “ceding,” a portion of its premium and losses in order to control its exposure. The ceding of liability to a reinsurer does not relieve the obligation of the primary insurer to the policyholder. The primary insurer remains liable for the entire loss if the reinsurer fails to meet its obligations under the reinsurance agreement.

      Our treaty reinsurance is contracted under both quota share and excess of loss reinsurance contracts. We have historically adjusted our level of quota share reinsurance based on our premiums produced and our level of capitalization, as well as our risk appetite for a particular type of business. We currently maintain a 50% quota share on all of our business other than our legal professional liability class, for which we maintain a variable 70% to 85% quota share, and our umbrella policies, for which we maintain a 90% quota share. Our excess of loss reinsurance is used to limit our maximum exposure per claim occurrence. We currently maintain a $500,000 excess of $500,000 per occurrence coverage. Our quota share reinsurance treaty renews on January 1, 2007 for specialty classes for which we write insurance and on April 1, 2007 for the legal professional liability class. Our excess of loss treaties renew on January 1, 2007.

      In addition to our treaty reinsurance, we also may occasionally purchase facultative reinsurance, which is obtained on a case-by-case basis for all or part of the insurance provided by a single risk, exposure, or policy. We also currently assume reinsurance from fronting carriers on a small portion of our business and have historically assumed a significant portion of our business from various fronting carriers. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview” for a complete discussion of our historic fronting arrangements.

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      For a more detailed discussion of our reinsurance structure over time, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Reinsurance — Ceded Reinsurance” and “Risk Factors — Risks Relating to Our Business.”

      The following is a summary of our significant treaty ceded reinsurance programs:

Policy Type	Company Policy Limit	Reinsurance Coverage	Company Retention
Primary Security and Specialty General Liability	Up to $1.0 million per occurrence	$500,000 excess of $500,000 per occurrence 50% quota share up to $1.0 million per occurrence	Up to $250,000 per occurrence
Legal Professional Liability	Up to $2.0 million per occurrence	Variable Quota Share: 70% quota share on policies with $1.0 million limit 85% quota share on policies with $2.0 million limit	Up to $300,000 per occurrence
Umbrella Security and Specialty General Liability	Up to $5.0 million excess of $1.0 million per occurrence	90% quota share up to $5.0 million per occurrence	Up to $500,000 per occurrence

Technology

      We believe that advanced information processing is important in order for us to maintain our competitive position. We have invested significant resources to move toward a paperless environment for record-keeping and for underwriting and claims management, which allows us to operate efficiently and to share data seamlessly across our organization in order to reduce administrative expenses and monitor our exposure. We have developed an extensive data warehouse of underwriting and claims data for security classes and have implemented advanced management information systems to run substantially all of our principal data processing and financial reporting software applications. We use the Phoenix system by Allenbrook for policy administration and claims systems. We are also implementing imaging and workflow systems to eliminate the need for paper files and reduce processing errors. Our operating systems allow all of our offices to access files at the same time while discussing underwriting policies regarding certain accounts.

Competition

      The P&C insurance industry is highly competitive. We compete with domestic and international insurers, many of which have greater financial, marketing and management resources and experience than we do and many of which have both admitted and E&S lines insurance affiliates and, therefore, may be able to offer a greater range of products and services than we can. We also may compete with new market entrants in the future as the E&S lines market has low barriers to entry. Competition is based on many factors, including the perceived market and financial strength of the insurer, pricing and other terms and conditions, services, the speed of claims payment, the reputation and experience of the insurer and ratings assigned by independent rating organizations such as A.M. Best.

      Our primary competitors with respect to security classes are MGAs supported by various insurance or reinsurance partners. These MGAs include All Risks, Ltd., Brownyard Programs, Ltd., Mechanics Group and RelMark Program Managers. These MGAs provide services similar to CoverX, and they typically do not retain any insurance risk on the business they produce. These MGAs also typically do not handle the claims on the business they produce, as claims handling is retained by the company assuming the insurance risk or outsourced to third party administrators. We also face competition from U.S. and non-U.S. insurers,

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including American International Group, Inc. (Lexington Insurance Company) in the security guard segment, The Hartford Financial Services Group, Inc. in the alarm segment, and ACE Limited in the safety segment.

      Our primary competitors with respect to other specialty classes tend to be E&S lines insurance carriers. Competitors vary by region and market, but include W.R. Berkley Corp. (Admiral Insurance Company), Argonaut Group (Colony Insurance Company), RLI Corp, American International Group, Inc. (Lexington Insurance Company) and International Financial Group, Inc. (Burlington Insurance Co.).

Ratings

      Many insurance buyers, agents and brokers use the ratings assigned by A.M. Best and other rating agencies to assist them in assessing the financial strength and overall quality of the companies from which they are considering purchasing insurance. FMIC was assigned a letter rating of “A-” by A.M. Best following the completion of the investment by Glencoe Capital, LLC in June 2004 and maintained such rating after the issuance of the debt in August 2005. An “A-” rating is the fourth highest of 15 rating categories used by A.M. Best and is the lowest rating necessary to compete in our targeted markets. A.M. Best assigns each insurance company a Financial Size Category, or FSC. The FSC is designed to provide a convenient indicator of the size of a company in terms of its statutory surplus and related accounts. There are 15 categories with FSC I being the smallest and FSC XV being the largest. As of the date of this prospectus, A.M. Best has assigned FMIC an FSC VII because its Adjusted Policyholders Surplus is between $50 million and $100 million. ANIC is assigned a rating of “B+” by A.M. Best, which is the sixth highest rating given. In evaluating a company’s financial and operating performance, A.M. Best reviews the company’s profitability, indebtedness and liquidity, as well as its book of business, the adequacy and soundness of its reinsurance, the quality and estimated market value of its assets, the adequacy of its unpaid loss and loss adjustment expense, the adequacy of its surplus, its capital structure, the experience and competence of its management and its market presence. This rating is intended to provide an independent opinion of an insurer’s financial strength and its ability to meet ongoing obligations to policyholders and is not directed toward the protection of investors. Ratings by rating agencies of insurance companies are not ratings of securities or recommendations to buy, hold or sell any security and are not applicable to the common stock being offered by this prospectus. See “Risk Factors — Risks Relating to Our Business — Any downgrade in the A.M. Best rating of FMIC would prevent us from successfully engaging in direct insurance writing or obtaining adequate reinsurance on competitive terms, which would lead to a decrease in revenue and net income.”

Properties

      Our headquarters is located in Southfield, Michigan in a building owned by FMIC and has approximately 25,000 square feet. CoverX also leases office space in Florida, Illinois, Massachusetts and Texas. We believe our current space is adequate for our current operations.

Employees

      As of June 30, 2006, we had 130 full-time employees and 6 part-time employees. We have employment agreements with certain of our executive officers, which are described under “Management — Employment and Related Agreements.”

Legal proceedings

      We are, from time to time, involved in various legal proceedings in the ordinary course of business, including litigation involving claims with respect to policies that we write. We do not believe that the resolution of any currently pending legal proceedings, either individually or taken as a whole, will have a material adverse effect on our business, results of operations or financial condition.

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INSURANCE AND OTHER REGULATORY MATTERS

Insurance Regulation

      Our insurance subsidiaries are subject to regulation under the insurance statutes of various jurisdictions, including Illinois, the domiciliary state of FMIC, and Minnesota, the domiciliary state of ANIC. In addition, we are subject to regulation by the state insurance regulators of other states and foreign jurisdictions in which we or our operating subsidiaries do business. State insurance regulations generally are designed to protect the interests of policyholders, consumers or claimants rather than stockholders, noteholders or other investors. The nature and extent of state regulation varies by jurisdiction, and state insurance regulators generally have broad administrative power relating to, among other matters, setting capital and surplus requirements, licensing of insurers and agents, establishing standards for reserve adequacy, prescribing statutory accounting methods and the form and content of statutory financial reports, regulating certain transactions with affiliates and prescribing the types and amounts of investments.

      In recent years, the state insurance regulatory framework has come under increased federal scrutiny, and some state legislatures have considered or enacted laws that alter and, in many cases, increase state authority to regulate insurance companies. Although the federal government is not the primary direct regulator of the insurance business, federal initiatives often affect the insurance industry and possible increased regulation of insurance by the federal government continues to be discussed by lawmakers.

      In addition to state imposed insurance laws and regulations, our insurance subsidiaries are subject to the statutory accounting practices and reporting formats established by the National Association of Insurance Commissioners, or NAIC. The NAIC also promulgates model insurance laws and regulations relating to the financial and operational regulation of insurance companies. These model laws and regulations generally are not directly applicable to an insurance company unless and until they are adopted by applicable state legislatures or departments of insurance. All states have adopted the NAIC’s financial reporting form, which is typically referred to as the NAIC “annual statement,” and all states generally follow the codified statutory accounting practices promulgated by the NAIC. In this regard, the NAIC has a substantial degree of practical influence and is able to accomplish certain quasi legislative initiatives through amendments to the NAIC annual statement and applicable accounting practices and procedures.

      Insurance companies also are affected by a variety of state and federal legislative and regulatory measures and judicial decisions that define and qualify the risks and benefits for which insurance is sought and provided. These include redefining risk exposure in such areas as product liability, environmental damage and workers’ compensation. In addition, individual state insurance departments may prevent premium rates for some classes of insureds from adequately reflecting the level of risk assumed by the insurer for those classes. Such developments may result in adverse effects on the profitability of various lines of insurance. In some cases, these adverse effects on profitability can be minimized, when possible, through the repricing of coverages to the extent permitted by applicable regulations, or the limitation or cessation of the affected business, which may be restricted by state law.

Required Licensing

      FMIC operates on a non-admitted or surplus lines basis and is authorized in 51 states and jurisdictions. While FMIC does not have to apply for and maintain a license in those states, it is subject to meeting and maintaining eligibility standards or approval under each particular state’s surplus lines laws in order to be an eligible surplus line carrier. FMIC maintains surplus line approvals or eligibility in all states in which it operates and therefore FMIC is not subject to the rate and form filing requirements applicable to licensed or “admitted” insurers.

      Surplus lines insurance must be written through agents and brokers who are licensed as surplus lines brokers. The broker or their retail insurance agents generally are required to certify that a certain number of licensed admitted insurers had been offered and declined to write a particular risk prior to placing that risk with us.

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      ANIC is licensed and can operate on an admitted basis in its home state of Minnesota and in 14 other states. Insurers operating on an admitted basis must file premium rate schedules and policy forms for review and, in some states, approval by the insurance regulators in each state in which they do business on an admitted basis. Admitted carriers also are subject to other market conduct regulation and examinations in the states in which they are licensed. Insurance regulators have broad discretion in judging whether an admitted insurer’s rates are adequate, not excessive and not unfairly discriminatory.

Insurance Holding Company Regulation

      Our insurance subsidiaries operate as part of an insurance holding company system and are subject to holding company regulation in the jurisdictions in which they are licensed. These regulations require that each insurance company that is part of a holding company system register with the insurance department of its state of domicile and furnish information concerning contracts, transactions, and relationships between those insurance companies and companies within the holding company system. Transactions between insurance subsidiaries and their parents and affiliates generally must be disclosed to the state regulators, and prior approval or nondisapproval of the applicable state insurance regulator generally is required for any material or other specified transactions. The insurance laws similarly provide that all transactions and agreements between an insurance company and members of a holding company system must be fair and reasonable. FMIC and ANIC are parties to various agreements, including underwriting agreements, a management service agreement, and a tax sharing agreement with members of the holding company system and are parties to reinsurance agreements with each other, all of which are subject to regulation under state insurance holding company acts.

      In addition, a change of control of an insurer or of any controlling person requires the prior approval of the domestic state insurance regulator. Generally, any person who acquires 10% or more of the outstanding voting securities of the insurer or its parent company is presumed to have acquired control of the insurer. A person seeking to acquire control, directly or indirectly, of an insurance company or of any person controlling an insurance company generally must file with the domestic insurance regulatory authority a statement relating to the acquisition of control containing certain information about the acquiring party and the transaction required by statute and published regulations and provide a copy of such statement to the insurer and obtain the prior approval of such regulatory agency for the acquisition.

Quarterly and Annual Financial Reporting

      Our insurance subsidiaries are required to file quarterly and annual financial reports with state insurance regulators utilizing statutory accounting practices, or SAP, rather than GAAP. In keeping with the intent to assure policyholder protection, SAP emphasize solvency considerations. See Note 13 to our consolidated financial statements included elsewhere in our prospectus for further information.

Periodic Financial and Market Conduct Examinations

      The insurance departments of our insurance subsidiaries’ states of domicile may conduct on-site visits and examinations of the affairs of our insurance subsidiaries, including their financial condition and their relationships and transactions with affiliates, typically every three to five years, and may conduct special or target examinations to address particular concerns or issues at any time. Insurance regulators of other states in which we do business also may conduct examinations. The results of these examinations can give rise to regulatory orders requiring remedial, injunctive or other corrective action. Insurance regulatory authorities have broad administrative powers to regulate trade practices and to restrict or rescind licenses or other authorizations to transact business and to levy fines and monetary penalties against insurers, insurance agents and brokers found to be in violation of applicable laws and regulations. During the past five years, the insurance subsidiaries have had periodic financial reviews and have not been the subject of market conduct or other investigations or been required to pay any material fines or penalties.

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Risk-based Capital

      Risk-based capital, or RBC, requirements laws are designed to assess the minimum amount of capital that an insurance company needs to support its overall business operations and to ensure that it has an acceptably low expectation of becoming financially impaired. Regulators use RBC to set capital requirements considering the size and degree of risk taken by the insurer and taking into account various risk factors including asset risk, credit risk, underwriting risk and interest rate risk. As the ratio of an insurer’s total adjusted capital and surplus decreases relative to its risk-based capital, the RBC laws provide for increasing levels of regulatory intervention culminating with mandatory control of the operations of the insurer by the domiciliary insurance department at the so-called mandatory control level. At December 31, 2005, our insurance subsidiaries maintained RBC levels in excess of amounts that would require any corrective actions on our part.

IRIS Ratios

      The NAIC Insurance Regulatory Information System, or IRIS is part of a collection of analytical tools designed to provide state insurance regulators with an integrated approach to screening and analyzing the financial condition of insurance companies operating in their respective states. IRIS is intended to assist state insurance regulators in targeting resources to those insurers in greatest need of regulatory attention. IRIS consists of two phases: statistical and analytical. In the statistical phase, the NAIC database generates key financial ratio results based on financial information obtained from insurers’ annual statutory statements. The analytical phase is a review of the annual statements, financial ratios and other automated solvency tools. The primary goal of the analytical phase is to identify companies that appear to require immediate regulatory attention. A ratio result falling outside the usual range of IRIS ratios is not considered a failing result; rather, unusual values are viewed as part of the regulatory early monitoring system. Furthermore, in some years, it may not be unusual for financially sound companies to have several ratios with results outside the usual ranges. An insurance company may fall out of the usual range for one or more ratios because of specific transactions that are in themselves immaterial. As of December 31, 2005, FMIC had IRIS ratios outside the usual range in four of the IRIS tests relating to net written premiums and loss reserve development. An insurance company may become the subject of increased scrutiny when four or more of its IRIS ratios fall outside the range deemed usual by the NAIC. The nature of increased regulatory scrutiny resulting from IRIS ratios that are outside the usual range is subject to the judgment of the applicable state insurance department, but generally will result in accelerated review of annual and quarterly filings. Depending on the nature and severity of the underlying cause of the IRIS ratios being outside the usual range, increased regulatory scrutiny could range from increased but informal regulatory oversight to placing a company under regulatory control. Because FMIC had four ratios outside the usual range, we could become subject to greater scrutiny and oversight by regulatory authorities. To our knowledge, neither of the insurance companies is subject to increased regulatory scrutiny as a result of falling outside the usual range for the IRIS ratios.

      As of December 31, 2005, FMIC had IRIS ratios outside of the usual range, as set forth in the following table:

Ratio	Usual Range		Actual Results
Change in net written premiums		-33% to 33%		49	%
One-year reserve development to policyholders’ surplus		<20%		29	%
Two-year reserve development to policyholders’ surplus		<20%		69	%
Estimated current reserve deficiency to policyholders’ surplus		<25%		107	%

      Our net written premiums increased 49% in 2005, which is higher than the usual change in net written premiums by 16 percentage points. The change in net written premiums was primarily the result of the $26 million capital contribution made to FMIC in June 2004 which permitted us to write more premium. In addition, the Company has experienced growth in surplus from operating results of over

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$13.2 million since December 31, 2004. With this growth in capital and surplus, we increased our retention of the policies underwritten by CoverX.

      The unusual ranges with respect to the one-year and two-year reserve development to policyholder’s surplus and the estimated current reserve deficiency to policyholders’ surplus are due to changes in reserves made with respect to adverse development for accident years 2000 to 2002 in the security industry classes assumed during 1999 to 2001. See “Management’s Discussion and Analysis and Results of Operations — Loss and Loss Adjustment Expense Reserves.”

      Estimated current reserve deficiency to policyholders’ surplus estimates reserves as a ratio to earned premium based on historical developed reserves as a ratio of historical earned premium. We believe that our significant rate increases during 2003 and 2004 and our rapid growth in net written premiums has overstated our deficiency for estimated current reserve deficiency to policyholders’ surplus. The rate increases result in significantly higher earned premiums in 2005, without an equivalent increase in exposure to loss. As a result, the 2003 reserve to earned premium ratio, which is used in the calculation of the estimated reserve deficiency for 2005, may produce an upwardly biased estimate of the 2005 value. In an environment where a company is growing rapidly, historical ratios of reserves to earned premium will overstate current ratios of reserves to earned premium, since reserves arising from the experience of older accident years will be a smaller proportion of the total reserves of a growing company.

Restrictions on Paying Dividends

      We are a holding company with no business operations of our own. Consequently, our ability to pay dividends to stockholders and meet our debt payment obligations is dependent on dividends and other distributions from our subsidiaries. State insurance laws restrict the ability of our insurance company subsidiaries to declare stockholder dividends. State insurance regulators require insurance companies to maintain specified levels of statutory capital and surplus. Generally, dividends may be paid only out of earned surplus, and the amount of an insurer’s surplus following payment of any dividends must be reasonable in relation to the insurer’s outstanding liabilities and adequate to meet its financial needs. Further, prior approval from the insurance departments of our insurance subsidiaries’ states of domicile generally is required in order for our insurance subsidiaries to declare and pay “extraordinary dividends” to us. For FMIC, Illinois defines an extraordinary dividend as any dividend or distribution that, together with other distributions made within the preceding 12 months, exceeds the greater of 10% of FMIC’s surplus as of the preceding December 31st, or FMIC’s net income for the 12 month period ending the preceding December 31st, in each case determined in accordance with statutory accounting principles. FMIC must give the Illinois insurance regulator written notice of every dividend or distribution, whether or not extraordinary, within the time periods specified under applicable law. With respect to ANIC, Minnesota imposes a similar restriction on extraordinary dividends and requires a similar notice of all dividends after declaration and before paid. For ANIC, Minnesota defines an extraordinary dividend as any dividend or distribution that, together with other distributions made within the preceding 12 months, exceeds the greater of 10% of the insurer’s surplus as of the preceding December 31st, or ANIC’s net income, not including realized capital gains, for the 12 month period ending the preceding December 31st, in each case determined in accordance with statutory accounting principles. In 2005, 2004 and 2003, our insurance subsidiaries would have been permitted to pay up to $9.7 million, $8.9 million and $4.1 million, respectively, in ordinary dividends without the prior regulatory approval. State insurance regulatory authorities that have jurisdiction over the payment of dividends by our insurance subsidiaries may in the future adopt statutory provisions more restrictive than those currently in effect.

Investment Regulation

      Our insurance subsidiaries are subject to state laws which require diversification of their investment portfolios and impose limits on the amount of their investments in certain categories. Failure to comply with these laws and regulations would cause non-conforming investments to be treated as non-admitted assets in the states in which they are licensed to sell insurance policies for purposes of measuring statutory

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surplus and, in some instances, would require them to sell those investments. At December 31, 2005, we had no investments that would be treated as non-admitted assets.

Guaranty Funds

      Under state insurance guaranty fund laws, insurers doing business on an admitted basis in a state can be assessed for certain obligations of insolvent insurance companies to policyholders and claimants. The maximum guaranty fund assessments in any one year typically is between 1.0% to 2.0% of a company’s net direct written premium written in the state for the preceding calendar year on the types of insurance covered by the fund. In most states, guaranty fund assessments can be recouped at least in part through future premium increases or offsets to state premium tax liability. In most states, FMIC is not subject to state guaranty fund assessments because of its status as a surplus lines insurer.

Licensing of Agents, Brokers and Adjusters

      CoverX is licensed as a resident producer and surplus lines broker in the State of Michigan and as a non resident producer/agency and/or surplus lines broker in other states. CoverX and our insurance subsidiaries have obligations to ensure that they pay commissions to only properly licensed insurance producers/brokers.

      In certain states in which we operate, insurance claims adjusters also are required to be licensed and in some states must fulfill annual continuing education requirements.

Privacy Regulations

      In 1999, the United States Congress enacted the Gramm Leach Bliley Act, which, among other things, protects consumers from the unauthorized dissemination of certain personal information by financial institutions. Subsequently, all states have implemented similar or additional regulations to address privacy issues that are applicable to the insurance industry. These regulations limit disclosure by insurance companies and insurance producers of “nonpublic personal information” about individuals who obtain insurance or other financial products or services for personal, family, or household purposes. The Gramm Leach Bliley Act and the regulations generally apply to disclosures to nonaffiliated third parties, subject to specified exceptions, but not to disclosures to affiliates. The federal Fair Credit Reporting Act imposes similar limitations on the disclosure and use of certain types of consumer information among affiliates.

      State privacy laws also require ANIC to maintain appropriate procedures for managing and protecting certain personal information of its applicable customers and to disclose to them its privacy practices. In 2002, to further facilitate the implementation of the Gramm Leach Bliley Act, the NAIC adopted the Standards for Safeguarding Customer Information Model Regulation. A majority of states have adopted similar provisions regarding the safeguarding of nonpublic personal information. ANIC has adopted a privacy policy for safeguarding nonpublic personal information, and ANIC follows procedures pertaining to applicable customers to comply with the Gramm Leach Bliley Act’s related privacy requirements. We may also be subject to future privacy laws and regulations, which could impose additional costs and impact our results of operations or financial condition.

Trade Practices

      The manner in which insurance companies and insurance agents and brokers conduct the business of insurance is regulated by state statutes in an effort to prohibit practices that constitute unfair methods of competition or unfair or deceptive acts or practices. Prohibited practices include, but are not limited to, disseminating false information or advertising, unfair discrimination, rebating and false statements.

Unfair Claims Practices

      Generally, insurance companies, adjusting companies and individual claims adjusters are prohibited by state statutes from engaging in unfair claims practices on a willful basis or with such frequency to indicate

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a general business practice. Unfair claims practices include, but are not limited to, misrepresenting pertinent facts or insurance policy provisions; failing to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies; and attempting to settle a claim for less than the amount to which a reasonable person would have believed such person was entitled.

Investigation of Broker Compensation Practices

      The recent investigations and legal actions brought by the New York State Attorney General and other attorneys general and state insurance departments relating to broker compensation practices, as well as other measures (such as proposed legislation) that have been taken to address some of the practices at issue in those investigations and actions, may result in potentially far-reaching changes in industry broker compensation practices. These investigations are continuing, and market practices are still evolving in response to these developments. We cannot predict what practices the market will ultimately adopt or how these changes will affect our competitive standing with brokers and agents or our commission rates.

Restrictions on Cancellation, Non-renewal or Withdrawal

      Many states have laws and regulations that limit the ability of an insurance company licensed by that state to exit a market. Some states prohibit an insurer from withdrawing from one or more lines of business in the state, except pursuant to a plan approved by the state insurance regulator. Regulators may disapprove a plan that may lead to market disruption. Some state statutes explicitly, or by interpretation, apply these restrictions to insurers operating on a surplus line basis.

Terrorism Exclusion Regulatory Activity

      The Terrorism Risk Insurance Act of 2002, as extended and amended by the Terrorism Risk Insurance Extension Act of 2005, or TRIA provides insurers with federally funded reinsurance for “acts of terrorism.” TRIA also requires insurers to make coverage for “acts of terrorism” available in certain commercial property/casualty insurance policies and to comply with various other provisions of TRIA. For applicable policies in force on or after November 26, 2002, we are required to provide coverage for losses arising from acts of terrorism as defined by TRIA on terms and in amounts which may not differ materially from other policy coverages. To be covered under TRIA, aggregate industry losses from a terrorist act must exceed $50 million in 2006 and $100 million in 2007, the act must be perpetrated within the U.S. or in certain instances outside of the U.S. on behalf of a foreign person or interest and the U.S. Secretary of the Treasury must certify that the act is covered under the program. We generally offer coverage only for those acts covered under TRIA. As of December 31, 2005, we estimate that less than 10% of our policyholders in our E&S lines markets had purchased TRIA coverage.

      The federal reinsurance assistance under TRIA is scheduled to expire on December 31, 2007 unless Congress decides to further extend it. We cannot predict whether or when another extension may be enacted or what the final terms of such legislation would be.

      While the provisions of TRIA and the purchase of terrorism coverage described above mitigate our exposure in the event of a large scale terrorist attack, our effective deductible is significant. Generally, we exclude acts of terrorism outside of the TRIA coverage, such as domestic terrorist acts. Regardless of TRIA, some state insurance regulators do not permit terrorism exclusions for various coverages or causes of loss.

OFAC

      The Treasury Department’s Office of Foreign Asset Control, or OFAC, maintains various economic sanctions regulations against certain foreign countries and groups and prohibits “U.S. Persons” from engaging in certain transactions with certain persons or entities in or associated with those countries or groups. One key element of these sanctions regulations is a list maintained by the OFAC of “Specifically Designated Nationals and Blocked Persons,” or the SDN List. The SDN List identifies persons and entities that the government believes are associated with terrorists, rogue nations and /or drug traffickers.

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OFAC’s regulations, among other things, prohibit insurers and others from doing business with persons or entities on the SDN List. If the insurer finds and confirms a match, the insurer must take steps to block or reject the transaction, notify the affected person and file a report with OFAC. The focus on insurers’ responsibilities with respect to the sanctions regulations compliance has increased significantly since the terrorist attacks of September 11, 2001.

Federal Regulation of Insurance

      While the business of insurance traditionally has been subject to regulation by the states, there continue to be discussions among lawmakers and members of the insurance industry over the possible expanded role of the federal government in regulating the insurance industry. There have been recent calls by insurer and broker trade associations for optional federal chartering of insurance companies, similar to the federal chartering of banks in the United States. In addition, the U.S. House of Representatives Financial Services Committee has held hearings on the draft of the State Modernization and Regulatory Transparency Act, or the SMART Act, that has been proposed for discussion. Rather than providing for the option of federal chartering, the SMART Act would establish minimum requirements for certain specified areas of state regulation of insurance, including surplus lines laws. These minimum requirements are largely, but not completely, based on NAIC model laws and regulations. We cannot predict whether or not these or similar federal regulatory schemes will be enacted or, if enacted, what effect they may have on our insurance subsidiaries.

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MANAGEMENT

      The following persons are our directors, executive officers and other key members of management as of the date of this prospectus:

Name	Age		Position
Richard H. Smith*		55	President, CEO and Director
John A. Marazza*		46	Executive Vice President, Chief Financial Officer and Treasurer
Jeffrey R. Wawok*		29	Executive Vice President
John Brockschmidt		50	Senior Vice President — ARPCO
John C. Bures		42	Vice President — Security Underwriting
Thomas B. Dulapa		45	Vice President — Operations
Joseph J. George		51	Chief Underwriting Officer — Specialty Casualty
William A. Kindorf		28	Vice President — Corporate Development
Joseph D. Knox		59	Chief Claims Officer
Marcia M. Paulsen		51	Vice President — Administration
James M. Thomas		60	Vice President — Finance
William S. Weaver		63	Senior Vice President
Jon Burgman		65	Director
Hollis W. Rademacher		70	Director
Steven A. Shapiro		41	Director
Jerome Shaw		62	Director

*  Executive officer as defined by SEC regulations

      Richard H. Smith, President, Chief Executive Officer and Director. Mr. Smith has served as our President and Chief Executive Officer since 2005. He joined the Company as its President and Chief Operating Officer in 1996. Mr. Smith began his insurance career with Providian Corporation in 1975 and held various financial positions before becoming Chief Financial Officer of Providian Direct Insurance in 1989 and President and Chief Operating Officer of Providian Direct Auto Insurance in 1993. Mr. Smith has served as a member of our Board of Directors since 1996.

      John A. Marazza, Executive Vice President, Chief Financial Officer and Treasurer. Mr. Marazza has served as our Executive Vice President, Chief Financial Officer and Treasurer since July 2006. From 2003 to 2005, he served as the Chief Operating Officer and Secretary of ProCentury Corporation, formerly known as ProFinance Holdings Corporation. From 2000 to 2003, he was the Executive Vice President, Treasurer and Secretary of ProCentury Corporation. Mr. Marazza was also a director of ProCentury Corporation from 2000 to 2005. From 1991 to 2000, Mr. Marazza served as a financial or operational executive with four insurance enterprises and from 1982 to 1991 was with KPMG LLP serving insurance industry clients. Mr. Marazza is a Certified Public Accountant (non-practicing).

      Jeffrey R. Wawok, Executive Vice President. Mr. Wawok joined the Company as its Executive Vice President in 2006. Mr. Wawok began his career in 1999 with Cochran, Caronia & Co., a boutique investment bank focused on the insurance industry, most-recently serving as a Vice President with a specialty in working with property & casualty insurance carriers on a variety of transactions, including mergers & acquisitions, divestitures, and private and public capital raising. Mr. Wawok has been awarded the Chartered Financial Analyst designation.

      John Brockschmidt, Senior Vice President-ARPCO. Mr. Brockschmidt has served as our Senior Vice President overseeing the operations of ARPCO since 2002. Before joining the Company, Mr. Brockschmidt held various positions with Willis, an insurance brokerage firm, between 1988 and 2002, including Marketing Manager for its Michigan and Ohio offices. Mr. Brockschmidt’s career began with

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Home Insurance Company in 1978 where he held various underwriting positions including Casualty Underwriting Manager. Mr. Brockschmidt holds CPCU and ARM designations.

      John C. Bures, Vice President-Security Underwriting. Mr. Bures has served as our Vice President overseeing Security Underwriting since joining the Company in 2001. Prior to joining the Company, Mr. Bures held positions at various insurance companies most recently as Vice President/ Branch Manager at Royal & Sun Alliance from 2000 to 2001. Mr. Bures holds a CPCU Designation.

      Thomas B. Dulapa, Vice President-Operations. Mr. Dulapa has served as our Vice President overseeing Operations since 1997. In his present position, he oversees operations for FMIC and ANIC and related entities. He joined the Company in 1990, serving as our Controller from 1990 to 1997. Prior to joining the Company, he held various positions including Accounting Manager and Assistant Treasurer for The First Reinsurance Company of Hartford from 1988 to 1990 and Russell Reinsurance Agency from 1984 to 1988.

      Joseph J. George, Chief Underwriting Officer-Specialty Underwriting. Mr. George has served as our Chief Underwriting Officer since 2005. Prior to joining the Company, he worked for Renaissance Reinsurance from 2003 to 2005. Prior to that, he served as the Senior Vice President of Lexington Insurance Company from 1998 to 2003. From 1995 to 1998 he served as the President of USF&G Specialty Insurance Company and from 1994 to 1995 he served as the Vice President, Brokerage Division of Scottsdale Insurance Company. He has over 25 years experience in the insurance industry, with 20 years as a casualty underwriting executive specializing in underwriting large, unique excess accounts, including reinsurance and direct insurance. Mr. George holds CPCU and AIAF designations.

      William A. Kindorf, Vice President-Corporate Development. Mr. Kindorf joined the Company as its Vice President in charge of Corporate Development in 2006. Prior to joining the Company, Mr. Kindorf worked for Madison Capital Funding LLC, a subsidiary of New York Life Investment Management from 2003 to 2006. At Madison Capital, he focused on analyzing senior debt and equity co-investments to support private equity-backed leveraged buyouts, recapitalizations and growth-oriented investments. From 2000 to 2003 he worked as an analyst and most recently as an associate with Cochran, Caronia & Co., a boutique investment banking firm focused on the insurance industry. Mr. Kindorf has been awarded the Chartered Financial Analyst designation.

      Joseph D. Knox, Chief Claim Officer. Mr. Knox joined the Company as its Chief Claims Officer in 2005. Prior to joining the Company, Mr. Knox was the Vice President, Claims for Broadspire Services, Inc. from 2003 to 2005 and the Corporate Head of the Special Investigative Unit. He worked for Kemper Insurance from 1976 to 2003, most recently serving as a Vice President of Claims. Mr. Knox holds the CPCU, AIM and AIC designations.

      Marcia M. Paulsen, Vice President-Administration. Ms. Paulsen has served as our Vice President in charge of Administration since 1980. Her responsibilities include management of our regulatory compliance affairs for our various entities. She has held various positions since joining the Company in 1975, including positions related to research and development, underwriting and administration. Prior to joining the Company, Ms. Paulsen was employed in various underwriting and administrative capacities by the St. Paul Insurance Companies from 1971 to 1975.

      James M. Thomas, Vice President-Finance. Mr. Thomas has served as our Vice President in charge of Finance since 1998. He oversees the accounting functions of our regulated companies. From 1997 to 1998 he was employed by PRS International, Inc. From 1993 to 1996 he served as a Vice President of the Greentree Group. Mr. Thomas began his career in public accounting in 1972, where his clients included several insurance carriers. Mr. Thomas is a Certified Public Accountant.

      William S. Weaver, Senior Vice President. Mr. Weaver currently serves as a Senior Vice President. Mr. Weaver served as our Senior Vice President, Treasurer and Chief Financial Officer from 1994 to July 2006. He joined the Company in 1986. From 1973 to 1986, Mr. Weaver was a partner with the accounting firm of Grant & Silverman. Mr. Weaver is a Certified Public Accountant.

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      Jon Burgman, Director. Mr. Burgman has served as a member of our Board of Directors since 2005. Mr. Burgman is a self-employed financial consultant. From 2002 to 2004, Mr. Burgman served as a Principal of Glencoe Capital, LLC. From 1995 to 2002, Mr. Burgman was a partner of Tatum CFO Partners, LLP. From 1987 to 1995, Mr. Burgman was Chief Financial Officer and Treasurer of Culligan Water Technologies, Inc. Mr. Burgman is a director of Polyair Inter Pack Inc.

      Hollis W. Rademacher, Director. Mr. Rademacher has served as a member of our Board of Directors since 2004. Mr. Rademacher is currently self-employed in the fields of consulting and investments. Mr. Rademacher held various positions with Continental Bank, N.A., from 1957 to 1993, most recently serving as Chief Financial Officer of Continental Bank Corporation from 1988 to 1993. Mr. Rademacher serves as a director of Schawk, Inc. and Wintrust Financial Corporation.

      Steven A. Shapiro, Director. Mr. Shapiro has served as a member of our Board of Directors since 2004. Mr. Shapiro is a Vice President of SF Investments, Inc., a registered broker/ dealer and investment advisor. Mr. Shapiro is also a manager of Millennium Group, LLC, which is the general partner in a series of investment limited partnerships.

      Jerome Shaw, Director. Mr. Shaw has served as a member of our Board of Directors since 1973. From 1973 to 2005, he was our Chief Executive Officer. He is the founder of the Company. Mr. Shaw entered the insurance business in 1967 and formed CoverX in 1973.

Board Composition

      Our board of directors is currently comprised of five directors, namely Messrs. Smith, Burgman, Rademacher, Shapiro and Shaw. The Board has determined that each of Messrs. Rademacher and Shapiro are independent as defined in applicable New York Stock Exchange rules and the rules and regulations of the SEC. Within 12 months of completion of this offering, we intend to either increase the number of directors and appoint additional independent directors or reconfigure the composition of the current board such that a majority of the directors are independent.

Board Committees

      Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee, all of which are comprised entirely of independent directors.

Audit Committee

      The Audit Committee of the board of directors performs oversight responsibilities as they relate to our accounting policies and internal controls, financial reporting practices and legal and regulatory compliance, including, among other things:

•  the integrity of our financial statements;

•  our compliance with legal and regulatory requirements;

•  review of the independent auditor’s qualifications and independence; and

•  the performance of our internal audit function and our independent auditors.

      The members of our audit committee are Messrs. Rademacher and Shapiro.

      Our audit committee currently consists of two members. We intend to increase the size of the audit committee to three and appoint an additional member who is an independent director within 12 months of completion of this offering.

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Compensation Committee

      The Compensation Committee of the board of directors determines the compensation of our executive officers, administers our incentive compensation plans and equity-based plans, makes recommendations to the board of directors with respect to the amendment, termination or replacement of such plans, recommends to the board of directors the compensation for board members and conducts an annual evaluation of the performance of the Compensation Committee.

      The members of the compensation committee are Messrs. Rademacher and Shapiro.

Nominating and Corporate Governance Committee

      The Nominating and Corporate Governance Committee of the board of directors is responsible for evaluating and nominating prospective members for our board of directors. The Nominating and Corporate Governance Committee is responsible for exercising a leadership role in developing, maintaining and monitoring our corporate governance policies and procedures.

      The members of our nominating and corporate governance committee are Messrs. Rademacher and Shapiro.

Director Compensation

      Under our bylaws, our directors may receive such compensation and reimbursement of expenses for their services as may be determined by the board of directors. Prior to this offering, we paid our directors a per meeting fee of $1,500. After becoming a public company, we plan to increase the compensation of our directors. We are currently considering the specific compensation arrangements for our directors and intend to provide them with compensation comparable to similar publicly traded companies. We will reimburse our directors for reasonable expenses they incur in attending board of directors or committee meetings.

Compensation Committee Interlocks and Insider Participation

      The members of our compensation committee will have no interlocking relationships as defined under the regulations of SEC.

Executive Compensation

      The following table summarizes the annual and other compensation earned or awarded to our Chief Executive Officer and each of our other executive officers who served as executive officers during the year ended December 31, 2005 (the “named executive officers”).

Summary Compensation Table

	Annual Compensation
					Other Annual		All Other
Name and principal position	Salary		Bonus		Compensation(1)		Compensation(2)
Richard Smith	$	350,000	$	700,000	$	204,400	$	8,714
President and Chief Executive Officer
Jerome Shaw	$	1,250,000	$	450,000	$	2,114,379	$	1,829
Chief Executive Officer(3)
William S. Weaver	$	225,000	$	250,000	$	8,400	$	9,082
Senior Vice President

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(1)	Amounts consist of compensation paid in consideration for a covenant not to compete as follows: Mr. Smith — $200,000, Mr. Shaw — $2,100,000 and Mr. Weaver — $0; and an automobile allowance as follows: Mr. Smith — $4,400, Mr. Shaw — $14,379 and Mr. Weaver — $8,400.
(2)	Amounts consist of a 401(k) match as follows: Mr. Smith — $7,200, Mr. Shaw — $0 and Mr. Weaver — $7,200; life insurance premiums paid by the Company as follows: Mr. Smith — $774, Mr. Shaw — $1,089 and Mr. Weaver — $1,188; and long-term disability insurance premiums paid by the Company as follows: Mr. Smith — $740, Mr. Shaw — $740 and Mr. Weaver — $694.
(3)	Jerome Shaw served as Chief Executive Officer until August 2005.

Option Grants in Last Fiscal Year

      No stock options or stock appreciation rights were granted to our named executive officers in 2005.

Aggregate Options Exercised in the Last Fiscal Year and Year-End Values

      There were 40 options exercised by the named executive officers in 2005. The following table sets forth the number and value of unexercised options held by each of the named executive officers on December 31, 2005. The value of “in-the-money” stock options represents the positive spread between the exercise price of stock options and the fair market value of the options, based upon an initial public offering price of $           per share (the midpoint of the price range set forth on the cover page of this prospectus) minus the exercise price per share.

				Number of Shares				Value of Unexercised
				Underlying Unexercised				In-The-Money Options at
				Options at Year End (#)				Year End ($)
	Shares Acquired		Value
Name and principal position	on Exercise(#)		Realized	Exercisable		Unexercisable		Exercisable	Unexercisable
Richard Smith		0			515.7		0
President and Chief Executive Officer
Jerome Shaw		0			203.2		0
Chief Executive Officer(1)
William S. Weaver		40			289.8		0
Senior Vice President

(1)  Jerome Shaw served as Chief Executive Officer until August 2005.

401(k) Plan

      We have established a 401(k) plan intended to qualify under Section 401 of the Internal Revenue Code. Generally, upon commencement of employment, all employees of the Company and any of its subsidiaries are eligible to participate. Employee contributions are allocated to investment options at the election of the participant. Each participant is fully vested in all participant contributions and investment earnings from those contributions. We make a discretionary matching contribution in an amount determined by us, subject to statutory limits. Contributions by the participants or us, and the income earned on these contributions, are generally not taxable to the participants until withdrawn. Contributions by us are generally deductible by us when made. Contributions and investment earnings are held in trust as required by law.

Equity Based Compensation Plans

1998 Stock Compensation Plan

      Our 1998 stock compensation plan, or the 1998 Plan was established in September 1998. Under the terms of the 1998 Plan, directors, officers, employees, and other key individuals may be granted options to

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purchase our common stock. A total of 5,500 shares of our common stock are reserved and available for distribution pursuant to awards under the 1998 Plan. Option and vesting periods and option exercise prices are determined by the compensation committee of our board of directors (or, in the absence of a compensation committee, by the entire board), provided that no stock options shall be exercisable more than ten years after the grant date. All of the options which were issued under the 1998 Plan and outstanding at the time of the senior notes offering and minority share repurchase transaction became fully vested as a result of such transaction.

Employment and Related Agreements

Agreements with Mr. Shaw

      We have an employment agreement with Mr. Shaw that provides Mr. Shaw will serve as our Vice Chairman. The agreement will terminate upon consummation of this offering; however Mr. Shaw intends to remain on the board of directors following the consummation of this offering. Under his employment agreement, Mr. Shaw receives an annual salary of $1,000,000, but is not entitled to an incentive bonus. Under a separate non-competition and confidentiality agreement with us effective as of June 7, 2004, Mr. Shaw is subject to non-competition and non-solicitation covenants for a period beginning on the effective date of the agreement and ending on the later of seven years after the effective date or two years after termination of Mr. Shaw’s employment with us. Mr. Shaw is also subject to perpetual non-disparagement and confidentiality covenants under the agreement.

      In connection with our acquisition of ARPCO, ARPCO entered into a non-competition and confidentiality agreement with Mr. Shaw pursuant to which ARPCO agreed to pay Mr. Shaw $250,000 per year until the occurrence of a change of control of ARPCO or its parent, ARPCO Holdings, in exchange for non-competition, non-solicitation, non-disparagement and confidentiality covenants from Mr. Shaw. The term of the non-compete (and the payments thereunder) will expire upon consummation of this offering.

      Upon the closing of the senior notes offering and share repurchase in 2005, we entered into a non-competition and confidentiality agreement with Mr. Shaw containing covenants substantially similar to Mr. Shaw’s non-competition and confidentiality agreement in connection with our acquisition of ARPCO described in the preceding paragraph. The covenants under this new agreement will expire on the date that is the later of (i) seven years from the closing of the recapitalization and (ii) the date on which Mr. Shaw owns less than 5% of our fully diluted common stock. The agreement provides for two payments of $1,975,000 each, the first of which was paid in 2005 and the second of which is due on June 30, 2006.

Agreements with Mr. Smith

      We have entered into an employment agreement with Richard Smith pursuant to which Mr. Smith has agreed to serve as our President and Chief Executive Officer. The agreement will remain in effect until terminated by us or Mr. Smith. We may terminate the agreement for cause, upon a change of control or without cause upon 90 days’ notice. Mr. Smith may terminate the agreement without cause upon 90 days’ notice, in the event of a material breach by us under the agreement or the institution of bankruptcy proceedings against, or the involuntary dissolution of, the Company. Under the agreement, Mr. Smith is entitled to an annual base salary of $550,000 plus benefits and reimbursement of reasonable business expenses. Mr. Smith’s annual base salary of $550,000 includes $200,000 allocated to the non-competition covenant in the agreement. In addition, we may, but are not obligated to, pay Mr. Smith additional compensation in the form of a bonus, as determined by our board of directors in their sole discretion at the end of each calendar year. In the event we terminate Mr. Smith’s employment without cause, we are required to pay Mr. Smith severance in an amount equal to two times his base salary plus any bonus which he received in the calendar year prior to the year of termination. Mr. Smith is subject to non-competition and non-solicitation covenants during the term of the agreement and for a period of three years after termination of the agreement, and to a confidentiality covenant.

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Agreements with Mr. Weaver

      We have entered into an employment agreement with Mr. Weaver pursuant to which Mr. Weaver has agreed to serve as our Senior Vice President, Treasurer and Chief Financial Officer. Mr. Weaver currently serves as our Senior Vice President. The agreement will remain in effect until terminated by us or Mr. Weaver. We may terminate the agreement for cause, upon a change of control or without cause upon 90 days’ notice. Mr. Weaver may terminate the agreement without cause upon 90 days’ notice, in the event of a material breach by us under the agreement or the institution of bankruptcy proceedings against, or the involuntary dissolution of, the Company. Under the agreement, Mr. Weaver is entitled to an annual base salary of $225,000 plus benefits and reimbursement of reasonable business expenses. In addition, we may, but are not obligated to, pay Mr. Weaver additional compensation in the form of a bonus, as determined by our CEO and/or our board of directors in their sole discretion at the end of each calendar year. In the event we terminate Mr. Weaver’s employment without cause, we are required to pay Mr. Weaver severance in an amount equal to two times his base salary plus any bonus which he received in the calendar year prior to the year of termination. Mr. Weaver is subject to a confidentiality covenant under the agreement.

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PRINCIPAL STOCKHOLDERS

      The table below sets forth information regarding the beneficial ownership of our outstanding common stock by:

•  each person or group that we know owns more than 5% of our common stock,

•  each of our directors and named executive officers, and

•  all of our directors and executive officers as a group.

      Beneficial ownership is determined in accordance with rules of the SEC and includes shares over which the indicated beneficial owner exercises voting and/or investment power. Except as otherwise indicated, we believe the beneficial owners of the common stock listed below, based on information furnished by them, have sole voting and investment power with respect to the number of shares listed opposite their names. Unless otherwise indicated, the business address for each person listed is c/o First Mercury Financial Corporation, 29621 Northwestern Highway, Southfield, Michigan 48034.

      The information presented in the table below regarding the number of shares beneficially owned prior to this offering reflects the beneficial ownership of Holdings common stock. Immediately prior to the consummation of this offering, Holdings will be merged into us and the common stock of Holdings will be converted into our common stock.

	Number of		Percentage of
	Shares of		Shares of Common
	Common		Stock Outstanding
	Stock
	Beneficially		Before			After
Name and Address of Beneficial Owner	Owned		Offering			Offering
Glencoe Capital, LLC(1)		6,956.9089		60.4	%		(7)
Jerome Shaw(2)		4,155.4609		35.5	%
4SFW, L.L.C.(3)		1,129.6077		9.8	%
Richard Smith(4)		966.0869		8.0	%
William S. Weaver(5)		329.8000		2.8	%
Jon Burgman		0		0
Hollis Rademacher		0		0
Steven Shapiro		66.9456		*
All directors and executive officers as a group (7 persons)(6)		5,600.7934		44.5	%

*  Less than 1% of the outstanding shares of common stock

(1)	Reflects 400 shares of Series A Preferred Stock of Holdings, which are convertible into 6,956.9089 shares of common stock, held of record by FMFC Holdings, LLC. Glencoe, as the manager of FMFC Holdings, LLC, may be deemed to be the beneficial owner of these shares. The manager of Glencoe is DSE Manager, Inc., whose President and sole director is David S. Evans, Chairman of Glencoe. Each of Glencoe, DSE Manager, Inc. and Mr. Evans disclaims any beneficial ownership in these shares, except to the extent of its respective pecuniary interest therein. The address for Glencoe is 222 West Adams Street, Suite 1000, Chicago, Illinois 60606.
(2)	Includes 2,822.6532 shares held by The Jerome M. Shaw 2005 Intangibles Trust, which is controlled by Mr. Shaw and options to purchase 203.2 shares of common stock which are exercisable currently or within 60 days of the date of this prospectus. Also includes 1,129.6077 shares of common stock held by 4SFW, L.L.C. with respect to which Mr. Shaw may be deemed to be the beneficial owner of these shares by virtue of his owning a majority of the membership interests in 4SFW, L.L.C. Mr. Shaw disclaims any beneficial ownership in these shares, except to the extent of his pecuniary interest therein.
(3)	Mr. Shaw and Mr. Smith own 53.2%, and 37.3%, respectively, of the membership interests in 4SFW, L.L.C.

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(4)	Includes options to purchase 515.70 shares of common stock which are exercisable currently or within 60 days of the date of this prospectus.
(5)	Includes 40 shares of common stock held by The William S. Weaver Revocable Trust, which is controlled by Mr. Weaver, and options to purchase 289.8000 shares of common stock which are exercisable currently or within 60 days of the date of this prospectus.
(6)	Includes options to purchase 1,091.2000 shares of common stock which are exercisable currently or within 60 days of the date of this prospectus and 1,129.6077 shares beneficially owned by Mr. Shaw through 4SFW, L.L.C.
(7)	Reflects payment of amounts due under our convertible preferred stock in connection with this offering, the conversion of our convertible preferred stock into                      shares of common stock upon completion of this offering and the repurchase of                     shares of common stock held by Glencoe following conversion of our convertible preferred stock.

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

ARPCO Transactions

      Prior to our acquisition of ARPCO in June 2004, we shared our office space and some of our resources with ARPCO, whose shareholders included Mr. Shaw and Mr. Weaver. Subsequent to our acquisition of ARPCO, these transactions and agreements were no longer in effect.

      On June 14, 2004, we acquired all of the outstanding common stock of ARPCO and Public Entity Risk Services of Ohio, Inc. from Mr. Shaw, Mr. Weaver and Larry Spilkin for aggregate consideration of $20 million, consisting of $15 million in cash and $5 million of promissory notes payable to Messrs. Shaw, Weaver and Spilkin. The promissory notes bore interest at the rate of 8.0% and were repaid in full in August 2005. In connection with our acquisition of ARPCO, ARPCO entered into a non-competition and confidentiality agreement with Mr. Shaw. See “Management — Employment and Related Agreements.”

Florida Homeowners Insurance Business

      In the second quarter of 2005, we began providing management and administrative services to First Home Insurance Agency, LLC, or FHIA, a wholly owned subsidiary of First Home Acquisition Company, LLC, or FHAC. FHIA is the licensed managing general agency that provides management and administrative services for First Home Insurance Company, or FHIC. FHIC is also a wholly owned subsidiary of FHAC. FHIC is a property and casualty insurance company authorized to write homeowners, dwelling fire and allied lines insurance in Florida. FHIA manages the insurance operations of FHIC by providing, or supervising subcontractors in providing, underwriting and policy issuance services, reinsurance services, claims management services, premium collection services, regulatory and governmental compliance services, policy advisory and consulting services, advertising and marketing services, and other management and administrative services related to FHIC’s business.

      We provide executive management services to FHIA, including marketing, claims analysis, supervisory accounting, information services, product and underwriting development and management, regulatory compliance, human resource benefits and technology services. We receive a management fee of up to 1.5% of the direct written premiums associated with the policies to be serviced, in accordance with the management agreement between us and FHIA. In addition to our management fee, we are also reimbursed by FHIA for all facilities and overhead expenses incurred by us for providing management services to FHIA. During 2005, we billed FHIA $690,960 in management fees and allocated expenses. We also paid $279,666 of expenses on behalf of FHIA and provided working capital advances of $335,500. During the first quarter of 2006, we billed FHIA $81,201 in allocated expenses and paid $121,790 of expenses on behalf of FHIA. We had $1,172,623 in outstanding accounts receivable from FHIA as of December 31, 2005 and $1,064,315 in outstanding accounts receivable from FHIA as of June 30, 2006.

      Glencoe is the manager of FHAC, and an affiliate of Glencoe owns more than 85% of the membership interests of FHAC. Mr. Shaw and Mr. Smith each own approximately 7% of the membership interests of FHAC. In the second quarter of 2005, we made an unsecured loan to Mr. Smith in an aggregate principal amount of $750,000 to provide funds for him to make an investment in FHAC. The loan was evidenced by a promissory note which bore interest at a compound annual rate of 1.0%, payable annually in arrears. The principal balance of the note was payable in three equal installments commencing in May 2006. In May 2006, we forgave this loan.

Advances to Executive Officers

      In 2004, we advanced $130,200 to Mr. Smith and $92,628 to Mr. Weaver to pay certain income tax liabilities incurred by them in connection with their exercise of stock options at the time of Glencoe’s original investment. Mr. Smith and Mr. Weaver repaid these amounts in June 2006.

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Stockholder Promissory Notes

      During the third quarter of 2003, we issued seven unsecured, non-convertible subordinated notes having an aggregate principal amount of $4,415,000, including $1,000,000 of which was issued to Mr. Shaw and $70,000 of which was issued to Mr. Weaver. The notes held by Mr. Shaw and Mr. Weaver bore interest at 10.25%, payable quarterly. The notes were repaid in full in August 2005.

Glencoe’s Investment

      In connection with Glencoe’s investment in June 2004, we entered into a stockholders agreement, a securities purchase agreement, a management services agreement and a registration rights agreement with Glencoe.

      The stockholders agreement contained restrictions on transfer, rights of first refusal, co-sale, drag-along and preemptive rights, and voting provisions relating to the composition of our board of directors, all of which will terminate upon consummation of this offering.

      The securities purchase agreement contained a number of financial and negative covenants that we were required to observe. These covenants will terminate upon consummation of this offering. In addition, in the securities purchase agreement, we agreed, subject to certain limitations, to indemnify Glencoe and its affiliates for any losses (i) arising out of any breach of any representation, warranty, covenant or agreement made by us or any of our subsidiaries in the agreement or in any agreement or document delivered in connection with the agreement or (ii) to the extent not prohibited by law, in their capacity as a director, stockholder, representative or controlling person of us or any of our subsidiaries arising out of any third party or governmental claims, including claims under the Securities Act and the Exchange Act.

      Under the management services agreement, Glencoe provided management services, including services and assistance with respect to strategic planning, budgeting, cash management, record keeping, quality control, advisory and administrative services, finance, tax, consumer affairs, public relations, accounting, risk management, procurement and supervision of third party service providers, contract negotiation, and providing economic, investment and acquisition analysis with respect to investments and acquisitions or potential investments and acquisitions. As compensation for the services it provided under the agreement, we paid Glencoe an annual management fee of $750,000, plus reimbursement of reasonable expenses. We are obligated to indemnify Glencoe for any and all losses, claims and damages arising out of or incidental to the services performed by Glencoe under the agreement except where the claim at issue is based on Glencoe’s gross negligence or willful misconduct or a material breach by Glencoe of any provision of the agreement, in each case as finally adjudicated by a court of competent jurisdiction. The management services agreement will terminate upon consummation of this offering.

      Under the registration rights agreement, Glencoe has the right to request that we register for underwritten public sale, on each of two occasions, shares of our common stock having an aggregate value of at least $10,000,000. In addition, Glencoe has “piggyback” registration rights which allow Glencoe to participate in any registered offerings of our common stock by us for our own account or for the account of others. Mr. Shaw has the right to participate pro rata with Glencoe in any such offering in which Glencoe participates. The registration rights agreement will remain in effect following this offering.

      In connection with the senior notes offering and minority share repurchase transaction, we paid a $1.3 million advisory fee to Glencoe. No independent committee of the board of directors examined the transaction and the payments made thereunder from a fairness point of view, nor did any third party render any advice as to whether or not the transactions were fair to the minority stockholders. Minority stockholders were advised to consult with their own advisors as needed to assist them in making a decision regarding whether to participate in the repurchase. Minority stockholders were also advised that Mr. Shaw received a premium price for his shares in excess of the price paid to the minority stockholders. The board of directors made no recommendation to stockholders as to whether they should participate in the transaction.

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Repurchase of Glencoe Shares

      We have agreed to repurchase up to $                    or                      shares of our common stock held by Glencoe with the net proceeds from the offering and the over-allotment option, if exercised. If the over-allotment option is not exercised, we intend to borrow amounts under our credit facility to fund a portion of this repurchase obligation.

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      DESCRIPTION OF CAPITAL STOCK

      Effective upon consummation of this offering, our authorized capital stock will consist of 100,000,000 shares of common stock, par value $0.01 per share and 10,000,000 shares of undesignated preferred stock, par value $0.01 per share. The following description of our capital stock is intended as a summary only and is qualified in its entirety by reference to our amended and restated certificate of incorporation and amended and restated bylaws filed as exhibits to the registration statement, of which this prospectus forms a part, and to Delaware corporate law. We refer in this section to our amended and restated certificate of incorporation as our certificate of incorporation and we refer to our amended and restated bylaws as our bylaws.

Common Stock

      Holders of common stock are entitled to one vote per share in the election of directors and on all other matters on which stockholders are entitled or permitted to vote. Subject to the terms of any outstanding series of preferred stock, the holders of common stock are entitled to dividends in amounts and at times as may be declared by the board of directors out of funds legally available for that purpose. Upon liquidation or dissolution, holders of common stock are entitled to share ratably in all net assets available for distribution to stockholders, after payment in full to creditors and payment of any liquidation preferences to holders of preferred stock. Holders of common stock have no redemption, conversion or preemptive rights. All outstanding shares of common stock are fully paid and nonassessable, and the shares of common stock to be issued upon the closing of this offering will be fully paid and nonassessable.

Undesignated Preferred Stock

      In addition, our certificate of incorporation provides that we may issue up to 10,000,000 shares of preferred stock in one or more series as may be determined by our board of directors.

      Our board of directors has broad discretionary authority with respect to the rights of any new series of preferred stock and may take several actions without any vote or action of the stockholders, including:

•  To determine the number of shares to be included in each series;

•  To fix the designation, powers, preferences and relative rights of the shares of each series and any qualifications, limitations or restrictions; and

•  To increase or decrease the number of shares of any series.

      We believe that the ability of our board of directors to issue one or more series of preferred stock will provide us with flexibility in structuring possible future financings and acquisitions, and in meeting other corporate needs that might arise. The authorized shares of preferred stock, as well as shares of common stock, will be available for issuance without action by our stockholders, unless such action is required by applicable law or the rules of any stock exchange or automated quotation system on which our securities may be listed or traded.

      The board of directors may authorize, without stockholder approval, the issuance of preferred stock with voting and conversion rights, that could adversely affect the voting power and other rights of holders of common stock. Preferred stock could be issued quickly with terms designed to delay or prevent a change in the control of our company or to make the removal of our management more difficult. This could have the effect of decreasing the market price of our common stock.

      Although our board of directors has no intention at the present time of doing so, it could issue a series of preferred stock that could, depending on the terms of such series, impede the completion of a merger, tender offer or other takeover attempt of our company. Our board of directors will make any determination to issue such shares based on its judgment as to our company’s best interest and the best interests of our stockholders. Our board of directors could issue preferred stock having terms that could discourage an acquisition attempt through which an acquirer may be able to change the composition of the board of directors, including a tender offer or other transaction that some, or a majority, of our

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stockholders might believe to be in their best interests or in which stockholders might receive a premium for their stock over the then-current market price.

      We have no present plans to issue any shares of our preferred stock after this offering.

Listing

      We have applied to have our common stock entered in the New York Stock Exchange under the symbol “FMR.”

Delaware Law and Charter and Bylaw Provisions’ Anti-Takeover Effects

      We have elected to be governed by the provisions of Section 203 of the Delaware General Corporation Law, which we refer to as Section 203. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a three-year period following the time that this stockholder becomes an interested stockholder, unless the business combination is approved in a prescribed manner. A “business combination” includes, among other things, a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder. An “interested stockholder” is a person who, together with affiliates and associates, owns (or, in some cases, within three years prior, did own) 15% or more of the corporation’s voting stock, or is an affiliate of the corporation and owned 15% or more of the corporation’s voting stock at any time during the three years prior to the time that the determination of an interested stockholder is made. Under Section 203, a business combination between the corporation and an interested stockholder is prohibited unless it satisfies one of the following conditions:

•  before the stockholder became interested, the board of directors approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; or

•  upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced (excluding, for purposes of determining the number of our shares outstanding, shares owned by (a) persons who are directors and also officers and (b) employee stock plans, in some instances); or

•  after the stockholder became interested, the business combination was approved by the board of directors of the corporation and authorized at an annual or special meeting of the stockholders by the affirmative vote of at least two-thirds of the outstanding voting stock which is not owned by the interested stockholder.

      Our bylaws provide for the division of our board of directors into three classes as nearly equal in size as possible with staggered three-year terms. Approximately one-third of our board will be elected each year. We refer you to “Management.” In addition, our bylaws provide that directors may be removed only for cause and then only by the affirmative vote of the holders of a majority of the outstanding voting power of our capital stock outstanding and entitled to vote generally in the election of directors. Under our bylaws, any vacancy on our board of directors, however occurring, including a vacancy resulting from an enlargement of our board, may only be filled by vote of a majority of our directors then in office even if less than a quorum. The classification of our board of directors and the limitations on the removal of directors and filling of vacancies could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of us.

      Our bylaws provide that special meetings of the stockholders may only be called by the chairman of the board of directors or by the board of directors. Our bylaws further provide that stockholders at an annual meeting may only consider proposals or nominations specified in the notice of meeting or brought before the meeting by or at the direction of the board or by a stockholder who was a stockholder of record on the record date for the meeting, who is entitled to vote at the meeting and who has given to our corporate secretary the required written notice, in proper form, of the stockholder’s intention to bring that

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proposal or nomination before the meeting. In addition to other applicable requirements, for a stockholder proposal or nomination to be properly brought before an annual meeting by a stockholder, the stockholder generally must have given notice in proper written form to the corporate secretary not less than 90 days nor more than 120 days prior to the anniversary date of the immediately preceding annual meeting of stockholders, unless the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from the anniversary date, in which case the notice must be delivered no later than the 10th day following the day on which public announcement of the meeting is first made. Although our bylaws do not give the board the power to approve or disapprove stockholder nominations of candidates or proposals regarding other business to be conducted at a special or annual meeting, our bylaws may have the effect of precluding the consideration of some business at a meeting if the proper procedures are not followed or may discourage or defer a potential acquiror from conducting a solicitation of proxies to elect its own slate of directors or otherwise attempting to obtain control of us.

      Our certificate of incorporation also provides that any action required or permitted to be taken by our stockholders at an annual meeting or special meeting of stockholders may only be taken at a stockholders meeting and may not be taken by written consent in lieu of a meeting. Our certificate of incorporation includes a “constituency” provision that permits (but does not require) a director of our company in taking any action (including an action that may involve or relate to a change or potential change in control of us) to consider, among other things, the effect that our actions may have on other interests or persons (including our employees, clients, suppliers, customers and the community) in addition to our stockholders.

      Our certificate of incorporation includes a fair price provision, which we refer to as the “fair price provision” that prohibits business combinations (as defined below) with a related person (as defined below), unless either:

      (a) the holders of our capital stock receive in the business combination either:

      (i) the same consideration in form and amount per share as the highest consideration paid by the related person in a tender or exchange offer in which the related person acquired at least 30% of the outstanding shares of our capital stock and which was consummated not more than one year prior to the business combination or the entering into of a definitive agreement for the business combination; or

      (ii) not less in amount (as to cash) or fair market value (as to non-cash consideration) than the highest price paid or agreed to be paid by the related person for shares of our capital stock in any transaction that either resulted in the related person’s beneficially owning 15% or more of our capital stock, or was effected at a time when the related person beneficially owned 15% or more of our capital stock, in either case occurring not more than one year prior to the business combination; or

      (b) the transaction is approved by:

      (i) a majority of continuing directors (as defined below); or

      (ii) shares representing at least 75% of the votes entitled to be cast by the holders of our capital stock.

      Under the fair price provision, a “related person” is any person who beneficially owns 15% or more of our capital stock or is one of our affiliates and at any time within the preceding two-year period was the beneficial owner of 15% or more of our outstanding capital stock. The relevant “business combinations” involving our company covered by the fair price provision are:

•  any merger or consolidation of our company or any subsidiary of our company with or into a related person on an affiliate of a related person;

•  any sale, lease, exchange, transfer or other disposition by us of all or substantially all of the assets of our company to a related person or an affiliate of a related person;

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•  reclassifications, recapitalizations and other corporate actions requiring a stockholder vote that have the effect of increasing by more than one percent the proportionate share of our capital stock beneficially owned by a related person or an affiliate of a related person; and

•  a dissolution of our company voluntarily caused or proposed by a related person or an affiliate of a related person.

      A “continuing director” is a director who is unaffiliated with the related person and who was a director before the related person became a related person, and any successor of a continuing director who is unaffiliated with a related person and is recommended or nominated to succeed a continuing director by a majority of the continuing directors.

      The Delaware corporate law provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation’s certificate of incorporation or bylaws or to approve mergers, consolidations or the sale of all or substantially all its assets, unless a corporation’s certificate of incorporation or bylaws, as the case may be, requires a greater percentage. Our certificate of incorporation requires the affirmative vote of the holders of at least two-thirds of the shares of common stock outstanding at the time such action is taken to amend or repeal the fair price and constituency provisions of our certificate of incorporation. Our bylaws may be amended or repealed by a majority vote of the board of directors, subject to any limitations set forth in the bylaws, and may also be amended by the stockholders by the affirmative vote of the holders of at least two-thirds of the total voting power of all outstanding shares of capital stock. The two-thirds stockholder vote would be in addition to any separate class vote that might in the future be required pursuant to the terms of any series of preferred stock that might be outstanding at the time any of these amendments are submitted to stockholders.

Limitation of Liability and Indemnification

      Our certificate of incorporation and bylaws provide that:

•  we must indemnify our directors and officers to the fullest extent permitted by Delaware law, as it may be amended from time to time;

•  we may indemnify our other employees and agents to the same extent that we indemnify our officers and directors, unless otherwise required by law, our certificate of incorporation or our bylaws; and

•  we must advance expenses, as incurred, to our directors and officers in connection with legal proceedings to the fullest extent permitted by Delaware law, subject to very limited exceptions.

      In addition, our certificate of incorporation provides that our directors will not be liable for monetary damages to us for breaches of their fiduciary duty as directors, except for:

•  any breach of their duty of loyalty to us or our stockholders;

•  acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law;

•  under Section 174 of the Delaware General Corporation Law, with respect to unlawful dividends or redemptions; or any transaction from which the director derived an improper personal benefit.

      We also plan to obtain director and officer insurance providing for indemnification for our directors and officers for certain liabilities, including liabilities under the Securities Act of 1933.

      These provisions may discourage stockholders from bringing a lawsuit against our directors for breach of their fiduciary duty. These provisions may also have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit us and our stockholders. Furthermore, a stockholder’s investment may be adversely affected to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these

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indemnification provisions. We believe that these provisions, the insurance and the indemnity agreements are necessary to attract and retain talented and experienced directors and officers.

      At present, there is no pending litigation or proceeding involving any of our directors or officers where indemnification will be required or permitted. We are not aware of any threatened litigation or proceeding that might result in a claim for such indemnification.

Transfer Agent and Registrar

      The transfer agent and registrar for our common stock is                     .

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SHARES ELIGIBLE FOR FUTURE SALE

      Sales of substantial amounts of our common stock in the public market could adversely affect prevailing market prices of our common stock. Furthermore, since some shares of common stock will not be available for sale shortly after this offering because of the contractual and legal restrictions on resale described below, sales of substantial amounts of common stock in the public market after these restrictions lapse could adversely affect the prevailing market price and our ability to raise equity capital in the future.

      Prior to this offering, there has been no public market for our common stock. Upon completion of this offering, we will have outstanding an aggregate of                      shares of our common stock, assuming no exercise of outstanding stock options. Of these shares, the                      shares sold in this offering will be freely tradable without restrictions or further registration under the Securities Act of 1933, as amended, unless those shares are purchased by “affiliates,” as that term is defined in Rule 144 under the Securities Act. The                      shares of common stock held by our officers, directors and Glencoe are subject to the 180-day lock-up period described below.

Rule 144

      In general, under Rule 144, beginning 90 days after the date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of:

•  1% of the number of shares of common stock then outstanding, which will equal approximately                      shares immediately after this offering; or

•  the average weekly trading volume of the common stock on the New York Stock Exchange during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale.

      Sales under Rule 144 also are subject to manner of sale provisions and notice requirements and to the availability of current public information about us.

Rule 144(k)

      Common stock eligible for sale under Rule 144(k) may be sold immediately upon the completion of this offering. In general, under Rule 144(k), a person may sell shares of common stock acquired from us immediately upon completion of this offering, without regard to manner of sale, the availability of public information or volume, if:

•  the person is not an affiliate of us and has not been an affiliate of us at any time during the three months preceding such a sale; and

•  the person has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate.

Lock-Up Agreements

      We, our executive officers and directors, and certain of our other stockholders have agreed that, for a period of 180 days from the date of this prospectus, we and they will not, without the prior written consent of                     , dispose of or hedge any shares of our common stock or any securities convertible into or exchangeable for our common stock, subject to customary exceptions.                     in its sole discretion may release any of the securities subject to these lock-up agreements at any time without notice.

Stock Options

      Upon completion of this offering, options to purchase a total of                      shares of common stock will be outstanding. We intend to file a registration statement to register for resale the                      shares of common stock reserved for issuance under our stock option plans. That registration statement will automatically become effective upon filing. Accordingly, shares issued upon the exercise of stock options

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granted under our stock option plans, which are being registered under that registration statement, will, subject to vesting provisions and in accordance with Rule 144 volume limitations applicable to our affiliates, be eligible for resale in the public market from time to time.

Effect of Sales of Shares

      Prior to this offering, there has been no public market for our common stock and we cannot predict the effect, if any, that market sales of shares of common stock or the availability of shares for sale will have on the market price of our common stock prevailing from time to time. Nevertheless, sales of significant numbers of shares of our common stock in the public market after the completion of this offering could adversely affect the market price of our common stock and could impair our future ability to raise capital through an offering of our equity securities.

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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS

General

      The following is a general discussion of certain United States federal income and estate tax consequences of the ownership and disposition of our common stock by a Non-U.S. Holder. Generally, for purposes of this discussion, a “Non-U.S. Holder” is a beneficial owner of our common stock who or which is, for United States federal income tax purposes, a non-resident alien individual, a foreign corporation, or a foreign estate or trust. In general, an individual is a non-resident alien individual with respect to a calendar year if he or she is not a United States citizen (and in certain circumstances is not a former United States citizen) and, with respect to such calendar year (i) has at no time had the privilege of residing permanently in the United States and (ii) is not present in the United States a specified number of days in the current year and the prior two years. Different rules apply for United States federal estate tax purposes. We refer you to “— Federal Estate Taxes” below.

      The following discussion is based upon current provisions of the Internal Revenue Code of 1986, as amended, which we refer to as the Code, existing, proposed and temporary regulations promulgated under the Code and administrative and judicial interpretations, all of which are subject to change, possibly on a retroactive basis. The following discussion does not address aspects of United States federal taxation other than income and estate taxation, and does not address all aspects of United States federal income and estate taxation. The discussion does not consider any specific facts or circumstances that might apply to a particular Non-U.S. Holder and does not address all aspects of United States federal income and estate tax law that might be relevant to a Non-U.S. Holder subject to special treatment under the Code, for example, insurance companies, tax-exempt organizations, financial institutions or broker-dealers. This discussion does not address the tax treatment of partnerships or persons who hold their interests through a partnership or other pass-through entity. In addition, this discussion does not address state, local or non-United States tax consequences that might be relevant to a Non-U.S. Holder, and does not address the applicability or effect of any specific tax treaty. Accordingly, prospective purchasers of our common stock are urged to consult their tax advisors regarding the United States federal, state and local tax consequences, as well as non-United States tax consequences, of acquiring, holding and disposing of shares of our common stock.

Dividends

      In general, if we were to make distributions with respect to our common stock, such distributions would be treated as dividends to the extent of our current or accumulated earnings and profits as determined under the Code. Any distribution that is not a dividend will be applied in reduction of the Non-U.S. Holder’s basis in our common stock. To the extent the distribution exceeds such basis, the excess will be treated as gain from the disposition of our common stock.

      Subject to the discussion below, dividends paid to a Non-U.S. Holder of our common stock generally will be subject to withholding of United States federal income tax at a 30% rate. A lower rate may apply if the Non-U.S. Holder is a qualified tax resident of a country with which the U.S. has an income tax treaty and if certain procedural requirements are satisfied by the Non-U.S. Holder. A Non-U.S. Holder generally will have to file IRS Form W-8BEN or successor form in order to be eligible to claim the benefits of a U.S. income tax treaty. Special rules may apply in the case of dividends paid to or through an account maintained outside the United States at a financial institution, for which certain documentary evidence procedures must be followed.

      Withholding generally will not apply in respect of dividends if (i) the dividends are effectively connected with the conduct of a trade or business of the Non-U.S. Holder within the United States or (ii) a tax treaty applies, the dividends are effectively connected with the conduct of a trade or business of the Non-U.S. Holder within the United States and are attributable to a United States permanent establishment (or a fixed base through which certain personal services are performed) maintained by the

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Non-U.S. Holder. To claim relief from withholding on this basis, a Non-U.S. Holder generally must file IRS Form W-8ECI or successor form, with the payor of the dividend.

      Dividends received by a Non-U.S. Holder that are effectively connected with the conduct of a trade or business within the United States or, if a tax treaty applies, are effectively connected with the conduct of a trade or business within the United States and attributable to a United States permanent establishment (or a fixed base through which certain personal services are performed), are subject to United States federal income tax on a net income basis (that is, after allowance for applicable deductions) at applicable graduated individual or corporate rates. Any such dividends received by a Non-U.S. Holder that is a corporation may, under certain circumstances, be subject to an additional “branch profits tax” at a 30% rate or such lower rate as may be specified by an applicable income tax treaty.

      A Non-U.S. Holder eligible for a reduced rate of withholding of United States federal income tax may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the United States Internal Revenue Service.

Gain on Disposition of Common Stock

      A Non-U.S. Holder generally will not be subject to United States federal income tax with respect to gain recognized on a sale, exchange, or other disposition of our common stock (including a redemption of our common stock treated as a sale for federal income tax purposes) unless (i) the gain is effectively connected with the conduct of a United States trade or business of the Non-U.S. Holder, (ii) the Non-U.S. Holder is an individual who holds our common stock as a capital asset, is present in the United States for 183 or more days in the taxable year of the sale or other disposition, and either the individual has a “tax home” in the United States or the sale is attributable to an office or other fixed place of business maintained by the individual in the United States, (iii) the Non-U.S. Holder is subject to tax under U.S. tax law provisions applicable to certain U.S. expatriates (including former citizens or residents of the United States), or (iv) we are or have been a “United States real property holding corporation” within the meaning of Section 897(c)(2) of the Code at any time within the shorter of the five-year period ending on the date of disposition or the Non-U.S. Holder’s holding period and certain other conditions are met. We do not believe that we are, or are likely to become, a “United States real property holding corporation.”

      The 183-day rule summarized above applies only in limited circumstances because generally an individual present in the United States for 183 days or more in the taxable year of the sale, exchange, or other disposition will be treated as a resident for United States federal income tax purposes and therefore will be subject to United States federal income tax at graduated rates applicable to individuals who are United States persons for such purposes.

      Non-U.S. Holders should consult applicable tax treaties, which may result in United States federal income tax treatment on the sale, exchange or other disposition of the common stock different from that described above.

Backup Withholding Tax and Information Reporting

      We must report annually to the IRS and to each Non-U.S. Holder any dividend income that is subject to withholding, or that is exempt from U.S. withholding tax pursuant to a tax treaty. Copies of these information returns may also be made available under the provisions of a specific treaty or agreement to the tax authorities of the country in which the Non-U.S. Holder resides.

      A Non-U.S. Holder of common stock that fails to establish that it is entitled to an exemption or to provide a correct taxpayer identification number and other information to the payor in accordance with applicable U.S. Treasury regulations may be subject to information reporting and backup withholding on payments of dividends. The rate of backup withholding is currently 28% but is scheduled to increase in the year 2011. Backup withholding may apply to the payment of disposition proceeds by or through a non-U.S. office of a broker that is a U.S. person or a “U.S. related person” unless certification

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requirements are established or an exemption is otherwise established and the broker has no actual knowledge that the holder is a U.S. person.

      The payment of proceeds from the disposition of common stock to or through the United States office of any broker, U.S. or foreign, will be subject to information reporting and possible backup withholding unless the owner certifies as to its non-U.S. status under penalty of perjury or otherwise establishes its entitlement to an exemption from information reporting and backup withholding, provided that the broker does not have actual knowledge that the holder is a U.S. person or that the conditions of an exemption are not, in fact, satisfied. The payment of proceeds from the disposition of common stock to or through a non-U.S. office of a non-U.S. broker that is not a “U.S. related person” will not be subject to information reporting or backup withholding. For this purpose, a “U.S. related person” is a foreign person with one or more enumerated relationships with the United States.

      In the case of the payment of proceeds from the disposition of common stock to or through a non-U.S. office of a broker that is either a U.S. person or a U.S. related person, the regulations require information reporting (but not backup withholding) on the payment unless the broker has documentary evidence in its files that the owner is a Non-U.S. Holder and the broker has no knowledge to the contrary.

      Any amounts withheld under the backup withholding rules from a payment to a Non-U.S. Holder will be allowed as a refund or a credit against such Non-U.S. Holder’s U.S. federal income tax liability provided the requisite procedures are followed.

Federal Estate Taxes

      An individual Non-U.S. Holder who is treated as the owner of our common stock at the time of his death generally will be required to include the value of such common stock in his gross estate for United States federal estate tax purposes and may be subject to United States federal estate tax on such value, unless an applicable tax treaty provides otherwise. For United States federal estate tax purposes, a “Non-U.S. Holder” is an individual who is neither a citizen nor a domiciliary of the United States. In general, an individual acquires a domicile in the United States for United States estate tax purposes by living in the United States, for even a brief period of time, with the intention of remaining in the United States indefinitely.

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UNDERWRITING

                                    are acting as representatives of the underwriters named below.

      Subject to the terms and conditions stated in the underwriting agreement dated the date of this prospectus, each underwriter named below has severally agreed to purchase, and we have agreed to sell to that underwriter, the number of shares set forth opposite the underwriter’s name.

		Number
Underwriter		of Shares
J.P. Morgan Securities Inc.
Keefe, Bruyette & Woods, Inc.
Cochran Caronia Waller Securities LLC
William Blair & Company, L.L.C.
Dowling & Partners Securities, LLC
	Total

      The underwriting agreement provides that the obligations of the underwriters to purchase the shares included in this offering are subject to approval of legal matters by counsel and to other conditions. The underwriters are obligated to purchase all the shares (other than those covered by the over-allotment option described below) if they purchase any of the shares.

      The underwriters propose to offer some of the shares directly to the public at the public offering price set forth on the cover page of this prospectus and some of the shares to dealers at the public offering price less a concession not to exceed $           per share. The underwriters may allow, and dealers may reallow, a concession not to exceed $           per share on sales to other dealers. If all of the shares are not sold at the initial offering price, the representatives may change the public offering price and the other selling terms. The representatives have advised us that the underwriters do not intend sales to discretionary accounts to exceed five percent of the total number of shares of our common stock offered by them.

      We have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to                      additional shares of common stock at the public offering price less the underwriting discount. The underwriters may exercise the option solely for the purpose of covering over-allotments, if any, in connection with this offering. To the extent the option is exercised, each underwriter must purchase a number of additional shares approximately proportionate to that underwriter’s initial purchase commitment.

      We, our executive officers and directors, and certain of our other stockholders have agreed that, for a period of 180 days from the date of this prospectus, we and they will not, without the prior written consent of a representative, dispose of or hedge any shares of our common stock or any securities convertible into or exchangeable for our common stock, subject to customary exceptions. The representatives in their sole discretion may release any of the securities subject to these lock-up agreements at any time without notice.

      At our request, the underwriters have reserved up to           % of the shares of common stock for sale at the initial public offering price to persons who are directors, officers or employees, or who are otherwise associated with us through a directed share program. The number of shares of common stock available for sale to the general public will be reduced by the number of directed shares purchased by participants in the program. Any directed shares not purchased will be offered by the underwriters to the general public on the same basis as all other shares of common stock offered. We have agreed to indemnify the underwriters against certain liabilities and expenses, including liabilities under the Securities Act, in connection with the sales of the directed shares.

      Prior to this offering, there has been no public market for our common stock. Consequently, the initial public offering price for the shares was determined by negotiations between us and the representatives. Among the factors considered in determining the initial public offering price were our

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record of operations, our current financial condition, our future prospects, our markets, the economic conditions in and future prospects for the industry in which we compete, our management, and currently prevailing general conditions in the equity securities markets, including current market valuations of publicly traded companies considered comparable to our company. We cannot assure you, however, that the prices at which the shares will sell in the public market after this offering will not be lower than the initial public offering price or that an active trading market in our common stock will develop and continue after this offering.

      We have applied to have our common stock listed on the New York Stock Exchange under the symbol “FMR.”

      The following table shows the underwriting discounts that we are to pay to the underwriters in connection with this offering. These amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase additional shares of common stock.

	No	Full
	Exercise	Exercise
Per share	$	$
Total	$	$

      In connection with this offering, the representatives, on behalf of the underwriters, may purchase and sell shares of common stock in the open market. These transactions may include short sales, syndicate covering transactions and stabilizing transactions. Short sales involve syndicate sales of common stock in excess of the number of shares to be purchased by the underwriters in this offering, which creates a syndicate short position. “Covered” short sales are sales of shares made in an amount up to the number of shares represented by the underwriters’ over-allotment option. In determining the source of shares to close out the covered syndicate short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. Transactions to close out the covered syndicate short involve either purchases of the common stock in the open market after the distribution has been completed or the exercise of the over-allotment option. The underwriters may also make “naked” short sales of shares in excess of the over-allotment option. The underwriters must close out any naked short position by purchasing shares of common stock in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in this offering. Stabilizing transactions consist of bids for or purchases of shares in the open market while this offering is in progress.

      The underwriters also may impose a penalty bid. Penalty bids permit the underwriters to reclaim a selling concession from a syndicate member when the representatives repurchase shares originally sold by that syndicate member in order to cover syndicate short positions or make stabilizing purchases.

      Any of these activities may have the effect of preventing or retarding a decline in the market price of the common stock. They may also cause the price of the common stock to be higher than the price that would otherwise exist in the open market in the absence of these transactions. The underwriters may conduct these transactions on the New York Stock Exchange or in the over-the-counter market, or otherwise. If the underwriters commence any of these transactions, they may discontinue them at any time.

      We estimate that our portion of the total expenses of this offering will be $          .

      The underwriters have performed investment banking and advisory services for us from time to time for which they have received customary fees and expenses. The underwriters may, from time to time, engage in transactions with and perform services for us in the ordinary course of their business.

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      We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933, or to contribute to payments the underwriters may be required to make because of any of those liabilities.

LEGAL MATTERS

      The validity of the common stock offered hereby will be passed upon for us by McDermott Will & Emery LLP, Chicago, Illinois. Certain legal matters related to this offering will be passed upon for us by Foley & Lardner LLP. Certain legal matters relating to this offering will be passed upon for the underwriters by Mayer, Brown, Rowe & Maw LLP, Chicago, Illinois.

EXPERTS

      The consolidated financial statements for each of the periods listed in the index to the consolidated financial statements under the heading “Audited Consolidated Financial Statements” have been audited by BDO Seidman, LLP, an independent registered public accounting firm, as stated in its report appearing herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

      We have filed a registration statement on Form S-1 with the Securities and Exchange Commission for the common stock we are offering by this prospectus. This prospectus does not include all of the information contained in the registration statement. You should refer to the registration statement and its exhibits for additional information. Whenever we make reference in this prospectus to any of our contracts, agreements or other documents, the references are not necessarily complete, and you should refer to the exhibits attached to the registration statement for copies of the actual contract, agreement or other document. When we complete this offering, we also will be required to file annual, quarterly and special reports, proxy statements and other information with the SEC. We anticipate making these documents publicly available free of charge on our website at www.coverx.com as soon as practicable after filing such documents with the SEC. Information contained on our website is not incorporated by reference into this prospectus and should not be considered to be part of this prospectus. Our website address is included here only as a reference. Anyone may inspect the registration statement and its exhibits and schedules without charge at the SEC’s public reference facilities at 100 F Street, N.E., Washington, D.C. 20549. You may obtain copies of all or any part of these materials from the SEC upon the payment of duplicating fees prescribed by the SEC. You may obtain further information about the operation of the SEC’s Public Reference Room by calling the SEC at 1-800-SEC-0330, or you may inspect the reports and other information without charge at the SEC’s website, www.sec.gov.

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FIRST MERCURY HOLDINGS, INC. AND SUBSIDIARIES

Contents

Unaudited Condensed Interim Consolidated Financial Statements
Consolidated Balance Sheets
	Successor Company — as of June 30, 2006	F-2
	Predecessor Company — as of December 31, 2005	F-2
Consolidated Statements of Operations
	Successor Company — for the six months ended June 30, 2006	F-3
	Predecessor Company — for the six months ended June 30, 2005	F-3
Consolidated Statements of Stockholders’ Equity
	Successor Company — for the six months ended June 30, 2006	F-4
	Predecessor Company — for the six months ended June 30, 2005	F-4
Consolidated Statements of Cash Flows
	Successor Company — for the six months ended June 30, 2006	F-5
	Predecessor Company — for the six months ended June 30, 2005	F-5
Notes to Condensed Unaudited Interim Consolidated Financial Statements		F-6
Report of Independent Registered Public Accounting Firm		F-13
Consolidated Balance Sheets
	Successor Company — as of December 31, 2005	F-14
	Predecessor Company — as of December 31, 2004	F-14
Consolidated Statements of Operations
	Successor Company — for the period August 17, 2005 through December 31, 2005	F-15
	Predecessor Company — for the period January 1, 2005 through August 16, 2005	F-15
Consolidated Statements of Stockholders’ Equity
	Successor Company — for the period August 17, 2005 through December 31, 2005	F-16
	Predecessor Company — for the period January 1, 2003 through August 16, 2005 and years ended December 31, 2004 and 2003	F-16
Consolidated Statements of Cash Flows
	Successor Company — for the period August 17, 2005 through December 31, 2005	F-17
	Predecessor Company — for the period January 1, 2005 through August 16, 2005 and years ended December 31, 2004 and 2003	F-17
Notes to Condensed Consolidated Financial Statements		F-18
Schedules to Financial Statements
Schedule I — Summary of Investments — Other than Investments in Related Parties		F-43
Schedule II — Condensed Financial Information of Registrant
	Condensed Balance Sheet	F-44
	Condensed Statement of Operations	F-45
	Condensed Statement of Cash Flows	F-46
Schedule IV — Reinsurance		F-47
Schedule VI — Supplemental Information Concerning Insurance Operations		F-48

F-1

FIRST MERCURY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Interim Consolidated Balance Sheets

		June 30,			December 31,
		2006			2005
		(Unaudited)
ASSETS
Investments
	Debt securities	$	210,663,511		$	182,679,565
	Equity securities and other		3,824,939			3,332,816
	Short-term		8,677,307			25,012,499
Total Investments			223,165,757			211,024,880
	Cash and cash equivalents		20,043,260			8,399,598
	Premiums and reinsurance balances receivable		15,505,279			17,573,531
	Accrued investment income		2,368,938			2,094,458
	Accrued profit sharing commissions		8,261,549			9,606,916
	Reinsurance recoverable on paid and unpaid losses		44,852,247			22,482,855
	Prepaid reinsurance premiums		49,945,245			36,879,714
	Deferred acquisition costs		6,115,371			9,700,457
	Deferred federal income taxes		515,349			5,270,942
	Debt issuance costs, net of amortization		4,193,661			4,535,968
	Intangible assets, net of accumulated amortization		38,546,870			30,645,143
	Receivable — stockholders and related entity		213,217			2,249,537
	Other assets		5,700,581			5,133,212
Total Assets		$	419,427,324		$	365,597,211
LIABILITIES AND STOCKHOLDERS’ EQUITY
	Loss and loss adjustment expense reserves	$	150,940,434		$	113,863,642
	Unearned premium reserves		95,367,761			84,476,255
	Senior notes		65,000,000			65,000,000
	Long-term debt		20,620,000			20,620,000
	Shareholder rights payable		—			5,049,416
	Premiums payable to insurance companies		965,813			3,175,354
	Reinsurance payable on paid losses		5,508,472			5,425,262
	Accounts payable, accrued expenses, and other liabilities		6,573,736			3,660,634
Total Liabilities			344,976,216			301,270,563
Stockholders’ Equity
	Convertible preferred stock, Series A voting, $0.01 par value; authorized 400 shares; issued and outstanding 400 shares		4			4
	Common stock, $0.01 par value; authorized 59,600 shares; issued and outstanding 4,557.9934 and 4,517.2478 shares		46			45
	Paid-in capital		59,142,439			58,898,985
	Accumulated other comprehensive loss		(2,748,492	)		(1,284,164	)
	Retained earnings		18,057,111			6,711,778
Total Stockholders’ Equity			74,451,108			64,326,648
Total Liabilities and Stockholders’ Equity		$	419,427,324		$	365,597,211

See accompanying notes.

F-2

FIRST MERCURY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Interim Consolidated Statements of Operations

(Unaudited)

		Successor			Predecessor
		Six Months			Six Months
		Ended June 30,			Ended June 30,
		2006			2005
Operating Revenue
	Net earned premiums	$	56,856,868		$	44,356,354
	Commissions and fees		8,762,782			10,340,727
	Net investment income		4,270,790			3,221,343
	Net realized losses on investments		(481,653	)		(74,800	)
Total Operating Revenues			69,408,787			57,843,624
Operating Expenses
	Losses and loss adjustment expenses, net		29,961,507			21,244,196
	Amortization of deferred acquisition expenses		9,092,283			9,873,205
	Underwriting, agency and other expenses		7,378,673			6,586,483
	Amortization of intangible assets		583,333			583,333
Total Operating Expenses			47,015,796			38,287,217
Operating Income			22,392,991			19,556,407
Interest Expense			5,395,471			1,211,276
Change In Fair Value of Interest Rate Swap			(387,072	)		(36,500	)
Income Before Income Taxes			17,384,592			18,381,631
Income Taxes			6,039,259			6,464,930
Net Income		$	11,345,333		$	11,916,701
Earnings Per Share:
Basic		$	2,090.90		$	755.57
Diluted		$	851.53		$	544.98
Weighted Average Shares Outstanding:
Basic			4,557.9934			13,552,6747
Diluted			13,323.4363			21,866.3722.

See accompanying notes.

F-3

FIRST MERCURY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Interim Consolidated Statements of Stockholders’ Equity

(Unaudited)

									Accumulated
					Convertible				Other
			Common		Preferred		Paid-in		Comprehensive			Retained		Treasury
			Stock		Stock		Capital		Income			Earnings		Stock			Total
Predecessor
Balance, January 1, 2005			$	135	$	4	$	48,155,365	$	358,923		$	43,743,991	$	(628,853	)	$	91,629,565
Stock option expense				—		—		61,064		—			—		—			61,064
Comprehensive income
	Net income			—		—		—		—			11,916,701		—			11,916,701
	Other comprehensive loss
		Unrealized holding losses on securities arising during the year		—		—		—		(673,209	)		—		—			(673,209	)
		Less reclassification adjustment for losses included in net income		—		—		—		49,368			—		—			49,368
	Total other comprehensive loss			—		—		—		—			—		—			(623,841	)
Total comprehensive income				—		—		—		—			—		—			11,292,860
Balance, June 30, 2005			$	135	$	4	$	48,216,429	$	(264,918	)	$	55,660,692	$	(628,853	)	$	102,983,489
Successor
Balance, January 1, 2006			$	45	$	4	$	58,898,985	$	(1,284,164	)	$	6,711,778	$	—		$	64,326,648
Issuance of stock				1		—		243,454		—			—		—			243,455
Comprehensive income
	Net income			—		—		—		—			11,345,333		—			11,345,333
	Other comprehensive loss
		Unrealized holding losses on securities arising during the year		—		—		—		(1,955,781	)		—		—			(1,955,781	)
		Less reclassification adjustment for losses included in net income		—		—		—		491,453			—		—			491,453
	Total other comprehensive loss			—		—		—		—			—		—			(1,464,328	)
Total comprehensive income				—		—		—		—			—		—			9,881,005
Balance, June 30, 2006			$	46	$	4	$	59,142,439	$	(2,748,492	)	$	18,057,111	$	—		$	74,451,108

See accompanying notes.

F-4

FIRST MERCURY HOLDINGS, INC. AND SUBSIDIARIES

Condensed Interim Consolidated Statements of Cash Flows

(Unaudited)

				Successor
				Six Months			Predecessor Six
				Ended			Months Ended
				June 30, 2006			June 30, 2005
Cash Flows From Operating Activities
	Net income			$	11,345,333		$	11,916,701
	Adjustments to reconcile net income to net cash provided by operating activities
		Depreciation and amortization			1,217,706			862,737
		Realized losses on investments			481,653			74,800
		Deferrals of acquisition costs, net			3,585,086			(1,397,867	)
		Deferred federal income taxes			(2,427,828	)		(772,390	)
		Stock option expense			—			61,064
		Increase (decrease) in cash resulting from changes in assets and liabilities
			Premiums and reinsurance balances receivable		2,068,251			(2,172,494	)
			Accrued investment income		(274,480	)		(335,945	)
			Receivable from related entity		1,813,492			—
			Accrued profit sharing commissions		1,345,367			(1,849,597	)
			Reinsurance recoverable on paid and unpaid losses		(22,369,392	)		(7,124,578	)
			Prepaid reinsurance premiums		(13,065,531	)		(11,295,874	)
			Loss and loss adjustment expense reserves		37,076,792			16,143,057
			Unearned premium reserves		10,891,506			24,144,595
			Premiums payable to insurance companies		(2,209,541	)		189,398
			Reinsurance payable on paid losses		83,210			2,498,230
			Other		2,495,964			7,157,729
Net Cash Provided By Operating Activities					32,057,588			38,099,566
Cash Flows From Investing Activities
	Cost of short-term investments acquired				(99,507,231	)		(127,747,314	)
	Proceeds from disposals of short-term investments				117,613,840			128,778,223
	Cost of debt and equity securities acquired				(84,349,285	)		(77,263,420	)
	Proceeds from debt and equity securities				51,768,745			43,920,094
	Repayment of receivable from stockholders				222,828			—
	Acquisition, net of cash acquired				(6,351,055	)		—
	Cost of fixed asset purchases				(55,223	)		(245,580	)
Net Cash Used In Investing Activities					(20,657,381	)		(32,557,997	)
Cash Flows From Financing Activities
	Issuance of common stock				243,455			—
	Payments of long-term debt				—			(1,999,996	)
Net Cash Provided By (Used In) Financing Activities					243,455			(1,999,996	)
Net Increase In Cash and Cash Equivalents					11,643,662			3,541,573
Cash and Cash Equivalents, beginning of period					8,399,598			4,075,304
Cash and Cash Equivalents, end of period				$	20,043,260		$	7,616,877

See accompanying notes.

F-5

FIRST MERCURY HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Interim Consolidated Financial Statements

(Unaudited)

1. Summary of Significant Accounting Policies

Basis of Presentation

      The accompanying condensed consolidated financial statements and notes of First Mercury Holdings, Inc. and Subsidiaries (“Holdings” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and do not contain all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Readers are urged to review the Company’s 2005 audited consolidated financial statements for a more complete description of the Company’s business and accounting policies. In the opinion of management, all adjustments necessary for a fair presentation of the condensed consolidated financial statements have been included. Such adjustments consist only of normal recurring items. Interim results are not necessarily indicative of results of operations for the full year. The consolidated balance sheet as of December 31, 2005 was derived from the Company’s audited annual consolidated financial statements.

      Significant intercompany transactions and balances have been eliminated.

      First Mercury Holdings, Inc. was formed in the State of Delaware on July 28, 2005. On August 17, 2005, Holdings issued $65 million of Senior Floating Rate Notes due 2012 (“Notes”) and used the net proceeds from the issuance to purchase certain outstanding shares of First Mercury Financial Corporation’s (“FMFC”) common stock, under the terms of the August 17, 2005 “Stock Contribution Agreement” among Holdings and the former shareholders and option holders of FMFC. Concurrently, Holdings issued convertible preferred shares and common shares to certain former shareholders and option holders of FMFC in exchange for their convertible preferred and common shares. In connection with the Stock Contribution Agreement, Holdings assumed the Stock Option Plan of FMFC (the “Plan”), and each stock option grant thereunder for the purchase of FMFC common stock was converted to the right to purchase Holdings common stock. As a result of the transactions described above, such outstanding stock options became fully vested and exercisable pursuant to the terms of the Plan. Approximately 96% of the FMFC shareholders and stock option holders participated in such transactions.

      On December 15, 2005, Holdings formed First Mercury Merger Corporation (“FMMC”), a Delaware corporation, and on December 29th merged FMMC with and into FMFC, with FMFC being the surviving entity (the “Merger”). The remaining common shares of FMFC that were not sold to Holdings under the August 17, 2005 “Stock Contribution Agreement” were cancelled and converted to rights for those shareholders to receive cash for their shares from FMFC at the same price contained in the “Stock Contribution Agreement” or the amount determined if those shareholders exercise these appraisal rights. At the completion of the December 29, 2005 merger, Holdings owned 100% of the common shares and the convertible preferred shares of FMFC. In the second quarter of 2006, the Company made its final payment related to the former shareholder’s rights to receive cash of $6.4 million resulting in a $1.3 million increase in purchase consideration. In addition, the Company completed its evaluation of the tax bases of its net assets in connection with the acquisition. As a result of these events, the Company adjusted its purchase accounting to reflect an increase in its intangible assets of $8.5 million and a decrease in its net deferred tax assets of $7.2 million as of June 30, 2006.

      This transaction, was accounted for as a purchase and resulted in a new basis of accounting on August 17, 2005. The financial statements for the six months ended June 30, 2006 are those of Holdings and Subsidiaries (the “Successor”). The financial statements for six months ended June 30, 2005 are those of FMFC and Subsidiaries (the “Predecessor”). As a result, the financial statements for the six months ended June 30, 2006 are not comparable to those for the six months ended June 30, 2005.

F-6

FIRST MERCURY HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Interim Consolidated Financial Statements (Unaudited) — (Continued)

      The following unaudited pro forma operating data presents the results of operations for the six months ended June 30, 2005 as if the Acquisition had occurred on January 1, 2005 and assumes that there were no other changes in our operations.

	Predecessor
	Pro Forma For
	Six Months Ended
	June 30, 2005
Operating revenues	$	57,483,624
Operating income		19,556,407
Interest expense, net		4,758,657
Net income		9,610,903
Basic earnings per share		1,772.13
Diluted earnings per share		751.38

     Use of Estimates

      In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the consolidated financial statements, and revenues and expenses reported for the periods then ended. Actual results may differ from those estimates. Material estimates that are susceptible to significant change in the near term relate primarily to the determination of the reserves for losses and loss adjustment expenses and the recoverability of deferred tax assets.

     Stock Based Compensation

      In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment,” which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation”. SFAS No. 123(R) eliminates the option of accounting for share-based payments using the intrinsic value method and making only pro forma disclosures of the impact on earnings of the cost of stock options and other share-based awards measured using a fair value approach. SFAS No. 123(R) requires that companies measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award (i.e., the requisite service period) which is usually equal to the vesting period. The Company adopted SFAS 123(R) on January 1, 2006. Prior to adopting SFAS 123(R), the Company recorded stock option expense under SFAS 123, as amended by SFAS 148.

     Recently Issued Accounting Standards

      In June 2006, the FASB issued FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes, an Interpretation of SFAS No. 109” (“FIN 48”). This statement clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS 109, “Accounting for Income Taxes.” This Interpretation prescribes a recognition threshold and measurement attribute for the financial statements recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The provisions of FIN 48 are

F-7

FIRST MERCURY HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Interim Consolidated Financial Statements (Unaudited) — (Continued)

effective for fiscal years ending after December 15, 2006. The Company does not expect the adoption of this pronouncement to have a significant impact on its financial statements.

2. Earnings Per Share

      Basic earnings per share are computed by dividing net income by the weighted-average number of shares of common stock outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if common stock equivalents were issued and exercised.

      The following is a reconciliation of basic number of common shares outstanding to diluted common and common equivalent shares outstanding.

	Successor		Predecessor
June 30,	2006		2005
Net income	$	11,345,333	$	11,916,701
Less: Dividends in arrears		1,815,032		1,676,640
Net income available to common	$	9,530,301	$	10,240,061
Weighted average number of common and common equivalent shares outstanding:
Basic number of common shares outstanding		4,557.9934		13,552.6747
Dilutive effect of stock options		886.7370		892.1497
Dilutive effect of convertible preferred stock		6,956.5217		6,956.5217
Dilutive effect of cumulative dividends on preferred stock		922.1842		465.0260
Dilutive number of common and common equivalent shares outstanding		13,323.436		21,866.3722
Basic Net Earnings Per Common Share	$	2,090.90	$	755.57
Diluted Net Earnings Per Common Share	$	851.53	$	544.98

3. Income Taxes

      The Company files a consolidated federal income tax return with its subsidiary, First Mercury Financial Corporation (FMFC), and FMFC’s subsidiaries. Taxes are allocated among the Company’s subsidiaries based on the Tax Allocation Agreement employed by these entities, which provides that taxes of the entities are calculated on a separate-return basis at the highest marginal tax rate.

      Income taxes in the accompanying consolidated statements of operations differ from the statutory tax rate of 35% primarily due to state income taxes, non-deductible expenses, and the nontaxable portion of dividends received and tax-exempt interest.

      In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Although realization is not assured, the Company believes it is more likely than not that all of the net deferred tax asset will be realized.

4.     Loss and Loss Adjustment Expense Reserves

      The Company establishes a reserve for both reported and unreported covered losses, which includes estimates of both future payments of losses and related loss adjustment expenses. The following represents

F-8

FIRST MERCURY HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Interim Consolidated Financial Statements (Unaudited) — (Continued)

changes in those aggregate reserves for the Company during the six months ended June 30, 2006 and 2005:

		Successor		Predecessor
		Six Months		Six Months
		Ended June 30,		Ended June 30,
		2006		2005
Balance, January 1		$	113,864,000	$	68,699,000
	Less reinsurance recoverables		21,869,000		5,653,000
Net Balance, January 1			91,995,000		63,046,000
Incurred Related To
	Current year		28,904,000		18,309,000
	Prior years		1,058,000		2,935,000
Total Incurred			29,962,000		21,244,000
Paid Related To
	Current year		791,000		388,000
	Prior years		12,576,000		11,863,000
Total Paid			13,367,000		12,251,000
Net Balance, end of period			108,590,000		72,039,000
	Plus reinsurance recoverables		42,350,000		12,803,000
Balance, end of period		$	150,940,000	$	84,842,000

      The increases and decreases in incurred losses related to prior accident years, as noted in the above table, primarily resulted from differences in actual versus expected loss development.

5. Reinsurance

      Net written and earned premiums, including reinsurance activity as well as reinsurance recoveries, were as follows:

		Successor			Predecessor
		Six Months			Six Months
		Ended June 30,			Ended June 30,
		2006			2005
Written Premiums
	Direct	$	110,980,000		$	79,308,000
	Assumed		2,262,000			4,308,000
	Ceded		(59,305,000	)		(27,258,000	)
Net Written Premiums		$	53,937,000		$	56,358,000
Earned Premiums
	Direct	$	100,372,000		$	45,787,000
	Assumed		1,615,000			14,102,000
	Ceded		(45,876,000	)		(16,380,000	)
	Earned but unbilled premiums		746,000			847,000
Net Earned Premiums		$	56,857,000		$	44,356,000

      The Company manages its credit risk on reinsurance recoverables by reviewing the financial stability, A.M. Best rating, capitalization, and credit worthiness of prospective and existing risk-sharing partners.

F-9

FIRST MERCURY HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Interim Consolidated Financial Statements (Unaudited) — (Continued)

The Company customarily collateralizes reinsurance balances due from non-admitted reinsurers through funds withheld trusts or stand-by letters of credit issued by highly rated banks.

6.     Related Party Transactions

      First Home Insurance Agency (FHIA), is considered a related party to the Company due to common ownership of FHIA and Holdings. The Company provides systems support, accounting, human resources, claims and regulatory oversight for FHIA under an administrative services and cost allocation agreement. Under the terms of this agreement, FMFC allocates actual expenses and costs related to the activities discussed above. Costs related to this agreement were $354,474 during the first six months of 2006. As of June 30, 2006, the Company had a receivable for these charges of $72,829 from FHIA.

      In the second quarter of 2006, the Company forgave its $750,000 unsecured loan due from its chief executive officer and recorded the amount as compensation.

7.     Credit Facility

      On April 25, 2006, First Mercury Financial Corporation entered into a $10,000,000 revolving credit agreement with a financial institution which matures on June 30, 2010. The agreement provides for outstanding borrowings to bear interest under one of three methods (at FMFC’s option) as defined in the credit agreement: (a) a fluctuating rate of interest equal to the higher of the bank’s Prime Rate minus ¹/2% per annum or the Federal Funds Rate plus ¹/2% per annum; (b) Eurodollar rate plus an “applicable margin” which varies dependent upon certain financial ratios; and (c) a negotiated rate plus an “applicable margin” which varies dependant upon certain financial ratios.

      The agreement contains various restrictive covenants that relate to FMFC’s stockholders’ equity, leverage ratio, AM Best Ratings of its insurance subsidiaries, fixed charge coverage ratio, surplus and risk based capital.

      No borrowings are outstanding under the revolving credit agreement at June 30, 2006.

8.     Stock Compensation Plan

      The FMFC stock option plan was established September 3, 1998, and was assumed by Holdings concurrent with the Acquisition of FMFC on August 17, 2005. Under the terms of the plan, directors, officers, employees, and other key individuals may be granted options to purchase the Company’s common stock. A total of 5,000 shares of the Company’s common stock are reserved and 2,625 are available for future grant under the plan. Option and vesting periods and option exercise prices are determined by the Compensation Committee of the Board of Directors, provided no stock options shall be exercisable more than ten years after the grant date. On August 17, 2005, all of the then outstanding stock options under the plan became fully vested under the change in control provision in the plan.

F-10

FIRST MERCURY HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Interim Consolidated Financial Statements (Unaudited) — (Continued)

      The following table summarizes stock option activity for the six months ended June 30, 2006.

			Weighted
			Average
	Number of		Exercise
	Options		Price
Options outstanding at beginning of period		1,210		1,715.23
Granted during the period		99		6,000.00
Forfeited during the period		—		—
Exercised during the period		—		—
Cancelled during the period		—		—
Options outstanding at the end of the period		1,309		2,043.75
Options exercisable		1,210		1,715.23

      There was no stock option activity for the six months ended June 30, 2005.

      The fair values of stock options granted during the six month period ended June 30, 2006 were determined on the dates of grant using the Black-Scholes option valuation model with the following weighted average assumptions:

	Six Months
	Ended June 30,
	2006			2005
Expected term (years)		2.5			—
Expected stock price volatility		26.5	%		—
Risk-free interest rate		4.72	%		—
Expected dividend yield		—			—
Estimated fair value per option	$	1,290			—

      For 2006, the expected term of options was determined based on the midpoint of the vesting period of the options. For 2006, expected stock price volatility was based an average of the volatility factors utilized by companies within the Company’s peer group. Prior to the adoption of SFAS No. 123R, expected term was based on the contractual term of the award and price volatility was not utilized in the Company’s calculation. The risk-free interest rate is based on the yield of U.S. Treasury securities with an equivalent remaining term. The Company has not paid dividends in the past and does not plan to pay any dividends in the near future.

      The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect market conditions and the Company’s historical experience and future expectations. The calculated fair value is recognized as compensation cost in the Company’s financial statements over the requisite service period of the entire award. Compensation cost is recognized only for those options expected to vest, with forfeitures estimated at the date of grant and evaluated and adjusted periodically to reflect the Company’s historical experience and future expectations. Any change in the forfeiture assumption is accounted for as a change in estimate, with the cumulative effect of the change on periods previously reported being reflected in the financial statements of the period in which the change is made.

F-11

FIRST MERCURY HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Interim Consolidated Financial Statements (Unaudited) — (Continued)

      The number of stock options outstanding and exercisable at June 30, 2006 by range of exercise price was as follows:

Options Outstanding							Options Exercisable
			Weighted		Weighted				Weighted
			Average		Average				Average
			Remaining		Exercise				Exercise
Range of Exercise Prices	Number		Contract Life		Price		Number		Price
$1,400.00 - $1,980.00		1,166		2.9	$	1,610.18		1,166	$	1,610.18
$4,500.00 - $6,000.00		143		7.8	$	5,525.00		44		4,500.00

      At June 30, 2006, the outstanding and exercisable options had an intrinsic value of $5.2 million. Compensation expense for the six months ended June 30, 2006 was insignificant and compensation expense of $61,000 was recorded for the six months ended June 30, 2005. As of June 30, 2006, there was approximately $125,000 of total unrecognized compensation cost related to unvested options that is expected to be recognized over a weighted-average period of 4.8 years.

F-12

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

First Mercury Holdings, Inc. and Subsidiaries

Southfield, Michigan

      We have audited the accompanying consolidated balance sheets of First Mercury Holdings, Inc. and Subsidiaries as of December 31, 2005 (Successor Company) and 2004 (Predecessor Company), and the related consolidated statements of operations, stockholders’ equity and cash flows for the periods August 17, 2005 through December 31, 2005 (Successor Company), January 1, 2005 through August 16, 2005 (Predecessor Company), and for the years ended December 31, 2004 and 2003 (Predecessor Company). We have also audited the schedules listed in the accompanying index. These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

      We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedules are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedules, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedules. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Mercury Holdings, Inc. and Subsidiaries as of December 31, 2005 (Successor Company) and 2004 (Predecessor Company), and the results of its operations and its cash flows for the periods August 17, 2005 through December 31, 2005 (Successor Company), January 1, 2005 through August 16, 2005 (Predecessor Company), and for the years ended December 31, 2004 and 2003 (Predecessor Company) in conformity with accounting principles generally accepted in the United States of America.

      Also in our opinion, the schedules present fairly, in all material respects, the information set forth therein.

      As explained in Note 1 to the consolidated financial statements, controlling ownership of the predecessor company was acquired in a purchase transaction as of August 17, 2005. The acquisition was accounted for as a purchase and, accordingly, the consolidated financial statements of the successor company are not comparable to those of the predecessor company.

BDO Seidman, LLP

Troy, Michigan

May 24, 2006

F-13

FIRST MERCURY HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

			Successor			Predecessor
December 31,			2005			2004
ASSETS
Investments
	Debt securities		$	182,679,565		$	152,494,486
	Equity securities and other			3,332,816			4,276,899
	Short-term			25,012,499			14,887,826
Total Investments				211,024,880			171,659,211
	Cash and cash equivalents			8,399,598			4,075,304
	Premiums and reinsurance balances receivable			17,573,531			16,839,613
	Accrued investment income			2,094,458			1,756,034
	Accrued profit sharing commissions			9,606,916			3,490,426
	Reinsurance recoverable on paid and unpaid losses			22,482,855			6,096,251
	Prepaid reinsurance premiums			36,879,714			14,892,204
	Deferred acquisition costs			9,700,457			9,070,923
	Deferred income taxes			5,270,942			2,001,822
	Debt issuance costs, net of amortization			4,535,968			—
	Goodwill			—			2,424,695
	Intangible assets, net of accumulated amortization			30,645,143			16,868,056
	Receivable — stockholders and related entity			2,249,537			—
	Other assets			5,133,212			4,789,998
Total Assets			$	365,597,211		$	253,964,537
LIABILITIES AND STOCKHOLDERS’ EQUITY
	Loss and loss adjustment expense reserves		$	113,863,642		$	68,698,672
	Unearned premium reserves			84,476,255			52,483,938
	Senior floating rate notes			65,000,000			—
	Other debt			20,620,000			29,534,996
	Shareholder rights payable			5,049,416			—
	Premiums payable to insurance companies			3,175,354			3,978,142
	Reinsurance payable on paid losses			5,425,262			5,084,396
	Accounts payable, accrued expenses, and other liabilities			3,660,634			2,554,828
Total Liabilities				301,270,563			162,334,972
Stockholders’ Equity
	Successor
		Convertible preferred stock, Series A voting, $0.01 par value; authorized 400 shares; issued and outstanding 400 shares		4			—
		Common stock, $0.01 par value; authorized 59,600 shares; issued and outstanding 4,517.2478 shares		45			—
	Predecessor
		Convertible preferred stock, Series A voting, $0.01 par value; authorized 400 shares; issued and outstanding 400 shares		—			4
		Common stock, $0.01 par value; authorized 59,600 shares; issued and outstanding 13,552.6747 shares		—			135
	Paid-in capital			58,898,985			48,155,365
	Accumulated other comprehensive income (loss)			(1,284,164	)		358,923
	Retained earnings			6,711,778			43,743,991
	Treasury stock			—			(628,853	)
Total Stockholders’ Equity				64,326,648			91,629,565
Total Liabilities And Stockholders’ Equity			$	365,597,211		$	253,964,537

See accompanying notes to consolidated financial statements.

F-14

FIRST MERCURY HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

		Successor			Predecessor
		August 17 to			January 1 to			Year Ended December 31,
		December 31,			August 16,
		2005			2005			2004			2003
Operating Revenue
	Net earned premiums	$	40,145,833		$	57,575,789		$	61,290,733		$	40,338,173
	Commissions and fees		12,427,565			13,649,492			33,729,955			33,489,060
	Net investment income		2,628,911			4,118,590			4,618,579			3,983,462
	Net realized gains (losses) on investments		278,240			(57,919	)		(119,762	)		812,529
Total Operating Revenues			55,480,549			75,285,952			99,519,505			78,623,224
Operating Expenses
	Losses and loss adjustment expenses, net		27,021,764			28,072,054			26,853,970			21,732,039
	Amortization of deferred acquisition expenses		7,953,663			12,675,827			15,713,127			11,995,231
	Amortization of intangible assets		434,330			732,337			631,944			—
	Underwriting, agency and other expenses		5,711,989			7,758,250			26,952,562			29,922,992
Total Operating Expenses			41,121,746			49,238,468			70,151,603			63,650,262
Operating Income			14,358,803			26,047,484			29,367,902			14,972,962
Interest Expense			3,979,865			1,518,649			1,696,656			965,201
Change In Fair Value of Derivative Instruments			(334,125	)		(230,291	)		(69,885	)		(256,530	)
Income Before Income Taxes			10,713,063			24,759,126			27,741,131			14,264,291
Income Taxes			4,001,285			8,636,398			10,006,318			3,287,779
Net Income		$	6,711,778		$	16,122,728		$	17,734,813		$	10,976,512
Earnings Per Share:
Basic		$	1,200.94		$	1,032.86		$	1,220.39		$	874.56
Diluted		$	515.49		$	742.22		$	972.30		$	843.93
Weighted Average Shares Outstanding:
Basic			4,482.2113			13,522.6747			13,017.6589			12,551.4250
Diluted			13,020.5451			21,722.8065			18,240.2670			13,006.9543

See accompanying notes to consolidated financial statements.

F-15

FIRST MERCURY HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

										Accumulated
					Convertible					Other
			Common		Preferred		Paid-in			Comprehensive			Retained		Treasury
			Stock		Stock		Capital			Income			Earnings		Stock			Total
Predecessor:
Balance, January 1, 2003			$	125	$	—	$	11,764,742		$	1,142,053		$	15,032,666	$	(528,853	)	$	27,410,733
Treasury stock purchase — Quantum Direct Financial Corporation				—		—		(1,700,000	)		—			—		—			(1,700,000	)
Stock option expense				—		—		49,663			—			—		—			49,663
Comprehensive Income
	Net income			—		—		—			—			10,976,512		—			10,976,512
	Other comprehensive loss, net of tax
		Unrealized holding gains on securities arising during the year		—		—		—			139,579			—		—			139,579
		Less reclassification adjustment for gains included in net income		—		—		—			(536,270	)		—		—			(536,270	)
	Total other comprehensive loss			—		—		—			—			—		—			(396,691	)
Total comprehensive income				—		—		—			—			—		—			10,579,821
Balance, December 31, 2003				125		—		10,114,405			745,362			26,009,178		(528,853	)		36,340,217
Issuance of preferred stock				—		4		36,240,421			—			—		—			36,240,425
Exercise of stock options				10		—		1,690,921			—			—		—			1,690,931
Stock option expense				—		—		109,618			—			—		—			109,618
Treasury stock purchase				—		—		—			—			—		(100,000	)		(100,000	)
Comprehensive Income
	Net income			—		—		—			—			17,734,813		—			17,734,813
	Other comprehensive loss, net of tax
		Unrealized holding losses on securities arising during the year		—		—		—			(465,482	)		—		—			(465,482	)
		Less reclassification adjustment for losses included in net income		—		—		—			79,043			—		—			79,043
	Total other comprehensive loss			—		—		—			—			—		—			(386,439	)
Total comprehensive income				—		—		—			—			—		—			17,348,374
Balance, December 31, 2004				135		4		48,155,365			358,923			43,743,991		(628,853	)		91,629,565
Stock option expense				—		—		76,329			—			—		—			76,329
Comprehensive income
	Net income			—		—		—			—			16,122,728		—			16,122,728
	Other comprehensive loss, net of tax
	Unrealized holding losses on securities arising during the period			—		—		—			(958,553	)		—		—			(958,553	)
	Less reclassification adjustment for losses included in net income			—		—		—			37,647			—		—			37,647
	Total other comprehensive loss			—		—		—			—			—		—			(920,906	)
Total comprehensive income				—		—		—			—			—		—			15,201,822
Balance, at August 16, 2005			$	135	$	4	$	48,231,694		$	(561,983	)	$	59,866,719	$	(628,853	)	$	106,907,716
Successor:
Common stock issued on August 17, 2005 (reflects the new basis of 4,477.2478 common shares in connection with the acquisition)			$	45	$	4	$	101,746,955		$	—		$	—	$	—		$	101,747,004
Predecessor basis adjustment				—		—		(42,911,970	)		—			—		—			(42,911,970	)
Exercise of stock options				—		—		64,000			—			—		—			64,000
Comprehensive income
	Net income			—		—		—			—			6,711,778		—			6,711,778
	Other comprehensive loss
		Unrealized holding losses on securities arising during the period		—		—		—			(1,103,308	)		—		—			(1,103,308	)
		Less reclassification adjustment for gains included in net income		—		—		—			(180,856	)		—		—			(180,856	)
	Total other comprehensive loss			—		—		—			—			—		—			(1,284,164	)
Total comprehensive income				—		—		—			—			—		—			5,427,614
Balance, December 31, 2005			$	45	$	4	$	58,898,985		$	(1,284,164	)	$	6,711,778	$	—		$	64,326,648

See accompanying notes to consolidated financial statements.

F-16

FIRST MERCURY HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

					Successor			Predecessor
					August 17 to			January 1
					December 31,			to August 16,
					2005			2005			2004			2003
Cash Flows From Operating Activities
	Net income				$	6,711,778		$	16,122,728		$	17,734,813		$	10,976,512
	Adjustments to reconcile net income to net cash provided by operating activities
			Depreciation and amortization			914,752			1,106,500			1,119,029			513,365
			Realized (gains) losses on investments			(278,240	)		57,919			119,762			(812,529	)
			Deferrals of acquisition costs, net			126,759			(756,293	)		(2,298,582	)		(1,598,356	)
			Deferred income taxes			(1,756,853	)		(1,512,267	)		1,402,829			(994,592	)
			Stock option expense			—			76,329			109,618			49,663
			Increase (decrease) in cash resulting from changes in assets and liabilities
				Premiums and reinsurance balances receivable		(937,709	)		203,791			1,603,835			(2,419,863	)
				Accrued investment income		(3,887	)		(334,537	)		(517,429	)		(444,374	)
				Receivable from related entity		(1,195,696	)		23,073			—			—
				Accrued profit sharing commissions		(3,910,775	)		(2,205,715	)		(1,552,281	)		(1,475,291	)
				Reinsurance recoverable on paid and unpaid losses		(5,569,105	)		(10,817,498	)		(471,478	)		(328,938	)
				Prepaid reinsurance premiums		(7,591,043	)		(14,396,467	)		(14,892,204	)		—
				Loss and loss adjustment expense reserves		21,710,292			23,454,678			6,971,930			2,277,425
				Unearned premium reserves		6,698,200			25,294,117			28,061,187			8,798,619
				Premiums payable to insurance companies		(1,272,800	)		470,012			(8,526,856	)		1,754,100
				Reinsurance payable on paid losses		194,707			146,159			707,535			3,585,630
				Trust preferred investments, including deferred costs		—			—			(1,090,000	)		—
				Other		(3,890,871	)		5,309,738			427,702			971,580
Net Cash Provided By Operating Activities						9,949,509			42,242,267			28,909,410			20,852,951
Cash Flows From Investing Activities
	Cost of short-term investments acquired					(52,038,858	)		(158,284,920	)		(128,467,035	)		(89,702,627	)
	Proceeds from disposals of short-term investments					50,037,617			152,197,811			116,742,977			88,440,564
	Cost of debt and equity securities acquired					(32,292,157	)		(98,222,017	)		(87,082,558	)		(56,425,439	)
	Proceeds from debt and equity securities					23,916,502			72,746,055			41,549,524			34,020,317
	Receivable from stockholders					(326,914	)		(750,000	)		—			—
	Acquisition, net of cash acquired					(55,297,001	)		(245,324	)		(20,514,671	)		—
	Cost of fixed asset purchases					(348,255	)		(316,724	)		(440,805	)		(179,668	)
Net Cash Used In Investing Activities						(66,349,066	)		(32,875,119	)		(78,212,568	)		(23,846,853	)
Cash Flows From Financing Activities
	Stock issued on stock options exercised					64,000			—			1,690,931			—
	Issuance of Series A convertible preferred Stock					—			—			36,240,425			—
	Issuance of senior notes, net of debt issuance costs					60,207,699			—			—			—
	Purchase of Quantum Direct Financial Corporation treasury stock					—			—			—			(1,700,000	)
	Purchase of treasury stock					—			—			(100,000	)		—
	Net increase (decrease) in other debt					(6,915,000	)		(1,999,996	)		11,781,459			4,753,509
Net Cash Provided By (Used In) Financing Activities						53,356,699			(1,999,996	)		49,612,815			3,053,509
Net Increase In Cash and Cash Equivalents						(3,042,858	)		7,367,152			309,657			59,607
Cash and Cash Equivalents, beginning of period						11,442,456			4,075,304			3,765,647			3,706,040
Cash and Cash Equivalents, end of period					$	8,399,598		$	11,442,456		$	4,075,304		$	3,765,647
Supplemental Disclosure of Cash Flow Information:
	Cash paid during the period for:
		Interest			$	1,938,000		$	1,712,000		$	1,456,000		$	900,000
		Income taxes			$	8,049,000		$	6,675,000		$	7,503,000		$	3,560,000

      See accompanying notes to consolidated financial statements.

F-17

FIRST MERCURY HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

      First Mercury Holdings, Inc. (“Holdings”) was formed in the State of Delaware on July 28, 2005. On August 17, 2005, Holdings issued $65 million of Senior Floating Rate Notes due 2012 (“Notes”) and used the net proceeds from the issuance to purchase certain outstanding shares of First Mercury Financial Corporation’s (“FMFC”) common stock, under the terms of the August 17, 2005 “Stock Contribution Agreement” among Holdings and the former shareholders and option holders of FMFC. Concurrently, Holdings issued convertible preferred shares and common shares to certain former shareholders and option holders of FMFC in exchange for their convertible preferred and common shares. In connection with the Stock Contribution Agreement, Holdings assumed the Stock Option Plan of FMFC (the “Plan”), and each stock option grant thereunder for the purchase of FMFC common stock was converted to the right to purchase Holdings common stock. As a result of the transactions described above, such outstanding stock options became fully vested and exercisable pursuant to the terms of the Plan. Approximately 96% of the FMFC shareholders and stock option holders participated in such transactions.

      On December 15, 2005, Holdings formed First Mercury Merger Corporation (“FMMC”), a Delaware corporation, and on December 29th merged FMMC with and into FMFC, with FMFC being the surviving entity (the “Merger”). The remaining common shares of FMFC that were not sold to Holdings under the August 17, 2005 “Stock Contribution Agreement” were cancelled and converted into rights for those shareholders to receive cash for their shares from FMFC at the same price contained in the “Stock Contribution Agreement” or the amount determined if those shareholders exercise these appraisal rights. At the completion of the December 29, 2005 merger, Holdings owned 100% of the common shares and the convertible preferred shares of FMFC.

      This transaction, more fully described in Note 2, was accounted for as a purchase and resulted in a new basis of accounting on August 17, 2005. The financial statements for the period including and after August 17, 2005 are those of Holdings and Subsidiaries (the “Successor”). The financial statements for periods prior to August 17, 2005 are those of FMFC and Subsidiaries (the “Predecessor”). As a result, the financial statements including and after August 17, 2005 are not comparable to those prior to that date.

      The business of Holdings is the holding and management of its investments in the common and convertible preferred stock of FMFC, the receipt of dividends from FMFC as declared, the filing of consolidated tax returns with FMFC and its subsidiaries, and the servicing of the Notes.

      FMFC’s subsidiaries are First Mercury Insurance Company (FMIC), All Nation Insurance Company (ANIC), CoverX Corporation (CoverX), Quantum Direct Service Corporation (QDSC), Questt Agency, Inc. (Questt), Quantum Insurance Agency, Inc. (QIA), Van-American Insurance Services, Inc. (VAIS) and ARPCO Holdings, Inc. and its subsidiaries (AHI), collectively referred to as “the Company”. All significant intercompany transactions have been eliminated upon consolidation. Minority interest in consolidated subsidiaries is insignificant and is reflected as part of other liabilities and other expenses.

      FMIC, an “A-” rated company as determined by A.M. Best, is domiciled in the State of Illinois and is eligible to write general liability insurance in 51 states or jurisdictions. FMIC writes general liability insurance coverage placed by CoverX, and cedes portions of this business to both ANIC and unaffiliated insurance companies.

      ANIC is domiciled in the State of Minnesota, is licensed in 15 states, and assumes the same general liability insurance coverage placed by CoverX from FMIC.

F-18

FIRST MERCURY HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

      CoverX (incorporated in the State of Michigan) is a wholesale insurance agency producing commercial lines (primarily general liability) business on primarily an excess and surplus lines basis for non-affiliated insurers and for FMIC and ANIC. VAIS (incorporated in the State of Alabama) is an inactive retail and wholesale insurance agency.

      AHI’s subsidiaries are American Risk Pooling Consultants, Inc., Public Entity Risk Services of Ohio, Inc., a 67.8% equity interest in Public Entity Risk Services of Iowa, Inc. and a 50% equity interest in Intergrated Risk Management, Inc., collectively referred to as the “ARPCO Group.” The ARPCO Group is a third party administrator and service provider for five public entity risk pools and an excess reinsurance pool. They provide or coordinate accounting, finance, claim handling, loss control, underwriting, investments and general welfare services for the pools and their members.

      The consolidated financial statements also include earnings on investment in First Mercury Financial Capital Trusts I and II; wholly-owned, unconsolidated subsidiaries of the Company (see Note 8).

      The consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP), which vary in certain respects from statutory accounting principles followed in reporting to insurance regulatory authorities (see Note 16 for a description of such differences).

      Following is a description of the more significant risks facing property/casualty insurers and how the Company mitigates those risks:

      Legal/ Regulatory Risk is the risk that changes in the legal or regulatory environment in which an insurer operates will create additional loss costs or expenses not anticipated by the insurer in pricing its products. That is, regulatory initiatives designed to reduce insurer profits or new legal theories may create costs for the insurer beyond those recorded in the financial statements. The Company mitigates this risk through underwriting and loss adjusting practices, which identify and minimize the adverse impact of this risk.

      Credit Risk is the risk that issuers of securities owned by the Company will default, or other parties, including reinsurers, which owe the Company money, will not pay. The Company minimizes this risk by adhering to a conservative investment strategy and by maintaining sound reinsurance and credit and collection policies.

      Interest Rate Risk is the risk that interest rates will change and cause a decrease in the value of an insurer’s investments or an increase in the Company’s interest expense due on the Notes. The Company mitigates this risk by attempting to match the maturity schedule of its assets with the expected payout of its liabilities. To the extent that liabilities come due more quickly than assets mature, the Company would have to sell assets prior to maturity and recognize a gain or loss. At December 31, 2005, the estimated market value of the Company’s bond portfolio was lower than its cost, while at December 31, 2004, market value was greater than its cost. The interest rate on the Notes is based on a rate per annum of the three month LIBOR (London Inter-bank Offering Rate) plus 8%, reset quarterly.

Use of Estimates

      In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the consolidated financial statements, and revenues and expenses reported for the periods then ended. Actual results may differ from those estimates. Material estimates that are susceptible to significant change in the near term relate primarily to the determination of the reserves for losses and loss adjustment expenses and the recoverability of deferred tax assets.

F-19

FIRST MERCURY HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

Cash Equivalents

      The Company considers all short-term investments with a maturity date of three months or less from the date of purchase to be cash equivalents. The carrying amount approximates market value because of the short maturity of those instruments.

Investments

      The Company’s marketable investment securities, including short-term investments (money market accounts) held in our investment portfolio, are classified as available-for-sale, and, as a result, are reported at market value. A decline in the market value of any security below cost that is deemed other than temporary is charged to earnings and results in the establishment of a new cost basis for the security. In most cases, declines in market value that are deemed temporary are excluded from earnings and reported as a separate component of stockholders’ equity, net of the related taxes, until realized.

      The exception of this rule relates to investments with embedded derivatives, primarily convertible debt securities (see “Derivative Investments and Hedging Activities”).

      Premiums and discounts are amortized or accreted over the life of the related debt security as an adjustment to yield using the effective-interest method. For government agency mortgage-backed securities and collateralized mortgage obligations and other asset-backed securities, the life of the security is estimated by anticipating prepayments which are considered probable and the timing and the amount of the prepayments can be reasonably estimated. As differences between the estimated and actual prepayments arise, the yield for the security is recalculated based on the current information and the revised prepayment rate. Dividend and interest income are recognized when earned. Realized gains and losses are included in earnings and are derived using the specific-identification method for determining the cost of securities sold.

Deferred Policy Acquisition Costs

      Policy acquisition costs related to direct and assumed premiums consist of commissions, underwriting, policy issuance, and other costs that vary with and are primarily related to the production of new and renewal business, and are deferred, subject to ultimate recoverability, and expensed over the period in which the related premiums are earned. Investment income is included in the calculation of ultimate recoverability.

Goodwill and Intangible Assets

      The Company performs an annual impairment test for goodwill. Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”, requires the Company to compare the fair value of the reporting unit to its carrying amount on an annual basis, or earlier if triggering events occur, to determine if there is potential goodwill impairment. Fair values for goodwill are determined based on discounted cash flows, market multiples or appraised values as appropriate. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill within the reporting unit is less than its carrying value. The Company has determined there was no impairment of goodwill during the periods.

      In accordance with SFAS No. 142, intangible assets that are not subject to amortization shall be tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test shall consist of a comparison of the fair value of an intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess.

F-20

FIRST MERCURY HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

      In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets”, the carrying value of long-lived assets, including amortizable intangibles and property and equipment, are evaluated whenever events or changes in circumstances indicate that a potential impairment has occurred relative to a given asset or assets. Impairment is deemed to have occurred if projected undiscounted cash flows associated with an asset are less than the carrying value of the asset. The estimated cash flows include management’s assumptions of cash inflows and outflows directly resulting from the use of that asset in operations. The amount of the impairment loss recognized is equal to the excess of the carrying value of the asset over its then estimated fair value.

Fixed Assets

      Fixed assets are recorded at cost. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets, as follows:

Office building	39 years
Real estate improvements	7-39  years
Data processing equipment	3-8 years
Computer software	3-5 years

      Computer software includes the cost of developed software to be used internally. The Company has capitalized $70,286, $-0- and $40,537 of such costs during 2005, 2004 and 2003, respectively. These costs are being amortized on a straight-line basis over a five-year useful life.

Loss and Loss Adjustment Expense Reserves

      The reserves for losses and loss adjustment expenses represent the accumulation of individual case estimates for reported losses and loss adjustment expenses, and actuarial estimates for incurred but not reported losses and loss adjustment expenses. The reserves for losses and loss adjustment expenses are intended to cover the ultimate net cost of all losses and loss adjustment expenses incurred but unsettled through the balance sheet date. The reserves are stated net of anticipated deductibles, salvage and subrogation, and gross of reinsurance ceded. Reinsurance recoverables on paid and unpaid losses are reflected as assets. The reserve estimates are continually reviewed and updated; however, the ultimate liability may be more or less than the current estimate. The effects of changes in the estimated reserves are included in the results of operations in the period in which the estimate is revised.

Premiums

      Premiums are recognized as earned using the daily pro rata method over the terms of the policies. Unearned premiums represent the portion of premiums written that relate to the unexpired terms of policies-in-force.

Commissions and Fees

      Wholesale agency commissions and fee income from unaffiliated companies are earned at the effective date of the related insurance policies produced by CoverX. Related commissions to retail agencies are concurrently expensed at the effective date of the related insurance policies produced. Profit sharing commissions due from certain insurance companies, based on losses and loss adjustment expense experience, are earned when computed and communicated by the applicable insurance company.

      ARPCO Group fees are earned as services are provided under the terms of the administrative and service provider contracts.

F-21

FIRST MERCURY HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

Federal Income Taxes

      Federal income taxes are calculated using the liability method as specified by SFAS No. 109, “Accounting for Income Taxes”.

      Deferred taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect of a change in tax rate on deferred tax assets and liabilities is recognized in income in the period of enactment.

      The Company assesses the likelihood that deferred tax assets will be realized based on available taxable income in carryback periods and in future periods when the deferred tax assets are expected to be deducted in the Company’s tax return. A valuation allowance is established if it is deemed more likely than not that all or a portion of the deferred tax assets will not be realized.

Stock-Based Compensation

      Effective January 1, 2003, the Company adopted the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure — An Amendment to FASB Statement No. 123, and selected the prospective method of transition and began recognizing compensation expense based on the fair value method on newly granted stock awards (see Note 14). Under this method, compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the vesting period of the grant.

      In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment,” which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation”. SFAS No. 123(R) eliminates the option of accounting for share-based payments using the intrinsic value method and making only pro forma disclosures of the impact on earnings of the cost of stock options and other share-based awards measured using a fair value approach. SFAS No. 123(R) will require that companies measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award (i.e., the requisite service period) which is usually equal to the vesting period. SFAS No. 123(R) is effective starting January 1, 2006. The Company has evaluated the impact of adopting SFAS No. 123(R) and has determined there will be no impact on its financial statements because all outstanding stock options are fully vested. The Company will be impacted by SFAS No. 123(R) if it grants new awards.

Earnings Per Share

      Basic earnings per share are computed by dividing net income by the weighted-average number of shares of common stock outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if common stock equivalents were issued and exercised.

F-22

FIRST MERCURY HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

      The following is a reconciliation of basic number of common shares outstanding to diluted common and common equivalent shares outstanding.

	Successor		Predecessor
	For the Period		For the
	From		Period
	August 17, 2005		January 1,		For the Years Ended
	Through		2005 Through
	December 31,		August 16,		December 31,		December 31,
	2005		2005		2004		2003
Net income	$	6,711,778	$	16,122,728	$	17,734,813	$	10,976,512
Less: Dividends in arrears		1,329,152		2,125,010		1,848,397		—
Net income available to common	$	5,382,626	$	13,997,718	$	15,886,416	$	10,976,512
Weighted average number of common and common equivalent shares outstanding:
Basic number of common shares outstanding		4,482.2113		13,552.6747		13,017.6589		12,551.4250
Dilutive effect of stock options		890.7854		892.1497		1,258.3437		455.5293
Dilutive effect of convertible preferred stock		6,956.5217		6,956.5217		3,964.2644		—
Dilutive effect of cumulative dividends on preferred stock		691.0273		321.4603		—		—
Dilutive number of common and common equivalent shares outstanding		13,020.5451		21,722.8065		18,240.2670		13,006.9543
Basic Net Earnings Per Common Share	$	1,200.94	$	1,032.86	$	1,220.39	$	874.56
Diluted Net Earnings Per Common Share	$	515.49	$	742.22	$	972.30	$	843.93

Derivative Instruments and Hedging Activities

      SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives in the balance sheet at fair value. It also requires that unrealized gains and losses resulting from changes in fair value be included in income or comprehensive income, depending on whether the instrument qualifies as a hedge transaction, and if so, the type of hedge transaction.

      The Company does not hold derivatives for speculative purposes, and our derivatives do not constitute hedges for financial reporting purposes (see Note 9), accordingly, gains and losses are recognized in earnings. The fair value of these derivatives is included in other assets or other liabilities on the balance sheet.

      Certain of the Company’s financial instruments contain embedded derivatives where the economic characteristics of the embedded instrument do not closely relate to those of the host contract. The Company bifurcates these embedded derivatives under SFAS 133 and recognizes in realized gains and losses the changes in fair value. The fair value of these embedded derivatives, primarily related to investments in convertible debt securities, is included in investments on the balance sheet.

Segment Information

      Under Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS 131”), operating segments are determined by the management approach which designates the internal organization that is used by management for

F-23

FIRST MERCURY HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

allocating resources and assessing performance as the source of the Company’s reportable segments. SFAS 131 also requires disclosures about products and services, geographic areas and major customers.

      The Company has managed its business on the basis of one operating segment, Insurance Underwriting and Services Operations, in accordance with the qualitative and quantitative criteria established by SFAS 131, “Disclosures about Segments of an Enterprise and Related Information.”

      The Company’s operations are conducted throughout the United States of America. The Company’s net earned premiums are derived from substantially similar products.

Reclassifications

      Certain prior year amounts have been reclassified to conform to the current year presentation.

Recently Issued Accounting Standards

      In May 2005, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 154, “Accounting Changes and Error Corrections, a replacement of Accounting Principles Board Opinion (APB) No. 20, Accounting Changes and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements.” This Statement requires retrospective application to prior periods’ financial statements of a change in accounting principle. It applies both to voluntary changes and to changes required by an accounting pronouncement if the pronouncement does not include specific transition provisions. APB 20 previously required that most voluntary changes in accounting principles be recognized by recording the cumulative effect of a change in accounting principle. SFAS 154 is effective for fiscal years beginning after December 15, 2005. The adoption is not expected to have a material effect on the financial statements.

      In November 2005, the FASB issued Staff Position (“FSP”) Nos. FAS 115-1 and FAS 124-1. “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” This FSP addresses the determination as to when an investment is considered impaired, whether the impairment is other than temporary, and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP Nos. FAS 115-1 and FAS 124-1 are effective for reporting periods beginning after December 15, 2005; however, the disclosure requirements are already in effect. The adoption of this FSP is not expected to have a material effect on the Company’s results of operations or financial condition.

      In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments.” Under current generally accepted accounting principles, an entity that holds a financial instrument with an embedded derivative must bifurcate the financial instrument, resulting in the host and the embedded derivative being accounted for separately. SFAS No. 155 permits, but does not require, entities to account for financial instruments with an embedded derivative at fair value, thus negating the need to bifurcate the instrument between its host and the embedded derivative. SFAS No. 155 is effective for fiscal periods beginning after September 15, 2006. The Company does not expect that SFAS No. 155 will have a material impact on its consolidated financial statements.

      In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets.” SFAS No. 156 amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” to require that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. SFAS No. 156 permits, but does not require, the subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value. An entity that uses derivative instruments to mitigate the risks inherent in servicing assets and servicing liabilities is required to account for those derivative instruments at fair value. SFAS No. 156 is effective

F-24

FIRST MERCURY HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

for fiscal periods beginning after September 15, 2006. The Company does not expect that SFAS No. 156 will have a material impact on its consolidated financial statements.

2. Mergers and Acquisitions

      As of January 1, 2004, the stockholders of Quantum Direct Financial Corporation (QDFC), former parent of ANIC and QDSC, and FMFC approved a merger of QDFC into FMFC. At closing, FMFC issued 0.0753 shares of Class A common stock to QDFC stockholders for each share of QDFC Class A common stock. FMFC assumed all of the assets and obligations of QDFC. Prior to the merger, the entities were under common control. As a result, the merger was accounted for at QDFC’s historical basis. The 2005, 2004 and restated 2003 financial statements reflect the combined results of the entities as if the merger occurred at the beginning of 2003.

      On June 7, 2004, FMFC issued 250 shares of voting convertible preferred stock, resulting in an increase in its capitalization, and in a dilution of its ownership with no single stockholder owning a majority of the common stock of FMFC (see Note 13).

      Subsequently, on June 11, 2004, FMFC became the 100% owner of AHI in exchange for 150 shares of voting convertible preferred stock (see Note 13).

      On June 14, 2004, AHI acquired 100% of the common stock of the ARPCO Group for $20 million, funded with $15 million in cash and the issuance of a $5 million promissory note by FMFC (See Note 8). The former majority owner of the ARPCO Group also owned, at the date of the acquisition, common stock of FMFC representing a 34% voting interest in FMFC. Direct costs related to the acquisition totaling $514,671 were also capitalized as part of the purchase price.

      The purpose of this acquisition was to improve the Company’s operational earnings and cash flow potential, as well as to diversify the Company’s operations to include non-risk based, administrative and service fee income.

      The acquisition of the ARPCO Group was accounted for in accordance with SFAS 141, “Business Combinations.” The cost of the acquisition was allocated to the assets acquired and liabilities assumed based on estimates of their respective fair values at the date of acquisition. Fair values were determined by internal analysis and an independent third party appraisal.

      For tax purposes, the Company made a 338(h)(10) election that will treat the stock purchase as an asset purchase. Of the $17.5 million of acquired ARPCO Group intangible assets, $15.7 million was assigned to administrative agreement contracts and $1.8 million was assigned to other contracts, all of which is deductible for tax purposes. The amortization of these contractual agreements is on the straight-line method over their estimated useful lives of 15 years and was $732,337 for the period January 1, 2005 to August 16, 2005 and $631,944 in 2004.

      The excess of the purchase price over the fair value of the identifiable net assets acquired of $2,904,905 was allocated to goodwill. The increase in goodwill in 2005 of $480,210 resulted from a payment to the former ARPCO Group owners related to the 338(h)(10) election. As a result of the acquisition discussed below, these predecessor intangibles and goodwill amounts were eliminated and a new basis of accounting was established on August 17, 2005.

      The Company’s consolidated results of operations have incorporated the ARPCO Group’s activity on a consolidated basis from June 14, 2004, the date of acquisition. If the acquisition occurred January 1, 2004, the pro forma impact on revenues, net income, basic and diluted earnings per share would have been insignificant.

F-25

FIRST MERCURY HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

      On August 17, 2005, Holdings acquired 96.12% of FMFC through a Stock Contribution Agreement among Holdings and the stockholders of FMFC and through Holdings assumption of obligations of the FMFC stock option plan. FMFC stockholders and option holders received either cash, Holdings preferred or common stock, or Holdings options in exchange for their shares or options of FMFC. On December 29, 2005, the remaining outstanding shares of FMFC common stock were cancelled and converted to stockholder rights to receive cash through a merger of Holdings wholly owned subsidiary, FMMC with and into FMFC (the “Merger”). The estimated amount payable is reflected as shareholder rights payable. As a result of these transactions, Holdings acquired 100% of FMFC (the “Acquisition”).

      The Acquisition was accounted for as a purchase in accordance with SFAS No. 141 and Emerging Issues Task Force (EITF) Issue No. 88-16, “Basis In Leveraged Buyout Transactions.” (“EITF 88-16”). Because the transaction resulted in a “change in control” as described in EITF 88-16, the total purchase price was allocated to the acquired assets and liabilities based on their estimated fair values at the Acquisition date to the extent of the new investors ownership of 28%. The remaining 72% ownership was accounted for at the continuing investors’ carrying basis in FMFC. The resulting purchase price was $118,946,292. Cash consideration, including the accrual of shareholders rights amounts, of $60,111,258 was financed by Holdings issuance of the $65,000,000 in Senior Floating Rate Notes discussed in Note 7. Approximately $27.6 million of the cash consideration was paid to a common stockholder that had a 33% voting interest before the transaction and a 28% voting interest after the transaction. Financing costs of $4.8 million are being amortized over the seven year term of the notes as interest expense.

      The following table summarizes both the cash and non-cash consideration related to the Acquisition (In thousands).

Cash consideration
Cash paid to sellers, paid with the net proceeds of the $65 million in Senior Floating Rate Notes		$	60,111
Non-cash consideration(1)
Securities issued to continuing stockholders at carryover basis			80,616
Securities issued to continuing stockholder’s new ownership interest at fair value			21,131
Deemed dividend to continuing stockholders			(42,912	)
	Total purchase price	$	118,946

(1)  Securities issued were 400 shares of convertible preferred stock and 4,477 shares of common stock.

      The allocation of the excess fair value, to the extent of the new investor’s ownership of 28%, was determined by a preliminary valuation analysis by Company management. A final analysis by independent third party appraisal firms will be completed by the end of the second quarter of 2006, and the preliminary valuation will be adjusted at that time to the extent appropriate. The excess of the fair market value of the assets acquired and liabilities assumed over the purchase price taking into account the carryover basis applicable to the continuing stockholders’ residual interests in Holdings, has been allocated on a pro rata basis to reduce the fair values to amounts included in the Acquisition purchase price amount. The following table summarizes the estimated values of the assets acquired and liabilities assumed on August 17, 2005.

F-26

FIRST MERCURY HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

		(In thousands)
Assets Acquired
	Cash and invested assets	$	209,923
	Premiums and reinsurance balances receivable		16,636
	Accrued investment income		2,091
	Accrued profit sharing		5,696
	Reinsurance recoverables on paid and unpaid losses		16,914
	Prepaid reinsurance premiums		29,289
	Deferred acquisition costs		9,827
	Deferred federal income taxes		3,514
	Other assets		5,399
	Intangibles — amortizing		9,981
	Intangibles — non-amortizing		21,099
Total Assets Acquired		$	330,369
Liabilities Assumed
	Loss and loss adjustment expense reserves	$	92,154
	Unearned premium reserves		77,778
	Long-term debt		24,002
	Premiums payable to insurance companies		4,448
	Reinsurance payable on paid losses		5,231
	Other liabilities		7,810
Total Liabilities Assumed			211,423
Net Assets Acquired		$	118,946

      Components of intangible assets at December 31, 2005 (Successor) consisted of the following:

						Total
						Gross
		Estimated		Amortization		Carrying		Accumulated
		Useful Life		Method		Amount		Amortization
						(In thousands)
Amortizing intangible assets
	ARPCO contracts		15		Straight-line	$	6,283	$	231
	CoverX customer list		10		Cash flow		2,503		138
	CoverX broker relationships		10		Cash flow		935		52
	Software license		11		Straight-line		260		13
Total amortizing intangible assets						$	9,981	$	434
Non-amortizing intangible assets
	CoverX trade name		Indefinite		n/a		18,083		n/a
	FMIC & ANIC state licenses		Indefinite		n/a		3,016		n/a
Total non-amortizing intangible assets						$	21,099

F-27

FIRST MERCURY HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

      Our non-amortizing intangible assets consist of the trade name for CoverX and the state/jurisdiction licenses to conduct insurance operations, as it is expected that these intangibles will contribute to cash flows indefinitely. The trade name and the state/jurisdiction licenses have been in existence for many years and there is no foreseeable limit on the period of time over which they are expected to contribute cash flows. Aggregate amortization expense related to intangible assets was $434,330 for the Successor period August 17, 2005 through December 31, 2005. The weighted-average remaining useful life is 12.9 years. Estimated amortization expense is $1.1 million for each of the next five years.

      The following unaudited pro forma operating data presents the results of operations for the years ended December 31, 2005 and 2004 as if the Acquisition had occurred on January 1, 2005 and 2004, with financing obtained as described above, and assumes that there were no other changes in our operations. The pro forma results are not necessarily indicative of the financial results that might have occurred had the transaction actually taken place on January 1, 2005 and 2004, or of future results of operations:

	Pro Forma for		Pro Forma for
	the Year Ended		the Year Ended
	December 31,		December 31,
	2005		2004
	(Combined)		(Predecessor)
	(In thousands, except per share data)
Operating revenues	$	130,833	$	99,520
Operating income		40,472		29,368
Interest expense, net		10,801		10,219
Net income		19,432		12,215
Basic earning per share		3,567.19		2,315.40
Diluted earnings per share		1,536.38		1,259.30

F-28

FIRST MERCURY HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

3. Investments

      The amortized cost, gross unrealized gains and losses, and market value of marketable investment securities classified as available-for-sale at December 31, 2005 (Successor) by major security type were as follows:

			Gross Unrealized
	Amortized Cost		Gains		Losses			Market Value
Debt Securities
U.S. government securities	$	10,237,128	$	9,156	$	(360,949	)	$	9,885,335
Government agency mortgage-backed securities		6,919,032		17,501		(85,499	)		6,851,034
Government agency obligations		2,950,897		23,150		(48,347	)		2,925,700
Collateralized mortgage obligations and other asset-backed securities		32,820,452		37,262		(407,116	)		32,450,598
Obligations of states and political subdivisions		86,127,040		142,298		(704,287	)		85,565,051
Corporate bonds		45,578,630		8,296		(585,079	)		45,001,847
Total Debt Securities		184,633,179		237,663		(2,191,277	)		182,679,565
Preferred stocks		3,965,132		62,562		(768,326	)		3,259,368
Common stocks		26		49		—			75
Limited partnerships		73,373		—		—			73,373
Short-term investments		25,012,071		428		—			25,012,499
Total	$	213,683,781	$	300,702	$	(2,959,603	)	$	211,024,880

F-29

FIRST MERCURY HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

      The amortized cost, gross unrealized gains and losses, and market value of marketable investment securities classified as available-for-sale at December 31, 2004 (Predecessor) by major security type were as follows:

			Gross Unrealized
	Amortized Cost		Gains		Losses			Market Value
Debt Securities
U.S. government securities	$	38,345,578	$	82,488	$	(334,680	)	$	38,093,386
Government agency mortgage-backed securities		6,081,034		98,779		(12,942	)		6,166,871
Government agency obligations		6,629,599		168,219		(22,639	)		6,775,179
Collateralized mortgage obligations and other asset-backed securities		22,036,967		250,776		(236,670	)		22,051,073
Obligations of states and political subdivisions		40,405,529		712,778		(11,569	)		41,106,738
Corporate bonds		38,134,953		590,083		(423,797	)		38,301,239
Total Debt Securities		151,633,660		1,903,123		(1,042,297	)		152,494,486
Preferred stocks		4,333,600		121,729		(255,284	)		4,200,045
Common stocks		668		4,060		—			4,728
Limited partnerships		86,542		—		(14,416	)		72,126
Short-term investments		14,887,826		—		—			14,887,826
Total	$	170,942,296	$	2,028,912	$	(1,311,997	)	$	171,659,211

      The amortized cost and market value of debt securities, by contractual maturity, as of December 31, 2005 are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Additionally, the expected maturities of the Company’s investments in putable bonds fluctuate inversely with interest rates and therefore may also differ from contractual maturities.

	Amortized Cost		Market Value
Due in one year or less	$	5,602,458	$	5,484,279
Due after one year through five years		69,555,522		68,681,586
Due after five years through ten years		35,329,680		34,830,822
Due after ten years		34,406,035		34,381,246
		144,893,695		143,377,933
Government agency mortgage-backed securities		6,919,032		6,851,034
Collateralized mortgage obligations and other asset-backed securities		32,820,452		32,450,598
Total	$	184,633,179	$	182,679,565

F-30

FIRST MERCURY HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

      Net investment income was as follows:

	Successor			Predecessor
	August 17 to			January 1 to
	December 31,			August 16,
	2005			2005			2004			2003
Debt securities	$	2,456,110		$	3,847,871		$	4,529,005		$	3,606,191
Preferred stocks		89,417			140,085			(15,515	)		293,226
Cash and short-term investments		336,432			527,072			337,553			152,432
Net investment expenses		(253,048	)		(396,438	)		(232,464	)		(68,387	)
Net Investment Income	$	2,628,911		$	4,118,590		$	4,618,579		$	3,983,462

      Details of realized gains and losses on investments is as follows:

	Successor			Predecessor
	August 17 to			January 1 to
	December 31,			August 16,
	2005			2005			2004			2003
Realized gains	$	582,435		$	970,724		$	382,919		$	1,222,658
Realized losses		(304,195	)		(1,028,643	)		(502,681	)		(410,129	)
Net Realized Gains (Losses)	$	278,240		$	(57,919	)	$	(119,762	)	$	812,529

      FMIC and ANIC maintain trust accounts for the protection of reinsureds, pursuant to the assumed reinsurance contracts. These funds are to be used to pay or reimburse the reinsureds for FMIC’s and ANIC’s share of any losses and allocated loss adjustment expenses paid by the reinsureds if not otherwise paid by FMIC and ANIC. At December 31, 2005 and 2004, investments held in the trust accounts totaled approximately $93,234,000 and $104,780,000, respectively. In addition, CoverX maintains premium trust accounts, which represent premiums collected by CoverX but not yet remitted to the corresponding insurance carriers. The balances in the premium trust accounts as of December 31, 2005 and 2004 were approximately $3,972,000 and $2,423,000.

      At December 31, 2005 and 2004, FMIC had marketable securities approximating $6,992,000 and $5,125,000, respectively, on deposit with various states for regulatory purposes.

      At December 31, 2005 and 2004, ANIC had marketable securities approximating $2.1 million on deposit with the State of Minnesota.

4. Other Than Temporary Impairments of Investment Securities

      At December 31, 2005, 63.2% of the Company’s total investment portfolio was in an unrealized loss position and was determined by management to be temporarily impaired. Of the securities which were impaired, 21.8% had been impaired for more than 12 months, and the unrealized losses on these investments was only 2.2% of their total market value. Positive evidence considered in reaching the Company’s conclusion that the investments in an unrealized loss position are not other-than temporarily impaired consisted of: 1) there were no specific events which caused concerns; 2) there were no past due interest payments or other significant credit related events; 3) the Company’s ability and intent to retain the investment for a sufficient amount of time to allow an anticipated recovery in value; and 4) the Company also determined that the changes in market value were considered normal in relation to overall fluctuations in interest rates.

F-31

FIRST MERCURY HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

      The fair value and amount of unrealized losses segregated by the time period the investment had been in an unrealized loss position is as follows:

	Less Than 12 Months					Greater Than 12 Months
	Fair Value					Fair Value
	of					of
	Investments					Investments
	With		Gross			With		Gross
	Unrealized		Unrealized			Unrealized		Unrealized
December 31, 2005	Losses		Losses			Losses		Losses
Debt Securities
U.S. government securities	$	2,710,164	$	(40,807	)	$	6,177,623	$	(320,142	)
Government agency mortgage-backed securities		4,698,230		(73,656	)		497,814		(11,843	)
Government agency obligations		558,420		(5,859	)		1,380,298		(42,488	)
Collateralized mortgage obligations and other asset-backed securities		22,527,465		(244,716	)		4,781,765		(162,400	)
Obligations of states and political subdivisions		65,863,923		(616,467	)		3,128,559		(87,820	)
Corporate bonds		6,266,226		(90,309	)		12,294,073		(494,770	)
Total Debt Securities		102,624,428		(1,071,814	)		28,260,132		(1,119,463	)
Preferred Stocks		1,662,053		(300,762	)		869,265		(467,564	)
Total	$	104,286,481	$	(1,372,576	)	$	29,129,397	$	(1,587,027	)

5. Fixed Assets

      The following is a summary of fixed assets, included in other assets, as of December 31, 2005 and 2004:

	(Successor)			(Predecessor)
	2005			2004
Real estate and leasehold improvements	$	2,531,043		$	2,528,987
Data processing equipment		1,125,677			1,295,954
Computer software		2,995,619			2,731,962
Furniture and fixtures		858,630			772,891
Automobiles		591,816			391,368
		8,102,785			7,721,162
Accumulated depreciation		(4,624,520	)		(4,403,620	)
Fixed Assets, Net	$	3,478,265		$	3,317,542

6. Income Taxes

      FMHI files a consolidated federal income tax return with FMFC and its subsidiaries. Taxes are allocated among the Company’s subsidiaries based on the Tax Allocation Agreement employed by these

F-32

FIRST MERCURY HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

entities, which provides that taxes of the entities are calculated on a separate-return basis at the highest marginal tax rate. Income tax expense consists of:

	Successor			Predecessor
	August 17 to			January 1 to
	December 31,			August 16,
	2005			2005			2004			2003
Current — federal	$	4,561,543		$	8,711,496		$	7,873,384		$	3,710,045
Current — state		504,154			941,589			538,458			364,091
Deferred		(1,064,412	)		(1,016,687	)		1,594,476			(786,357	)
Total Income Tax Expense	$	4,001,285		$	8,636,398		$	10,006,318		$	3,287,779
Deferred Taxes On Other Comprehensive Loss Included In Stockholders’ Equity	$	(691,473	)	$	(495,872	)	$	(208,083	)	$	(204,356	)

      Our income tax rate percentage is reconciled to the U.S. federal statutory tax rate as follow:

	Successor			Predecessor
	For the Period			For the Period
	From August 17,			From January 1,
	2005			2005
	Through			Through
	December 31,			August 16,
	2005			2005			2004			2003
Federal statutory tax rate		35.0			35.0			35.0			35.0
State and local income taxes, net of federal benefit		3.0			2.6			2.3			1.7
Utilization of net operating loss carryforward		—			—			—			(13.2	)
Non-taxable portion of dividends and tax-exempt interest		(1.5	)		(1.5	)		(0.9	)		(0.8	)
Other		0.8			(1.2	)		(0.3	)		0.4
Effective Tax Rate		37.3			34.9			36.1			23.1

      Income taxes in the accompanying consolidated statements of operations differ from the statutory tax rate of 35% primarily due to state income taxes, non-deductible expenses, and the nontaxable portion of dividends received and tax-exempt interest.

F-33

FIRST MERCURY HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

      The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:

		(Successor)			(Predecessor)
December 31,		2005			2004
Deferred Tax Assets
	Loss and loss adjustment expense reserves	$	4,552,888		$	2,889,868
	Unearned premiums		3,331,758			2,582,576
	Investments at market below cost		930,615			—
Total Gross Deferred Tax Assets			8,815,261			5,472,444
Deferred Tax Liabilities
	Deferred policy acquisition costs		(3,395,160	)		(3,107,099	)
	Investments at market above cost		—			(249,881	)
	Other		(149,159	)		(113,642	)
Total Deferred Tax Liabilities			(3,544,319	)		(3,470,622	)
Net Deferred Tax Asset		$	5,270,942		$	2,001,822

      In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Although realization is not assured, the Company believes it is more likely than not that all of the net deferred tax asset will be realized.

7. Senior Floating Rate Notes

      On August 17, 2005, the Holdings issued $65 million in non-registered Senior Floating Rate Notes for sale to qualified institutional investors under SEC Rule 144A. The notes mature on August 15, 2012, and bear interest at a rate per annum, reset quarterly, equal to the three month LIBOR plus 8.000% (12.34% at December 31, 2005). Interest accrues from August 17, 2005 and is payable quarterly on each February 15, May 15, August 15, and November 15. During the period ended December 31, 2005, $3.0 million in interest was paid or accrued.

      None of Holdings’ present or future subsidiaries are, or will be directly or indirectly liable, by guarantee or otherwise, for Holdings’ obligations under the notes. The notes are secured by a pledge of all of the stock held by Holdings of Holdings’ direct subsidiary, FMFC.

      Holdings may redeem some or all of the notes at any time on or after August 15, 2006 at the following redemption prices (expressed as percentages of the principal amount thereof) if redeemed during the twelve-month period commencing on August 15, of the year set forth below:

Year	Percentage
2006		105%
2007		104%
2008		103%
2009		102%
2010		101%
2011 and thereafter		100%

      In addition, the Company must pay accrued and unpaid interest to the date of redemption on the notes redeemed.

F-34

FIRST MERCURY HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

      If there is a sale of all or substantially all of Holdings, the stock of FMFC or significant assets or significant subsidiaries, then Holdings must redeem some or all of the outstanding notes. If Holdings sells certain assets or experiences specific kinds of changes in control, it must offer to purchase the notes at 101% of the principal amount plus accrued interest.

      The notes rank senior in right of payment to any of Holdings future subordinated indebtedness and pari passu with any of Holdings’ future senior indebtedness.

      The indenture includes covenants that restrict Holdings’ ability and the ability of “restricted” subsidiaries to among other things: incur additional indebtedness and issue preferred stock; make certain distributions, investments and other restricted payments; sell assets; create certain liens; merge, consolidate or sell substantially all of its assets; enter into transactions with affiliates; and, engage in new lines of business (excluding new lines of insurance products). Holdings was in compliance with all covenants as of and for the period ended December 31, 2005.

8. Other Debt

Junior Subordinated Debentures

      During 2004, the FMFC issued floating rate junior subordinated debentures (the “Debentures”) having a cumulative principal amount of $20,620,000. The debentures were issued to First Mercury Financial Capital Trusts I and II (the “Trusts”). Cumulative interest on the principal sum of the Debentures accrues from the date of issuance and is payable quarterly in arrears at a variable rate per annum equal to three months LIBOR plus 3.75% related to the principal amount of $8,248,000 issued under Trust I and at a variable rate per annum equal to three months LIBOR plus 4.00% related to the principal amount of $12,372,000 issued under Trust II. At December 31, 2005, the three months LIBOR was equal to 4.37%. The Company shall have the right, so long as no Event of Default (as defined) has occurred, to defer the quarterly payment of interest for up to 20 consecutive quarterly periods; no such deferral has been made.

      The Debentures are unsecured obligations and rank subordinate and junior in right of payment to all Indebtedness (as defined) of the Company and there are no minimum financial covenants. The Debentures mature in 2034, but may be redeemed at the Company’s option in whole or in part beginning in 2009, or earlier upon the occurrence of certain special events defined in the Indentures governing the Debentures.

      In connection with the issuance of the Debentures, the Trusts sold floating rate preferred securities (“Preferred Securities”) having an aggregate liquidation amount of $20 million to private third party investors and issued floating rate common securities (“Common Securities”) having an aggregate liquidating amount of $620,000 to the Company. The terms of the Preferred Securities mirror the terms of the debentures, including deferral of distributions and early redemption at the option of the Company. All of the proceeds from the sale of Preferred Securities and Common Securities were invested in the Debentures. Preferred Securities and Common Securities represent undivided beneficial interests in the Debenture, which are the sole asset of the Trusts. Holders of Preferred Securities and Common Securities are entitled to receive distributions from the Trust on terms that correspond to the interest and principal payments due on the Debentures. Payment of distributions by the Trust and payments on liquidation of the Trust or redemption of Preferred Securities are guaranteed by the Company to the extent the Trust has funds available (the “Guarantee”). The Company’s obligations under the Guarantee, taken together with its obligations under the Debenture and the Indenture, constitute a full and unconditional guarantee of all of the Trust’s obligations under the Preferred Securities issued by the Trusts.

F-35

FIRST MERCURY HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

Bank Debt

      In 2003, the Company entered into a three year term loan maturing on June 30, 2006 and requiring quarterly principal payments of $333,334 plus interest, which floated at the prime rate. The loan, which was secured by the Company’s cash, receivables, and equipment, was paid off in full in May 2005, without penalty.

Other Long-Term Debt

      On June 14, 2004, the Company issued $5 million of unsecured promissory notes to certain stockholders of the Company in connection with the ARPCO Group acquisition (see Note 2), which could be repaid, in whole or in part, at the Company’s option, with no penalty or premium. In September 2005, the Company elected to pay off this note in full.

      In the third quarter 2003, the Company issued $1,915,000 of unsecured, non-convertible subordinated notes, which were callable, in whole or in part, at the Company’s option, with no penalty, on or after June 30, 2005, provided thirty days notice was given to the holder. The Company opted to call these notes, and they were fully paid off in September 2005. Company shareholders owned $1,815,000 of the subordinated notes.

      Related party interest expense was of $73,255, $366,273, $403,518 and $75,374 in the periods August 17 to December 31, 2005 (Successor), January 1 to August 16, 2005, 2004 and 2003 (Predecessor), respectively.

Subsequent Borrowing Arrangement

      On April 25, 2006, our subsidiary, First Mercury Financial Corporation, entered into a $10 million revolving credit agreement with a financial institution which matures on June 30, 2010. The agreement provides for outstanding borrowings to bear interest under one of three methods (at FMFC’s option) as defined in the credit agreement: (a) a fluctuating rate of interest equal to the higher of the bank’s Prime Rate and the sum of the Federal Funds Rate as determined by the bank plus ¹/2% per annum; (b) Eurodollar rate plus an “applicable margin” which varies dependent upon certain financial ratios; and (c) a negotiated rate plus an “applicable margin” which varies dependant upon certain financial ratios.

      The agreement contains various restrictive covenants that relate to FMFC’s stockholders’ equity, leverage ratio, A.M. Best Ratings of its insurance subsidiaries, fixed charge coverage ratio, surplus and risk based capital.

9. Derivative Financial Instruments

      The Company has entered into two interest rate swap agreements in order to fix the interest rate on its variable rate junior subordinated debentures and thereby reduce the exposure to interest rate fluctuations. At December 31, 2005, the interest rate swaps had a combined notional amount of $20,000,000. Under these agreements, the Company will pay the counterparty interest at a fixed rate of 4.12%, and the counterparty will pay the Company interest at a variable rate equal to three months LIBOR until expiration in August 2009. The notional amount does not represent an amount exchanged by the parties, and thus is not a measure of exposure of the Company. The variable rate is subject to change over time as LIBOR fluctuates.

      Neither the Company nor the counterparty, which is a major U.S. bank, is required to collateralize its obligation under the swap. The Company is exposed to loss if the counterparty should default. At December 31, 2005, the Company had minimal exposure to credit loss on the interest rate swap. The

F-36

FIRST MERCURY HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

Company does not believe that any reasonably likely change in interest rates would have a materially adverse effect on the financial position, the results of operations or cash flows of the Company.

10. Loss and Loss Adjustment Expense Reserves

      As discussed in Note 1, the Company establishes a reserve for both reported and unreported covered losses, which includes estimates of both future payments of losses and related loss adjustment expenses. The following represents changes in those aggregate reserves:

		Successor		Predecessor
		August 17 to		January 1 to
		December 31,		August 16,
		2005		2005		2004		2003
Balance, beginning of period		$	92,153,000	$	68,699,000	$	61,727,000	$	59,449,000
	Less reinsurance recoverables		15,340,000		5,653,000		5,083,000		4,942,000
Net Balance, beginning of period			76,813,000		63,046,000		56,644,000		54,507,000
Incurred Related To
	Current year		14,811,000		21,241,000		25,157,000		20,218,000
	Prior years		12,211,000		6,831,000		1,697,000		1,514,000
Total Incurred			27,022,000		28,072,000		26,854,000		21,732,000
Paid Related To
	Current year		1,493,000		626,000		498,000		841,000
	Prior years		10,347,000		13,679,000		19,954,000		18,754,000
Total Paid			11,840,000		14,305,000		20,452,000		19,595,000
Net Balance			91,995,000		76,813,000		63,046,000		56,644,000
	Plus reinsurance recoverables		21,869,000		15,340,000		5,653,000		5,083,000
Balance, end of period		$	113,864,000	$	92,153,000	$	68,699,000	$	61,727,000

      During the period January 1 to August 16, 2005, the Company experienced adverse development in its security industry general liability business, especially in the safety equipment class. In response to the adverse loss development, the Company increased its reserves applicable to prior accident years on this business by approximately $6.8 million. During the period August 17 to December 31, 2005, the Company increased its reserves applicable its security industry general liability business due adverse development by an additional $6 million and increased its reserves applicable to its specialty general liability classes of business by approximately $6.2 million. The specialty general liability increase was principally a result of using updated industry development factors, which became available during 2005, in the calculations of ultimate expected losses and reserves on that business.

11. Reinsurance

      In the normal course of business, FMIC and ANIC seek to reduce the loss that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with reinsurers. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy.

      Reinsurance contracts do not relieve the Company from its primary obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company; consequently, allowances are established for amounts deemed uncollectible. The Company evaluates the financial

F-37

FIRST MERCURY HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

condition of its reinsurers and monitors the concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. Based upon management’s evaluation, we have concluded the reinsurance agreements entered into by the Company transfer both significant timing and underwriting risk to the reinsurer and, accordingly, are accounted for as reinsurance under the provisions of SFAS No. 113 “Accounting and Reporting for Reinsurance for Short-Duration and Long-Duration Contracts.”

      FMIC assumes liability business on a quota share basis from primary insurers who write business produced through CoverX. Beginning in June 2004, and concurrent with an upgrade in the Company’s AM Best Rating to A-, the Company, to a much greater extent than before, directly writes this same business. As of December 31, 2005, the Company is writing essentially all of this business directly. FMIC retains, at varying percentages, the first $500,000 or $1 million per occurrence, depending on the underwriting year and program. The Company, as well as the other primary insurers, retain a portion of the quota share and cede excess and remaining quota share to others. For the periods August 17 to December 31, 2005 (Successor), January 1 to August 16, 2005, 2004 and 2003 (Predecessor), FMIC retained 42.0%, 51.8%, 41.1% and 32.3%, respectively, of the aforementioned liability business.

      ANIC assumes liability business on a quota share basis from primary insurers and reinsurers on business produced through CoverX. ANIC assumes, at varying percentages, the first $500,000 or $1 million per occurrence, depending on the underwriting year and program, while the primary insurers retain a portion of the quota share and cede excess and remaining quota share to others. In the Successor and Predecessor periods of 2005, 2004 and 2003, ANIC retained 8.2%, 8.5% and 8.1%, respectively, of the aforementioned liability business.

      Net written and earned premiums, including reinsurance activity as well as reinsurance recoveries, were as follows:

		Successor			Predecessor
		August 17 to			January 1 to
		December 31,			August 16,
		2005			2005			2004			2003
Written Premiums
	Direct	$	68,492,000		$	99,731,000		$	53,121,000		$	1,131,000
	Assumed		2,548,000			5,125,000			38,945,000			47,604,000
	Ceded		(33,812,000	)		(36,383,000	)		(19,171,000	)		(266,000	)
Net Written Premiums		$	37,228,000		$	68,473,000		$	72,895,000		$	48,469,000
Earned Premiums
	Direct	$	60,867,000		$	65,658,000		$	12,510,000		$	1,117,000
	Assumed		4,184,000			13,558,000			51,496,000			39,436,000
	Ceded		(25,759,000	)		(22,812,000	)		(4,279,000	)		(883,000	)
	Earned but unbilled premiums		854,000			1,172,000			1,564,000			668,000
Net Earned Premiums		$	40,146,000		$	57,576,000		$	61,291,000		$	40,338,000
Reinsurance Recoveries		$	1,083,000		$	1,804,000		$	1,511,000		$	1,282,000

      The Company manages its credit risk on reinsurance recoverables by reviewing the financial stability, A.M. Best rating, capitalization, and credit worthiness of prospective and existing risk-sharing partners. The Company customarily collateralizes reinsurance balances due from non-admitted reinsurers through funds withheld trusts or stand-by letters of credit issued by highly rated banks. The largest unsecured

F-38

FIRST MERCURY HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

reinsurance recoverable is due from an admitted reinsurer with an A.M. Best rating of “A” and accounts for 71.9% of the total recoverable from reinsurers.

      The Company had reinsurance recoverables from the following reinsurers:

	(Successor)		(Predecessor)
December 31,	2005		2004
	(In thousands)
ACE Property & Casualty Insurance Company	$	42,680	$	12,852
GE Reinsurance Corporation		13,094		3,913
Berkley Insurance Company		2,613		2,310
Others		976		1,913
Amount Recoverable From Reinsurers	$	59,363	$	20,988

      Amounts due from reinsurers on the accompanying balance sheet consisted of the following:

	(Successor)		(Predecessor)
December 31,	2005		2004
	(In thousands)
Reinsurance recoverable	$	22,483	$	6,096
Prepaid reinsurance premiums		36,880		14,892
Amount Recoverable From Reinsurers	$	59,363	$	20,988

12. Related Party Transactions

      First Home Insurance Agency (FHIA), is considered a related party to the Company due to common ownership of FHIA and Holdings. The Company provides systems support, accounting, human resources, claims and regulatory oversight for FHIA under an administrative services and cost allocation agreement. Under the terms of this agreement, FMFC charges a fee of 1.5% of premium from FHIA’s agency-produced business for systems usage, and allocates actual expenses and costs related to the activities discussed above. Costs related to this agreement and other allocated expenses were $283,686 and $686,940 for the periods August 17 to December 31, 2005 (Successor) and January 1 to August 16, 2005 (Predecessor), respectively. As of December 31, 2005, the Company had a receivable for these charges and other advances of $1,172,623 from FHIA.

      At December 31 2005, the Company had an unsecured loan to its chief executive officer in an aggregate principal amount of $750,000. The loan is evidenced by a promissory note and bears interest at 1% per annum compounded annually which is payable annually in arrears. The principal balance of the note is payable in three equal installments, commencing in May 2006. Additionally, the note is payable in full not later than thirty days after the officer ceases to be employed by the Company.

13. Convertible Preferred Stock

      All of FMFC’s obligations under the Series A Convertible Preferred Stock (“Preferred Stock”), par value $.01 per share, originally issued by FMFC in 2004 to Holdings’ current controlling shareholder, were assumed by Holdings in accordance with an Assumption Agreement entered into concurrently with the Stock Contribution Agreement of August 17, 2005 (See Note 2). The preferred stock is convertible into shares of the Company’s common stock at a conversion rate of $5,750 per share. The conversion rate of $5,750 is adjustable downward up to a maximum of $440 per share based on unfavorable actual loss results, measured using the three year period ending December 31, 2006. The conversion rate is adjustable only if any shares of the Series A Preferred Stock remain outstanding on or after January, 1, 2007. As

F-39

FIRST MERCURY HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

required by EITF 00-27 this contingent conversion option is triggered by future events not controlled by the Company, and therefore is not recognized until and unless the triggering event occurs. The shares carry full voting rights and are mandatorily convertible 15 years from date of issue. They carry a cumulative, 8% dividend, payable in kind, and are only payable in case of a liquidating event as defined in the Purchase Agreement. The Purchase Agreement provides that the Company pay an annual fee of $750,000 in consideration for advisory services.

      The Purchase Agreement contains various financial and other covenants that require, among other things, FMFC to maintain a certain level of shareholder’s equity, a minimum level of pre-tax operating income, and a defined leverage ratio and fixed charge coverage ratio. In addition, FMFC’s insurance subsidiaries must maintain certain risk-based capital and surplus levels. Violation of these covenants would result in various remedies that are defined in the Purchase Agreement and include an increase in the dividend rate on the Preferred Stock, Investor’s control of the Board, and preferences in a change of control transaction. FMFC and Holdings were in compliance with these covenants as of and for the year ended December 31, 2005.

14. Stockholders’ Equity

Dividend Restriction

      FMFC’s insurance company subsidiaries, FMIC and ANIC, are limited in their ability to pay dividends to FMFC. FMIC may declare and pay dividends according to the provisions of the Illinois Insurance Holding Company Systems Act, which provides that, without prior approval of the Illinois Insurance Department, dividends may not exceed the greater of 10% of FMIC’s policyholders’ surplus on the most recent annual statutory financial statement filed with the State of Illinois or net income after taxes for the prior year. In 2006, FMIC’s dividends may not exceed approximately $7,703,000.

      ANIC may declare and pay dividends according to the provisions of the Minnesota Insurance Holding Company Systems Act, which provides that, without prior approval of the Minnesota Department of Commerce, dividends may not exceed the greater of 10% of ANIC’s policyholders’ surplus on the most recent annual statutory financial statement filed with the State of Minnesota or net income, excluding capital gains or losses, for the prior year. ANIC can pay dividends of approximately $1,981,000 in 2006.

Stock Compensation Plan

      The FMFC stock option plan was established September 3, 1998, and was assumed by Holdings concurrent with the Acquisition of FMFC on August 17, 2005. Under the terms of the plan, directors, officers, employees, and other key individuals may be granted options to purchase the Company’s common stock. A total of 5,000 shares of the Company’s common stock are reserved and 2,724 are available for future grant under the plan. Option and vesting periods and option exercise prices are determined by the Compensation Committee of the Board of Directors, provided no stock options shall be exercisable more than ten years after the grant date. All outstanding stock options under the plan became fully vested on August 17, 2005 under the change in control provision in the plan.

F-40

FIRST MERCURY HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

      A summary of the Company’s stock option activity was as follows:

	Successor					Predecessor
	August 17 to					January 1 to
	December 31,					August 16,
	2005					2005				2004					2003
				Weighted				Weighted					Weighted				Weighted
	Number			Averaged		Number		Averaged		Number			Averaged		Number		Averaged
	of			Exercise		of		Exercise		of			Exercise		of		Exercise
	Options			Price		Options		Price		Options			Price		Options		Price
Options outstanding at beginning of period		1,250			1,711.55		1,250		1,711.55		2,232			1,627.63		1,547		1,623.74
Granted during the period		—			—		—		—		44			4,500.00		685		1,636.44
Exercised during the period		(40	)		1,800.00		—		—		(1,026	)		1,648.56		—		—
Options outstanding at end of period		1,210			1,715.23		1,250		1,711.55		1,250			1,711.55		2,232		1,627.63
Options exercisable		1,210			1,715.23		272		1,614.31		19			1,611.70		723		1,650.30

      The number of stock options outstanding and exercisable at December 31, 2005 by range of exercise prices was as follows:

Options Outstanding							Options Exercisable
			Weighted
			Average		Weighted				Weighted
			Remaining		Average				Average
			Contract		Exercise				Exercise
Range of Exercise Prices	Number		Life		Price		Number		Price
$1,400.00-$1,980.00		1,166		3.4		1,610.18		1,170		1,610.18
$4,500.00		44		3.8		4,500.00		40		4,500.00

      The grant date fair values were $515 in 2003 and $805 in 2004 and were estimated using the Black-Scholes option-pricing model. The following assumptions were used in the Black-Scholes calculation for options granted in 2003 and 2004: risk-free rate of return of 3.70%, dividend yield of 0%, and expected life of 5 years. No volatility factor was included in the Black-Scholes calculation.

      Pursuant to SFAS No. 148, the Company recognized $76,329, $109,618 and $49,663 in compensation expense in the periods January 1, 2005 through August 16, 2005, 2004, and 2003, respectively, related to stock option grants in these periods.

15. Regulatory Requirements

Capitalization

      FMIC was originally formed in 1996 as an Illinois Domestic Stock Property and Casualty Insurer operating on an admitted basis in Illinois, which required maintaining minimum capital and surplus of $2 million. On July 15, 2004, FMIC received approval from the Illinois Department of Insurance and became an Illinois Domestic Stock Surplus Lines Insurer. With this change in status Illinois now requires a minimum $15 million in surplus of which $1 million must be paid in capital to qualify for domestic surplus lines status. FMIC was in compliance with the applicable requirements at December 31, 2005, 2004, and 2003.

      The State of Minnesota requires ANIC to maintain a minimum of $1.5 million in capital stock and surplus, which they were in compliance with at December 31, 2005, 2004, and 2003.

Risk-Based Capital

      The National Association of Insurance Commissioners (NAIC) has established risk-based capital models to measure the adequacy of capitalization for insurance companies. The model calculates minimum

F-41

FIRST MERCURY HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

capital requirements for each insurer based on certain criteria, including investment risk, underwriting profitability and losses and loss adjustment expense risk. As of December 31, 2005, 2004, and 2003, FMIC and ANIC exceeded the minimum capital requirements determined by the NAIC’s risk-based capital models.

16. Statutory Financial Information

      The statutory net income and stockholder’s equity of the Company’s insurance subsidiaries were as follows:

	Successor		Predecessor
	August 17 to		January 1 to		Year Ended		Year Ended
	December 31, 2005		August 16, 2005		December 31, 2004		December 31, 2003
Net Income	$	1,894,100	$	6,330,640	$	8,217,635	$	3,408,801
December 31,		2005				2004		2003
Stockholder’s Equity	$	89,172,996			$	77,092,539	$	41,170,458

      Accounting practices that result in significant differences between the Company’s consolidated net income and stockholder’s equity prepared in accordance with GAAP and with statutory accounting practices are: consolidation of insurance and non-insurance subsidiaries; modification of deferred income taxes; establishment of deferred acquisition costs; admission of non-admitted statutory assets; and reporting investment securities at market value.

17. Defined Contribution Plan

      The Company maintains an employer-sponsored 401(k) plan. All employees are eligible to participate in the plan on the first day of the calendar quarter following 30 days of service and having attained 21 years of age. Employer contributions are voluntary and are allocated based upon the participants’ compensation and contribution levels. Vesting in the plan is immediate. The Company’s expense for this plan was approximately $75,000 for the period August 17 to December 31, 2005 (Successor), $125,000 for the period January 1 to August 16, 2005, $136,000 in 2004 and $106,000 in 2003 (Predecessor).

18. Fair Value of Financial Instruments

      The Company’s financial instruments include investments, cash and cash equivalents, premiums and reinsurance balances receivable, reinsurance recoverable on paid losses and long-term debt. At December 31, 2005, the carrying amounts of the Company’s financial instruments, including its derivative financial instruments, approximated fair value. The fair values of the Company’s investments, as determined by quoted market prices, are disclosed in Note 3.

F-42

SCHEDULE I

FIRST MERCURY HOLDINGS, INC.

Summary of Investments — Other than Investments in Related Parties

As of December 31, 2005 (In Thousands)

						Amount at Which
						Shown in the
Type of Investment		Cost		Value		Balance Sheet
Fixed Maturities:
Bonds:
	U.S. government and government agencies and authorities	$	20,107	$	19,662	$	19,662
	States and political subdivisions		86,127		85,565		85,565
	Collateralized mortgage obligations and other asset-backed securities		32,820		32,451		32,451
	Convertibles		14,808		14,431		14,431
	All other corporate bonds		30,771		30,570		30,570
	Redeemable preferred stock		2,022		1,550		1,550
Total Fixed Maturities			186,655		184,229		184,229
Equity Securities:
Common stocks:
	Industrial, miscellaneous and all other		100		75		75
Nonredeemable preferred stocks			1,917		1,709		1,709
Total Equity Securities			2,017		1,784		1,784
Short-Term Investments			25,012		25,012		25,012
Total Investments		$	213,684	$	211,025	$	211,025

See report of Independent Registered Public Accounting Firm.

F-43

SCHEDULE II

FIRST MERCURY HOLDINGS, INC.

Condensed Financial Information of Registrant

Condensed Balance Sheet

(In Thousands)

		(Successor)
December 31,		2005
ASSETS
Cash and cash equivalents		$	3,308
Federal income tax recoverable			1,117
Debt issuance costs, net of amortization			4,536
Investment in subsidiaries			126,448
Total Assets		$	135,409
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
	Senior notes	$	65,000
	Shareholders rights payable		5,049
	Accrued expenses and other liabilities		1,032
Total Liabilities			71,082
Commitments and Contingencies
Stockholders Equity
	Convertible preferred stock, $.01 par value; 400 shares Authorized; issued and outstanding Series A voting, 400 shares		—
	Common stock, $.01 par value; authorized 59,000 shares; 4517.2478 shares issued and outstanding		—
Paid-in capital			58,899
Accumulated other comprehensive income			(1,284	)
Retained earnings			6,712
Treasury stock			—
Total Stockholders’ Equity			64,327
Total Liabilities and Stockholders’ Equity		$	135,409

See report of Independent Registered Public Accounting Firm.

F-44

SCHEDULE II

FIRST MERCURY HOLDINGS, INC.

Condensed Financial Information of Registrant

Condensed Statement of Operations

(In Thousands)

		Successor
		August 17 to
		December 31,
		2005
Revenue
	Income from subsidiaries	$	8,785
	Net investment income		36
Total Revenues			8,821
Losses and Expenses
	Interest expense		3,220
	Other expenses		6
Total Expenses			3,226
Income Before Income Taxes			5,598
Income Tax Benefit			1,117
Net Income			6,712
Other Comprehensive Loss
	Equity in other comprehensive loss of consolidated subsidiary		(1,284	)
Comprehensive Income			5,428

See report of Independent Registered Public Accounting Firm.

F-45

SCHEDULE II

FIRST MERCURY HOLDINGS, INC.

Condensed Financial Information of Registrant

Condensed Statement of Cash Flows

(In Thousands)

				Successor
				August 17 to
				December 31,
				2005
Cash Flows From Operating Activities
	Net income			$	6,712
	Adjustments to reconcile net income to net cash provided by operating activities
		Undistributed equity in consolidated subsidiary			(8,785	)
		Amortization of debt issuance costs			256
		Increase (decrease) in cash resulting from changes in assets and liabilities
			Accrued federal income taxes		(1,117	)
			Accrued interest and other expenses		1,032
Net Cash Provided By Operating Activities					(1,902	)
Cash Flows From Investing Activities
	Purchase of outstanding shares of FMFC				(55,062	)
Cash Flows From Financing Activities
Proceeds from stock options exercised					64
Issuance of senior notes, net of debt issuance costs					60,208
Net Cash Provided By Financing Activities					60,272
Net Increase In Cash and Cash Equivalents					3,308
Cash and Cash Equivalents, at the beginning of the period					—
Cash and Cash Equivalents, at the end of period					3,308

See report of Independent Registered Public Accounting Firm.

F-46

SCHEDULE IV

FIRST MERCURY HOLDINGS, INC.

Reinsurance

($ In Thousands)

									Percent of
			Ceded to		Assumed				Amount
			Other		from Other				Assumed
	Direct		Companies		Companies		Net		to Net
Period August 17 to December 31, 2005 (Successor):	$	68,492	$	33,812	$	2,548	$	37,228		6.8%
Period January 1 to December 16, 2005 (Predecessor):		99,731		36,383		5,125		68,473		7.5%
Year ended December 31, 2004 (Predecessor):		53,121		19,171		38,945		72,895		53.4%
Year ended December 31, 2003 (Predecessor):		1,131		266		47,604		48,469		98.2%

See report of Independent Registered Public Accounting Firm.

F-47

SCHEDULE VI

FIRST MERCURY HOLDINGS, INC.

Supplemental Information Concerning Insurance Operations

(In Thousands)

											Loss and Loss
											Adjustment
			Unpaid								Expenses Incurred				Amortization
	Deferred		Loss and								Related to				Deferred
	Policy		Loss		Net		Net		Net						Policy		Other		Net
	Acquisition		Adjustment		Unearned		Earned		Investment		Current		Prior		Acquisition		Operating		Premiums
	Costs, Net		Expense		Premium		Premium		Income		Year		Year		Costs		Expenses		Written
Period August 17 to December 31, 2005 (Successor):	$	9,700	$	113,864	$	47,597	$	40,146	$	2,629	$	14,811	$	12,211	$	7,954	$	6,146	$	37,228
Period January 1 to August 16, 2005 (Predecessor):		9,827		92,153		48,489		57,576		4,119		21,241		6,831		12,676		8,491		68,473
Year ended December 31, 2004 (Predecessor):		9,071		68,699		37,592		61,291		4,619		25,157		1,697		15,713		27,585		72,895
Year ended December 31, 2003 (Predecessor):		6,772		61,727		24,423		40,338		3,983		20,218		1,514		11,995		29,923		48,469

See report of Independent Registered Public Accounting Firm.

F-48

GLOSSARY OF SELECTED INSURANCE TERMS

      Accident year The annual accounting period in which loss events occurred, regardless of when the losses are actually reported, recorded or paid.

      Admitted assets Assets of an insurer permitted by a state to be taken into account in determining the insurer’s financial condition for statutory purposes.

      Admitted insurers Insurers operating on an admitted basis that file premium rate schedules and policy forms for review and, in some states, approval by the insurance regulators in each state in which they do business. Admitted carriers also are subject to other market conduct regulation and examinations in the states in which they are licensed.

      Allocated loss adjustment expenses Loss adjustment expenses specifically identified and allocated to a particular claim.

      Assume To accept from the primary insurer or reinsurer all or a portion of the liability underwritten by such primary insurer or reinsurer.

      Assumed reinsurance Insurance liabilities acquired from a ceding company through reinsurance.

      Calendar year The calendar year in which loss events were recorded, regardless of when the losses are actually reported or paid.

      Capacity The percentage of surplus, or the dollar amount of exposure, that an insurer or reinsurer is willing or able to place at risk. Capacity may apply to a single risk, a program, a line of business or an entire book of business. Capacity may be constrained by legal restrictions, corporate restrictions, or indirect restrictions.

      Case reserves Loss reserves established with respect to outstanding, individually reported claims.

      Casualty insurance Coverage primarily for the liability of an individual or organization that results from negligent acts and/or omissions, that cause bodily injury and/or property damage to a third party.

      Combined ratio The sum of the loss and loss adjustment expense ratio and the expense ratio, each determined in accordance with GAAP or SAP, as applicable. A combined ratio under 100% generally indicates an underwriting profit. A combined ratio over 100% generally indicates an underwriting loss.

      Earned premium The portion of premiums written that is allocable to the expired portion of the policy term.

      Excess and surplus (“E&S”) lines Insurance coverage generally not available from an admitted company in the regular market; thus, a surplus lines broker agent representing an applicant seeks coverage in the surplus lines market from a nonadmitted insurer according to the insurance regulations of a particular state.

      Excess of loss reinsurance Reinsurance that indemnifies the reinsured against all or a specified portion of losses under reinsured policies in excess of a specified dollar amount or “retention.”

      Expense ratio The ratio of (i) the amortization of deferred acquisition expenses plus other operating expenses, less expenses related to insurance services operations, less commissions and fee income related to underwriting operations to (ii) net earned premiums. (For statutory purposes, the ratio of underwriting expenses incurred to net written premiums.)

      Fronting The process by which a primary insurer cedes all or virtually all of the insurance risk of loss to a reinsurer who also controls the underwriting and/or claims handling process either directly or through a managing general agent.

      General liability insurance Coverage primarily for the liability of an individual or organization that results from negligent acts and/or omissions that cause bodily injury and/or property damage on the

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premises of a business, when someone is injured as the result of using the product manufactured or distributed by a business or when someone is injured in the general operation of a business.

      Hard market The “up” phase of the underwriting cycle where competition is less intense, underwriting standards become more stringent, the supply of insurance is limited due to the depletion of capital and, as a result, rates rise. The prospect of higher profits draws more capital into the marketplace, leading to more competition and the corresponding “down” or “soft” phase of the cycle.

      IBNR claims or IBNR reserves See “Incurred but not reported”

      Incurred but not reported (“IBNR”) reserves Reserves for estimated losses and loss adjustment expenses which have been incurred but not yet reported to the insurer.

      Incurred losses Paid loss and loss adjustment expenses, case reserves for estimated losses and loss adjustment expenses and IBNR reserves.

      Insurance Regulatory Information System (“IRIS”) ratios Financial ratios calculated by the NAIC to assist state insurance departments in monitoring the financial condition of insurance companies.

      Liability insurance Coverage for sums that the insured becomes legally obligated to pay because of bodily injury or property damage, and sometimes other wrongs to which an insurance policy applies.

      Loss An occurrence that is the basis for submission and/or payment of a claim and the costs of indemnification of such a claim. Losses may be covered, limited, or excluded from coverage, depending on the terms of the policy.

      Loss adjustment expenses The expenses of settling claims, including legal and other fees and the portion of internal operating expenses allocated to claim settlement costs.

      Loss and loss adjustment expense reserves or LAE reserves A balance sheet liability for unpaid losses and loss adjustment expenses which represents estimates of amounts needed to pay losses and loss adjustment expenses, both on claims which have been reported but have not yet been resolved and on claims which have occurred but have not yet been reported.

      Loss ratios The ratio of incurred losses and loss adjustment expenses to net earned premiums.

      Loss reserves Liabilities established by insurers and reinsurers to reflect the estimated cost of claims incurred that the insurer or reinsurer will ultimately be required to pay in respect of insurance or reinsurance it has written. Reserves are established for losses and consist of case reserves and IBNR reserves.

      Losses and loss adjustment expenses The sum of losses and loss adjustment expenses incurred.

      Losses incurred The total losses sustained by an insurance company under a policy or policies, whether paid or unpaid. Losses incurred include a provision for IBNR.

      National Association of Insurance Commissioners (“NAIC”) An organization of the insurance commissioners or directors of all 50 states and the District of Columbia organized to promote consistency of regulatory practice and statutory accounting standards throughout the United States.

      Net earned premiums The portion of premiums written that is recognized for accounting purposes as revenue during a period, i.e., the portion of premiums written allocable to the expired portion of policies after the assumption and cessation of reinsurance.

      Net written premiums Direct written premiums plus assumed written premiums less premiums ceded to reinsurers.

      P&C See “Property insurance” and “Casualty insurance.”

      Policyholders’ surplus As determined under SAP, the amount remaining after all liabilities, including loss reserves, are subtracted from all admitted assets. Policyholder surplus is also referred to as “statutory surplus,” “surplus” or “surplus as regards policyholders” for statutory accounting purposes.

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      Premiums produced Premiums billed by CoverX on insurance policies that it produces and underwrites on behalf of FMIC and other third party insurers.

      Professional liability Coverage for specialists in various professional fields. Since basic liability policies do not protect against situations arising out of business or professional pursuits, professional liability insurance is purchased by individuals who hold themselves out to the general public as having greater than average expertise in particular areas.

      Property insurance Insurance that provides coverage to a person with an insurable interest in tangible property for that person’s property loss, damage or loss of use.

      Quota share reinsurance Reinsurance under which the insurer cedes an agreed fixed percentage of liabilities, premiums, and losses for each policy covered on a pro rata basis.

      Rates Amounts charged per unit of insurance.

      Redundancy (deficiency) Estimates in reserves change as more information becomes known about the frequency and severity of claims for each year. A redundancy (deficiency) exists when the liability is less (greater) than the posted reserves. The cumulative redundancy (deficiency) is the aggregate net change in estimates over time subsequent to establishing the original liability estimate.

      Reinsurance Form of insurance that insurance companies buy for their own protection, i.e., “a sharing of insurance.” An insurer reduces its possible maximum loss on either an individual risk or a large number of risks by giving a portion of its liability to another insurance company.

      Reinsurance recoverables Recoverables on paid and unpaid losses and loss adjustment expenses, plus ceded unearned premiums (also referred to as prepaid reinsurance premiums), less ceded reinsurance balances payable (ceded premiums payable net of ceding commissions receivable including any profit sharing ceding commissions).

      Reserves or loss reserves Estimated liabilities established by an insurer to reflect the estimated costs of claims payments that the insurer will ultimately be required to pay with respect to insurance it has written.

      Retention See “Risk retention.”

      Risk-based capital (“RBC”) A measure adopted by the NAIC and enacted by states for determining the minimum statutory capital and surplus requirements of insurers with required regulatory and company actions that apply when an insurer’s capital and surplus is below these minimums.

      Risk retention The amount or portion of a risk an insurer retains for its own account after ceded reinsurance. Losses above the stated retention level are collectible from the reinsurer. The retention level may be stated as a percentage or dollar amount.

      Soft market The “down” phase of the underwriting cycle, characterized by the drop in premium rates as insurance companies compete vigorously to increase market share. As the market softens to the point that profits diminish or vanish completely, the capital needed to underwrite new business is depleted, leading to less competition and the corresponding “up” or “hard” phase of the cycle.

      Specialty insurance Coverage for businesses whose risks are harder to assess because of the nature of the endeavor or limited number of potential insured, where underwriters have been reluctant to write coverages, or when new kinds of businesses emerge.

      Statutory accounting principles (“SAP”) The accounting principles required by statute, regulation, or rule, or permitted by specific approval by the insurance department in the insurance company’s state of domicile for recording transactions and preparing financial statements.

      Statutory surplus See “Policyholders’ surplus.”

      Subrogation A principle of law incorporated in insurance policies, which enables an insurance company, after paying a loss to its insured, to recover the amount of the loss from another who is legally liable for it.

G-3

      Surplus See “Policyholders’ surplus.”

      Third party administrator Performance of managerial and clerical functions related to an insurance plan by an unaffiliated individual or company.

      Third party liability A liability owed to a claimant (or “third party”) who is not one of the two parties to the insurance contract. Insured liability claims are referred to as third party claims.

      Treaty reinsurance A reinsurance agreement between the ceding company and the reinsurer, usually for one year or longer, which stipulates the technical particulars applicable to the reinsurance of some class or classes of business. Reinsurance treaties may be divided into two broad classifications: (1) the participating type (proportional) which provides for sharing of risks between the ceding company and the reinsurer; and (2) the excess type (non-proportional) which provides for indemnity by the reinsurer only for a loss that exceeds some specified predetermined monetary amount.

      Unallocated loss adjustment expenses Loss adjustment expenses not specifically identified to a particular case, including claims department expenses, and general overhead and administrative expenses associated with the adjustment and processing of claims. These expenses are based on internal cost studies and analyses.

      Underwriter An individual who examines, accepts, or rejects risks and classifies accepted risks in order to charge an appropriate premium for each accepted risk. The underwriter is expected to select business that will produce an average risk of loss no greater than that anticipated for the class of business.

      Underwriting The insurer’s or reinsurer’s process of reviewing applications for insurance coverage, and the decision whether to accept all or part of the coverage and determination of the applicable premiums; also refers to the acceptance of such coverage.

      Underwriting expenses All costs associated with acquiring and servicing business, including commissions, premium taxes, and general and administrative expenses.

      Underwriting profit or underwriting loss results The pre-tax profit or loss experienced by a property and casualty insurance company after deducting loss and loss adjustment expenses and underwriting expenses. This profit or loss calculation includes reinsurance assumed and ceded but excludes investment income.

      Unearned premium The portion of premiums written that is allocable to the unexpired portion of the policy term.

      Writing The issuance by an insurance company of an insurance policy. Direct writing occurs when the insurance company issues the insurance policy and has primary liability to the policyholder. Indirect writing occurs when an insurance company assumes a portion of the risk under a policy from the issuer of the insurance policy as a reinsurer or through quota share arrangements.

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                                    Shares

First Mercury

Financial Corporation

Common Stock

PROSPECTUS

                    , 2006

JPMorgan Keefe, Bruyette & Woods

Cochran Caronia Waller

William Blair & Company

Dowling & Partners Securities

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution.

      The following sets forth the estimated expenses and costs (other than underwriting discounts ) expected to be incurred in connection with the issuance and distribution of the common stock registered hereby:

SEC registration fee	$	20,304
NASD fee		*
Exchange listing fee		*
Printing and engraving expenses		*
Accounting fees and expenses		*
Legal fees and expenses		*
Transfer agent fees and expenses		*
Miscellaneous		*
TOTAL		*

*  To be filed by amendment.

      We are required to bear all fees, costs and expenses (except underwriting discounts and commissions) in connection with this offering.

Item 14. Indemnification of Directors and Officers.

      Section 145 of the Delaware General Corporation Law, or the DGCL, provides, among other things, that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the corporation’s request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys’ fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with the action, suit or proceeding. The power to indemnify applies (i) if such person is successful on the merits or otherwise in defense of any action, suit or proceeding or (ii) if such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The power to indemnify applies to actions brought by or in the right of the corporation as well, but only to the extent of defense expenses, (including attorneys’ fees but excluding amounts paid in settlement) actually and reasonably incurred and not to any satisfaction of judgment or settlement of the claim itself, and with the further limitation that in such actions no indemnification shall be made in the event of any adjudication of negligence or misconduct in the performance of his duties to the corporation, unless a court believes that in light of all the circumstances indemnification should apply.

      Our amended and restated certificate of incorporation provides that we shall indemnify and hold harmless, to the fullest extent permitted by applicable law as it presently exists or may hereafter be amended, any person who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative, any or all of which may be referred to as a proceeding, by reason of the fact that he or she, or a person for whom he or she is the legal representative, is or was at any time a director or officer of the corporation or, while a director or officer of the corporation, is or was at any time serving at the written request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, enterprise or nonprofit entity, including service with respect to employee benefit plans, against all liability

II-1

and loss suffered and expenses (including attorneys’ fees) reasonably incurred by such person; provided, however, that we shall be required to indemnify a person in connection with a proceeding (or part thereof) initiated by such person only if the commencement of such proceeding (or part thereof) was authorized by our board of directors.

      Section 102 of the DGCL permits the limitation of directors’ personal liability to the corporation or its stockholders for monetary damages for breach of fiduciary duties as a director except for (i) any breach of the director’s duty of loyalty to the corporation or its stockholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law, (iii) breaches under section 174 of the DGCL, which relates to unlawful payments of dividends or unlawful stock repurchase or redemptions, and (iv) any transaction from which the director derived an improper personal benefit.

      Our amended and restated certificate of incorporation limits the personal liability of our directors to the fullest extent permitted by section 102 of the DGCL.

      Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the registrant pursuant to the foregoing provisions, the registrant has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

      We maintain directors’ and officers’ liability insurance for our officers and directors.

      The underwriting agreement for this offering will provide that each underwriter severally agrees to indemnify and hold harmless the Company, each of our directors, each of our officers who signs the registration statement, and each person who controls the Company within the meaning of the Securities Act but only with respect to written information relating to such underwriter furnished to the Company by or on behalf of such underwriter specifically for inclusion in the documents referred to in the foregoing indemnity.

Item 15. Recent Sales of Unregistered Securities.

      The following is a summary of transactions involving sales of our securities during the three years prior to the filing of this registration statement that were not registered under the Securities Act.

      During the third quarter of 2003, we issued seven unsecured, non-convertible subordinated notes having an aggregate principal amount of $4,415,000 to a group of investors, including $1,000,000 of which was issued to Mr. Shaw and $70,000 of which was issued to Mr. Weaver. The notes were repaid in full in August 2005. The sale of the subordinated notes was exempt from registration under the Securities Act by virtue of Section 4(2) of the Securities Act.

      In April 2004, First Mercury Capital Trust I, a Delaware statutory trust sponsored by us, sold $8 million of preferred securities to various institutional investors and $240,000 of common securities to us. In May 2004, First Mercury Capital Trust II, a Delaware statutory trust sponsored by us, sold $12 million of preferred securities to various institutional investors and $360,000 of common securities to us. The trusts used the proceeds of the sale of preferred and common securities to purchase an aggregate $20.6 million cumulative principal amount of floating rate junior subordinated debentures from us. The sales of preferred and common securities by the trust and of junior debentures by us were exempt from registration under the Securities Act by virtue of Section 4(2) of the Securities Act.

      In June 2004, we issued 400 shares of our convertible preferred stock to FMFC Holdings, LLC at a price of $100,000 per share, for an aggregate purchase price of $40 million. FMFC Holdings represented its intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates issued in the transaction. The sale of the convertible preferred stock was exempt from registration under the Securities Act by virtue of Section 4(2) of the Securities Act.

      In August 2005, we issued $65 million aggregate principal amount of senior notes to various institutional investors. The purchasers represented their intention to acquire the securities for investment

II-2

only and not with a view to or for sale in connection with any distribution thereof. The sale of the senior notes was exempt from registration under the Securities Act by virtue of Section 4(2) of the Securities Act and Rule 144A promulgated thereunder.

      From May 2003 through the date of the filing of this registration statement, we granted options to purchase 729.0 shares of our common stock to employees and directors pursuant to the 1996 Stock Plan. The grants of these options were exempt from registration under the Securities Act in reliance on the exemption provided by Rule 701 thereof. In June 2004, certain of our directors and officers exercised options to purchase an aggregate of 865.5 shares of our common stock. In December 2004, certain of our directors and officers exercised options to purchase an aggregate of 865.5 shares of our common stock. In December 2005, Mr. Weaver exercised options to purchase 40.0 shares of our common stock. The exercise of these options was exempt from registration under the Securities Act in reliance on the exemption provided by Rule 701 thereof.

Item 16. Exhibits and Financial Statement Schedules

Exhibit Number		Description
	1.1*	Form of Underwriting Agreement.
	2.1	Stock Contribution Agreement dated as of August 17, 2005 by and among First Mercury Holdings, Inc., First Mercury Financial Corporation, FMFC Holdings, LLC, and each of the other parties signatory thereto.
	3.1*	Amended and Restated Certificate of Incorporation.
	3.2*	Amended and Restated Bylaws.
	4.1*	Form of Stock Certificate.
	5.1*	Opinion of McDermott Will & Emery LLP.
	10.1	First Mercury Financial Corporation 1998 Stock Compensation Plan.
	10.2	Registration Rights Agreement dated as of June 7, 2004 by and between First Mercury Financial Corporation and FMFC Holdings, LLC.
	10.3*	Letter dated as of August 17, 2005 from First Mercury Holdings, Inc. to Jerome M. Shaw regarding Registration Rights.
	10.4	Non-Competition and Confidentiality Agreement dated as of June 7, 2004 by and between First Mercury Financial Corporation and Jerome M. Shaw.
	10.5	Non-Competition and Confidentiality Agreement dated as of June 14, 2004 by and between American Risk Pooling Consultants, Inc. and Jerome M. Shaw.
	10.6	Amendment No. 1 to Non-Competition and Confidentiality Agreement dated as of August 17, 2005 by and between American Risk Pooling Consultants, Inc. and Jerome M. Shaw.
	10.7	Non-Competition and Confidentiality Agreement dated as of August 17, 2005 by and between First Mercury Holdings, Inc. and Jerome M. Shaw.
	10.8	Employment Agreement dated as of November 6, 2003 by and between First Mercury Financial Corporation and Richard H. Smith.
	10.9*	First Amendment to Employment Agreement dated May 25, 2005 between First Mercury Financial Corporation and Richard Smith.
	10.10	Employment Agreement by and between First Mercury Financial Corporation and William S. Weaver.
	10.11*	Services Agreement dated May 25, 2005 between First Home Financial Corporation and Glencoe Capital, LLC.
	10.12	Credit Agreement, dated as of May 8, 2006 by and between First Mercury Financial Corporation, the Guarantors and JPMorgan Chase Bank, N.A.
	10.13	Indemnification Agreement dated as of June 7, 2004 by and between First Mercury Financial Corporation and Steven Shapiro.
	10.14	Indemnification Agreement dated as of June 7, 2004 by and between First Mercury Financial Corporation and Hollis Rademacher.

II-3

Exhibit Number		Description
	10.15	Indenture between First Mercury Financial Corporation and Wilmington Trust Company, as Trustee, dated as of May 26, 2004 for Floating Rate Junior Subordinated Debentures.
	10.16	Indenture between First Mercury Financial Corporation and Wilmington Trust Company, as Trustee, dated as of April 29, 2004 for Floating Rate Junior Subordinated Debentures.
	21*	Subsidiaries.
	23.1	Consent of BDO Seidman, LLP.
	23.2*	Consent of McDermott Will & Emery LLP (incorporated by reference to Exhibit 5.1).
	†24.1	Power of Attorney.

*  To be filed by amendment.

†  Previously filed.

Item 17. Undertakings

      (a) The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.

      (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

      (c) The undersigned registrant hereby undertakes that:

      (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

      (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

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SIGNATURES

      Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Southfield, State of Michigan, on August 23, 2006.

First Mercury Financial Corporation

By:  /s/ Richard Smith

Name: Richard Smith

Title: President and Chief Executive Officer

      Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed by the following persons in the capacities indicated on August 23, 2006.

Signature	Title
* Richard Smith	President, Chief Executive Officer and Director (Principal Executive Officer of the Registrant)
* John A. Marazza	Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer of the Registrant)
* Jon Burgman	Director
* Hollis W. Rademacher	Director
* Steven A. Shapiro	Director
* Jerome Shaw	Director
* Pursuant to Power of Attorney
/s/ Richard Smith Attorney-in-fact

II-5 EX-2.1 2 c05689a2exv2w1.htm STOCK CONTRIBUTION AGREEMENT

Exhibit 2.1

STOCK CONTRIBUTION AGREEMENT

     This Stock Contribution Agreement (this “Agreement”) is entered into as of August 17, 2005, by and among First Mercury Holdings, Inc., a Delaware corporation (“Holdings”), First Mercury Financial Corporation, a Delaware corporation (the “Company”), FMFC Holdings, LLC, a Delaware limited liability company (the “GC-Holdings”), Jerome M. Shaw (“Mr. Shaw”), William S. Weaver (“Mr. Weaver”) each of the individuals set forth under the heading “Managers” on the signature pages hereto (each, a “Manager” and collectively, the “Managers”), and each of the individuals set forth under the heading “Selling Shareholders” on the signature pages hereto (each, a “Selling Shareholder” and collectively, the “Selling Shareholders”). GC-Holdings, Mr. Shaw, Mr. Weaver, the Managers and the Selling Shareholders are sometimes referred to herein as “Contributors”.

     WHEREAS, this Agreement contemplates a transaction in which each Contributor will contribute all of its stock and options in the Company to Holdings in exchange for cash and/or shares of capital stock and/or options in Holdings (collectively, the “Exchange”);

     WHEREAS, in exchange for its contributions to Holdings, GC-Holdings will receive preferred stock of Holdings (on terms substantially the same as its existing series of preferred stock in the Company and on a fully accreted basis with all accrued and unpaid dividends) convertible into 54.85% (assuming all potential Contributors participate in the Exchange) of the shares of common stock of Holdings on a fully diluted basis;

     WHEREAS, in exchange for their contributions to Holdings, the Managers will receive common stock in Holdings equal to an aggregate of 13.75% (assuming all potential Contributors participate in the Exchange) of the shares of common stock of Holdings on a fully diluted basis;

     WHEREAS, in exchange for his contribution to Holdings, Mr. Shaw will receive (i) common stock in Holdings equal to an aggregate of 28.59% (assuming all potential Contributors participate in the Exchange) of the shares of common stock of Holdings on a fully diluted basis and (ii) $27,554,030 of cash;

     WHEREAS, in exchange for his contribution to Holdings, Mr. Weaver will receive (i) common stock in Holdings equal to an aggregate of 2.81% (assuming all potential Contributors participate in the Exchange) of the shares of common stock of Holdings on a fully diluted basis and (ii) $3,417,005 of cash;

     WHEREAS, in exchange for their contributions to Holdings, each Selling Shareholder will receive its pro rata share of $29,140,223 of cash;

     WHEREAS, the parties to this agreement hereby recognize and acknowledge that Mr. Shaw’s cash payment of $27,554,030 is based upon a premium value of $7,597.93 per share of the Company’s common stock (the “Premium”), and that Mr. Weaver’s cash payment of $3,417,005 and the Selling Shareholder’s cash payment of $29,140,223 are based upon a value of $5,975.00 per share of the Company’s common stock;

     WHEREAS, to the extent that a Contributor is receiving stock pursuant to the Exchange, the contribution of stock from such Contributor to Holdings is intended to qualify for “tax-free” treatment under Section 351 of the Code;

     WHEREAS, funds for the cash payments to Mr. Shaw and the Selling Shareholders and for the payment of the Transaction Expenses (as defined below) incurred by Holdings and GC-Holdings will be paid out of the proceeds of the Financing (as defined below);

     WHEREAS, upon the consummation of the Exchange, Holdings shall pay to Glencoe an advisory fee equal to 2% of the principal amount issued in the Financing (as defined below).

     WHEREAS, Holdings has agreed in connection with the Financing to use commercially reasonable efforts to acquire the Company Stock outstanding after the Initial Closing Date that is not acquired by Holdings pursuant to the Exchange.

     NOW, THEREFORE, in consideration of the premises and the actual promises herein made, and in consideration of the representations, warranties, and covenants herein contained, the parties agree as follows.

     Section 1. Definitions

     “Acceptance Date” shall mean the date upon which (i) the condition in Section 5(c) has been satisfied and (ii) Signing Deliveries representing at least 90% of the shares of Company Stock on a fully diluted basis have been tendered to Holdings.

     “Agreement” shall have the meaning set forth in the recitals.

     “Amended and Restated Employment Agreement” shall mean that certain Amended and Restated Employment Agreement, to be entered into by and between the Company and Mr. Shaw, in the form of the Amended and Restated Employment Agreement that was included in the Distribution.

     “Amendment No. 1 to Non-Competition and Confidentiality Agreement” shall mean that certain Amendment No. 1 to Non-Competition and Confidentiality Agreement, to be entered into by and between American Risk Pooling Consultants, Inc. and Mr. Shaw, in the form of the Amendment No. 1 to Non-Competition and Confidentiality Agreement that was included in the Distribution.

     “Business Day” shall mean any day other than a Saturday, a Sunday or any day that is a legal holiday under the laws of the State of Illinois or New York, or any day on which banks located in the State of Illinois or New York are required or authorized by law to be closed.

     “Closing” and “Closings” shall have the meanings set forth in Section 2(c).

     “Closing Date” shall have the meaning set forth in Section 2(c).

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     “Company” shall have the meaning set forth in the recitals.

     “Company Common Stock” shall mean the shares of common stock, par value $0.01 per share, of the Company.

     “Company Options” shall mean the outstanding options to purchase Company Common Stock, issued pursuant to the Stock Option Plan by the Company to certain Contributors from time to time.

     “Company Series A Preferred Stock” shall mean the Series A Convertible Preferred Stock, par value $0.01 per share, of the Company.

     “Company Stock” shall mean the Company Series A Preferred Stock and Company Common Stock.

     “Consent and Acknowledgement” shall mean that certain Consent and Acknowledgement, to be executed by the holders of Company Options in connection with the Exchange, in the form of the Consent and Acknowledgement that was included in the Distribution.

     “Contributors” shall have the meaning set forth in the recitals.

     “Distribution” shall mean the distribution of certain agreements, documents, and informational materials made by McDermott Will & Emery LLP on behalf of Holdings to the stockholders and option holders of the Company in connection with and to effectuate the Exchange and related transactions.

     “Exchange” shall have the meaning set forth in the recitals.

     “Financing” shall mean the Rule 144A offering by Holdings of its senior floating rate notes due 2012 in the aggregate principal amount of $65.0 million.

     “Glencoe” shall mean Glencoe Capital, LLC, an Illinois limited liability company.

     “GC-Holdings” shall have the meaning set forth in the recitals.

     “Holdings” shall have the meaning set forth in the recitals.

     “Holdings Common Stock” shall mean the shares of common stock, par value $0.01 per share, of Holdings.

     “Holdings Options” shall mean the options to purchase Holdings Common Stock resulting from the assumption by Holdings of the Company Options and the Stock Option Plan upon the consummation of the transactions contemplated herein.

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     “Holdings Series A Preferred Stock” shall mean the Series A Convertible Preferred Stock, par value $0.01 per share, of Holdings.

     “Holdings Stock” shall mean the Holdings Series A Preferred Stock and Holdings Common Stock.

     “Initial Closing” shall have the meaning set forth in Section 2(c)(i).

     “Initial Closing Date” shall have the meaning set forth in Section 2(c)(i).

     “Liability” means any liability, whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, and whether due or to become due.

     “Manager” and “Managers” shall have the meanings set forth in the recitals.

     “Material Adverse Effect” means any change or effect that is materially adverse to the properties, assets, business, condition (financial or otherwise), results of operations, or prospects of the Company and its Subsidiaries, taken as a whole.

     “Mr. Shaw” shall have the meaning set forth in the recitals.

     “Mr. Weaver” shall have the meaning set forth in the recitals.

     Non-Competition and Confidentiality Agreement” shall mean that certain Non-Competition and Confidentiality Agreement, to be entered into by and between Holdings and Mr. Shaw, in the form of the Non-Competition and Confidentiality Agreement that was included in the Distribution.

     “Offering Memorandum” shall mean that certain Preliminary Offering Memorandum dated July 28, 2005 prepared in connection with the Financing.

     “Premium” shall have the meaning set forth in the recitals.

     “Released Claims” shall have the meaning set forth in Section 2(d).

     “Released Parties” shall have the meaning set forth in Section 2(d).

     “Releasors” shall have the meaning set forth in Section 2(d).

     “Securities Act” means the Securities Act of 1933, as amended.

     “Security Interest” means any lien, encumbrance, mortgage, pledge, or other security interest.

     “Selling Shareholder” and “Selling Shareholders” shall have the meanings set forth in the recitals.

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     “Stock Option Plan” shall mean that certain First Mercury Financial Corporation 1998 Stock Compensation Plan dated as of September 14, 1998, as amended from time to time.

     Stockholders Agreement” shall mean that certain Stockholders Agreement to be entered into by and among Holdings and the shareholders and option holders of Holdings, in the form of the Stockholders Agreement that was included in the Distribution.

     “Signing Deliveries” shall have the meaning set forth in Section 2(a).

     “Subsequent Closing” shall have the meaning set forth in Section 2(c)(ii).

     “Subsequent Closing Date” shall have the meaning set forth in Section 2(c)(ii).

     “Subsidiary” means any corporation more than fifty percent (50%) of the outstanding voting securities of which, or any partnership, joint venture or other entity more than fifty percent (50%) of the total equity interest of which, is directly or indirectly owned by the Company or any other entity otherwise controlled by or under common control with the Company.

     “Transaction Expenses” shall have the meaning set forth in Section 7(c).

     Section 2. Basic Transaction.

     (a) Actions at the Signing. To be eligible to participate in the Exchange, each Contributor shall first execute and deliver to Holdings an executed copy of this Agreement and the following related transaction documents (the “Signing Deliveries”):

          (i) any certificates or instruments representing all of such Contributor’s Company Stock complete with any executed stock powers or instruments necessary to effect the contribution of such Company Stock to Holdings, which shall be held in escrow by Holdings until the applicable Closing;

          (ii) with respect to any Contributor who is not a Selling Shareholder, an executed Stockholders Agreement, which shall become effective upon the Initial Closing Date;

          (iii) with respect to any Contributor who holds Company Options, an executed Consent and Acknowledgement;

          (iv) with respect to Mr. Shaw, (A) an Amended and Restated Employment Agreement, (B) a Non-Competition and Confidentiality Agreement, and (C) an Amendment No. 1 to Non-Competition and Confidentiality Agreement, each of which shall become effective upon the Initial Closing Date; and

          (v) with respect to Mr. Smith and Mr. Weaver, executed waiver letters with respect to a change of control under their respective employment agreements with the Company.

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Holdings shall hold all of the Signing Deliveries in escrow until the applicable Closing. No Closing shall occur until after the Acceptance Date. Once the Acceptance Date occurs, one or more Closings may occur as provided in Section 2(c)(ii). In the event that this Agreement is terminated pursuant to Section 6 hereof, Holdings shall promptly return to each Contributor such Contributor’s Signing Deliveries and such Contributor will have no further rights under this Agreement.

     (b) The Contributions and Assumption.

          (i) At the Initial Closing, subject to and in accordance with the terms and conditions of this Agreement:

          (A) GC-Holdings shall contribute all of its Company Preferred Stock to Holdings, and, provided that GC-Holdings has executed this Agreement and tendered the requisite Signing Deliveries on or prior to the Acceptance Date, Holdings shall issue to GC-Holdings the number of shares of Holdings Preferred Stock set forth next to GC-Holdings’ name on the attached Contributions Schedule;

          (B) Each Manager shall contribute all of his or her Company Common Stock to Holdings, and in return, provided that such Manager has executed this Agreement and tendered the requisite Signing Deliveries on or prior to the Acceptance Date, Holdings shall issue to each Manager the number of shares of Holdings Common Stock set forth next to such Manager’s name on the attached Contributions Schedule;

          (C) Mr. Shaw shall contribute all of his Company Common Stock to Holdings, and in return, provided that Mr. Shaw has executed this Agreement and tendered the requisite Signing Deliveries on or prior to the Acceptance Date, Holdings shall (A) issue to Mr. Shaw the number of shares of Holdings Common Stock set forth next to Mr. Shaw’s name on the attached Contributions Schedule and (B) pay $27,554,030 to Mr. Shaw in immediately available funds;

          (D) Mr. Weaver shall contribute all of his Company Common Stock to Holdings, and in return, provided that Mr. Weaver has executed this Agreement and tendered the requisite Signing Deliveries on or prior to the Acceptance Date, Holdings shall (A) issue to Mr. Weaver the number of shares of Holdings Common Stock set forth next to Mr. Weaver’s name on the attached Contributions Schedule and (B) pay $3,417,005 to Mr. Weaver in immediately available funds;

          (E) Each Selling Shareholder who has executed this Agreement and tendered the requisite Signing Deliveries on or prior to the Acceptance Date, shall contribute all of his or her Company Common Stock to Holdings, and in return, Holdings shall pay to each Selling Shareholder the amount set forth next to such Selling Shareholder’s name on the attached Contributions Schedule, in immediately available funds; and

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          (F) Holdings shall assume the Stock Option Plan and any outstanding Company Option, and each Contributor who is a holder of any Company Option shall execute a Consent and Acknowledgement, the combined effect of which shall be that each such Company Option shall thereafter become a Holdings Option. In consideration of Holdings’ assumption of the Stock Option Plan, the Company shall issue to Holdings an option to purchase Company Common Stock for the like number of shares and for the aggregate exercise price of Company Options that have been assumed by Holdings.

          (ii) At any Subsequent Closing, subject to and in accordance with the terms and conditions of this Agreement, each Selling Shareholder who has executed this Agreement and tendered the requisite Signing Deliveries after the Acceptance Date, shall contribute all of his or her Company Common Stock to Holdings, in return for the amount set forth next to such Selling Shareholder’s name on the attached Contributions Schedule, in immediately available funds.

     (c) The Closings. The closings of the transactions contemplated by this Agreement shall take place at the offices of McDermott Will & Emery LLP, 227 West Monroe Street, Chicago, IL 60606 as follows:

          (i) The Initial Closing. With respect to each Contributor who has delivered to Holdings an executed copy of this Agreement and the Signing Deliveries required in Section 2(a) above on or prior to the Acceptance Date, Holdings shall consummate an initial closing (the “Initial Closing”) of the Exchange simultaneously with the closing of the Financing (“the Initial Closing Date”) and shall deliver the following items on or before the fifth Business Day after the Initial Closing Date: (i) the stock certificates representing Holdings Stock and/or cash to the Contributors in the amounts and manner provided in Section 2(b)(i) above and (ii) to each such Contributor who is not a Selling Shareholder, an executed Stockholders Agreement, which shall become effective as of the Initial Closing Date.

          (ii) The Subsequent Closings. For a period of 30 calendar days after the Acceptance Date, any Selling Shareholder who did not participate in the Initial Closing may participate in the Exchange by delivering to Holdings an executed copy of this Agreement and the applicable Signing Deliveries required in Section 2(a) above. On or before the fifth Business Day after such Selling Shareholder has made such deliveries to Holdings (a “Subsequent Closing Date”), Holdings shall consummate the Exchange and deliver to such Selling Shareholder cash in the amounts and manner provided in Section 2(b)(ii) above (a “Subsequent Closing”).

The Initial Closing and each Subsequent Closing shall be referred to herein as a “Closing” and collectively as the “Closings”, and the Initial Closing Date and Subsequent Closing Dates shall be referred to herein collectively as the “Closing Date”.

     (d) Release. Effective upon the Closing Date upon which the Exchange occurs with respect to the relevant Selling Shareholder, each Selling Shareholder and each of his, her or its successors and assigns (collectively, the “Releasors”), hereby and forever fully and irrevocably releases Holdings, the Company, GC-Holdings, Glencoe and Mr. Shaw and their predecessors, successors, assigns and past and present subsidiaries, affiliates, stockholders, directors, officers,

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employees, agents, and representatives (collectively, the “Released Parties”) from any and all claims, demands, and causes of action of every kind and nature arising on or prior to such Closing Date whether from the Selling Shareholder’s status as a stockholder, director, employee, creditor or lender of the Released Parties prior to the date of this Agreement, or otherwise (including, without limitation, claims or damages, costs, expenses, and attorneys’, brokers’ and accountants’ fees and expenses), whether known or unknown, suspected or unsuspected (collectively, the “Released Claims”), including those arising from, or made with respect to, this Agreement other than the right to receive the cash and/or Holdings Stock such Contributor is entitled to receive pursuant to Section 2(b)(i). The Releasors hereby irrevocably agree to refrain from directly or indirectly asserting any claim or demand or commencing (or causing to be commenced) any suit, action, or proceeding of any kind in any court or before any tribunal, against any Released Party based upon any Released Claim.

     (e) Consent. Pursuant to Section 228 of the Delaware General Corporate Law and the Second Amended and Restated Stockholders Agreement dated June 7, 2004, each Contributor hereby consents to and approves the Exchange, the Financing, and the payment of the Premium.

     Section 3. Representations and Warranties of Holdings. Holdings represents and warrants to the Contributors that the statements contained in this Section 3 are correct and complete as of the date of this Agreement and will be correct and complete as of the Initial Closing Date (as though made then and as though the Initial Closing Date were substituted for the date of this Agreement throughout this Section 3).

     (a) Organization, Qualification, and Corporate Power. Holdings is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware.

     (b) Authorization. Holdings has full power and authority to execute and deliver this Agreement and the documents to be delivered hereunder, and to perform its obligations hereunder and thereunder. The execution, delivery and performance of this Agreement and the documents to be delivered hereunder by Holdings have been duly authorized and approved by all requisite corporate action and no other corporate proceedings on the part of Holdings are necessary to authorize this Agreement and the documents to be delivered hereunder, and the transactions contemplated hereby and thereby. This Agreement constitutes, and the documents to be delivered hereunder when executed and delivered will constitute, the valid and legally binding obligations of Holdings, enforceable in accordance with their terms, subject to bankruptcy, reorganization and similar laws of general applicability relating to or affecting creditors rights and to general equity principles.

     (c) Noncontravention. Subject to receipt of all applicable approvals under state insurance holding company system laws, neither the execution and the delivery of this Agreement and each of the documents to be delivered hereunder, nor the consummation of the transactions contemplated hereby or thereby will (i) violate any provision of the certificate of incorporation or bylaws of Holdings, (ii) violate any law, statute, regulation, rule, injunction, judgment, order, decree, ruling, or other restriction of any government, governmental agency, or court to which Holdings is subject, (iii) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, or cancel, or require any notice under any agreement, contract, lease, license, instrument, or other

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arrangement to which Holdings is a party or by which it is bound or to which any of its assets is subject or (iv) result in the imposition of any Security Interest upon any of its assets. Holdings is not required to give any notice to, make any filing with, or obtain any authorization, consent, or approval of any governmental agency or authority or other third party in order for the parties to consummate the transactions contemplated by this Agreement, other than applicable filings under state insurance holding company system laws.

     (d) Capitalization. The entire authorized capital stock of Holdings consists of (i) 59,600 shares of Holdings Common Stock of which 1 share is issued and outstanding and held of record by GC-Holdings and which will be cancelled and retired on the Initial Closing Date in return for the amount contributed therefor, and (ii) 400 shares of Holdings Series A Preferred Stock, none of which is issued and outstanding. Except as required to be issued pursuant to this Agreement, there are no outstanding or authorized options, warrants, purchase rights, subscription rights, conversion rights, exchange rights, or other contracts or commitments that could require Holdings to issue, sell, or otherwise cause to become outstanding any of its capital stock or securities convertible into any such capital stock.

     (e) Holdings Shares. The Holdings Stock to be issued to the Contributors hereunder will, at the time of their issuance, be duly authorized and validly issued, fully paid and nonassessable and free and clear of any Security Interests.

     Section 4. Representations and Warranties Concerning the Contributors. Each Contributor represents and warrants to the Company that the statements contained in this Section 4 are correct and complete as of the date of this Agreement and will be correct and complete as of the applicable Closing Date for such Contributor (as though made then and as though such Closing Date were substituted for the date of this Agreement throughout this Section 4) with respect to himself, herself or itself.

     (a) Organization, Qualification, and Corporate Power. If the Contributor is a corporation, partnership, limited liability company or other entity, the Contributor is duly organized, validly existing, and in good standing under the laws of the jurisdiction of its formation.

     (b) Authorization. The Contributor has full power and authority to execute and deliver this Agreement and the documents to be delivered hereunder, and to perform its obligations hereunder and thereunder. If the Contributor is a corporation, partnership, limited liability company or other entity, the execution, delivery and performance of this Agreement and the documents to be delivered hereunder by such Contributor has been duly authorized and approved by all requisite action, and no other proceedings on the part of such Contributor are necessary to authorize this Agreement and the documents to be delivered hereunder, and the transactions contemplated hereby or thereby. This Agreement constitutes, and the documents to be delivered hereunder when executed and delivered will constitute, the valid and legally binding obligations of each Contributor, enforceable in accordance with their terms, subject to bankruptcy, reorganization and similar laws of general applicability relating to or affecting creditors rights and to general equity principles.

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     (c) Noncontravention. Neither the execution and the delivery of this Agreement and each of the documents to be delivered hereunder, nor the consummation of the transactions contemplated hereby or thereby will (i) if the Contributor is a corporation, partnership, limited liability company or other entity, violate any provision of the organizational documents of such Contributor, (ii) violate any law, statute, regulation, rule, injunction, judgment, order, decree, ruling, or other restriction of any government, governmental agency, or court to which the Contributor is subject (iii) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, or cancel, or require any notice under any agreement, contract, lease, license, instrument, or other arrangement to which the Contributor is a party or by which it is bound or to which any of its assets is subject or (iv) result in the imposition of any Security Interest upon any of its assets. The Contributor is not required to give any notice to, make any filing with, or obtain any authorization, consent, or approval of any governmental agency or authority or other third party in order for the parties to consummate the transactions contemplated by this Agreement.

     (d) Company Stock. The Contributor holds of record and owns beneficially the number of shares of Company Stock set forth next to such Contributors name on the attached Contributions Schedule free and clear of any restrictions on transfer (other than restrictions under the Company Stockholders Agreement, the Securities Act and State securities laws), Security Interests, options, warrants, purchase rights, contracts, commitments and claims and such Contributor holds no other shares of Company Stock or other equity interests of the Company or options, warrants, purchase rights, conversion rights, subscription rights, exchange rights or other rights with respect to such equity interests.

     (e) Investment Representation. The Contributor acknowledges that the shares of Holdings Stock to be issued hereunder have not been, and will not be as of the applicable Closing Date, registered under the Securities Act or the securities laws of any state or other regulatory body and such shares are being offered and sold in reliance upon federal and state exemptions. The Contributor is acquiring the Holdings Stock for its own account with the present intention of holding such securities for investment purposes and not with a view to or for sale in connection with any public distribution of such securities in violation of any federal or state securities laws. The Contributor is a sophisticated investor capable of evaluating the merits and risks of its investment in the Holdings Stock and is an “accredited investor” as such term is defined Section 2(15) of the Securities Act.

     (f) Exchange Offer Circular; Preliminary Offering Memorandum. Prior to the execution of this Agreement, the Contributor and its advisors have received the Exchange Offer Circular, including the Preliminary Offering Memorandum and all other documents related to the Exchange requested by the Contributor, have carefully reviewed them, and have understood the information contained therein. The Contributor and its advisors have had a reasonable opportunity to ask questions of and receive answers from a person or persons acting on behalf of Holdings concerning the Exchange Offer Circular, including the Preliminary Offering Memorandum, the Exchange, the Financing, the Premium and the business, financial condition, results of operations and prospects of the Company and Holdings, and all such questions have been answered to the full satisfaction of Contributor and its advisors. In evaluating its decision to participate in the Exchange and the suitability of an investment in Holdings, the Contributor has not relied upon any representation or other information (oral or written) other than as stated

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in the Exchange Offer Circular, including the Preliminary Offering Memorandum or this Agreement.

     Section 5. Conditions to Obligation to Close of Holdings. The obligation of Holdings to consummate the transactions to be performed by it in connection with the Initial Closing is subject to satisfaction of the following conditions:

     (a) Representations and Warranties. The representations and warranties set forth in Section 4 above shall be true and correct at and as of each Contributor’s applicable Closing Date;

     (b) Covenants. Each of the Contributors shall have performed and complied with all of its covenants hereunder through such Contributor’s applicable Closing Date;

     (c) Debt Financing. Holdings shall have simultaneously with the Initial Closing received gross proceeds in the amount not less than $65.0 million from the Financing, on terms acceptable to GC-Holdings;

     (d) No Violation or Injunction. The consummation of the transactions contemplated by this Agreement shall not be in violation of any law or regulation, and shall not be subject to any injunction, stay or restraining order;

     (e) Consents and Waivers. Holdings and the Company shall have made all filings with and notifications of governmental authorities, regulatory agencies and other entities required to be made by such parties in connection with the execution and delivery of this Agreement, the performance of the transactions contemplated hereby and the continued operation of the business of Holdings subsequent to the Initial Closing (except for such as may be properly obtained subsequent to the Initial Closing). Holdings and the Company shall have received all authorizations, waivers, consents and permits, in form and substance satisfactory to Holdings, including any and all notices, consents and waivers required from all third parties, including, without limitation, applicable governmental authorities, regulatory agencies, lessors, lenders and contract parties, required to permit the continuation of the business of Holdings and the Company subsequent to the Initial Closing and the consummation of the transactions contemplated by this Agreement, and to avoid a breach, default, termination, acceleration or modification of any indenture, loan or credit agreement or any other material agreement, contract, instrument, mortgage, lien, lease, permit, authorization, order, writ, judgment, injunction, decree, determination or arbitration award as a result of, or in connection with, the execution and performance of this Agreement. Holdings shall have received approval from the insurance regulatory authority in the states of domicile of the Company’s insurance company Subsidiaries, and from any other applicable insurance regulatory authority, in a form and subject to any conditions or qualifications satisfactory to Holdings, in order to consummate the transactions contemplated in this Agreement;

     (f) No Material Adverse Effect. There shall not have been any Material Adverse Effect whether or not in the ordinary course of business;

     (g) Stockholders Agreement. Holdings, GC-Holdings, the Managers, Mr. Shaw, and Mr. Weaver shall have entered into the Stockholders Agreement;

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     (h) Employment and Non-Competition and Confidentiality Agreements. Mr. Shaw and the Company shall have entered into the Amended and Restated Employment Agreement and the Amended and Restated Non-Competition Agreement;

     (i) Change of Control Waivers. Each of Mr. Smith and Mr. Weaver shall have executed waiver letters with respect to a change of control under their respective employment agreements with the Company; and

     (j) Signing Deliveries. Holdings shall have received Signing Deliveries representing at least 90% of the shares of the Company Stock on a fully diluted basis.

     The obligation of Holdings to consummate any Subsequent Closing shall, with respect to the relevant Contributor, be conditioned only upon (i) satisfaction of items (a), (b) and (d) above and (ii) receipt of the applicable Contributor’s Signing Deliveries on or before thirty calendar days after the Acceptance Date.

     Section 6. Termination.

     (a) Termination of Agreement. The parties may earlier terminate this Agreement as provided below:

     (i) This Agreement may be terminated by the written consent of Holdings and the holders of a majority of the Company’s Common Stock on a fully diluted basis at any time prior to the Initial Closing;

     (ii) Holdings or the holders of a majority of the Company’s Common Stock on a fully diluted basis may terminate this Agreement at any time if the Initial Closing has not occurred by September 30, 2005.

     (b) Effect of Termination. If the parties terminate this Agreement pursuant to Section 6(a) above, all rights and obligations of the parties hereunder shall terminate without any Liability of any party, except for any Liability of any party then in breach.

     Section 7. Miscellaneous.

     (a) Survival of Representations and Warranties. All of the covenants and agreements contained in this Agreement have been relied upon and shall survive the Closing until fully performed or discharged. All of the representations and warranties contained in this Agreement have been relied upon and shall survive the Closing and continue in full force and effect indefinitely.

     (b) Indemnification. Each Contributor, severally and not jointly, agrees to indemnify Holdings from and against any loss, damage, claim, liability or expense (including court costs and reasonable attorneys’ fees) Holdings may suffer resulting from, arising out of, relating to, or caused by (A) a misrepresentation or breach by the Contributor of the representations and warranties contained in Section 4 or the covenants and agreements of the Contributor contained in this Agreement, or (B) any and all claims made by third parties based on facts alleged that, if true, would constitute a misrepresentation or breach by the Contributor of the representations and

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warranties contained in Section 4, or the covenants and agreements Contributor contained in this Agreement.

     (c) Expenses. Each of the parties shall bear its own out-of-pocket, legal, accounting, consulting, actuarial and other fees and expenses related to the transactions contemplated hereby (collectively, the “Transaction Expenses”), provided that, the Company shall pay all of the Transaction Expenses of Holdings and GC-Holdings, whether or not any Closing occurs.

     (d) No Third-Party Beneficiaries. This Agreement shall not confer any rights or remedies upon any Person other than the parties and their respective successors and permitted assigns.

     (e) Entire Agreement. This Agreement (including the documents referred to herein) constitutes the entire agreement between the parties and supersedes any prior understandings, agreements, or representations by or between the parties, written or oral, to the extent they related in any way to the subject matter hereof.

     (f) Succession and Assignment. This Agreement shall be binding upon and inure to the benefit of the parties named herein and their respective successors, assigns and heirs. No party may assign either this Agreement or any of its rights, interests, or obligations hereunder without the prior written approval of the other party.

     (g) Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument.

     (h) Headings. The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement.

     (i) Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be delivered in person or sent by registered or certified mail, postage prepaid, commercial overnight courier (such as Express Mail, Federal Express, etc.) with written verification of receipt or by telecopy. A notice shall be deemed given: (a) when delivered by personal delivery (as evidenced by the receipt); (b) five (5) days after deposit in the mail if sent by registered or certified mail; (c) one (1) Business Day after having been sent by commercial overnight courier as evidenced by the written verification of receipt; or (d) on the date of confirmation if telecopied, in each case to the address for each party specified on the signature page hereto. Any party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient using any other means, but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any party may change the address or facsimile number to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other parties notice in the manner herein set forth.

     (j) Governing Law. This Agreement shall be governed by and construed in accordance with the domestic laws of the State of Illinois without giving effect to any choice or conflict of

- 13 -

law provision or rule (either of the State of Illinois or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Illinois.

     (k) Amendments and Waivers. No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by the parties. No waiver by any party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence.

     (l) Severability. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction.

     (m) Construction. Any reference to any federal, state, local, or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. The word “including” shall mean including without limitation.

     (n) Incorporation of Schedules. The Schedules identified in this Agreement are incorporated herein by reference and made a part hereof.

*    *    *    *    *

- 14 -

Contributions Schedule

See the attached Annex A which is incorporated by reference herein.

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

Annex A — Atribution Schedule

	Current
							Shares			Post Recap		Per Share				Current %			Post Recap
Name	Shares		Options		Total		Repurchased			Diluted Shares		Valuation		Proceeds		Ownership			Ownership
Jerome M. Shaw Revocable Trust(1)(2)		7,049.8360		203.2000		7,253.0360		(3,626.5180	)		3,626.5180	$	7.597.93	$	27,554,030		33.33	%		28.59	%
Bruce Seyburn(1)(2)		849.1938		0.0000		849.1938		(849.1938	)		0.0000	$	5,975.00	$	5,073,933		3.90	%		0.00	%
Susann Spilkin Revocable Trust(3)		737.1756		0.0000		737.1756		(737.1756	)		0.0000	$	5,975.00	$	4,404,624		3.39	%		0.00	%
Ronald N. Weiser		635.7071		0.0000		635.7071		(635.7071	)		0.0000	$	5,975.00	$	3,798,350		2.92	%		0.00	%
McKinley Associates, Inc.		152.7455		0.0000		152.7455		(152.7455	)		0.0000	$	5,975.00	$	912,654		0.70	%		0.00	%
Scott Turban		152.7455		0.0000		152.7455		(152.7455	)		0.0000	$	5,975.00	$	912,654		0,70	%		0.00	%
William M. Wetsman		125.2733		0.0000		125.2733		(125.2733	)		0.0000	$	5,975.00	$	748,508		0.58	%		0.00	%
The Waze Family Trust		109.8889		0.0000		109.8889		(109.8889	)		0.0000	$	5,975.00	$	656,586		0.51	%		0.00	%
David Horberg & Gail Horberg, JTWROS		97.8011		0.0000		97.8011		(97.8011	)		0.0000	$	5,975.00	$	584,362		0.45	%		0.00	%
Frederick Rapoport Family Limited Partnership		97.8011		0.0000		97.8011		(97.8011	)		0.0000	$	5,975.00	$	584,362		0.45	%		0.00	%
Joel H. Shapiro		97.8011		0.0000		97.8011		(97.8011	)		0.0000	$	5,975.00	$	584,362		0.45	%		0.00	%
S.S.J. Investments		97.8011		0.0000		97.8011		(97.8011	)		0.0000	$	5,975.00	$	584,362		0.45	%		0.00	%
Gene Turban Trust		97.8011		0.0000		97.8011		(97.8011	)		0.0000	$	5,975.00	$	584,362		0.45	%		0.00	%
Wake Forest, Inc.		97.8011		0.0000		97.8011		(97.8011	)		0.0000	$	5,975.00	$	584,362		0.45	%		0.00	%
Bob Armstrong, Inc.		54.9444		0.0000		54.9444		(54.9444	)		0.0000	$	5,975.00	$	328,293		0.25	%		0,00	%
Donald G. Cox		54.9444		0.0000		54.9444		(54.9444	)		0.0000	$	5,975.00	$	328,293		0.25	%		0,00	%
Harvey M. Franklin & Josephine M Franklin, JTWROS		54.9444		0.0000		54.9444		(54.9444	)		0.0000	$	5,975.00	$	328,293		0.25	%		0,00	%
A. Michael Levin Revocable Trust		54.9444		0.0000		54.9444		(54.9444	)		0.0000	$	5,975.00	$	328,293		0.25	%		0.00	%
Megdall Partnership		54.9444		0.0000		54.9444		(54.9444	)		0.0000	$	5,975.00	$	328,293		0.25	%		0.00	%
Mark J. Moss Employees Profit Sharing Plan		54.9444		0.0000		54.9444		(54.9444	)		0.0000	$	5,975.00	$	328,293		0.25	%		0.00	%
James Howard Sherman Trust		54.9444		0.0000		54.9444		(54.9444	)		0.0000	$	5,975.00	$	328,293		0.25	%		0.00	%
Paul Tai & Tiana Tai, JTWROS		54.9444		0.0000		54.9444		(54.9444	)		0.0000	$	5,975.00	$	328,293		0.25	%		0.00	%
Roberto L. Valdesuso, MD		54.9444		0.0000		54.9444		(54.9444	)		0.0000	$	5,975.00	$	328,293		0.25	%		0.00	%
WCT Investment Trust		51.9225		0.0000		51.9225		(51.9225	)		0.0000	$	5,975.00	$	310,237		0.24	%		0.00	%
Ronald D. Sider Revocable Trust		48.9005		0.0000		48.9005		(48.9005	)		0.0000	$	5,975.00	$	292,180		0.22	%		0.00	%
Norman H. Rosen & Mary Pat Rosen, JTWROS		44.9999		0.0000		44.9999		(44.9999	)		0.0000	$	5,975.00	$	268,874		0.21	%		0.00	%
Marilyn Y. Borkin		42.8567		0.0000		42.8567		(42.8567	)		0.0000	$	5,975.00	$	256,069		0.20	%		0.00	%
Aaron D. Cushman		42.8567		0.0000		42.8567		(42.8567	)		0.0000	$	5,975.00	$	256,069		0.20	%		0.00	%
Otto Gago		42.8567		0.0000		42.8567		(42.8567	)		0.0000	$	5,975.00	$	256,069		0.20	%		0.00	%
Arthur B. Kellert		42.8567		0.0000		42.8567		(42.8567	)		0.0000	$	5,975.00	$	256,069		0.20	%		0.00	%
H. Paul Koepke, Jr. Revocable Trust		42.8567		0.0000		42.8567		(42.8567	)		0.0000	$	5,975.00	$	256,069		0.20	%		0.00	%
Bernard Meyers Revocable Trust		42.8567		0.0000		42.8567		(42.8567	)		0.0000	$	5,975.00	$	256,069		0.20	%		0.00	%
Joe D. Morris, Trustee		42.8567		0.0000		42.8567		(42.8567	)		0.0000	$	5,975.00	$	256,069		0.20	%		0.00	%
NPM Trust		42.8567		0.0000		42.8567		(42.8567	)		0.0000	$	5,975.00	$	256,069		0.20	%		0.00	%
Bradley J. Schram Revocable Living Trust		42.8567		0.0000		42.8567		(42.8567	)		0.0000	$	5,975.00	$	256,069		0.20	%		0.00	%
Michael W. Freedman		27.8568		0.0000		27.8568		(27.8568	)		0.0000	$	5.975.00	$	166,444		0.13	%		0.00	%
Paul R. Dimond		27.4722		0.0000		27.4722		(27.4722	)		0.0000	$	5,975.00	$	164,146		0.13	%		0.00	%
Herbert Glass		25.7140		0.0000		25.7140		(25.7140	)		0.0000	$	5,975.00	$	153,641		0.12	%		0.00	%
D. Keith Hayward		24.4503		0.0000		24.4503		(24.4503	)		0.0000	$	5,975.00	$	146,091		0.11	%		0.00	%
Alex F. Kato		24.4503		0.0000		24.4503		(24.4503	)		0.0000	$	5,975.00	$	146,091		0.11	%		0.00	%
Dr. Marvin Borsand		21.4283		0.0000		21.4283		(21.4283	)		0.0000	$	5,975.00	$	128,034		0.10	%		0.00	%
Dr. Albert C. Cattell Trust		21.4283		0.0000		21.4283		(21.4283	)		0.0000	$	5,975.00	$	128,034		0.10	%		0.00	%
Jeffrey Howard Trust		21.4283		0.0000		21.4283		(21.4283	)		0.0000	$	5,975.00	$	128,034		0.10	%		0.00	%
Salvatore LoChico & Pauline LoChico, JTWROS		21.4283		0.0000		21.4283		(21.4283	)		0.0000	$	5,975.00	$	128,034		0.10	%		0,00	%
R. Gordon Mathews		21.4283		0.0000		21.4283		(21.4283	)		0.0000	$	5,975.00	$	128,034		0.10	%		0,00	%
Lawrence H. Megdall		21.4283		0.0000		21.4283		(21.4283	)		0.0000	$	5,975.00	$	128,034		0 10	%		0,00	%
Howard E. Phillips		21.4283		0.0000		21.4283		(21.4283	)		0.0000	$	5,975,00	$	128,034		0.10	%		0.00	%
Marty Polin Trust		21.4283		0.0000		21.4283		(21.4283	)		0.0000	$	5,975.00	$	128,034		0.10	%		0.00	%
Robin Jo Draper		21.4283		0.0000		21.4283		(21.4283	)		0.0000	$	5,975.00	$	128,034		0,10	%		0.00	%
Richard L. Dan		21.4283		0.0000		21.4283		(21.4283	)		0.0000	$	5,975.00	$	128,034		0,10	%		0.00	%
Gail Berman		21.4283		0.0000		21.4283		(21.4283	)		0.0000	$	5,975.00	$	128,034		0.10	%		0.00	%

	Current
							Shares			Post Recap		Per Share				Current %			Post Recap
Name	Shares		Options		Total		Repurchased			Diluted Shares		Valuation		Proceeds		Ownership			Ownership
Robert S. Moss		21.4283		0.0000		21.4283		(21.4283	)		0.0000	$	5,975.00	$	128,034		0.10	%		0.00	%
Isadore Silverman Revocable Trust		18.3185		0.0000		18.3185		(18.3185	)		0.0000	$	5,975.00	$	109,453		0.08	%		0.00	%
Margo Katz		18.3081		0.0000		18.3081		(18.3081	)		0.0000	$	5,975.00	$	109,391		0.08	%		0.00	%
Stuart M. Sakwa Trust		18.3081		0.0000		18.3081		(18.3081	)		0.0000	$	5,975.00	$	109,391		0.08	%		0.00	%
Spilkin Family Trust		18.3075		0.0000		18.3075		(18.3075	)		0.0000	$	5,975.00	$	109,387		0.08	%		0.00	%
Eileen Weiser		13.7361		0.0000		13.7361		(13.7361	)		0.0000	$	5,975.00	$	82,073		0.06	%		0.00	%
Michelle Areeda		10.7142		0.0000		10.7142		(10.7142	)		0.0000	$	5,975.00	$	64,017		0.05	%		0.00	%
Andrew Spilkin		8.3400		0.0000		8.3400		(8.3400	)		0.0000	$	5,975.00	$	49,832		0.04	%		0.00	%
Emily Spilkin		8.3400		0.0000		8.3400		(8.3400	)		0.0000	$	5,975.00	$	49,832		0.04	%		0.00	%
Total Minority Shareholders		4,877.0248		0.0000		4,877.0248		(4,877.0248	)		0.0000			$	29,140,223		22.41	%		0.00	%
Richard H. Smith(1)		871.7486		515.7000		1,387.4486		0.0000			1,387.4486	$	0.00	$	0		6.38	%		10.94	%
William S. Weaver Revocable Trust(1)		598.0836		329.8000		927.8836		(571.8836	)		356.0000	$	5,975.00	$	3,417,005		4.26	%		2.81	%
James M. Thomas(1)		60.0609		56.8000		116.8609		0.0000			116.8609	$	0.00	$	0		0.54	%		0.92	%
Thomas B. Dulapa(1)		42.1297		56.8000		98.9297		0.0000			98.9297	$	0.00	$	0		0.45	%		0.78	%
Francis P. McGovern		0.0000		42.5000		42.5000		0.0000			42.5000	$	0.00	$	0		0.20	%		0.34	%
John C. Bures		0.0000		40.0000		40.0000		0.0000			40.0000	$	0.00	$	0		0.18	%		0.32	%
Marcia Paulsen(1)		35.8609		0.0000		35.8609		0.0000			35.8609	$	0.00	$	0		0.16	%		0.28	%
Chris P. Dondzila(1)		17.9297		0.0000		17.9297		0.0000			17.9297	$	0.00	$	0		0.08	%		0.14	%
Robert Butterworth		0.0000		5.5000		5.5000		0.0000			5.5000	$	0.00	$	0		0.03	%		0.04	%
Total Management Shareholders		1,625.8134		1,047.1000		2,672.9134		(571.8836	)		2,101.0298			$	3,417,005		12.28	%		16.56	%
Glencoe Capital, LLC(4)		6,956.9059		0.0000		6,956.9059		0.0000			6,956.9059	$	0.00	$	0		31.97	%		54.85	%
Grand Total		20,509.5801		1,250.3000		21,759.8801		(9,075.4264	)		12,684.4537			$	60,111,258		100.00	%		100.00	%

(1)	Includes shares held of record by 4SFW, LLC.
(2)	Includes shares held of record by Shaw-Fin Holdings, LLC.
(3)	Includes shares held of record by 4SFW, LLC, attributed by 4SFW, LLC to Larry Spilkin.
(4)	Ownership composed of 400 shares of Preferred Stock of First Mercury Holdings, Inc. convertible into common as provided.

     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

p

HOLDINGS:
FIRST MERCURY HOLDINGS, INC.
By:	/s/ Richard H. Smith
Name:
Title:
ADDRESS:		29621 Northwestern Highway
		Southfield, Michigan 48034
THE COMPANY:
FIRST MERCURY FINANCIAL CORPORATION
By:        /s/ Richard H. Smith
Name:
Title:
ADDRESS:		29621 Northwestern Highway
		Southfield, Michigan 48034
MR. SHAW
/s/ Jerome M. Shaw
Jerome M. Shaw, individually
ADDRESS: 4751 Cove Road
		Orchard Lake, MI 48323

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

GC-HOLDINGS:
FMFC HOLDINGS, LLC
By:	Glencoe Capital, LLC
Its:	Manager
By:	/s/   G. D. Patterson
Name:		G. D. Patterson
Title:		Principal
ADDRESS:		222 West Adams Street
		Suite 1000
		Chicago, IL 60606

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

MR. WEAVER
/s/ William S. Weaver
William S. Weaver, individually
William S. Weaver Revocable Trust
/s/ William S. Weaver
(signature)
(print name)
Trustee
(title)
ADDRESS:	47455 Blue Heron Court
	Northville, MI 48167

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

4SFW, L.L.C.
/s/ William S. Weaver
(signature)
William S. Weaver
(print name)
Member
(title)
ADDRESS:	c/o Larry Spilkin
	P.O. Box 5039
	Southfield, MI 48086-5039

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SKG-64, LLC
/s/ William S. Weaver
(signature)
William S. Weaver
(print name)
Member
(title)
ADDRESS:	c/o Larry Spilkin
	P.O. Box 5039
	Southfield, MI 48086-5039

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

MANAGER:
/s/ Richard H. Smith
Richard H. Smith
ADDRESS:	847 McDonald
	Northville, MI 48167

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

MANAGER:
/s/ John C. Bures
John C. Bures
ADDRESS:	46625 Covington Dr.
	Macomb, MI 48044

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

MANAGER:
/s/ Thomas B. Dulapa
Thomas B. Dulapa
ADDRESS:	4487 Timberlake Court
	Shelby Twp., MI 48317

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

MANAGER:
/s/ James M. Thomas
James M. Thomas
ADDRESS:	32391 Dunford Street
	Farmington Hills, MI 48334

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

MANAGER:
/s/ Marcia Paulsen
Marcia Paulsen
ADDRESS:	43895 Cherry Grove Ct. W
	Canton, MI 48188

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

MANAGER:
/s/ Chris P. Dondzila
Chris P. Dondzila
ADDRESS:	5549 Arapaho Pass
	Pinckney, MI 48169

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
Susann Spilkin Revocable Trust
/s/ Larry Spilkin
(signature)
Susann Spilken
(print name)
Co-Trustees
(title)
ADDRESS:	29621 Northwestern Hwy.
	Southfield, MI 48034

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
/s/ Bruce Seyburn
Bruce Seyburn
ADDRESS:	2000 Town Center, Suite 1500
	Southfield, MI 48075-1195

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
/s/ Scott Turban
Scott Turban
ADDRESS:	2363 Pebblefork Lane
	Northfield, IL 60093

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
/s/ William M. Wetsman
William M.Wetsman
ADDRESS:	P.O. Box 3032-282
	Birmingham, MI 48012

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
The Waze Family Trust
/s/ Herbert Waze
(signature)
HERBERT WAZE
(print name)
TRUSTEE
(title)
(signature)
(print name)
(title)
ADDRESS:	Mr. and Mrs. Waza, Co-Trustees
	7465 E. Mercer Lane
	Scottsdale, AZ 85260

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
David Horberg & Gail Horberg, JTWROS
/s/ David Horberg
(signature)
David Horberg
(print name)
(title)
/s/ Gail Horberg
(signature)
Gail Horberg
(print name)
(title)
ADDRESS:	803 Turnberry Lane
	Northbrook, IL 60062

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
Frederick Rapoport Family Limited Partnership
/s/ Bradley J. Schram
(signature) Power of Attorney from Frederick Rapport
Bradley J. Schram
(print name)
Trustee with Authorized Signatory by Frederick Rapport
(title)
ADDRESS:	7980 Lawrence
	West Bloomfield, MI 48322

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
/s/ Joel H. Shapiro
Joel H. Shapiro
ADDRESS:	1421 Lochridge
	Bloomfield Hills, MI 48304

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
S.S.J. Investments
/s/ Edward Rosenbloom
(signature)
Edward Rosenbloom
(print name)
Partner
(title)
ADDRESS:	Attn: Edward Rosenbloom
	30230 Orchard Lake Road
	Suite 200
	Farmington Hills, MI 48334

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
Gene Turban Trust
/s/ Gene Turban
(signature)
Gene Turban
(print name)
Trustee
(title)
ADDRESS:	Gene Turban, Trustee
	1160 Wade
	Highland Park, IL 60035

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
Bob Armstrong, Inc.
/s/ A. Robert Armstrong
(signature)
A. Robert Armstrong
(print name)
President
(title)
ADDRESS:	Attn: Robert Armstrong
	10066 Creekwood Circle
	Plymouth, MI 48170

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
/s/ Donald G. Cox
Donald G. Cox
ADDRESS:	34501 Commerce Road
	Fraser, MI 48026

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
Harvey M. Franklin & Josephine M. Franklin, JTWROS
/s/ Harvey M. Franklin
(signature)
Harvey M. Franklin
(print name)
(title)
/s/ Josephine M. Franklin
(signature)
Josephine M. Franklin
(print name)
(title)
ADDRESS:	684 Falmouth Drive
	Bloomfield Hills, MI 48304

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
A. Michael Levin Revocable Trust
/s/ A. Michael Levin
(signature)
A. Michael Levin
(print name)
Trustee
(title)
ADDRESS:	6232 Charles Drive
	West Bloomfield, MI 48322

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
Megdall Partnership
/s/ Stuart Megdall
(signature)
Stuart Megdall
(print name)
Partner
(title)
ADDRESS:	Attn: Adell Megdall
	488 Vinewood
	Birmingham, MI 48009

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
Mark J. Moss Employees Profit Sharing Plan
/s/ Mark J. Moss
(signature)
Mark J. Moss
(print name)
President/Trustee
(title)
ADDRESS:	29701 W. Six Mile Road
	Livonia, MI 48152

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
James Howard Sherman Trust
/s/ James H. Sherman
(signature)
James H. Sherman
(print name)
Trustee
(title)
ADDRESS:	1440 Old Salem Court
	Birmingham, MI 48009

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
Paul Tai & Tiana Jai, JTWROS
/s/ Paul Tai
(signature)
Paul Tai
(print name)
(title)
/s/ Tiana Tai
(signature)
Tiana Tai
(print name)
(title)
ADDRESS:	421 Glazier Road
	Chelsea, MI 48118

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
/s/ Roberto I. Valdesuso, MD
Roberto I. Valdesuso, MD
ADDRESS:	352 W. 30 Road
	Boon, MI 49618-9700

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
WCT Investment Trust
/s/ William C. Tyler
(signature)
William C. Tyler
(print name)
Trustee
(title)
ADDRESS:	William C. Tyler, Trustee
	3100 Hunting Valley Drive
	Ann Arbor, MI 48104

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
Ronald D. Sider & Barbara C. Sider, JTWROS
/s/ Ronald D. Sider
(signature)
Ronald D. Sider
(print name)
Joint Tenant
(title)
/s/ Barbara C. Sider
(signature)
Barbara C. Sider
(print name)
Joint Tenant
(title)
ADDRESS:	6639 Audubon Trace West West Palm Beach, FL 33412

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
Norman H. Rosen & Mary Pat Rosen, JTWROS
/s/ Norman H. Rosen
(signature)
Norman H. Rosen
(print name)
(title)
/s/ Mary Pat Rosen
(signature)
Mary Pat Rosen
(print name)
(title)
ADDRESS:	75 Harlan Drive
	Bloomfield Hills, MI 48304-3314

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
/s/ Marilyn Y. Borkin
Marilyn Y. Borkin
ADDRESS:	1201 S. Ocean Dr., #801-N
	Hollywood, FL 33019

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
/s/ Aaron D. Cushman
Aaron D. Cushman
ADDRESS:	2521 Augusta Way
	Highland Park, IL 60035

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
/s/ Otto Gago
Otto Gago
ADDRESS:	811 Barton Shore Drive
	Ann Arbor, MI 48105

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
/s/ Arthur B. Kellert
Arthur B. Kellert
ADDRESS:	35519 Michigan East
	Wayne, MI 48184

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
H. Paul Koepke, Jr. Revocable Trust
/s/ H. Paul Koepke, Jr. Revocable Trust
(signature)
H. PAUL KOEPKE JR.
(print name)
TTEE
(title)
ADDRESS:	H. Paul Koepke, Jr., Trustee
	28 Glenmoor Place
	Hilton Head, SC 29926

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
Bernard Meyers Revocable Trust
/s/ Bernard Meyers
(signature)
BERNARD MEYERS
(print name)
TRUSTEE
(title)
ADDRESS:	975 Brand Lane
	Deerfield, IL 60015

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
NPM Trust
/s/ Pamela Netzky
(signature)
PAMELA NETZKY
(print name)
TRUSTEE
(title)
ADDRESS:	Pamela Netzky, Trustee
	Third Floor
	55 East Superior Street
	Chicago, IL 60611

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
Bradley J. Schram Recovable Living Trust
/s/ Bradley J. Schram
(signature)
Bradley J. Schram
(print name)
TRUSTEE
(title)
ADDRESS:	1760 S. Telegraph Road,
	Suite 300
	Bloomfield Hills, MI 48302

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
/s/ Michael W. Freedman
Michael W. Freedman
ADDRESS:	30400 Telegraph Road,
	Suite 435
	Bingham Farms, MI 48025-4541

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
/s/ Paul R. Dimond
Paul R. Dimond
ADDRESS:	1286 Stags Leap
	Ann Arbor, MI 48103

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
/s/ Herbert Glass
Herbert Glass
ADDRESS:	30400 Telegraph Road,
	Suite 435
	Bingham Farms, MI 48025-4541

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
/s/ D. Keith Hayward
D. Keith Hayward
ADDRESS:	3848 Michael Road, South
	Ann Arbor, MI 48103

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
/s/ Alex F. Kato
Alex F. Kato
ADDRESS:	11091 Harry Court
	Brighton, MI 48116

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
/s/ Dr. Marvin A. Borsand
Dr. Marvin A. Borsand
ADDRESS:	5338 East Arcadia Lane Phoenix, AZ 85018

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
Dr. Albert C. Cattell Trust
/s/ Albert C. Cattell
(signature)
Albert C. Cattell
(print name)
Trustee
(title)
ADDRESS:	706 West Huron Street
	Ann Arbor, MI 48103

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
Jeffrey Howard Trust
/s/ Jeffrey Howard Trust
(signature)
Jeffrey Howard
(print name)
Trustee
(title)
ADDRESS:	100 Bloomfield Hills Parkway
	Suite 200
	Bloomfield Hills, MI 48304

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
Salvatore LoChirco & Pauline LoChirco, JTWROS
/s/ Salvatore LoChirco
(signature)
Salvatore LoChirco
(print name)
(title)
/s/ Pauline LoChirco
(signature)
Pauline LoChirco
(print name)
(title)
ADDRESS:	3151 Meriett Ct.
	Shelby Township, MI 48316-1362

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
/s/ R. Gordon Mathews
R. Gordon Mathews
ADDRESS:	Mathews-Phillips Mgmt. Co. #500
	650 Washington Road
	Pittsburgh, PA 15228

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
/s/ Lawrence H. Megdall
Lawrence H. Megdall
ADDRESS:	4627 Cimarron
	Bloomfield Hills, MI 48302

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
Marty Polin Trust
/s/ Marty Polin
(signature)
Marty Polin
(print name)
Trustee
(title)
ADDRESS:	2550 Salceda Drive
	Northbrook, IL 60062

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
Isadore Silverman Revocable Trust
/s/ Isadore Silverman
(signature)
Isadore Silverman
(print name)
Trustee
(title)
ADDRESS:	29200 Northwestern Hwy.,
	Suite 150
	Southfield, MI 48034

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
/s/ Margo Katz
Margo Katz
ADDRESS:	6023 Indianwood
	Bloomfield Hills, MI 48301

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
Stuart M. Sakwa Trust
Stuart M. Sakwa
(signature)
Stuart M. Sakwa
(print name)
Trustee
(title)
ADDRESS:	Stuart M. Sakwa, Trustee
	c/o 29200 Northwestern Hwy.,
	Suite 150
	Southfield, MI 48034

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
/s/ Michelle Areeda
Michelle Areeda
ADDRESS:	1240 Buckingham
	Birmingham, MI 48009

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
Wake Forest, Inc.
/s/ Reginald Winssinger
(signature)
Reginald Winssinger
(print name)
President
(title)
ADDRESS:	2944 N. 44th Street, Suite 200
	Scottsdale, AZ 85260

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
Spilkin Family Trust
/s/ Edward S. Spilkin
(signature)
SPILKIN FAMILY TRUST
(print name)
TRUSTEE
(title)
ADDRESS:	1314 Hidden Plateau Court
	El Cajon, CA 92019

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
Andrew Z. Spilkin Revocable Trust
/s/ Andrew Spilkin
(signature)
Andrew Spilkin
(print name)
Trustee
(title)
ADDRESS:	4511 Brafferton Drive
	Bloomfield Hills, MI 48302

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
/s/ Gail D. Berman
Gail D. Berman
ADDRESS:	115 Eastwood
	Deerfield, IL 60015

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
/s/ Richard L. Dan
Richard L. Dan
ADDRESS:	4045 Dixon
	Hoffman Estates, IL 60195

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
/s/ Robin Jo Draper
Robin Jo Draper
ADDRESS:	5926 Neva
	Chicago, IL 60631

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
/s/ Robert S. Moss
Robert S. Moss
ADDRESS:	184 Cedar
	Highland Park, IL 60035

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

SELLING SHAREHOLDER:
/s/ Emily Spilkin
Emily Spilkin
ADDRESS:	3537 Smuggler Way
	Boulder, CO 80305

[SIGNATURE PAGE TO THE STOCK CONTRIBUTION AGREEMENT]

EX-2.1

exv2w1

EX-10.1

Exhibit 10.1

FIRST MERCURY FINANCIAL CORPORATION

1998

STOCK COMPENSATION PLAN

TABLE OF CONTENTS

	Page
ARTICLE I INTRODUCTION		1
1.1 Purpose		1
ARTICLE II DEFINITIONS		1
2.1 “Affiliate”		1
2.2 “Agreement” or “Award Agreement”		1
2.3 “Award”		1
2.4 “Beneficiary”		1
2.5 “Board of Directors”		2
2.6 “Cause”		2
2.7 “Change in Control”		2
2.8 “Code”		2
2.9 “Commission”		2
2.10 “Committee”		2
2.11 “Common Stock”		2
2.12 “Company”		2
2.13 “Covered Employee”		3
2.14 “Disability” or “Permanent Disability”		3
2.15 “Effective Date”		3
2.16 “Exchange Act”		3
2.17 “Fair Market Value”		3
2.18 “Grant Date”		3
2.19 “Incentive Stock Option”		3
2.20 “NASDAQ”		4
2.21 “Non-Qualified Stock Opting”		4
2.22 “Option Period”		4
2.23 “Option Price”		4
2.24 “Participant”		4
2.25 “Plan”		4
2.26 “Representative”		4
2.27 “Retirement”		4
2.28 “Rule 16b-3” and “Rule 16a-1(c)(3)”		4
2.29 “Securities Act”		4
2.30 “Stock Option” or “Option”		5
2.31 “Termination of Employment”		5
2.31 “Transfer”		5
ARTICLE III ADMINISTRATION		5
3.1 Committee Structure and Authority		5
ARTICLE IV STOCK SUBJECT TO PLAN		7
4.1 Number of Shares		7
4.2 Release of Shares		7
4.3 Restrictions on Shares		8
4.4 Stockholder Rights		8

 -i- 

TABLE OF CONTENTS
(continued)

	Page
4.5 Best Efforts To Register		8
4.6 Anti-Dilution		9
ARTICLE V ELIGIBILITY		9
5.1 Eligibility		9
ARTICLE VI STOCK OPTIONS		9
6.1 General		9
6.2 Grant and Exercise		10
6.3 Terms and Conditions		10
6.4 Termination by Reason of Death		11
6.5 Termination by Reason of Disability		12
6.6 Other Termination		12
ARTICLE VII PROVISIONS APPLICABLE TO STOCK ACQUIRED UNDER THE PLAN		12
7.1 Limited Transfer During Offering		12
7.2 Committee Discretion		12
7.3 No Company Obligation		13
ARTICLE VIII CHANGE IN CONTROL PROVISIONS		13
8.1 Impact of Event		13
8.2 Definition of Change in Control		14
8.3 Change in Control Price		14
ARTICLE IX MISCELLANEOUS		15
9.1 Amendments and Termination		15
9.2 Stand-Alone, Additional, Tandem, and Substitute Awards		15
9.3 Form and Timing of Payment Under Awards; Deferrals		16
9.4 Status of Awards Under Code Section 162(m)		16
9.5 Unfunded Status of Plan; Limits on Transferability		16
9.6 General Provisions		16
9.7 Mitigation of Excise Tax		18
9.8 Rights with Respect to Continuance of Employment		18
9.9 Awards in Substitution for Awards Granted by Other Corporations		18
9.10 Procedure for Adoption		18
9.11 Procedure for Withdrawal		19
9.12 Delay		19
9.13 Heading		19
9.14 Severability		19
9.15 Successors and Assigns		19
9.16 Entire Agreement		19

 -ii- 

FIRST MERCURY FINANCIAL CORPORATION
1998 STOCK COMPENSATION PLAN

ARTICLE I

INTRODUCTION

     1.1 Purpose

     The First Mercury Financial Corporation 1998 Stock Compensation Plan (“Plan”) is hereby established by First Mercury Financial Corporation (“Company”). The purpose of the Plan is to promote the overall financial objectives of the Company and its stockholders by motivating those persons selected to participate in the Plan to achieve long-term growth in stockholder value and by retaining the association of those individuals who are instrumental in achieving this growth. At the time the Company is a publicly held corporation, if any, it is intended that compensation awarded under the Plan qualifies for tax deductibility under Section 162(m) of the Code to the extent deemed appropriate by the Committee (as defined herein). The Plan and the grant of Awards (as defined herein) hereunder are expressly conditioned upon the Plan’s approval by the stockholders of the Company. If such approval is not obtained, then this Plan and all Awards hereunder shall be null and void ab initio. The Plan is adopted, subject to stockholder approval, effective as of September 3, 1998.

ARTICLE II

DEFINITIONS

     For purposes of the Plan, the following terms are defined as set forth below:

     2.1 ““Affiliate” means any individual, partnership, firm, corporation, association, trust joint-stock company, unincorporated association or other entity (other than the Company) that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the Company including, without limitation, any member of an affiliated group of which the Company is a common parent corporation as provided in Section 1504 of the Code.

     2.2 “Agreement” or “Award Agreement” means, individually or collectively, any agreement entered into pursuant to the Plan pursuant to which an Award is granted to a Participant.

     2.3 “Award” means any Option and any other right or interest granted to a participant under the Plan.

     2.4 “Beneficiary” means the person, persons, trust or trusts which have been designated by a Participant in his or her most recent written beneficiary designation filed with the Committee to receive the benefits specified under the Plan upon such Participant’s death or to which Awards or other rights are transferred if and to the extent permitted hereunder. If, upon a Participant’s death, there is no designated Beneficiary or surviving designated Beneficiary,

then the term Beneficiary means the person, persons, trust or trusts entitled by will or the laws of descent and distribution to receive such benefits.

     2.5 “Board of Directors” or “Board” means the Board of Directors of the Company.

     2.6 “Cause” shall mean, for purposes of whether and when a Participant has incurred a Termination of Employment for Cause, any act or omission which permits the Company to terminate the written agreement or arrangement between the Participant and the Company or an Affiliate for “cause” as defined in such agreement or arrangement, or in the event there is no such agreement or arrangement or the agreement or arrangement does not define the term “cause” or a substantially equivalent term, then Cause shall mean (a) the Participant’s willful misconduct or participation in any fraud against the Company or any of its Affiliates, (b) the Participant’s material breach of fiduciary duty involving personal profit, which breach has a material adverse effect on the Company and which breach is not cured within thirty (30) days after written notice thereof is given to the Participant, or (c) a felony conviction in a court of law under applicable Federal or state laws which results in material damage to the Company or any of its Affiliates or materially impairs the value of the Participant’s services to the Company or any of its Affiliates.

     2.7 “Change in Control” and “Change in Control Price” have the meanings set forth in Sections 8.2 and 8.3, respectively.

     2.8 “Code” or “Internal Revenue Code” means the Internal Revenue Code of 1986, as amended, Treasury Regulations (including proposed regulations) thereunder and any subsequent Internal Revenue Code.

     2.9 “Commission” means the Securities and Exchange Commission or any successor agency.

     2.10 “Committee” means the Compensation Committee of the Board and/or such other individuals designated by the Board to administer the Plan and named in an Appendix to the Plan; provided, however, that with respect to options granted at the time the Company is publicly held, insofar as a Committee is responsible for granting Options to Participants hereunder, it shall consist solely of two or more directors, each of whom is a “Non-Employee Director” within the meaning of Rule 16b-3 and each of whom is also an “outside director’ under Section 162(m) of the Code.

     2.11 “Common Stock” means the shares of the Company’s Common Stock, $0.1 par value, whether presently or hereafter issued, and any other stock or security resulting from adjustment thereof as described hereinafter or the common stock of any successor to the Company which is designated for the purposes of the Plan.

     2.12 “Company” means First Financial Mercury Corporation and includes any successor or assignee corporation or corporations into which the Company may be merged, changed or consolidated; any corporation for whose securities the securities of the Company shall be exchanged; and any assignee of or successor to substantially all of the assets of the Company.

- 2 -

     2.13 “Covered Employee” means a Participant who is a “covered employee” within the meaning of Section 162(m) of the Code.

     2.14 “Disability” or “Permanent Disability”, unless otherwise provided in an Agreement, means a mental or physical illness that entitles the Participant to receive benefits under the long-term disability plan of the Company or an Affiliate, or if the Participant is not covered by such a plan or the Participant is not an employee of the Company or an Affiliate, a mental or physical illness that renders a Participant totally and permanently incapable of performing the Participant’s duties for the Company or an Affiliate. Notwithstanding the foregoing, a Disability shall not qualify under this Plan if it is the result of (i) a willfully self-inflicted injury or willfully self-induced sickness; or (ii) an injury or disease contracted, suffered, or incurred while participating in a felony criminal offense. The determination of Disability shall be made by the Committee. The determination of Disability for purposes of this Plan shall not be construed to be an admission of disability for any other purpose.

     2.15 “Effective Date” means September 3, 1998.

     2.16 “Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

     2.17 “Fair Market Value” means the value determined on the basis of the good faith determination of the Committee, without regard to whether the Common Stock is restricted or represents a minority interest, pursuant to the applicable method described below:

     (a) if the Common Stock is listed on a national securities exchange or quoted in NASDAQ, the Closing price of the Common Stock on the relevant date (or, if such date is not a business day or a day on which quotations are reported, then on the immediately preceding date on which quotations were reported), as reported by the principal national exchange on which such shares are traded (in the case of an exchange) or by NASDAQ, as the case may be;

     (b) if the Common Stock is not listed on a national securities exchange or quoted on NASDAQ, but is actively traded in the over-the-counter market, the average of the closing bid and asked prices for the Common Stock on the relevant date (or, if such date is not a business day or a day on which quotations are reported, then on the immediately preceding date on which quotations were reported), or the most recent preceding date for which such quotations are reported; and

     (c) if, on the relevant date, the Common Stock is not publicly traded or reported as described in (a) or (B), the value determined in good faith by the Committee.

     2.18 “Grant Date” means the date as of which an Agreement is entered into pursuant to the Plan.

     2.19 “Incentive Stock Option” means any Stock Option intended to be and designated as an “incentive stock option” within the meaning of Section 422 of the Cede.

- 3 -

     2.20 “NASDAQ” means The NASDAQ Stock Market, including the NASDAQ National Market.

     2.21 “Non-Qualified Stock Opting” means an Option to purchase Common Stock in the Company granted under the Plan, the taxation of which is pursuant to Section 83 of the Code.

     2.22 “Option Period” means the period during which an Option shall be exercisable in accordance with the related Agreement and Article VI.

     2.23 “Option Price” means the price at which the Common Stock may be purchased under an Option as provided in Section 6.3(b).

     2.24 “Participant” means a person who satisfies the eligibility conditions of Article V and with whom an Agreement has been entered into under the Plan, and in the event a Representative is appointed for a Participant or another person becomes a Representative, then the term “Participant” shall mean such Representative. The term shall also include a trust for the benefit of the Participant, the Participant’s parents, spouse or descendants, or a custodian under a uniform gifts to minors act or similar statute for the benefit of the Participant’s descendants, to the extent permitted by the Committee and not inconsistent with Rule 16b-3. Notwithstanding the foregoing, the term “Termination of Employment” shall mean the Termination of Employment of the person to whom the Award was originally granted.

     2.25 “Plan” means this First Mercury Financial Corporation 1998 Stock Compensation Plan, as herein set forth and as may be amended from time to time.

     2.26 “Representative” meats (a) the person or entity acting as the executor or administrator of a Participant’s estate pursuant to the last will and testament of a Participant or pursuant to the laws of the jurisdiction in which the Participant had the Participant’s primary residence at the date of the Participant’s death; (b) the person or entity acting as the guardian or temporary guardian of a Participant; (c) the person or entity which is the Beneficiary of the Participant upon or following the Participant’s death; or (d) any person to whom an Option has been permissibly transferred; provided that only one of the foregoing shall be the Representative at any point in time as determined under applicable law and recognized by the Committee.

     2.27 “Retirement” means the Participant’s Termination of Employment after attaining either the normal retirement age or the early retirement age as defined in the principal (as determined by the Committee) tax-qualified plan of the Company or an Affiliate, if the Participant is covered by such a plan, or if the Participant is not covered by such a plan, then age 65, or age 55 with the accrual of 8 years of service.

     2.28 “Rule 16b-3” and “Rule 16a-1(c)(3)” mean Rule 16b-3 and “Rule 16a-1(c)(3), as from time to time in effect and applicable to the Plan and Participants, promulgated by the Commission under Section 16 of the Exchange Act.

     2.29 “Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

- 4 -

     2.30 “Stock Option” or “Option” means a right, granted to a Participant under Section 6.1 hereof, to purchase Common Stock at a specified price during specified time periods.

     2.31 “Termination of Employment” means the occurrence of any act or event that actually or effectively causes or results in the person’s ceasing, for whatever reason, to be an officer, independent contractor, director or employee of the Company or of any Affiliate of the Company, or to be an officer, independent contractor, director or employee of any entity that provides services to the Company or an Affiliate of the Company, including, without limitation, death, Disability, dismissal, severance at the election of the Participant, Retirement, or severance as a result of the discontinuance, liquidation, sale or transfer by the Company or its Affiliates of all businesses owned or operated by the Company or its Affiliates. With respect to any person who is not an employee with respect to the Company, the Agreement shall establish what act or event shall constitute a Termination of Employment for purposes of the Plan. A transfer of employment from the Company to an Affiliate, or from an Affiliate to the Company, will not be a Termination of Employment, unless expressly determined by the Committee. A Termination of Employment shall occur for an employee who is employed by an Affiliate of the Company if the Affiliate shall cease to be an Affiliate and the Participant shall nut immediately thereafter become an employee of the Company or an Affiliate of the Company.

     2.32 “Transfer” means any sale, gill, assignment, distribution, conveyance, pledge, hypothecation, encumbrance or other transfer of title, whether by operation of’ law or otherwise.

     In addition, certain other terms used herein have definitions given to them in the first place in which they are used.

ARTICLE III

ADMINISTRATION

     3.1 Committee Structure and Authority. The Plan shall be administered by a committee (the “Committee”) of the Board of Directors composed of no fewer than two directors designated by the Board of Directors. For purposes of this Plan, including the definition of “Committee” and the regulations thereunder, (a) a “Non-Employee Director” is determined under the rules and regulations adopted by the Securities and Exchange Commission under Section 16 of the Exchange Act and (b) an “outside director” is determined under the Regulations adopted by the Internal Revenue Service relating to Section 162(m) of the Code. A majority or the Committee shall constitute a quorum, the acts of a majority of the members present at any meeting at which a quorum is present, or acts approved in writing by all of the members, shall be the acts of the Committee. At any time the Company is publicly held, this Plan is intended to qualify for exemption from Section 16(b) of the Exchange Act and to qualify as performance-based compensation under Section 162(m) of the Code and shall be interpreted in such a way as to result in such qualification. A member of the Committee shall not exercise any discretion respecting himself or herself under the Plan. The Board shall have the authority to remove, replace or fill any vacancy of any member of the Committee upon notice to the Committee and the affected member. Any member of the Committee may resign upon notice to the Board. The Committee may allocate among one or more of its members, or may delegate to one or more of its agents, such duties and responsibilities as it determines.

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     Subject to (i) the terms of the Plan, and (ii) subject to the approval of the Board (to the extent required to qualify an Option granted hereunder for exemption under Section 16(b) of the Exchange Act and as “performance-based compensation” under Section 162(m) of the Code), the Committee shall have the authority:

     (a) to select those persons to whom Awards maybe granted from time to time;

     (b) to determine whether and to what extent Awards are to be granted hereunder;

     (c) to determine the number of shares of Common Stock to be covered by each Award granted hereunder;

     (d) to determine the tens and conditions of any Option granted hereunder (including, but not limited to, the Option Price, the Option Period, any exercise restriction or limitation and any exercise acceleration, forfeiture or waiver regarding any Award, any shares of Common Stock relating thereto, any performance criteria and the satisfaction of each criteria);

     (e) to adjust the terms and conditions, at any time or from time to time, of any Award, subject to the limitations of Section 9.1;

     (f) to determine to what extent and under what circumstances Common Stock and other amounts payable with respect to an Award shall be deferred;

     (g) to determine under what circumstances an Award may be settled in cash or Common Stock;

     (h) to provide for the forms of Agreements to be utilized in connection with the Plan;

     (i) to determine whether a Participant has a Disability or a Retirement;

     (j) to determine what securities law requirements are applicable to the Plan, Awards and the issuance of shares of Common Stock under the Plan and to require of a Participant that appropriate action be taken with respect to such requirements;

     (k) to cancel, with the consent of the Participant or as otherwise provided in the Plan or an Agreement, outstanding Awards;

     (l) to interpret and make final determinations with respect to the remaining number of shares of Common Stock available under this Plan;

     (m) to require, as a condition of the exercise of an Award or the issuance or transfer of a certificate of Common Stock, the withholding from a Participant of the amount of any Federal, state or local taxes as may be necessary in order for the Company or any other employer to obtain a deduction or as may be otherwise required by law;

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     (n) to determine whether and under what circumstances a Participant has incurred a Termination of Employment;

     (o) to determine whether the Company or any other person has a right or obligation to purchase Common Stock from a Participant and, if so, the terms and conditions on which such Common Stock is to be purchased;

     (p) to determine the restrictions or limitations on the transfer of Common Stock;

     (q) to determine whether an Award is to be adjusted, modified or purchased, or is to become fully exercisable, under the Plan or the terms of an Agreement;

     (r) to determine the permissible methods of Award exercise and payment, including cashless exercise arrangements;

     (s) to adopt, amend and rescind such rules and regulations as, in its opinion, may be advisable in the administration of the Plan; and

     (t) to appoint and compensate agents, counsel, auditors or other specialists to aid it in the discharge of its duties.

     The Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable, to interpret the terms and provisions of the Plan and any Award issued under the Plan (and any Agreement) and to otherwise supervise the administration of the Plan. The Committee’s policies and procedures may differ with respect to Awards granted at different times or to different Participants.

     Any determination made by the Committee pursuant to the provisions of the Plan shall be made in its sole discretion, and in the case of any determination relating to an Award, may be made at the time of the grant of the Award or, unless in contravention of any express term of the Plan or an Agreement, at any time thereafter. All decisions made by the Committee pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company and Participants. No determination shall be subject to de novo review if challenged in court.

ARTICLE IV

STOCK SUBJECT TO PLAN

     4.1 Number of Shares. Subject to the adjustment under Section 46, the total number of shares of Common Stock reserved and available for distribution pursuant to Awards under the Plan shall be 600 shares of Common Stock. Such shares may consist, in whole or in part, of authorized and unissued shares or treasury shares.

     4.2 Release of Shares. Subject to Section 6.3(f), if any shares of Common Stock that are subject to any Award cease to be subject to an Award or are forfeited or repurchased, if any Award otherwise terminates without issuance of shares of Common Stock being made to the

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Participant, or if any shares of Common Stock are received by the Company in connection with the exercise of an Award, including the satisfaction of tax withholding, such shares, in the discretion of the Committee, may again be available for distribution in connection with Awards under the Plan.

     4.3 Restrictions on Shares. Shares of Common Stock issued as or in conjunction with an Award shall be subject to the terms and conditions specified herein and to such other terms, conditions and restrictions as the Committee in its discretion may determine or provide in an Agreement. The Company shall not be required to issue or deliver any certificates for shares of Common Stock, cash or other property prior to (i) the listing of such shares on any stock exchange or NASDAQ (or other public market) on which the Common Stock may then be listed (or regularly traded), (ii) the completion of any registration or qualification of such shares under Federal or state law, or any ruling or regulation of any government body which the Committee determines to be necessary or advisable, and (iii) the satisfaction of any applicable withholding obligation in order for the Company or an Affiliate to obtain a deduction with respect to the exercise of an Award. The Company may cause any certificate for any share of Common Stock to be delivered to be properly marked with a legend or other notation reflecting the limitations on transfer of such Common Stock as provided in this Plan or as the Committee may otherwise require. The Committee may require any person exercising an Award to make such representations and furnish such information as it may consider appropriate in connection with the issuance or delivery of the shares of Common Stock in compliance with applicable law or otherwise. Fractional shares shall not be delivered, but shall be rounded to the next lower whole number of shares, and the Fair Market Value of such fractional shares, as of the date of exercise, shall be paid in cash.

     4.4 Stockholder Rights. No person shall have any rights of a stockholder as to shares of Common Stock subject to an Award until, (i) after proper exercise of the Award, (ii) after such other action required pursuant to such Award, or (iii) as otherwise provided herein or in an Agreement, such shares shall have been recorded on the Company’s official stockholder records as having been issued or transferred. Upon exercise of the Award or any portion thereof, the Company will have thirty (30) days in which to issue the shares, and the Participant will not be treated as a stockholder for any purpose prior to such issuance. No adjustment shall be made for cash dividends or other rights for which the record date is prior to the date such shares are recorded as issued or transferred in the Company’s official stockholder records, except as provided herein or in an Agreement.

     4.5 Best Efforts To Register. The Company will register under the Securities Act the Common Stock delivered or deliverable pursuant to Awards on Commission Form S-8 if available to the Company for this purpose (or any successor or alternate form that is substantially similar to that form to the extent available to effect such registration), in accordance with the rules and regulations governing such forms, as soon after stockholder approval of the Plan as the Committee, in its sole discretion, shall deem appropriate. The Company will use its best efforts to cause the registration statement to become effective and will file such supplements and amendments to the registration statement as may be necessary to keep the registration statement in effect until the earliest of (a) one year following the expiration of the Award Period of the last Award outstanding, (b) the date the Company is no longer a reporting company under the

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Exchange Act and (c) the date all Participants have disposed of all shares delivered pursuant to any Award.

     4.6 Anti-Dilution. In the event of any Company stock dividend, stock split, combination or exchange of shares, recapitalization or other change in the capital structure of the Company, corporate separation or division of the Company (including, but not limited to, a split-off, spin-off split-off or distribution to Company stockholders other than a normal cash dividend), sale by the Company of all or a substantial portion of its assets, reorganization, rights offering, a partial or complete liquidation, or any other corporate transaction or event involving the Company, then the Committee shall adjust or substitute, as the case may be, the number of shares of Common Stock available for Awards under the Plan, the number of shares of Common Stock covered by outstanding Awards, the exercise price per share of outstanding Awards, and performance conditions and any other characteristics or terms of the Awards as the Committee shall deem necessary or appropriate to reflect equitably the effects of such changes to the Participants; provided, however, that the Committee may limit any such adjustment so as to maintain the deductibility of the Awards under Section 162(m) of the Code and that any fractional shares resulting from such adjustment shall be eliminated by rounding to the next lower whole number of shares, and the Fair Market Value of such fractional shares, as of the date of such adjustment, shall be paid in cash.

ARTICLE V

ELIGIBILITY

     5.1 Eligibility. The persons eligible to participate in the Plan and be granted Awards shall be directors, officers, employees, consultants or other service providers of the Company or any Affiliate of the Company, who shall be in a position, in the opinion of the Committee, to make contributions to the growth, management, protection and success of the Company and its Affiliates. Of those persons described in the preceding sentence, the Committee may, from time to time, select persons to be granted Awards and shall determine the terms and conditions with respect thereto. The Committee may give consideration to the person’s functions and responsibilities, the person’s contributions to the Company, the value of the individual’s service to the Company and other factors deemed relevant by the Committee.

ARTICLE VI

STOCK OPTIONS

     6.1 General. The Committee shall have authority to grant Stock Options under the Plan at any time or from time to time. Stock Options may be either Incentive Stock Options or Non-Qualified Stock Options. An Option shall entitle the Participant to receive shams of Common Stock upon exercise of such Option, subject to the Participants satisfaction in full of any conditions, restrictions or limitations imposed in accordance with the Plan or an Option Agreement (which may differ from other Agreements), including, without limitation, payment of the Option Price. During any calendar year, Options to purchase no more than 300 shares (as adjusted pursuant to Sections 4.1 and 4.6) of Common Stock shall be granted to any Participant.

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     6.2 Grant and Exercise. The grant of a Stock Option shall occur as of the date the Committee determines. Each Option granted under this Plan shall be evidenced by an Agreement, in a form approved by the Committee, which shall embody the terms and conditions of such Option and which shall be subject to the express terms and conditions set forth in the Plan. Such Agreement shall become effective upon execution by the Participant. To the extent that any Stock Option is not designated as an Incentive Stock Option or even if so designated does not qualify as an Incentive Stock Option, it shall constitute a Non-Qualified Stock Option. Anything in the Plan to the contrary notwithstanding, no term of the Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be exercised, so as to disqualify the Plan under Section 422 of the Code.

     6.3 Terms and Conditions. Stock Options shall be subject to such terms and conditions as shall be determined by the Committee, including the following:

     (a) Option Period. The Option Period of each Stock Option shall be fixed by the Committee; provided that no Stock Option shall be exercisable more than ten (10) years after the date the Stock Option is granted. No Option which is intended to be an Incentive Stock Option shall be granted more than ten (10) years from the date the Plan is adopted by the Company or the date the Plan is approved by the stockholders of the Company, whichever is earlier.

     (b) Option Price. The Option Price per share of the Common Stock purchasable under an Option shall be determined by the Committee.

     (c) Exerciseability. Subject to Section 8.1, Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee. If the Committee provides that any Stock Option is exercisable only in installments, the Committee may, to the extent such waiver will not cause the Option income to fail to be deductible under Section 162(m), at any time waive such installment exercise provisions, in whole or in part, and, subject to the foregoing, may at any time accelerate the exerciseability of any Stock Option. The aggregate Fair Market Value (determined at the Grant Date) of the Common Stock under an Incentive Stock Option shall not exceed $100,000 of exercisable Common Stock in any calendar year.

     (d) Method of Exercise. Subject to the provisions of this Article VI, a Participant may exercise Stock Options, in whole or in part, at any time during the Option Period by the Participants giving written notice of exercise on a form provided by the Committee (if available) to the Company specifying the number of shares of Common Stock subject to the Stock Option to be purchased. Such notice shall be accompanied by payment in full of the purchase price by cash or check or such other form of payment as the Company may accept. If approved by the Committee, payment in full or in part may also be made (i) by delivering Common Stock already owned by the Participant having a total Fair Market Value on the date of such delivery equal to the Option Price; (ii) by the execution and delivery of a note or other evidence of indebtedness (and any security agreement thereunder) satisfactory to the Committee and permitted in accordance with Section 6.3(e); (iii) by the delivery of cash or the extension of credit by a broker-dealer to whom the Participant has submitted a notice of exercise or otherwise indicated an intent

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to exercise an Option (in accordance with Part 220, Chapter II, Title 12 of the Code of Federal Regulations, so-called “cashless” exercise); (iv) by authorizing the Company to retain shares of Common Stock which would otherwise be issuable upon the exercise of the Option having a total Fair Market Value on the date of delivery equal to the Option Price; or (v) by any combination of the foregoing. In the case of an incentive Stock Option, the right to make a payment in the form of already owned shares of Common Stock of the same class as the Common Stock subject to the Stock Option may be authorized only at the time the Stock Option is granted. No shares of Common Stock shall be issued until full payment therefor, as determined by the Committee, has been made.

     (e) Company Loan or Guarantee. Upon the exercise of any Option and subject to the pertinent Agreement and the discretion of the Committee, the Company may at the request of the Participant:

     (i) lend to the Participant an amount equal to such portion of the Option Price as the Committee may determine; or

     (ii) guarantee a loan obtained by the Participant from a third-party for the purpose of tendering the Option Price.

The terms and conditions of any loan or guarantee, including the term, interest rate and any security interest thereunder and whether the loan shall be with recourse, shall be determined by the Committee, except that no extension of credit or guarantee shall obligate the Company for an amount to exceed the lesser of the aggregate Fair Market Value per share of the Common Stock on the date of exercise, less the par value of the shares of Common Stock to be purchased upon the exercise of the Award, or the amount permitted under applicable laws or the regulations and rules of the Federal Reserve Board and any other governmental agency having jurisdiction.

     (f) Non-transferability of Options. Except as provided herein or in an Agreement, no Stock Option or interest therein shall be transferable by the Participant other than by will or by the laws of descent and distribution, and all Stock Options shall be exercisable during the Participant’s lifetime only by the Participant. If and to the extent transferability is permitted by Rule 16b-3 or does not result in liability to any Participant and except as otherwise provided by an Agreement, every Option granted hereunder shall be freely transferable, but only if such transfer is consistent with the use of Form S-8 (or the Committee’s waiver of such condition) and consistent with an Award’s intended status as an Incentive Stock Option (as applicable).

     6.4 Termination by Reason of Death. Unless otherwise provided in an Agreement or determined by the Committee, if a Participant incurs a Termination of Employment due to death, any unexpired and unexercised Stack Option held by such Participant shall thereafter be fully exercisable for a period of ninety (90) days following the date of the appointment of a Representative (or such other period or no period as the Committee may specify) or until the expiration of the Option Retied, whichever period is the shorter.

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     6.5 Termination by Reason of Disability. Unless otherwise provided in an Agreement or determined by the Committee, if a Participant incurs a Termination of Employment due to a Disability, any unexpired and unexercised Stock Option held by such Participant shall thereafter be fully exercisable by the Participant for the period of ninety (90) days (or such other period or no period as the Committee may specify) immediately following the date of such Termination of Employment or until the expiration of the Option Period, whichever period is shorter, and the Participant’s death at any time following such Termination of Employment due to Disability shall not affect the foregoing. In the event of Termination of Employment by reason of Disability, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Non-Qualified Stock Option.

     6.6 Other Termination. Unless otherwise provided in an Agreement or determined by the Committee, if a Participant incurs a Termination of Employment due to Retirement, or the Termination of Employment is involuntary on the part of the Participant (but is not due to death or Disability or with Cause), any Stock Option held by such Participant shall thereupon terminate, except that such Stock Option, to the extent then exercisable, may be exercised for the lesser of the ninety (90) day period commencing with the date of such Termination of Employment or until the expiration of the Option Period. Unless otherwise provided in an Agreement or determined by the Committee, if the Participant incurs a Termination of Employment which is voluntary on the part or the Participant (and is not due to Retirement) the Option shall terminate 30 days after such Termination. Unless otherwise provided in an Agreement or determined by the Committee, if the Participant’s Termination of Employment is for Cause, the Option shall terminate immediately. The death or Disability of a Participant after a Termination of Employment otherwise provided herein shall not extend the time permitted to exercise an Option.

ARTICLE VII

PROVISIONS APPLICABLE TO STOCK ACQUIRED UNDER THE PLAN

     7.1 Limited Transfer During Offering. In the event there is an effective registration statement under the Securities Act pursuant to which shares of Common Stock shall be offered for sale in an underwritten offering, a Participant shall not, during the period requested by the underwriters managing the registered public offering, effect any public sale or distribution of shares received directly or indirectly pursuant to an exercise of an Award.

     7.2 Committee Discretion. The Committee may in its sole discretion include in any Agreement an obligation that the Company purchase a Participant’s shares of Common Stock received upon the exercise of an Award (including the purchase of any unexercised Awards which have not expired), or may obligate a Participant to sell shares of Common Stock to the Company, upon such terms and conditions as the Committee may determine and set forth in an Agreement. The provisions of this Article VII shall be construed by the Committee in its sole discretion, and shall be subject to such other terms and conditions as the Committee may from time to time determine. Notwithstanding any provision herein to the contrary, the Company may upon determination by the Committee assign its right to purchase shares of Common Stock under

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this Article VII, whereupon the assignee of such right shall have all the rights, duties and obligations of the Company with respect to purchase of the shares of Common Stock.

     7.3 No Company Obligation. None of the Company, an Affiliate or the Committee shall have any duty or obligation to disclose affirmatively to a record or beneficial holder of Common Stock or an Award, and such holder shall have no right to be advised of, any material information regarding the Company or any Affiliate at any time prior to, upon or in connection with receipt or the exercise of an Award or the Company’s purchase of Common Stock or an Award from such holder in accordance with the terms hereof.

ARTICLE VIII

CHANGE IN CONTROL PROVISIONS

     8.1 Impact of Event. Notwithstanding any other provision of the Plan to the contrary, unless otherwise provided in an Agreement, in the event of a Change in Control (as defined in Section 8.2):

     (a) Any Stock Options outstanding as of the date of such Change in Control and not then exercisable shall become fully exercisable to the full extent of the original grant;

     (b) The restrictions and deferral limitations applicable to any Award shall lapse, and such Award shall become free of all restrictions and become fully vested and transferable to the full extent of the original grant.

     (c) Notwithstanding any other provision of the Plan, unless the Committee shall provide otherwise in an Agreement, a Participant shall have the right, whether or not the Award is fully exercisable or may be otherwise realized by the Participant, by giving notice during the 60-day period from and after a Change in Control to the Company, to elect to surrender all or part of a stock-based Award to the Company and to receive cash, within 30 days of such notice, in an amount equal to the amount by which the “Change in Control Price” (as defined in Section 8.3) per share of Common Stock on the date of such election shall exceed the amount which the Participant must pay to exercise the Award per share of Common Stock wider the Award (the “Spread”) multiplied by the number of             shares of Common Stock granted under the Award as to which the right granted under this Section 8.1 shall have been exercised; provided, however, that if the end of such 60-day period from and after a Change in Control is within six months of the date of grant of the Award held by a Participant (except a Participant who has died during such six-month period) who is an officer or director of the Company (within the meaning of Section 16(b) of the Exchange Act), such Award shall be cancelled in exchange for a payment to the Participant, effective on the day which is six months and one day after the date of grant of such Award, equal to the Spread multiplied by the number of shares of Common Stock granted under the Award, plus interest on such amount at the prime rate as reported from time to time in The Wall Street Journal, compounded annually and determined from time to time. With respect to any Participant who is an officer or director of the Company (within the meaning of Section 16(b) of the Exchange Act), the 60-day period

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shall be extended, if necessary, to include the “window period” of Rule 16b-3 which first commences on or after the date of the (Change in Control and the Committee shall have sole discretion, if necessary, to approve the Participant’s exercise hereunder and the date on which the Spread is calculated may be adjusted, if necessary, to a later date if necessary to avoid liability to such Participant under Section 16(b).

     8.2 Definition of Change in Control. For purposes of this Plan, a “Change in Control” shall be deemed to have occurred if:

     (a) any individual, partnership, firm, corporation, association, trust, joint-stock company, unincorporated association or other entity, or any syndicate or group deemed to be a person under Section 14(d)(2) of the Exchange Act (other than shareholders holding more than 20% of the Company’s voting securities as of the effective date of the Plan), is or becomes the “beneficial owner” (as defined in Rule 13d-3 of the General Rules and Regulations under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company’s then outstanding securities entitled to vote in the election of directors of the Company; or

     (b) Jerome M. Shaw no longer shall be entitled, pursuant to that certain Agreement Among Stockholders of Mercury Insurance Group, Inc. (n/k/a First Mercury Financial Corporation), effective as of January 1, 1994, as such agreement may be amended and/or restated from time to time, to nominate for election to the Company’s Board that number of individuals which will constitute a majority of the Company’s Board; or

     (c) all or substantially all of the assets of the Company are transferred, liquidated or distributed.

     8.3 Change in Control Price. For purposes of the Plan, “Change in Control Price” means the higher of (a) the highest reported sales price of a share of Common Stock in any transaction reported on the principal exchange on which such shares are listed or on NASDAQ during the 60-day period prior to and including the date of a Change in Control or (b) if the Change in Control is the result of a tender or exchange officer merger, consolidation, liquidation or sale of all or substantially all of the assets of the Company (in each case a “Corporate Transaction”), the highest price per share of Common Stock paid in such Corporate Transaction, except that, in the case of Incentive Stock Options, such price shall be based only on the Fair Market Value of the Common Stock on the date any such Incentive Stock Option is exercised. To the extent that the consideration paid in any such Corporate Transaction consists all or in part of securities or other non-cash consideration, the value of such securities or other non-cash consideration shall be determined in the sole discretion of the Committee.

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ARTICLE IX

MISCELLANEOUS

     9.1 Amendments and Termination. The Board may amend, alter or discontinue the Plan at any time, but no amendment, alteration or discontinuation shall be made which would (a) impair the rights of a Participant under a Stock Option theretofore granted without the Participant’s consent, except such an amendment made to cause the Plan to qualify for the exemption provided by Rule 16b-3 or (b) disqualify the Plan from the exemption provided by Rule 16b-3. In addition, no such amendment shall be made without the approval of the Company’s stockholders to the extent such approval is required by law or agreement.

     The Committee may amend the Plan at any time provided that (a) no amendment shall impair the rights of any Participant under any Award theretofore granted without the Participant’s consent, (b) no amendment shall disqualify the Plan from the exemption provided by Rule 16b-3, and (c) any amendment shall be subject to the approval or rejection of the Board.

     The Committee may amend the terms of any Award or other Award theretofore granted, prospectively or retroactively, but no such amendment shall impair the rights of any Participant without the Participant’s consent or reduce an Option Price, except such an amendment made to cause the Plan or Award to qualify for the exemption provided by Rule 16b-3.

     Subject to the above provisions, the Board shall have authority to amend the Plan to take into account changes in law and tax and accounting rules, as well as other developments, and to grant Awards which qualify for beneficial treatment under such rules without stockholder approval. Notwithstanding anything in the Plan to the contrary, if any right under this Plan would cause a transaction to be ineligible for pooling of interest accounting that would, but for the right hereunder, be eligible for such accounting treatment, the Committee may modify or adjust the right so that pooling of interest accounting shall be available, including the substitution of Common Stock having a Fair Market Value equal to the cash otherwise payable hereunder for the right which caused the transaction to be ineligible for pooling of interest accounting.

     9.2 Stand-Alone, Additional, Tandem, and Substitute Awards. Awards granted under the Plan may, in the discretion of the Committee, be granted either alone or in addition to, in tandem with, or in substitution or exchange for, any other Award or any award granted under another plan of the Company, any Affiliate, or any business entity to be acquired by the Company or an Affiliate, or any other right of a Participant to receive payment from the Company or any Affiliate, except as provided in such other plan or right. Such additional, tandem, any substitute or exchange Awards may be granted at any time. If an Award is granted in substitution or exchange for another Award or award, the Committee shall require the surrender of such other Award or award in consideration for the grant of the new Award. In addition, Awards may be granted in lieu of cash compensation, including in lieu of cash amounts payable under other plans of the Company or any Affiliate, in which the Fair Market Value of Common Stock subject to the Award is equivalent in value to the cash compensation, or in which the exercise price, grant price or purchase price of the Award in the nature of a right that maybe exercised is equal to the Fair Market Value of the underlying Common Stock minus the value of the cash compensation surrendered.

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     9.3 Form and Timing of Payment Under Awards; Deferrals. Subject to the terms of the Plan and any applicable Agreement, payments to be made by the Company or an Affiliate upon the exercise of an Award or settlement of an Award may be made in such forms as the Committee shall determine, including, without limitation, cash, Common Stock, other Awards or other property, and may be made in a single payment or transfer, in installments, or on a deferred basis. The settlement of any Award may be accelerated, and cash paid in lieu of Common Stock in connection with such settlement, in the discretion of the Committee or upon occurrence of one or more specified events (in addition to a Change in Control). Installment or deferred payments may be required by the Committee (subject to Section 9.1 of the Plan) or permitted at the election of the Participant. Payments may include, without limitation, provisions for the payment or crediting of reasonable interest on installment or deferred payments or the granting or crediting of dividend equivalents in respect of installment or deferred payments denominated in Common Stock.

     9.4 Status of Awards Under Code Section 162(m). It is the intent of the Company that Awards granted to persons who are Covered Employees within the meaning of Code Section 162(m) shall constitute “qualified performance-based compensation” satisfying the requirements of Code Section 162(m). Accordingly, the provisions of the Plan shall be interpreted in a manner consistent with Code Section 162(m). If any provision of the Plan or any agreement relating to such an Award does not comply or is inconsistent with the requirements of Code Section 162(m), such provision shall be construed or deemed amended to the extent necessary to conform to such requirements.

     9.5 Unfunded Status of Plan; Limits on Transferability. It is intended that the Plan be an “unfunded” plan for incentive and deterred compensation. The Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Common Stock or make payments; provided, however, that, unless the Committee otherwise determines, the existence of such trusts or other arrangements is consistent with the “unfunded” status of the Plan. Unless otherwise provided in this Plan or in an Agreement, no Award shall be subject to the claims of Participant’s creditors and no Award may be transferred, assigned, alienated or encumbered in any way other than by will or the laws of descent and distribution or to a Representative upon the death of the Participant.

     9.6 General Provisions.

     (a) Representation. The Committee may require each person purchasing or receiving shares pursuant to an Award to represent to and agree with the Company in writing that such person is acquiring the shares without a view to the distribution thereof The certificates for such shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer.

     (b) No Additional Obligation. Nothing contained in the Plan shall prevent the Company or an Affiliate from adopting other or additional compensation arrangements for its employees.

     (c) Withholding. No later than the date as of which an amount first becomes includable in the gross income of the Participant for Federal income tax purposes with

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respect to any Award, the Participant shall pay to the Company (or other entity identified by the Committee), or make arrangements satisfactory to the Company or other entity identified by the Committee regarding the payment of, any Federal, state, local or foreign taxes of any kind required by law to be withheld with respect to such amount required in order for the Company or an Affiliate to obtain a current deduction. If the Participant disposes of shares of Common Stuck acquired pursuant to an Incentive Stock Option in any transaction considered to be a disqualifying transaction under the Code, the Participant must give written notice of such transfer and the Company shall have the right to deduct any taxes required by law to be withheld from any amounts otherwise payable to the Participant. Unless a otherwise determined by the Committee, withholding obligations may be settled with Common Stock, including Common Stock that is part of the Award that gives rise to the withholding requirement, provided that any applicable requirements under Section 16 of the Exchange Act ate satisfied. The obligations of the Company under the Plan shall be conditional on such payment or arrangements, and the Company and its Affiliates shall, to the extent permitted by law, have the right to deduct any such taxes from any payment otherwise due to the Participant.

     (d) Reinvestment. The reinvestment of dividends in additional shares of Common Stock at the time of any dividend payment shall be permissible only if sufficient shares of Common Stock are available under the Plan for such reinvestment (taking into account then outstanding Options and other Awards).

     (e) Representation. The Committee shall establish such procedures as it deems appropriate for a Participant to designate a Representative to whom any amounts payable in the event of the Participants death are to be paid.

     (f) Controlling Law. The Plan and all Awards made and actions taken thereunder shall be governed by and construed in accordance with the laws of the State of Michigan (other than its law respecting choice of law). The Plan shall be construed to comply with all applicable law and to avoid liability to the Company, an Affiliate or a Participant, including, without limitation, liability under Section 16(b) of the Exchange Act.

     (g) Offset. Any amounts owed to the Company or an Affiliate by the Participant of whatever nature may be offset by the Company from the value of any shares of Common Stock, cash or other thing of value under this Plan or an Agreement to be transferred to the Participant, and no shares of Common Stock, cash or other thing of value under this Plan or an Agreement shall be transferred unless and until all disputes between the Company and the Participant have been fully and finally resolved and the Participant has waived all claims to such against the Company or an Affiliate.

     (h) Fail Safe. With respect to persons subject to Section 16 of the Exchange Act, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 or Rule 16a-1(c)(3), as applicable To the extent any provision of the Plan or action by the Committee fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee Moreover, in the event the Plan does not include a provision required by Rule 16b-3 or Rule 16a-1(c)(3) to be stated

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herein, such provision (other than one relating to eligibility requirements or the price and amount of Awards) shall be deemed to be incorporated by reference into the Plan with respect to Participants subject to Section 16.

     9.7 Mitigation of Excise Tax. Except as otherwise provided in an Agreement, if any payment or right accruing to a Participant under this Plan (without the application of this Section 9.7), either alone or together with other payments or rights accruing to the Participant from the Company or an Affiliate (“Total Payments”), would constitute a ‘parachute payment” (as defined in Section 280G of the Code and regulations thereunder), such payment or right shall, if so elected by the Participant in his or her sole discretion, be reduced to the largest amount or greatest right that will result in no portion of the amount payable or right accruing under the Plan being subject to an excise tax under Section 4999 of the Code or being disallowed as a deduction under Section 280G of the Code. The determination of the amount of any potential reduction in the rights or payments shall be made by the Committee in good faith after consultation with the Participant and shall be communicated to Participant prior to his or her making such election. The Participant shall cooperate in good faith with the Committee in making such determination and providing the necessary information for this purpose. The foregoing provisions of this Section 9.7 shall apply with respect to any person only if, after reduction for any applicable Federal excise tax imposed by Section 4999 of the Code and Federal income tax imposed by the Code, the Total Payments accruing to such person would be less than the amount of the Total Payments as reduced, if applicable, under the foregoing provisions of the Plan and after reduction for only Federal income taxes.

     9.8 Rights with Respect to Continuance of Employment. Nothing contained herein shall be deemed to alter the relationship between the Company or an Affiliate and a Participant, or (he contractual relationship between a Participant aid the Company or an Affiliate if there is a written contract regarding such relationship. Nothing contained heroin shall be construed to constitute a contract of employment between the Company or an Affiliate and a Participant. The Company or an Affiliate and each of the Participants continue to have the right to terminate the employment or service relationship at any time for any reason, except as provided in a written contract.

     9.9 Awards in Substitution for Awards Granted by Other Corporations. Awards (including cash in respect of fractional shares) may be granted under the Plan from time to time in substitution for awards held by employees, directors or service providers of other corporations who are about to become officers, directors or employees of the Company or an Affiliate as the result of a merger or consolidation of the employing corporation with the Company or an Affiliate, or the acquisition by the Company or an Affiliate of the assets of the employing corporation, or the acquisition by the Company or Affiliate of the stock of the employing corporation, as the result of which it becomes a designated employer under the Plan. The terms and conditions of the Awards so granted may vary from the terms and conditions set forth in this Plan at the time of such grant as the majority of the members of the Committee may deem appropriate to conform, in whole or in part, to the provisions of the awards in substitution for which they are granted.

     9.10 Procedure for Adoption. Any Affiliate of the Company may by resolution of such Affiliate’s board of directors, with the consent of the Board of Directors and subject to such

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conditions as may be imposed by the Board of Directors, adopt the Plan for the benefit of its employees as of the date specified in the board resolution.

     9.11 Procedure for Withdrawal. Any Affiliate which has adopted the Plan may, by resolution of the board of directors of such Affiliate, with the consent of the Board of Directors and subject to such conditions as may be imposed by the Board of Directors, terminate its adoption of the Plan.

     9.12 Delay. If at the time a Participant incurs a Termination of Employment (other than due to Cause) or if at the time of a Change in Control, the Participant is subject to “short-swing” liability under Section 16 of the Exchange Act, any time period provided for under the Plan or an Agreement to the extent necessary to avoid the imposition of liability shall be suspended and delayed during the period the Participant would be subject to such liability, but not more than six (6) months and one (1) day and not to exceed the Option Period. The Company shall have the right to suspend or delay any time period described in the Plan or art Agreement if the Committee shall determine that the action may constitute a violation of any law or result in liability under any law to the Company, an Affiliate or a stockholder of the Company until such time as the action required or permitted shall not constitute a violation of law or result in liability to the Company, an Affiliate or a stockholder of the Company. The Committee shall have the discretion to suspend the application of the provisions of the Plan required solely to comply with Rule 16b-3 if the Committee shall determine that Rule 16b-3 does not apply to the Plait.

     9.13 Heading. The headings contained in this Plan are for reference purposes only and shall not affect the meaning or interpretation of this Plan.

     9.14 Severability. If any provision of this Plan shall for any reason be held to be invalid or unenforceable, such invalidity or unenforceability shall not effect any other provision hereby, and this Plan shall be construed as if such invalid or unenforceable provision were omitted.

     9.15 Successors and Assigns. This Plan shall inure to the benefit of and be binding upon each successor and assign of the Company. All obligations imposed upon a Participant, and all rights granted to the Company hereunder, shall be binding upon the Participant’s heirs, legal representatives and successors.

     9.16 Entire Agreement. This Plan and the Agreement constitute the entire agreement with respect to the subject matter hereof and thereof, provided that in the event of any inconsistency between the Plan and (he Agreement, the terms and conditions of this Plan shall control.

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     IN WITNESS WHEREOF, this instrument has been executed by the undersigned as of September 14, 1998.

FIRST MERCURY FINANCIAL CORPORATION
By:	/s/ Richard H. Smith
Name:	Richard H. Smith
Its:	President, C.O.O.

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AMENDMENT NO. 1
TO THE
FIRST MERCURY FINANCIAL CORPORATION
1998 STOCK COMPENSATION PLAN

     THIS AMENDMENT NO. 1 TO THE FIRST MERCURY FINANCIAL CORPORATION 1998 STOCK COMPENSATION PLAN (this “Amendment”) is adopted, subject to stockholder approval, effective as of March 2, 1999. This Amendment amends that certain First Mercury Financial Corporation 1998 Stock Compensation Plan (the “Plan”), effective September 3, 1998, which was established by First Mercury Financial Corporation, a Delaware corporation (“FMFC”). The Plan was adopted by the Board of Directors of FMFC on September 3 1998 and approved by the stockholders of FMFC on October 6, 1998;

     WHEREAS, according to Section 1.1 of the Plan, the purpose of the Plan is to promote the overall financial objectives of FMFC and its stockholders by motivating those persons selected to participate in (he Plan to achieve long-term growth in stockholder value and by retaining the association of those individuals who are instrumental in achieving this growth; and

     WHEREAS in order to fulfill this purpose, it is in FMFC’s best interest to amend the Plan according to the provisions of this Amendment, in accordance with Section 9.1 of the Plan.

     NOW, THEREFORE, in consideration of the foregoing premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Plan is hereby amended as follows:

     1. Section 2.11 of the Plan is deleted in its entirety and replaced with the following:

2.11 “Common Stock” means the shares of the Company’s Common Stock, voting or non-voting, $.01 par value, whether presently or hereafter issued, and any other stock or security resulting from adjustment thereof as described hereinafter or the common stock of any successor to the Company which is designated for the purposes of the Plan.

     2. Section 4.1 of the Plan is deleted in its entirety and replaced with the following:

4.1 Number of Shares. Subject to the adjustment under Section 4.6, the total number of shares of Common Stock reserved and available for distribution pursuant to Awards under the Plan shall be 0 shares of the Company’s Class A voting common stock and 5,000 shares of the Company’s Class B non-voting common stock. Such shares may consist, in whole or in part, of authorized and unissued shares or treasury shares.

     3. Section 6.1 of the Plan is deleted in its entirety and replaced with the following:

6.1 General. The Committee shall have authority to grant Stock Options under the Plan at any time or from time to time. Stock Options may be either Incentive Stock Options or Non-Qualified Stock Options. An Option shall entitle the Participant to receive shares of Common Stock upon exercise of such Option, subject to the Participant’s satisfaction in full of any conditions, restrictions or limitations imposed in accordance with the Plan or an Option Agreement (which may differ from other Agreements) including, without limitation, payment of the Option Price. During any calendar year, Options to purchase tin tame than 0 shares (as adjusted Pursuant to Sections 4.1 and 4.6) of the Company‘s Class A voting common stock and 2,500 states (as adjusted pursuant to Sections 4.1 and 4.6) of the Company’s Class B non-voting common stock shall be granted to any Participant.

     Pursuant to Section 9.1 of the Plan, this Amendment shall not be effective without the approval of the Company’s stockholders. If such approval is not obtained, then this Amendment shall be null and void ab initio.

     IN WITNESS WHEREOF, this instrument has been executed by the undersigned as of March 2, 1999.

FIRST MERCURY FINANCIAL CORPORATION
By:	/s/ Richard H. Smith
	Richard H. Smith, President

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EX-10.2

Exhibit 10.2

REGISTRATION RIGHTS AGREEMENT

          This Registration Rights Agreement (this “Agreement”) is made as of this 7^th day of June, 2004 by and among First Mercury Financial Corporation, a Delaware corporation (together with any successor thereto, the “Company”), and FMFC Holdings, LLC, a Delaware limited liability company (the “Investor”).

          WHEREAS, the Company and the Investor are entering into a certain Series A Convertible Preferred Stock Purchase Agreement, dated as of March 1, 2004 (the “Purchase Agreement”), pursuant to which the Company has agreed to issue and sell, and the Investor has agreed to purchase, shares of Series A Convertible Preferred Stock, par value $.01 per share (the “Series A Preferred Stock”); and

          WHEREAS, the execution of this Agreement is a condition precedent to the purchase by the Investor of the Series A Preferred Stock under the Purchase Agreement.

          NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements hereinafter set forth, the parties hereto agree as follows:

     1. Certain Definitions. As used in this Agreement, the following terms shall have the respective meanings set forth below:

          An “Affiliate” of a Person means any person controlling, controlled by, or under common control with, such Person. For purposes of this definition, “control” means the power to direct the management and policies of a Person, whether through the ownership of voting securities, by agreement or otherwise, including control within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act.

          “Agreement” has the meaning set forth in the introduction to this Agreement.

          “Commission” means the United States Securities and Exchange Commission or any other federal agency at the time administering the Securities Act and the Exchange Act.

          “Common Stock” means the Company’s common stock, par value $.01 per share.

          “Company” has the meaning set forth in the introduction to this Agreement.

          “Controlling Person” has the meaning set forth in Section 5 of this Agreement.

          “Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time, or any similar successor federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time.

          “Form S-1 Demand Registration” has the meaning set forth in Section 3(a) of this Agreement.

          “Holders” has the meaning set forth in Section 2 of this Agreement.

          “Initial Public Offering” means the initial public offering of Common Stock by the Company pursuant to an effective registration statement under the Securities Act.

          “Inspector” has the meaning set forth in Section 4(h) of this Agreement.

          “Investor” has the meaning set forth in the introduction to this Agreement.

          “Person” means any individual, corporation, association, partnership, limited liability company, joint venture, estate, trust, or unincorporated organization or any government and any agency or political subdivision thereof.

          “Purchase Agreement” has the meaning set forth in the introduction to this Agreement.

          “Registrable Securities” means (i) any shares of Series A Preferred Stock held by the Investor, (ii) the shares of Common Stock or any other securities issued or issuable upon conversion of the Series A Preferred Stock, (iii) any other shares of Common Stock acquired by the Investor and (iv) any other securities issued or issuable with respect to any such shares described in clauses (i), (ii) and (iii) above by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization (it being understood that for purposes of this Agreement, a Person will be deemed to be a holder of Registrable Securities whenever such Person has the right to then acquire or obtain from the Company any Registrable Securities, whether or not such acquisition has actually been effected).

          “Securities Act” shall mean the Securities Act of 1933, as amended from time to time, or any similar successor federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time.

          “Selling Holder” has the meaning set forth in Section 5 of this Agreement.

          “Series A Preferred Stock” has the meaning set forth in the introduction to this Agreement.

          “Stockholders Agreement” means the Stockholders Agreement of even date herewith by and among the Company, the Investor and all the stockholders of the Company.

          “Tier 1 Default” has the meaning set forth in the Purchase Agreement.

          “Tier 2 Default” has the meaning set forth in the Purchase Agreement.

     2. Piggyback Registrations. If at any time or times after the date hereof the Company shall seek to file a registration statement under the Securities Act with respect to an offering of shares of Common Stock to the public for its own account or on the account of others (except with respect to registration statements on Form S-4 or Form S-8 or another form not available for registering the Registrable Securities for sale to the public), the Company will promptly give written notice thereof to all holders of Registrable Securities (the “Holders”). If within twenty (20) days after their receipt of such notice, one or more Holders request the

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inclusion of some or all of the Registrable Securities held by them in such registration statement, the Company will use its best efforts to include such securities in such registration statement. In the case of any underwritten public offering, if the managing underwriter determines that marketing factors require a limitation on the number of Registrable Securities to be offered under such registration statement, subject to the following sentence, the Company shall not be required to include in such registration statement Registrable Securities of the Holders in excess of the amount, if any, of shares of Common Stock which the managing underwriter of such underwritten offering shall reasonably and in good faith agree to include in such offering in addition to any amount to be registered for the account of the Company. If any limitation of the number of shares of Registrable Securities to be registered by the Holders is required pursuant to this Section 2, the number of such securities to be excluded from such registration statement shall be determined in the following sequence: (i) first, securities held by any Persons not having any contractual, incidental “piggyback” registration rights to include such securities in the registration statement, (ii) second, securities held by any Persons having contractual, incidental “piggyback” rights to include such securities on the registration statement pursuant to an agreement which is not this Agreement and (iii) third, Registrable Securities to be registered by the Holders as determined on a pro rata basis (based upon the relative number of Registrable Securities held by such Holders requesting inclusion pursuant to this Section 2).

     3. Required Registrations.

          (a) Demand Registration. At any time on or after the two (2) year anniversary of the date hereof (or at any time after the occurrence and during the continuation of a Tier 1 Default or a Tier 2 Default, the Holders of a majority of the then outstanding Registrable Securities may request that the Company register under the Securities Act all or a portion of the Registrable Securities held by such requesting Holders having an aggregate value of at least $10,000,000 (based on the then current market price) (a “Form S-1 Demand Registration”); provided however, that in the event of a Material Default (as defined in the Purchase Agreement), the Holders shall be entitled to exercise their rights under this Section 3(a) at any time prior to the two (2) year anniversary of the date hereof or at any time thereafter. Such requests shall be in writing and shall state the number of shares of Registrable Securities to be disposed of and the intended method of disposition of such shares by such requesting Holders. The Holders shall only be entitled to request two (2) Form S-1 Demand Registrations pursuant to this Section 3(a). Notwithstanding anything to the contrary contained herein, a registration will not count as a Form S-1 Demand Registration under this Section 3(a) until the registration statement relating to all such Registrable Securities requested to be so registered has been declared effective by the Commission at the request of the requesting Holders and, if such method of disposition is a firm commitment underwritten public offering, all of such shares shall have been sold pursuant thereto.

          (b) Registration Requirements. Following receipt of a request for registration pursuant to this Section 3, the Company will promptly notify all of the other Holders of such request and such Holders shall then have twenty (20) days to notify the Company of their desire to participate in the registration. Thereupon, the Company will use its best efforts to cause such of the Registrable Securities as may be requested by the Holders to be registered under the Securities Act in accordance with the terms of this Section 3. If the request for registration contemplates an underwritten public offering, the Company shall state

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such in the written notice and in such event the right of any Person to participate in such registration shall be conditioned upon their participation in such underwritten public offering and the inclusion of their securities in the underwritten public offering to the extent provided herein.

          (c) Underwritten Offering. If a requested registration pursuant to this Section 3 involves an underwritten public offering and the managing underwriter of such offering determines in good faith that the number of securities sought to be offered should be limited due to market conditions, then the number of securities to be included in such underwritten public offering shall be reduced to a number deemed satisfactory by such managing underwriter; provided that the shares to be excluded shall be determined in the following sequence: (i) first, securities held by any Persons not having any contractual, incidental “piggyback” registration rights to include such securities on the registration statement, (ii) second, securities held by any Persons (other than the Holders) having contractual, incidental “piggyback” rights to include such securities in the registration statement pursuant to an agreement which is not this Agreement, (iii) third, securities to be registered by the Company for its own account and (iv) fourth, Registrable Securities sought to be included by the Holders. If there is a reduction of the number of Registrable Securities pursuant to clause (iv), such reduction shall be made on a pro rata basis (based upon the relative number of Registrable Securities held by Holders requesting inclusion pursuant to this Section 3). With respect to a request for registration pursuant to this Section 3 which is for an underwritten public offering, the managing underwriter shall be chosen by a majority-in-interest of the Holders requesting such registration, subject to the approval of the Company, which approval will not be unreasonably withheld. If the managing underwriter has not limited the number of Registrable Securities or other securities to be underwritten, the Company may include securities for its own account in such registration if the managing underwriter so agrees and if the number of Registrable Securities which would otherwise have been included in such registration and underwriting will not thereby be limited. If requested in good faith by the managing underwriter, the Holders agree not to offer, sell, pledge, transfer or otherwise dispose of any Common Stock not registered under the Securities Act for a period not to exceed ninety (90) days following the effective date of the registration statement filed by the Company.

          (d) Postponement. The Company may postpone the filing of a registration statement requested by the Holders pursuant to this Section 3 for a reasonable period of time not more than once during any twelve-month period, if the Company delivers to such Holders a certificate signed by the President of the Company stating that the Board of Directors of the Company determined in good faith that the filing of a registration statement would have a material adverse effect on the Company at such time. The Company shall not be required to cause a registration statement requested pursuant to this Section 3 to become effective within ninety (90) days following the effective date of a registration statement on Form S-1 initiated by the Company, provided that the Company had received the Holder’s request for registration after the Company had given written notice, made in good faith, to the Holders that the Company was commencing to prepare a Company-initiated registration statement (other than a registration effected solely to implement an employee benefit plan or a transaction to which Rule 145 or any other similar rule under the Securities Act is applicable); provided further, however, that the Company shall use its best efforts to achieve such

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effectiveness promptly following such period.

     4. Further Obligations of the Company. Whenever the Company is required hereunder to include any Registrable Securities in a registration statement under the Securities Act, it agrees that it shall also do the following:

          (a) Pay all fees and expenses relating to such registrations and offerings (exclusive of underwriting discounts and commissions) and the reasonable fees and expenses of not more than one independent counsel for the Holders (chosen by a majority-in-interest of the Holders requesting registration of Registrable Securities) in connection with any registrations pursuant to Sections 2 or 3 hereof;

          (b) Use its best efforts to diligently prepare and file with the Commission a registration statement and such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective until the Holder or Holders have completed the distribution described in the registration statement relating thereto and to comply with the provisions of the Securities Act with respect to the sale of securities covered by such registration statement for such period;

          (c) Furnish to each selling Holder such copies of each preliminary and final prospectus and such other documents as such Holder may reasonably request to facilitate the public offering of its Registrable Securities;

          (d) Enter into any reasonable underwriting agreement required by the proposed underwriter, if any, in such form and containing such terms as are customary; provided, however, that no Holder shall be required to make any representations or warranties other than with respect to its title to the Registrable Securities and with respect to any written information provided by the Holder to the Company;

          (e) Use its best efforts to register or qualify the securities covered by such registration statement under the securities or “blue sky” laws of such jurisdictions as any selling Holder may reasonably request; provided that the Company shall not for any such purpose be required to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified;

          (f) Immediately notify each selling Holder, at any time when a prospectus relating to his, her or its Registrable Securities is required to be delivered under the Securities Act, of the happening of any event as a result of which such prospectus contains an untrue statement of a material fact or omits any material fact necessary to make the statements therein not misleading, and, at the request of any such selling Holder, promptly prepare a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus will not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading;

          (g) Cause all such Registrable Securities to be listed on each securities exchange or quotation system on which similar securities issued by the Company are then

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listed or quoted (or if similar securities issued by the Company are not yet listed or quoted, then on such exchange or quotation system as a majority-in-interest of the Holders requesting such registration shall determine) and provide a transfer agent and registrar for all such Registrable Securities not later than the effective date of such registration statement;

          (h) Make available to each selling Holder, any underwriter participating in any disposition pursuant to a registration statement, and any attorney, accountant or other agent or representative retained by any such selling Holder or underwriter (each, an “Inspector”), all financial and other records, pertinent corporate documents and properties of the Company, as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause the Company’s officers to supply all information reasonably requested by any such Inspector in connection with such registration statement as shall be reasonably necessary to enable them to exercise their due diligence responsibility; provided, however, that such Inspector shall agree in writing to hold in confidence and trust all information so provided and to use such information only to satisfy such due diligence responsibility and no other.

          (i) Permit any Holder, who, in its sole and exclusive judgment exercised in good faith, believes that it might be deemed to be a Controlling Person (as defined in Section 5) of the Company, to participate in good faith and at its own expense in the preparation of such registration or comparable statement and to request the insertion therein of material furnished to the Company in writing, which request shall not be denied by the Company without good reason; provided, however, that preparation of the registration or comparable statement shall be under the Company’s control and at the Company’s direction, and the Company shall retain authority to determine the content of the registration or comparable statement.

          (j) Otherwise use its best reasonable efforts to comply with the securities laws of the United States and other applicable jurisdictions and all applicable rules and regulations of the Commission and comparable governmental agencies in other applicable jurisdictions and make generally available to the Holders, in each case as soon as practicable, but not later than forty-five (45) days after the end of the twelve (12) month period beginning at the end of the fiscal quarter of the Company during which the effective date of the registration statement occurs (or ninety (90) days if such twelve (12) month period coincides with the Company’s fiscal year), an earnings statement (which need not be audited) of the Company, covering such twelve (12) month period, which will satisfy the provisions of Section 11(a) of the Securities Act;

          (k) In the case of an underwritten public offering, furnish to a prospective selling Holder holding at least a majority of the Registrable Securities being sold in such offering, upon written request, a signed counterpart, addressed to such prospective selling Holder, of an opinion of counsel for the Company, dated the effective date of the registration statement, and covering substantially the same matters with respect to the registration statement (and the prospectus included therein), as customarily covered in opinions of the Company’s counsel delivered to the underwriters in underwritten public offerings of securities; and

          (l) Otherwise cooperate with the underwriter or underwriters, the Commission

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and other regulatory agencies and take all actions and execute and deliver or cause to be executed and delivered all documents necessary to effect the registration of any Registrable Securities hereunder.

     5. Indemnification; Contribution.

          (a) Incident to any registration of any Registrable Securities under the Securities Act pursuant to this Agreement, the Company will indemnify and hold harmless each underwriter, each Holder who offers or sells any such Registrable Securities in connection with such registration statement (including its partners (including partners of partners and stockholders of any such partners), directors, officers, employees, representatives and agents of any of them) (each, a “Selling Holder”), and each person who controls any of them within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act (each, a “Controlling Person”), from and against any and all losses, claims, damages, expenses and liabilities, joint or several (including any investigative, legal and other expenses reasonably incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claim asserted, as the same are incurred), to which they, or any of them, may become subject under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities arise out of or are based on (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement (including any related preliminary or definitive prospectus, or any amendment or supplement to such registration statement or prospectus), (ii) any omission or alleged omission to state in such document a material fact required to be stated in it or necessary to make the statements in it not misleading, (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act or any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law, (iv) any failure to register or qualify the Registrable Securities in any state where the Company or its agents has affirmatively undertaken or agreed in writing that the Company (the undertaking of any underwriter chosen by the Company being attributed to the Company) will undertake such registration or qualification on the Selling Holder’s behalf (provided that in such instance the Company shall not be so liable if it has undertaken its best efforts to so register or qualify the Registrable Securities), or (v) any blue sky application or other document executed by the Company specifically for the purpose or based upon written information furnished by the Company filed in any state or other jurisdiction in order to qualify any or all of the Registrable Securities under the securities laws thereof; provided, however, that the Company will not be liable to the extent that such loss, claim, damage, expense or liability arises from and is based on an untrue statement or omission of a material fact contained in such registration statement or alleged untrue statement or omission made in reliance on and in conformity with information furnished in writing to the Company by such underwriter, Selling Holder or Controlling Person expressly for use in such registration statement. With respect to such untrue statement or omission or alleged untrue statement or omission in the information furnished in writing to the Company by such Selling Holder expressly for use in such registration statement, such Selling Holder will indemnify and hold harmless each underwriter, the Company (including its directors, officers, employees, representatives and agents), each other Holder (including its partners (including partners of partners and stockholders of such partners), directors, officers, employees, representatives and agents of

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any of them, and each Controlling Person of any of them), from and against any and all losses, claims, damages, expenses and liabilities, joint or several, to which they, or any of them, may become subject under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, at common law or otherwise as a direct result of such untrue statement or omission or alleged untrue statement or omission in the information furnished in writing to the Company by such Selling Holder expressly for use in such registration statement. In no event, however, shall the liability of a Selling Holder for indemnification under this Section 5(a) exceed the net proceeds received by such Selling Holder from its sale of Registrable Securities under such registration statement.

          (b) If the indemnification provided for in Section 5(a) above for any reason is held by a court of competent jurisdiction to be unavailable to an indemnified party in respect of any losses, claims, damages, expenses or liabilities referred to therein, then each indemnifying party under this Section 5, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, expenses or liabilities in such proportion as is appropriate to reflect (i) the relative benefits received by the Company, the Selling Holders and the underwriters from the offering of the Registrable Securities and (ii) the relative fault of the Company, the Selling Holders and the underwriters in connection with the statements or omissions which resulted in such losses, claims, damages, expenses or liabilities, as well as any other relevant equitable considerations; provided, however, that in the event of a registration statement filed in response to a demand for registration under Section 3(a) or Section 3(b) and in which the Company does not register any shares of capital stock, the proportion of contribution by the Company, the Selling Holders and the underwriters shall in all cases be governed solely by clause (ii) above. The relative benefits received by the Company, the Selling Holders and the underwriters shall be deemed to be in the same respective proportions that the net proceeds from the offering (before deducting expenses) received by the Company and the Selling Holders and the underwriting discount received by the underwriters, in each case as set forth in the table on the cover page of the applicable prospectus, bear to the aggregate public offering price of the Registrable Securities. The relative fault of the Company, the Selling Holders and the underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, the Selling Holders or the underwriters and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.

          The Company and the Selling Holders agree that it would not be just and equitable if contribution pursuant to this Section 5(b) were determined by pro rata or per capita allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. In no event, however, shall a Selling Holder be required to contribute any amount under this Section 5(b) in excess of the net proceeds received by such Selling Holder from its sale of Registrable Securities under such registration statement. No Person found guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not found guilty of such fraudulent misrepresentation.

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          (c) The amount required to be paid by an indemnifying party or payable to an indemnified party as a result of the losses, claims, damages and liabilities referred to in this Section 5 shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim, payable as the same are incurred. The indemnification and contribution provided for in this Section 5 will remain in full force and effect regardless of any investigation made by or on behalf of the indemnified parties or any officer, director, employee, agent or Controlling Person of the indemnified parties. No indemnifying party, in the defense of any such claim or litigation, shall enter into a consent of entry of any judgment or enter into a settlement without the consent of the indemnified party, which consent will not be unreasonably withheld.

     6. Rule 144 and Rule 144A Requirement. In the event that the Company becomes subject to Section 13 or Section 15(d) of the Exchange Act, the Company shall use its best efforts to take all action as may be required as a condition to the availability of Rule 144 or Rule 144A under the Securities Act (or any successor or similar exemptive rules hereafter in effect). The Company shall furnish to any Holder, within fifteen (15) days of a written request, a written statement verifying its compliance with the current public information requirement of Rule 144 or Rule 144A or such successor rules.

     7. Transferability of Registration Rights. The registration rights set forth in this Agreement are transferable to any transferee of 5% or more of the Registrable Securities. Each subsequent holder of Registrable Securities must consent in writing to be bound by the terms and conditions of this Agreement in order to acquire the rights of a Holder granted pursuant to this Agreement.

     8. Rights Which May Be Granted to Subsequent Investors. Other than transferees of Registrable Securities under Section 7 hereof, the Company shall not, without the prior written consent of the holders of a majority of the outstanding Registrable Securities, grant any other registration rights to any third parties.

     9. Miscellaneous.

          (a) Amendments. For the purposes of this Agreement and all agreements executed pursuant hereto, no course of dealing between the parties hereto and no delay on the part of either party hereto in exercising any rights hereunder or thereunder shall operate as a waiver of the rights hereof and thereof. This Agreement may be amended, modified or terminated and any provision hereof may be waived by the joint written consent of the Company and the holders of not less than a majority of the outstanding Registrable Securities; provided that no amendment, modification or waiver may treat adversely one Holder in a manner different from the Holders as a group without the consent of such Holder. Any amendment, modification, termination or waiver effected in accordance with this Section 9(a) shall be binding upon all Holders of Registrable Securities even if they do not execute such joint written consent.

          (b) Notices and Demands. Any notice or demand which, by any provision of this Agreement or any agreement, document or instrument executed pursuant hereto or

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thereto, except as otherwise provided therein, is required to be given shall be deemed to have been sufficiently given or served and received for all purposes when delivered by hand or facsimile or five (5) days after being sent by certified or registered mail, postage and charges prepaid, return receipt requested, or two (2) days after being sent by overnight delivery providing receipt of delivery, to the following addresses:

               (i) If to the Company, First Mercury Financial Corporation, 29621 Northwestern Highway, Southfield, MI 48034, Attn: Richard Smith, or at such other address designated by the Company to the Investor in writing, with a copy to Dickinson Wright PLLC, 215 S. Washington Square, Suite 200, Lansing, MI 48933, Attn: Joseph A. Fink.

               (ii) If to the Investor, FMFC Holdings, LLC, 222 West Adams Street, Suite 1000, Chicago, IL 60606, Attn: Douglas Patterson, or at such other address designated by the Investor to the Company in writing, with a copy to McDermott, Will & Emery, 227 West Monroe Street, Chicago, IL 60606, Attn: Scott M. Williams.

          (c) Remedies; Severability. It is specifically understood and agreed that any breach of the provisions of this Agreement by either party will result in irreparable injury to the other party, that the remedy at law alone will be an inadequate remedy for such breach, and that, in addition to any other remedies which it may have, such other party may enforce its rights by an action or actions for specific performance in the federal or state courts in the State of Illinois (to the extent permitted by law). Whenever possible, each provision of this Agreement shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be deemed prohibited or invalid under such applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, and such prohibition or invalidity shall not invalidate the remainder of such provision or the other provisions of this Agreement.

          (d) Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the respective successors and permitted assigns of the parties hereto as contemplated herein, and any successor to the Company by way of merger or otherwise shall specifically agree to be bound by the terms hereof.

          (e) Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original but all of which shall constitute but one and the same instrument. One or more counterparts of this Agreement may be delivered via telecopier or other electronic means, with the intention that they shall have the same effect as an original counterpart hereof.

          (f) Effect of Heading. The Section headings herein are for convenience only and shall not affect the construction hereof.

          (g) Governing Law. This Agreement shall be deemed a contract made under the laws of the State of Delaware and together with the rights and obligations of the parties hereunder, shall be construed under and governed by the laws of the State of Delaware, without giving effect to its conflict of laws principles.

          (h) Jurisdiction; Venue; Waiver Of Jury Trial.

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               (i) Each of the parties to this Agreement hereby agrees that the state and federal courts of the State of Illinois shall have exclusive jurisdiction to hear and determine any claims or disputes between the parties hereto pertaining directly or indirectly to this Agreement, and all documents, instruments and agreements executed pursuant hereto or thereto, or to any matter arising herefrom (unless otherwise expressly provided for herein or therein). To the extent permitted by law, each party hereby expressly submits and consents in advance to such jurisdiction in any action or proceeding commenced by the other party hereto in any of such courts, and agrees that service of such summons and complaint or other process or papers may be made by registered or certified mail addressed to such party at the address to which notices are to be sent pursuant to this Agreement. Each of the parties waives any claim that Chicago, Illinois is an inconvenient forum or an improper forum based on lack of venue. The choice of forum set forth in this Section shall not be deemed to preclude the enforcement of any judgment obtained in such forum or the taking of any action to enforce the same in any other appropriate jurisdiction.

               (ii) Each party hereto hereby waives, to the fullest extent permitted by applicable law, any right it may have to a trial by jury in respect of any litigation directly or indirectly arising out of, under or in connection with this Agreement. Each party hereto (a) certifies that no representative, agent or attorney of the other party has represented, expressly or otherwise, that the other party would not, in the event of litigation, seek to enforce the foregoing waiver and (b) acknowledges that it and the other party hereto have been induced to enter into this Agreement by, among other things, the mutual waivers and certifications in this Section.

          (i) Further Assurances. From and after the date of this Agreement, upon the request of either party hereto, the other party shall execute and deliver such instruments, documents and other writings as may be reasonably necessary or desirable to confirm and carry out and to effectuate fully the intent and purposes of this Agreement.

          (j) Term. The provisions contained in Sections 2, 3 and 4 shall terminate ten (10) years from the date of the Company’s Initial Public Offering or the date on which all Registrable Securities held by and issuable to a Holder may be sold without restriction pursuant to Rule 144 of the Securities Act following the Company’s Initial Public Offering, whichever is later.

          (k) Integration. This Agreement, including the exhibits, documents and instruments referred to herein or therein, constitutes the entire agreement, and supersedes all other prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof.

[SIGNATURE PAGE FOLLOWS]

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          IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights Agreement to be duly executed as of the date first set forth above.

COMPANY:
FIRST MERCURY FINANCIAL CORPORATION
By:		/s/   Richard H. Smith
	Name:	Richard H. Smith
	Title:	President
INVESTOR:
FMFC HOLDINGS, LLC
By: Glencoe Capital, LLC
Its: Manager
	By:	/s/   Louis J. Manetti
	Name:	Louis J. Manetti
	Title:

EX-10.4

Exhibit 10.4

NON-COMPETITION AND CONFIDENTIALITY AGREEMENT

     This Non-Competition and Confidentiality Agreement the (“Agreement”) is dated June 7, 2004, and is effective as of June 7, 2004 (the “Effective Date”), by and between First Financial Corporation, a Delaware corporation (“Holdings”), and Jerome M. Shaw (“Stockholder”).

     WHEREAS, pursuant to that certain Stock Contribution Agreement (the “Exchange Agreement”) dated as of June 7, 2004 by and among Holdings, Stockholder, First Mercury Financial Corporation, a Delaware corporation (the “Company”), FMFC Holdings, LLC, a Delaware limited liability company (the “Investor”), and certain other signatories thereto, Stockholder will contribute to Holdings all of the shares of Company common stock and options to purchase Company common stock owned by him, and in return Holdings will (i) issue shares of its common stock and options to purchase its common stock to Stockholder and (ii) pay cash to Stockholder in the amount of $45.5 million;

     WHEREAS, Stockholder will benefit from the consummation of the transactions contemplated by the Exchange Agreement; and

     WHEREAS, as a condition to the consummation of the transactions contemplated by the Exchange Agreement, Holdings has required that Stockholder execute and deliver this Agreement and Stockholder desires to do so.

     NOW, THEREFORE, for and in consideration of the foregoing and the mutual covenants and promises contained herein, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows:

     1. Definitions. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Exchange Agreement. For purposes of Sections 3, 4, 5 and 7 hereof, the term “Holdings” shall include the Company and all Affiliates of Holdings.

     2. Consideration. The Company and Stockholder have entered into this Agreement and made the covenants set forth herein in order to induce Holdings and the Investor to consummate the transactions contemplated by the Exchange Agreement, which includes payments of cash and issuances of stock and options to Stockholder.

     3. Non-Competition. Stockholder covenants and agrees that during the Non-Competition Period (as defined below) Stockholder will not:

     (a) engage, directly or indirectly, in any manner (whether as an owner, officer, director, partner, manager, employee, independent contractor, consultant or otherwise) in the Business (as defined below) anywhere in the Territory; provided, however, that the passive ownership by Stockholder of no more than one percent (1%) of the total equity securities of a publicly-traded entity shall not violate the provisions of this Section 3;

     (b) engage, directly or indirectly, in any activity that competes with the Business anywhere in the Territory;

     (c) accept employment with or provide any services to, directly or indirectly, in any manner (whether as an owner, officer, director, partner, manager, employee, independent contractor, consultant or otherwise) any competitor of the Holdings or any of such competitor’s successors, subsidiaries or affiliates; or

     (d) attempt in any way, directly or indirectly, to obtain for himself, or others, or to divert from the Holdings any rights, benefits, sales or profits arising out of or in connection with the Business.

For purposes hereof, “Territory” shall mean the United States.

For purposes hereof, the “Non-Competition Period” shall mean the period beginning on the Effective Date and ending on the fifth anniversary of the Effective Date.

For purposes hereof, “Business” shall mean, collectively, (i) the provision or coordination of accounting, finance, claims handling, underwriting, investment and general welfare services as a third-party administrator for public entity risk pools or excess reinsurance pools and their members, (ii) any brokerage, agency, managing general agency, administrator, third-party administrator, insurance or other similar activities relating to the property and casualty or excess and surplus segments of the insurance industry; and (iii) any other business in which Holdings or any Subsidiary of Holdings is then engaged.

     4. Non-Solicitation. Stockholder covenants and agrees that during the Non-Competition Period, Stockholder will not, directly or indirectly, in any manner (whether as an owner, officer, director, partner, manager, employee, independent contractor, consultant or otherwise):

     (a) solicit any Producer or customer of the Holdings for policies, products or services competitive with the Holdings or its Subsidiaries; or

     (b) solicit for employment or other services or employ or engage as a consultant or otherwise any person who is or was an employee of Holdings.

The covenant in subparagraph (a) above applies to those Producers and customers and the related entities of the Producers and customers through which wrote, sold or produced any of its policies, products or services during the twelve (12) month period prior to the termination of Stockholder’s employment with the Company, and those prospective Producers and customers with which Holdings pursued sales during such period.

     5. Non-Disparagement. Stockholder covenants and agrees that from the Effective Date and thereafter, (i) Stockholder shall not induce or incite claims of discrimination, wrongful discharge, or any other claims against Holdings (including directors, officers, employees or equity holders of Holdings), by any other persons, employees or entities, (ii) Stockholder shall not undertake any harassing or disparaging

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conduct directed at Holdings (including any of the directors, officers, employees or equity holders of Holdings), and (iii) Stockholder shall not make any negative or derogatory statements concerning Holdings (including the officers, directors, employees, equity holders and agents of Holdings) or the policies, products or services of Holdings.

     6. Assignment. Holdings shall have the right to assign, in whole or in part and from time to time, to any purchaser of any segment of the Business, the rights of Holdings set forth in Sections 3, 4 and 5 of this Agreement to the extent that they relate to the segment of the Business that is transferred to such purchaser and, upon such assignment, the provisions of Sections 3, 4 and 5 shall continue to bind Stockholder in the same manner as prior to such assignment.

     7. Confidential Information.

     (a) Non-Disclosure. Stockholder in the past has learned and had access to and may, from time to time, learn or have additional access to information and/or materials, constituting trade secrets and other confidential and proprietary information of Holdings or predecessors, or of third parties to whom Holdings or predecessors is obligated to maintain the confidentiality of, including, but not by way of limitation, financial data, pricing information, technical data, future plans, Producer and customer and prospective Producer and customer requirements and marketing techniques and procedures (the “Confidential Information”). Notwithstanding the foregoing, information which is or becomes generally available to the public other than as a result of a disclosure by the Stockholder in violation of this Agreement or other obligation of confidentiality shall not be deemed Confidential Information for purposes hereof. Holdings shall not be required to advise Stockholder specifically of the confidential nature of any such Confidential Information, nor shall Holdings be required to affix a designation of confidentiality to any tangible item delivered or made available to Stockholder, in order to establish and maintain the confidential nature of the same. Confidential Information shall include the work product of Stockholder developed or to be developed as a part or in furtherance of, or during the working hours of, Stockholder’s engagement with Holdings, including all financial data, Producers and customers and prospective Producers and customers developed or to be developed or identified or to be identified by Stockholder. All Confidential Information provided to Stockholder by Holdings or predecessors or to which Stockholder, intentionally or inadvertently, otherwise becomes aware, knowledgeable, or in possession of as a direct or indirect result of Stockholder’s involvement with Holdings in the capacity of director, employee, or stockholder, shall be held and protected by Stockholder with the strictest confidentiality, and Stockholder shall not, whether during or after employment, cause or allow any of the Confidential Information to be disclosed, delivered, transferred, or otherwise made known to any person or entity not expressly authorized by Holdings to receive or be made aware of the same. Disclosure of Confidential Information by Stockholder, except as specifically required in the performance of his duties to Holdings, to any person or entity not then an employee of Holdings who is not subject to a confidentiality agreement similar to this Section 7 and with a need to

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know such Confidential Information shall require prior written authorization by the Board of Directors of Holdings.

     (b) Limitation on Use. All Confidential Information of Holdings or predecessors, or of any third party to whom Holdings or predecessors owes a duty of non-disclosure, which Stockholder has received, receives or becomes knowledgeable of shall be utilized by Stockholder for the singular purpose of carrying out Stockholder’s duties and undertakings on behalf of Holdings. Stockholder shall diligently protect and maintain the confidentiality of the Confidential Information. In no event shall Stockholder, whether during or after employment, copy any Confidential Information, except as needed, nor utilize any Confidential Information in a manner so as to compete with Holdings, or to aid or further the competition of any other person or entity with Holdings, or to otherwise disclose or dispose thereof for personal gain or for any reason injurious to the interests of Holdings. Upon termination of Stockholder’s employment for any reason, Stockholder shall immediately turn over to Holdings all books, records, financial data, price lists, Producer or customer lists and other material relating to Stockholder’s engagement or to the business of Holdings.

     8. Construction. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement or the application thereof to any party or circumstance shall be prohibited by or invalid under applicable law, including, without limitation, by reason of its being extended over too great a period of time or too large a geographic area or over too great a range of activities or otherwise, such provision shall be ineffective to the minimal extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement or the application of such provision and, if applicable, such provision shall be interpreted to extend only over the maximum period of time, geographic area or range of activities as to which is may be enforceable.

     9. Injunctive Relief and Other Remedies. Stockholder agrees that any breach of the provisions hereof will result in irreparable damage to Holdings for which Holdings will have no adequate remedy at law, and, therefore if such a breach should occur, Stockholder consents to any temporary or permanent injunction or decree of specific performance by any court of competent jurisdiction in favor of Holdings enjoining any such breach, without prejudice to any other right or remedy to which Holdings shall be entitled and without requirement of a bond or other security. Stockholder agrees that if Stockholder breaches any of his obligations hereunder, Holdings shall not be obligated to pay Stockholder any salary or benefits with respect to such period during which Stockholder is in breach pursuant to the Amended and Restated Employment Agreement, dated of even date herewith, between Stockholder and the Company.

     10. Costs of Enforcement. In the event either party brings an action or proceeding to enforce any provision or provisions of this Agreement or to obtain damages as a result of a breach of this Agreement or to enjoin any breach of this Agreement, the nonbreaching party in such action or proceeding shall be entitled to

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recover from the breaching party any and all reasonable costs and expenses (including without limitation attorneys’ fees) incurred by such nonbreaching party in connection with such action or proceeding.

     11. Extension of Time Period. The time periods for the restrictions set forth in this Agreement shall be extended by the number of days in which Stockholder is in breach of such restrictions.

     12. Notices. Any notice required to be given with respect to this Agreement shall be in writing, and shall be deemed to have been duly given: (a) when delivered personally; (b) two (2) business days after being deposited with a nationally recognized overnight courier with instructions for next day delivery; (c) one (1) day after receipt of electronic confirmation if sent by facsimile or electronic mail; and (d) five (5) business days after being deposited in the mails, certified or registered, return receipt requested, and with the proper postage prepaid, addressed as follows:

If to the Holdings:	First Financial Corporation
	29621 Northwestern Highway
	Southfield, Michigan 48034
	Attention:
	Facsimile: 248-353-5879
If to Stockholder:
	Facsimile:

The address of any party hereto may be changed by a notice in writing given in accordance with the provisions hereof.

     13. Amendments and Waiver. No amendment, waiver or consent with respect to any provision of this Agreement shall in any event be effective, unless the same shall be in writing and signed by each of the parties hereto, and then such amendment, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.

     14. Entire Agreement. This Agreement contains the entire understanding of the parties hereto respecting the subject matter hereof and supersedes all prior agreements, discussions and understandings.

     15. Assignment; Successors. Stockholder may not assign any of his obligations hereunder. Any assignment in violation of the foregoing shall be null and void. Subject to the foregoing, this Agreement shall be binding upon the parties hereto and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, legal representatives, successors and permitted assigns.

     16. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute but one and the same instrument. One or

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more counterparts of this Agreement may be delivered via facsimile, with the intention that they shall have the same effect as an original counterpart hereof.

     17. Non-Waiver of Breach. A waiver by any party hereto of a particular breach or default by another party in connection with any provision of this Agreement must be in writing and shall not be deemed a waiver of a default by a third party or any subsequent default or breach of the same or any other provision of this Agreement.

     18. GOVERNING LAW. THE VALIDITY AND EFFECT OF THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL SUBSTANTIVE LAWS OF THE STATE OF ILLINOIS. ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF, OR WITH RESPECT TO, THIS AGREEMENT OR ANY JUDGMENT ENTERED BY ANY COURT IN RESPECT THEREOF SHALL BE BROUGHT EXCLUSIVELY IN THE COURTS OF ILLINOIS OR IN THE U.S. DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS, AND THE PARTIES HERETO ACCEPT THE EXCLUSIVE JURISDICTION OF THOSE COURTS FOR THE PURPOSE OF ANY SUIT, ACTION OR PROCEEDING. IN ADDITION, EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY JUDGMENT ENTERED BY ANY COURT IN RESPECT THEREOF BROUGHT IN ILLINOIS OR THE U.S. DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS, AND HEREBY FURTHER IRREVOCABLY WAIVES ANY CLAIM THAT ANY SUIT, ACTION OR PROCEEDINGS BROUGHT IN ILLINOIS OR IN SUCH DISTRICT COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. THE PARTIES HERETO HEREBY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF, OR WITH RESPECT TO, THIS AGREEMENT AND AGREE THAT ANY SUCH SUIT, ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.

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     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.

HOLDINGS:
First Mercury Financial Corporation
By:	/s/ Richard H. Smith
Name:	Richard H. Smith
Title:	President
STOCKHOLDER:
/s/ Jerome M. Shaw
Name: Jerome M. Shaw

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EX-10.5

Exhibit 10.5

Execution Copy

NON-COMPETITION AND CONFIDENTIALITY AGREEMENT

     This Non-Competition and Confidentiality Agreement the (“Agreement”) is dated June 14, 2004, and is effective as of June 14, 2004 (the “Effective Date”), by and between American Risk Pooling Consultants, Inc., a Michigan corporation (the “Company”), and Jerome M. Shaw (“Stockholder”).

     WHEREAS, the Company, Public Entity Risk Services of Ohio, Inc., an Ohio corporation (together with the Company, the “Companies”), ARPCO Holdings, Inc., a Delaware corporation (the “Purchaser”), Stockholder, Larry J. Spilkin and William S. Weaver (Stockholder, Spilkin and Weaver being collectively referred to herein as the “Sellers”) have entered into that certain Stock Purchase Agreement dated as of March 1, 2004 (the “Purchase Agreement”), pursuant to which the Purchaser has agreed to purchase from the Sellers all of the outstanding shares of capital stock of the Companies;

     WHEREAS, Stockholder will benefit from the consummation of the transactions contemplated by the Purchase Agreement; and

     WHEREAS, as a condition to the consummation of the transactions contemplated by the Purchase Agreement, the Purchaser has required that Stockholder execute and deliver this Agreement and Stockholder desires to do so.

     NOW, THEREFORE, for and in consideration of the foregoing and the mutual covenants and promises contained herein, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows:

     1. Definitions. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Purchase Agreement.

     2. Consideration. In consideration of the covenants made by Stockholder herein, the Company shall pay Stockholder $250,000 per year for each year of the Non-Competition Period (as defined below), which amount shall be payable quarterly in advance; provided, however, that in the event Stockholder breaches in any material respect any of the covenants set forth herein and such breach is not cured to the reasonable satisfaction of the Company within ten (10) days after written notice thereof is delivered to Stockholder, Stockholder shall return all amounts paid to him by the Company and the Company shall have no further obligation to make any payments hereunder.

     3. Non-Competition. Stockholder covenants and agrees that during the Non-Competition Period (as defined below) Stockholder will not:

     (a) engage, directly or indirectly, in any manner (whether as an owner, officer, director, partner, manager, employee, independent contractor, consultant or otherwise) in the Business (as defined below) anywhere in the Territory; provided, however, that the passive ownership by Stockholder of no more than

one percent (1%) of the total equity securities of a publicly-traded entity shall not violate the provisions of this Section 3;

     (b) engage, directly or indirectly, in any activity that competes with the Business anywhere in the Territory;

     (c) accept employment with or provide any services to, directly or indirectly, in any manner (whether as an owner, officer, director, partner, manager, employee, independent contractor, consultant or otherwise) any competitor of the Business; or

     (d) attempt in any way, directly or indirectly, to obtain for himself, or others, or to divert from the Company or its Subsidiary and Affiliates any rights, benefits, sales or profits arising out of or in connection with the Business.

For purposes hereof, “Territory” shall mean the United States.

For purposes hereof, the “Non-Competition Period” shall mean the period beginning on the Effective Date and ending upon a Change of Control. For purposes hereof, “Change of Control” shall mean (i) a merger or consolidation of the Company or the Purchaser with or into another corporation or other entity pursuant to which the equity holders of the surviving corporation or entity that did not beneficially own a majority of the voting power of the outstanding shares of capital stock of the Company immediately prior to such merger or consolidation, the effect of which is that such party or group beneficially owns at least a majority of such voting power immediately after such merger or consolidation; (ii) the sale, lease, license, conveyance or transfer of all or substantially all of the assets of the Company or the Purchaser; (iii) except for the transactions contemplated by the Purchase Agreement, any purchase of shares of capital stock of the Company or the Purchaser (either through a negotiated stock purchase or a tender for such shares) by any party or group, through one, or a series of related transactions, that did not beneficially own a majority of the voting power of the outstanding shares of capital stock of the Company or the Purchaser immediately prior to such purchase, the effect of which is that such party or group beneficially owns at least a majority of such voting power immediately after such purchase; or (iv) any liquidation, dissolution or winding up of the Company or the Purchaser, whether voluntary or involuntary.

For purposes hereof, “Business” shall mean, collectively, (i) the provision or coordination of accounting, finance, claims handling, underwriting, investment and general welfare services as a third party administrator for public entity risk pools or excess reinsurance pools and their members; (ii) any brokerage, agency, managing general agency, administrator, third-party administrator, insurance or other similar activities relating to the property and casualty or excess and surplus segments of the insurance industry; and (iii) any other business in which the Company or any direct or indirect parent company or Subsidiary of the Company is engaged during the term hereof.

     4. Non-Solicitation. Stockholder covenants and agrees that during the Non-Competition Period, Stockholder will not, directly or indirectly, in any manner (whether

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as an owner, officer, director, partner, manager, employee, independent contractor, consultant or otherwise):

     (a) solicit any customer of the Company or its Subsidiary for products or services competitive with the Company or its Subsidiary; or

     (b) solicit for employment or other services or employ or engage as a consultant or otherwise any person who is or was an employee of the Company or its Subsidiary and Affiliates.

The covenant in subparagraph (a) above applies to those customers and the related entities of the customers to which the Company or its Subsidiary sold any of its products or services during the twelve (12) month period prior to the termination of Stockholder’s relationship with the Company as an owner, officer, director, employee, consultant or otherwise, and those prospective customers with which the Company or its Affiliates pursued sales during such period. The covenant in paragraph (b) above will not prohibit any general solicitation for employment by Stockholder or any of his Affiliates not specifically directed at employees of the Company or its Subsidiary and Affiliates.

     5. Non-Disparagement. Stockholder covenants and agrees that from the Effective Date and thereafter, (i) Stockholder shall not induce or incite claims of discrimination, wrongful discharge, or any other claims against the Company, or any of its Affiliates (including their directors, officers, employees or equity holders), by any other persons, employees or entities, (ii) Stockholder shall not undertake any harassing or disparaging conduct directed at the Company, or any of its Affiliates (including any of their directors, officers, employees or equity holders), and (iii) Stockholder shall not make any negative or derogatory statements concerning the Company, or the any of its Affiliates (including their officers, directors, employees, equity holders and agents) or the Company’s products or services.

     6. Assignment. The Company shall have the right to assign, in whole or in part and from time to time, to any purchaser of any segment of the Business, the rights of the Company set forth in Sections 3, 4 and 5 of this Agreement to the extent that they relate to the segment of the Business that is transferred to such purchaser and, upon such assignment, the provisions of Sections 3, 4 and 5 shall continue to bind Stockholder in the same manner as prior to such assignment.

     7. Confidential Information.

     (a) Non-Disclosure. Stockholder in the past has learned and had access to and may, from time to time, learn or have additional access to information and/or materials, constituting trade secrets and other confidential and proprietary information of the Company or its Subsidiary or predecessors, or of third parties to whom the Company or its Subsidiary or predecessors is obligated to maintain the confidentiality of, including, but not by way of limitation, financial data, pricing information, technical data, future plans, customer and prospective customer requirements and marketing techniques and procedures (the

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“Confidential Information”). Notwithstanding the foregoing, information which is or becomes generally available to the public other than as a result of a disclosure by the Stockholder in violation of this Agreement or other obligation of confidentiality shall not be deemed Confidential Information for purposes hereof. Neither the Company nor its Subsidiary shall be required to advise Stockholder specifically of the confidential nature of any such Confidential Information, nor shall the Company or its Subsidiary be required to affix a designation of confidentiality to any tangible item delivered or made available to Stockholder, in order to establish and maintain the confidential nature of the same. Confidential Information shall include any work product of Stockholder developed or to be developed as a part or in furtherance of, or during the working hours of, Stockholder’s relationship with the Company as an owner, officer, director, employee, consultant or otherwise, including all financial data, customers and prospective customers developed or to be developed or identified or to be identified by Stockholder. All Confidential Information provided to Stockholder by the Company or its Subsidiary or predecessors or to which Stockholder, intentionally or inadvertently, otherwise becomes aware, knowledgeable, or in possession of as a direct or indirect result of Stockholder’s relationship with the Company as an owner, officer, director, employee, consultant or otherwise shall be held and protected by Stockholder with the strictest confidentiality, and Stockholder shall not, whether during or after the termination of such relationship, cause or allow any of the Confidential Information to be disclosed, delivered, transferred, or otherwise made known to any person or entity not expressly authorized by the Company to receive or be made aware of the same. Disclosure of Confidential Information by Stockholder, except as specifically required in the performance of his duties to the Company, to any person or entity not then an employee of the Company who is not subject to a confidentiality agreement similar to this Section 7 and with a need to know such Confidential Information shall require prior written authorization by the Board of Directors of the Company.

     (b) Limitation on Use. All Confidential Information of the Company or its Subsidiary or predecessors, or of any third party to whom the Company or its Subsidiary or predecessors owes a duty of non-disclosure, which Stockholder has received, receives or becomes knowledgeable of shall be utilized by Stockholder for the singular purpose of carrying out Stockholder’s duties and undertakings on behalf of the Company. Stockholder shall diligently protect and maintain the confidentiality of the Confidential Information. In no event shall Stockholder, whether during or after termination of his relationship with the Company, copy any Confidential Information, except as needed, nor utilize any Confidential Information in a manner so as to compete with the Company or its Subsidiary, or to aid or further the competition of any other person or entity with the Company or its Subsidiary, or to otherwise disclose or dispose thereof for personal gain or for any reason injurious to the interests of the Company or its Subsidiary. Upon termination of Stockholder’s relationship with the Company, Stockholder shall immediately turn over to the Company all books, records,

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financial data, price lists, customer lists and other material relating to the business of the Company or its Subsidiary.

     8. Release. In the event the Company fails to make payments required hereunder (other than in connection with a good faith dispute with Stockholder) and such failure continues for a period of twenty (20) days after written notice thereof is delivered to the Company, Stockholder shall have no further obligations under Section 3 above.

     9. Construction. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement or the application thereof to any party or circumstance shall be prohibited by or invalid under applicable law, including, without limitation, by reason of its being extended over too great a period of time or too large a geographic area or over too great a range of activities or otherwise, such provision shall be ineffective to the minimal extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement or the application of such provision and, if applicable, such provision shall be interpreted to extend only over the maximum period of time, geographic area or range of activities as to which it may be enforceable.

     10. Injunctive Relief and Other Remedies. Stockholder agrees that any breach of the provisions hereof will result in irreparable damage to the Company for which the Company will have no adequate remedy at law, and, therefore if such a breach should occur, Stockholder consents to any temporary or permanent injunction or decree of specific performance by any court of competent jurisdiction in favor of the Company enjoining any such breach, without prejudice to any other right or remedy to which the Company shall be entitled and without requirement of a bond or other security.

     11. Costs of Enforcement. In the event either party brings an action or proceeding to enforce any provision or provisions of this Agreement or to obtain damages as a result of a breach of this Agreement or to enjoin any breach of this Agreement, the prevailing party in such action or proceeding shall be entitled to recover from the non-prevailing party any and all reasonable costs and expenses (including, without limitation, attorneys’ fees) incurred by such prevailing party in connection with such action or proceeding.

     12. Extension of Time Period. The time periods for the restrictions set forth in this Agreement shall be extended by the number of days in which Stockholder is in breach of such restrictions.

     13. Notices. Any notice required to be given with respect to this Agreement shall be in writing, and shall be deemed to have been duly given: (a) when delivered personally; (b) two (2) business days after being deposited with a nationally recognized overnight courier with instructions for next day delivery; (c) one (1) day after receipt of electronic confirmation if sent by facsimile or electronic mail; and (d) five (5) business days after being deposited in the mails, certified or registered, return receipt requested, and with the proper postage prepaid, addressed as follows:

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If to the Company:	American Risk Pooling Consultants, Inc.
	c/o Glencoe Capital, LLC
	222 West Adams Street, Suite 1000
	Chicago, Illinois 60606
	Attention: Douglas Patterson
	Facsimile: (312) 795-0455
	with a copy to:
	McDermott, Will & Emery
	227 West Monroe Street
	Chicago, Illinois 60606
	Attention: Scott M. Williams, Esq.
	Facsimile: (312) 984-7700
If to Stockholder:	Jerome M. Shaw
	4751 Cove Road
	Orchard Lake, Michigan 48323
	and
	Jerome M. Shaw
	3 Grove Isle
	Penthouse 1
	Coconut Grove, Florida 33133
	with a copy to:
	Spilkin, Shapiro & Feeney, P.C.
	29621 Northwestern Hwy.
	Southfield, Michigan 48034
	Attention: Larry J. Spilkin, Esq.

The address of any party hereto may be changed by a notice in writing given in accordance with the provisions hereof.

     14. Amendments and Waiver. No amendment, waiver or consent with respect to any provision of this Agreement shall in any event be effective, unless the same shall be in writing and signed by each of the parties hereto, and then such amendment, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.

     15. Entire Agreement. This Agreement contains the entire understanding of the parties hereto respecting the subject matter hereof and supersedes all prior agreements, discussions and understandings.

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     16. Assignment; Successors. Stockholder may not assign any of his obligations hereunder. Any assignment in violation of the foregoing shall be null and void. Subject to the foregoing, this Agreement shall be binding upon the parties hereto and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, legal representatives, successors and permitted assigns.

     17. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute but one and the same instrument. One or more counterparts of this Agreement may be delivered via facsimile, with the intention that they shall have the same effect as an original counterpart hereof.

     18. Non-Waiver of Breach. A waiver by any party hereto of a particular breach or default by another party in connection with any provision of this Agreement must be in writing and shall not be deemed a waiver of a default by a third party or any subsequent default or breach of the same or any other provision of this Agreement.

     19. GOVERNING LAW. THE VALIDITY AND EFFECT OF THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL SUBSTANTIVE LAWS OF THE STATE OF DELAWARE. EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY JUDGMENT ENTERED BY ANY COURT IN RESPECT THEREOF BROUGHT IN ILLINOIS OR THE U.S. DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS, AND HEREBY FURTHER IRREVOCABLY WAIVES ANY CLAIM THAT ANY SUIT, ACTION OR PROCEEDINGS BROUGHT IN ILLINOIS OR IN SUCH DISTRICT COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. THE PARTIES HERETO HEREBY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF, OR WITH RESPECT TO, THIS AGREEMENT AND AGREE THAT ANY SUCH SUIT, ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.

*      *      *

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     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.

COMPANY:
American Risk Pooling Consultants, Inc.
By:	/s/ Richard H. Smith
Name:	Richard H. Smith
Title:	Vice President
STOCKHOLDER:
/s/ Jerome M. Shaw
Jerome M. Shaw

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EX-10.6

Exhibit 10.6

AMENDMENT NO. 1 TO
NON-COMPETITION AND CONFIDENTIALITY AGREEMENT

          THIS AMENDMENT NO. 1 TO NON-COMPETITION AND CONFIDENTIALITY AGREEMENT (the “Amendment”), dated as of August 17, 2005, is entered into by and between American Risk Pooling Consultants, Inc., a Michigan corporation (the “Company”) and Jerome M. Shaw (the “Stockholder”).

RECITALS

          WHEREAS, the Company and Stockholder are parties to that certain Non-Competition and Confidentiality Agreement dated as of June 14, 2004 (the “Agreement”);

          WHEREAS, capitalized terms used herein, unless otherwise herein defined, are used with the meanings given them in the Agreement;

          WHEREAS, this Amendment amends the Agreement to satisfy certain conditions under the Stock Contribution Agreement dated as of August 17, 2005 by and among Stockholder, First Mercury Financial Corporation (the “FMFC”), a Delaware corporation, First Mercury Holdings, Inc. (“Holdings”), a Delaware corporation, FMFC Holdings, LLC, a Delaware limited liability company, and the other signatories thereto.

          NOW, THEREFORE, in consideration of the foregoing recitals and of the mutual promises set forth herein, the parties hereto hereby agree as follows:

          1. Amendments. The paragraph defining “Non-Competition Period” in Section 3 of the Agreement is hereby amended and restated in its entirety, as of the date of this Amendment, to read as follows:

      For purposes hereof, the “Non-Competition Period” shall mean the period beginning on the Effective Date and ending on the earlier of (i) August 17, 2010 and (ii) the occurrence of a Change of Control or a Public Sale after the date hereof. For purposes of this Agreement “Change of Control” shall mean (i) a merger or consolidation of FMFC or Holdings with or into another corporation or other entity, pursuant to which a Third Party beneficially owns at least a majority of the voting power of the outstanding equity securities of the surviving corporation or entity immediately after such merger or consolidation, (ii) the sale, lease, license, conveyance or transfer of all or substantially all of the assets of FMFC or Holdings other than to Glencoe or an entity in which a majority of the voting power is beneficially owned by Glencoe, (iii) any purchase of shares of capital stock of FMFC or Holdings (either through a negotiated stock purchase or a tender for such shares) by a Third Party, through one, or a series of related transactions, the effect of which is that the Third Party beneficially owns at least a majority of the voting power of FMFC or Holdings immediately after such purchase, or (iv) any liquidation, dissolution or winding up of FMFC or Holdings, whether voluntary or

involuntary; provided, that after such event, the business of FMFC or Holdings is not owned or operated by Glencoe or by an entity in which a majority of the voting power is beneficially owned by Glencoe. For purposes of this Agreement, “Third Party” means a person or entity other than Glencoe or an entity in which a majority of the voting power is beneficially owned by Glencoe. For purposes of this Agreement, “Glencoe” means Glencoe Capital, LLC, FMFC Holdings, LLC and each of their respective affiliates. For the purposes of this agreement, “Public Sale” shall mean a sale of the stock of Holdings (or any material subsidiary of Holdings) to the public pursuant to an offering registered under the Securities Act of 1933, as amended, and any successor statute, the aggregate price being paid for such stock being at least (i) $75,000,000 or (ii) $65,000,000 if after completion of such offering Glencoe owns less than a majority of the fully diluted common stock of Holdings.

2. General Provisions.

                         (a) Except as expressly amended, modified, agreed, waived, released or settled herein, including without limitation in the recitals hereto, (i) there are no waivers or releases hereby of any provisions of the Agreement, (ii) the Agreement shall remain unchanged and in full force and effect, and (iii) as amended or modified herein, the Agreement is hereby ratified, approved and confirmed in all respects.

                         (b) After the date hereof all references in the Agreement to the “Agreement,” “herein,” “hereof” and the like, shall refer to the Agreement as amended or modified herein.

                         (c) This Amendment may be executed in multiple counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

                         (d) This Amendment shall be governed by and construed under the laws of the State of Delaware.

[SIGNATURE PAGE FOLLOWS]

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          IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first above written.

COMPANY:
American Risk Pooling Consultants, Inc.
By:	/s/ William S. Weaver
Name:
Title:
STOCKHOLDER:
/s/ Jerome M. Shaw
Jerome M. Shaw

EX-10.7

Exhibit 10.7

NON-COMPETITION AND CONFIDENTIALITY AGREEMENT

     This Non-Competition and Confidentiality Agreement the (“Agreement”) is dated August 17, 2005, and is effective as of August 17, 2005 (the “Effective Date”), by and between First Mercury Holdings, Inc., a Delaware corporation (“Holdings”), and Jerome M. Shaw (“Stockholder”).

     WHEREAS, pursuant to that certain Stock Contribution Agreement (the “Exchange Agreement”) dated as of August 17, 2005 by and among Holdings, Stockholder, First Mercury Financial Corporation, a Delaware corporation (the “Company”), FMFC Holdings, LLC, a Delaware limited liability company (the “Investor”), and certain other signatories thereto, Stockholder will contribute to Holdings all of the shares of Company common stock, and in return Holdings will (i) issue shares of its common stock to Stockholder and (ii) pay cash to Stockholder in the amount of $27.5 million;

     WHEREAS, Stockholder will benefit from the consummation of the transactions contemplated by the Exchange Agreement; and

     WHEREAS, as a condition to the consummation of the transactions contemplated by the Exchange Agreement, Holdings has required that Stockholder execute and deliver this Agreement and Stockholder desires to do so.

     NOW, THEREFORE, for and in consideration of the foregoing and the mutual covenants and promises contained herein, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows:

     1. Definitions. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Exchange Agreement. For purposes of Sections 3, 4, 5 and 7 hereof, the term “Holdings” shall include the Company and all Affiliates of Holdings.

     2. Consideration. In consideration of the covenants made by Stockholder herein, Holdings shall pay to Stockholder $1,975,000 on December 31, 2005 and $1,975,000 on June 30, 2006.

     3. Non-Competition. Stockholder covenants and agrees that during the Non-Competition Period (as defined below) Stockholder will not:

     (a) engage, directly or indirectly, in any manner (whether as an owner, officer, director, partner, manager, employee, independent contractor, consultant or otherwise) in the Business (as defined below) anywhere in the Territory; provided, however, that the passive ownership by Stockholder of no more than one percent (1%) of the total equity securities of a publicly-traded entity shall not violate the provisions of this Section 3;

     (b) engage, directly or indirectly, in any activity that competes with the Business anywhere in the Territory;

     (c) accept employment with or provide any services to, directly or indirectly, in any manner (whether as an owner, officer, director, partner, manager, employee, independent contractor, consultant or otherwise) any competitor of the Holdings or any of such competitor’s successors, subsidiaries or affiliates; or

     (d) attempt in any way, directly or indirectly, to obtain for himself, or others, or to divert from the Holdings any rights, benefits, sales or profits arising out of or in connection with the Business.

For purposes hereof, “Territory” shall mean the United States.

For purposes hereof, the “Non-Competition Period” shall mean the period beginning on the Effective Date and ending on the later of (i) the seventh anniversary of the Effective Date and (ii) the first date upon which Stockholder owns less than 5% of the shares of common stock of Holdings on a fully diluted basis (assuming the conversion, exchange, or exercise of all securities convertible into or exchangeable or exercisable for common stock of Holdings).

For purposes hereof, “Business” shall mean, collectively, (i) the provision or coordination of accounting, finance, claims handling, underwriting, investment and general welfare services as a third-party administrator for public entity risk pools or excess reinsurance pools and their members, (ii) any brokerage, agency, managing general agency, administrator, third-party administrator, insurance or other similar activities relating to the property and casualty or excess and surplus segments of the insurance industry; and (iii) any other business in which Holdings or any Subsidiary of Holdings is then engaged.

     4. Non-Solicitation. Stockholder covenants and agrees that during the Non-Competition Period, Stockholder will not, directly or indirectly, in any manner (whether as an owner, officer, director, partner, manager, employee, independent contractor, consultant or otherwise):

     (a) solicit any Producer or customer of the Holdings for policies, products or services competitive with the Holdings or its Subsidiaries; or

     (b) solicit for employment or other services or employ or engage as a consultant or otherwise any person who is or was an employee of Holdings.

The covenant in subparagraph (a) above applies to those Producers and customers and the related entities of the Producers and customers through which wrote, sold or produced any of its policies, products or services during the twelve (12) month period prior to the termination of Stockholder’s employment with the Company, and those prospective Producers and customers with which Holdings pursued sales during such period.

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     5. Non-Disparagement. Stockholder covenants and agrees that from the Effective Date and thereafter, (i) Stockholder shall not induce or incite claims of discrimination, wrongful discharge, or any other claims against Holdings (including directors, officers, employees or equity holders of Holdings), by any other persons, employees or entities, (ii) Stockholder shall not undertake any harassing or disparaging conduct directed at Holdings (including any of the directors, officers, employees or equity holders of Holdings), and (iii) Stockholder shall not make any negative or derogatory statements concerning Holdings (including the officers, directors, employees, equity holders and agents of Holdings) or the policies, products or services of Holdings.

     6. Assignment. Holdings shall have the right to assign, in whole or in part and from time to time, to any purchaser of any segment of the Business, the rights of Holdings set forth in Sections 3, 4 and 5 of this Agreement to the extent that they relate to the segment of the Business that is transferred to such purchaser and, upon such assignment, the provisions of Sections 3, 4 and 5 shall continue to bind Stockholder in the same manner as prior to such assignment.

     7. Confidential Information.

     (a) Non-Disclosure. Stockholder in the past has learned and had access to and may, from time to time, learn or have additional access to information and/or materials, constituting trade secrets and other confidential and proprietary information of Holdings or predecessors, or of third parties to whom Holdings or predecessors is obligated to maintain the confidentiality of, including, but not by way of limitation, financial data, pricing information, technical data, future plans, Producer and customer and prospective Producer and customer requirements and marketing techniques and procedures (the “Confidential Information”). Notwithstanding the foregoing, information which is or becomes generally available to the public other than as a result of a disclosure by the Stockholder in violation of this Agreement or other obligation of confidentiality shall not be deemed Confidential Information for purposes hereof. Holdings shall not be required to advise Stockholder specifically of the confidential nature of any such Confidential Information, nor shall Holdings be required to affix a designation of confidentiality to any tangible item delivered or made available to Stockholder, in order to establish and maintain the confidential nature of the same. Confidential Information shall include the work product of Stockholder developed or to be developed as a part or in furtherance of, or during the working hours of, Stockholder’s engagement with Holdings, including all financial data, Producers and customers and prospective Producers and customers developed or to be developed or identified or to be identified by Stockholder. All Confidential Information provided to Stockholder by Holdings or predecessors or to which Stockholder, intentionally or inadvertently, otherwise becomes aware, knowledgeable, or in possession of as a direct or indirect result of Stockholder’s involvement with Holdings in the capacity of director, employee, or stockholder, shall be held and protected by Stockholder with the strictest confidentiality, and Stockholder shall not, whether during or after employment, cause or allow any of the Confidential Information to be disclosed, delivered, transferred, or otherwise

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made known to any person or entity not expressly authorized by Holdings to receive or be made aware of the same. Disclosure of Confidential Information by Stockholder, except as specifically required in the performance of his duties to Holdings, to any person or entity not then an employee of Holdings who is not subject to a confidentiality agreement similar to this Section 7 and with a need to know such Confidential Information shall require prior written authorization by the Board of Directors of Holdings.

     (b) Limitation on Use. All Confidential Information of Holdings or predecessors, or of any third party to whom Holdings or predecessors owes a duty of non-disclosure, which Stockholder has received, receives or becomes knowledgeable of shall be utilized by Stockholder for the singular purpose of carrying out Stockholder’s duties and undertakings on behalf of Holdings. Stockholder shall diligently protect and maintain the confidentiality of the Confidential Information. In no event shall Stockholder, whether during or after employment, copy any Confidential Information, except as needed, nor utilize any Confidential Information in a manner so as to compete with Holdings, or to aid or further the competition of any other person or entity with Holdings, or to otherwise disclose or dispose thereof for personal gain or for any reason injurious to the interests of Holdings. Upon termination of Stockholder’s employment for any reason, Stockholder shall immediately turn over to Holdings all books, records, financial data, price lists, Producer or customer lists and other material relating to Stockholder’s engagement or to the business of Holdings.

     8. Construction. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement or the application thereof to any party or circumstance shall be prohibited by or invalid under applicable law, including, without limitation, by reason of its being extended over too great a period of time or too large a geographic area or over too great a range of activities or otherwise, such provision shall be ineffective to the minimal extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement or the application of such provision and, if applicable, such provision shall be interpreted to extend only over the maximum period of time, geographic area or range of activities as to which is may be enforceable.

     9. Injunctive Relief and Other Remedies. Stockholder agrees that any breach of the provisions hereof will result in irreparable damage to Holdings for which Holdings will have no adequate remedy at law, and, therefore if such a breach should occur, Stockholder consents to any temporary or permanent injunction or decree of specific performance by any court of competent jurisdiction in favor of Holdings enjoining any such breach, without prejudice to any other right or remedy to which Holdings shall be entitled and without requirement of a bond or other security. Stockholder agrees that Stockholder is subject to Section 10.2 of the Amended and Restated Employment Agreement, dated of even date herewith, between Stockholder and the Company in accordance with its terms.

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     10. Costs of Enforcement. In the event either party brings an action or proceeding to enforce any provision or provisions of this Agreement or to obtain damages as a result of a breach of this Agreement or to enjoin any breach of this Agreement, the nonbreaching party in such action or proceeding shall be entitled to recover from the breaching party any and all reasonable costs and expenses (including without limitation attorneys’ fees) incurred by such nonbreaching party in connection with such action or proceeding.

     11. Extension of Time Period. The time periods for the restrictions set forth in this Agreement shall be extended by the number of days in which Stockholder is in breach of such restrictions.

     12. Notices. Any notice required to be given with respect to this Agreement shall be in writing, and shall be deemed to have been duly given: (a) when delivered personally; (b) two (2) business days after being deposited with a nationally recognized overnight courier with instructions for next day delivery; and (c) five (5) business days after being deposited in the mails, certified or registered, return receipt requested, and with the proper postage prepaid, addressed as follows:

If to Holdings:	First Mercury Holdings, Inc.
	29621 Northwestern Highway
	Southfield, Michigan 48034
	Attention: Richard Smith
If to Stockholder:	Jerome M. Shaw
	3 Grove Isle
	Penthouse 1
	Coconut Grove, Florida 33133
With a copy to:	Spilkin, Shapiro & Feeney, P.C.
	29621 Northwestern Hwy.
	Southfield, Michigan 48034
	Attention: Larry J. Spilkin

The address of any party hereto may be changed by a notice in writing given in accordance with the provisions hereof.

     13. Amendments and Waiver. No amendment, waiver or consent with respect to any provision of this Agreement shall in any event be effective, unless the same shall be in writing and signed by each of the parties hereto, and then such amendment, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.

     14. Entire Agreement. This Agreement contains the entire understanding of the parties hereto respecting the subject matter hereof and supersedes all prior agreements, discussions and understandings.

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     15. Assignment; Successors. Stockholder may not assign any of his obligations hereunder. Any assignment in violation of the foregoing shall be null and void. Subject to the foregoing, this Agreement shall be binding upon the parties hereto and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, legal representatives, successors and permitted assigns.

     16. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute but one and the same instrument. One or more counterparts of this Agreement may be delivered via facsimile, with the intention that they shall have the same effect as an original counterpart hereof.

     17. Non-Waiver of Breach. A waiver by any party hereto of a particular breach or default by another party in connection with any provision of this Agreement must be in writing and shall not be deemed a waiver of a default by a third party or any subsequent default or breach of the same or any other provision of this Agreement.

     18. GOVERNING LAW. THE VALIDITY AND EFFECT OF THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL SUBSTANTIVE LAWS OF THE STATE OF ILLINOIS. ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF, OR WITH RESPECT TO, THIS AGREEMENT OR ANY JUDGMENT ENTERED BY ANY COURT IN RESPECT THEREOF SHALL BE BROUGHT EXCLUSIVELY IN THE COURTS OF ILLINOIS OR IN THE U.S. DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS, AND THE PARTIES HERETO ACCEPT THE EXCLUSIVE JURISDICTION OF THOSE COURTS FOR THE PURPOSE OF ANY SUIT, ACTION OR PROCEEDING. IN ADDITION, EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY JUDGMENT ENTERED BY ANY COURT IN RESPECT THEREOF BROUGHT IN ILLINOIS OR THE U.S. DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS, AND HEREBY FURTHER IRREVOCABLY WAIVES ANY CLAIM THAT ANY SUIT, ACTION OR PROCEEDINGS BROUGHT IN ILLINOIS OR IN SUCH DISTRICT COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. THE PARTIES HERETO HEREBY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF, OR WITH RESPECT TO, THIS AGREEMENT AND AGREE THAT ANY SUCH SUIT, ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.

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     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.

HOLDINGS:
First Mercury Holdings, Inc.
By:	/s/ Richard H. Smith
Name:	Richard H. Smith
Title:	President
STOCKHOLDER:
/s/ Jerome M. Shaw
Name: Jerome M. Shaw

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EX-10.8

Exhibit 10.8

EMPLOYMENT AGREEMENT

     THIS EMPLOYMENT AGREEMENT (“Agreement”) is made and entered into as of the 6th day of November, 2003, by and between FIRST MERCURY FINANCIAL CORPORATION, a Delaware corporation (“Employer”), and RICHARD H. SMITH (“Employee”).

     R E C I T A L S:

     R.1. Employer is a Delaware corporation which holds ownership of various businesses in the insurance and insurance related fields.

     R.2. Employee has skill and experience in the operations of insurance businesses.

     R.3. Employer desires to employ Employee under the terms and conditions contained herein.

     R.4. Employee desires to be employed by Employer under such terms and conditions.

     NOW, THEREFORE, in consideration of the above premises and the mutual covenants and conditions contained herein, Employer and Employee agree as follows:

     1. EMPLOYMENT.

     Employer employs Employee as its President and Chief Operating Officer to perform, the duties described in Section 3 of this Agreement, and Employee accepts such employment upon all of the terms and conditions set forth in this Agreement for the term specified in Section 2 of this Agreement.

     2. TERM.

     The term of employment under this Agreement (the “Term”) shall be continuous until Employee’s employment is terminated pursuant to and in accordance with the terms hereof.

     3. DUTIES.

          A. Employee, as the President and Chief Operating Officer of Employer, agrees and promises to perform and discharge in an efficient and competent manner the duties assigned to Employee by Employer and shall devote his full business and professional time, energy and diligence to the performance of such duties, for the conduct of Employer’s business. the duties shall be those duties in connection with Employer’s business and affairs as are customarily incident to the offices which Employee holds, In addition, Employee shall serve as a director of Employer and as an officer and director of the subsidiaries and affiliates of Employer. Those duties shall include those generally assigned to the president and chief operating officer of insurance holding and insurance businesses. Employee agrees to perform those duties necessary to meet the reasonable expectations of Employer as established from time to time by Employer.

          B. Employee shall devote such time, attention, and energies to the business of Employer as is necessary for Employee to satisfactorily perform his duties as President and Chief Operating Officer Except as otherwise provided in this Agreement or Employer’s policies as adopted by its Board of Directors, Employee shall not during the Term of this Agreement be

engaged in any other business activity or accept any other employment, whether or not such business activity is pursued for gain, profit, or other pecuniary advantage, without prior approval of Employer.

          C. During the Term of this Agreement, Employee agrees that he will not without the prior written consent of Employer, either directly or indirectly, alone, or as a member of any other corporation, partnership, organization or entity, engage in or become concerned with any other duties or pursuits which are contrary to the best interest of Employer, except for personal investments which do not conflict with the business of Employer or the time which Employee is required to devote to Employer’s business activities.

     4. COMPENSATION.

          A. Base Salary: Employer shall pay to Employee an annual salary (“Base Salary”), payable in installments twice each month in conformity with Employer’s ordinary executive payroll procedures in effect during the Term. Employee’s initial Base Salary shall be Five Hundred Fifty Thousand ($550,000.00) Dollars and shall be allocated as follows: (i) Salary — basic compensation: $350,000.00 (ii) Agreement not to compete: $200,000.00.

          B. Bonus Compensation: Employer may but shall not be obligated to pay Employee additional compensation in the term of a bonus. Employer’s Chairman of the Board and Chief Executive Officer, Jerome M. Shaw, and/or the Board of Directors may, at the end of each calendar year, evaluate Employer, the performance of Employer, and determine Employee’s contribution to the performance. Based upon this evaluation, Employer may, but shall not under any circumstances be obligated to, pay Employee additional bonus compensation. Under no circumstances may Employee’s Base Salary be reduced without Employee’s written consent.

     5. BENEFITS.

     Employer shall provide for Employee those employee welfare, pension and other benefits as Employer from time to time provides to managerial employees. Anything contained in this Agreement to the contrary notwithstanding, it is understood that Employer may modify, amend, change, alter, revoke or terminate any Employer welfare, pension, or other plan currently maintained by Employer, provided that such change shall apply to all managerial employees and not be specifically targeted to or against Employee.

     6. REIMBURSEMENT FOR EXPENSES

     Employee shall be entitled to monthly reimbursements for reasonable costs and expenses of travel and customer entertainment in the pursuit of Employer’s business; provided. however, that no reimbursement shall be paid by Employer until: Employee submits paid receipts and other documentation acceptable to Employer and as required by the Internal Revenue Service to qualify as ordinary and necessary business expenses pursuant to the applicable provisions of the Internal Revenue Code of 1986, as amended.

     7. VACATION

     Employee shall receive such paid vacations as Employer may determine to be appropriate.

     8. DEATH DURING EMPLOYMENT PERIOD

     In the event Employee dies during the Term. Employer agrees and shall be obligated to pay to a beneficiary named by Employee, and in the event that Employee shall not name a beneficiary then to Employee’s estate, the balance of Employee’s Base Salary set forth in Section 4A above for the remainder of the calendar year in which death occurs.

     9. TERMINATION OF EMPLOYMENT

          A. Employer shall have the right to immediately terminate Employee’s employment under this Agreement in the following circumstance:

               (i) For Reasonable Cause. As used in this Agreement, “Reasonable Cause” shall include any one or more of the following: (a) willful misconduct on the part of Employee which causes material harm or damage to Employer, (b) misappropriation by Employee of any material property of Employer, (c) conviction of Employee of a felony, (d) the failure to perform competently the duties and obligations assigned by Employer to Employee under the terms of this Agreement, or (e) any other material breach by Employee of any of his obligations under this Agreement. Termination for Reasonable Cause may occur who or without prior notice, in Employer’s sole discretion.

               (ii) Upon a Change of Control. As used in this Agreement, “Change of Control” shall occur if:

                              (a) Any individual, partnership, firm, corporation, association, trust, joint-stock company, unincorporated association or other entity, or any syndicate or group deemed to be a person under Section 14(d)(2) of the Securities Exchange Act of 1934, as amended from time to time (the “Exchange Act”) (other than shareholders holding more than 20% of Employer’s voting securities as of the effective date of this Agreement), is or becomes the “beneficial owner” (as defined in Rule 13d-3 of the General Rules and Regulations under the Exchange Act), directly or indirectly, of securities of Employer representing 50% or more of the combined voting power of Employer’s then outstanding securities entitled to vote in the election of directors of Employer; or

                              (b) Jerome M. Shaw no longer shall be entitled either (i) pursuant to that certain Agreement Among Stockholders of Mercury Insurance Group, inc., (n/k/a First Mercury Financial Corporation), effective as of January 1, 1994, amended and restated by agreement effective October 23, 1998, as such agreement may be amended and/or restated from time to time, or (ii) as a stockholder of Employer pursuant to its Bylaws, to nominate for election to Employer’s Board that number of individuals which will constitute a majority of Employer’s Board; or

                              (c) All or substantially all of the assets of Employer are transferred, liquidated or distributed.

          B. Employer, at any time, shall have the right to terminate Employee’s employment under this Agreement without cause upon ninety (90) days written notice, but, in that event, Employer shall be required to pay to Employee severance pay in an amount equal to two times the Base Salary plus bonus which Employee received in the calendar year prior to the year in which such termination notice was given. Employee’s severance pay shall be paid to Employee in equal monthly installments, the first installment to commence on the first day of the

month after the ninety (90) day notice expires, and a like payment to be paid to Employee on the first day of each month thereafter until twenty four (24) consecutive equal monthly payments have been made. The severance pay to be paid to Employee shall be deemed to be in consideration for the agreement of Employee not to compete as set forth in Section 10 below, and shall be in lieu of any benefits which Employee may have been entitled to receive from Employer as an employee, which benefits shall terminate on the date of Employee’s termination. The severance pay to be paid pursuant to this Section 9B shall be due and payable only in the event that Employer elects in Employer’s sole discretion to terminate Employee’s employment pursuant to this Section 9B. In addition, the severance pay to be paid to Employee shall be in lieu of and shall not be in addition to benefits which Employee may have been entitled to under the First Mercury Financial Corporation Executive Benefit Plan effective October 1, 1998, as amended, which plan is being terminated by Employer, and Employee consents to the termination of such plan.

          C. Employee’s right to terminate his employment with Employer under this Agreement shall be limited to the following circumstances: (i) any material breach by Employer of any of its obligations under this Agreement; (ii) the institution of any bankruptcy or similar proceeding against Employer, if such proceeding is not dismissed within sixty (60) business days; (iii) the involuntary dissolution of Employer; or (iv) for any reason or no reason following 90 days written notice to Employer.

     10. COVENANT NOT TO COMPETE/CONFIDENTIAL INFORMATION

     Employee recognizes that during the course of his employment with Employer. Employee has had and will continue to have access to substantial amounts of confidential and proprietary information and trade secrets relating to the business of Employer, and that it would be detrimental to the business of Employer, and have a substantial detrimental effect on the value to Employer of Employee’s employment, if Employee were to compete with Employer upon the termination of his employment. Therefore, in consideration of Employer entering into this Agreement and establishing the compensation and benefits to be paid to and derived by Employee pursuant to the terms of this Agreement, Employee agrees that during the Term of this Agreement and for a period of thirty six (36) months after termination of this Agreement, Employee will not: (i) engage in, assist in, or in any manner become interested in, directly or indirectly, as an owner, partner, joint venturer, investor, shareholder, member, employee, consultant, agent or otherwise in any competing business; (ii) accept employment with or directly or indirectly render services or assistance to a third party in a competing business as a director, officer, agent, employee, or consultant (with or without compensation) or contract with or work for a competing business; or (iii) directly or indirectly solicit for employment any person presently employed by Employer or an affiliate of Employer or induce any individual employed by Employer to change employment or quit the employment of Employer. As used herein, the term “competing business” shall mean any business, trade or operation which conducts any business in the insurance industry including but not limited to insurance agencies, insurance carriers, insurance consulting firms, insurance brokers, insurance general managing agencies. or similar businesses.

     Further, during employment and after termination of employment, Employee will not, unless otherwise required to do so by law, divulge or furnish any of Employer’s confidential information to any person, firm, company or corporation or use any such confidential information directly or indirectly for Employee’s own benefit or for the benefit of any person, firm or entity other than Employer. Employee acknowledges that all confidential information is to be and shall, at all times, remain the property of Employer. Confidential information as used herein shall

mean, without limitation, the names and addresses of brokers that do business with Employer, customer lists, customer files, customer information including, but not limited to, expiration information and types of coverages that customers require, pricing information, and product information of Employer, marketing techniques and programs of Employer and methods that Employer procures business, as well as information concerning Employer’s dealing with third parties such as reinsurance companies,

     Upon termination, Employer shall have the right to request that Employee enter into and execute a separate agreement which reasonably incorporates the terms and conditions of this Section 10.

     Employer and Employee agree, in light of the facts known as of this date, and after considering the nature and extent of Employer’s business, Employee’s position with Employer, the amount of compensation and other benefits provided herein, and the damages that could be done to Employer’s business by Employee competing with Employer, that the foregoing restriction on competition is reasonable. However, if a court or arbitrator should construe any portion of the restriction to be too broad or extensive, it is the intent of the parties that this Agreement be automatically reformed to permit the broadest scope of the restriction, and, as so reformed, enforced to the maximum limits which may be found to be reasonable by such court or arbitrator.

     11. DISPUTE RESOLUTION.

     Employer and Employee agree that any dispute arising out of or related to this Agreement, or the breach thereof, whether occurring during the Term of the Agreement or after the Agreement expires or is terminated, shall be submitted exclusively to binding arbitration in the following manner:

          A. Within ninety (90) days of a dispute arising, the aggrieved party shall send written notice to the other party. Such notice shall describe the nature of the dispute that is claimed and the relief demanded by the aggrieved party.

          B. Within the next thirty (30) days, the parties shall attempt to resolve the dispute between themselves through informal discussion.

          C. If at the end of such thirty (30) days there is no resolution of the dispute, either party may submit the dispute to binding arbitration pursuant to the Voluntary Labor Arbitration Rules of the American Arbitration Association, as amended, which are incorporated herein by this reference. In addition to those rules, the following provisions shall apply:

               (i) The decision of the arbitrator shall be final and binding upon the parties.

               (ii) Except as explicitly provided in this Agreement, in reaching his or her decision, the arbitrator shall have no authority to add, subtract from or modify any provisions of this Agreement.

               (iii) In reaching his or her decision, the arbitrator may award damages and/or order the parties to provide specific performance of the terms of this Agreement. However, the arbitrator may not under any circumstances award punitive, exemplary or similar damages to either party.

          D. By agreeing to this arbitration provision, both parties waive any and all rights they have to pursue any other claims arising out of this Agreement or Employee’s employment with the Employer through civil litigation in any local, state and/or federal court or administrative agency.

          E. Neither Employer nor Employee shall have the right to appeal any decision or order of the arbitrators or of arbitration to any court. Either party may enter any order, decision or judgment of any arbitration panel or arbitrator in a court of competent jurisdiction.

          F.Anything contained in this Agreement to the contrary notwithstanding, Employee acknowledges that in the event that Employee were to violate the terms and conditions of Section 10 of this Agreement, Covenant Not to Compete/Confidential Information, Employer would suffer immediate and irreparable harm. In the event of a violation or breach of the terms and conditions of Section 10, Employee agrees that Employer is entitled to and shall be entitled to injunctive relief in addition to any other relief or damages that Employer shall incur and which may be recoverable in any manner. Employer may seek injunctive relief in any manner and in any form that Employer deems suitable in Employer’s sole discretion, and shall be entitled to enforce injunctive relief in a court of competent jurisdiction.

     12. NOTICES.

     Any and all notices given in connection with this Agreement shall be deemed adequately given only if in writing and personally delivered or sent by first class registered or certified mail (or any other means which are at least as fast and reliable as registered or certified mail), postage prepaid, to the party for whom such notices are intended. A written notice shall be deemed to have been given to the recipient party on the earlier of. (a) the date it shall be delivered to the address required by this Agreement; or (b) the date delivery shall have been refused at the address required by this Agreement; or (c) with respect to notices sent by mail or other means, the date as of which the postal service or other carrier shall have indicated such notice to be undeliverable at the address required by this Agreement. Any and all notices referred to in this Agreement, or which either party desires to give to the other, shall be addressed as follows:

To Employer:	First Mercury Financial Corporation
	29621 Northwestern Highway
	Southfield, MI 48034
	Attention: Jerome M. Shaw
To Employee:	Richard H. Smith

The above addresses may be changed by notice of such change, given as provided herein, to the last address designated.

     13. REPRESENTATION AND WARRANTY.

     Employee represents and warrants that he is in no way restricted, whether by an employment agreement, a noncompetition agreement or otherwise, from entering into and performing under this Agreement or from becoming employed by Employer

     14. MISCELLANEOUS.

          A. CAPTIONS AND HEADINGS: The captions and headings herein are inserted only as a matter of convenience and for reference and in no way define, limit, or describe the scope of this Agreement or the intent of any provision thereof

          B. GOVERNING LAW AND VENUE: This Agreement shall be construed and enforced in accordance with and interpreted by the internal laws of the State of Illinois, without regard to principles of conflicts of law.

          C. WAIVER: No restriction, condition, obligation or provision contained in this Agreement shall be deemed to have been abrogated or waived by reason of any failure to enforce the same, irrespective of the number of violations or breaches thereof which may occur.

          D. SEVERABILITY: The provisions hereof shall be deemed independent and severable, and the invalidity or partial invalidity or unenforceability of any provision shall not affect the validity or enforceability of the remainder of this Agreement. In the event any provision is deemed unenforceable, the remainder of this Agreement shall be modified to the minimum extent necessary to render this Agreement valid and enforceable.

          E. ASSIGNMENT: This Agreement is Employees personal undertaking, and Employee may not transfer or assign any of his obligations or rights hereunder; however, this Agreement shall be binding upon Employees heirs, executors, administrators and personal representatives. The rights and obligations of Employer under this Agreement shall inure to the benefit of and shall be binding upon its successors and assigns of Employer.

          F. NO CONFLICTING OBLIGATIONS: Employee represents and warrants to Employer that he is not under, or bound to be under in the future, any obligation to any person, firm or corporation that is or would be inconsistent or conflict with this Agreement or would prevent, limit or impair in any way the performance by Employee of his obligations hereunder.

          G. COUNTERPARTS: This Agreement may be executed in multiple counterparts, each of which shah be considered an original, but all of which. together, shall constitute a single agreement.

          H. GENDER: The use of any gender in this Agreement shall be deemed to include either or both of the genders, and the use of the singular shall be deemed to include the plural whenever the context so requires.

          I. AMENDMENT: This Agreement may be amended only by a written instrument signed by the parties hereto.

          J. COMPLETE AGREEMENT: This Agreement constitutes the entire agreement and understanding among the parties concerning the subject matter hereof and this Agreement supersedes any and all prior negotiations, proposed agreements or understandings, if any, among the parties concerning any of the provisions of this Agreement.

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written.

EMPLOYER:
FIRST MERCURY FINANCIAL CORPORATION
By:	/s/ Jerome M. Shaw
	Its:	CEO
EMPLOYER:
/s/ Richard H. Smith
RICHARD H. SMITH

EX-10.10

Exhibit 10.10

EMPLOYMENT AGREEMENT

     THIS EMPLOYMENT AGREEMENT (“Agreement”) is made and entered into as of the 27th day of February, 2004, by and between FIRST MERCURY FINANCIAL CORPORATION, a Delaware corporation (“Employer”), and WILLIAM S. WEAVER (“Employee”).

     R E C I T A L S:

     R.1. Employer is a Delaware corporation which holds ownership of various businesses in the insurance and insurance related fields.

     R. 2. Employee has skill and experience in the operations of insurance businesses.

     R. 3. Employer desires to employ Employee under the terms and conditions contained herein.

     R. 4. Employee desires to be employed by Employer under such terms and conditions.

     NOW, THEREFORE, in consideration of the above premises and the mutual covenants and conditions contained herein. Employer and Employee agree as follows:

     1. EMPLOYMENT.

     Employer employs Employee as its Chief Financial Officer, Senior Vice President and Treasurer to perform the duties described in Section 3 of this Agreement, and Employee accepts such employment upon all of the terms and conditions set forth in this Agreement for the term specified in Section 2 of this Agreement.

     2. TERM.

     The term of employment under this Agreement (the “Term”) shall be continuous until Employee’s employment is terminated pursuant to and in accordance with the terms hereof.

     3. DUTIES.

          A. Employee, as the Chief Financial Officer, Senior Vice President and Treasurer of Employer, agrees and promises to perform and discharge in an efficient and competent manner the duties assigned to Employee by Employer and shall devote his full business and professional time, energy and diligence to the performance of such duties, for the conduct of Employer’s business. The duties shall be those duties in connection with Employer’s business and affairs as are customarily incident to the offices which Employee holds. In addition, Employee shall serve as a director of Employer and as an officer and director of the subsidiaries and affiliates of Employer. Those duties shall include those generally assigned to the chief financial officer, senior vice president and treasurer of insurance holding and insurance businesses. Employee agrees to perform those duties necessary to meet the reasonable expectations of Employer as established from time to lime by Employer.

          B. Employee shall devote such time, attention, and energies to the business of Employer as is necessary for Employee to satisfactorily perform his duties as Chief Financial Officer, Senior Vice President and Treasurer. Except as otherwise provided in this Agreement or Employer’s policies as adopted by its Board of Directors, Employee shall not during the Term of

this Agreement be engaged in any other business activity or accept any other employment, whether or not such business activity is pursued for gain, profit, or other pecuniary advantage, without prior approval of Employer.

          C. During the Term of this Agreement, Employee agrees that he will not without the prior written consent of Employer, either directly or indirectly, alone, or as a member of any other corporation, partnership, organization or entity, engage in or become concerned with any other duties or pursuits which are contrary to the best interest of Employer, except for personal investments which do not conflict with the business of Employer or the time which Employee is required to devote to Employer’s business activities.

     4. COMPENSATION.

          A. Base Salary: Employer shall pay to Employee an annual salary (“Base Salary”), payable in installments twice each month in conformity with Employers ordinary executive payroll procedures in effect during the Term. Employee’s initial Base Salary shall be TWO HUNDRED TWENTY FIVE THOUSAND ($225,000.00) Dollars.

          B. Bonus Compensation: Employer may but shall not be obligated to pay Employee additional compensation in the term of a bonus. Employer’s Chairman of the Board and Chief Executive Officer, Jerome M. Shaw, and/or the Board of Directors may, at the end of each calendar year, evaluate Employer, the performance of Employer, and determine Employee’s contribution to the performance. Based upon this evaluation, Employer may, but shall not under any circumstances be obligated to, pay Employee additional bonus compensation. Under no circumstances may Employees Base Salary be reduced without Employee’s written consent.

     5. BENEFITS.

     Employer shall provide for Employee those employee welfare, pension and other benefits as Employer from time to time provides to managerial employees. Anything contained in this Agreement to the contrary notwithstanding, it is understood that Employer may modify, amend, change, alter, revoke or terminate any Employer welfare, pension, or other plan currently maintained by Employer, provided that such change shall apply to all managerial employees and not be specifically targeted to or against Employee.

     6. REIMBURSEMENT FOR EXPENSES

     Employee shall be entitled to monthly reimbursements for reasonable costs and expenses of travel and customer entertainment in the pursuit of Employer’s business; provided, however, that no reimbursement shall be paid by Employer until Employee submits paid receipts and other documentation acceptable to Employer and as required by the Internal Revenue Service to qualify as ordinary and necessary business expenses pursuant to the applicable provisions of the Internal Revenue Code of 1986, as amended.

     7. VACATION

     Employee shall receive such paid vacations as Employer may determine to be appropriate.

     8. DEATH DURING EMPLOYMENT PERIOD

     In the event Employee dies during the Term, Employer agrees and shall be obligated to pay to a beneficiary named by Employee, and in the event that Employee shall not name a beneficiary then to Employee’s estate, the balance of Employee’s Base Salary set forth in Section 4A above for the remainder of the calendar year in which death occurs.

     9. TERMINATION OF EMPLOYMENT

          A. Employer shall have the right to immediately terminate Employee’s employment under this Agreement in the following circumstance:

               (i) For Reasonable Cause. As used in this Agreement, “Reasonable Cause” shall include any one or more of the following: (a) willful misconduct on the part of Employee which causes material harm or damage to Employer, (b) misappropriation by Employee of any material property of Employer, (c) conviction of Employee of a felony, (d) the failure to perform competently the duties and obligations assigned by Employer to Employee under the terms of this Agreement, or (e) any other material breach by Employee of any of his obligations under this Agreement. Termination for Reasonable Cause may occur with or without prior notice, in Employer’s sole discretion.

               (ii) Upon a Change of Control. As used in this Agreement, “Change of Control” shall occur if:

                    (a) Any individual, partnership, firm, corporation, association. trust, joint-stock company, unincorporated association or other entity, or any syndicate or group deemed to be a person under Section 14(d)(2) of the Securities Exchange Act of 1934, as amended from time to time (the “Exchange Act”) (other than shareholders holding more than 20% of Employer’s voting securities as of the effective date of this Agreement), is or becomes the “beneficial owner” (as defined in Rule 13d-3 of the General Rules and Regulations under the Exchange Act), directly or indirectly, of securities of Employer representing 50% or more of the combined voting power of Employer’s then outstanding securities entitled to vote in the election of directors of Employer; or

                    (b) Jerome M. Shaw no longer shall be entitled either (i) pursuant to that certain Agreement Among Stockholders of Mercury Insurance Group, Inc., (n/k/a First Mercury Financial Corporation), effective as of January 1, 1994, amended and restated by agreement effective October 23, 1998, as such agreement may be amended and/or restated from time to time, or (ii) as a stockholder of Employer pursuant to its By-Laws, to nominate for election to Employer’s Board that number of individuals which will constitute a majority of Employer’s Board; or

                    (c) All or substantially all of the assets of Employer are transferred, liquidated or distributed.

          B. Employer, at any time, shall have the right to terminate Employee’s employment under this Agreement without cause upon ninety (90) days written notice, but, in that event, Employer shall be required to pay to Employee severance pay in an amount equal to two times the Base Salary plus bonus which Employee received in the calendar year prior to the year in which such termination notice was given. Employee’s severance pay shall be paid to Employee in equal monthly installments, the first installment to commence on the first day of the month after the ninety (90) day notice expires, and a like payment to be paid to Employee on the first day of each month thereafter until twenty four (24) consecutive equal monthly payments

have been made. The severance pay to be paid to Employee shall be deemed to be in consideration for the agreement of Employee not to compete as set forth in Section 10 below, and shall be in lieu of any benefits which Employee may have been entitled to receive from Employer as an employee, which benefits shall terminate on the date of Employee’s termination. The severance pay to be paid pursuant to this Section 98 shall be due and payable only in the event that Employer elects in Employer’s sole discretion to terminate Employee’s employment pursuant to this Section 9B. In addition, the severance pay to be paid to Employee shall be in lieu of and shall not be in addition to benefits which Employee may have been entitled to under the First Mercury Financial Corporation Executive Benefit Plan effective October 1, 1998, as amended, which plan is being terminated by Employer, and Employee consents to the termination of such plan.

          C. Employee’s right to terminate his employment with Employer under this Agreement shall be limited to the following circumstances: (i) any material breach by Employer of any of its obligations under this Agreement; (ii) the institution of any bankruptcy or similar proceeding against Employer, if such proceeding is not dismissed within sixty (60) business days: (iii) the involuntary dissolution of Employer; or (iv) for any reason or no reason following 90 days written notice to Employer.

     10. CONFIDENTIAL INFORMATION

     During employment and after termination of employment, Employee will not, unless otherwise required to do so by law, divulge or furnish any of Employer’s confidential information to any person, firm, company or corporation or use any such confidential information directly or indirectly for Employee’s own benefit or for the benefit of any person, firm or entity other than Employer. Employee acknowledges that all confidential information is to be and shall, at all times, remain the property of Employer Confidential information as used herein shall mean, without limitation, the names and addresses of brokers that do business with Employer, customer lists, customer files, customer information including, but not limited to, expiration information and types of coverages that customers require, pricing information, and product information of Employer, marketing techniques and programs of Employer and methods that Employer procures business, as well as information concerning Employer’s dealing with third parties such as reinsurance companies.

     Upon termination. Employer shall have the right to request that Employee enter into and execute a separate agreement which reasonably incorporates the terms and conditions of this Section 10.

     11. DISPUTE RESOLUTION.

     Employer and Employee agree that any dispute arising out of or related to this Agreement, or the breach thereof, whether occurring during the Term of the Agreement or after the Agreement expires or is terminated, shall be submitted exclusively to binding arbitration in the following manner:

          A. Within ninety (90) days of a dispute arising, the aggrieved party shall send written notice to the other party. Such notice shall describe the nature of the dispute that is claimed and the relief demanded by the aggrieved party.

          B. Within the next thirty (30) days, the parties shall attempt to resolve the dispute between themselves through informal discussion.

          C. If at the end of such thirty (30) days there is no resolution of the dispute, either party may submit the dispute to binding arbitration pursuant to the Voluntary Labor Arbitration Rules of the American Arbitration Association, as amended, which are incorporated herein by this reference. In addition to those rules, the following provisions shall apply:

               (i) The decision of the arbitrator shall be final and binding upon the parties.

               (ii) Except as explicitly provided in this Agreement, in reaching his or her decision, the arbitrator shall have no authority to add, subtract from or modify any provisions of this Agreement.

               (iii) In reaching his or her decision, the arbitrator may award damages and/or order the parties to provide specific performance of the terms of this Agreement. However, the arbitrator may not under any circumstances award punitive, exemplary or similar damages to either party.

          D. By agreeing to this arbitration provision, both parties waive any and all rights they have to pursue any other claims arising out of this Agreement or Employee’s employment with the Employer through civil litigation in any local, state and/or federal court or administrative agency.

          E. Neither Employer nor Employee shall have the right to appeal any decision or order of the arbitrators or of arbitration to any court. Either party may enter any order, decision or judgment of any arbitration panel or arbitrator in a court of competent jurisdiction.

          F. Anything contained in this Agreement to the contrary notwithstanding, Employee acknowledges that in the event that Employee were to violate the terms and conditions of Section 10 of this Agreement, Confidential Information, Employer would suffer immediate and irreparable harm. In the event of a violation or breach of the terms and conditions of Section 10, Employee agrees that Employer is entitled to and shall be entitled to injunctive relief in addition to any other relief or damages that Employer shall incur and which may be recoverable in any manner. Employer may seek injunctive relief in any manner and in any form that Employer deems suitable in Employer’s sole discretion, and shall be entitled to enforce injunctive relief in a court of competent jurisdiction.

     12. NOTICES.

     Any and all notices given in connection with this Agreement shall be deemed adequately given only if in writing and personally delivered or sent by first class registered or certified mail (or any other means which are at least as fast and reliable as registered or certified mail), postage prepaid, to the party for whom such notices are intended. A written notice shall be deemed to have been given to the recipient party on the earlier of. (a) the date it shall be delivered to the address required by this Agreement; or (b) the date delivery shall have been refused at the address required by this Agreement; or (c) with respect to notices sent by mail or other means, the date as of which the postal service or other carrier shall have indicated such notice to be undeliverable at the address required by this Agreement. Any and all notices referred to in this Agreement, or which either party desires to give to the other, shall be addressed as follows:

To Employer:	First Mercury Financial Corporation
	29621 Northwestern Highway
	Southfield, Ml 48034
	Attention: Jerome M. Shaw
To Employee:	William S. Weaver
	47455 Blue Heron Court
	Northville, Ml 46167

     The above addresses may be changed by notice of such change, given as provided herein, to the last address designated.

     13. REPRESENTATION AND WARRANTY.

     Employee represents and warrants that lie is in no way restricted, whether by an employment agreement. a noncompetition agreement or otherwise, from entering into and performing under this Agreement or from becoming employed by Employer.

     14. MISCELLANEOUS.

          A. CAPTIONS AND HEADINGS: The captions and headings herein are inserted only as a matter of convenience and for reference and in no way define, limit or describe the scope of this Agreement or the intent of any provision thereof

          B. GOVERNING LAW AND VENUE: This Agreement shall be construed and enforced in accordance with and interpreted by the internal laws of the State of Illinois, without regard to principles of conflicts of law.

          C. WAIVER: No restriction, condition, obligation or provision contained in this Agreement shall be deemed to have been abrogated or waived by reason of any failure to enforce the same, irrespective of the number of violations or breaches thereof which may occur

          D. SEVERABILITY: The provisions hereof shall be deemed independent and severable, and the invalidity or partial invalidity or unenforceability of any provision shall not affect the validity or enforceability of the remainder of this Agreement. In the event any provision is deemed unenforceable, the remainder of this Agreement shall be modified to the minimum extent necessary to render this Agreement valid and enforceable.

          E. ASSIGNMENT: This Agreement is Employee’s personal undertaking, and Employee may not transfer or assign any of his obligations or rights hereunder; however, this Agreement shall be binding upon Employees heirs, executors, administrators and personal representatives. The rights and obligations of Employer under this Agreement shall inure to the benefit of and shall be binding upon its successors and assigns of Employer.

          F. NO CONFLICTING OBLIGATIONS: Employee represents and warrants to Employer that he is not under, or bound to be under in the future, any obligation to any person, firm or corporation that is or would be inconsistent or conflict with this Agreement or would prevent, limit or impair in any way the performance by Employee of his obligations hereunder.

          G. COUNTERPARTS: This Agreement may be executed in multiple counterparts, each of which shall be considered an original, but all of which, together. shall constitute a single agreement.

          H. GENDER: The use of any gender in this Agreement shall be deemed to include either or both of the genders, and the use of the singular shall be deemed to include the plural whenever the context so requires.

          I. AMENDMENT: This Agreement may be amended only by a written instrument signed by the parties hereto

          J. COMPLETE AGREEMENT: This Agreement constitutes the entire agreement and understanding among the parties concerning the subject matter hereof and this Agreement supersedes any and all prior negotiations, proposed agreements or understandings, if any, among the parties concerning any of the provisions of this Agreement.

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written.

EMPLOYER:
FIRST MERCURY FINANCIAL CORPORATION
By:	/s/ Jerome M. Shaw
	Its:	Chairman
EMPLOYEE:
/s/ William S. Weaver
WILLIAM S. WEAVER

EX-10.12

Exhibit 10.12

CREDIT AGREEMENT

DATED AS OF MAY 8, 2006

AMONG

FIRST MERCURY FINANCIAL CORPORATION,

THE GUARANTORS

AND

JPMORGAN CHASE BANK, N.A.

TABLE OF CONTENTS

			Page
ARTICLE I. DEFINITIONS				1
	1.1	Certain Definitions		1
	1.2	Other Definitions; Rules of Construction		12
	1.3	Accounting Terms		13
ARTICLE II. THE COMMITMENTS AND THE LOANS				13
	2.1	Commitment of the Lender		13
	2.2	Notice of Borrowings		13
	2.3	Limitation on Advances		14
	2.4	Funding of Advances		14
	2.5	Note		14
	2.6	Maturity of Advances		14
	2.7	Commitment and Letter of Credit Fees		14
	2.8	Other Fees		15
	2.9	Minimum Amounts of Borrowings		15
	2.10	Optional Termination or Reduction of Commitment		15
	2.11	Mandatory Reduction or Termination of Commitment		15
	2.12	Conditions for First Borrowing		15
	2.13	Further Conditions for Disbursement		17
	2.14	Limitations of Requests and Elections		17
ARTICLE III. PAYMENTS AND PREPAYMENTS OF LOANS				18
	3.1	Principal Parents and Prepayments		18
	3.2	Interest Payments		19
	3.3	General Provisions as to Payments		19
	3.4	Computation of Interest and Fees		19
	3.5	No Setoff or Deduction		19
	3.6	Additional Costs		19
	3.7	Illegality and Impossibility		21
	3.8	Funding Losses		21
	3.9	Letter of Credit Reimbursement Payments		21
ARTICLE IV. REPRESENTATION AND WARRANTIES				22
	4.1	Organizing and Good Standing		23
	4.2	Due Authorization		23
	4.3	Third-Party Consents		23
	4.4	Validity of Agreements		23
	4.5	Financial Statements		23
	4.6	Litigation		24
	4.7	Regulations T, U and X		24
	4.8	Title to Property		24
	4.9	Other Agreements		24

-i-

TABLE OF CONTENTS
(continued)

			Page
	4.10	Taxes		24
	4.11	Accuracy of Information		24
	4.12	Subsidiaries		25
	4.13	ERISA		25
	4.14	Environmental and Safety Matters		26
	4.15	Reportable Transaction		26
	4.16	FMH Senior Note Debt Documents		26
	4.17	Guarantors		26
ARTICLE V. COVENANTS OF THE COMPANY				27
	5.1	Preservation of Corporate Existence Etc.		27
	5.2	Compliance with laws Etc.		27
	5.3	Maintenance of Properties; Insurance		27
	5.4	Reporting Requirements		28
	5.5	Shareholder’s Equity		29
	5.6	Leverage Ratio		30
	5.7	Fixed Charge Coverage Ratio		30
	5.8	Risk-Based Capital		30
	5.9	Ratings		30
	5.10	Surplus		30
	5.11	Lens		30
	5.12	Merger, Consolidation, Lease-Back, or Sale of Assets		31
	5.13	Dividends		32
	5.14	Transactions with Affiliates		32
	5.15	Additional Covenants		32
	5.16	Additional Covenants		32
	5.17	FMH Senior Note Documents		33
	5.18	Company Distributions		33
	5.19	Investments, Loans, Advances, Guarantees and Acquisitions		33
	5.20	Prepayment of Indebtedness; Subordinated Debt		33
	5.21	Indebtedness		33
ARTICLE VI. DEFAULT				33
	6.1	Events of Default		34
	6.2	Automatic Events of Default		36
	6.3	Setoff by Lender		37
ARTICLE VII. GUARANTY				37
	7.1	Guarantee of Obligations		37
	7.2	Nature of Guaranty		38
	7.3	Waivers and Other Agreements		38
	7.4	Obligations Absolute		39

-ii-

TABLE OF CONTENTS
(continued)

			Page
	7.5	No Investigation by Lender		39
	7.6	Indemnity		40
	7.7	Subordination Subrogation Etc.		40
	7.8	Waiver		40
	7.9	Limitation or Obligations		40
ARTICLE VIII. MISCELLANEOUS				41
	8.1	Amendments, Etc.		41
	8.2	Notices		42
	8.3	No Waiver By Conduct; Remedies Cumulative		42
	8.4	Reliance on and Survival of Various Provisions		42
	8.5	Expenses		43
	8.6	Successors and Assigns		43
	8.7	Counterparts		45
	8.8	Governing Law		45
	8.9	Table of Contents and Headings		46
	8.10	Construction of Certain Provisions		46
	8.11	Integration and Severability		46
	8.12	Independence of Covenants		46
	8.13	Interest Rate Limitation		46
	8.14	Acknowledgments		46
	8.15	Waiver of Jury Trial; Etc.		47
	8.16	USA Patriot Act		47

-iii-

FIRST MERCURY FINANCIAL CORPORATION
CREDIT AGREEMENT

     THIS CREDIT AGREEMENT, dated as of May 8, 2006 (as amended from time to time, this “Agreement”), is by and between FIRST MERCURY FINANCIAL CORPORATION, a Delaware corporation (the “Company”), the Guarantors party hereto from time to time and JPMORGAN CHASE BANK, N.A., (the “Lender”).

          In consideration of the premises and of the mutual agreements herein contained, the parties hereto agree that the Existing Credit Agreement shall be amended and restated as follows:

ARTICLE I.

DEFINITIONS

     1.1 Certain Definitions. As used herein the following terms shall have the following respective meanings:

     “Account Party” shall mean, with respect to any Letter of Credit, the account party under such Letter of Credit, which shall be the Company or any Subsidiary of the Company (including CoverX Corporation, First Mercury Insurance Company and All Nation Insurance Company) requested by the Company and agreed to by the Lender.

     “Advance” shall mean any Loan and any Letter of Credit Advance.

     “Affiliate”, when used with respect to any person shall mean any other person which, directly or indirectly, controls or is controlled by or is under common control with such person. For purposes of this definition “control” (including the correlative meanings of the terms “controlled by” and “under common control with”), with respect to any person, shall mean possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such person, whether through the ownership of voting securities or by contract or otherwise.

     “Alternate Base Rate” shall mean the per annum rate that is equal to the greater of (i) the Prime Rate minus one-half percent (1/2%) or (ii) the Federal Funds Rate plus one-half percent (1/2%) per annum. The Alternate Base Rate shall change simultaneously with any change in such Prime Rate or such Federal Funds Rate, if applicable.

     “Alternate Base Rate Loan” shall mean any borrowing which bears interest at the Alternate Base Rate.

     “ANIC” means All Nation Insurance Company.

     “Applicable Lending Office” shall mean, with respect to any Advance made by the Lender or with respect to the Lender’s Commitment, the office of the Lender or of any Affiliate of the Lender located at the address specified for the Lender on the signature pages hereof (or identified on the signature pages hereof as the lending office for a particular type of Advance) or

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FIRST MERCURY FINANCIAL CORPORATION
CREDIT AGREEMENT

any other office or Affiliate of the Lender or of any Affiliate of the Lender hereafter selected and notified to the Company as an Applicable Lending Office for a particular type of Advance by the Lender.

     “Applicable Margin” shall mean, the applicable percentage per annum, based on the Leverage Ratio, as determined by reference to the following table:

	I			III
Leverage Ratio		<20	%		≥20	%
Applicable Margin for Eurodollar Rate Loans/Letter of Credit Fees under §2.7(b)		1.00	%		1.25	%
Commitment Fees under §2.7(a)		0.20	%		0.25	%

     For purposes of determining the Applicable Margin, the Applicable Margin will be adjusted, if necessary, quarterly as of the 1^st day of month following the month in which the Lender receives the financial statements required under Section 5.4(b) for each of the first three fiscal quarters of each fiscal year and under Section 5.4(d) for the last fiscal quarter of each fiscal year, based on the Leverage Ratio as of the most recently ended fiscal quarter of the Company, provided that upon the occurrence and during the continuance of any Event of Default or Default the Applicable Margin shall be as set forth in column III above. As of the Effective Date the Applicable Margin shall be as set forth in column I above. Notwithstanding the foregoing, if the Company provides cash collateral or marketable securities acceptable to the Lender at a appropriate margin level acceptable to the Lender as collateral for the Advances, the Applicable Margin for the purposes of commitment fees under §2.7(a) shall be 0.15% and the Applicable Margin for Eurodollar Rate Loans and Letter of Credit fees under §2.7(b) shall be 0.75% during such time such collateral is provided for the Advances.

     “ARPCO” shall mean American Risk Pooling Consultants, Inc., a Michigan corporation.

     “ARPCO Holdings” shall mean ARPCO Holdings, Inc., a Delaware corporation.

     “Assignment and Acceptance” is defined in Section 8.6(c).

     “Borrowing” shall mean the aggregation of Advances of the Lender to be made to the Company pursuant to Article II on a single date and for a single Eurodollar Interest Period, which Borrowings may be classified for purposes of this Agreement by reference to the type of Advances comprising the related Borrowing, e.g., a “Eurodollar Rate Borrowing” is a Borrowing comprised of Eurodollar Rate Loans.

     “Business Day” shall mean a day other than a Saturday, Sunday or other day on which the Lender is not open to the public for carrying on substantially all of its banking functions, and if the applicable Business Day relates to a Eurodollar Rate Loan or request therefor, a day which is also a day on which dealings in Dollar deposits are carried out in the London interbank market.

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FIRST MERCURY FINANCIAL CORPORATION
CREDIT AGREEMENT

     “Capital Lease” shall mean any lease which, in accordance with Generally Accepted Accounting Principles, is or should be capitalized.

     “Capital Stock” shall mean (i) in the case of any corporation, all capital stock and any securities exchangeable for or convertible into capital stock, (ii) in the ease of an association or business entity, any and all shares, interests, participations, rights or other equivalents of corporate stock (however designated) in or to such association or entity, (iii) in the case of a partnership or limited liability company, partnership or membership interests (whether general or limited) and (iv) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distribution of assets of, the issuing Person, and including, in all of the foregoing cases described in clauses (i), (ii) (iii) or (iv), any warrants, rights or other options to purchase or otherwise acquire any of the interests described in any of the foregoing cases.

     “Change in Control” shall mean:

     (a) prior to the completion of an IPO (i) Richard Smith shall fail to be President of the Company, or shall fail to exercise a role within the Company with duties and responsibilities normally associated with such position and the board of directors or equivalent governing body of the Company shall fail to appoint a replacement reasonably acceptable to the Lender, (ii) the shareholders of FMH existing as of the Effective Date shall cease to own and control, free and clear of all Liens, at least 51% of the issued and outstanding Capital Stock of FMH and have the right and authority to appoint, designate or otherwise elect at least 51% of the members of the board of directors or equivalent governing body of FMH; (iii) FMH shall cease to own and control at least 51% of the issued and outstanding Capital Stock of the Company and have the right and authority to appoint, designate or otherwise elect at least 51% of the members of the board of directors or equivalent governing body of the Company; or (iv) any person, other than shareholders existing as of the Effective Date, or two or more such persons acting in concert, shall acquire or own beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of more than 30% of the outstanding shares of Capital Stock of FMH or the Company; or

     (b) after the completion of an IPO, (i) any Person, (which shall include, for purposes of this definition only, a “person” within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act)) acquires or owns beneficial ownership (within the meaning of Rule 13d-3 of the SEC under the Exchange Act, except that a person or group shall be deemed to have “beneficial ownership” of all securities that such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of 30% or more of the Capital Stock of the FMH or the Company entitled to vote for members of the board of directors or equivalent governing body of FMH or the Company, as the case may be, on a fully-diluted basis (and taking into account all such securities that such Person has the right to acquire pursuant to any option right) or (ii) the occupation of a majority of the seats (other than vacant seats) on the board of directors or equivalent governing body (after giving effect to any change therein simultaneously with the IPO) of FMH or the Company by Persons who were neither (x) nominated by the board of directors or equivalent governing body of FMH or the Company, as the case may be, nor (y) appointed by directors so nominated; or

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FIRST MERCURY FINANCIAL CORPORATION
CREDIT AGREEMENT

     (c) the occurrence of any “change of control”, “change in control” or similar event under any FMH Senior Note Documents.

     “Code” shall mean the Internal Revenue Code of 1986, as amended from time to time, and the regulations thereunder.

     “Commitment” shall mean the commitment of the Lender to make Advances pursuant to Section 2.1 in amounts not exceeding an aggregate principal amount outstanding of $10,000,000.

     “Consolidated” or “consolidated” shall mean, when used with reference to any financial term in this Agreement, the aggregate for two or more persons of the amounts signified by such term for all such persons determined on a consolidated basis in accordance with Generally Accepted Accounting Principles.

     “Contingent Obligation” of a Person means any agreement, undertaking or arrangement by which such Person assumes, guarantees, endorses, contingently agrees to purchase or provide funds for the payment of, or otherwise becomes or is contingently liable upon, the obligation or liability of any other Person, or agrees to maintain the net worth or working capital or other financial condition of any other Person, or otherwise assures any creditor of such other Person against loss, including, without limitation, any comfort letter, operating agreement, take-or-pay contract or the obligations of any such Person as general partner of a partnership with respect to the liabilities of the partnership.

     “Default” shall mean any of the events or conditions described in Section 6.1 or 6.2 which might become an Event of Default with notice or lapse of time or both.

     “Dollars” and “$” shall mean the lawful money of the United States of America.

     “Effective Date” shall mean the effective date specified in the final paragraph of this Agreement.

     “Environmental Laws” at any date shall mean all provisions of law, statute, ordinances, rules, regulations, judgments, writs, injunctions, decrees, orders, awards and standards promulgated by the government of the United States of America or any foreign government or by any state, province, municipality or other political subdivision thereof or therein or by any court, agency, instrumentality, regulatory authority or commission of any of the foregoing concerning the protection of, or regulating the discharge of substances into, the environment.

     “ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations thereunder.

     “ERISA Affiliate” shall mean, with respect to any person, any trade or business (whether or not incorporated) which, together with such person or any Subsidiary of such person, would be treated as a single employer under Section 414 of the Code.

     “Eurodollar Interest Period” shall mean, with respect to any Eurodollar Rate Loan, the period commencing on the day such Eurodollar Rate Loan is made and ending on the date one,

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FIRST MERCURY FINANCIAL CORPORATION
CREDIT AGREEMENT

two, three or six months thereafter, as the Company may elect in the applicable Notice of Borrowing; provided, that (a) any Eurodollar Interest Period which would otherwise end on a day which is not a Business Day shall be extended to the next succeeding Business Day unless such Business Day falls in another calendar month in which case such Eurodollar Interest Period shall end on the next preceding Business Day and (b) any Eurodollar Interest Period which begins on the last Business Day of a calendar month or on a day for which there is no numerically corresponding day in the calendar month during which such Eurodollar Interest Period is to end, shall end on the last Business Day of such calendar month.

     “Eurodollar Rate” shall mean, with respect to any Eurodollar Rate Loan and the related Eurodollar Interest Period, the per annum rate that is equal to the sum of:

     (d) the Applicable Margin, plus

     (e) the rate per annum obtained by dividing (i) the applicable British Bankers’ Association LIBOR rate for deposits in U.S. dollars as reported by any generally recognized financial information service as of 11:00 a.m. (London time) two Business Days prior to the first day of such Eurodollar Interest Period, and having a maturity equal to such Eurodollar Interest Period, provided that, if no such British Bankers’ Association LIBOR rate is available to the Lender, the applicable Eurodollar Base Rate for the relevant Eurodollar Interest Period shall instead be the rate determined by the Lender to be the rate at which the Lender or one of its Affiliate banks offers to place deposits in U.S. dollars with first-class banks in the interbank market at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Eurodollar Interest Period, in the approximate amount of such Eurodollar Rate Loan and having a maturity equal to such Eurodollar Interest Period, by (ii) an amount equal to one minus the stated maximum rate (expressed as a decimal) of all reserve requirements including, without limitation, any marginal, emergency, supplemental, special or other reserves, that is specified on the first day of such Eurodollar Interest Period by the Board of Governors of the Federal Reserve System (or any successor agency thereto) or any other governmental authority (including any nation or government, any political functions of or pertaining to government) having jurisdiction with respect thereto, for determining the maximum reserve requirement with respect to eurocurrency funding (currently referred to as “Eurodollar liabilities” in Regulation D of such Board) maintained by a member bank of such System or otherwise with respect to determining reserves or similar amounts;

     all as conclusively determined by the Lender, such sum to be rounded up, if necessary, to the nearest whole multiple of one sixteenth of one percent (1/16 of 1%).

     “Eurodollar Rate Loan,” shall mean any Loan which bears interest at the Eurodollar Rate.

     “Event of Default” shall mean any of the events or conditions described in Section 6.1 or 6.2.

     “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.

     “Federal Funds Rate” means, for any day, an interest rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the

-5-

FIRST MERCURY FINANCIAL CORPORATION
CREDIT AGREEMENT

Federal Reserve System arranged by Federal funds brokers on such day, as published for such day (or, if such day is not a Business Day, for the immediately preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations at approximately 10:00 a.m. (Chicago time) on such day on such transactions received by the Lender from three Federal funds brokers of recognized standing selected by the Lender in its sole discretion.

     “Fixed Charge Coverage Ratio” shall mean, as of the end of any fiscal quarter of the Company, the ratio of (a) the sum of: (i) the maximum dividends available to the Company from its Insurance Subsidiaries for the next four fiscal quarters, plus (ii) without duplication of any amounts referred to in the previous clause, cash and cash equivalents held by the Company and its Subsidiaries, including at such time the unused amount of the Commitment, plus (iii) dividends paid to the Company from non-insurance administrative services or marketing Subsidiaries for the four consecutive fiscal quarters then ending to (b) the sum of (i) Total Interest Expense for the four consecutive fiscal quarters then ending, plus (ii) scheduled reductions to the Commitment for the next four fiscal quarters, plus (iii) all dividends, distributions and other obligations paid or payable with respect to the Company’s Capital Stock for the four consecutive fiscal quarters then ending.

     “Fixed Rate Loan” shall mean any Eurodollar Rate Loan or Negotiated Rate Loan.

     “EMH” shall mean First Mercury Holdings, Inc., a Delaware corporation.

     “FMH Senior Note Debt” means all current and future Indebtedness and other liabilities owing pursuant to the FMH Senior Notes or any other FMH Senior Note Document and any extensions, refinancings, renewals or refundings thereof and any increases in the amount thereof.

     “FMH Senior Note Documents” means the FMH Senior Note Indenture, the FMH Senior Notes and all agreements and documents executed in connection therewith at any time.

     “FMH Senior Notes” means the Senior Floating Rate Notes due 2012 Notes issued by FMH in August, 2005 in the aggregate principal amount of $65,000,000 pursuant to the FMH Senior Note Indenture and any other securities issued pursuant to the FMH Senior Note Indenture at any time.

     “FMH Senior Note Indenture” means the Indenture with respect to the FMH Senior Notes dated as of August 17, 2005, as amended or modified from time to time.

     “FMIC” shall mean First Mercury Insurance Company.

     “Generally Accepted Accounting Principles” shall mean generally accepted accounting principles applied on a basis consistent with that reflected in the financial statements referred to in Section 4.5 hereof.

     “Governmental Authority” shall mean any nation or government, any state, or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government.

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FIRST MERCURY FINANCIAL CORPORATION
CREDIT AGREEMENT

     “Guarantors” shall mean the Company (with respect to the Guaranteed Obligations of each Account Party) and CoverX Corporation, ARPCO, ARPCO Holdings and all other present and future material non-Insurance Subsidiaries of the Company (with respect to all Guaranteed Obligations); provided, however, that (a) Public Entities Risk Services of Iowa, Inc. (a/k/a PERSI) and a non-Insurance Subsidiary commonly known as IRM shall not be required to be a Guarantor so long as any Person that is not an Affiliate of the Company owns any material amount of the Capital Stock of Public Entities Risk Services, Inc. and (b) the Company may exclude certain non-Insurance Subsidiaries of the Company from this definition of Guarantors (and such non-Insurance Subsidiaries shall not be Guarantors) if both of the following conditions are satisfied (i) the Company designates such non-Insurance Subsidiaries which are to be excluded from this definition to the Lender and (ii) all such non-Insurance Subsidiaries so excluded do not have total assets or annual revenues in excess of $500,000 in the aggregate; provided further, that Van American Insurance Services, Inc. shall not be required to be a Guarantor so long as its only asset is a note receivable from the sale of all its assets in an amount not to exceed $1,000,000, as reduced from time to time, and payments on such note are dividended to the Company.

     “Guaranty” shall mean the guaranty agreement entered into by the Guarantors for the benefit of the Lender pursuant to Article VII of this Agreement.

     “Historical Statutory Statements” is defined in Section 4.5(b).

     “Indebtedness” of any person shall mean, as of any date, (a) all obligations of such person for borrowed money, (b) all obligations of such person as lessee under any Capital Lease, (c) all obligations which are secured by any Lien existing on any asset or property of such person whether or not the obligation secured thereby shall have been assumed by such person, (d) the unpaid purchase price for goods, property or services acquired by such person, except for trade accounts payable arising in the ordinary course of business that are not past due, (e) all obligations of such person to purchase goods, property or services where payment therefor is required regardless of whether delivery of such goods or property or the performance of such services is ever made or tendered (generally referred to as “take or pay contracts”), (f) all liabilities of such person in respect of Unfunded Benefit Liabilities under any plan of such person or of any member of a controlled group of which such person is a member, (g) all obligations of such person in respect of any interest rate or currency swap, rate cap or other similar transaction (valued in an amount equal to the highest termination payment, if any, that would be payable by such person upon termination for any reason on the date of determination), (h) all liabilities under any securitization, any so-called “synthetic lease” or “tax ownership operating lease” or any other off balance sheet transaction which is the functional equivalent of or takes the place of borrowing but which does not constitute a liability on a balance sheet of such person, based on the outstanding amount of such liability if it had been structured as a financing on the balance sheet of such person, and (i) all obligations of others similar in character to those described in clauses (a) through (h) of this definition for which such person is contingently liable, as obligor, guarantor, surety or in any other capacity, or in respect of which obligations such person assures a creditor against loss or agrees to take any action to prevent any such loss (other than endorsements of negotiable instruments for collection in the ordinary course of business), including without limitation all reimbursement obligations of such person in

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FIRST MERCURY FINANCIAL CORPORATION
CREDIT AGREEMENT

respect of letters of credit, surety bonds or similar obligations and all obligations of such person to advance funds to, or to purchase assets, property or services from, any other person in order to maintain the financial condition of such other person, other than insurance contacts issued by the Company or any of its Subsidiaries in the ordinary course of business.

     “Insurance Regulatory Authority” shall mean, with respect to any Insurance Subsidiary, the insurance department or similar Governmental Authority charged with regulating insurance companies or insurance holding companies, in its state of domicile and, to the extent that it has regulatory authority over such Insurance Subsidiary, in each other jurisdiction in which such Insurance Subsidiary conducts business or is licensed to conduct business.

     “Insurance Subsidiary” shall mean any Subsidiary of the Company, the ability of which to pay dividends is regulated by an Insurance Regulatory Authority or that is otherwise required to be regulated thereby in accordance with the applicable Requirements of Law of its state of domicile.

     “Interest Payment Date” shall mean (a) with respect to any Eurodollar Rate Loan, the last day of each Eurodollar Interest Period with respect to such Eurodollar Rate Loan and, in the case of any interest period exceeding three months, those days that occur during such Eurodollar Interest Period at intervals of three months after the first day of such Eurodollar Interest Period and (1,) in all other cases, the last Business Day of each March, June, September and December occurring after the date hereof, commencing with the first such Business Day occurring after the date of this Agreement, and the Termination Date.

     “Interest Period” shall mean any Eurodollar Interest Period or Negotiated Interest Period.

     “IPO” shall mean the sale of the Capital Stock of the Company or FMH pursuant to (a) a registration statement under the Securities Act that has been declared effective by the SEC or (b) a public offering outside the United States and which results, in either case, in an active trading market for such shares. An active trading market shall be deemed to exist if such shares are listed on the New York Stock Exchange, the American Stock Exchange or the Nasdaq National Market System or any major international or domestic trading market exchange.

     “Junior Subordinated Debentures” means (1) debentures which (i) by their terms (or by the terms of any security into which they are convertible or for which they are exchangeable at the option of the holder thereof), or upon the happening of any event (other than an event which would constitute a Change of Control), mature or arc mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or are redeemable at the sole option of the holder thereof (except, in each case, upon the occurrence of a Change of Control) on or after the Termination Date, (ii) which are issued to a TOPS Trust which issues to investors, simultaneously with the issues of such debentures, trust preferred shares having substantially similar terms as such debentures and (iii) are reasonably acceptable to the Lender and (2) any other debentures of such person or its Subsidiaries having substantially the same terms as the securities described in clause (1), or terms no more adverse to the Company and its Subsidiaries or the Lender than such items and are reasonably acceptable to the Lender.

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     “Leverage Ratio” shall mean, as of the end of any fiscal quarter of the Company, the ratio of: (a) Total Debt of such person to (b) Total Capital of such person, all as determined in accordance with Generally Acceptable Accounting Principles.

     “Letter of Credit” shall mean a standby letter of credit having a stated expiry date or a date upon which the draft must be reimbursed not later than twelve months after the date of issuance and not later than twelve months after the Termination Date issued by the Lender for the account of the Account Party under an application and related documentation acceptable to the Lender requiring, among other things, immediate reimbursement by the Account Party to the Lender in respect of all drafts or other demand for payment honored thereunder and all expenses paid or incurred by the Lender relative thereto.

     “Letter of Credit Advance” shall mean any issuance of a Letter of Credit under Section 2.4 made pursuant to Section 2.1.

     “Letter of Credit Documents” shall have the meaning ascribed thereto in Section 3.9(b).

     “Lien” shall mean any pledge, assignment, hypothecation, mortgage, security interest, deposit arrangement, option, conditional sale or title retaining contact, sale and leaseback transaction, financing statement filing, lessor’s or lessee’s interest under any lease, subordination of any claim or right, or any other type of lien, charge, encumbrance, preferential arrangement or other claim or right.

     “Loan” shall mean any borrowing under Section 2.4 evidenced by the Note and made pursuant to Section 2.1. Any such Loan or portion thereof may also be denominated as a Alternate Base Rate Loan, Negotiated Rate Loan or a Eurodollar Rate Loan and such Alternate Base Rate Loans, Negotiated Rate Loan and Eurodollar Rate Loans are referred to herein as “types” of Loans.

     “Loan Documents” shall mean, collectively, this Agreement, the Note, the Joinder Agreements, the Letter of Credit Documents and all other agreements and documents executed in connection herewith at any time, as amended or modified from time to time.

     “Material Adverse Affect” shall mean (i) a material adverse effect on the property, business, operations, financial condition, liabilities, prospects or capitalization of the Company and its Subsidiaries, taken as a whole or (ii) a material adverse effect on the rights and remedies of the Lender under the Loan Documents.

     “Multiemployer Plan” shall mean any “multiemployer plan” as defined in Section 4001(a)(3) of ERISA or Section 414(f) of the Code.

     “NAIC” shall mean the National Association of Insurance Commissioners.

     “Negotiated Interest Period” shall mean, with respect to any Negotiated Rate Loan, the period commencing on the day such Negotiated Rate Loan is made or converted to a Negotiated Rate and ending on the date agreed upon between the Company and the Lender at the time such Negotiated Rate Loan is made, and each subsequent period commencing on the last day of the

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CREDIT AGREEMENT

immediately preceding Negotiated Interest Period and ending on the date agreed upon between the Company and the Lender at the time such Negotiated Rate Loan is elected to be continued as a Negotiated Rate Loan by the Company, provided, however, that no Negotiated Rate Interest Period which would end after the Termination Date shall be permitted.

     “Negotiated Rate” shall mean, with respect to any Negotiated Rate Loan, the rate per annum agreed upon between the Company and the Lender at the time such Negotiated Rate Loan is made.

     “Negotiated Rate Loan” shall mean any Loan which bears interest at the Negotiated Rate.

     “Net Income” of any person, shall mean, for any period, the net income (after deduction for income and other taxes of such person determined by reference to income or profits of such person) for such period (but without reduction for any net loss incurred for any fiscal year during such period), taken as one accounting period, all as determined in accordance with Generally Accepted Accounting Principles.

     “Note” shall mean any promissory note of the Company evidencing the Loans, in substantially the form annexed hereto as Exhibit A, as amended or modified from time to time and together with any promissory note or notes in exchange or replacement therefor.

     “Notice of Borrowing” shall mean any notice of any Borrowing.

     “Overdue Rate” shall mean (a) in respect of the principal of any Fixed Rate Loan, a rate per annum that is equal to the sum of two percent (2%) per annum plus the per annum rate in effect thereon until the end of the then current Interest Period for such Fixed Rate Loan and, thereafter, a rate per annum that is equal to the sum of two percent (2%) per annum plus the Alternate Base Rate, and (b) in respect of the principal of any Alternate Base Rate Loan, and other amounts payable by the Company hereunder (other than interest or amounts described in clause (a) above), a per annum rate that is equal to the sum of two percent (2%) per annum plus the Alternate Base Rate.

     “PBGC” shall mean the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA.

     “Permitted Liens” shall mean Liens permitted by Section 5.11 hereof.

     “Person” or “person” shall include an individual, a corporation, an association, a partnership, a trust or estate, a joint stock company, an unincorporated organization, a joint venture, a trade or business (whether or not incorporated), a government (foreign or domestic) and any agency or political subdivision thereof, or any other entity.

     “Plan” shall mean, with respect to any person, any pension plan (other than a Multiemployer Plan) subject to Title IV of ERISA or to the minimum finding standards of Section 412 of the Code which is maintained or sponsored by such person, any Subsidiary of such person or any ERISA Affiliate, if such person could have liability with respect to such pension plan.

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CREDIT AGREEMENT

     “Prime Rate” means a rate per annum equal to the prime rate of interest announced from time to time by the Lender or its parent (which is not necessarily the lowest rate charged to any customer), changing when and as said prime rate changes.

     “Prohibited Transaction” shall mean any transaction involving any Plan which is proscribed by Section 406 of ERISA or Section 4975 of the Code.

     “Reportable Event” shall mean a reportable event as described in Section 4043(b) of ERISA including those events as to which the thirty (30) day notice period is waived under Part 2615 of the regulations promulgated by the PBGC under ERISA.

     “Requirement of Law”’ shall mean as to any Person, the certificate of incorporation and by-laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other governmental authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject.

     “SAP” means, as to FMFC, ANIC or any other Insurance Subsidiary, statutory accounting principles prescribed or permitted by such Person’s state of domicile.

     “SEC” shall mean the Securities and Exchange Commission or any successor agency thereof.

     “Securities Act” shall mean the Securities Act of 1933, as amended.

     “Statutory Accounting Principles” shall mean, with respect to any Insurance Subsidiary, the statutory accounting practices prescribed or permitted by the relevant Insurance Regulatory Authority of its state of domicile, consistently applied and maintained and in conformity with those used in the preparation of the most recent Historical Financial Statements.

     “Subordinated Debt” of a Person means any Indebtedness of such Person the payment of which is subordinated to payment of all Advances and other obligations hereunder to the written satisfaction of the Lender and is on terms, including without limitation maturities, defaults and covenants, satisfactory to the Lender.

     “Subsidiary of any person shall mean any other person (whether now existing or hereafter organized or acquired) in which (other than directors qualifying shares required by law) at least a majority of the securities or other ownership interests of each class having ordinary voting power or analogous rights (other than securities or other ownership interests which have such power or right only by reason of the happening of a contingency), at the time as of which any determination is being made, are owned, beneficially and of record, by such person or by one or more of the other Subsidiaries of such person or by any combination thereof. Unless otherwise specified, reference to “Subsidiary” shall mean a Subsidiary of the Company. Notwithstanding the foregoing, a TOPS Trust of any person shall not be considered a Subsidiary of such person.

     “Substantial Portion” shall mean, with respect to the assets of the Company and its Subsidiaries, assets which (a) represent more than 10% of the consolidated assets of the

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Company and its Subsidiaries as would be shown in the consolidated financial statements of the Company and its Subsidiaries as of December 31, 2005, or (b) is responsible for more than 10% of the consolidated net revenues or of the consolidated net income of the Company and its Subsidiaries as reflected in the financial statements referred to in clause (a) above.

     “Termination Date” shall mean the earlier to occur of: (a) June 30, 2010, or (b) the date on which the Commitment shall be terminated pursuant to Sections 2.2, 6.1 or 6.2.

     “TOPS Trust” means a trust sponsored by the Company created for the purpose of issuing its securities in connection with the issuance of Junior Subordinated Debentures and which is not part of the Company’s consolidated group of entities in accordance with GAAP.

     “Total Capital” shall mean, as of any date, the sum of: (a) Total Debt, plus (b) common equity of the Company and its Subsidiaries, plus (c) preferred equity of the Company and its Subsidiaries, all on a consolidated basis.

     “Total Debt” shall mean, as of any date, all Indebtedness of the Company and its Subsidiaries on a consolidated basis. It is acknowledged that the FMH Senior Notes are not Indebtedness of the Company and its Subsidiaries.

     “Total Interest Expense” shall mean, for any period, total interest and related expense (including, without limitation, that portion of any capitalized lease obligation attributable to interest expense in conformity with Generally Accepted Accounting Principles, amortization of debt discount, all capitalized interest, the interest portion of any deferred payment obligations, all commissions, discounts and other fees and charges owed with respect to letter of credit and bankers acceptance financing, the net costs and net payments under any interest rate hedging, cap or similar agreement or arrangement, prepayment charges, agency fees, administrative fees, commitment fees and capitalized transaction costs allocated to interest expense) paid, payable or accrued during such period, without duplication for any other period, with respect to all outstanding Indebtedness of the Company and its Subsidiaries, all as determined for the Company and its Subsidiaries on a consolidated basis for such period in accordance with Generally Accepted Accounting Principles.

     “Unfunded Benefit Liabilities” shall mean, with respect to any Plan as of any date, the amount of the unfunded benefit liabilities determined in accordance with Section 4001(a)(18) of ERISA.

     1.2 Other Definitions; Rules of Construction. As used herein, the terms “Lender” “Company” and “this Agreement” shall have the respective meanings ascribed thereto in the introductory paragraph of this Agreement. Such terms, together with the other terms defined in Section 1.1, shall include both the singular and the plural forms thereof and shall be construed accordingly. Use of the terms “herein”, “hereof’, and “hereunder” shall be deemed references to this Agreement in its entirety and not to the Section or clause in which such term appears. References to “Sections” and “subsections” shall be to Sections and subsections, respectively, of this Agreement unless otherwise specifically provided.

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CREDIT AGREEMENT

     1.3 Accounting Terms. Except as specifically provided otherwise in this Agreement, all accounting terms used herein that are not specifically defined shall have the meanings customarily given them, and all financial computations hereunder shall be made, in accordance with Generally Accepted Accounting Principles (or, to the extent that such terms apply solely to any Insurance Subsidiary or if otherwise expressly required, Statutory Accounting Principles). Notwithstanding the foregoing, in the event that any changes in Generally Accepted Accounting Principles or Statutory Accounting Principles after the date hereof are required to be applied to the transactions described herein and would affect the computation of the financial covenants contained in Sections 5.6 and 5.7, as applicable, such changes shall be followed only from and after the date this Agreement shall have been amended to take into account any such changes. References to amounts on particular exhibits, schedules, lines, pages and columns of any annual financial statement or quarterly financial statement of the Company and its Subsidiaries are based on the format promulgated by the NAIC for such 2005 annual financial statements and quarterly financial statements. In the event such format is changed in future years so that different information is contained in such items or they no longer exist, or if such annual financial statement or quarterly financial statement is replaced by the NAIC or by any Insurance Regulatory Authority after the date hereof such that different forms of financial statements are required to be furnished by the Insurance Subsidiaries in lieu thereof, such references shall be to information consistent with that reported in the referenced item in the 2005 annual financial statements or quarterly financial statements, as the case may be.

ARTICLE II.

THE COMMITMENTS AND THE LOANS

     2.1 Commitment of the Lender. The Lender agrees, subject to the terms and conditions of this Agreement, to make Loans to the Company and to issue Letter of Credit Advances to Account Parties pursuant to Section 2.4, from time to time, from and including the Effective Date, to but excluding the Termination Date, in an aggregate amount not to exceed the amount of its Commitment.

     2.2 Notice of Borrowings. The Company shall give the Lender verbal notice (a “Notice of Borrowing”) of each Borrowing not later than 10:00 a.m. Detroit time on (a) the Business Day on which each Alternate Base Rate Borrowing is to be made, (b) three Business Days before each Fixed Rate Borrowing and (c) five Business Days before each Letter of Credit Advance is to be made, specifying:

     (i) the date of such Borrowing, which shall be a Business Day;

     (ii) the aggregate amount of such Borrowing;

     (iii) if a Loan, whether the Loans comprising such Borrowing are to be Alternate Base Rate Loans, Negotiated Rate Loans or Eurodollar Rate Loans;

     (iv) with respect to Fixed Rate Loans, the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Negotiated Interest Period and Eurodollar Interest Period, as the case may be; and

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     (v) in the case of each Letter of Credit Advance, such information as may be necessary for the issuance thereof by the Lender.

     2.3 Limitation on Advances. Notwithstanding anything in this Agreement to the contrary, the sum of the aggregate principal amount of all Advances shall not at any time exceed the Commitment of the Lender as of the date any such Advance is made.

     2.4 Funding of Advances.

     (a) Subject to the terms and conditions of this Agreement, not later than 1:00 p.m. Detroit time on the date of each Borrowing consisting of Loans, the Lender shall make available such Borrowing, in federal or other funds immediately available in Detroit, to the Company at the address of the Lender referred to in Section 8.2 and, on the date any Letter of Credit Advance is requested to be made, issue the related Letter of Credit. Notwithstanding anything herein to the contrary, the Lender may decline to issue any requested Letter of Credit on the basis that the beneficiary, the purpose of issuance or the terms or the conditions of drawing are contrary to a policy of the Lender.

     (b) If the Lender makes a new Loan hereunder on a day on which the Company is to repay all or any part of an outstanding Loan from the Lender, the Lender shall apply the proceeds of its new Loan to make such repayment and only an amount equal to the difference (if any) between the amount being borrowed and the amount being repaid shall be made available by the Lender to the Company as provided in subsection (a) of this Section, or remitted by the Company to the Lender as provided in Section 3.5.

     2.5 Note. (a) The Loans of the Lender shall be evidenced by a single Note payable to the order of the Lender at its Applicable Lending Office in an amount equal to $10,000,000.

     (b) The Lender shall record on its books and records, and prior to any transfer of its Note shall endorse on the schedules forming a part thereof, appropriate notations to evidence, the date, amount and maturity of each Advance made by it and the date and amount of each payment of principal made by the Company with respect thereto; provided that the failure of the Lender to make any such recordation or endorsement shall not affect the obligations of the Company hereunder or under the Note. The Lender is hereby irrevocably authorized by the Company so to endorse its Note and to attach to and make a part of any Note a continuation of any such schedule as and when required. The records and endorsements of the Lender regarding the Advances made by it shall constitute prima facie evidence of the information contained therein.

     2.6 Maturity of Advances. Each Advance shall mature, and the principal amount thereof and all accrued interest thereon shall be due and payable, as described in Article III and VI hereof and elsewhere in this Agreement and the Note.

     2.7 Commitment and Letter of Credit Fees. (a) The Company agrees to pay to the Lender a commitment fee on the daily average unused amount of the Commitment, for the period from the Effective Date to and including the Termination Date, in arrears, at the rate per annum equal to the Applicable Margin. Accrued commitment fees shall be payable quarterly in arrears

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on the last Business Day of each March, June, September and December, commencing on the first such Business Day occurring after the date of this Agreement and on the Termination Date.

     (a) The Company agrees to pay, and to cause the relevant Account Party to pay, a fee to the Lender, at a per annum rate equal to the Applicable Margin on the maximum amount available to be drawn from time to time under such Standby Letters of Credit for the period from and including the date of issuance of such Standby Letter of Credit to and including the stated expiry date of such Letter of Credit. Such fees shall be payable quarterly in arrears on the last Business Day of each March, June, September and December, commencing on the first such Business Day occurring after the date of this Agreement and on termination or expiry of each Letter of Credit. The Company further agrees to pay, and to cause the relevant Account Party to pay, to the Lender, on demand, such other customary administrative fees, charges and expenses of the Lender in respect of the issuance, negotiation, acceptance, amendment, transfer and payment of such Standby Letter of Credit or otherwise payable pursuant to the application and related documentation under which such Letter of Credit is issued.

     2.8 Other Fees. The Company shall pay to the Lender such closing and other fees as may be separately agreed upon between the Company and the Lender.

     2.9 Minimum Amounts of Borrowings. Except for (a) Borrowings and conversions thereof which exhaust the entire remaining amount of the Commitment and (b) payments required pursuant to Section 3.1 or Section 3.6, each Borrowing and each continuation or conversion thereof pursuant to Section 2.15 and each prepayment thereof shall be in a minimum amount of $500,000 and in an integral multiple of $250,000. No more than six (6) Eurodollar Interest Periods shall be permitted to exist at any one time with respect to all Borrowings outstanding hereunder from time to time.

     2.10 Optional Termination or Reduction of Commitment. The Company shall have the right to terminate or reduce the Commitment without premium or penalty at any time and from time to time at its option, provided that (a) the Company shall give at least three (3) Business Days prior notice of such termination or reduction to the Lender specifying the amount and effective date thereof, (b) each partial reduction of the Commitment shall be in a minimum amount of $1,000,000 and in an integral multiples of $1,000,000, (c) no such termination or reduction shall be permitted with respect to any portion of the Commitment as to which a Notice of Borrowing is then pending and (d) the Commitment may not be terminated if any Advances are then outstanding and may not be reduced below the aggregate principal amount of all Advances then outstanding. The Commitment or any portion thereof terminated or reduced pursuant to this Section may not be reinstated.

     2.11 Mandatory Reduction or Termination of Commitment. The Commitment shall terminate on the Termination Date, and any Advances outstanding (together with accrued interest and fees thereon) pursuant to such Commitment shall be due and payable on such date.

     2.12 Conditions for First Borrowing. The obligation of the Lender to make a Advance on the occasion of the first Borrowing is subject to receipt by the Lender of the following documents and completion of the following matters, in form and substance satisfactory to the Lender:

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     (a) Charter Documents. Certificates of recent date of the appropriate authority or official of the Company’s state of incorporation listing all charter documents of the Company on file in that office and certifying as to the good standing and corporate existence of the Company together with copies of such charter documents of the Company, certified as of a recent date by such authority or official and certified as true and correct as of the Effective Date by a duly authorized officer of the Company;

     (b) By-Laws and Corporate Authorization. Copies of the by-laws of the Company together with all authorizing resolutions and evidence of other corporate action taken by the Company to authorize the execution, delivery and performance by the Company of this Agreement and the Note and the consummation by the Company of the transactions contemplated hereby, certified as true and correct as of the Effective Date by a duly authorized officer of the Company;

     (c) Incumbency Certificate. Certificates of incumbency of the Company containing, and attesting to the genuineness of, the signatures of those officers authorized to act on behalf of the Company in connection with this Agreement and the Note and the consummation by the Company of the transactions contemplated hereby, certified as true and correct as of the Effective Date by a duly authorized officer of the Company;

     (d) Consents Approvals, Etc. Copies of all governmental and nongovernmental consents, approvals, authorizations, declarations, registrations or filings, if any, required on the part of the Company in connection with the execution, delivery and performance of this Agreement or the Note or the transactions contemplated hereby or as a condition to the legality, validity or enforceability of this Agreement or the Note, certified as true and correct and in full force and effect as of the Effective Date by a duly authorized officer of the Company, or, if none are required, a certificate of such officer to that effect;

     (e) Representations and Warranties. A certificate of a senior officer of the Company to the effect that (i) the representations and warranties of the Company contained in this Agreement are true in all material respects, and (ii) no Default or Event of Default has occurred and is continuing;

     (f) Legal Opinion of Counsel for the Company. The favorable written opinion of counsel for the Company and the Guarantors with respect to the transactions and other matters         .contemplated hereby, dated the Effective Date and satisfactory in form and substance to the Lender;

     (g) Note. The Revolving Loan Note complying with Section 2.5, duly executed on behalf of the Company for the Lender;

     (h) Fees. The payment in full of all fees required to be paid by the Company on or before the Effective Date hereunder;

     (i) No Material Adverse Effect. Evidence satisfactory to the Lender that there has been no Material Adverse Effect on the Company or any of its Subsidiaries with respect to the

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financial condition of the Company and its Subsidiaries as reflected in the audited financial statements delivered to the Lender for the fiscal year ended December 31, 2005.

     (j) Adequacy of Reserves Etc. The Lender shall be satisfied: (i) that adequate reserves exist for the Insurance Subsidiaries; (ii) with the actual structure of the investment portfolio of the Insurance Subsidiaries; (iii) with the reinsurance arrangements of the Insurance Subsidiaries of the Company; and (iv) that no Material Adverse Effect has occurred with respect to any of the foregoing prior to the Effective Date.

     (k) No Litigation. Evidence satisfactory to the Lender that no litigation is pending against the Company and its Subsidiaries which could have a Material Adverse Effect.

     (l) Other Conditions. The Company shall have delivered to the Lender such other certificates and documents as the Lender may reasonably request, including without limitation any management discussion and analysis report and expense exhibit as required by the NAIC, each acceptable to the Lender.

     2.13 Further Conditions for Disbursement. The obligation of the Lender to make any Advance on the occasion of each Borrowing (including without limitation the first Borrowing) is further subject to the satisfaction of the following conditions precedent:

     (a) receipt by the Lender of a Notice of Borrowing as required under this Agreement and, in the case of any Letter of Credit Advance, the Account Party shall have delivered to the Lender an application for the related Letter of Credit, a Joinder Agreement (if the Account Party is not the Company) and other related documentation requested by and acceptable to the Lender appropriately completed and duly executed on behalf of the Account Party thereto.

     (b) the fact that, immediately after such Borrowing, the aggregate outstanding principal amount of the Borrowings will not exceed the aggregate amount of the relevant Commitment or otherwise be in excess of the amount permitted under Section 2.3;

     (c) the fact that, at the time of, and immediately after, such Borrowing, no Default or Event of Default shall have occurred and be continuing; and

     (d) the fact that the representations and warranties of the Company contained in this Agreement shall be true in all material respects as of the date of such Borrowing.

     Each Borrowing hereunder shall be deemed to be a representation and warranty by the Company on the date of such Borrowing as to the facts specified in subsection (b), (c) and (d) of this Section. For purposes of this Section the representations and warranties contained in Section 4.5 hereof shall be deemed made with respect to both the financial statements referred to therein and the most recent financial statements delivered pursuant to Section 5.4.

     2.14 Limitations of Requests and Elections. Notwithstanding any other provision of this Agreement to the contrary, if, upon receiving a request for a Eurodollar Rate Borrowing (a) in the case of any Eurodollar Rate Borrowing, deposits in Dollars for periods comparable to the Eurodollar Interest Period elected by the Company are not available to the Lender in the relevant

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CREDIT AGREEMENT

interbank secondary market, or (b) the Eurodollar Rate will not adequately and fairly reflect the cost to the Lender of making, funding or maintaining the related Eurodollar Rate Loan, or (c) by reason of national or international financial, political or economic conditions or by reason of any applicable law, treaty, rule or regulation (whether domestic or foreign) now or hereafter in effect, or the interpretation or administration thereof by any governmental authority charged with the interpretation or administration thereof, or compliance by the Lender with any guideline, request or directive of such authority (whether or not having the force of law), including without limitation exchange controls, it is impracticable, unlawful or impossible for the Lender (i) to make or fund Eurodollar Rate Borrowings or (ii) to maintain outstanding such Eurodollar Rate Borrowing, or (iii) to convert a Loan to a Eurodollar Rate Loan, then the Company shall not be entitled, so long as such circumstances continue, to request a Eurodollar Rate Borrowing or a continuation of or conversion to a Eurodollar Rate Borrowing. In the event that such circumstances no longer exist, the Lender shall again consider requests for Eurodollar Rate Borrowings, and requests for continuations of and conversions to Eurodollar Rate Borrowings.

ARTICLE III.

PAYMENTS AND PREPAYMENTS OF LOANS

     3.1 Principal Parents and Prepayments.

     (a) Unless earlier payment is required under this Agreement, the Company shall pay to the Lender the principal amount on each Eurodollar Rate Loan included in any Revolving Credit Borrowing on the last day of the Eurodollar Interest Period applicable thereto or on the Termination Date, whichever is earlier, and the principal amount of each Alternate Base Rate Loan included in any Revolving Credit Borrowing shall be due and payable on the Termination Date.

     (b) The Company may, upon two Business Days notice to the Lender, prepay any Alternate Base Rate Borrowing without premium or penalty in whole at any time, or from time to time in part in a minimum amount of $500,000 and in integral multiples of $250,000, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. The Company may not prepay any Eurodollar Rate Borrowing except on the last day of the relevant Eurodollar Interest Period. Each such optional prepayment shall be applied to prepay the Advances.

     All notices of prepayment that are delivered to the Lender by the Company pursuant to this Section 3.1 shall be delivered by 10:00 a.m. Detroit time on the relevant Business Day or if delivered at a later time shall be deemed to have been delivered as of the next Business Day. A notice of prepayment shall not be revocable by the Company after the Lender receives notice thereof.

     (c) If at any time the aggregate outstanding principal amount of the Advances shall exceed the Commitment, the Company shall forthwith pay to the Lender, without demand, an amount not less than the amount of such excess for application to the outstanding principal of the Advances.

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     3.2 Interest Payments. The Company shall pay interest to the Lender on the unpaid principal amount of each Loan, for the period commencing on the date such Loan is made until such Loan is paid in full, on each Interest Payment Date and at maturity (whether at stated maturity, by demand, by acceleration or otherwise), and thereafter on demand, at the following rates per annum:

     (a) with respect to each Alternate Base Rate Loan, the Alternate Base Rate;

     (b) with respect to each Eurodollar Rate Loan, the Eurodollar Rate.

     (c) with respect to each Negotiated Rate Loan, the Negotiated Rate.

     Notwithstanding the foregoing subsections (a), (b) and (c), the Company shall pay interest on demand at the Overdue Rate on the outstanding principal amount of any Loan and any other amount payable by the Company hereunder (other than interest) which is not paid in full when due (whether at stated maturity, by demand, by acceleration or otherwise) for the period commencing on the due date thereof until the same is paid in full.

     3.3 General Provisions as to Payments. The Company shall make each payment of principal of, and interest on, the Advances and of fees and other amounts payable hereunder, not later than 10:00 a.m. Detroit time on the date when due, in federal or other funds immediately available in Detroit, to the Lender at its address referred to in Section 8.2. Whenever any payment of principal of, or interest on, Alternate Base Rate Loans or any commitment, facility, or other fee or expense payable hereunder shall be due on a day which is not a Business Day, the date for payment thereof shall be extended to the next succeeding Business Day. Whenever any payment of principal of, or interest on, the Eurodollar Rate Loans shall be due on a day which is not a Business Day, the date for payment thereof shall be extended to the next succeeding Business Day unless such Business Day falls in another calendar month, in which case the date for payment thereof shall be the next preceding Business Day. If the date for any payment of principal is extended pursuant to this Section, by operation of law, or otherwise, interest thereon shall be payable for such extended time.

     3.4 Computation of Interest and Fees. Interest and fees based on the Advances and facility fees hereunder shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day).

     3.5 No Setoff or Deduction. All payments of principal of and interest and fees on the Advances and other amounts payable by the Company hereunder shall be made by the Company without setoff or counterclaim, and free arid clear of, and without deduction or withholding for, or on account of, any present or future taxes, levies, imposts, duties, fees, assessments, or other charges of whatever nature, imposed by any governmental authority, or by any department, agency or other political subdivision or taxing authority.

     3.6 Additional Costs.

     (a) In the event that the adoption of, or any change in or in the interpretation by any governmental authority of, any applicable law, treaty, rule or regulation (whether domestic or

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foreign), or compliance by the Lender with any guideline, request or directive of any governmental authority that is promulgated, made, issued, or changed (whether or not having the force of law), shall (i) change the basis of taxation of payments to the Lender of any amounts payable by the Company under this Agreement (other than taxes imposed on the overall net income of the Lender, by the jurisdiction, or by any political subdivision or taxing authority of any such jurisdiction, in which the Lender has its principal office), or (ii) shall impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by the Lender, or (iii) shall impose any other condition wit respect to this Agreement, the Commitment, the Note or the Advances, and the result of any of the foregoing is to increase the cost to the Lender, of making, funding or maintaining any Eurodollar Rate Loan or to reduce the amount of any sum receivable by the Lender thereon, then the Company shall pay to the Lender, from time to time, upon request by the Lender, additional amounts sufficient to compensate the Lender for such increased cost or reduced sum receivable to the extent, in the case of any Eurodollar Rate Loan, the Lender is not compensated therefor in the computation of the interest rate applicable to such Eurodollar Rate Loan or pursuant to subsection (b) of this Section. A statement as to the amount of such increased cost or reduced sum receivable and reason therefor, prepared in good faith and in reasonable detail by the Lender and submitted by the Lender to the Company, shall be conclusive and binding for all purposes absent manifest error in computation.

     (b) In the event that any applicable law, rule, regulation, or guideline now in effect relating to capital adequacy, or that the adoption of, or any change in or in the interpretation by any governmental authority of any applicable law, treaty, rule or regulation (whether domestic or foreign), or that compliance by the Lender with any guideline, request or directive of any governmental authority (whether or not having the force of law) relating to capital adequacy, or that is promulgated, made, issued, or changed, including any risk-based capital guidelines, affects or would affect the amount of capital required or expected to be maintained by the Lender (or any corporation controlling the Lender) and the Lender determines that the amount of such capital required or expected to be maintained is increased by or based upon the existence of the Lender’s obligations hereunder and such increase has the effect of reducing the rate of return on the Lender’s (or such controlling corporation’s) capital as a consequence of such obligations hereunder to a level below that which the Lender (or such controlling corporation) could have achieved but for such circumstances (taking into consideration its policies with respect to capital adequacy) by an amount deemed by the Lender to be material, then the Company shall pay to the Lender, from time to time, upon request by the Lender, additional amounts sufficient to compensate the Lender (or such controlling corporation) for any increase in the amount of capital and reduced rate of return which the Lender reasonably determines to be allocable to the existence of the Lender’s obligations hereunder. A statement as to the amount of such compensation and reason therefor, prepared in good faith and in reasonable detail by the Lender and submitted by the Lender to the Company, shall be conclusive and binding for all purposes absent manifest error in computation.

     (c) The Lender shall not charge any amount under this Section 3.6 unless it is charging other borrowers similarly-situated to the Company, as reasonably determined by the Lender, similar amounts.

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     3.7 Illegality and Impossibility. In the event that the adoption of, or any change in or in the interpretation by any governmental authority of, any applicable law, treaty, rule or regulation (whether domestic or foreign), or compliance by the Lender with any guideline, request or directive of any governmental authority that is promulgated, made, issued, or changed (whether or not having the force of law), including without limitation exchange controls, shall make it unlawful or impossible for the Lender to maintain any Eurodollar Rate Loan under this Agreement, the Company shall upon receipt of notice thereof from the Lender, repay in full the ten outstanding principal amount of each Eurodollar Rate Loan so affected, together with all accrued interest thereon to the date of payment and all amounts owing to the Lender under Section 3.10, (a) on the last day of the then current Eurodollar Interest Period applicable to such Loan if the Lender may lawfully continue to maintain such Loan to such day, or (b) immediately if the Lender may not continue to maintain such Loan to such day. The Lender shall not charge any amount under this Section 3.7 unless it is charging other borrowers similarly-situated to the Company, as reasonably determined by the Lender, similar amounts.

     3.8 Funding Losses. If the Company makes any payment of principal with respect to any Fixed Rate Loan on any day other than the last day of an Interest Period applicable thereto (whether pursuant to Section 3.1, Section 3.7, Article VI or otherwise), or if the Company fails to borrow any Fixed Rate Loan after notice has been given to the Lender in accordance with Section 2.2, or if the Company fails to make any payment of principal or interest in respect of a Fixed Rate Loan when due, the Company shall, in addition to any amounts that may be payable pursuant to Section 3.6 or 3.7 reimburse the Lender on demand for any resulting loss or expense incurred by the Lender, including without limitation any loss incurred in obtaining, liquidating or employing deposits from third parties and anticipated profits in connection with any participation of Loans hereunder. A statement as to the amount of such loss or expense and reason therefor, prepared in good faith and in reasonable detail by the Lender and submitted by the Lender to the Company, shall be conclusive and binding for all purposes in the absence of manifest error in computation.

     3.9 Letter of Credit Reimbursement Payments. (a) The Account Party agrees to pay to the Lender, on the day on which the Lender shall honor a draft or other demand for payment presented or made under any Letter of Credit an amount equal to the amount paid by the Lender in respect of such draft or other demand under such Letter of Credit and all expenses paid or incurred by the Lender relative thereto. Each reimbursement amount not paid pursuant to the first sentence of Section 3.9(a) shall bear interest, payable on demand by the Lender, at the interest rate then applicable to Alternate Base Rate Loans.

     (b) The reimbursement obligation of the Account Party under this Section 3.9 shall be absolute, unconditional and irrevocable and shall remain in full force and effect until all obligations of the Account Party to the Lender hereunder shall have been satisfied, and such obligations of the Account Party shall not be affected, modified or impaired upon the happening of any event, including without limitation, any of the following, whether or not with notice to, or the consent of, the Account Patty:

          (i) Any lack of validity or enforceability of any Letter of Credit or any documentation relating to any Letter of Credit or to any transaction related in any way to such Letter of Credit (the “Letter of Credit Documents”);

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          (ii) Any amendment, modification, waiver, consent, or any substitution, exchange or release of or failure to perfect any interest in collateral or security, with respect to any of the Letter of Credit Documents;

          (iii) The existence of any claim, setoff, defense or other right which the Account Party may have at any time against any beneficiary or any transferee of any Letter of Credit (or any persons or entities for whom any such beneficiary or any such transferee may be acting), the Lender or any other person or entity, whether in connection with any of the Letter of Credit Documents, the transactions contemplated herein or therein or any unrelated transactions;

          (iv) Any draft or other statement or document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any, respect;

          (v) Payment by the Lender to the beneficiary under any Letter of Credit against presentation of a document which does not comply with the terms of the Letter of Credit, including failure of any documents to bear any reference or adequate reference to such Letter of Credit;

          (vi) Any failure, omission, delay or lack on the part of the Lender or any party to any of the Letter of Credit Documents to enforce, assert or exercise any right, power or remedy conferred upon the Lender or any such party under this Agreement or any of the Letter of Credit Documents, or any other acts or omissions on the part of the Lender or any such party;

          (vii) Any other event or circumstance that would, in the absence of this clause, result in the release or discharge by operation of law or otherwise of the Account Party from the performance or observance of any obligation, covenant or agreement contained in this Section 3.9.

          No setoff, counterclaim, reduction or diminution of any obligation or any defense of any kind or nature which the Account Party has or may have against the beneficiary of any Letter of Credit shall be available hereunder to the Account Party against the Lender. Nothing in this Section 3.9 shall limit the liability, if any, of the Lender to the Account Party pursuant to Section 7.5.

     (c) For purposes of this Agreement, a Letter of Credit Advance (i) shall be deemed outstanding in an amount equal to the sum of the maximum amount available to be drawn under the related Letter of Credit on or after the date of determination and on or before the stated expiry date thereof plus the amount of any draws under such Letter of Credit that have not been reimbursed as provided in this Section 3.9 and (ii) shall be deemed outstanding at all times on and before such stated expiry date or such earlier date on which all amounts available to be drawn under such Letter of Credit have been fully drawn, and thereafter until all related reimbursement obligations have been paid pursuant to this Section 3.9.

ARTICLE IV.

REPRESENTATION AND WARRANTIES

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     The Company represents and warrants to the Lender that:

     4.1 Organizing and Good Standing. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware, and the Company is duly qualified to transact business and is in good standing in each jurisdiction where such qualification is necessary, and the Company has all requisite power and authority, corporate or otherwise, to conduct its business, to own and operate its properties and to execute and deliver, and to perform all of its obligations under, this Agreement and the Note.

     4.2 Due Authorization. The execution, delivery and performance by the Company of this Agreement and the Note have been duly authorized by all necessary corporate action and do not and will not (a) require any consent or approval of the stockholders of the Company, (b) violate, any provision of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to the Company or of the Certificate of Incorporation or By-Laws of the Company, or (c) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, Lease or instrument to which the Company is a party or by which it or its properties may be bound or affected; and the Company is not in default under any such law, rule, regulation, order, writ, judgment, injunction, decree, determination or award or any such indenture, agreement, lease or instrument where such default could have a Material Adverse Effect.

     4.3 Third-Party Consents. No authorization, consent, approval, license, exemption of or filing or registration with any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, is or will be necessary to the valid execution, delivery or performance by the Company of this Agreement or the Note.

     4.4 Validity of Agreements. This Agreement constitutes, and the Note when delivered hereunder will constitute, legal, valid and binding obligations of the Company enforceable against the Company in accordance with their terms.

     4.5 Financial Statements.

     (a) The consolidated financial statements of the Company and its Subsidiaries for the fiscal year ended December 31, 2005, certified by BDO Seidman, LLP, independent public accountants, copies of which have been furnished to the Lender, fairly present the consolidated financial condition of the Company and its Subsidiaries as at such date and the consolidated results of the operations of the Company and its Subsidiaries for the period ended on such date, all in accordance with Generally Accepted Accounting Principles applied on a consistent basis. Since December 31, 2005, there has been no Material Adverse Effect and there exists no event, condition, or state of facts that could reasonably be expected to result in a Material Adverse Effect.

     (b) The Company has heretofore furnished to the Lender copies of the annual financial statements of each of the Insurance Subsidiaries as of December 31, 2005, 2004, 2003 and 2002, and for the fiscal years then ended, each as filed with the relevant Insurance Regulatory Authority (collectively, the “Historical Statutory Statements”). The Historical Statutory Statements (including, without limitation, the provisions made therein for investments

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and the valuation thereof, reserves, policy and contract claims and statutory liabilities) have been prepared in accordance with Statutory Accounting Principles (except as may be reflected in the notes thereto and subject, with respect to the relevant quarterly statements, to the absence of notes required by Statutory Accounting Principles and to normal year-end adjustments), were in compliance with applicable Requirements of Law when filed and present fairly the financial condition of the respective Insurance Subsidiaries covered thereby as of the respective dates thereof and the results of operations, changes in capital and surplus and cash flow of the respective Insurance Subsidiaries covered thereby for the respective periods then ended. Except for liabilities and obligations disclosed or provided for in the Historical Statutory Statements (including, without limitation, reserves, policy and contract claims and statutory liabilities), no Insurance Subsidiary had, as of the date of its respective Historical Statutory Statements, any material liabilities or obligations of any nature whatsoever (whether absolute, contingent or otherwise and whether or not due) that, in accordance with Statutory Accounting Principles, would have been required to have been disclosed or provided for in such Historical Statutory Statements. All books of account of each Insurance Subsidiary fully and fairly disclose all of its material transactions, properties, assets, investments, liabilities and obligations, are in its possession and are true, correct and complete in all material respects.

     4.6 Litigation. There are no actions, suits or proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company or any Subsidiary or the properties of the Company or any Subsidiary before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which, if determined adversely to the Company or such Subsidiary, could have a Material Adverse Effect.

     4.7 Regulations T, U and X. The Company is not engaged as one of its principal activities in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations T, U or X of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any Advance hereunder will be used, directly or indirectly, to purchase or carry any margin stock or for any other purpose that would violate any of the margin regulations of the Board of Governors.

     4.8 Title to Property. The Company and the Subsidiaries have good and marketable title to their respective properties and assets, including the properties and assets reflected in the most recent audited financial statements referred to in Section 4.5 or delivered pursuant to Section 5.4, subject to no Lien except Permitted Liens.

     4.9 Other Agreements. Neither the Company nor any of its Subsidiaries is a party to any indenture, loan or credit agreement or any lease or other agreement or instrument or subject to any charter or corporate restriction which would have a Material Adverse Effect.

     4.10 Taxes. The Company and each Consolidated Subsidiary have filed all tax returns (Federal, state and local) required to be filed and paid all taxes shown thereon to be due, including interest and penalties, or provided adequate reserves for payment thereof.

     4.11 Accuracy of Information. No information, exhibit or report furnished in writing by the Company to the Lender in connection with the negotiation of this Agreement contained

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any material misstatement of fact or omitted to state a material fact or any fact necessary to make the statements contained therein not materially misleading at the time that they were made.

     4.12 Subsidiaries.

     (a) The list of Subsidiaries and their jurisdictions of incorporation and addresses, set forth on Schedule 4.12 hereto is accurate and complete as of the Effective Date. Each Subsidiary is a corporation duly incorporated, validly existing and in good standing (where the concept of good standing applies) under the laws of the state of its incorporation, is duly qualified to transact business and is in good standing (where the concept of good standing applies) in each jurisdiction where such qualification is necessary, and has all requisite power and authority, corporate or otherwise, to conduct its business, and to own and operate its properties. All outstanding shares of Capital Stock of each class of each Subsidiary of the Company have been and will be validly issued and are and will be fully paid and nonassessable and such shares that are and will be owned, beneficially and of record, by the Company are or will be free and clear of any liens, other than Liens disclosed on Schedule 5.11 hereto.

     (b) Each Insurance Subsidiary holds all licenses (including, without limitation, licenses or certificates of authority from relevant Insurance Regulatory Authorities), permits or authorizations to transact insurance and reinsurance business (collectively, the “Licenses”), necessary for such Insurance Subsidiaries to engage in the line or lines of insurance in which each such Insurance Subsidiary is engaged. To the knowledge of the Company, (i) no such License is the subject of a proceeding for suspension, revocation or limitation or any similar proceedings, (ii) there is no sustainable basis for such a suspension, revocation or limitation, and (iii) no such suspension, revocation or limitation is threatened by any relevant Insurance Regulatory Authority, that, in each instance under (i), (ii) and (iii) above, would be reasonably likely, individually or in the aggregate, to have a Material Adverse Effect.

     (c) Other than existing regulatory restrictions applicable to insurance companies generally, none of the Insurance Subsidiaries is subject to any regulatory prohibition on the payment of normal dividends in the 2005 fiscal year or in any year thereafter.

     4.13 ERISA. The Company, its Subsidiaries, their ERISA Affiliates and their respective Plans are in compliance in all material respects with those provisions of ERISA and of the Code which are applicable with respect to any Plan. No Prohibited Transaction and no Reportable Event has occurred with respect to any such Plan that would reasonably be likely, individually or in the aggregate, to have a Material Adverse Effect. None of the Company, any of its Subsidiaries or any of their ERISA Affiliates is an employer with respect to any Multiemployer Plan. The Company, its Subsidiaries and their ERISA Affiliates have met the minimum funding requirements under ERISA and the Code with respect to each of their respective Plans, if any, and have not incurred any liability to the PBGC or any Plan other than obligations in the ordinary course of business to make Plan contributions and pay PBGC premiums which have been paid when due. The execution, delivery and performance of this Agreement and the Note does not constitute a Prohibited Transaction with respect to any Plan. There is no material unfunded benefit liability, determined in accordance with Section 4001(a)(18) of ERISA, with respect to any Plan of the Company, its Subsidiaries or their ERISA Affiliates in excess of $50,000 as of January 1, 2006.

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     4.14 Environmental and Safety Matters. The Company and each Subsidiary is in substantial compliance with all federal, state and local laws, ordinances and regulations relating to safety and industrial hygiene or to the environmental condition, including without limitation all applicable Environmental Laws in jurisdictions in which the Company or any Subsidiary owns or operates, or has owned or operated, a facility or site, or arranges or has arranged for disposal or treatment of hazardous substances, solid waste, or other wastes, accepts or has accepted for transport any hazardous substances, solid wastes or other wastes or holds or has held any interest in real property or otherwise. No demand, claim, notice, suit, suit in equity, action, administrative action, investigation or inquiry whether brought by any governmental authority, private person or entity or otherwise, arising under, relating to or in connection with any Environmental Laws is pending or threatened against the Company or any of its Subsidiaries, any real property in which the Company or any such Subsidiary holds or has held an interest or any past or present operation of the Company or any Subsidiary. Neither the Company nor any of its Subsidiaries (a) is the subject of any federal or state investigation evaluating whether any remedial action is needed to respond to a release of any toxic substances, radioactive materials, hazardous wastes or related materials into the environment, (b) has received any notice of any toxic substances, radioactive materials, hazardous waste or related materials in, or upon any of its properties in violation of any Environmental Laws, or (c) has knowledge of any facts, events or conditions which would reasonably be expected to result in or give rise to such investigation, notice or violation. No release, threatened release or disposal of hazardous waste, solid waste or other wastes is occurring or has occurred on, under or to any real property in which the Company or any of its Subsidiaries holds any interest or performs any of its operations, in violation of any Environmental Law which could reasonably be expected to have a Material Adverse Effect.

     4.15 Reportable Transaction. The Company does not intend to treat the Advances and related transactions as being a “reportable transaction” (within the meaning of Treasury Regulation Section 1.6011-4). In the event the Company determines to take any action inconsistent with such intention, it will promptly notify the Lender thereof.

     4.16 FMH Senior Note Debt Documents. As of the Effective Date, the outstanding principal balance of the FMH Senior Notes is $65,000,000 and all substantive (i.e., excluding officer certificates, resolutions, opinions and other deliveries to be made FMH in respect of the issuance of the FMH Senior Notes) agreements, instruments and documents executed or delivered pursuant to the issuance of the FMH Senior Notes are described on Schedule 4.16 hereto. Neither the Company nor any of its Subsidiaries is or will be liable, either directly, pursuant to any Contingent Obligation or otherwise, for any FMH Senior Note Debt and nothing in any FMH Senior Note Debt Document or other document or agreement evidencing or relating to any FMH Senior Note Debt outstanding or to be outstanding obligates the Company or any of its Subsidiaries to pay any amount of the FMH Senior Note Debt or redeem any of its Capital Stock or incur any other obligation.

     4.17 Guarantors. As of the Effective Date: (a) excluding CoverX Corporation, ARPCO, ARPCO Holdings and Van American Insurance Services, Inc., all non-Insurance Subsidiaries of the Company do not have total assets or annual revenues in excess of $500,000 in the aggregate and (b) the only asset of Van American Insurance Services, Inc. is a note

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receivable from the sale of all its assets in an amount not to exceed $1,000,000, as reduced from time to time, and payments on such note are dividended to the Company.

ARTICLE V.

COVENANTS OF THE COMPANY

     The Company covenants and agrees that until all Advances and other amounts due hereunder are irrevocably paid in full, and the Commitment shall expire or terminate, unless the Lender shall otherwise consent in writing:

     5.1 Preservation of Corporate Existence Etc. It will do or cause to be done, and cause all Subsidiaries to do or cause to be done, all things necessary to preserve, renew and keep in full force and effect its legal existence, except to the extent permitted by Section 5.12, and its qualification as a foreign corporation in good standing in each jurisdiction in which such qualification is necessary under applicable law, and the rights, licenses, permits (including those required under Environmental Laws), franchises, patents, copyrights, trademarks and trade names material to the conduct of its businesses; and defend all of the foregoing against all claims, actions, demands, suits or proceedings at law or in equity or by or before any governmental instrumentality or other agency or regulatory authority, except where the failure to do so would not have a Material Adverse Effect.

     5.2 Compliance with laws Etc. It will, and will cause each Subsidiary to, comply in all material respects with all Requirements of Law in effect from time to time; and pay and discharge promptly when due all taxes, assessments and governmental charges or levies imposed upon it or upon its income, revenues or property, before the same shall become delinquent or in default, as well as all lawful claims for labor, materials and supplies or otherwise, which, if unpaid, might give rise to Liens upon such properties or any portion thereof, except to the extent that payment of any of the foregoing is then being contested in good faith by appropriate legal proceedings and with respect to which adequate financial reserves have been established on the books and records of the Company or such Subsidiary.

     5.3 Maintenance of Properties; Insurance. It will, and will cause each Subsidiary to, maintain, preserve and protect all property that is material to the conduct of the business of the Company or any of its Subsidiaries and keep such property in good repair, working order and condition and from time to time make, or cause to be made all needful and proper repairs, renewals, additions, improvements and replacements thereto necessary in order that the business carried on in connection therewith may be properly conducted at all times in accordance with customary and prudent business practices for similar businesses; and maintain in full force and effect insurance with responsible and reputable insurance companies or associations in such amounts, on such terms and covering such risks, including fire and other risks insured against by extended coverage, as is usually carried by companies engaged in similar businesses and owning similar properties similarly situated and maintain in full force and effect public liability insurance, insurance against claims for personal injury or death or property damage occurring in connection with any of its activities or any of any properties owned, occupied or controlled by it, in such amount as it shall reasonably deem necessary, and maintain such other insurance as may

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be required by law or as may be reasonably requested by the Lender for purposes of assuring compliance with this Section 5.3.

     5.4 Reporting Requirements. It will furnish to the Lender the following:

     (a) Promptly and in any event within three calendar days after becoming aware of the occurrence of (i) any Event of Default or Default, (ii) the commencement of any material litigation against, by or affecting the Company or any of its Subsidiaries, and any material developments therein, or (iii) entering into any material contract or undertaking that is not entered into in the ordinary course of business or (iv) any development in the business or affairs of the Company or any of its Subsidiaries which has resulted in or which is likely in the reasonable judgment of the Company, to result in a Material Adverse Effect, a statement of the chief financial officer of the Company setting forth details of such Event of Default or Default or such event or condition or such litigation and the action which the Company or such Subsidiary, as the case may be, has taken and proposes to take with respect thereto;

     (b) As soon as available and in any event within 60 days after the end of each of the first three fiscal quarters of each fiscal year of the Company, the consolidated balance sheet of the Company and its Subsidiaries as of the end of such quarter, and the related consolidated statements of income, retained earnings and changes in financial position for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, and if requested by the Lender such consolidating financial statements, setting forth in each case in comparative form the corresponding figures for the corresponding date or period of the preceding fiscal year, all in reasonable detail and duly certified (subject to year-end audit adjustments) by the chief financial officer of Company as having been prepared in accordance with Generally Accepted Accounting Principles, together with a certificate of the chief financial officer of Company stating that no Event of Default or Default has occurred and is continuing or, if an Event of Default or Default has occurred and is continuing, a statement setting forth the details thereof and the action which the Company has taken and proposes to take with respect thereto;

     (c) As soon as available and in any event within 60 days after the end of each of the first three fiscal quarters of each fiscal year of the Company’s Insurance Subsidiaries, a quarterly financial statement prepared in substantially the same form as and in accordance with the statutory and regulatory requirements of the annual financial statements of the Company’s Insurance Subsidiaries, which such Subsidiaries are required to be filed with any state board, commission, department or other regulatory body, together with a certificate of the chief financial officer of each such insurance Subsidiary stating that a computation (which computation shall accompany such certificate and shall be in reasonable detail) showing compliance with Sections 5.6 and 5.7 hereof in conformity with the terms of this Agreement;

     (d) As soon as available and in any event within 105 days after the end of each fiscal year of the Company, a copy of the consolidated balance sheet of the Company and its Subsidiaries and the unconsolidated balance sheet of the Company as of the end of such fiscal year and the related consolidated statements of income and cash flow of the Company and its Subsidiaries on a consolidated basis and for the Company on an unconsolidated basis for such fiscal year and, if requested by the Lender, such consolidating financial statements for such fiscal

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year, and in the case of such consolidated financial statements, certified without qualifications unacceptable to the Lender by BDO Seidman, LLP, or other independent certified public accountants selected by the Company and acceptable to the Lender and in the case of such unconsolidated financial statements of the Company only, in reasonable detail and duly certified by the chief financial officer of the Company as having been prepared in accordance with Generally Accepted Accounting Principles, in each case together with a certificate of the chief financial officer of the Company stating that no Event of Default or Default has occurred and is continuing or, if an Event of Default or Default has occurred and is continuing, a statement setting forth the details thereof and the action in which the Company has taken and proposes to take with respect thereto;

     (e) As soon as available and in any event within 105 days after the end of each fiscal year of the Company’s Insurance Subsidiaries, annual financial statements of the Company’s Insurance Subsidiaries, which such Subsidiaries are required to file with any state board, commission, department or other regulatory body, together with a certificate of the chief financial officer of each such insurance Subsidiary stating that a computation (which computation shall accompany such certificate and shall be in reasonable detail) showing compliance with Sections 5.5, 5.6, 5.7 and 5.8 hereof in conformity with the terms of this Agreement;

     (f) Promptly after the sending or filing thereof, copies of all reports, proxy statements and financial statements which the Company or any of its Subsidiaries sends to or files with any of their respective security holders or any securities exchange or the SEC;

     (g) Promptly and in any event within 10 calendar days after receiving or becoming aware thereof (i) a copy of any notice of intent filed with the PBGC to terminate any Plan of the Company, its Subsidiaries or any ERISA Affiliate, (ii) a statement of the chief financial officer of the Company setting forth the details of the occurrence of any Reportable Event with respect to any such Plan, (iii) a copy of any notice that the Company, any of its Subsidiaries or any ERISA Affiliate may receive from the PBGC relating to the intention of the PBGC to terminate any such Plan or to appoint a trustee to administer any such Plan, or (iv) a copy of any notice of failure to make a required installment or other payment within the meaning of Section 412(n) of the Code or Section 302(f) of ERISA with respect to any such Plan; and

     (h) Promptly, such other information respecting the business, properties, operations or condition, financial or otherwise, of the Company or any of it Subsidiaries as the Lender may from time to time reasonably request, including without limitation, promptly after the sending or filing thereof, copies of all management discussion and analysis reports required by the NAIC and any expense exhibit as required by the NAIC, each in form and detail satisfactory to the Lender.

     5.5 Shareholder’s Equity. It will not permit or suffer the consolidated shareholders’ equity of the Company and its Subsidiaries, determined on a consolidated basis in accordance with Generally Accepted Accounting Principles, but excluding the effects of FASB 115, at any time to be less than the sum of: (i) $55,000,000; (ii) 25% of the Company’s Net Income for each fiscal year of the Company ended on or after December 31, 2007, provided, if Net Income is negative, such number will be zero; and (iii) 50% of the net proceeds to the Company from the

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issuance of any Capital Stock after the Effective Date. Notwithstanding the foregoing, the amount set forth in the foregoing clause (i) shall be reset as of December 31, 2006 to an amount equal to 85% of the consolidated shareholders’ equity of the Company and its Subsidiaries as of December 31, 2006 (provided such amount is acceptable to the Lender); provided that, (a) if the IPO is completed on or before December 31, 2006 such amount shall be determined after giving effect to the IPO and (b) if the IPO is completed after December 31, 2006, such amount shall again be reset upon the completion of the IPO to an amount equal to 85% of the consolidated shareholders’ equity of the Company and its Subsidiaries after giving effect to the IPO (provided in each case that such amount is acceptable to the Lender).

     5.6 Leverage Ratio. At any time on or after an IPO has been completed (but not at any time prior to the completion of an IPO), it will not permit or suffer the Leverage Ratio to be greater than: (i) to 1.0 at any time from and including January 1, 2005 to and including December 31, 2006; (iii) to 1.0 at any time from and including January 1, 2007 to and including December 31, 2007; and 0.30 to 1.0 at any time from and including January 1, 2008 and thereafter.

     5.7 Fixed Charge Coverage Ratio. It will not permit or suffer the Fixed Charge Coverage Ratio to be less than 4.0 to 1.0 as determined as of the end of any fiscal quarter of the Company.

     5.8 Risk-Based Capital. The Company will not permit “total adjusted capital” (within the meaning of the Risk-Based Capital for Insurers Model Act as promulgated by the NAIC as of the Effective Date (the “Model Act”)) of FMIC or of any of its existing or future Insurance Subsidiaries (on a combined basis, but excluding ANIC), in each case as determined as of the end of each fiscal year, commencing with the fiscal year ending December 31, 2006, to be less than 162.5% of the applicable “Company Action Level RBC” (within the meaning of the Model Act) for such Insurance Subsidiary.

     5.9 Ratings. The Company will not permit or suffer the A.M. Best rating of any of its Insurance Subsidiaries (excluding ANIC) to be less than “B++” at any time.

     5.10 Surplus. It will not permit or suffer the “surplus as regards policyholders” (calculated in accordance with SAP), as determined as of the end of any fiscal quarter of FMIC, ANIC or of any of its existing or future Insurance Subsidiaries (on a combined basis) at any time to be less than the sum of: (i) $57,500,000; (ii) 25% of the Company’s Net Income for each succeeding fiscal year of the Company ended on or after December 31, 2007, provided, if Net Income is negative, such number will be zero; and (iii) 50% of the net proceeds to the Company from the issuance of any Capital Stock after the Effective Date that would be considered as such “surplus as regards policyholders”. Notwithstanding the foregoing, the amount set forth in the foregoing clause (i) shall be reset upon the completion of an IPO acceptable to the Lender in an amount equal to 85% of such “surplus as regards policyholders” after giving effect to such IPO, provided such amount is acceptable to the Lender.

     5.11 Lens. It will not permit or suffer any Lien to exist on any of its properties, or any property of any Consolidated Subsidiary, real, personal or mixed, tangible or intangible, whether now owned or hereafter acquired, except:

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     (a) Liens for taxes not delinquent or for taxes being contested in good faith by appropriate proceedings and as to which adequate financial reserves have been established on its books and records;

     (b) Liens (other than any Lien imposed by ERISA) created and maintained in the ordinary course of business which are not material in the aggregate, and which would not have a Material Adverse Effect and which constitute (i) pledges or deposits under worker’s compensation laws, unemployment insurance laws or similar legislation, (ii) good faith deposits in connection with bids, tenders, contracts or leases to which the Company or any of its Subsidiaries is a party for a purpose other than borrowing money or obtaining credit, including rent security deposits, (iii) liens imposed by law, such as those of carriers, warehousemen and mechanics, if payment of the obligation secured thereby is not yet due, (iv) Liens securing taxes, assessments or other governmental charges or levies not yet subject to penalties for nonpayment, and (v) pledges or deposits to secure public or statutory obligations of the Company or any of its Subsidiaries, or surety, customs or appeal bonds to which the Company or any of its Subsidiaries is a party;

     (c) Liens affecting real property which constitute minor survey exceptions or defects or irregularities in title, minor encumbrances, easements or reservations of, or rights of others for, rights of way, sewers, electric lines, telegraph and telephone lines and other similar purposes, or zoning or other restrictions as to the use of such real property, provided that all of the foregoing, in the aggregate, do not at any time materially detract from the value of said properties or materially impair their use in the operation of the businesses of the Company or any of its Subsidiaries;

     (d) Each Lien described in Schedule 5.11 hereto may be suffered to exist upon the same terms as those existing on the date hereof, but no extension or renewal thereof shall be permitted; and

     (e) Any Lien created to secure payment of a portion of the purchase price of any tangible fixed asset acquired by the Company or any of its Subsidiaries or payments under any Capital Lease for the lease of any tangible fixed asset leased by the Company or any of its Subsidiaries may be created or suffer to exist upon such fixed asset if the outstanding principal amount of the Indebtedness secured by such Lien does not at any time exceed the purchase price of such fixed asset and the aggregate principal amount of all such Indebtedness secured by such Liens (including without limitation the capitalized amount of all such Capital Leases) does not exceed at any time an amount equal to $10,000,000, provided that such Lien does not encumber any other asset at any time owned by the Company or such Subsidiary.

     5.12 Merger, Consolidation, Lease-Back, or Sale of Assets. It will not, and will not allow any Subsidiary to, merge or consolidate with any other corporation or entity, or, sell, lease or transfer or otherwise dispose of any assets or business to any Person, except (a) the Company and its Subsidiaries may sell or transfer investments made in the ordinary course of business or enter into leases in the ordinary course of business provided that at the time of any such transaction, and after giving effect to each such transaction, no Default or Event of Default exists or would exist, and (b) the Company and its Subsidiaries may sell, lease, transfer or otherwise dispose of other assets which in the aggregate for all such assets sold, leased, transferred or

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otherwise disposed of do not constitute a Substantial Portion of the assets of the Company and its Subsidiaries, provided that at the time of any such sale, and after giving effect to each such transaction, no Default or Event of Default exists or would exist. Notwithstanding the foregoing, FMH may undertake an P0 on terms satisfactory the Lender, including without limitation (i) the allowance of a merger between FMH and the Company on terms satisfactory the Lender, with the resulting entity assuming all obligations hereunder, (ii) the use of the P0 proceeds to pay all existing debt of FMH, (iii) the allowance of a portion of the P0 proceeds to be paid to the shareholders of FMH, and (iv) such other terms and conditions to be determined and reasonably acceptable to the Lender.

     5.13 Dividends. The Company will take all action necessary to cause its Subsidiaries to make such dividends, distributions or other payments to the Company as shall be necessary for the Company to make payments of the principal of and interest on the Advances in accordance with the terms of this Agreement. In the event the approval of any Governmental Authority or other Person is required in order for any such Subsidiary to make any such dividends, distributions or other payments, the Company will forthwith exercise its best efforts and take all actions permitted by law and necessary to obtain such approval.

     5.14 Transactions with Affiliates. Except with respect to those transactions in effect on the Effective Date described as permitted affiliate transactions in the FMH Senior Note Indenture, it will not enter into, become a party to, or become liable in respect of, any contract or undertaking with any Affiliate (other than a Subsidiary) except in the ordinary course of business and on terms not less favorable to the Company or such Subsidiary than those which could be obtained if such contract or undertaking were an arm’s-length transaction with a person other than an Affiliate, except for any Guaranty executed by a Subsidiary.

     5.15 Additional Covenants. Except with respect to those transactions in effect on the Effective Date described as permitted affiliate transactions in the FMH Senior Note Indenture, it will not enter into, become a party to, or become liable in respect of, any contract or undertaking with any Affiliate (other than a Subsidiary) except in the ordinary course of business and on terms not less favorable to the Company or such Subsidiary than those which could be obtained if such contract or undertaking were an arm’s-length transaction with a person other than an Affiliate, except for any Guaranty executed by a Subsidiary.

     5.16 Additional Covenants. If at any time the Company or any of its Subsidiaries shall enter into or be a party to any instrument or agreement with respect to any Indebtedness which in the aggregate, together with any related Indebtedness, exceeds $1,000,000, including all such instruments or agreements in existence as of the date hereof and all such instruments or agreements entered into after the date hereof, relating to or amending any terms or conditions applicable to any of such Indebtedness which includes financial covenants, affirmative or negative covenants or defaults or the equivalent thereof not substantially provided for in this Agreement or more favorable to the lender or lenders thereunder than those provided for in this Agreement, then the Company shall promptly so advise the Lender. Thereupon, if the Lender shall request, upon notice to the Company, the Lender and the Company shall enter into an amendment to this Agreement or an additional agreement (as the Lender may request), providing for substantially the same covenants, defaults or the equivalent thereof, as those provided for in such instrument or agreement to the extent required and as may be selected by the Lender.

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     5.17 FMH Senior Note Documents. Neither the Company nor any of its Subsidiaries will be liable, either directly, pursuant to any Contingent Obligation or otherwise, for any FMH Senior Note Debt, or obligated to pay any amount of the FMH Senior Note Debt or redeem any of its Capital Stock or incur any other obligation in connection with the FMH Senior Note Debt. Neither the Company nor any of its Subsidiaries will sell any assets if such sale would cause a payment to be due under the FMH Senior Note Documents.

     5.18 Company Distributions. The Company will not declare or pay any dividends or make any distributions on its Capital Stock (other than dividends payable in its own common stock) or redeem, repurchase or otherwise acquire or retire any of its Capital Stock at any time outstanding, except that the Company may declare and pay dividends on its Capital Stock provided that no Default or Event of Default shall exist before or after giving effect to such dividends or be created as a result thereof.

     5.19 Investments, Loans, Advances, Guarantees and Acquisitions. The Company will not and will not permit any of its Subsidiaries to, purchase, hold or acquire any Capital Stock, evidences of indebtedness or other securities (including any option, warrant or other right to acquire any of the foregoing) of, make or permit to exist any loans or advances to, Guarantee any obligations of, or make or permit to exist any investment or any other interest in, any other Person, or make any acquisition, except:

     (a) investments existing on the date hereof and set forth in Schedule 5.18(a), without any increase the outstanding amount thereof; and

     (b) other in investments of the type set forth and permitted under Schedule 5.18(b).

     5.20 Prepayment of Indebtedness; Subordinated Debt. The Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, voluntarily purchase, redeem, defease or prepay any principal of, premium, if any, interest or other amount payable in respect of any Subordinated Debt or any obligations in respect of any Capital Stock or amend or modify any agreements with respect to any Subordinated Debt or Capital Stock.

     5.21 Indebtedness. The Company will not, nor will it permit any Subsidiary to, create, incur or suffer to exist any Indebtedness, except:

          (i) The Advances;

          (ii) Indebtedness existing on the date hereof and described in Schedule 5.20; and

          (iii) Subordinated Debt.

ARTICLE VI.

DEFAULT

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     6.1 Events of Default. Upon the occurrence of any of the following Events of Default:

     (a) The Company shall fail to pay when due any principal of any Note, or any other amount payable hereunder other than those amounts described in paragraph (b) of this Section 6.1; or

     (b) The Company shall fail to pay when due any principal of any Note, any Account Party shall fail to pay when due any amount due under any Letter of Credit Document or any Account Party shall fail to pay when due any other amount payable hereunder or under any other Loan Document other than those amounts described in paragraph (b) of this Section 6.1; or

     (c) Any representation or warranty made by the Company, any Guarantor or any Account Party in any Loan Document or in any certificate, report, financial statement or other document furnished by or on behalf of the Company or any Subsidiary in connection with this Agreement, shall prove to have been incorrect in any material respect when made or deemed made, and shall not be cured within five (5) Business Days after notice thereof shall have been given to the Company by the Lender; or

     (d) The Company or its Insurance Subsidiaries shall be prohibited by any state board, commission, department or other regulatory body from issuing new insurance policies in any jurisdiction which in the previous year constituted 10% or more of the total direct written premium of the Company or its Insurance Subsidiaries.

     (e) The Company or any Account Party shall fail to perform or observe any term, covenant or agreement contained in any Loan Document, other than those contained in Sections 5.1, 5.2, 5.3, 5.11, 5.13, 5.14 or 5.15 of this Agreement; or

     (f) The Company shall fail to perform or observe any term, covenant or agreement contained in Section 5.1, 5.2, 5.3, 5.11, 5.13, 5.14 or 5.15 and any such failure shall remain unremedied for 10 days after notice thereof shall have been given to the Company by the Lender; or

     (g) The Company or any Subsidiary shall fail to pay any part of the principal of, the premium, if any, or the interest on, or any other payment of money due under any of its Indebtedness (other than Indebtedness hereunder), beyond any period of grace provided with respect thereto, which individually or together wit other such Indebtedness as to which any such failure exists has an aggregate outstanding principal amount in excess of $500,000, whether such Indebtedness shall become due by scheduled maturity, by required prepayment, by acceleration, by demand or otherwise; or the Company or any Subsidiary shall fail to perform any term, covenant or agreement on its part to be performed under any agreement or instrument (other than this Agreement) evidencing or securing or relating to any such Indebtedness having such aggregate outstanding principal amount owing by the Company or any Subsidiary, as the case may be, when required to be performed (or, if permitted by the terms of the relevant document, within any applicable grace period), if the effect of such failure is to accelerate, or to permit the holder or holders of such Indebtedness or the trustee or trustees under any such agreement or instrument to accelerate, the maturity of such Indebtedness, whether or not such failure to

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perform shall be waived by the holder or holders of such Indebtedness or such trustee or trustees; or

     (h) The occurrence of a Reportable Event that results in or could result in liability of the Company, any Subsidiary of the Company or their ERISA Affiliates to the PBGC or to any Plan and such Reportable Event is not corrected within thirty (30) days after the occurrence thereof; or the occurrence of any Reportable Event which could constitute grounds for termination of any Plan of the Company, its Subsidiaries or their ERISA Affiliates by the PBGC or for the appointment by the appropriate United States District Court of a trustee to administer any such Plan and such Reportable Event is not corrected within thirty (30) days after the occurrence thereof; or the filing by the Company, any Subsidiary of the Company or any of their ERISA Affiliates of a notice of intent to terminate a Plan or the institution of other proceedings to terminate a Plan; or the Company, any Subsidiary of the Company or any of their ERISA Affiliates shall fail to pay when due any liability to the PBGC or to a Plan; or the PBGC shall have instituted proceedings to terminate, or to cause a trustee to be appointed to administer, any Plan of the Company, its Subsidiaries or their ERISA Affiliates; or the Company or any of its ERISA Affiliates engages in a Prohibited Transaction with respect to any Plan which results in or could result in liability of the Company, any Subsidiary of the Company, any of their ERISA Affiliates, any Plan of the Company, its Subsidiaries or their ERISA Affiliates or fiduciary of any such Plan; or failure by the Company, any Subsidiary of the Company or any of their ERISA Affiliates to make a required installment or other payment to any Plan within the meaning of Section 302(0 of ERISA or Section 4 12(n) of the Code that results in or could result in liability of the Company, any Subsidiary of the Company or any of their ERISA Affiliates to the PBGC or any Plan; or the withdrawal of the Company, any of its Subsidiaries or any of their ERISA Affiliates from a Plan during a plan year in which it was a ‘substantial employer” as defined in Section 4001(a)(2) of ERISA; or the Company, any of its Subsidiaries or any of their ERISA Affiliates becomes an employer with respect to any Multiemployer Plan all without the prior written consent of the Lender, provided, however, that the aggregate liability caused by any of the foregoing exceeds $500,000; or

     (i) The Company, any Guarantor, any Account Party or any Insurance Subsidiary of the Company shall be dissolved or liquidated (or any judgment, order or decree therefor shall be entered), or shall generally not pay its debts as they become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors, or shall institute, or there shall be instituted against the Company, any Guarantor, any Account Party or any Insurance Subsidiary of the Company, any proceeding or case seeking to adjudicate it a bankrupt or insolvent or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief or protection of debtors or seeking the entry of an order for relief, or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its assets, rights, revenues or property, and, if such proceeding is instituted against the Company, any Guarantor, any Account Party or any Insurance Subsidiary of the Company and is being contested by it in good faith by appropriate proceedings, such proceeding shall remain undismissed or unstayed for a period of 30 days; or the Company, any Guarantor, any Account Party or any Insurance Subsidiary of the Company

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shall take any action (corporate or other) to authorize or further any of the actions described above in this subsection; or

     (j) Any judgment or judgments against the Company or any Subsidiary or Subsidiaries for payment of money aggregating for the Company and all Subsidiaries in excess of $500,000 are entered, which judgment or judgments are not judicially stayed and with respect to which an appeal is not diligently pursued in good faith, remain unsatisfied for more than 10 days;

     (k) Any Change of Control shall occur; or

     (l) Any failure to pay any part of the principal of, the premium, if any, or the interest on, or any other amounts due under any FMH Senior Note Document, whether such amounts shall become due by scheduled maturity, by required prepayment, by acceleration, by demand or otherwise; or the occurrence of any event or condition that causes the holder or holders of the FMH Senior Note Debt to accelerate, or to permit such holder or holders or the applicable trustee or trustees to accelerate, the maturity of such Indebtedness, whether or not such failure to perform shall be waived by the holder or holders of such Indebtedness or such trustee or trustees.

     then, or at any time thereafter, unless such Event of Default has been remedied, the Lender may by notice to the Company (i) terminate the Commitment or (ii) declare the outstanding principal of, and accrued interest on, the Notes, all unpaid reimbursement obligations in respect of drawings under Letters of Credit and all other amounts owing under this Agreement to be immediately due and payable, or (iii) demand immediate delivery of cash collateral, and the Company agrees to deliver such cash collateral upon demand, in an amount equal to the maximum amount that may be available to be drawn at any time prior to the stated expiry of all outstanding Letters of Credit, or any one or more of the foregoing, whereupon the Commitment shall terminate forthwith and all such amounts, including such cash collateral, shall become immediately due and payable, provided that in the case of any event or condition described in Section 6.1(i) the Commitment shall automatically terminate forthwith and all such amounts, including such cash collateral, shall automatically become immediately due and payable without notice; in all cases without demand, presentment, protest, diligence, notice of dishonor or other formality, all of which are hereby expressly waived. Such cash collateral delivered in respect of outstanding Letters of Credit shall be deposited in a special cash collateral account to be held by, and controlled solely by, the Lender as collateral security for the payment and performance of the Company’s and each Account Party’s obligations under the Loan Documents to the Lender, and the Company and each Account Party hereby grants a security interest in all such cash collateral to the Lender to secure the Advances and all other present and future obligations and other liabilities of the Company and of the Account Parties under the Loan Documents, and the Lender may apply such cash collateral to the Advances and such other obligations and liabilities at any time in its sole discretion.

     6.2 Automatic Events of Default. Upon the occurrence of any of the following Events of Default:

     The Company shall be dissolved or liquidated (or any judgment, order or decree therefor shall be entered), or shall generally not pay its debts as they become due, or shall admit in

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writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors, or shall institute, or there shall be instituted against the Company, any proceeding or case seeking to adjudicate it a bankrupt or insolvent or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief or protection of debtors or seeking the entry of an order for relief, or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its assets, rights, revenues or property, and, if such proceeding is instituted against the Company and is being contested by the Company, in good faith by appropriate proceedings, such proceeding shall remain undismissed or unstayed for a period of 30 days; or the Company shall take any action (corporate or other) to authorize or further any of the actions described above in this subsection;

     then the Commitment shall automatically terminate and the Note shall automatically become immediately due and payable, without notice, demand, protest, or presentment, all of which are hereby expressly waived by the Company.

     6.3 Setoff by Lender. Upon the occurrence and during the continuance of any Event of Default, the Lender is hereby authorized at any time and from time to time, without notice to the Company (any such notice being expressly waived), to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by the Lender to or for the credit or the account of the Company, as the case may be, and although such obligations may be unmatured, against any and all of the obligations of the Company, now or hereafter existing under this Agreement and the Note. The Lender agrees to promptly notify the Company after any such setoff and application, provided that the failure to give such notice shall not affect the validity of such setoff and application. The rights of the Lender under this Section are in addition to other rights and remedies (including, without limitation, other rights of setoff) which the Lender may have.

ARTICLE VII.

GUARANTY

          As an inducement to the Lender to enter into the transactions contemplated by this Agreement, each Guarantor agrees with the Lender as follows:

     7.1 Guarantee of Obligations.

     (a) Each Guarantor hereby (i) guarantees, as principal obligor and not as surety only, to the Lender and/or its Affiliates the prompt payment of (A) the principal of and any and all accrued and unpaid interest (including interest which otherwise may cease to accrue by operation of any insolvency law, rule, regulation or interpretation thereof) on the Advances, all reimbursement and other obligations of the Company and of each Account Party under each Letter of Credit and the Letter of Credit Documents and all other obligations of the Company and of each Account Party to the Lender under the Loan Documents when due, whether by scheduled maturity, acceleration or otherwise, all in accordance with the terms of the Loan Documents, including, without limitation, default interest, indemnification payments and all reasonable costs and expenses incurred by the Lender in connection with enforcing any obligations of the

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Company or of any Account Party, including without limitation the reasonable fees and disbursements of counsel and in all cases whether now existing or hereafter arising and (B) all other obligations, indebtedness and liabilities of the Borrower to the Lender or any of its Affiliates, whether now existing or later arising, including, without limitation, all loans, advances, interest, costs, overdraft indebtedness, credit card indebtedness, treasury management agreement obligations, obligations relating to any interest rate or currency swap, rate cap, collar or option, equity or equity index swap, equity or equity index option, bond option, or other similar transaction (whether linked to one or more interest rates, foreign currencies, commodity prices, equity prices or other financial measures), all monetary obligations incurred or accrued during the pendency of any bankruptcy, insolvency, receivership or other similar proceedings, regardless of whether allowed or allowable in such proceeding, and all renewals, extensions, modifications, consolidations or substitutions of any of the foregoing, whether due, or not due, absolute or contingent, direct or indirect, liquidated or unliquidated, (iii) guarantees the prompt and punctual performance and observance of each and every term, covenant or agreement contained in the Loan Documents to be performed or observed on the part of the Company and of each Account Party and (iv) agrees to make prompt payment, on demand, of any and all reasonable costs and expenses incurred by the Lender in connection with enforcing the obligations of the Guarantors hereunder, including, without limitation, the reasonable fees and disbursements of counsel (all of the foregoing being collectively referred to as the “Guaranteed Obligations”).

     (b) If for any reason any duty, agreement or obligation of the Company or any Account Party contained in any Loan Document shall not be performed or observed by the Company or any Account Party as provided therein, or if any amount payable under or in connection with any Loan Document shall not be paid in full when the same becomes due and payable, each Guarantor undertakes to perform or cause to be performed promptly each of such duties, agreements and obligations and to pay forthwith each such amount to the Lender regardless of any defense or setoff or counterclaim which the Company or any Account Party may have or assert, and regardless of any other condition or contingency.

     7.2 Nature of Guaranty. The obligations of the Guarantors hereunder constitute an absolute and unconditional and irrevocable guaranty of payment and not a guaranty of collection and are wholly independent of and in addition to other rights and remedies of the Lender and are not contingent upon the pursuit by the Lender of any such rights and remedies, such pursuit being hereby waived by the Guarantors.

     7.3 Waivers and Other Agreements. Each Guarantor hereby unconditionally (a) waives any requirement that the Lender, upon the occurrence of an Event of Default first make demand upon, or seek to enforce remedies against the Company or any Account Party before demanding payment under or seeking to enforce the obligations of the Guarantors hereunder, (b) covenants that the obligations of the Guarantors hereunder will not be discharged except by complete performance of all obligations of the Company and of each Account Party to the Lender, (c) agrees that the obligations of the Guarantors hereunder shall remain in hill force and effect without regard to, and shall not be affected or impaired, without limitation, by any invalidity, irregularity or unenforceability in whole or in part of this Agreement or any other Loan Document, or any limitation on the liability of the Company or any Account Party

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thereunder, or any limitation on the method or terms of payment thereunder which may or hereafter be caused or imposed in any manner whatsoever (including, without limitation, usury laws), (d) waives diligence, presentment and protest with respect to, and any notice of default or dishonor in the payment of any amount at any time payable by the Company or any Account Party under or in connection with any Loan Document, and further waives any requirement of notice of acceptance of, or other formality relating to, the obligations of the Guarantors hereunder and (e) agrees that the Guaranteed Obligations shall include any amounts paid by the Company or any Account Party to the Lender which may be required to be returned to the Company or any Account Party or to its representative or to a trustee, custodian or receiver for the Company or any Account Party.

     7.4 Obligations Absolute. The obligations, covenants, agreements and duties of the Guarantors under this Agreement shall not be released, affected or impaired by any of the following whether or not undertaken with notice to or consent of the Guarantors: (a) an assignment or transfer made in compliance herewith, in whole or in part, of the Advances made to the Company or any Account Party or of this Agreement or any Note although made without notice to or consent of the Guarantors, or (b) any waiver by the Lender or by any other person, of the performance or observance by the Company or any Account Party of any of the agreements, covenants, terms or conditions contained in this Agreement or in the other Loan Documents, or (c) any indulgence in or the extension of the time for payment by the Company or any Account Party of any amounts payable under or in connection with this Agreement or any other Loan Document, or of the time for performance by the Company or any Account Party of any other obligations under or arising out of this Agreement or any other Loan Document, or the extension or renewal thereof, or (d) the modification, amendment or waiver (whether material or otherwise) of any duty, agreement or obligation of the Company or any Account Party set forth in this Agreement or any other Loan Documents (the modification, amendment or waiver from time to time of this Agreement and the other Loan Documents being expressly authorized without further notice to or consent of the Guarantors), or (e) the voluntary or involuntary liquidation, sale or other disposition of all or substantially all of the assets of the Company or any Account Party or any receivership, insolvency, bankruptcy, reorganization, or other similar proceedings, affecting the Company or any Account Party or any of its assets, or (f) the merger or consolidation of the Company or any Account Party or the Guarantors with any other person, or (g) the release or discharge of the Company or any Account Party or the Guarantors from the performance or observance of any agreement, covenant, term or condition contained in this Agreement or any other Loan Document, by operation of law, or (h) any other cause whether similar or dissimilar to the foregoing which would release, affect or impair the obligations, covenants, agreements or duties of the Guarantors hereunder.

     7.5 No Investigation by Lender. Each Guarantor hereby waives unconditionally any obligation which, in the absence of such provision, the Lender might otherwise have to investigate or to assure that there has been compliance with the law of any jurisdiction with respect to the Guaranteed Obligations recognizing that, to save both time and expense, each Guarantor has requested that the Lender not undertake such investigation. Each Guarantor hereby expressly confirms that the obligations of such Guarantor hereunder shall remain in full force and effect without regard to compliance or noncompliance with any such law and irrespective of any investigation or knowledge of the Lender of any such law.

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     7.6 Indemnity. As a separate, additional and continuing obligation, each Guarantor unconditionally and irrevocably undertakes and agrees with the Lender that, should the Guaranteed Obligations not be recoverable from the Guarantors under Section 7.1 for any reason whatsoever (including, without limitation, by reason of any provision of any Loan Document or any other agreement or instrument executed in connection herewith being or becoming void, unenforceable, or otherwise invalid under any applicable law) then, notwithstanding any knowledge thereof by the Lender at any time, each Guarantor as sole, original and independent obligor, upon demand by the Lender, will make payment to the Lender of the Guaranteed Obligations by way of a full indemnity in such currency and otherwise in such manner as is provided in the Loan Documents.

     7.7 Subordination Subrogation Etc. Each Guarantor agrees that any present or future indebtedness, obligations or liabilities of the Company or any Account Party to any Guarantor shall be fully subordinate and junior in right and priority of payment to any present or future indebtedness, obligations or liabilities of the Company and the Account Parties to the Lender. Each Guarantor waives any right of subrogation to the rights of the Lender against the Company, the Account Parties or any other person obligated for payment of the Guaranteed Obligations and any right of reimbursement or indemnity whatsoever arising or accruing out of any payment which any Guarantor may make pursuant to the Loan Documents, and any right of recourse to security for the debts and obligations of the Company and the Account Parties, unless and until the entire principal balance of and interest on the Guaranteed Obligations shall have been paid in full.

     7.8 Waiver. To the extent that it lawfully may, each Guarantor agrees that it will not at any time insist upon or plead, or in any manner whatsoever claim or take any benefit or advantage of any applicable present or future stay, extension or moratorium law, which may affect observance or performance of the provisions of any Loan Document; nor will it claim, take or insist upon any benefit or advantage of any present or future law providing for the evaluation or appraisal of any security for its obligations hereunder or the Company or any Account Party under the Loan Documents prior to any sale or sales thereof which may be made under or by virtue of any instrument governing the same; nor will it, after any such sale or sales claim or exercise any right, under any applicable law, to redeem any portion of such security so sold.

     7.9 Limitation or Obligations. (a) The provisions of this Guaranty are severable, and in any action or proceeding involving any state corporate law, or any state, federal or foreign bankruptcy, insolvency, reorganization or other law affecting the rights of creditors generally, if the obligations of any Guarantor under this Guaranty would otherwise be held or determined to be avoidable, invalid or unenforceable on account of the amount of such Guarantor’s liability under this Guaranty, then, notwithstanding any other provision of this Guaranty to the contrary, the amount of such liability shall, without any further action by the Guarantors, the Lender, be automatically limited and reduced to the highest amount that is valid and enforceable as determined in such action or proceeding (such highest amount determined hereunder being the relevant Guarantor’s “Maximum Liability”). This Section 7.9 with respect to the Maximum Liability of the Guarantors is intended solely to preserve the rights of the Lender hereunder to the maximum extent not subject to avoidance under applicable law, and neither the Guarantor nor any other person or entity shall have any right or claim under this Section 7.9 with respect to the

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Maximum Liability, except to the extent necessary so that the obligations of the Guarantor hereunder shall not be rendered voidable under applicable law.

     (a) Each of the Guarantors agrees that the Guaranteed Obligations may at any time and from time to time exceed the Maximum Liability of each Guarantor, and may exceed the aggregate Maximum Liability of all other Guarantors, without impairing this Guaranty or affecting the rights and remedies of the Lender hereunder. Nothing in this Section 7.9 shall be construed to increase any Guarantor’s obligations hereunder beyond its Maximum Liability.

     (b) In the event any Guarantor (a “Paying Guarantor”) shall make any payment or payments under this Guaranty or shall suffer any loss as a result of any realization upon any collateral granted by it to secure its obligations under this Guaranty, each other Guarantor (each a “Non-Paying Guarantor”) shall contribute to such Paying Guarantor an amount equal to such Non-Paying Guarantor’s “Pro Rata Share” of such payment or payments made, or losses suffered, by such Paying Guarantor. For the purposes hereof, each Non-Paying Guarantor’s “Pro Rata Share” with respect to any such payment or loss by a Paying Guarantor shall be determined as of the date on which such payment or loss was made by reference to the ratio of (i) such Non-Paying Guarantor’s Maximum Liability as of such date (without giving effect to any right to receive, or obligation to make, any contribution hereunder) or, if such Non-Paying Guarantor’s Maximum Liability has not been determined, the aggregate amount of all monies received by such Non-Paying Guarantor from the Principal after the date hereof (whether by loan, capital infusion or by other means) to (ii) the aggregate Maximum Liability of all Guarantors hereunder (including such Paying Guarantor) as of such date (without giving effect to any right to receive, or obligation to make, any contribution hereunder), or to the extent that a Maximum Liability has not been determined for any Guarantors, the aggregate amount of all monies received by such Guarantors from the Principal after the date hereof (whether by loan, capital infusion or by other means). Nothing in this Section 7.9 shall affect any Guarantor’s several liability for the entire amount of the Guaranteed Obligations (up to such Guarantor’s Maximum Liability). Each of the Guarantors covenants and agrees that its right to receive any contribution under this Guaranty from a Non-Paying Guarantor shall be subordinate and junior in right of payment to all the Guaranteed Obligations. The provisions of this Section 7.9 are for the benefit of both the Lender and the Guarantors and may be enforced by any one, or more, or all of them in accordance with the terms hereof.

ARTICLE VIII.

MISCELLANEOUS

8.1 Amendments, Etc.

     (a) No amendment, modification, termination or waiver of any provision of this Agreement nor any consent to any departure therefrom shall be effective unless the same shall be in writing and signed by the Lender and the Company.

     (b) Any such amendment, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.

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     8.2 Notices.

     (a) Except as otherwise provided in Section 8.2(c) hereof, all notices and other communications hereunder shall be in writing and shall be delivered or sent to the Company and the Lender at the respective addresses and numbers for notices set forth on the signatures pages hereof, or to such other address as may be designated by the Company or the Lender by notice to the other parties hereto. All notices and other communications shall be deemed to have been given at the time of actual delivery thereof to such address, or if sent by certified or registered mail, postage prepaid, to such address, on the third day after the date of mailing, or if deposited prepaid with Federal Express or other nationally recognized overnight delivery service prior to the deadline for next day delivery, on the Business Day next following such deposit, provided, however, that notices to the Lender or to the Company shall not be effective until received.

     (b) Notices by the Company to the Lender with respect to terminations or reductions of the Commitment, requests for Advances, requests for continuations or conversions of Advances, and notices of prepayment shall be irrevocable and binding on the Company.

     (c) Any request for an Advance or a continuation or conversion thereof, and any notice to be given by the Lender hereunder, may be given by telephone, and all such notices given by the Company must be immediately confirmed in writing in the manner provided in Section 8.2(a). Any such notice given by telephone shall be deemed effective upon receipt thereof by the party to whom such notice is to be given.

     8.3 No Waiver By Conduct; Remedies Cumulative. No course of dealing on the part of the Lender, nor any delay or failure on the part of the Lender in exercising any right, power or privilege hereunder shall operate as a waiver of such right, power or privilege or otherwise prejudice the Lender’s tights and remedies hereunder; nor shall any single or partial exercise thereof preclude any further exercise thereof or the exercise of any other right, power or privilege. No right or remedy conferred upon or reserved to the Lender under this Agreement or the Note is intended to be exclusive of any other right or remedy, and every right and remedy shall be cumulative and in addition to every other right or remedy granted thereunder or now or hereafter existing under any applicable law. Every right and remedy granted by this Agreement or the Note or by applicable law to the Lender may be exercised from time to time and as often as may be deemed expedient by the Lender and, unless contrary to the express provisions of this Agreement or the Note, irrespective of the occurrence or continuance of any Default or Event of Default.

     8.4 Reliance on and Survival of Various Provisions. All terms, covenants, agreements, representations and warranties of the Company made herein or in any certificate, report, financial statement or other document furnished by or on behalf of the Company or any Subsidiary in connection with this Agreement shall be deemed to be material and to have been relied upon by the Lender, notwithstanding any investigation heretofore or hereafter made by the Lender and those covenants and agreements of the Company set forth in Section 3.6, 3.8 and 8.5 hereof shall survive the repayment in full of the Advances and the termination of the Commitment.

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     8.5 Expenses. (a) The Company agrees to pay, or reimburse the Lender for the payment of, on demand, (i) the reasonable fees and expenses of counsel to the Lender, including without limitation the fees and expenses of Dickinson Wright PLLC, in connection with the preparation, execution, delivery and administration of this Agreement or any other Loan Document and the consummation of the transactions contemplated hereby, and in connection with advising the Lender as to its rights and responsibilities with respect thereto, provided that the Company shall not be liable for such fees and expenses in connection with any assignment or participation by the Lender pursuant to Section 8.6 unless an Event of Default has occurred and is continuing at the time of such assignment or participation, and (ii) all stamp and other taxes and fees payable or determined to be payable in connection with the execution, delivery, filing or recording of this Agreement, any other Loan Document and the consummation of the transactions contemplated hereby, and any and all liabilities with respect to or resulting from any delay in paying or omitting to pay such taxes or fees, and (iii) all reasonable costs and expenses of the Lender (including reasonable fees and expenses of counsel and whether incurred through negotiations, legal proceedings or otherwise) in connection with any Default or Event of Default or the enforcement of, or the exercise or preservation of any rights under, this Agreement or any other Loan Document.

     (a) The Company hereby further agrees to indemnify the Lender and its directors, officers and employees against all losses, claims, damages, penalties, judgment, liabilities and expenses (including, without limitation, all expenses of litigation or preparation therefor whether or not the Lender is a party thereto) which any of them may pay or incur at any time arising out of or relating to this Agreement, the other Loan Documents, the transactions contemplated hereby or the direct or indirect application or proposed application of the proceeds of any Advance hereunder except to the extent that they are determined in a final non-appealable judgment by a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of the party seeking indemnification. The obligations of the Company under this section 8.5 shall survive the termination of this Agreement.

     8.6 Successors and Assigns.

     (a) This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, provided that the Company may not, without the prior consent of the Lender, assign its rights or obligations under any Loan Document and the Lender shall not be obligated to make any Advance hereunder to any entity other than the Company.

     (b) The Lender may sell a participation interest to any financial institution or institutions, and such financial institution or institutions may further sell a participation interest (undivided or divided) in the Advances and the Lender’s rights and benefits under the Loan Documents, provided, however, that so long as no Event of Default has occurred and is continuing, the Lender shall at all times hold at least 60% of the amount outstanding under the Advances, and to the extent of that participation, such participant or participants shall have the same rights and benefits against the Company under Section 6.3 as it or they would have had if participation of such participant or participants were the Lender making the Advances to the Company hereunder, provided, farther, that (i) the Lenders obligations under this Agreement shall remain unmodified and fully effective and enforceable against the Lender, (ii) the Lender

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shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) the Lender shall remain the holder of its Note for all purposes of this Agreement, (iv) the Company shall continue to be entitled to deal solely and directly with the Lender in connection with the Lender’s rights and obligations under this Agreement, and (v) the Lender shall not grant to its participant any rights to consent or withhold consent to any action taken by the Lender under this Agreement.

     (c) The Lender may, with the prior written consent of the Company, which consent from the Company shall not be unreasonably withheld (and shall not be required if any Event of Default has occurred and is continuing or if such assignment is to an Affiliate of the Lender), assign to one or more lenders or other entities all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment, the Advances owing to it and the Note held by it); provided, however, that (i) the amount of the Commitment of the Lender being assigned pursuant to each such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than $5,000,000, and in integral multiples of $1,000,000 thereafter, or such lesser amount as the Company and the Lender may consent to and (ii) the parties to each such assignment shall execute an Assignment and Acceptance in the form of Exhibit B hereto (an “Assignment and Acceptance”) and such other agreements and documents in connection therewith as may be required by the Lender. Upon such execution, from and after the effective date specified in such Assignment and Acceptance, (x) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of the Lender hereunder and (y) the Lender shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement. For purposes hereof, a failure of the Company to consent to an assignment by the Lender of 40% or more of the amount of the Commitment or 40% or more of the amounts outstanding under the Advances, shall be deemed to be consent reasonably withheld by the Company.

     (d) By executing and delivering an Assignment and Acceptance, the Lender and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, the Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document finished pursuant hereto; (ii) the Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Company or the performance or observance by the Company of any of its obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement together with copies of the financial statements referred to in Section 4.5 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance under the Lender or any other lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; and (v) such assignee

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agrees that it will perform in accordance with their terms all of the obligations that by the terms of this Agreement are required to be performed by it as a lender.

     (e) Within five Business Days after its receipt of notice from the Lender of an assignment hereunder, the Company, at its own expense, shall execute and deliver to the Lender in exchange for the surrendered Note a new Note to the order of such assignee in an amount equal to the Commitment assumed by it pursuant to such Assignment and Acceptance. Such new Note shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Note, shall be dated the effective date of such Assignment and Acceptance and shall otherwise be in substantially the form of Exhibit A hereto.

     (f) The Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 8.6, disclose to the assignee or participant or proposed assignee or participant, any information relating to the Company, provided that such assignee or participant or such proposed assignee or participant agrees to keep all non public information confidential.

     (g) Notwithstanding any other provision set forth in this Agreement, the Lender may at any time create a security interest in, or assign, all or any portion of its rights under this Agreement (including, without limitation, the Advances owing to it and the Note held by it in favor of any Federal Reserve Bank in accordance with Regulation A of the Board of Governors of the Federal Reserve System); provided that such creation of a security interest or assignment shall not release the Lender from its obligations under this Agreement.

     (h) The Lender from time to time in its sole discretion may appoint agents for the purpose of servicing and administering this Agreement and the transactions contemplated hereby and enforcing or exercising any rights or remedies of the Lender provided under this Agreement, the Note or otherwise. In furtherance of such agency, the Lender may from time to time direct that the Company provide notices, reports and other documents contemplated by this Agreement (or duplicates thereof) to such agent. The Company hereby consents to the appointment of such agent and agrees to provide all such notices, reports and other documents and to otherwise deal with such agent acting on behalf of the Lender in the same manner as would be required if dealing with the Lender itself.

     8.7 Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Agreement by signing any such counterpart.

     8.8 Governing Law. This Agreement is a contract made under, and shall be governed by and construed in accordance with, the law of the State of Michigan applicable to contracts made and to be performed entirely within such State and without giving effect to choice of law principles of such State. The Company further agrees that any legal action or proceeding with respect to this Agreement or the Note or the transactions contemplated hereby may be brought in any court of the State of Michigan, or in any court of the United States of America sitting in Michigan, and the Company hereby submits to and accepts generally and unconditionally the jurisdiction of those courts with respect to its person and property, and irrevocably consents to the service of process in connection with any such action or proceeding by personal delivery to

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the Company or by the mailing thereof by registered or certified mail, postage prepaid to the Company at its address set forth on the signature page hereof. Nothing in this paragraph shall affect the right of the Lender to serve process in any other manner permitted by law or limit the right of the Lender to bring any such action or proceeding against the Company or property in the courts of any other jurisdiction. The Company hereby irrevocably waives any objection to the laying of venue of any such suit or proceeding in the above described courts.

     8.9 Table of Contents and Headings. The table of contents and the headings of the various subdivisions hereof are for the convenience of reference only and shall in no way modify any of the terms or provisions hereof.

     8.10 Construction of Certain Provisions. If any provision of this Agreement refers to any action to be taken by any person, or which such person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such person, whether or not expressly specified in such provision.

     8.11 Integration and Severability. This Agreement embodies the entire agreement and understanding between the Company and the Lender, and supersedes all prior agreements and understandings, relating to the subject matter hereof In case any one or more of the obligations of the Company under this Agreement or the Note shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining obligations of the Company shall not in any way be affected or impaired thereby, and such invalidity, illegality or unenforceability in one jurisdiction shall not affect the validity, legality or enforceability of the obligations of the Company under this Agreement or the Note in any other jurisdiction.

     8.12 Independence of Covenants. All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any such covenant, the fact that it would be permitted by an exception to, or would be otherwise within the limitations of, another covenant shall not avoid the occurrence of a Default or an Event of Default or any event or condition which with notice or lapse of time, or both, could become such a Default or an Event of Default if such action is taken or such condition exists.

     8.13 Interest Rate Limitation. Notwithstanding any provisions of this Agreement or the Note, in no event shall the amount of interest paid or agreed to be paid by the Company exceed an amount computed at the highest rate of interest permissible under applicable law. If from any circumstances whatsoever, fulfillment of any provision of this Agreement or the Note at the time performance of such provision shall be due, shall involve exceeding the interest rate limitation validly prescribed by law which a court of competent jurisdiction may deem applicable hereto, then, ipso than, the obligations to be fulfilled shall be reduced to an amount computed at the highest rate of interest permissible under applicable law, and if for any reason whatsoever the Lender shall ever receive as interest an amount which would be deemed unlawful under such applicable law such interest shall be automatically applied to the payment of principal of the Advances outstanding hereunder (whether or not then due and payable) and not to the payment of interest, or shall be refunded to the Company if such principal and all other obligations of the Company to the Lender have been paid in full.

     8.14 Acknowledgments. The Company hereby acknowledges that:

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     (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents:

     (b) the Lender has no fiduciary relationship with or duty to the Company arising out of or in connection with this Agreement or any of the other Loan Documents, and the relationship between the Lender and the Company in connection herewith or therewith is solely that of debtor and creditor; and

     (c) no joint venture is created hereby or by the other Loan Documents or otherwise exists by virtue of the transactions contemplated hereby between the Company and the Lender.

     8.15 Waiver of Jury Trial; Etc. The Lender and the Company, after consulting or having had the opportunity to consult with counsel, knowingly, voluntarily and intentionally waive any right either of them may have to a trial by jury in any litigation based upon or arising out of this Agreement, the Note or any related instrument or agreement or any of the transactions contemplated by this Agreement or any course of conduct, dealing, statements (whether oral or written) or actions of either of them. Neither of the Lender or the Company shall seek to consolidate, by counterclaim or otherwise, any such action in which a jury trial has been waived with any other action in which a jury trial cannot be or has not been waived. These provisions shall not be deemed to have been modified in any respect or relinquished by either of the Lender or the Company except by a written instrument executed by each of them. The Lender and the Company waive, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this subsection any special, exemplary, punitive or consequential damages.

     8.16 USA Patriot Act. The Lender hereby notifies the Company that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the “Act”), it is required to obtain, verify and record information that identifies the Company, which information includes the name and address of the Company and other information that will allow such Lender to identify the Company in accordance with the Act.

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     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written.

	FIRST MERCURY FINANCIAL CORPORATION
	By:	/s/ Richard H. Smith
		Its:	President
	COVERX CORPORATION
	By:	/s/ Richard H. Smith
		Its:	President
	ARPCO HOLDINGS, INC
	By:	/s/ William S. Weaver
		Its:	President
	AMERICAN RISK POOLING CONSULTANTS, INC.
	By:	/s/ William S. Weaver
		Its:	President
Address for Notices	29621 Northwestern Highway
for the company and	P.O. Box 5096
each Guarantor:	Southfield, Michigan 48034
	Attention: Richard H. Smith
	Telecopy No.: (248) 353-5879
	Telephone No.: (248) 358-4010

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FIRST MERCURY FINANCIAL CORPORATION
CREDIT AGREEMENT

	JPMORGAN CHASE BANK, N.A.
	By:	/s/ Richard C. Ellis
		Its:	SVP
Address for Notices:	28660 Northwestern Highway
	Southfield, Michigan 48034
	Attention: Rick Ellis
	Telecopy No.: (248) 799-5826
	Telephone No.: (248) 799-5849

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EX-10.13

EXHIBIT 10.13

INDEMNIFICATION AGREEMENT

     THIS AGREEMENT, made and entered into this 7^th day of June, 2004 (“Agreement”), by and between First Mercury Financial Corporation, a Delaware corporation (the “Company”), and Steven Shapiro (“Indemnitee”):

     WHEREAS, qualified persons are reluctant to serve corporations as directors or officers or in other capacities, unless they are provided with adequate protection against inordinate risks of claims and actions against them arising out of their service to and activities on behalf of such corporations;

     WHEREAS, the uncertainties related to obtaining adequate insurance and indemnification have increased the difficulty of attracting and retaining such persons;

     WHEREAS, it is reasonable, prudent and necessary for the Company to obligate itself contractually to indemnify such persons to the fullest extent permitted by law, so that such persons will serve or continue to serve the Company free from undue concern that they will not be adequately indemnified;

     WHEREAS, the Company and Indemnitee recognize that the legal risks and potential liabilities, and the threat thereof, associated with lawsuits filed against persons serving the Company, and the resultant substantial time, expense and anxiety spent and endured in defending lawsuits bears no reasonable relationship to the compensation received by such persons, and thus poses a significant deterrent and increased reluctance on the part of experienced and capable individuals to serve the Company;

     WHEREAS, the By-laws of the Company and the laws of the State of Delaware provide for the indemnification of directors, officers, agents and employees of the Company and specifically provide that they are not exclusive, and thereby contemplate that contracts may be entered into between the Company and persons providing services to it; and

     WHEREAS, Indemnitee is willing to serve, continue to serve and to take on additional service for or on behalf of the Company on the condition that he be indemnified according to the terms of this Agreement.

     NOW, THEREFORE, in consideration of the premises and promises contained herein, the parties agree as follows:

     Section 1.      Services by Indemnitee. Indemnitee agrees to serve as a director of the Company, and, if he subsequently consents, at its request or for its benefit, as a director, officer, employee, agent or fiduciary of certain other corporations and entities. Nothing contained herein shall entitle or require Indemnitee to continue in Indemnitee’s present position or any future position with the Company.

     Section 2.      Term of Agreement. This Agreement shall continue until and terminate upon the later of: (a) ten (10) years after the date that Indemnitee ceases to hold a Corporate Status or (b) one hundred twenty (120) days after the final termination of all pending Proceedings in respect of which Indemnitee is granted rights of indemnification or advancement

of Expenses hereunder and of any proceeding commenced by Indemnitee pursuant to Section 8 of this Agreement.

     Section 3.      Indemnification

          3.1      General. As more specifically set forth in Section 3.2 and subject to the limitations of Section 5, the Company shall hold harmless and indemnify Indemnitee against all Liabilities and advance to Indemnitee all Expenses to the fullest extent permitted by the Delaware General Corporation Law, or by any amendment thereof (but in the case of any such amendment, only to the extent such amendment permits the Company to provide broader indemnification than provided prior to such amendment), or by other statutory provisions authorizing or permitting such indemnification applicable from time to time hereafter.

          3.2      Proceedings. Indemnitee shall be entitled to the rights of indemnification provided in this Section 3.2 if, by reason of Indemnitee’s Corporate Status, Indemnitee is, or is threatened to be, made a party to any threatened, pending or completed Proceeding (including a Proceeding by or in the right of the Company). Under this Section 3.2, Indemnitee shall be indemnified against all Liabilities actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection with such Proceeding or any claim, issue or matter therein, if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal Proceeding, had no reasonable cause to believe the conduct was unlawful.

          3.3      Indemnification for Expenses as a Witness. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of Indemnitee’s Corporate Status, a witness in any Proceeding, he shall be indemnified against all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection therewith.

          3.4      Partial Indemnity. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of any Liabilities but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is entitled. Moreover, notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any Proceeding or in defense of any claim, issue or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against all Expenses incurred in connection therewith.

     Section 4.      Advancement of Expenses. The Company shall advance all Expenses incurred or to be incurred by or on behalf of Indemnitee in connection with any Proceeding within thirty (30) days after the receipt by the Company of a statement from Indemnitee requesting such advance from time to time, whether prior to or after final disposition of such Proceeding. Each such statement shall reasonably evidence the Expenses incurred or to be incurred by Indemnitee. Indemnitee hereby agrees and undertakes to repay any Expenses advanced, if it shall ultimately be determined by a final non-appealable judgment of a court of competent jurisdiction that Indemnitee is not entitled to be indemnified against such Expenses.

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     Section 5.      Specific Limitations on Indemnity. Indemnitee shall not be entitled to indemnification or advancement of expenses under this Agreement (i) with respect to proceedings or claims initiated or brought voluntarily by the Indemnitee and not by way of defense, except with respect to proceedings specifically authorized by the Board or brought to establish or enforce a right to indemnification and/or advancement of expenses arising under this Agreement, the charter documents of the Company or any subsidiary, the Series A Convertible Preferred Stock Purchase Agreement dated March 1, 2004 between the Company and FMFC Holdings, LLC or any statute or law or otherwise, but such indemnification or advancement of expenses may be provided by the Company in specific cases if the Board finds it to be appropriate; or (ii) for any amounts paid in settlement of a proceeding unless the Company consents in advance in writing to such settlement, which consent shall not be unreasonably withheld; or (iii) on account of any suit in which judgment is rendered against the Indemnitee for an accounting of profits made from the purchase or sale by the Indemnitee of securities of the Company pursuant to the provisions of Section l6(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any federal, state or local statutory law; or (iv) if a final decision by a court having jurisdiction in the matter shall determine that such indemnification is not lawful (in this respect, the Company and the Indemnitee have been advised that the Securities and Exchange Commission takes the position that indemnification for liabilities arising under the federal securities laws is against public policy and is, therefore, unenforceable and that claims for indemnification should be submitted to appropriate courts for adjudication).

     Section 6.      Procedure for Determination of Entitlement to Indemnification.

          6.1      Initial Request. To obtain indemnification under this Agreement in connection with any Proceeding, and for the duration thereof, Indemnitee shall submit to the Company a written request, including such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification. The Secretary of the Company shall, promptly upon receipt of any request for indemnification, advise the Board in writing that Indemnitee has requested indemnification.

          6.2      Method of Determination. Upon written request by Indemnitee for indemnification pursuant to Section 6.1 hereof, a determination, if required by applicable law, with respect to Indemnitee’s entitlement thereto shall be made in the specific case by one of the following methods, which shall be selected by agreement of the Indemnitee and the Company: (1) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (2) by a majority vote of a committee of such directors designated by a majority of such directors even though less than a quorum, or (3) if there are no such directors or if such directors so direct, by independent legal counsel in a written opinion, or (4) by the stockholders (the individual or body making such determination, the “Reviewing Party”). If the Indemnitee and the Company fail to agree on the appropriate Reviewing Party, then Independent Counsel shall be selected as the Reviewing Party. If it is determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within ten (10) days after such determination.

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          6.3      Selection, Payment and Discharge of Independent Counsel. If required, Independent Counsel shall be selected by Indemnitee and Indemnitee shall give written notice to the Company advising it of the identity of Independent Counsel so selected. The Company may, within seven (7) days after such written notice of selection shall have been given, deliver to Indemnitee a written objection to such selection. Such objection may be asserted only on the ground that Independent Counsel so selected does not meet the requirements of “Independent Counsel” as defined in this Agreement, and the objection shall set forth with particularity the factual basis of such assertion. If such written objection is made, Independent Counsel so selected may not serve as Independent Counsel, unless and until a court has determined that such objection is without merit. If, within twenty (20) days after submission by Indemnitee of a written request for indemnification pursuant to Section 6.1 hereof, no Reviewing Party shall have been selected and not objected to, either the Company or Indemnitee may petition the Court of Chancery of the State of Delaware, or other court of competent jurisdiction, for resolution of any objection which shall have been made by the Company to the selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by such court or by such other person as such court shall designate, and the person with respect to whom an objection is so resolved or the person so appointed shall act as Independent Counsel under Section 6.2 hereof. The Company shall pay any and all reasonable fees and expenses of Independent Counsel incurred by such Independent Counsel in connection with its actions pursuant to this Agreement, and the Company shall pay all reasonable fees and expenses incident to the procedures of this Section 6.3, regardless of the manner in which such Independent Counsel was selected or appointed. Upon the due commencement date of any judicial proceeding or arbitration pursuant to Section 8.1 of this Agreement, Independent Counsel shall be discharged and relieved of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing).

          6.4      Cooperation. Both the Company and Indemnitee shall cooperate with the Reviewing Party with respect to Indemnitee’s entitlement to indemnification, including providing to such person, persons or entity any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee or the Company, as the case may be, and reasonably necessary to such determination. Any reasonable costs or expenses (including attorneys’ fees and disbursements) incurred by Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to Indemnitee’s entitlement to indemnification).

     Section 7.      Presumptions and Effects of Certain Proceedings.

          7.1      Burden of Proof. In making a determination with respect to entitlement to indemnification hereunder, the Reviewing Party shall presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 6.1 of this Agreement, and the Company shall have the burden of proof to overcome that presumption in connection with the making by any Reviewing Party of any determination contrary to that presumption.

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          7.2      Failure to Determine Entitlement. If the Reviewing Party shall not have made a determination within sixty (60) days after receipt by the Company of the request therefor, the requisite determination of entitlement to indemnification shall be deemed to have been made and Indemnitee shall be entitled to such indemnification; provided, however, that such 60-day period may be extended for a reasonable time, not to exceed an additional thirty (30) days, if the Reviewing Party in good faith require(s) such additional time for the obtaining or evaluating of documentation or information relating thereto.

          7.3      Effect of Other Proceedings. The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that the conduct was unlawful.

     Section 8.      Remedies of Indemnitee.

          8.1      Adjudication. In the event that (a) a determination is made pursuant to Section 6 of this Agreement that Indemnitee is not entitled to indemnification under this Agreement, (b) advancement of Expenses is not timely made pursuant to Section 4 of this Agreement, (c) payment of indemnification is not made pursuant to Section 3 of this Agreement within ten (10) days after receipt by the Company of a written request therefor, or (d) payment of indemnification is not made within ten (10) days after a determination has been made that Indemnitee is entitled to indemnification or such determination is deemed to have been made pursuant to Sections 6 or 7 of this Agreement, Indemnitee shall be entitled to an adjudication, in any court of competent jurisdiction selected by Indemnitee within or without the State of Delaware, of Indemnitee’s entitlement to such indemnification or advancement of Expenses. Alternatively, Indemnitee, at his option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the rules of the American Arbitration Association. Indemnitee shall commence any action under this Section 8.1 within one (1) year following the date on which Indemnitee first has the right to commence such action hereunder.

          8.2      De Novo Review. In the event that a determination shall have been made pursuant to Section 6 of this Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration commenced pursuant to Section 8.1 shall be conducted in all respects as a de novo trial or arbitration on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination. In any such judicial proceeding or arbitration, the Company shall have the burden of proving that Indemnitee is not entitled to indemnification or the advancement of Expenses.

          8.3      Company Bound. If a determination shall have been made or deemed to have been made pursuant to Section 6 or 7 of this Agreement that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding or arbitration absent (a) a misstatement of a material fact by Indemnitee, or an omission of a

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material fact necessary to make Indemnitee’s statement not materially misleading, in connection with the request for indemnification or the furnishing of information or (b) a prohibition of such indemnification under applicable law. The Company shall be precluded from asserting in any such judicial proceeding or arbitration that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court or before any such arbitrator that the Company is bound by all provisions of this Agreement.

          8.4      Expenses of Adjudication. In the event that Indemnitee seeks an adjudication or an award to enforce his rights under, or to recover damages for breach of, this Agreement, Indemnitee shall be entitled to recover from the Company, and shall be indemnified by the Company against, any and all expenses (of the type described in the definition of Expenses) actually and reasonably incurred by Indemnitee in such adjudication or arbitration, but only if Indemnitee prevails therein. If it shall be determined in such adjudication or arbitration that Indemnitee is entitled to receive part but not all of the indemnification or advancement of Expenses sought, Indemnitee shall be entitled to recover expenses from the Company on a pro rata basis.

     Section 9.      Non-Exclusivity; Subrogation.

          9.1      Non-Exclusivity. The rights of indemnification and to receive advancement of Expenses as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the certificate of incorporation or by-laws of any corporation, any other agreement, a vote of stockholders, a resolution of directors or otherwise.

          9.2      No Duplicative Payment. The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise.

     Section 10.      Insurance. The Company hereby covenants and agrees that during the term hereof, the Company shall obtain and maintain in full force and effect directors’ and officers’ liability insurance in reasonable amounts but in no event less than $1,000,000 from established and reputable insurers. Indemnitee shall be named as an insured in such a manner as to provide Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company’s directors.

     Section 11.      Company May Assume Defense. In the event the Company shall be obligated to pay the Expenses of any Proceeding against Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such Proceeding, with counsel reasonably acceptable to Indemnitee, upon the delivery to Indemnitee of written notice of its election to do so. After delivery of such notice, the Company shall not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same Proceeding; provided, however, that (a) Indemnitee shall have the right to employ counsel in any such Proceeding at Indemnitee’s expense and (b) if (i) the employment of counsel by Indemnitee has been previously authorized by the Company, (ii) Indemnitee shall have reasonably concluded

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that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense, or (iii) the Company shall not, in fact, have employed counsel to assume the defense of such Proceeding, the fees and expenses of Indemnitee’s counsel shall be at the expense of the Company.

     Section 12.      Definitions. For purposes of this Agreement:

     (a)      “Corporate Status” means the position of a person as a director, officer, employee, agent or fiduciary of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise held at the request of the Company and shall include any position which imposes duties on, or involves services by, such person with respect to an employee benefit plan, its participants or beneficiaries.

     (b)      “Expenses” means all reasonable attorneys’ fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types of customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, or being or preparing to be a witness in a Proceeding.

     (c)      “Independent Counsel” means a law firm, or a member of a law firm, that is nationally recognized as experienced in matters of corporation law and neither presently is, nor in the past five (5) years has been, retained to represent either (i) the Company or Indemnitee in any matter material to either such party or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. The term “Independent Counsel” shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s rights under this Agreement.

     (d)      “Liabilities” means any judgments, fines, penalties, or similar payments or amounts paid or incurred by Indemnitee in connection with any Proceeding, and amounts paid or incurred by Indemnitee or on Indemnitee’s behalf in settlement of any Proceeding (including any excise taxes assessed upon Indemnitee with respect to any employee benefit plan) and all Expenses.

     (e)      “Proceeding” means any action, suit, arbitration, alternate dispute resolution mechanism, investigation, administrative hearing or any other proceeding, pending or threatened, whether civil, criminal, administrative or investigative, except one initiated by Indemnitee, unless the Board of Directors consents thereto.

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          Section 13.      Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if (a) delivered by hand and receipted for by the party to whom such notice or other communication shall have been directed or (b) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed:

(a)	If to Indemnitee, to:
	Telephone:
	Facsimile:
(b)	If to the Company, to:
	First Mercury Financial Corporation
	29621 Northwestern Highway
	Southfield, Michigan 48034
	Attention: Richard Smith
	Telephone: (248) 358-4010
	Facsimile: (248) 353-5879

or to such other address as may have been furnished to the other party. Promptly after receipt by Indemnitee of notice of the commencement of or the threat of commencement of any Proceeding, Indemnitee shall notify the Company of the commencement or the threat of commencement thereof.

     Section 14.      General Provisions.

          14.1      Successors and Assigns. This Agreement shall be binding upon the Company and its successors and assigns and shall inure to the benefit of Indemnitee and his heirs, executors and administrators. The Company shall require and cause any successor to substantially all of the business or assets of the Company, by written agreement in form and substance satisfactory to Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place.

          14.2      No Adequate Remedy. The parties acknowledge that it is impossible to measure in money the damages which will accrue to either party by reason of a failure to perform any of the obligations under this Agreement. Therefore, if either party shall institute any action or proceeding to enforce the provisions hereof, the party against whom such action or proceeding is brought hereby waives the claim or defense that the party bringing such action has an adequate remedy at law, and the party against whom the action is brought shall not urge in any action or proceeding the claim or defense that the other party has an adequate remedy at law.

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          14.3      Governing Law. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware.

          14.4      Severability. If any provision or provisions of this Agreement shall be held to be invalid or unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including, without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid or unenforceable) shall not in any way be affected or impaired thereby; and (b) to the fullest extent possible, the remaining provisions of this Amendment (including, without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid or unenforceable.

          14.5      Modification and Waiver. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No amendment, alteration, rescission or replacement of this Agreement or any provision hereof shall be effective as to Indemnitee with respect to any action taken or omitted by such Indemnitee in Indemnitee’s Corporate Status before such amendment, alteration, rescission or replacement. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. The party shall not be deemed to have waived a right or remedy provided in or relating to this Agreement, unless the waiver is in writing and duly executed by the party.

          14.6      Entire Agreement. This Agreement as to its subject matter, exclusively and completely states the rights and duties of the parties, sets forth their entire understanding and merges all prior and contemporaneous representations, promises, proposals, discussions and understandings by or between the parties.

[SIGNATURE PAGE FOLLOWS]

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     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above first above written.

COMPANY: FIRST MERCURY FINANCIAL CORPORATION
By:	/s/ Richard H. Smith
	Name:	Richard H. Smith
	Title:	President

INDEMNITEE:
/s/ Steven Shapiro
Name:	Steven Shapiro

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EX-10.14

EXHIBIT 10.14

INDEMNIFICATION AGREEMENT

     THIS AGREEMENT, made and entered into this 7^th day of June, 2004 (“Agreement”), by and between First Mercury Financial Corporation, a Delaware corporation (the “Company”), and Hollis Rademacher (“Indemnitee”):

     WHEREAS, qualified persons are reluctant to serve corporations as directors or officers or in other capacities, unless they are provided with adequate protection against inordinate risks of claims and actions against them arising out of their service to and activities on behalf of such corporations;

     WHEREAS, the uncertainties related to obtaining adequate insurance and indemnification have increased the difficulty of attracting and retaining such persons;

     WHEREAS, it is reasonable, prudent and necessary for the Company to obligate itself contractually to indemnify such persons to the fullest extent permitted by law, so that such persons will serve or continue to serve the Company free from undue concern that they will not be adequately indemnified;

     WHEREAS, the Company and Indemnitee recognize that the legal risks and potential liabilities, and the threat thereof, associated with lawsuits filed against persons serving the Company, and the resultant substantial time, expense and anxiety spent and endured in defending lawsuits bears no reasonable relationship to the compensation received by such persons, and thus poses a significant deterrent and increased reluctance on the part of experienced and capable individuals to serve the Company;

     WHEREAS, the By-laws of the Company and the laws of the State of Delaware provide for the indemnification of directors, officers, agents and employees of the Company and specifically provide that they are not exclusive, and thereby contemplate that contracts may be entered into between the Company and persons providing services to it; and

     WHEREAS, Indemnitee is willing to serve, continue to serve and to take on additional service for or on behalf of the Company on the condition that he be indemnified according to the terms of this Agreement.

     NOW, THEREFORE, in consideration of the premises and promises contained herein, the parties agree as follows:

     Section 1.      Services by Indemnitee. Indemnitee agrees to serve as a director of the Company, and, if he subsequently consents, at its request or for its benefit, as a director, officer, employee, agent or fiduciary of certain other corporations and entities. Nothing contained herein shall entitle or require Indemnitee to continue in Indemnitee’s present position or any future position with the Company.

     Section 2.      Term of Agreement. This Agreement shall continue until and terminate upon the later of: (a) ten (10) years after the date that Indemnitee ceases to hold a Corporate Status or (b) one hundred twenty (120) days after the final termination of all pending Proceedings in respect of which Indemnitee is granted rights of indemnification or advancement

of Expenses hereunder and of any proceeding commenced by Indemnitee pursuant to Section 8 of this Agreement.

     Section 3.      Indemnification

          3.1      General. As more specifically set forth in Section 3.2 and subject to the limitations of Section 5, the Company shall hold harmless and indemnify Indemnitee against all Liabilities and advance to Indemnitee all Expenses to the fullest extent permitted by the Delaware General Corporation Law, or by any amendment thereof (but in the case of any such amendment, only to the extent such amendment permits the Company to provide broader indemnification than provided prior to such amendment), or by other statutory provisions authorizing or permitting such indemnification applicable from time to time hereafter.

          3.2      Proceedings. Indemnitee shall be entitled to the rights of indemnification provided in this Section 3.2 if, by reason of Indemnitee’s Corporate Status, Indemnitee is, or is threatened to be, made a party to any threatened, pending or completed Proceeding (including a Proceeding by or in the right of the Company). Under this Section 3.2, Indemnitee shall be indemnified against all Liabilities actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection with such Proceeding or any claim, issue or matter therein, if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal Proceeding, had no reasonable cause to believe the conduct was unlawful.

          3.3      Indemnification for Expenses as a Witness. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of Indemnitee’s Corporate Status, a witness in any Proceeding, he shall be indemnified against all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection therewith.

          3.4      Partial Indemnity. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of any Liabilities but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is entitled. Moreover, notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any Proceeding or in defense of any claim, issue or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against all Expenses incurred in connection therewith.

     Section 4.      Advancement of Expenses. The Company shall advance all Expenses incurred or to be incurred by or on behalf of Indemnitee in connection with any Proceeding within thirty (30) days after the receipt by the Company of a statement from Indemnitee requesting such advance from time to time, whether prior to or after final disposition of such Proceeding. Each such statement shall reasonably evidence the Expenses incurred or to be incurred by Indemnitee. Indemnitee hereby agrees and undertakes to repay any Expenses advanced, if it shall ultimately be determined by a final non-appealable judgment of a court of competent jurisdiction that Indemnitee is not entitled to be indemnified against such Expenses.

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     Section 5.      Specific Limitations on Indemnity. Indemnitee shall not be entitled to indemnification or advancement of expenses under this Agreement (i) with respect to proceedings or claims initiated or brought voluntarily by the Indemnitee and not by way of defense, except with respect to proceedings specifically authorized by the Board or brought to establish or enforce a right to indemnification and/or advancement of expenses arising under this Agreement, the charter documents of the Company or any subsidiary, the Series A Convertible Preferred Stock Purchase Agreement dated March 1, 2004 between the Company and FMFC Holdings, LLC or any statute or law or otherwise, but such indemnification or advancement of expenses may be provided by the Company in specific cases if the Board finds it to be appropriate; or (ii) for any amounts paid in settlement of a proceeding unless the Company consents in advance in writing to such settlement, which consent shall not be unreasonably withheld; or (iii) on account of any suit in which judgment is rendered against the Indemnitee for an accounting of profits made from the purchase or sale by the Indemnitee of securities of the Company pursuant to the provisions of Section l6(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any federal, state or local statutory law; or (iv) if a final decision by a court having jurisdiction in the matter shall determine that such indemnification is not lawful (in this respect, the Company and the Indemnitee have been advised that the Securities and Exchange Commission takes the position that indemnification for liabilities arising under the federal securities laws is against public policy and is, therefore, unenforceable and that claims for indemnification should be submitted to appropriate courts for adjudication).

     Section 6.      Procedure for Determination of Entitlement to Indemnification.

          6.1      Initial Request. To obtain indemnification under this Agreement in connection with any Proceeding, and for the duration thereof, Indemnitee shall submit to the Company a written request, including such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification. The Secretary of the Company shall, promptly upon receipt of any request for indemnification, advise the Board in writing that Indemnitee has requested indemnification.

          6.2      Method of Determination. Upon written request by Indemnitee for indemnification pursuant to Section 6.1 hereof, a determination, if required by applicable law, with respect to Indemnitee’s entitlement thereto shall be made in the specific case by one of the following methods, which shall be selected by agreement of the Indemnitee and the Company: (1) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (2) by a majority vote of a committee of such directors designated by a majority of such directors even though less than a quorum, or (3) if there are no such directors or if such directors so direct, by independent legal counsel in a written opinion, or (4) by the stockholders (the individual or body making such determination, the “Reviewing Party”). If the Indemnitee and the Company fail to agree on the appropriate Reviewing Party, then Independent Counsel shall be selected as the Reviewing Party. If it is determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within ten (10) days after such determination.

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          6.3      Selection, Payment and Discharge of Independent Counsel. If required, Independent Counsel shall be selected by Indemnitee and Indemnitee shall give written notice to the Company advising it of the identity of Independent Counsel so selected. The Company may, within seven (7) days after such written notice of selection shall have been given, deliver to Indemnitee a written objection to such selection. Such objection may be asserted only on the ground that Independent Counsel so selected does not meet the requirements of “Independent Counsel” as defined in this Agreement, and the objection shall set forth with particularity the factual basis of such assertion. If such written objection is made, Independent Counsel so selected may not serve as Independent Counsel, unless and until a court has determined that such objection is without merit. If, within twenty (20) days after submission by Indemnitee of a written request for indemnification pursuant to Section 6.1 hereof, no Reviewing Party shall have been selected and not objected to, either the Company or Indemnitee may petition the Court of Chancery of the State of Delaware, or other court of competent jurisdiction, for resolution of any objection which shall have been made by the Company to the selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by such court or by such other person as such court shall designate, and the person with respect to whom an objection is so resolved or the person so appointed shall act as Independent Counsel under Section 6.2 hereof. The Company shall pay any and all reasonable fees and expenses of Independent Counsel incurred by such Independent Counsel in connection with its actions pursuant to this Agreement, and the Company shall pay all reasonable fees and expenses incident to the procedures of this Section 6.3, regardless of the manner in which such Independent Counsel was selected or appointed. Upon the due commencement date of any judicial proceeding or arbitration pursuant to Section 8.1 of this Agreement, Independent Counsel shall be discharged and relieved of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing).

          6.4      Cooperation. Both the Company and Indemnitee shall cooperate with the Reviewing Party with respect to Indemnitee’s entitlement to indemnification, including providing to such person, persons or entity any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee or the Company, as the case may be, and reasonably necessary to such determination. Any reasonable costs or expenses (including attorneys’ fees and disbursements) incurred by Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to Indemnitee’s entitlement to indemnification).

     Section 7.      Presumptions and Effects of Certain Proceedings.

          7.1      Burden of Proof. In making a determination with respect to entitlement to indemnification hereunder, the Reviewing Party shall presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 6.1 of this Agreement, and the Company shall have the burden of proof to overcome that presumption in connection with the making by any Reviewing Party of any determination contrary to that presumption.

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          7.2      Failure to Determine Entitlement. If the Reviewing Party shall not have made a determination within sixty (60) days after receipt by the Company of the request therefor, the requisite determination of entitlement to indemnification shall be deemed to have been made and Indemnitee shall be entitled to such indemnification; provided, however, that such 60-day period may be extended for a reasonable time, not to exceed an additional thirty (30) days, if the Reviewing Party in good faith require(s) such additional time for the obtaining or evaluating of documentation or information relating thereto.

          7.3      Effect of Other Proceedings. The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that the conduct was unlawful.

     Section 8.      Remedies of Indemnitee.

          8.1      Adjudication. In the event that (a) a determination is made pursuant to Section 6 of this Agreement that Indemnitee is not entitled to indemnification under this Agreement, (b) advancement of Expenses is not timely made pursuant to Section 4 of this Agreement, (c) payment of indemnification is not made pursuant to Section 3 of this Agreement within ten (10) days after receipt by the Company of a written request therefor, or (d) payment of indemnification is not made within ten (10) days after a determination has been made that Indemnitee is entitled to indemnification or such determination is deemed to have been made pursuant to Sections 6 or 7 of this Agreement, Indemnitee shall be entitled to an adjudication, in any court of competent jurisdiction selected by Indemnitee within or without the State of Delaware, of Indemnitee’s entitlement to such indemnification or advancement of Expenses. Alternatively, Indemnitee, at his option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the rules of the American Arbitration Association. Indemnitee shall commence any action under this Section 8.1 within one (1) year following the date on which Indemnitee first has the right to commence such action hereunder.

          8.2      De Novo Review. In the event that a determination shall have been made pursuant to Section 6 of this Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration commenced pursuant to Section 8.1 shall be conducted in all respects as a de novo trial or arbitration on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination. In any such judicial proceeding or arbitration, the Company shall have the burden of proving that Indemnitee is not entitled to indemnification or the advancement of Expenses.

          8.3      Company Bound. If a determination shall have been made or deemed to have been made pursuant to Section 6 or 7 of this Agreement that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding or arbitration absent (a) a misstatement of a material fact by Indemnitee, or an omission of a

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material fact necessary to make Indemnitee’s statement not materially misleading, in connection with the request for indemnification or the furnishing of information or (b) a prohibition of such indemnification under applicable law. The Company shall be precluded from asserting in any such judicial proceeding or arbitration that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court or before any such arbitrator that the Company is bound by all provisions of this Agreement.

          8.4      Expenses of Adjudication. In the event that Indemnitee seeks an adjudication or an award to enforce his rights under, or to recover damages for breach of, this Agreement, Indemnitee shall be entitled to recover from the Company, and shall be indemnified by the Company against, any and all expenses (of the type described in the definition of Expenses) actually and reasonably incurred by Indemnitee in such adjudication or arbitration, but only if Indemnitee prevails therein. If it shall be determined in such adjudication or arbitration that Indemnitee is entitled to receive part but not all of the indemnification or advancement of Expenses sought, Indemnitee shall be entitled to recover expenses from the Company on a pro rata basis.

     Section 9.      Non-Exclusivity; Subrogation.

          9.1      Non-Exclusivity. The rights of indemnification and to receive advancement of Expenses as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the certificate of incorporation or by-laws of any corporation, any other agreement, a vote of stockholders, a resolution of directors or otherwise.

          9.2      No Duplicative Payment. The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise.

     Section 10.      Insurance. The Company hereby covenants and agrees that during the term hereof, the Company shall obtain and maintain in full force and effect directors’ and officers’ liability insurance in reasonable amounts but in no event less than $1,000,000 from established and reputable insurers. Indemnitee shall be named as an insured in such a manner as to provide Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company’s directors.

     Section 11.      Company May Assume Defense. In the event the Company shall be obligated to pay the Expenses of any Proceeding against Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such Proceeding, with counsel reasonably acceptable to Indemnitee, upon the delivery to Indemnitee of written notice of its election to do so. After delivery of such notice, the Company shall not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same Proceeding; provided, however, that (a) Indemnitee shall have the right to employ counsel in any such Proceeding at Indemnitee’s expense and (b) if (i) the employment of counsel by Indemnitee has been previously authorized by the Company, (ii) Indemnitee shall have reasonably concluded

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that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense, or (iii) the Company shall not, in fact, have employed counsel to assume the defense of such Proceeding, the fees and expenses of Indemnitee’s counsel shall be at the expense of the Company.

     Section 12.      Definitions. For purposes of this Agreement:

     (a)      “Corporate Status” means the position of a person as a director, officer, employee, agent or fiduciary of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise held at the request of the Company and shall include any position which imposes duties on, or involves services by, such person with respect to an employee benefit plan, its participants or beneficiaries.

     (b)      “Expenses” means all reasonable attorneys’ fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types of customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, or being or preparing to be a witness in a Proceeding.

     (c)      “Independent Counsel” means a law firm, or a member of a law firm, that is nationally recognized as experienced in matters of corporation law and neither presently is, nor in the past five (5) years has been, retained to represent either (i) the Company or Indemnitee in any matter material to either such party or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. The term “Independent Counsel” shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s rights under this Agreement.

     (d)      “Liabilities” means any judgments, fines, penalties, or similar payments or amounts paid or incurred by Indemnitee in connection with any Proceeding, and amounts paid or incurred by Indemnitee or on Indemnitee’s behalf in settlement of any Proceeding (including any excise taxes assessed upon Indemnitee with respect to any employee benefit plan) and all Expenses.

     (e)      “Proceeding” means any action, suit, arbitration, alternate dispute resolution mechanism, investigation, administrative hearing or any other proceeding, pending or threatened, whether civil, criminal, administrative or investigative, except one initiated by Indemnitee, unless the Board of Directors consents thereto.

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          Section 13.      Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if (a) delivered by hand and receipted for by the party to whom such notice or other communication shall have been directed or (b) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed:

(a)	If to Indemnitee, to:
	Telephone:
	Facsimile:
(b)	If to the Company, to:
	First Mercury Financial Corporation
	29621 Northwestern Highway
	Southfield, Michigan 48034
	Attention: Richard Smith
	Telephone: (248) 358-4010
	Facsimile: (248) 353-5879

or to such other address as may have been furnished to the other party. Promptly after receipt by Indemnitee of notice of the commencement of or the threat of commencement of any Proceeding, Indemnitee shall notify the Company of the commencement or the threat of commencement thereof.

     Section 14.      General Provisions.

          14.1      Successors and Assigns. This Agreement shall be binding upon the Company and its successors and assigns and shall inure to the benefit of Indemnitee and his heirs, executors and administrators. The Company shall require and cause any successor to substantially all of the business or assets of the Company, by written agreement in form and substance satisfactory to Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place.

          14.2      No Adequate Remedy. The parties acknowledge that it is impossible to measure in money the damages which will accrue to either party by reason of a failure to perform any of the obligations under this Agreement. Therefore, if either party shall institute any action or proceeding to enforce the provisions hereof, the party against whom such action or proceeding is brought hereby waives the claim or defense that the party bringing such action has an adequate remedy at law, and the party against whom the action is brought shall not urge in any action or proceeding the claim or defense that the other party has an adequate remedy at law.

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          14.3      Governing Law. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware.

          14.4      Severability. If any provision or provisions of this Agreement shall be held to be invalid or unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including, without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid or unenforceable) shall not in any way be affected or impaired thereby; and (b) to the fullest extent possible, the remaining provisions of this Amendment (including, without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid or unenforceable.

          14.5      Modification and Waiver. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No amendment, alteration, rescission or replacement of this Agreement or any provision hereof shall be effective as to Indemnitee with respect to any action taken or omitted by such Indemnitee in Indemnitee’s Corporate Status before such amendment, alteration, rescission or replacement. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. The party shall not be deemed to have waived a right or remedy provided in or relating to this Agreement, unless the waiver is in writing and duly executed by the party.

          14.6      Entire Agreement. This Agreement as to its subject matter, exclusively and completely states the rights and duties of the parties, sets forth their entire understanding and merges all prior and contemporaneous representations, promises, proposals, discussions and understandings by or between the parties.

[SIGNATURE PAGE FOLLOWS]

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     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above first above written.

COMPANY: FIRST MERCURY FINANCIAL CORPORATION
By:	/s/ Richard H. Smith
	Name:	Richard H. Smith
	Title:	President

INDEMNITEE:
/s/ Hollis Rademacher
Name:	Hollis Rademacher

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EX-10.15

Exhibit 10.15

INDENTURE

Between

FIRST MERCURY FINANCIAL CORPORATION

and

WILMINGTON TRUST COMPANY

AS TRUSTEE

Dated as of May 26, 2004

FLOATING RATE JUNIOR SUBORDINATED DEBENTURES DUE 2034

TABLE OF CONTENTS

	Page
ARTICLE I DEFINITIONS		1
Section 1.01 Definitions		1
ARTICLE II SECURITIES		8
Section 2.01 Principal Amount; Maturity		8
Section 2.02 Form of Securities		8
Section 2.03 Form of Trustee’s Certificate of Authentication		9
Section 2.04 Authentication and Dating		9
Section 2.05 Date and Denomination of Securities		9
Section 2.06 Execution of Securities		11
Section 2.07 Exchange and Registration of Transfer of Securities		11
Section 2.08 Mutilated, Destroyed, Lost or Stolen Securities		14
Section 2.09 Temporary Securities		15
Section 2.10 Cancellation of Securities Paid, etc.		15
Section 2.11 Interest		16
Section 2.12 Deferral of Interest Payments		17
Section 2.13 CUSIP Number		17
ARTICLE III PARTICULAR COVENANTS OF THE COMPANY		18
Section 3.01 Payment of Principal, Premium, if any, and Interest		18
Section 3.02 Offices for Notices and Payments, etc.		18
Section 3.03 Appointments to Fill Vacancies in Trustee’s Office		19
Section 3.04 Provisions as to Paying Agent		19
Section 3.05 Certificate to Trustee		19
Section 3.06 Compliance with Consolidation Provisions		20
Section 3.07 Limitations on Dividends, etc.		20
Section 3.08 Covenants as to the Trust		20
Section 3.09 Notice of Default		21
ARTICLE IV SECURITYHOLDERS’ LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE		21
Section 4.01 Securityholders’ Lists		21
Section 4.02 Preservation and Disclosure of Lists		21
Section 4.03 Reports by Company		22
Section 4.04 Financial and Other Information Under Certain Circumstances		23
ARTICLE V REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS ON EVENT OF DEFAULT		24
Section 5.01 Events of Default		24
Section 5.02 Payment of Securities on Default; Suit Therefor		26
Section 5.03 Application of Moneys Collected by Trustee		27

TABLE OF CONTENTS
(continued)

	Page
Section 5.04 Proceedings by Securityholders		28
Section 5.05 Proceedings by Trustee		28
Section 5.06 Remedies Cumulative and Continuing		29
Section 5.07 Direction of Proceedings and Waiver of Defaults by Majority of Securityholders		29
Section 5.08 Notice of Defaults		30
Section 5.09 Undertaking to Pay Costs		30
Section 5.10 Delay or Omission Not Waiver		30
ARTICLE VI CONCERNING THE TRUSTEE		31
Section 6.01 Duties and Responsibilities of Trustee		31
Section 6.02 Reliance on Documents, Opinions, etc.		32
Section 6.03 No Responsibility for Recitals, etc.		33
Section 6.04 Trustee, Authenticating Agent, Paying Agents, Transfer Agents or Registrar May Own Securities		34
Section 6.05 Moneys to be Held in Trust		34
Section 6.06 Compensation and Expenses of Trustee		34
Section 6.07 Officers’ Certificate as Evidence		35
Section 6.08 Conflicting Interest of Trustee		35
Section 6.09 Eligibility of Trustee		35
Section 6.10 Resignation or Removal of Trustee		36
Section 6.11 Acceptance by Successor Trustee		37
Section 6.12 Succession by Merger, etc.		37
Section 6.13 Authenticating Agents		38
ARTICLE VII CONCERNING THE SECURITYHOLDERS		39
Section 7.01 Action by Securityholders		39
Section 7.02 Proof of Execution by Securityholders		39
Section 7.03 Who Are Deemed Absolute Owners		40
Section 7.04 Securities Owned by Company Deemed Not Outstanding		40
Section 7.05 Revocation of Consents; Future Holders Bound		40
ARTICLE VIII SECURITYHOLDERS’ MEETINGS		41
Section 8.01 Purposes of Meetings		41
Section 8.02 Call of Meetings by Trustee		41
Section 8.03 Call of Meetings by Company or Securityholders		41
Section 8.04 Qualifications for Voting		41
Section 8.05 Regulations		42
Section 8.06 Voting		42
ARTICLE IX SUPPLEMENTAL INDENTURES		43
Section 9.01 Supplemental Indentures without Consent of Securityholders		43

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TABLE OF CONTENTS
(continued)

	Page
Section 9.02 Supplemental Indentures with Consent of Securityholders		44
Section 9.03 Notation on Securities		45
Section 9.04 Evidence of Compliance of Supplemental Indenture to be Furnished to Trustee		45
ARTICLE X CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE		45
Section 10.01 Company May Consolidate, etc., on Certain Terms		45
Section 10.02 Successor Entity to be Substituted for Company		46
Section 10.03 Opinion of Counsel to be Given to Trustee		47
ARTICLE XI SATISFACTION AND DISCHARGE OF INDENTURE		47
Section 11.01 Discharge of Indenture		47
Section 11.02 Deposited Moneys to be Held in Trust by Trustee		47
Section 11.03 Paying Agent to Repay Moneys Held		48
Section 11.04 Return of Unclaimed Moneys		48
ARTICLE XIII IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS		48
Section 12.01 Indenture and Securities Solely Entity Obligations		48
ARTICLE XIII MISCELLANEOUS PROVISIONS		49
Section 13.01 Successors		49
Section 13.02 Official Acts by Successor Entity		49
Section 13.03 Surrender of Company Powers		49
Section 13.04 Addresses for Notices, etc.		49
Section 13.05 Governing Law		49
Section 13.06 Submission to Jurisdiction		49
Section 13.07 Evidence of Compliance with Conditions Precedent		50
Section 13.08 Table of Contents, Headings, etc.		50
Section 13.09 Execution in Counterparts		50
Section 13.10 Separability		50
ARTICLE XIV REDEMPTION OF SECURITIES		51
Section 14.01 Optional Redemption		51
Section 14.02 Notice of Redemption; Selection of Securities		51
Section 14.03 Payment of Securities Called for Redemption		52
ARTICLE XV SUBORDINATION OF SECURITIES		53
Section 15.01 Agreement to Subordinate		53
Section 15.02 Default on Senior Indebtedness		53

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TABLE OF CONTENTS
(continued)

	Page
Section 15.03 Liquidation; Dissolution; Bankruptcy		53
Section 15.04 Subrogation of Securityholders		55
Section 15.05 Trustee to Effectuate Subordination		56
Section 15.06 Notice by the Company		56
Section 15.07 Rights of the Trustee; Holders of Senior Indebtedness		56
Section 15.08 Subordination May Not Be Impaired		57
EXHIBIT A [FORM OF SECURITY] (FORM OF FACE)		1

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     THIS INDENTURE, dated as of May 24, 2004, between First Mercury Financial Corporation, a Delaware corporation (hereinafter sometimes called the “Company”), and Wilmington Trust Company, a Delaware banking corporation, as trustee (hereinafter sometimes called the “Trustee”).

WITNESSETH:

     WHEREAS, for its lawful corporate purposes, the Company has duly authorized the issuance of its Floating Rate Junior Subordinated Debentures due 2034 (the “Securities”) in the aggregate principal amount of $12,372,000 and, to provide the terms and conditions upon which the Securities are to be authenticated, issued and delivered, the Company has duly authorized the execution, delivery and performance of this Indenture; and

     WHEREAS, all acts and things necessary to make this Indenture a valid and legally binding agreement according to its terms, have been done and performed;

     NOW, THEREFORE, This Indenture Witnesseth:

     In consideration of the premises, and the purchase of the Securities by the Securityholders (as defined below) thereof, the Company covenants and agrees with the Trustee for the benefit of the respective Securityholders from time to time, as follows:

ARTICLE I
DEFINITIONS

     Section 1.01 Definitions.

     The terms defined in this Section 1.01 (except as herein otherwise expressly provided or unless the context otherwise requires) for all purposes of this Indenture and any indenture supplemental hereto shall have the respective meanings specified in this Section 1.01. All accounting terms used but not expressly defined herein shall have the meanings assigned to such terms in accordance with accounting principles generally accepted in the United States and the term “generally accepted accounting principles” means such accounting principles as are generally accepted in the United States at the time of any computation. The words “herein”, “hereof” and “hereunder” and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. Any reference to the singular includes the plural and vice versa (unless the context otherwise requires).

     “Additional Tax Sums” has the meaning specified in Section 2.11(c).

     “Affiliate” means, with respect to a specified Person, (a) any Person directly or indirectly owning, controlling or holding with power to vote, 10% or more of the outstanding Voting Securities or other ownership interests of the specified Person, (b) any Person 10% or more of whose outstanding Voting Securities or other ownership interests are directly or indirectly owned, controlled or held with power to vote by the specified Person, (c) any Person directly or indirectly controlling, controlled by, or under common control with the specified Person, (d) a partnership in which the specified Person is a general partner, (e) any officer or director of the

specified Person, and if the specified Person is an individual, any entity of which the specified Person is an officer, director or general partner.

     “Authenticating Agent” means any agent or agents of the Trustee which at the time shall be appointed and acting pursuant to Section 6.13.

     “Bankruptcy Law” means Title 11, U.S. Code, or any similar Federal or State law for the relief of debtors.

     “Board of Directors” means the Board of Directors of the Company or any duly authorized committee thereof.

     “Board Resolution” means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification.

     “Business Day” means any day other than a Saturday, Sunday or other day on which commercial banking institutions in The City of New York or Wilmington, Delaware are authorized or obligated by law, executive order or regulation to close.

     “Calculation Agent” means an agent appointed to calculate LIBOR in respect of each interest Payment Date, initially the Trustee.

     “Certificate of Authentication” means the certificate issued by the Trustee or the Authenticating Agent authenticating a Security issued under the Indenture.

     “Commission” means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act or, if at any time after the execution of this Indenture such Commission is not existing and performing the duties now assigned to it under the Trust indenture Act, then the body performing such duties at such time.

     “Common Securities” means undivided beneficial interests in the assets of the Trust which rank pari passu with Preferred Securities issued by the Trust; provided, however, that upon the occurrence of an Event of Default, the rights of registered holders of Common Securities to payment in respect of distributions and payments upon liquidation, redemption and otherwise are subordinated to the rights of registered holders of Preferred Securities.

     “Company” means First Mercury Financial Corporation, a Delaware corporation, and, subject to the provisions of Article X hereof, shall include its successors and assigns.

     “Compound Interest” has the meaning set forth in Section 2.11(a).

     “Custodian” means any receiver, trustee, assignee, liquidator, or similar official under any Bankruptcy Law.

     “Declaration”, with respect to the Trust, shall mean the Amended and Restated Declaration of Trust of the Trust by and among the holders from time to time of the Preferred Securities the Company, Wilmington Trust Company, as Institutional Trustee and Delaware

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Trustee, and the other trustees named therein, as it may be modified, amended or supplemented from time to time.

     “Default” means any event, act or condition that, with notice or lapse of time, or both, would constitute an Event of Default.

     “Defaulted interest” has the meaning set forth in Section 2.05.

     “Deferral Period” has the meaning set forth in Section 2.12(a).

     “Deferred Interest” has the meaning set forth in Section 2.12(a).

     “Dekania” means Dekania CDO II, Ltd, a limited liability company formed pursuant to the laws of the Cayman Islands.

     “Determination Date” means two London Banking Days next preceding the applicable Interest Payment Date.

     “Event of Default” means any event, act or condition specified in Section 5.01, continued for the period of time, if any, and after the giving of the notice, if any, therein designated.

     “Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time, or any successor legislation.

     “Indenture” means this instrument as originally executed or, if amended or supplemented as herein provided, as so amended or supplemented, or both.

     “Institutional Trustee” has the meaning set forth in the Declaration.

     “Interest Payment Date” has the meaning set forth in Section 2.11(a).

     “Interest Payment Period” means the period from and including an Interest Payment Date or, in the case of the first Interest Payment Period, the original date of issuance of the Securities, to, but excluding, the next succeeding Interest Payment Date or, in the case of the last Interest Payment Period, the Stated Maturity or date of redemption.

     “Interest Rate” means, with respect to any Interest Payment Period, a per annum rate of interest equal to LIBOR, as determined on the Determination Date for such Interest Payment Period, plus 4% (provided, that the Interest Rate for any Interest Payment Period prior to the Interest Payment Period commencing on the Interest Payment Date on May 15, 2009 may not exceed 12.50% per annum and, provided further, that the Interest Rate for any Interest Payment Period may not exceed the highest rate permitted by New York law, as the same may be modified by United States law of general applicability).

     “Investment Company Act” means the Investment Company Act of 1940, as amended from time to time, or any successor legislation.

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     “Investment Company Event” means that the Regular Trustees shall have received an opinion of nationally recognized independent counsel experienced in such matters, who shall not be an officer or employee of the Company or any of its Affiliates, to the effect that, as a result of the occurrence of a change in law or regulation or a written change (including any announced prospective change) in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority, there is more than an insubstantial risk that the Trust is or will within 90 days of the date of such opinion be considered an “investment company” that is required to be registered under the Investment Company Act, which change or prospective change becomes effective or would become effective, as the case may be, on or after the date of the issuance of the Preferred Securities.

     “LIBOR” means, with respect to an Interest Payment Period commencing on an Interest Payment Date (in the following order of priority):

     (a) the rate (expressed as a percentage per annum) for Eurodollar deposits having a three-month maturity that appears on Telerate page 3750 as of 11:00 a.m. (London time) on the Determination Date;

     (b) if such rate does not appear on Telerate page 3750 as of 11:00 a.m. (London time) on the Determination Date, the Calculation Agent will request the principal London offices of four leading banks in the London interbank market as selected by the Calculation Agent to provide such banks’ offered quotations (expressed as percentages per annum) to prime banks in the London interbank market for Eurodollar deposits having a three-month maturity as of 11:00 a.m. (London time) on such Determination Date, and if at least two quotations are provided, LIBOR will be the arithmetic mean of such quotations;

     (c) if fewer than two such quotations are provided as requested in clause (b) above, the Calculation Agent will request four major New York City banks selected by the Calculation Agent to provide such banks’ offered quotations (expressed as percentages per annum) to leading European banks for loans in Eurodollars as of 11:00 a.m. (New York City time) on such Determination Date, and, if at least two quotations are provided, LIBOR will be the arithmetic mean of such quotations; and

     (d) if fewer than two such quotations are provided as requested in clause (c) above, LIBOR will be LIBOR as in effect during the preceding Interest Payment Period.

     “London Banking Day” means any day, other than a Saturday or Sunday, on which banks are open for business (including dealings in deposits in U.S. dollars) in London.

     “Officers’ Certificate” means a certificate signed by the Chairman of the Board (if an executive officer), the President, any Executive Vice President or any Vice President, and by the Chief Financial Officer, the Treasurer, an Assistant Treasurer, the Controller, an Assistant Controller, the Secretary or an Assistant Secretary of the Company and delivered to the Trustee. Each such certificate shall include the statements provided for in Section 13.07 if and to the extent provided by the provisions of such Section.

     “Opinion of Counsel” means an opinion signed by legal counsel experienced in the matters as to which such opinion is being delivered, who may be an employee of or counsel to

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the Company, or may be other counsel satisfactory to the Trustee. Each such opinion shall include the statements provided for in Section 13.07 if and to the extent required by the provisions of such Section.

     The term “outstanding” (except as otherwise provided in Section 7.01), when used with reference to Securities, means, subject to the provisions of Section 7.04, as of any particular time, all Securities authenticated and delivered by the Trustee or the Authenticating Agent under this Indenture, except

     (a) Securities theretofore cancelled by the Trustee or the Authenticating Agent or delivered to the Trustee for cancellation;

     (b) Securities, or portions thereof, for the payment or redemption of which moneys in the necessary amount shall have been deposited in trust with the Trustee or with any paying agent (other than the Company) or shall have been set aside and segregated in trust by the Company (if the Company shall act as its own paying agent); provided that, if such Securities, or portions thereof, are to be redeemed prior to maturity thereof, notice of such redemption shall have been given in accordance with Article XIV or provision satisfactory to the Trustee shall have been made for giving such notice; and

     (c) Securities paid pursuant to Section 2.10 or Securities in lieu of or in substitution for which other Securities shall have been authenticated and delivered pursuant to the terms of Section 2.08 unless proof satisfactory to the Company and the Trustee is presented that any such Securities are held by bona fide holders in due course.

     “Paying Agent” has the meaning set forth in Section 3.04.

     “Person” means any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof.

     “Predecessor Security” of any particular Security means every previous Security evidencing all or a portion of the same debt and as that evidenced by such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 2.08 in lieu of a lost, destroyed or stolen Security shall be deemed to evidence the same debt as the lost, destroyed or stolen Security.

     “Preferred Securities” means undivided beneficial interests in the assets of the Trust which rank pari passu with Common Securities issued by the Trust, whether or not designated for the purposes of identification as preferred securities or capital securities; provided, however, that upon the occurrence of an Event of Default, the rights of registered holders of Common Securities to payment in respect of distributions and payments upon liquidation, redemption and otherwise are subordinated to the rights of registered holders of Preferred Securities.

     “Preferred Securities Guarantee” means the guarantee agreement dated as of the date hereof entered that the Company may into contemporaneously herewith with Wilmington Trust Company for the benefit of registered holders of the Preferred Securities of the Trust, as amended or supplemented from time to time.

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     “Principal Office of the Trustee”, or other similar term, shall mean the principal office of the Trustee at which, at any particular time, its corporate trust business is administered.

     “Redemption Price” has the meaning set forth in Section 14.01

     “Regular Trustees” has the meaning set forth in the Declaration.

     “Resale Restriction Termination Date” means, with respect to any Security, the date which is the later of (i) two years (or such shorter period of time as permitted by Rule 144(k) under the Securities Act) after the later of (y) the date of original issuance of such Security and (z) the last date on which the Company or any Affiliate (as defined in Rule 405 under the Securities Act) of the Company was the holder of such Security (or any predecessor thereto) and (ii) such later date, if any, as may be required by any subsequent change in applicable law.

     “Responsible Officer” means, with respect to the Trustee, any officer within the corporate trust department of the Trustee, including any vice president, any assistant vice president, any assistant secretary, any assistant treasurer, any financial services officer or other officer or agent of the corporate trust department of the Trustee customarily performing functions similar to those performed by any of the above designated officers or agents and also means, with respect to a particular corporate trust matter, any other officer or agent to whom such matter is referred because of that officer’s or agent’s knowledge of and familiarity with the particular subject.

     “Securities Act” means the Securities Act of 1933, as amended from time to time, or any successor legislation.

     “Security” or “Securities” has the meaning stated in the first recital of this Indenture and, more particularly, means the debt security or securities, as the case may be, authenticated and delivered under this Indenture.

     “Security Register” has the meaning set forth in Section 2.07.

     “Securityholder”, “Holder of Securities”, or other similar terms, mean any person in whose name at the time a Security is registered in the Security Register.

     “Senior Indebtedness” means, with respect to the Company, (i) the principal, premium, if any, and interest in respect of (a) indebtedness of the Company for money borrowed and (b) indebtedness evidenced by securities, debentures, notes, bonds or other similar instruments issued by the Company; (ii) all capital lease obligations of the Company; (iii) all obligations of the Company issued or assumed as the deferred purchase price of property, all conditional sale obligations of the Company and all obligations of the Company under any title retention agreement (but excluding trade accounts payable arising in the ordinary course of business); (iv) all obligations of the Company for the reimbursement of any letter of credit, any banker’s acceptance, any security purchase facility, any repurchase agreement or similar arrangement, any interest rate swap, any other hedging agreement, any obligation under options or any similar credit or other transaction; (v) all obligations of the type referred to in clauses (i) through (iv) above of other persons for the payment of which the Company is responsible or liable as obligor, guarantor or otherwise; and (vi) all obligations of the type referred to in clauses (i) through (v) above of other persons secured by any lien on any property or asset of the Company (whether or

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not such obligation is assumed by the Company), whether incurred on or prior to the date of the this Indenture or thereafter incurred, unless such obligations are not superior or are pari passu in right of payment to the Securities.

     “Special Event” means either a Tax Event or an Investment Company Event.

     “Stated Maturity” means the date on which the Securities mature and on which the principal shall be due and payable, together with all accrued and unpaid interest, including Compound Interest and Additional Interest, if any, thereon, which date shall be May 24, 2034, unless accelerated to an earlier date as provided in Article XIV.

     “Subsidiary” means with respect to any Person, (i) any corporation a majority of the outstanding Voting Securities of which are owned, directly or indirectly, by such Person or by one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries, (ii) any general partnership, joint venture or similar entity a majority of whose outstanding partnership or similar ownership interests shall at the time be owned by such Person, or by one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries and (iii) any limited partnership of which such Person or any of its Subsidiaries is a general partner.

     “Swap Agreement” means any financial agreement designed to manage the Company’s exposure to fluctuations in interest rates or credit conditions, currency exchange rates or commodity prices, including, without limitation, swap agreements, option agreements, cap agreements, floor agreements, collar agreements, credit swaps and forward purchase agreements.

     “Tax Event” means that the Company and, if any Preferred Securities remain outstanding, the Regular Trustees shall have received an opinion of a nationally recognized independent tax counsel experienced in such matters to the effect that, as a result of (a) any amendment to, or change (including any announced prospective change) in, the laws or any regulations thereunder of the United States or any political subdivision or taxing authority thereof or therein or (b) any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations, which amendment or change is effective or which pronouncement or decision is announced on or after the date of the original issuance of the Securities, there is more than an insubstantial risk that (i) the Trust is, or will be within 90 days of the date of such opinion, subject to United States federal income tax with respect to income received or accrued on the Securities, (ii) interest payable by the Company on the Securities is not, or within 90 days of the date of such opinion will not be, deductible by the Company (assuming the Company is organized under the laws of any state of the United States or the District of Columbia), in whole or in part, for United States federal income tax purposes, or (iii) the Trust is, or will be within 90 days of the date of such opinion, subject to more than a de minimis amount of other taxes, duties or other governmental charges.

     “Trust” means Mercury Financial Capital Trust II, a Delaware statutory trust established by the Certificate of Trust filed with the Delaware Secretary of State and existing pursuant to the Declaration, or any other similar trust sponsored by the Company and created for the purpose of issuing its securities in connection with the issuance of Securities under this Indenture.

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     “Trustee” means the Person identified as “Trustee” in the first paragraph hereof, and, subject to the provisions of Article VI hereof, shall also include its successors and assigns as Trustee hereunder.

     “Trust Indenture Act” means the Trust Indenture Act of 1939, as amended from time to time, or any successor legislation.

     “Trust Securities” means the Common Securities and the Preferred Securities of the Trust.

     “Voting Securities” mean shares, interests, participations or other equivalents in the equity (however designated) in such Person having ordinary voting power for the election of a majority of the directors (or their equivalent) of such Person, other than shares, interests, participations or other equivalents having such power only by reason of the occurrence of a contingency.

ARTICLE II
SECURITIES

     Section 2.01 Principal Amount; Maturity.

     The Company may issue up to $12,372,000 aggregate principal amount of the Securities. The Securities shall mature on May 24, 2034; provided that the Company may redeem the Securities prior to their Stated Maturity in accordance with Article XIV.

     Section 2.02 Form of Securities.

     The Securities shall be substantially in the form of Exhibit A hereto. Definitive Securities shall be typed, printed, lithographed or engraved on steel engraved borders or may be produced in any other manner, all as determined by the officers of the Company executing such Securities, as conclusively evidenced by their execution of such Securities. The Securities shall be issued in registered form only. Principal of, and premium, if any, and interest on the Securities issued in registered form will be payable, the transfer of such Securities will be registrable and such Securities will be exchangeable for Securities bearing identical terms and provisions at the office or agency of the Trustee in Wilmington, Delaware; provided, however, that payment of interest on an Interest Payment Date may be made at the option of the Company by check mailed to the Holder entitled thereto at such address as shall appear in the Security Register or by wire transfer to an account appropriately designated by the Holder entitled thereto, while payments due at Stated Maturity or earlier redemption will be made by the Company in same-day funds against presentation and surrender of the related Securities. Notwithstanding the foregoing, so long as the Holder of any Securities is the Institutional Trustee, the payment of the principal of, premium, if any, and interest (including Compound Interest and Additional Interest, if any) on such Securities held by the Institutional Trustee will be made by the Company in same-day funds at such place and to such account as may be designated by the Institutional Trustee.

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     Section 2.03 Form of Trustee’s Certificate of Authentication.

     The Trustee’s Certificate of Authentication on all Securities shall be in substantially the following form:

     This is one of the Securities referred to in the within-mentioned Indenture.

     Wilmington Trust Company, as Trustee

By:

Authorized Signatory

     Section 2.04 Authentication and Dating.

     At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities not in excess of $12,372,000 aggregate principal amount to the Trustee for authentication, and the Trustee shall thereupon authenticate and deliver said Securities to or upon the written order of the Company, signed by its Chairman of the Board of Directors (if an executive officer), its Chief Executive Officer, President, one of its Executive Vice Presidents or one of its Vice Presidents and by its Chief Financial Officer, Treasurer, any Assistant Treasurer, Secretary or any Assistant Secretary, without any further action by the Company hereunder. In authenticating such Securities, and accepting the additional responsibilities under this Indenture in relation to such Securities, the Trustee shall be entitled to receive, and (subject to Section 6.01) shall be fully protected in relying upon, a copy of any Board Resolution or Resolutions relating thereto and, if applicable, an appropriate record of any action taken pursuant to such resolution, in each case certified by the Secretary or an Assistant Secretary of the Company.

     Section 2.05 Date and Denomination of Securities.

     The Securities shall be issuable in fully registered form without coupons and in minimum denominations of $100,000 and any multiple of $1,000 in excess thereof. The Securities shall be numbered, lettered or otherwise distinguished in such manner or in accordance with such plans as the officers of the Company executing the same may determine with the approval of the Trustee, as conclusively evidenced by the execution and authentication thereof.

     Every Security shall be dated the date of its authentication and shall bear interest, if any, at the Interest Rate from such date. The interest on any Security that is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name said Security (or one or more Predecessor Securities) is registered at the close of business on the regular record date for such Interest Payment Period. In the event that any Security or portion thereof is called for redemption and the redemption date (i) falls after an Interest Payment Date, then interest on such Security payable on such Interest Payment Date shall be paid to the Holder on the related regular record date or (ii) is subsequent to a regular record date with respect to any Interest Payment Date and prior to such Interest Payment Date, then interest on such Security payable on such redemption date shall be paid upon presentation and surrender of such Security as provided in Section 3.01.

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     Any interest on any Security that is payable, but is not punctually paid or duly provided for, on any Interest Payment Date for any Security (herein called “Defaulted Interest”) shall forthwith cease to be payable to the Holder on the relevant regular record date by virtue of having been such Holder, and such Defaulted Interest shall be paid by the Company, at its election, as provided in clause (i) or clause (ii) below:

     (i) The Company may make payment of any Defaulted Interest on Securities to the Persons in whose names such Securities (or their respective Predecessor Securities) are registered at the close of business on a special record date for the payment of such Defaulted Interest, which shall be fixed in the following manner: the Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each such Security and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this clause provided. Thereupon the Trustee shall fix a special record date for the payment of such Defaulted Interest which shall not be more than 15 nor less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such special record date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the special record date therefor to be mailed, first class postage prepaid, to each Securityholder at his or her address as it appears in the Security Register, not less than 10 days prior to such special record date. Notice of the proposed payment of such Defaulted Interest and the special record date therefor having been mailed as aforesaid, such Defaulted Interest shall be paid to the Persons in whose names such Securities (or their respective Predecessor Securities) are registered on such special record date and shall be no longer payable pursuant to the following clause (ii).

     (ii) The Company may make payment of any Defaulted Interest on any Securities in any other lawful manner not inconsistent with the requirements of any securities exchange on which such Securities may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this clause, such manner of payment shall be deemed practicable by the Trustee.

     The term “regular record date” shall mean the fifteenth calendar day (whether or not a Business Day) preceding an Interest Payment Date.

     Subject to the foregoing provisions of this Section, each Security delivered under this Indenture upon transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, that were carried by such other Security.

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     Section 2.06 Execution of Securities.

     The Securities shall be signed in the name and on behalf of the Company by the manual or facsimile signature of its Chairman of the Board of Directors (if an executive officer), its Chief Executive Officer, President, one of its Executive Vice Presidents or one of its Vice Presidents and attested to by the manual or facsimile signature of its Chief Financial Officer, Treasurer, one of its Assistant Treasurers, Secretary or one of its Assistant Secretaries, by facsimile or otherwise. Only such Securities as shall bear thereon a Certificate of Authentication substantially in the form hereinbefore recited, executed by the Trustee or the Authenticating Agent, shall be entitled to the benefits of this Indenture or be valid or obligatory for any purpose. Such certificate by the Trustee or the Authenticating Agent upon any Security executed by the Company shall be conclusive evidence that the Security so authenticated has been duly authenticated and delivered hereunder and that the Holder is entitled to the benefits of this Indenture.

     In case any officer of the Company who shall have signed any of the Securities shall cease to be such officer before the Securities so signed shall have been authenticated and delivered by the Trustee or the Authenticating Agent, or disposed of by the Company, such Securities nevertheless may be authenticated and delivered or disposed of as though the person who signed such Securities had not ceased to be such officer of the Company; and any Security may be signed on behalf of the Company by such persons as, at the actual date of the execution of such Security, shall be the proper officers of the Company, although at the date of the execution of this Indenture any such person was not such an officer.

     Section 2.07 Exchange and Registration of Transfer of Securities.

     Securities may be exchanged for a like aggregate principal amount of Securities of other authorized denominations. Securities to be exchanged may be surrendered at the Principal Office of the Trustee or at any office or agency to be maintained by the Company for such purpose as provided in Section 3.02, and the Company or the Trustee shall execute and register and the Trustee or the Authenticating Agent shall authenticate and deliver in exchange therefor the Security or Securities which the Securityholder making the exchange shall be entitled to receive. Upon due presentment for registration of transfer of any Security at the principal office of the Trustee or at any office or agency of the Company maintained for such purpose as provided in Section 3.02, the Company or the Trustee shall execute and register and the Trustee or the Authenticating Agent shall authenticate and deliver in the name of the transferee or transferees a new Security or Securities for a like aggregate principal amount. Registration or registration of transfer of any Security by the Trustee or by any agent of the Company appointed pursuant to Section 3.02, and delivery of such Security, shall be deemed to complete the registration or registration of transfer of such Security.

     The Company or the Trustee shall keep, at the designated corporate trust office of the Trustee, a register for the Securities issued hereunder (the “Security Register”) in which, subject to such reasonable regulations as it may prescribe, the Company or the Trustee shall register ownership and transfer of ownership of all Securities and shall register the transfer of all Securities as in this Article II provided. The Security Register shall be in written form or in any other form capable of being converted into written form within a reasonable time.

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     All Securities presented for registration of transfer or for exchange shall (if so required by the Company, the Trustee or the Authenticating Agent) be duly endorsed by, or be accompanied by a written instrument or instruments of transfer in form satisfactory to the Company and either the Trustee or the Authenticating Agent duly executed by, the Holder of such Security or his attorney duly authorized in writing.

     No service charge shall be made for any exchange or registration of transfer of Securities, but the Company or the Trustee may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith.

     Neither the Company nor the Trustee shall be required to exchange or register a transfer of (a) any Security for a period of 15 days preceding the date of mailing of a notice of redemption of Securities, or (b) any Securities selected, called or being called for redemption in whole or in part, except in the case of any Securities to be redeemed in part, the portion thereof not to be so redeemed.

     Notwithstanding the foregoing, Securities may not be transferred prior to the Resale Restriction Termination Date except in compliance with the legend set forth below, unless otherwise determined by the Company in accordance with applicable law, which legend shall be placed on each Security:

     THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN, BY ITS ACCEPTANCE HEREOF OR THEREOF, AS THE CASE MAY BE, AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN PRIOR TO THE DATE WHICH IS THE LATER OF (i) TWO YEARS (OR SUCH SHORTER PERIOD OF TIME AS PERMITTED BY RULE 144(k) UNDER THE SECURITIES ACT) AFTER THE LATER OF (Y) THE DATE OF ORIGINAL ISSUANCE HEREOF AND (Z) THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE (AS DEFINED IN RULE 405 UNDER THE SECURITIES ACT) OF THE COMPANY WAS THE HOLDER OF THIS SECURITY OR SUCH INTEREST OR PARTICIPATION (OR ANY PREDECESSOR THERETO) AND (ii) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY ANY SUBSEQUENT CHANGE IN APPLICABLE LAW, ONLY (A) TO THE COMPANY, (B) PURSUANT TO RULE 144A UNDER THE SECURITIES ACT (“RULE 144A”), TO A PERSON THE HOLDER REASONABLY BELIEVES IS A “QUALIFIED INSTITUTIONAL BUYER”, AS DEFINED IN RULE 144A, THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (C) PURSUANT TO AN EXEMPTION FROM THE

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REGISTRATION REQUIREMENTS OF THE SECURITIES ACT TO AN “ACCREDITED INVESTOR” WITHIN THE MEANING OF SUBPARAGRAPH (a) (1), (2), (3), (7) OR (8) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS SECURITY OR SUCH INTEREST OR PARTICIPATION FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, (D) PURSUANT TO OFFERS AND SALES TO NON-US PERSONS THAT OCCUR OUTSIDE THE UNITED STATES PURSUANT TO REGULATION S UNDER THE SECURITIES ACT OR (E) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY’S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (C) OR (E) ABOVE TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO IT IN ACCORDANCE WITH THE INDENTURE, A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY. THE HOLDER OF THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN, BY ITS ACCEPTANCE HEREOF OR THEREOF, AS THE CASE MAY BE, AGREES THAT IT WILL COMPLY WITH THE FOREGOING RESTRICTIONS.

     THE HOLDER OF THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN, BY ITS ACCEPTANCE HEREOF OR THEREOF, AS THE CASE MAY BE, ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT PLAN, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED (“ERISA”), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE “CODE”) (EACH A “PLAN”), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE “PLAN ASSETS” BY REASON OF ANY PLAN’S INVESTMENT IN THE ENTITY AND NO PERSON INVESTING “PLAN ASSETS” OF ANY PLAN MAY ACQUIRE OR HOLD THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR THE EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF THIS SECURITY OR SUCH INTEREST OR PARTICIPATION IS NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING. ANY PURCHASER OR HOLDER OF THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING HEREOF OR THEREOF, AS THE CASE MAY BE, THAT EITHER (i) IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (ii) SUCH PURCHASE AND HOLDING WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER

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SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION.

     IN CONNECTION WITH ANY TRANSFER, THE HOLDER OF THIS SECURITY WILL DELIVER TO THE TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS MAY BE REQUIRED BY THE INDENTURE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS.

     THIS SECURITY WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN MINIMUM DENOMINATIONS OF $100,000 AND MULTIPLES OF $1,000 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF THIS SECURITY IN DENOMINATIONS OF LESS THAN $100,000 SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. ANY SUCH PURPORTED TRANSFEREE SHALL BE DEEMED NOT TO BE THE HOLDER OF THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN FOR ANY PURPOSE, INCLUDING, BUT NOT LIMITED TO, THE RECEIPT OF DISTRIBUTIONS ON THIS SECURITY OR SUCH INTEREST OR PARTICIPATION, AND SUCH PURPORTED TRANSFEREE SHALL BE DEEMED TO HAVE NO INTEREST WHATSOEVER IN THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN.

     Section 2.08 Mutilated, Destroyed, Lost or Stolen Securities.

     In case any temporary or definitive Security shall become mutilated or be destroyed, lost or stolen, the Company shall execute, and upon its request the Trustee shall authenticate and deliver, a new Security bearing a number not contemporaneously outstanding, in exchange and substitution for the mutilated Security, or in lieu of and in substitution for the Security so destroyed, lost or stolen. In every case, the applicant for a substituted Security shall furnish to the Company and the Trustee such security or indemnity as may be reasonably required by them to save each of them harmless, and, in every case of destruction, loss or theft, the applicant shall also furnish to the Company and the Trustee evidence to their satisfaction of the destruction, loss or theft of such Security and of the ownership thereof.

     The Trustee may authenticate any such substituted Security and deliver the same upon the written request or authorization of any officer of the Company. Upon the issuance of any substituted Security, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses connected therewith. In case any Security which has matured or is about to mature or has been called for redemption in full shall become mutilated or be destroyed, lost or stolen, the Company may, instead of issuing a substitute Security, pay or authorize the payment of the same (without surrender thereof except in the case of a mutilated Security) if the applicant for such payment shall furnish to the Company and the Trustee such security or indemnity as may be reasonably required by them to save each of them harmless and, in case of destruction, loss or theft, evidence satisfactory to the Company and to the Trustee of the destruction, loss or theft of such Security and of the ownership thereof.

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     Every substituted Security issued pursuant to the provisions of this Section 2.08 by virtue of the fact that any such Security is destroyed, lost or stolen shall constitute an additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be found at any time, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities duly issued hereunder. All Securities shall be held and owned upon the express condition that, to the extent permitted by applicable law, the foregoing provisions are exclusive with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities and shall preclude any and all other rights or remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment of negotiable instruments or other securities without their surrender.

     Section 2.09 Temporary Securities.

     Pending the preparation of definitive Securities, the Company may execute and the Trustee shall authenticate and deliver temporary Securities (typed, printed or lithographed). Temporary Securities shall be issuable in any authorized denomination, and substantially in the form of the definitive Securities but with such omissions, insertions and variations as may be appropriate for temporary Securities, all as may be determined by the Company. Every such temporary Security shall be executed by the Company and be authenticated by the Trustee upon the same conditions and in substantially the same manner, and with the same effect, as the definitive Securities. Without unreasonable delay, the Company will execute and deliver to the Trustee or the Authenticating Agent definitive Securities and, thereupon, any or all temporary Securities may be surrendered in exchange therefor at the Principal Office of the Trustee or at any office or agency maintained by the Company for such purpose as provided in Section 3.02, and the Trustee or the Authenticating Agent shall authenticate and deliver in exchange for such temporary Securities a like aggregate principal amount of such definitive Securities. Such exchange shall be made by the Company at its own expense and without any charge therefor except that in case of any such exchange involving a registration of transfer the Company may require payment of a sum sufficient to cover any tax, fee or other governmental charge that may be imposed in relation thereto. Until so exchanged, the temporary Securities shall in all respects be entitled to the same benefits under this Indenture as definitive Securities authenticated and delivered hereunder.

     Section 2.10 Cancellation of Securities Paid, etc.

     All Securities surrendered for the purpose of payment, redemption, exchange or registration of transfer, shall, if surrendered to the Company or any Paying Agent, be surrendered to the Trustee and promptly cancelled by it or, if surrendered to the Trustee or any Authenticating Agent, shall be promptly cancelled by it, and no Securities shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Indenture. All Securities cancelled by any Authenticating Agent shall be delivered to the Trustee. The Trustee shall dispose of cancelled Securities in accordance with its customary procedures. If the Company shall acquire any of the Securities, however, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Securities unless and until the same are surrendered to the Trustee for cancellation.

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     Section 2.11 Interest.

     (a) Each Security will bear interest at the then applicable interest Rate for each Interest Payment Period until the principal thereof becomes due and payable, and on any overdue principal and, to the extent that payment of such interest is enforceable under applicable law, on any overdue installment of interest at the then applicable Interest Rate (“Compound Interest”), compounded quarterly, payable quarterly in arrears on February 15, May 15, August 15 and November 15 of each year, commencing on August 15, 2004 (each, an “Interest Payment Date”), to the Person in whose name such Security or any Predecessor Security is registered at the close of business on the relevant record date, which will be the fifteenth calendar day (whether or not a Business Day) preceding the relevant Interest Payment Date, except as otherwise provided pursuant to the provisions of Section 2.12.

     (b) The amount of interest payable for any Interest Payment Period will be computed on the basis of a 360-day year and the actual number of days elapsed in such Interest Payment Period. In the event that any Interest Payment Date is not a Business Day, then any interest payable on such date will be paid on, and such interest Payment Date will be moved to, the next succeeding Business Day, and additional interest will accrue for each day that such payment is delayed as a result thereof, except that, if such next Business Day is in the next succeeding calendar month, such payment shall be made on the preceding Business Day, in each case with the same force and effect as if made on the date such payment otherwise would have been payable; provided, however, that in the event that the Stated Maturity date or earlier redemption date is not a Business Day, then payment of principal, interest and premium (if any) payable on such date will be made on the next Business Day (and without any additional accrual of interest or other payment in respect of any such delay).

     (c) If, at any time while the Institutional Trustee is the Holder of any Securities, the Trust or the institutional Trustee is required to pay any taxes, duties, assessments or governmental charges of whatever nature (other than withholding taxes) imposed by the United States, or any other taxing authority, then, in any such case, the Company will pay as additional interest (“Additional Tax Sums”) on the Securities held by the Institutional Trustee such additional amounts as shall be required so that the net amounts received and retained by the Institutional Trustee after paying such taxes, duties, assessments or other governmental charges will be equal to the amounts the Institutional Trustee would have received had no such taxes, duties, assessments or other governmental charges been imposed.

     (d) All percentages resulting from any calculations on the Securities will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with five one-millionths of a percentage point rounded upward (e.g., 7.553455% (or .07553455) being rounded to 7.553460% (or .0755346)), and all dollar amounts used in or resulting from such calculation will be rounded to the nearest cent (with one-half cent being rounded upward).

     (e) On each Determination Date, the Calculation Agent will calculate, and will give notice in writing to the Company and the Paying Agent of, the applicable Interest Rate for the related Interest Payment Period and shall give such notice in writing to any Holder of Securities that so requests. Absent manifest error, the Calculation Agent’s determination of LIBOR and its calculation of the applicable Interest Rate for any Interest Payment Period will be final and

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binding. The Company shall, from time to time, provide any necessary information to the Paying Agent relating to any original issue discount and interest on the Securities that is included in any payment and reportable for taxable income calculation purposes.

     Section 2.12 Deferral of Interest Payments.

     (a) So long as no Event of Default under this Indenture has occurred and is continuing, the Company shall have the right, at any time and from time to time during the term of the Securities, to defer payments of interest for a period (each of which periods shall end on an Interest Payment Date, each a “Deferral Period”); provided, that (i) no Deferral Period may exceed 20 consecutive quarterly periods and (ii) no Deferral Period may extend beyond the Stated Maturity or the earlier redemption of the Securities. No interest shall be due and payable during a Deferral Period. To the extent permitted by applicable law, interest, the payment of which has been deferred during a Deferral Period pursuant to this Section 2.12, will bear interest thereon at the applicable Interest Rate compounded quarterly for each quarter of any Deferral Period. At the end of each Deferral Period, the Company shall pay all interest, including any Additional Tax Sums and Compound Interest (collectively, “Deferred Interest”), accrued and unpaid on the Securities that shall be payable to the Holders in whose names the Securities are registered in the Security Register on the record date for the first Interest Payment Date after the end of such Deferral Period. Before the termination of any Deferral Period, the Company may extend such period, provided that such period, together with all such previous and further extensions within such Deferral Period, shall not exceed 20 consecutive quarterly periods or extend beyond the Stated Maturity or earlier redemption of the Securities. Upon the termination of any Deferral Period and upon the payment of all Deferred Interest then due, the Company may commence a new Deferral Period, subject to the foregoing requirements. No interest shall be due and payable during a Deferral Period, except at the end thereof, but the Company may prepay at any time all or any portion of the interest accrued during a Deferral Period.

     (b) If the Institutional Trustee is the only Holder of Securities at the time the Company selects a Deferral Period, the Company shall give written notice to the Regular Trustees, the Institutional Trustee and the Trustee of its establishment or extension of such Deferral Period not later than one Business Day before the next succeeding date on which Distributions (as defined in the Declaration) on the Trust Securities issued by the Trust are payable. If the Institutional Trustee is not the only Holder at the time the Company selects or extends a Deferral Period, the Company shall give the Holders of the Securities and the Trustee written notice of its selection of such Deferral Period at least ten Business Days before the next succeeding Interest Payment Date. The quarterly period in which any notice is given pursuant to this Section 2.12 shall be counted as one of the 20 quarterly periods permitted in the longest Deferral Period permitted under this Section 2.12.

     Section 2.13 CUSIP Number.

     The Company in issuing the Securities may use a “CUSIP” number (if then generally in use), and, if so, the Trustee shall use such “CUSIP” number in notices of redemption as a convenience to Holders; provided that any such notice may state that no representation is made as to the correctness of such number either as printed on the Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers

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printed on the Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. The Company will promptly notify the Trustee of any change in the “CUSIP” number.

ARTICLE III
PARTICULAR COVENANTS OF THE COMPANY

     Section 3.01 Payment of Principal, Premium, if any, and Interest. Premium if any, and Interest.

     The Company covenants and agrees for the benefit of the Holders of the Securities that it will duly and punctually pay or cause to be paid the principal of, and premium, if any, and interest on, the Securities at the place, at the times and in the manner provided in the Securities. Each installment of interest on the Securities may be paid at the option of the Company by check mailed to the Holder entitled thereto at such address as shall appear in the Security Register or by wire transfer to an account appropriately designated by the Holder of Securities entitled thereto, while payments due at Stated Maturity or earlier redemption will be made by the Company in same-day funds against presentation and surrender of the related Securities. Notwithstanding the foregoing, so long as the Holder of any Securities is the Institutional Trustee, the payment of the principal of and interest (including Compound Interest and Additional Tax Sums, if any) on such Securities held by the Institutional Trustee will be made by the Company in same-day funds at such place and to such account as may be designated by the Institutional Trustee.

     Section 3.02 Offices for Notices and Payments, etc.

     So long as any of the Securities remain outstanding, the Company will maintain in Wilmington, Delaware or Southfield, Michigan, an office or agency where the Securities may be presented for payment, for registration of transfer and for exchange as in this Indenture provided and where notices and demands to or upon the Company in respect of the Securities or this Indenture may be served. The Company will give to the Trustee written notice of the location of any such office or agency and of any change of location thereof. Until otherwise designated from time to time by the Company in a notice to the Trustee, any such office or agency for all of the above purposes shall be the Principal Office of the Trustee. In case the Company shall fail to maintain any such office or agency in Wilmington, Delaware or Southfield, Michigan, or shall fail to give such notice of the location or of any change in the location thereof, presentations and demands may be made and notices may be served at the designated corporate trust office of the Trustee.

     In addition to any such office or agency, the Company may from time to time designate one or more offices or agencies outside Wilmington, Delaware or Southfield, Michigan, where the Securities may be presented for registration of transfer and for exchange in the manner provided in this Indenture, and the Company may from time to time rescind such designation, as the Company may deem desirable or expedient; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain any such office or agency in Wilmington, Delaware or Southfield, Michigan, for the purposes above mentioned. The Company will give to the Trustee prompt written notice of any such designation or rescission thereof.

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     Section 3.03 Appointments to Fill Vacancies in Trustee’s Office.

     The Company, whenever necessary to avoid or fill a vacancy in the office of Trustee, will appoint, in the manner provided in Section 6.10, a Trustee, so that there shall at all times be a Trustee hereunder.

     Section 3.04 Provisions as to Paying Agent.

     (a) If the Company shall appoint a paying agent other than the Trustee with respect to the Securities (a “Paying Agent”), it will cause such Paying Agent to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section 3.04:

     (1) that it will hold all sums held by it as such agent for the payment of the principal of, and premium, if any, or interest, if any, on, the Securities (whether such sums have been paid to it by the Company or by any other obligor on the Securities) in trust for the benefit of the Holders of the Securities; and

     (2) that it will the Trustee notice of any failure by the Company (or by any other obligor on the Securities) to make any payment of the principal of, and premium, if any, or interest, if any, on, the Securities when the same shall be due and payable.

     (b) If the Company shall act as its own Paying Agent, it will, on or before each due date of the principal of and premium, if any, or interest on the Securities, set aside, segregate and hold in trust for the benefit of the Holders of the Securities a sum sufficient to pay such principal, premium or interest so becoming due and will notify the Trustee of any failure to take such action and of any failure by the Company (or by any other obligor under the Securities) to make any payment of the principal of, and premium, if any, or interest on, the Securities when the same shall become due and payable.

     (c) Anything in this Section 3.04 to the contrary notwithstanding, the Company may, at any time, for the purpose of obtaining a satisfaction and discharge with respect to the Securities hereunder, or for any other reason, pay or cause to be paid to the Trustee all sums held in trust by the Company or any paying agent hereunder, as required by this Section 3.04, such sums to be held by the Trustee upon the trusts herein contained.

     (d) Anything in this Section 3.04 to the contrary notwithstanding, the agreement to hold sums in trust as provided in this Section 3.04 is subject to Sections 11.03 and 11.04.

     (e) The Company hereby appoints the Trustee as the initial Paying Agent for the Securities.

     Section 3.05 Certificate to Trustee.

     The Company will deliver to the Trustee, within 120 days after the end of each fiscal year, so long as Securities are outstanding hereunder, a certificate from the principal executive, financial or accounting officer of the Company stating that in the course of the performance by

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the signers of their duties as officers of the Company they would normally have knowledge of any default by the Company in the performance of any covenants contained herein, stating whether or not they have knowledge of any such default and, if so, specifying each such default of which the signers have knowledge and the nature thereof, all without regard to periods of grace or notice requirements.

     Section 3.06 Compliance with Consolidation Provisions.

     The Company will not, while any of the Securities remain outstanding, consolidate with, merge into or merge into itself, or sell, convey, transfer or otherwise dispose of all or substantially all of its property or assets to any other entity unless the provisions of Article X hereof are complied with.

     Section 3.07 Limitations on Dividends, etc.

     If Securities are issued to the Trust or a trustee of the Trust in connection with the issuance of Trust Securities by such Trust and (i) there shall have occurred a Default or an Event of Default, (ii) the Company shall be in default under the Preferred Securities Guarantee, or (iii) the Company has given notice of its election, pursuant to Section 2.12, to defer payments of interest on the Securities and the period of such deferral is continuing, then the Company shall not (a) declare or pay any dividend on, make any distribution or other payment with respect to, or redeem, purchase, acquire or make a liquidation payment with respect to, any of its capital stock (other than (i) repurchases, redemptions or other acquisitions of shares of capital stock in connection with the satisfaction by the Company of its obligations under any employee benefit plans, (ii) as a result of an exchange or conversion of one class or series of the Company’s capital stock for another class or series of the Company’s capital stock, (iii) the purchase of fractional interests in shares of the Company’s capital stock pursuant to the conversion or exchange provisions of such Company capital stock or the security being converted or exchanged, (iv) any declaration of a dividend in connection with any shareholders’ rights plan or the redemption or repurchase of rights pursuant thereto or (v) any dividend or distribution in the form of capital stock or rights to acquire capital stock where the rights of the capital stock being issued, or issuable pursuant to such rights, rank pari passu or junior to the capital stock as to which such dividend or distribution is paid), (b) make any payment of interest, principal or premium, if any, on or repay, repurchase or redeem any debt securities issued by the Company that rank pari passu with or junior to the Securities or (c) make any guarantee payments with respect to the foregoing (other than pursuant to the Preferred Securities Guarantee).

     Section 3.08 Covenants as to the Trust.

     For so long as Trust Securities remain outstanding, the Company will (i) maintain 100% direct or indirect ownership of the Common Securities of the Trust; provided, however, that any permitted successor of the Company under this Indenture may succeed to the Company’s ownership of the Common Securities; (ii) use its best efforts to cause the Trust (a) to remain a statutory trust, except in connection with a distribution of Securities to the registered holders of Trust Securities in liquidation of the Trust, the redemption of all of the Trust Securities of the Trust or certain mergers, consolidations or amalgamations, in each case, as permitted by the Declaration, and (b) to continue to be treated as a grantor trust, and not an association or publicly

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traded partnership taxable as a corporation, for United States federal income tax purposes; (iii) use its best efforts to cause each registered holder of Trust Securities to be treated as owning an individual beneficial interest in the Securities; and (iv) not cause, as sponsor of the Trust, or permit, as registered holder of the Common Securities of the Trust, the termination of the Trust, except as permitted by the Declaration.

     Section 3.09 Notice of Default.

     The Company shall file with the Trustee written notice of the occurrence of any Event of Default within 5 Business Days of its becoming aware of any such Event of Default.

ARTICLE IV
SECURITYHOLDERS’ LISTS AND REPORTS BY THE
COMPANY AND THE TRUSTEE

     Section 4.01 Securityholders’ Lists.

     The Company covenants and agrees that it will furnish or cause to be furnished to the Trustee:

     (a) on each regular record date for the Securities, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders of the Securities as of such record date; and

     (b) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished;

except that no such lists need be furnished so long as the Trustee is in possession thereof by reason of its acting as Security registrar for the Securities.

     Section 4.02 Preservation and Disclosure of Lists.

     (a) The Trustee shall preserve, in as current a form as is reasonably practicable, all information as to the names and addresses of the Holders of Securities (1) contained in the most recent list furnished to it as provided in Section 4.01 or (2) received by it in the capacity of Securities registrar (if so acting) hereunder. The Trustee may destroy any list furnished to it as provided in Section 4.01 upon receipt of a new list so furnished.

     (b) In case three or more Holders of Securities (hereinafter referred to as “applicants”) apply in writing to the Trustee and furnish to the Trustee reasonable proof that each such applicant has owned a Security for a period of at least 6 months preceding the date of such application, and such application states that the applicants desire to communicate with other Holders of Securities with respect to their rights under this Indenture or under such Securities and is accompanied by a copy of the form of proxy or other communication which such applicants propose to transmit, then the Trustee shall, within 5 Business Days after the receipt of such application, at its election, either:

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     (1) afford such applicants access to the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.02; or

     (2) inform such applicants as to the approximate number of Holders of Securities, as the case may be, whose names and addresses appear in the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.02, and as to the approximate cost of mailing to such Securityholders the form of proxy or other communication, if any, specified in such application.

     If the Trustee shall elect not to afford such applicants access to such information, the Trustee shall, upon the written request of such applicants, mail to each Securityholder whose name and address appear in the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.02 a copy of the form of proxy or other communication which is specified in such request with reasonable promptness after a tender to the Trustee of the material to be mailed and of payment, or provision for the payment, of the reasonable expenses of mailing, unless within 5 days after such tender, the Trustee shall mail to such applicants (and file with the Commission, if permitted or required under applicable law, together with a copy of the material to be mailed), a written statement to the effect that, in the opinion of the Trustee, such mailing would be contrary to the best interests of the Holders of Securities or would be in violation of applicable law. Such written statement shall specify the basis of such opinion. If the Commission, if permitted or required under applicable law, after opportunity for a hearing upon the objections specified in the written statement so filed, shall enter an order refusing to sustain any of such objections or if, after the entry of an order sustaining one or more of such objections, the Commission shall find, after notice and opportunity for hearing, that all the objections so sustained have been met and shall enter an order so declaring, the Trustee shall mail copies of such material to all such Securityholders with reasonable promptness after the entry of such order and the renewal of such tender; otherwise the Trustee shall be relieved of any obligation or duty to such applicants respecting their application.

     (c) Each and every Holder of Securities, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any Paying Agent shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the Holders of Securities in accordance with the provisions of subsection (b) of this Section 4.02, regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under said subsection (b).

     Section 4.03 Reports by Company.

     (a) The Company covenants and agrees to file with the Trustee, (i) within 15 days after the Company is required to file the same with the Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may from time to time by rules and regulations prescribe) which

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the Company may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Exchange Act; or (ii) if the Company is not required to file information, documents or reports pursuant to either of such sections, then to file with the Trustee the information required to be provided pursuant to Rule 1 44A(d)(4) under the Securities Act.

     (b) The Company covenants and agrees to file with the Trustee and the Commission, in accordance with the rules and regulations prescribed from time to time by the Commission, such additional information, documents and reports with respect to compliance by the Company with the conditions and covenants provided for in this Indenture as may be required from time to time by such rules and regulations.

     (c) The Company covenants and agrees to transmit by mail to ICONS within 5 days after the filing thereof with the Trustee, copies of all information, documents and reports filed with the Trustee.

     (d) Delivery of such reports, information and documents to the Trustee is for informational purposes only and the Trustee’s receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company’s compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers’ Certificates).

     Section 4.04 Financial and Other Information Under Certain Circumstances.

     If at any time the Trust ceases to exist for whatever reason or is no longer the Holder of the Securities, the Company shall:

     (a) Deliver to each Holder (i) each report on Form 10-K and Form 10-Q prepared by Company and filed with the Commission in accordance with the Exchange Act within 15 days after the filing thereof, (ii) if the Company is at any time neither subject to Section 13 or 15(d) of the Exchange Act nor exempt from reporting pursuant to Rule 12g3-2(b) thereunder, the information required to be provided by Rule 144A(d)(4) under the Securities Act and (iii) within 30 days after the end of the fiscal year of the Company Form 1099 or such other annual U.S. federal income tax information statement required by the Internal Revenue Code of 1986, as amended (the “Code”), containing such information with regard to the Securities held by such Securityholder as is required by the Code and the income tax regulations of the U.S. Treasury thereunder; and

     (b) If, and for so long as, the Trust, or a trustee thereof, is a Holder of the Securities, deliver to such Holder copies of the annual and quarterly financial statements of the Company or its Affiliates that are filed with the insurance regulator in the State in which the Company or any such Affiliate is incorporated, promptly following their filing.

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ARTICLE V
REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS
ON EVENT OF DEFAULT

     Section 5.01 Events of Default.

     If one or more of the following events shall have occurred and be continuing, such event shall constitute an event of default hereunder (each, an “Event of Default”):

     (a) default in the payment of any interest upon any Securities when it becomes due and payable, and continuance of such default for a period of 30 days; provided, however, that a valid deferral of an Interest Payment Period by the Company in accordance with the terms of Section 2.12 shall not constitute a default in the payment of interest for this purpose; or

     (b) default in the payment of all or any part of the principal of, or premium, if any, on, any Securities as and when the same shall become due and payable, whether at maturity, upon redemption, by declaration or otherwise; or

     (c) default in the performance, or breach, of any covenant or warranty of the Company in this Indenture (other than a covenant or warranty a default in whose performance or whose breach is elsewhere in this Section 5.01 specifically addressed), and continuance of such default or breach for a period of 90 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the outstanding Securities, a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a “Notice of Default” hereunder; or

     (d) a court having jurisdiction in the premises shall enter a decree or order for relief in respect of the Company in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, Custodian, trustee, sequestrator (or similar official) of the Company or for all or any substantial part of its property, or ordering the winding-up or liquidation of its affairs and such decree or order shall remain unstayed and in effect for a period of 90 consecutive days; or

     (e) the Company shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, shall consent to the entry of an order for relief in an involuntary case under any such law, or shall consent to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, Custodian, sequestrator or other similar official of the Company or for all or any substantial part of its property, or shall make any general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due; or

     (f) the Trust shall have voluntarily or involuntarily dissolved or liquidated, wound-up its business or otherwise terminated its existence except in connection with (i) the distribution of Securities to holders of Trust Securities in liquidation of their interests in the Trust, (ii) the redemption of all of the outstanding Trust Securities of the Trust or (iii) certain mergers, consolidations or amalgamations, in each case, as permitted by the Declaration.

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     If an Event of Default occurs and is continuing, and in each and every such case, unless the principal of all of the Securities shall have already become due and payable, either the Trustee or the Holders of not less than 25% in aggregate principal amount of the Securities then outstanding hereunder, by notice in writing to the Company (and to the Trustee if given by Securityholders), may declare the entire principal of, premium (if any) and accrued, but unpaid, interest on the Securities to be due and payable immediately, and upon any such declaration the same shall become immediately due and payable, provided that, if, upon an Event of Default, the Trustee or the Holders of at least 25% in aggregate principal amount of the Securities then outstanding fail to declare the principal amount of all the Securities to be due and immediately payable, the registered holders of at least 25% in aggregate liquidation amount of the Preferred Securities then outstanding of the Trust shall have such right by a notice in writing to the Company and the Trustee. If an Event of Default referenced under clause (d), (e) or (f) of this Section 5.01 shall have occurred, the principal of, premium, if any, and accrued, but unpaid, interest on the Securities will automatically become immediately due and payable without further action.

     The foregoing provisions, however, are subject to the condition that if, at any time after the principal of the Securities shall have been so declared due and payable, and before any judgment or decree for the payment of the moneys due shall have been obtained or entered as hereinafter provided, the Company shall pay or shall deposit with the Trustee a sum sufficient to pay all matured installments of interest upon all the Securities arid the principal of and premium, if any, on any and all Securities which shall have become due otherwise than by acceleration (with interest upon such principal and premium, if any, and, to the extent that payment of such interest is enforceable under applicable law, on overdue installments of interest, at the same rate as the rate of interest then borne by the Securities, to the date of such payment or deposit) and such amount as shall be sufficient to cover compensation to the Trustee and each predecessor Trustee, their respective agents, attorneys and counsel, and all other expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee except as a result of negligence or bad faith, and if any and all Events of Default under the Indenture, other than the non-payment of the principal of or premium, if any, on Securities which shall have become due by acceleration, shall have been cured, waived or otherwise remedied as provided in this Indenture, then and in every such case the Holders of a majority in aggregate principal amount of the Securities then outstanding, by written notice to the Company and to the Trustee, may waive all defaults and rescind and annul such declaration and its consequences, but no such waiver or rescission and annulment shall extend to or shall affect any subsequent default or shall impair any right consequent thereon. If the Holders of a majority in aggregate principal amount of the Securities then outstanding fail to rescind and annul such declaration and its consequences, the registered holders of a majority in aggregate liquidation amount of the Preferred Securities then outstanding of the Trust shall have such right by written notice to the Company and the Trustee, subject to the satisfaction of the conditions set forth above.

     In case the Trustee shall have proceeded to enforce any right under this Indenture and such proceedings shall have been discontinued or abandoned because of such rescission or annulment or for any other reason or shall have been determined adversely to the Trustee, then and in every such case the Company, the Trustee, the Holders of the Securities and the registered holders of any Preferred Securities shall be restored respectively to their several positions and rights hereunder, and all rights, remedies and powers of the Company, the Trustee, the Holders

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of the Securities and the registered holders of any Preferred Securities shall continue as though no such proceeding had been taken.

     Section 5.02 Payment of Securities on Default; Suit Therefor.

     The Company covenants that in case an Event of Default under Section 5.01(a), (b), (c) or (f) shall have occurred and be continuing, then, upon demand of the Trustee, the Company will pay to the, Trustee, for the benefit of the Holders of the Securities, the whole amount that then shall have become due and payable on all Securities for principal and premium, if any, and interest, or both, as the case may be, with interest upon the overdue principal and premium, if any, and (to the extent that payment of such interest is enforceable under applicable law and, if the Securities are held by the Trust or a trustee of such trust, without duplication of any other amounts paid by the Trust or a trustee in respect thereof) upon the overdue installments of interest at the rate borne by the Securities; and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including a reasonable compensation to the Trustee, its agents, attorneys and counsel, and any expenses or liabilities incurred by the Trustee hereunder other than through its negligence or bad faith.

     In case the Company shall fail forthwith to pay such amounts upon such demand, the Trustee, in its own name and as trustee of an express trust, shall be entitled and empowered to institute any actions or proceedings at law or in equity for the collection of the sums so due and unpaid, and may prosecute any such action or proceeding to judgment or final decree, and may enforce any such judgment or final decree against the Company or any other obligor on the Securities and collect in the manner provided by law out of the property of the Company or any other obligor on the Securities wherever situated the moneys adjudged or decreed to be payable.

     In case an Event of Default under Section 5.01(d) or (e) shall have occurred, the Trustee, irrespective of whether the principal of the Securities shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand pursuant to the provisions of this Section 5.02, shall be entitled and empowered, by intervention in such proceedings or otherwise, (a) to file and prove a claim or claims for the whole amount of principal and interest owing and unpaid in respect of the Securities and, in case of any judicial proceedings, to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for reasonable compensation to the Trustee and each predecessor Trustee, and their respective agents, attorneys and counsel, and for reimbursement of all expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee, except as a result of negligence or bad faith) and of the Securityholders allowed in such judicial proceedings relative to the Company or any other obligor on the Securities, or to the creditors or property of the Company or such other obligor, unless prohibited by applicable law and regulations, (b) to vote on behalf of the Holders of the Securities in any election of a trustee or a standby trustee in arrangement, reorganization, liquidation or other bankruptcy or insolvency proceedings (or of a person performing similar functions in comparable proceedings) and (c) to collect and receive any moneys or other property payable or deliverable on any such claims, and to distribute the same after the deduction of its charges and expenses; and any receiver, assignee or trustee in bankruptcy or reorganization is hereby authorized by each of the Securityholders to make such payments to the Trustee, and, in the event that the Trustee shall consent to the making of such

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payments directly to the Securityholders, to pay to the Trustee such amounts as shall be sufficient to cover reasonable compensation to the Trustee, each predecessor Trustee and their respective agents, attorneys and counsel, and all other expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee except as a result of negligence or bad faith.

     Nothing herein contained shall be construed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Securityholder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of any Securityholder in any such proceeding.

     All rights of action and of asserting claims under this Indenture, or under any of the Securities, may be enforced by the Trustee without the possession of any of the Securities, or the production thereof on any trial or other proceeding relative thereto, and any such suit or proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall be for the ratable benefit of the Holders of the Securities.

     In any proceedings brought by the Trustee (and also any proceedings involving the interpretation of any provision of this Indenture to which the Trustee shall be a party) the Trustee shall be held to represent all the Holders of the Securities, and it shall not be necessary to make any Holders of the Securities parties to any such proceedings.

     Section 5.03 Application of Moneys Collected by Trustee.

     Any moneys collected by the Trustee pursuant to this Article V shall be applied in the following order, at the date or dates fixed by the Trustee for the distribution of such moneys, upon presentation of the several Securities in respect of which moneys have been collected, and stamping thereon the payment if only partially paid, and upon surrender thereof if fully paid:

     First: To the payment of costs and expenses of collection applicable to the Securities and compensation to the Trustee, its agents, attorneys and counsel, and of all other expenses and liabilities incurred, and all advances made, by the Trustee except as a result of its negligence or bad faith;

     Second: To the payment of all Senior Indebtedness of the Company if and to the extent required by Article XV hereof;

     Third: To the payment of the amounts then due and unpaid upon Securities for principal of (and premium, if any) and interest on the Securities, in respect of which or for the benefit of which money has been collected, ratably, without preference or priority of any kind, according to the amounts due on Securities for principal (and premium, if any) and interest, respectively; and

     Fourth: The balance, if any, to the Person or Persons entitled thereto.

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     Section 5.04 Proceedings by Securityholders.

     No Holder of any Security shall have any right by virtue of or by availing of any provision of this Indenture to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Indenture or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless such Holder previously shall have given to the Trustee written notice of an Event of Default and of the continuance thereof with respect to the Securities specifying such Event of Default, as hereinbefore provided, and unless also the Holders of not less than 25% in aggregate principal amount of the Securities then outstanding shall have made written request upon the Trustee to institute such action, suit or proceeding in its own name as Trustee hereunder and shall have offered to the Trustee security or indemnity reasonably satisfactory to the Trustee as it may require against the costs, expenses and liabilities to be incurred therein or thereby, and the Trustee for 60 days after its receipt of such notice and such notice has not been rescinded, request and offer of indemnity shall have failed to institute any such action, suit or proceeding, it being understood and intended, and being expressly covenanted by the taker and Holder of every Security with every other taker and Holder and the Trustee, that no one or more Holders of Securities shall have any right in any manner whatever by virtue of or by availing of any provision of this Indenture to affect, disturb or prejudice the rights of any other Holder of Securities, or to obtain or seek to obtain priority over or preference to any other such Holder, or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all Holders of Securities.

     Notwithstanding any other provisions in this Indenture, the right of any Holder of any Security to receive payment of the principal of (and premium, if any) and interest, if any, on such Security on or after the same shall have become due and payable, or to institute suit for the enforcement of any such payment, shall not be impaired or affected without the consent of such Holder. For the protection and enforcement of the provisions of this Section, each and every Securityholder and the Trustee shall be entitled to such relief as can be given either at law or in equity.

     If the Institutional Trustee of the Trust fails to enforce its rights under this Indenture as the Holder of Securities held as the assets of the Trust, any registered holder of Preferred Securities may, to the extent permitted by applicable law, institute legal proceedings directly against the Company to enforce such Institutional Trustee’s rights under this Indenture without first instituting any legal proceedings against such Institutional Trustee or any other person or entity. Notwithstanding the foregoing, the Company and the Trustee acknowledge that the Declaration may entitle registered holders of the Preferred Securities, in the circumstances and subject to the limitations set forth therein, to commence a Direct Action (as defined therein) with respect to any Event of Default under Section 5.01(a) or (b) and, if such registered holders are so entitled, the Company acknowledges their right to institute a Direct Action against the Company.

     Section 5.05 Proceedings by Trustee.

     In case of an Event of Default, the Trustee may, in its discretion, proceed to protect and enforce the rights vested in it by this Indenture by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any of such rights, either by suit in equity or by action at law or by proceeding in bankruptcy or otherwise, whether for the specific

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enforcement of any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted in this Indenture, or to enforce any other legal or equitable right vested in the Trustee by this Indenture or by law.

     Section 5.06 Remedies Cumulative and Continuing.

     Except as otherwise provided in the last paragraph of Section 2.08 with respect to the replacement or payment of mutilated, lost or stolen Securities, all powers and remedies given by this Article V to the Trustee or to the Securityholders shall, to the extent permitted by law, be deemed cumulative and not exclusive of any other powers and remedies available to the Trustee, the Holders of the Securities or any registered holder of any Preferred Securities, by judicial proceedings or otherwise, to enforce the performance or observance of the covenants and agreements contained in this Indenture, and no delay or omission of the Trustee, any Holder of any of the Securities or any registered holder of any Preferred Securities to exercise any right or power accruing upon any Event of Default occurring and continuing as aforesaid shall impair any such right or power, or shall be construed to be a waiver of any such default or an acquiescence therein; and, subject to the provisions of Section 5.04, every power and remedy given by this Article V or by law to the Trustee or to the Securityholders may be exercised from time to time, and as often as shall be deemed expedient, by the Trustee or by the Securityholders.

     Section 5.07 Direction of Proceedings and Waiver of Defaults by Majority of Securityholders.

     The Holders of a majority in aggregate principal amount of the Securities at the time outstanding shall have the right to direct the time, method and place of conducting any proceeding for an remedy available to the Trustee, or exercising any trust or power conferred on the Trustee, in respect of the Securities; provided, however, that (subject to the provisions of Section 6.01) the Trustee shall have the right to decline to follow any such direction if the Trustee shall determine that the action so directed would be unjustly prejudicial to the Holders that are entitled but fail to take part in such direction or if the Trustee being advised by counsel determines that the action or proceeding so directed may not lawfully be taken or if the Trustee in good faith by its board of directors or trustees, executive committee or a trust committee of directors or trustees and/or Responsible Officers shall determine that the action or proceedings so directed would involve the Trustee in personal liability. Prior to any declaration accelerating the maturity of the Securities, the Holders of a majority in aggregate principal amount of the Securities at the time outstanding may on behalf of the Holders of all of the Securities waive any past default or Event of Default, and its consequences, except a default (a) in the payment of principal of, or premium, if any, or interest on any of the Securities, (b) in respect of covenants or provisions hereof which cannot be modified or amended without the consent of the Holder of each Security affected, or (c) a default of the covenants contained in Section 3.06; provided, that such waiver or modification to such waiver shall not be effective until the registered holders of a majority in aggregate liquidation amount of Preferred Securities then outstanding of the Trust shall have consented to such waiver or modification to such waiver; provided further, that if the consent of the Holder of each outstanding Security is required, such waiver or modification to such waiver shall not be effective until each registered holder of the Preferred Securities then outstanding of the Trust shall have consented to such waiver. Upon any such waiver, the default covered thereby shall be deemed to be cured for all purposes of this Indenture and the Company,

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the Trustee and the Holders of Securities shall be restored to their former positions and rights hereunder, respectively; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. Whenever any default or Event of Default hereunder shall have been waived as permitted by this Section 5.07, said default or Event of Default shall for all purposes of the Securities and this Indenture be deemed to have been cured and to be not continuing.

     Section 5.08 Notice of Defaults.

     The Trustee shall, within 60 days after the occurrence of a default with respect to the Securities, mail to all Securityholders, as the names and addresses of such Holders appear upon the Security Register, notice of all defaults known to the Trustee, unless such defaults shall have been cured before the giving of such notice (the term “defaults” for the purpose of this Section 5.08 being hereby defined to be the events specified in clauses (a), (b), (c), (d), (e) and (f) of Section 5.01, not including periods of grace, if any, provided for therein, and irrespective of the giving of any written notice provided for therein); and provided that, except in the case of default in the payment of the principal of, or premium, if any, or interest on any of the Securities, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee, or a trust committee of directors and/or Responsible Officers of the Trustee in good faith determines that the withholding of such notice is in the interests of the Securityholders, and provided further, that in the case of any default of the character specified in Section 5.01(c), no such notice to Securityholders shall be given until at least 60 days after the Trustee has notified the Company of such occurrence but shall be given within 90 days after such occurrence.

     Section 5.09 Undertaking to Pay Costs.

     All parties to this Indenture agree, and each Holder of any Security by such Holder’s acceptance thereof shall be deemed to have agreed, that any court may, in its discretion, require in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys’ fees and expenses, against any party litigant in such suit having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section 5.09 shall not apply to any suit instituted by the Trustee, to any suit instituted by any Securityholder, or group of Securityholders, holding in the aggregate 10% or more in aggregate principal amount of the Securities outstanding, or to any suit instituted by any Securityholder for the enforcement of the payment of the principal of (or premium, if any) or interest on any Security against the Company on or after the same shall have become due and payable.

     Section 5.10 Delay or Omission Not Waiver.

     No delay or omission of the Trustee, any Holder of any Securities or any holder of any Preferred Security to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article V or by law to the Trustee or

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to the Holders and the right and remedy given to the holders of Preferred Securities in Section 5.07 may be exercised from time to time, and as often as may be deemed expedient, by the Trustee, the Holders or the holders of Preferred Securities, as the case may be.

ARTICLE VI
CONCERNING THE TRUSTEE

     Section 6.01 Duties and Responsibilities of Trustee.

     With respect to the Holders of Securities issued hereunder, the Trustee, prior to the occurrence of an Event of Default and after the curing or waiving of all Events of Default which may have occurred, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture. In case an Event of Default has occurred (which has not been cured or waived) the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of such person’s affairs.

     No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that:

     (a) prior to the occurrence of an Event of Default and after the curing or waiving of all Events of Default which may have occurred

     (1) the duties and obligations of the Trustee with respect to the Securities shall be determined solely by the express provisions of this Indenture, and the Trustee shall not be liable except for the performance of such duties and obligations with respect to the Securities as are specifically set forth in this Indenture, and no implied covenants or obligations, shall be read into this indenture against the Trustee; and

     (2) in the absence of bad faith on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but, in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture;

     (b) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; and

     (c) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith, in accordance with the direction of the Securityholders pursuant to Section 5.07, relating to the time, method and place of conducting any proceeding for any

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remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture.

     None of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if there is reasonable ground for believing that the repayment of such funds or liability is not reasonably assured to it under the terms of this Indenture or adequate indemnity against such risk is not reasonably assured to it. Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the eligibility of affording protection to the Trustee shall be subject to the provisions of this Section 6.01.

     Section 6.02 Reliance on Documents, Opinions, etc.

     Except as otherwise provided in Section 6.01:

     (a) the Trustee may conclusively rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, note, debenture or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties;

     (b) any request, direction, order or demand of the Company mentioned herein shall be sufficiently evidenced an Officers’ Certificate (unless other evidence in respect thereof be herein specifically prescribed); and any Board Resolution may be evidenced to the Trustee by a copy thereof certified b the Secretary or an Assistant Secretary of the Company;

     (c) the Trustee may consult with counsel of its selection, and any advice or Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with such advice or Opinion of Counsel;

     (d) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the Securityholders, pursuant to the provisions of this Indenture, unless such Securityholders shall have offered to the Trustee security or indemnity satisfactory to the Trustee against the costs, expenses and liabilities which may be incurred herein or thereby;

     (e) the Trustee shall not be liable for any action taken or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture; nothing contained herein shall, however, relieve the Trustee of the obligation, upon the occurrence of an Event of Default (that has not been cured or waived) to exercise with respect to Securities such of the rights and powers vested in it by this Indenture, and to use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of such person’s own affairs;

     (f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, debenture, coupon or other paper or document, unless requested

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in writing to do so by the Holders of not less than a majority in principal amount of the outstanding Securities; provided, however, that if the payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this indenture, the Trustee may require indemnity satisfactory to the Trustee against such expense or liability as a condition to so proceeding;

     (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents (including any Authenticating Agent), custodians, nominees or attorneys, and the Trustee shall not be responsible for any misconduct or negligence on the part of any such agent or attorney appointed by it with due care;

     (h) the Trustee shall not be liable for any action taken, suffered, or omitted to be taken by it in good faith and reasonably believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture;

     (i) the Trustee shall not be deemed to have notice of any Default or Event of Default unless a Responsible Officer of the Trustee has actual knowledge thereof or unless written notice of any event which is in fact such a default is received by the Trustee at the designated corporate trust office of the Trustee, and such notice references the Securities and this Indenture;

     (j) the rights, privileges, protections, immunities and benefits given to the Trustee, including, without limitation, its right to be indemnified, are extended to, and shall be enforceable by, the Trustee in each of its capacities hereunder, and to each agent, custodian and other Person employed to act hereunder;

     (k) the Trustee may request that the Company deliver an Officers’ Certificate setting forth the names of individuals and/or titles of officers authorized at such time to take specified actions pursuant to this Indenture, which Officers’ Certificate may be signed by any person authorized to sign an Officers’ Certificate, including any person specified as so authorized in any such certificate previously delivered and not superseded; and

     (l) the Trustee shall be under no obligation to institute any suit, or to take any remedial proceeding under this Indenture, or to enter any appearance or in any way defend in any suit in which it may be made defendant, or in the enforcement of any rights and powers hereunder, if the Trustee reasonably believes that it will not be adequately indemnified as provided in this Indenture.

     Section 6.03 No Responsibility for Recitals, etc.

     The recitals contained herein and in the Securities (except in the Certificate of Authentication of the Trustee or the Authenticating Agent) shall be taken as the statements of the Company, and the Trustee and the Authenticating Agent assume no responsibility for the correctness of the same. The Trustee and the Authenticating Agent make no representations as to the validity or sufficiency of this Indenture or of the Securities. The Trustee and the Authenticating Agent shall not be accountable for the use or application by the Company of the proceeds of any Securities authenticated and delivered by the Trustee or the Authenticating Agent in conformity with the provisions of this Indenture.

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     Section 6.04 Trustee, Authenticating Agent, Paying Agents, Transfer Agents or Registrar May Own Securities.

     The Trustee or any Authenticating Agent or any Paying Agent or any transfer ‘agent or any Security registrar, in its individual or any other capacity, may become the owner or pledgee of Securities with the same rights it would have if it were not Trustee, Authenticating Agent, Paying Agent, transfer agent or Security registrar.

     Section 6.05 Moneys to be Held in Trust.

     Subject to the provisions of Section 11.04, all moneys received by the Trustee or any paying agent shall, until used or applied as herein provided, be held in trust for the purpose for which they were received, but need not be segregated from other funds except to the extent required by law. The Trustee and any paying agent shall be under no liability for interest on any money received by it hereunder except as otherwise agreed in writing with the Company. So long as no Event of Default shall have occurred and be continuing, all interest allowed on any such moneys shall be paid from time to time to the Company or its order upon the written order of the Company, signed by the Chairman of the Board of Directors (if an executive officer) the Chief Executive Officer, the President, any Executive Vice President, any Vice President, and its Chief Financial Officer the Treasurer or any Assistant Treasurer of the Company.

     Section 6.06 Compensation and Expenses of Trustee.

     The Company covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to, such compensation as shall be agreed in writing between the Company and the Trustee (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust), and the Company will pay or reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any of the provisions of this Indenture (including the reasonable compensation and the expenses and disbursements of its counsel and of all persons not regularly in its employ and any amounts paid by the Trustee to any Authenticating Agent pursuant to Section 6.13) except any such expense, disbursement or advance as may arise from its negligence or bad faith. The Company also covenants to indemnify each of the Trustee and any predecessor Trustee (and its officers, agents, directors and employees) for, and to hold it harmless against, any and all loss, liability, damages, claim, action, suit, cost or expense, including taxes (other than taxes based on the income of the Trustee) of any kind and nature whatsoever incurred without negligence or bad faith on the part of the Trustee and arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim (whether asserted by the Company, a Holder of Securities or any other Person) of liability in the premises. The obligations of the Company under this Section 6.06 to compensate and indemnify the Trustee and to pay or reimburse the Trustee for expenses, disbursements and advances shall constitute additional indebtedness hereunder and shall survive the resignation or removal of the Trustee and the termination of this Indenture. Such additional indebtedness shall be secured by a lien prior to that of the Securities upon all property and funds held or collected by the Trustee as such, except funds held in trust for the benefit of the Holders of particular Securities.

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     When the Trustee incurs expenses or renders services in connection with an Event of Default specified in Section 5.01(d) or Section 5.01(e), the expenses (including the reasonable charges and expenses of its counsel) and the compensation for the services are intended to constitute expenses of administration under any applicable Federal or State bankruptcy, insolvency or other similar law.

     The provisions of this Section shall survive the termination of this Indenture.

     Section 6.07 Officers’ Certificate as Evidence.

     Except as otherwise provided in Sections 6.01 and 6.02; whenever in the administration of the provisions of this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or omitting any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of negligence or bad faith on the part of the Trustee, be deemed to be conclusively proved and established by an Officers’ Certificate delivered to the Trustee, and such certificate, in the absence of negligence or bad faith on the part of the Trustee, shall be full warrant to the Trustee for any action taken or omitted by it under the provisions of this Indenture upon the faith thereof.

     Section 6.08 Conflicting Interest of Trustee.

     If the Trustee has or shall acquire any “conflicting interest” within the meaning of Section 310(b) of the Trust Indenture Act, the Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to this Indenture.

     Section 6.09 Eligibility of Trustee.

     The Trustee hereunder shall at all times be a corporation organized and doing business under the laws of the United States of America or any State or territory thereof or of the District of Columbia or a corporation or other Person permitted to act as trustee by the Commission authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least $50,000,000 and subject to supervision or examination by federal, State, territorial or District of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section 6.09, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published.

     The Company may not, nor may any Person directly or indirectly controlling, controlled by or under common control with the Company, serve as Trustee.

     In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section 6.09, the Trustee shall resign immediately in the manner and with the effect specified in Section 6.10.

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     Section 6.10 Resignation or Removal of Trustee.

     (a) The Trustee, or any trustee or trustees hereafter appointed, may, at any time, resign by giving written notice of such resignation to the Company and by mailing notice thereof to the Holders of Securities at their addresses as they shall appear on the Security Register. Upon receiving such notice of resignation, the Company shall promptly appoint a successor trustee or trustees by written instrument, in duplicate, executed by order of its Board of Directors, one copy of which instrument shall be delivered to the resigning Trustee and one copy to the successor trustee. If no successor trustee shall have been so appointed and have accepted appointment within 30 days after the mailing of such notice of resignation to the Securityholders, the resigning Trustee may petition, at the expense of the Company, any court of competent jurisdiction for the appointment of a successor trustee, or any Securityholder who has been a bona fide Holder of a Security or Securities for at least six months may, subject to the provisions of Section 5.09, on behalf of himself or herself and all others similarly situated, petition any such court for the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, appoint a successor Trustee.

     (b) In case at any time any of the following shall occur:

     (i) the Trustee shall fail to comply with the provisions of Section 6.08 after written request therefor by the Company or by any Securityholder who has been a bona fide Holder of a Security or Securities for at least six months, or

     (ii) the Trustee shall cease to be eligible in accordance with the provisions of Section 6.09 and shall fail to resign after written request therefor by the Company or by any such Securityholder, or

     (iii) the Trustee shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation.

then, in any such case, the Company may remove the Trustee and appoint a successor trustee by written instrument, in duplicate, executed by order of the Board of Directors, one copy of which instrument shall be delivered to the Trustee so removed and one copy to the successor trustee, or, subject to the provisions of Section 5.09, any Securityholder who has been a bona fide Holder of a Security or Securities for at least six months may, on behalf of himself or herself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor trustee.

     (c) The Holders of a majority in aggregate principal amount of the Securities at the time outstanding may at any time remove the Trustee and nominate a successor trustee which shall be deemed appointed as successor trustee unless, within 10 days after such nomination, the Company objects thereto, in which case the Trustee so removed or any Securityholder, upon the terms and conditions and otherwise as provided in subsection (a) of this Section 6.10, may

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petition, at the expense of the Company, any court of competent jurisdiction for an appointment of a successor trustee.

     (d) Any resignation or removal of the Trustee and appointment of a successor trustee pursuant to any of the provisions of this Section 6.10 shall become effective upon acceptance of appointment by the successor trustee as provided in Section 6.11.

     Section 6.11 Acceptance by Successor Trustee.

     Any successor trustee appointed as provided in Section 6.10 shall execute, acknowledge and deliver to the Company and to its predecessor trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the retiring trustee shall become effective and such successor trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, duties and obligations with respect to the Securities of its predecessor hereunder, with like effect as if originally named as trustee herein; but, nevertheless, on the written request of the Company or of the successor trustee, the trustee ceasing to act shall, upon payment of any amounts then due it pursuant to the provisions of Section 6.06, execute and deliver an instrument transferring to such successor trustee all the rights and powers of the trustee so ceasing to act and shall duly assign, transfer and deliver to such successor trustee all property and money held by such retiring trustee thereunder. Upon request of any such successor trustee, the Company shall execute any and all instruments in writing for more fully and certainly vesting in and confirming to such successor trustee all such rights and powers. Any trustee ceasing to act shall, nevertheless, retain a lien upon all property or funds held or collected by such trustee to secure any amounts then due it pursuant to the provisions of Section 6.06.

     No successor trustee shall accept appointment as provided in this Section 6.11 unless, at the time of such acceptance, such successor trustee shall be qualified under the provisions of Section 6.08 and eligible under the provisions of Section 6.09.

     Upon acceptance of appointment by a successor trustee as provided in this Section 6.11, the Company shall mail notice of the succession of such trustee hereunder to the Holders of Securities at their addresses as they shall appear on the Security Register. If the Company fails to mail such notice within 10 days after the acceptance of appointment by the successor trustee, the successor trustee shall cause such notice to be mailed at the expense of the Company.

     Section 6.12 Succession by Merger, etc.

     Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto.

     In case at the time such successor to the Trustee shall succeed to the trusts created by this Indenture any of the Securities shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor trustee

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and deliver such Securities so authenticated; and in case at that time any of the Securities shall not have been authenticated, any successor to the Trustee may authenticate such Securities either in the name of any predecessor hereunder or in the name of the successor trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Securities or in this Indenture provided that the certificate of the Trustee shall have; provided, however, that the right to adopt the certificate of authentication of any predecessor Trustee or authenticate Securities in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation.

     Section 6.13 Authenticating Agents.

     There may be one or more Authenticating Agents appointed by the Trustee upon the request of the Company with power to act on its behalf and subject to its direction in the authentication and delivery of Securities issued upon exchange or transfer thereof as fully to all intents and purposes as though any such Authenticating Agent had been expressly authorized to authenticate and deliver Securities; provided, that the Trustee shall have no liability to the Company for any acts or omissions of the Authenticating Agent with respect to the authentication and delivery of Securities. Any such Authenticating Agent shall at all times be a corporation organized and doing business under the laws of the United States or of any State or territory thereof or of the District of Columbia authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of at least $50,000,000 and being subject to supervision or examination by Federal, State, territorial or District of Columbia authority. If such corporation publishes reports of condition at least annually pursuant to law or the requirements of such authority, then, for the purposes of this Section 6.13, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect herein specified in this Section.

     Any corporation into which any Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, consolidation or conversion to which any Authenticating Agent shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of any Authenticating Agent, shall be the successor of such Authenticating Agent hereunder, if such successor corporation is otherwise eligible under this Section 6.13 without the execution or filing of any paper or any further act on the part of the parties hereto or such Authenticating Agent.

     Any Authenticating Agent may, at any time, resign by giving written notice of resignation to the Trustee and to the Company. The Trustee may, at any time, terminate the agency of any Authenticating Agent by giving written notice of termination to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time any Authenticating Agent shall cease to be eligible under this Section 6.13, the Trustee may, and upon the request of the Company shall, promptly appoint a successor Authenticating Agent eligible under this Section 6.13, shall give written notice of such appointment to the Company and shall mail notice of such appointment to all Holders of the Securities as the names and addresses of such Holders appear on the Security Register. Any successor Authenticating Agent upon acceptance of its appointment hereunder

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shall become vested with all rights, powers, duties and responsibilities of its predecessor hereunder, with like effect as if originally named as Authenticating Agent herein.

     The Company agrees to pay to any Authenticating Agent from time to time reasonable compensation for its services. Any Authenticating Agent shall have no responsibility or liability for any action taken by it as such in accordance with the directions of the Trustee.

ARTICLE VII
CONCERNING THE SECURITYHOLDERS

     Section 7.01 Action by Securityholders.

     Whenever in this Indenture it is provided that the Holders of a specified percentage in aggregate principal amount of the Securities may take any action (including the making of any demand or request, the giving of any notice, consent or waiver or the taking of any other action), the fact that at the time of taking any such action the Holders of such specified percentage have joined therein may be evidenced (a) by any instrument or any number of instruments of similar tenor executed by such Securityholders in person or by agent or proxy appointed in writing, or (b) by the record of such Holders of Securities voting in favor thereof at any meeting of such Securityholders duly called and held in accordance with the provisions of Article VIII hereof or (c) by a combination of such instrument or instruments and any such record of such a meeting of such Securityholders.

     If the Company shall solicit from the Securityholders any request, demand, authorization, direction, notice, consent, waiver or other action, the Company may, at its option, as evidenced by an Officers’ Certificate, fix in advance a record date for the determination of Securityholders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other action, but the Company shall have no obligation to do so. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other action may be given before or after the record date, but only the Securityholders of record at the close of business on the record date shall be deemed to be Securityholders for the purposes of determining whether Securityholders of the requisite proportion of outstanding Securities have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other action, and for that purpose the outstanding Securities shall be computed as of the record date; provided, however, that no such authorization, agreement or consent by such Securityholders on the record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than six months after the record date.

     Section 7.02 Proof of Execution by Securityholders.

     Subject to the provisions of Sections 6.01, 6.02 and 8.05, proof of the execution of any instrument by a Securityholder or his agent or proxy shall be sufficient if made in accordance with such reasonable rules and regulations as may be prescribed by the Trustee or in such manner as shall be satisfactory to the Trustee. The ownership of Securities shall be proved by the Security Register or by a certificate of the Security registrar. The Trustee may require such additional proof of any matter referred to in this Section as it shall deem necessary.

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     The record of any Securityholders’ meeting shall be proved in the manner provided in Section 8.06.

     Section 7.03 Who Are Deemed Absolute Owners.

     Prior to due presentment for registration of transfer of any Security, the Company, the Trustee, any Authenticating Agent, any Paying Agent, any transfer agent and any Security registrar may deem the person in whose name such Security shall be registered upon the Security Register to be, and may treat such person as, the absolute owner of such Security (whether or not such Security shall be overdue) for the purpose of receiving payment of or on account of the principal of, and premium, if any, and interest on, such Security and for all other purposes; and neither the Company, the Trustee, any Authenticating Agent, any Paying Agent, any transfer agent nor any Security registrar shall be affected by any notice to the contrary.

     Section 7.04 Securities Owned by Company Deemed Not Outstanding.

     In determining whether the Holders of the requisite aggregate principal amount of Securities have concurred in any direction, consent or waiver under this Indenture, Securities which are owned by the Company or any other obligor on the Securities or by any person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any other obligor on the Securities shall be disregarded and deemed not to be outstanding for the purpose of any such determination; provided that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, consent or waiver, only Securities which a Responsible Officer of the Trustee actually knows are so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as outstanding for the purposes of this Section 7.04 if the pledgee shall establish to the satisfaction of the Trustee the pledgee’s right to vote such Securities and that the pledgee is not the Company or any such other obligor or person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any such other obligor. In the case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel shall be full protection to the Trustee.

     Section 7.05 Revocation of Consents; Future Holders Bound.

     At any time prior to (but not after) the evidencing to the Trustee, as provided in Section 7.01, of the taking of any action by the Holders of the percentage in aggregate principal amount of the Security specified in this Indenture in connection with such action, any Holder of a Security (or any Security issued in whole or in part in exchange or substitution therefor) the serial number of which is shown by the evidence to be included in the Securities the Holders of which have consented to such action may, by filing written notice with the Trustee at its Principal Office and upon proof of holding as provided in Section 7.02, revoke such action so far as concerns such Security (or so far as concerns the principal amount represented by any exchanged or substituted Security). Except as aforesaid, any such action taken by the Holder of any Security shall be conclusive and binding upon such Holder and upon all future Holders and owners of such Security, and of any Security issued in exchange or substitution therefor, irrespective of whether or not any notation in regard thereto is made upon such Security or any Security issued in exchange or substitution therefor.

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ARTICLE VIII
SECURITYHOLDERS’ MEETINGS

     Section 8.01 Purposes of Meetings.

     A meeting of Securityholders may be called at any time and from time to time pursuant to the provisions of this Article VIII for any of the following purposes:

     (a) to give any notice to the Company or to the Trustee, to give any directions to the Trustee, to consent to the waiving of any default hereunder and its consequences or to take any other action authorized to be taken by Securityholders pursuant to any of the provisions of Article V hereof;

     (b) to remove the Trustee and nominate a successor trustee pursuant to the provisions of Article VI hereof;

     (c) to consent to the execution of an indenture or indentures supplemental hereto pursuant to the provisions of Section 9.02; or

     (d) to take any other action authorized to be taken by or on behalf of the Holders of any specified aggregate principal amount of the Securities under any other provision of this Indenture or under applicable law.

     Section 8.02 Call of Meetings by Trustee.

     The Trustee may, at any time, call a meeting of Securityholders to take any action specified in Section 8.01, to be held at such time and at such place in the Borough of Manhattan, The City of New York, or in Wilmington, Delaware, as the Trustee shall determine. Notice of every meeting of the Securityholders, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be mailed to Holders of Securities at their addresses as they shall appear on the Securities Register. Such notice shall be mailed not less than 20 nor more than 180 days prior to the date fixed for the meeting.

     Section 8.03 Call of Meetings by Company or Securityholders.

     In case at any time the Company pursuant to a resolution of the Board of Directors, or the Holders of at least 10% in aggregate principal amount of the Securities then outstanding, shall have requested the Trustee to call a meeting of Securityholders, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have mailed the notice of such meeting within 20 days after receipt of such request, then the Company or such Securityholders may determine the time and the place in said Borough of Manhattan, The City of New York, or Wilmington, Delaware for such meeting and may call such meeting to take any action authorized in Section 8.01, by mailing notice thereof as provided in Section 8.02.

     Section 8.04 Qualifications for Voting.

     To be entitled to vote at any meeting of Securityholders a person shall (a) be a Holder of one or more Securities or (b) a person appointed by an instrument in writing as proxy by a

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Holder of one or more such Securities. The only persons who shall be entitled to be present or to speak at any meeting of Securityholders shall be the persons entitled to vote at such meeting and their counsel and any representatives of the Trustee and its counsel and any representatives of the Company and its counsel.

     Section 8.05 Regulations.

     Notwithstanding any other provisions of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Securityholders, in regard to proof of the holding of Securities and of the appointment of proxies, the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote and such other matters concerning the conduct of the meeting as it shall think fit.

     The Trustee shall, by an instrument in writing, appoint a temporary chair of the meeting, unless the meeting shall have been called by the Company or by Securityholders as provided in Section 8.03, in which case the Company or the Securityholders calling the meeting, as the case may be, shall in like manner appoint a temporary chair. A permanent chair and a permanent secretary of the meeting shall be elected by majority vote of the meeting.

     Subject to the provisions of Section 7.04, at any meeting of Securityholders, each Holder of Securities with respect to which such meeting is being held or proxy therefor shall be entitled to one vote for each $1,000 principal amount of Securities held or represented by such Holder; provided, however, that no vote shall be cast or counted at any meeting in respect of any Security challenged as not outstanding and ruled by the chair of the meeting to be not outstanding. The chair of the meeting shall have no right to vote other than by virtue of Securities held by him or her or instruments in writing as aforesaid duly designating him or her as the person to vote on behalf of other Securityholders. Any meeting of Securityholders duly called pursuant to the provisions of Section 8.02 or 8.03 may be adjourned from time to time by a majority of those present, whether or not constituting a quorum, and the meeting may be held as so adjourned without further notice.

     Section 8.06 Voting.

     The vote upon any resolution submitted to any meeting of Holders of Securities shall be by written ballots on which shall be subscribed the signatures of such Holders or of their representatives by proxy and the serial number or numbers of the Securities held or represented by them. The permanent chair of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in triplicate of all votes cast at the meeting. A record in duplicate of the proceedings of each meeting of Securityholders shall be prepared by the secretary of the meeting and there shall he attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice was mailed as provided in Section 8.02. The record shall show the serial numbers of the Securities voting in favor of or against any resolution. The record shall be signed and verified by the affidavits of the permanent chair and secretary of the meeting and one of the

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duplicates shall be delivered to the Company and the other to the Trustee to be preserved by the Trustee, the latter to have attached thereto the ballots voted at the meeting.

     Any record so signed and verified shall be conclusive evidence of the matters therein stated.

ARTICLE IX
SUPPLEMENTAL INDENTURES

     Section 9.01 Supplemental Indentures without Consent of Securityholders.

     The Company and the Trustee may, from time to time, and at any time enter into an indenture or indentures supplemental hereto (which shall conform to the provisions of the Trust Indenture Act as then in effect applicable to indentures qualified thereunder), without the consent of the Securityholders, for one or more of the following purposes:

     (a) to evidence the succession of another entity to the Company, or successive successions, and the assumption by the successor entity of the covenants, agreements and obligations of the Company pursuant to Article X hereof;

     (b) to add to the covenants of the Company such further covenants, restrictions or conditions for the protection of the Holders of Securities as the Board of Directors and the Trustee shall consider to be for the protection of the Holders of Securities, and to make the occurrence, or the occurrence and continuance, of a default in any of such additional covenants, restrictions or conditions a default or an Event of Default permitting the enforcement of all or any of the several remedies provided in this Indenture as herein set forth; provided, however, that in respect of any such additional covenant, restriction or condition such supplemental indenture may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults) or may provide for an immediate enforcement upon such default or may limit the remedies available to the Trustee upon such default;

     (c) to cure any ambiguity or to correct or supplement any provision contained herein or in any supplemental indenture which may be defective or inconsistent with any other provision contained herein or in any supplemental indenture, or to make such other provisions in regard to matters or questions arising under this Indenture; provided that any such action shall not adversely affect the interests of the Holders of the Securities in any material respect;

     (d) to add to, delete from or revise the terms of Securities, including, without limitation, any terms relating to the issuance, exchange, registration or transfer of Securities; provided, that no such action shall adversely affect the interests of Holders of outstanding Securities;

     (e) to evidence and provide for the acceptance of appointment hereunder by a successor trustee with respect to the Securities and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one trustee, pursuant to the requirements of Section 6.11;

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     (f) to make any change that does not adversely affect the rights of any Securityholder in any material respect; or

     (g) to provide for the issuance of and establish the form and terms and conditions of the Securities, to establish the form of any certifications required to be furnished pursuant to the terms of this Indenture or to add to the rights of the Holders of Securities.

     The Trustee is hereby authorized to join with the Company in the execution of any such supplemental indenture, to make any further appropriate agreements and stipulations which may be therein contained and to accept the conveyance, transfer and assignment of any property thereunder, but the Trustee shall not be obligated to, but may in its discretion, enter into any such supplemental indenture which affects the Trustee’s own rights, duties or immunities under this Indenture or otherwise.

     Any supplemental indenture authorized by the provisions of this Section 9.01 may be executed by the Company and the Trustee without the consent of the Holders of any of the Securities at the time outstanding, notwithstanding any of the provisions of Section 9.02.

     Section 9.02 Supplemental Indentures with Consent of Securityholders.

     With the consent (evidenced as provided in Section 7.01) of the Holders of a majority in aggregate principal amount of the Securities at the time outstanding, the Company, when authorized by a Board Resolution, and the Trustee may, from time to time and at any time, enter into an indenture or indentures supplemental hereto (which shall conform to the provisions of the Trust Indenture Act then in effect applicable to indentures qualified thereunder) for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or of modifying in any manner the rights of the Holders of the Securities; provided, however, that no such supplemental indenture shall, without the consent of the Holders of each Security, (i) change the Stated Maturity of any such Security, or reduce the Interest Rate (or change the manner of calculation of the Interest Rate) or change any date on which interest thereon is payable, or reduce the principal amount thereof or any premium thereon, or change any redemption or repayment date or period or price, or make the principal thereof or any interest or premium thereon payable in any coin or currency other than that provided in the Securities, or impair or affect the right of any Securityholder to institute suit for payment thereof (ii) reduce the aforesaid percentage of Securities the Holders of which are required to consent to any such supplemental indenture or (iii) otherwise materially and adversely affect the interests of the Holders of any such Security; provided, further, that if the Securities are held by the Trust or a trustee of the Trust, such supplemental indenture shall not be effective until the registered holders of a majority in aggregate liquidation amount of Trust Securities shall have consented to such supplemental indenture; provided further, that if the consent of the Holder of each outstanding Security is required, such supplemental indenture shall not be effective until each registered holder of the Trust Securities shall have consented to such supplemental indenture.

     Upon the request of the Company accompanied by a copy of a resolution of the Board of Directors certified by its Secretary or Assistant Secretary authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of

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Securityholders (and holders of Trust Securities as provided in this Section 9.02) as aforesaid, the Trustee shall join with the Company in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee’s own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture. The Trustee may receive an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant to this Article is authorized or permitted by, and conforms to, the terms of this Article and that it is proper for the Trustee under the provisions of this Article to join in the execution thereof.

     Promptly after the execution by the Company and the Trustee of any supplemental indenture pursuant to the provisions of this Section, the Trustee shall transmit by mail, first class postage prepaid, a notice, to be prepared by the Company, setting forth in general terms the substance of such supplemental indenture, to the Securityholders as their names and addresses appear upon the Security Register. Any failure of the Trustee to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture.

     It shall not be necessary for the consent of the Securityholders under this Section 9.02 to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof.

     Section 9.03 Notation on Securities.

     Securities authenticated and delivered after the execution of any supplemental indenture affecting the Securities pursuant to the provisions of this Article IX may bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company or the Trustee shall so determine, new Securities so modified as to conform, in the opinion of the Trustee and the Board of Directors, to any modification of this Indenture contained in any such supplemental indenture may be prepared and executed by the Company, authenticated by the Trustee or the Authenticating Agent and delivered in exchange for the Securities then outstanding.

     Section 9.04 Evidence of Compliance of Supplemental Indenture to be Furnished to Trustee.

     The Trustee, subject to the provisions of Sections 6.01 and 6.02, may receive an Officers’ Certificate and an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant hereto complies with the requirements of this Article IX.

ARTICLE X
CONSOLIDATION, MERGER, SALE,
CONVEYANCE AND LEASE

     Section 10.01 Company May Consolidate, etc., on Certain Terms.

     Nothing contained in this Indenture or in any of the Securities shall prevent any consolidation or merger of the Company with or into any other Person (whether or not affiliated with the Company, as the case may be), or successive consolidations or mergers in which the

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Company or its successor or successors, as the case may be, shall be a party or parties, or shall prevent any sale, conveyance, transfer or lease of the property of the Company, or its successor or successors, as the case may be, as an entirety, or substantially as an entirety, to any other Person (whether or not affiliated with the Company or its successor or successors, as the ;case may be) authorized to acquire and operate the same; provided, that (a) the Company is the surviving entity, or the entity formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, conveyance, transfer or lease of property is made is a corporation, partnership, trust or other entity organized and existing under the laws of the United States or any State thereof or the District of Columbia, (b) if the Company is not the surviving entity, upon any such consolidation, merger, sale, conveyance, transfer or lease, the due and punctual payment of the principal of and interest on the Securities according to their tenor, and the due and punctual performance and observance of all the covenants and conditions of this Indenture to be kept or performed by the Company shall be expressly assumed by the surviving entity, by supplemental indenture (which shall conform to the provisions of the Trust Indenture Act as then in effect applicable to indentures qualified thereunder) satisfactory in form to the Trustee executed and delivered to the Trustee by the entity formed by such consolidation, or into which the Company shall have been merged, or by the entity which shall have acquired such property, as the case may be, (c) after giving effect to such consolidation, merger, sale, conveyance, transfer or lease, no Default or Event of Default shall have occurred and be continuing, (d) such consolidation, merger, sale, conveyance, transfer or lease is permitted under the Declaration and Preferred Securities Guarantee and does not give rise to any breach or violation of the Declaration or Preferred Securities Guarantee, and (e) each company that is an insurance subsidiary of the Company immediately prior to the transaction shall, immediately after such transaction, have an A.M. Best financial strength rating equal to or higher than the rating assigned to such subsidiary immediately prior to the transaction.

     Section 10.02 Successor Entity to be Substituted for Company.

     In case of any such consolidation, merger, conveyance or transfer and upon the assumption by the successor entity, by supplemental indenture, executed and delivered to the Trustee and satisfactory in form to the Trustee, of the due and punctual payment of the principal of and premium, if any, and interest on all of the Securities and the due and punctual performance and observance of all of the covenants and conditions of this Indenture to be performed or observed by the Company, such successor entity shall succeed to and be substituted for the Company, with the same effect as if it had been named herein as the party of the first part, and the Company thereupon shall be relieved of any further liability or obligation hereunder or upon the Securities. Such successor entity thereupon may cause to be signed, and may issue either in its own name or in the name of the Company, any or all of the Securities issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee or the Authenticating Agent; and, upon the order of such successor entity instead of the Company and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee or the Authenticating Agent shall authenticate and deliver any Securities which previously shall have been signed and delivered by the officers of the Company to the Trustee or the Authenticating Agent for authentication, and any Securities which such successor entity thereafter shall cause to be signed and delivered to the Trustee or the Authenticating Agent for that purpose. All the Securities so issued shall in all respects have the same legal rank and benefit under this Indenture as the Securities theretofore or thereafter issued in accordance with the

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terms of this Indenture as though all of such Indentures had been issued at the date of the execution hereof.

     Section 10.03 Opinion of Counsel to be Given to Trustee.

     The Trustee, subject to the provisions of Sections 6.01 and 6.02, may receive an Opinion of Counsel as conclusive evidence that any consolidation, merger, conveyance or transfer, and any assumption, permitted or required by the terms of this Article X complies with the provisions of this Article X.

ARTICLE XI
SATISFACTION AND DISCHARGE OF INDENTURE

     Section 11.01 Discharge of Indenture.

     When (a) the Company shall deliver to the Trustee for cancellation all Securities theretofore authenticated (other than any Securities which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 2.08) and not theretofore cancelled or (b) all the Securities not theretofore cancelled or delivered to the Trustee for cancellation shall have become due and payable, or are by their terms to become due and payable within one year or are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption, and the Company shall deposit with the Trustee, in trust, immediately available funds sufficient to pay at maturity or upon redemption all of the Securities (other than any Securities which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 2.08) not theretofore cancelled or delivered to the Trustee for cancellation, including principal of, premium, if any, and interest (including Compound Interest and Additional Tax Sums, if any) due or to become due to such date of maturity or redemption date, as the case may be, but excluding, however, the amount of any moneys for the payment of principal of, and premium, if any, or interest on the Securities (1) theretofore repaid to the Company in accordance with the provisions of Section 11.04, or (2) paid to any State or to the District of Columbia pursuant to its unclaimed property or similar laws, and if, in either case, the Company shall also pay or cause to be paid all other sums payable hereunder by the Company, then this Indenture shall cease to be of further effect, except that the provisions of Sections 2.05, 2.07, 2.08, 3.01, 3.02, 3.04, 6.06, 6.10 and 11.04 hereof shall survive until such Securities shall mature and be paid. Thereafter, Sections 6.06 and 11.04 shall survive, and the Trustee, on demand of the Company accompanied by any Officers’ Certificate and an Opinion of Counsel and at the cost and expense of the Company, shall execute proper instruments acknowledging satisfaction of and discharging this Indenture, the Company, however, hereby agreeing to reimburse the Trustee for any costs or expenses thereafter reasonably and properly incurred by the Trustee in connection with this Indenture or the Securities.

     Section 11.02 Deposited Moneys to be Held in Trust by Trustee.

     Subject to the provisions of Section 11.04, all moneys deposited with the Trustee pursuant to Section 11.01 shall be held in trust and applied by it to the payment, either directly or through any Paying Agent (including the Company if acting as its own Paying Agent), to the

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Holders of the particular Securities for the payment of which such moneys have been deposited with the Trustee, of all sums due and to become due thereon for principal, premium, if any, and interest.

     Section 11.03 Paying Agent to Repay Moneys Held.

     Upon the satisfaction and discharge of this Indenture all moneys then held by any Paying Agent of the Securities (other than the Trustee) shall, upon written demand of the Company, be repaid to it or paid to the Trustee, and thereupon, such Paying Agent shall be released from all further liability with respect to such moneys.

     Section 11.04 Return of Unclaimed Moneys.

     Any moneys deposited with or paid to the Trustee or any Paying Agent for payment of the principal of, and premium, if any, or interest on Securities and not applied but remaining unclaimed by the Holders of Securities for two years after the date upon which the principal of, and premium, if any, or interest on such Securities, as the case may be, shall have become due and payable, shall be repaid to the Company by the Trustee or such Paying Agent on written demand; and the Holder of any of the Securities shall thereafter look only to the Company for any payment which such Holder may be entitled to collect and all liability of the Trustee or such Paying Agent with respect to such moneys shall thereupon cease.

ARTICLE XII
IMMUNITY OF INCORPORATORS, STOCKHOLDERS,
OFFICERS AND DIRECTORS

     Section 12.01 Indenture and Securities Solely Entity Obligations.

     No recourse for the payment of the principal of or premium, if any, or interest on any Security, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in this Indenture or in any supplemental indenture, or in any Security, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, member, partner, officer or director, as such, past, present or future, of the Company or of any successor entity of the Company, either directly or through the Company or any successor entity of the Company, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that all such liability is hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of the Securities.

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ARTICLE XIII
MISCELLANEOUS PROVISIONS

     Section 13.01 Successors.

     All the covenants, stipulations, promises and agreements in this Indenture made by the Company shall bind its successors and assigns whether so expressed or not.

     Section 13.02 Official Acts by Successor Entity.

     Any act or proceeding by any provision of this Indenture authorized or required to be done or performed by any board, committee or officer of the Company shall and may be done and performed with like force and effect by the like board, committee or officer of any entity that shall at the time be the lawful sole successor of the Company.

     Section 13.03 Surrender of Company Powers.

     The Company by instrument in writing executed by authority of at least 2/3 (two-thirds) of its Board of Directors and delivered to the Trustee may surrender any of the powers reserved to the Company, and thereupon such power so surrendered shall terminate both as to the Company and as to any successor entity.

     Section 13.04 Addresses for Notices, etc.

     Any notice or demand which by any provision of this Indenture is required or permitted to be given or served by the Trustee or by the Holders of Securities on the Company may be given or served by being deposited postage prepaid by first class mail in a post office letter box addressed (until another address is filed by the Company with the Trustee for the purpose) to the Company, 29621 Northwestern Highway, Southfield, Michigan, 48034, Attention: Richard H. Smith. Any notice, direction, request or demand by any Securityholder to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or made in writing at the office of the Trustee, addressed to the Trustee, Wilmington Trust Company, Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001, Attention: Corporate Trust Administration.

     Section 13.05 Governing Law.

     THIS INDENTURE AND EACH SECURITY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES THEREOF (OTHER THAN SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW).

     Section 13.06 Submission to Jurisdiction.

     The Company and the Trustee each irrevocably and unconditionally submits to the nonexclusive jurisdiction of the courts of the State of New York and the federal courts of the United States located in the Borough of Manhattan, The City of New York (and any courts having jurisdiction over appeals therefrom) in respect of any action, suit or proceeding arising

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out of this Indenture or the Securities or any of the transactions contemplated thereby and waives to the extent permitted by law any objection to venue in respect thereof (based on inconvenient forum or otherwise). Unless the Company or the Trustee, as the case may be, maintains a registered agent in the State of New York, each such party agrees that process in any such suit may be served by mailing the relevant process, by registered or certified mail, return receipt requested, to the address of such party then specified pursuant to Section 13.04.

     Section 13.07 Evidence of Compliance with Conditions Precedent.

     Upon any application or demand by the Company to the Trustee to take any action under any of the provisions of this Indenture, the Company shall furnish to the Trustee an Officers’ Certificate stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with.

     Each certificate or opinion provided for in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant provided for in this Indenture shall include (1) a statement that the person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with.

     Section 13.08 Table of Contents, Headings, etc.

     The table of contents and the titles and headings of the articles and sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof and shall in no way modify or restrict any of the terms or provisions hereof.

     Section 13.09 Execution in Counterparts.

     This Indenture may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute but one and the same instrument.

     Section 13.10 Separability.

     In case any one or more of the provisions contained in this Indenture or in the Securities shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Indenture or of such Securities, but this Indenture and such Securities shall be construed as if such invalid or illegal or unenforceable provision had never been contained herein or therein.

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ARTICLE XIV
REDEMPTION OF SECURITIES

     Section 14.01 Optional Redemption.

     The Securities are redeemable prior to their Stated Maturity at the option of the Company (i) in whole or in part, from time to time, on or after May 24, 2009 on an Interest Payment Date or (ii) at any time prior to May 24, 2009, in whole but not in part, upon the occurrence and continuation of a Special Event, in either case at a redemption price (the “Redemption Price”) equal to 100% of the principal amount thereof, plus unpaid interest thereon (including Additional Interest and Compound Interest, if any) accrued to the date of redemption; provided, (i) that the Company may not exercise its option to redeem with respect to a Special Event unless it fixes, not later than 90 days after the occurrence of such Special Event, a date for redemption and mails a notice thereof to Holders pursuant to Section 14.02 and (ii) that the Company may not exercise its option to redeem with respect to a Special Event unless it pays a premium, in addition to the Redemption Price, in cash equal to the product of (y) 100% of the outstanding principal amount of such Security, and (z) the percentage specified below for the applicable date of redemption provided that the Company shall have received prior approval of any applicable insurance regulatory authority therefor, if necessary:

Redemption During the 12-Month Period
Beginning May 24,	Percentage of Principal Amount
2004	5%
2005	4%
2006	3%
2007	2%
2008	1%
2009 and thereafter	0%

     Section 14.02 Notice of Redemption; Selection of Securities.

     In case the Company shall desire to exercise the right to redeem all, or, as the case may be, any part of the Securities in accordance with their terms, it shall evidence its election in a board resolution, fix a date for redemption and shall mail a notice of such redemption at least 30 and not more than 60 days prior to the date fixed for redemption to the Holders of Securities so to be redeemed as a whole or in part at their last addresses as the same appear on the Security Register, with a copy to the Trustee. Such mailing shall be by first class mail. The notice if mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the Holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the Holder of any Security designated for redemption as a whole or in part shall not affect the validity of the proceedings for the redemption of any other Security.

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     Each such notice of redemption shall identify the Securities to be redeemed (including CUSIP number), specify the date fixed for redemption, the redemption price and premium, if any, at which Securities are to be redeemed, the place or places of payment, that payment will be made upon presentation and surrender of such Securities, that interest accrued to the date fixed for redemption will be paid as specified in said notice and that on and after said date interest thereon or on the portions thereof to be redeemed will cease to accrue. If less than all the Securities are to be redeemed, the notice of redemption shall specify the numbers of the Securities to be redeemed. In case any Security is to be redeemed in part only, the notice of redemption shall state the portion of the principal amount thereof to be redeemed and shall state that on and after the date fixed for redemption, upon surrender of such Security, a new Security or Securities in principal amount equal to the unredeemed portion thereof will be issued.

     Prior to 10:00 a.m. New York City time on the redemption date specified in the notice of redemption given as provided in this Section, the Company will deposit with the Trustee or with one or more paying agents an amount of money sufficient to redeem on the redemption date all the Securities so called for redemption at the appropriate redemption price and premium, if any, together with accrued interest to the date fixed for redemption.

     If the Securities are to be redeemed, the Company will give the Trustee notice not less than 60 days prior to the redemption date as to the aggregate principal amount of Securities to be redeemed and, in the case of a partial redemption, the Trustee shall select, in such manner as in its sole discretion it shall deem appropriate and fair, the Securities or portions thereof (in integral multiples of $1,000) to be redeemed.

     Section 14.03 Payment of Securities Called for Redemption.

     If notice of redemption has been given as provided in Section 14.02, the Securities or portions of Securities with respect to which such notice has been given shall become due and payable on the date and at the place or places stated in such notice at the applicable redemption price and premium, if any, together with interest accrued to the date fixed for redemption, and on and after said date (unless the Company shall default in the payment of such Securities at the redemption price and premium, if any, together with interest accrued to said date) interest on the Securities or portions of Securities so called for redemption shall cease to accrue. On presentation and surrender of such Securities at a place of payment specified in said notice, the said Securities or the specified portions thereof shall be paid and redeemed by the Company at the applicable redemption price and premium (if any), together with interest accrued thereon to the date fixed for redemption.

     Upon presentation of any Security redeemed in part only, the Company shall execute and the Trustee shall authenticate and deliver to the Holder thereof, at the expense of the Company, a new Security or Securities of authorized denominations, in principal amount equal to the unredeemed portion of the Security so presented.

     If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal of and any premium on such Security shall, until paid, bear interest from the date fixed for redemption at the rate prescribed therefor in the Security.

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ARTICLE XV
SUBORDINATION OF SECURITIES

     Section 15.01 Agreement to Subordinate.

     The Company covenants and agrees, and each Holder of Securities issued hereunder, by such Securityholder’s acceptance thereof, likewise covenants and agrees, that all Securities shall be issued subject to the provisions of this Article XV; and each Holder of a Security, whether upon original issue or upon transfer or assignment thereof, accepts and agrees to be bound by such provisions.

     The payment by the Company of the principal of, premium, if any, and interest (including Compound Interest and Additional Interest, if any) on all Securities issued hereunder shall, to the extent and in the manner hereinafter set forth, be subordinated and junior in right of payment to the prior payment in full of all Senior Indebtedness of the Company and rank pari passu and equivalent to creditor obligations of those holding general unsecured claims not entitled to statutory priority under the United States Bankruptcy Code or otherwise, in each case whether outstanding at the date of this Indenture or thereafter incurred.

     No provision of this Article XV shall prevent the occurrence of any Default or Event of Default hereunder.

     Section 15.02 Default on Senior Indebtedness.

     No payment may be made of the principal of, premium, if any, or interest on the Securities, or in respect of any redemption, retirement, purchase or other acquisition of any of the Securities, at any time when (i) there is a default, after giving effect to any applicable grace period, in the payment of the principal of; premium, if any, interest on or otherwise in respect of any Senior Indebtedness, whether at maturity or at a date fixed for prepayment or by declaration or otherwise, or (ii) the maturity of any Senior Indebtedness of the Company has been accelerated because of a default and such acceleration has not been rescinded or canceled and such Senior Indebtedness has not been paid in full.

     In the event that, notwithstanding the foregoing, any payment shall be received by the Trustee when such payment is prohibited by the preceding paragraph of this Section 15.02, such payment shall be held in trust for the benefit of, and shall be paid over or delivered to, the holders of Senior Indebtedness or their respective representatives, or to the trustee or trustees under any indenture pursuant to which any of such Senior Indebtedness may have been issued, as their respective interests may appear, but only to the extent that the holders of the Senior Indebtedness (or their representative or representatives or a trustee) notify the Trustee in writing within 90 days of such payment of the amounts then due and owing on the Senior Indebtedness and only the amounts specified in such notice to the Trustee shall be paid to the holders of Senior Indebtedness.

     Section 15.03 Liquidation; Dissolution; Bankruptcy.

     Upon any payment by the Company or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon any dissolution, winding-

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up, liquidation or reorganization of the Company, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, all amounts due upon all Senior Indebtedness of the Company shall first be paid in full, or payment thereof provided for in money in accordance with their terms, before any payment is made by the Company on account of the principal or interest (including Compound Interest and Additional Interest, if any) on the Securities; and upon any such dissolution or winding-up or liquidation or reorganization, any payment by the Company, or distribution of assets of the Company of any kind or character, whether in cash, property or securities, which the Securityholders or the Trustee would be entitled to receive from the Company, except under the provisions of this Article XV, shall be paid by the Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such payment or distribution, or by the Securityholders or by the Trustee under the Indenture if received by them or it, directly to the holders of Senior Indebtedness of the Company (pro rata to such holders on the basis of the respective amounts of Senior Indebtedness held by such holders, as calculated by the Company) or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Senior Indebtedness may have been issued, as their respective interests may appear, to the extent necessary to pay such Senior Indebtedness in full, in money or money’s worth, after giving effect to any concurrent payment or distribution to or for the holders of such Senior Indebtedness, before any payment or distribution is made to the Securityholders or to the Trustee.

     In the event that, notwithstanding the foregoing, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, prohibited by the foregoing, shall be received by the Trustee before all Senior Indebtedness of the Company is paid in full, or provision is made for such payment in money in accordance with its terms, such payment or distribution shall be held in trust for the benefit of and shall be paid over or delivered to the holders of such Senior Indebtedness or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Senior Indebtedness may have been issued, as their respective interests may appear, as calculated by the Company, in each case, for application to the payment of all Senior Indebtedness of the Company remaining unpaid to the extent necessary to pay such Senior Indebtedness in full in money in accordance with its terms, after giving effect to any concurrent payment or distribution to or for the benefit of the holders of such Senior Indebtedness.

     For purposes of this Article XV, the words “cash, property or securities” shall not be deemed to include (a) shares of stock of the Company as reorganized or readjusted, or (b) securities of the Company or any other entity provided for by a plan of reorganization or readjustment, the payment of which is subordinated at least to the extent provided in this Article XV with respect to the Securities to the payment of all Senior indebtedness of the Company that may at the time be outstanding, provided, in each case, that (i) all Senior Indebtedness of the Company is assumed by the new entity, if any, resulting from any such reorganization or readjustment, and (ii) the rights of the holders of such Senior Indebtedness are not, without the consent of such holders, altered by such reorganization or readjustment. The consolidation of the Company with, or the merger of the Company into, another entity or the liquidation or dissolution of the Company following the conveyance or transfer of its property as an entirety, or substantially as an entirety, to another Person upon the terms and conditions provided for in Article X of this Indenture shall not be deemed a dissolution, winding-up, liquidation or reorganization for the purposes of this Section 15.03 if such other Person shall, as a part of such

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consolidation, merger, conveyance or transfer, comply with the conditions stated in Article X of this Indenture. Nothing in Section 15.02 or in this Section 15.03 shall apply to claims of, or payments to, the Trustee under or pursuant to Section 6.06 of this Indenture.

     Section 15.04 Subrogation of Securityholders.

     Subject to the payment in full of all Senior Indebtedness of the Company, the Securityholders shall be subrogated to the rights of the holders of the Senior Indebtedness to receive payments or distributions of cash, property or securities of the Company, as the case may be, applicable to the Senior Indebtedness until all amounts owing on the Securities shall be paid in full; and, for the purposes of such subrogation, no payments or distributions to the holders of such Senior Indebtedness of any cash, property or securities to which the Securityholders or the Trustee would be entitled except under the provisions of this Article XV, and no payment over pursuant to the provisions of this Article XV to or for the benefit of the holders of such Senior Indebtedness by Securityholders or the Trustee, shall, as between the Company, its creditors (other than holders of Senior Indebtedness of the Company) and the Holders of the Securities, be deemed to be a payment by the Company to or on account of such Senior Indebtedness. It is understood that the provisions of this Article XV are and are intended solely for the purposes of defining the relative rights of the Holders of the Securities, on the one hand, and the holders of such Senior Indebtedness, on the other hand.

     Nothing contained in this Article XV or elsewhere in this Indenture or in the Securities is intended to or shall impair, as between the Company, its creditors (other than the holders of Senior Indebtedness of the Company) and the Holders of the Securities, the obligation of the Company, which is absolute and unconditional, to pay to the Holders of the Securities the principal of, premium, if any, and interest (including Compound Interest and Additional Interest, if any) on, the Securities as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the Holders of the Securities and creditors of the Company, as the case may be, other than the holders of Senior Indebtedness of the Company, as the case may be, nor shall anything herein or therein prevent the Trustee or the Holder of any Security from exercising all remedies otherwise permitted by applicable law upon default under the Indenture, subject to the rights, if any, under this Article XV of the holders of such Senior Indebtedness in respect of cash, property or securities of the Company, as the case may be, received upon the exercise of any such remedy.

     Upon any payment or distribution of assets of the Company referred to in this Article XV, the Trustee, subject to the provisions of Article VI of this Indenture, and the Securityholders shall be entitled to conclusively rely upon any order or decree made by any court of competent jurisdiction in which such dissolution, winding-up, liquidation or reorganization proceedings are pending, or a certificate of the receiver, trustee in bankruptcy, liquidation trustee, agent or other Person making such payment or distribution, delivered to the Trustee or to the Securityholders, for the purposes of ascertaining (i) the Persons entitled to participate in such payment or distribution, (ii) the holders of Senior Indebtedness and other indebtedness of the Company, (iii) the amount of any payment or distribution made or payable to any such Persons, and (iv) all other facts pertinent thereto or to this Article XV in connection therewith.

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     Section 15.05 Trustee to Effectuate Subordination.

     Each Securityholder by such Securityholder’s acceptance of the Securities authorizes and directs the Trustee on such Securityholder’s behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article XV and appoints the Trustee such Securityholder’s attorney-in-fact for any and all such purposes.

     Section 15.06 Notice by the Company.

     The Company shall give prompt written notice to a Responsible Officer of any fact known to the Company that would prohibit the making of any payment of monies to or by the Trustee in respect of the Securities pursuant to the provisions of this Article XV. Notwithstanding the provisions of this Article XV or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment of monies to or by the Trustee in respect of the Securities pursuant to the provisions of this Article XV, unless and until a Responsible Officer shall ha e received written notice thereof from the Company or a holder or holders of Senior Indebtedness or from any trustee therefor; and before the receipt of any such written notice, the Trustee, subject to the provisions of Article VI of this Indenture, shall be entitled in all respects to assume that no such facts exist; provided, however, that if the Trustee shall not have received the notice provided for in this Section 15.06 at least two Business Days prior to the date upon which by the terms hereof any money may become payable for any purpose (including, without limitation, the payment of the principal of or interest on any Security), then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such money and to apply the same to the purposes for which they were received, and shall not be affected by any notice to the contrary that may be received by it within two Business Days prior to such date.

     The Trustee, subject to the provisions of Article VI of this Indenture, shall be entitled to conclusively rely on the delivery to it of a written notice by a Person representing himself or herself to be a holder of Senior Indebtedness of the Company, as the case may be (or a trustee on behalf of such holder), to establish that such notice has been given by a holder of such Senior Indebtedness or a trustee on behalf of any such holder or holders. In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of such Senior Indebtedness to participate in any payment or distribution pursuant to this Article XV, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of such Senior Indebtedness held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article XV, and, if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment.

     Section 15.07 Rights of the Trustee; Holders of Senior Indebtedness.

     The Trustee, in its individual capacity, shall be entitled to all the rights set forth in this Article XV in respect of any Senior Indebtedness at any time held by it to the same extent as any other holder of Senior Indebtedness, and nothing in this Indenture shall deprive the Trustee of any of its rights as such holder.

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     Nothing in this Article XV shall apply to claims of, or payments to, the Trustee under or pursuant to Section 6.06.

     With respect to the holders of Senior Indebtedness of the Company, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article XV, and no implied covenants or obligations with respect to the holders of such Senior Indebtedness shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of such Senior Indebtedness and, subject to the provisions of Article VI of this Indenture, the Trustee shall not be liable to any holder of such Senior Indebtedness if it shall pay over or deliver to Securityholders, the Company or any other Person money or assets to which any holder of such Senior Indebtedness shall be entitled by virtue of this Article XV or otherwise.

     Section 15.08 Subordination May Not Be Impaired.

     No right of any present or future holder of any Senior Indebtedness of the Company to enforce subordination as herein provided shall, at any time or in any way, be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act, in good faith, by any such holder or by any noncompliance by the Company with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof that any such holder may have or otherwise be charged with.

     Without in any way limiting the generality of the foregoing paragraph, the holders of Senior Indebtedness of the Company may, at any time and from time to time, without the consent of or notice to the Trustee or the Securityholders, without incurring responsibility to the Securityholders and without impairing or releasing the subordination provided in this Article XV or the obligations hereunder of the Holders of the Securities to the holders of such Senior Indebtedness, do any one or more of the following: (i) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, such Senior Indebtedness, or otherwise amend or supplement in any manner such Senior Indebtedness or any instrument evidencing the same or any agreement under which such Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing such Senior Indebtedness; (iii) release any Person liable in any manner for the collection of such Senior Indebtedness; and (iv) exercise or refrain from exercising any rights against the Company or any other Person.

     Wilmington Trust Company hereby accepts the trusts in this Indenture declared and provided, upon the terms and conditions hereinabove set forth.

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     IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed by their respective officers or agents thereunto duly authorized, all as of the day and year first above written.

Attest	First Mercury Financial Corporation
/s/ J.J.	By:	/s/ Richard H Smith
Name:		Name:   Richard H Smith
Title:		Title:     President
	WILMINGTON TRUST COMPANY,
	as Trustee
	By:	/s/ Kathleen A. Pedelini
		Name:   Kathleen A. Pedelini
		Title:     Financial Services Officer

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EXHIBIT A

[FORM OF SECURITY]

(FORM OF FACE)

     THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN, BY ITS ACCEPTANCE HEREOF OR THEREOF, AS THE CASE MAY BE, AGREES TO OFFER, SELL, OR OTHERWISE TRANSFER SUCH SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN PRIOR TO THE DATE WHICH IS THE LATER OF (i) TWO YEARS (OR SUCH SHORTER PERIOD OF TIME AS PERMITTED BY RULE 144k UNDER THE SECURITIES ACT) AFTER THE LATER OF (Y) THE DATE OF ORIGINAL ISSUANCE HEREOF AND (Z) THE LAST DATE ON WHICH THE COMPANY, OR ANY AFFILIATE (AS DEFINED IN RULE 405 UNDER THE SECURITIES ACT) OF THE COMPANY WAS THE HOLDER OF THIS SECURITY OR SUCH INTEREST OR PARTICIPATION (OR ANY PREDECESSOR THERETO) AND (ii) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY ANY CHANGE IN APPLICABLE LAW, ONLY (A) TO THE COMPANY, (B) PURSUANT TO RULE 144A UNDER THE SECURITIES ACT (“RULE 144A”), TO A PERSON, THE HOLDER REASONABLY BELIEVES IS A “QUALIFIED INSTITUTIONAL BUYER”, AS DEFINED IN RULE 144A, THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GWEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (C) PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT TO AN “ACCREDITED INVESTOR” WITHIN THE MEANING OF SUBPARAGRAPH (A) (1), (2), (3), (7) OR (8) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS SECURITY OR SUCH INTEREST OR PARTICIPATION FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, (D) PURSUANT TO OFFERS AND SALES TO NON-US PERSONS THAT OCCUR OUTSIDE THE UNITED STATES PURSUANT TO REGULATION S UNDER THE SECURITIES ACT OR (E) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY’S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (C) OR (E) ABOVE TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO IT IN ACCORDANCE WITH THE INDENTURE, A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY. THE HOLDER OF THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN, BY ITS ACCEPTANCE HEREOF OR THEREOF, AS THE

CASE MAY BE, AGREES THAT IT WILL COMPLY WITH THE FOREGOING RESTRICTIONS.

     THE HOLDER OF THIS SECURITY OR ANY INTEREST OR PARTICIPATION BY ITS ACCEPTANCE HEREOF OR THEREOF, AS THE CASE MAY BE, ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT PLAN, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED (“ERISA”), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1936, AS AMENDED (THE “CODE”) (EACH A “PLAN”), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE “PLAN ASSETS” BY REASON OF ANY PLAN’S INVESTMENT IN THE ENTITY AND NO PERSON INVESTING “PLAN ASSETS” OF ANY PLAN MAY ACQUIRE OR HOLD THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR THE EXEMPT THE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF THIS SECURITY OR SUCH INTEREST OR PARTICIPATION IS NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING. ANY PURCHASER OR HOLDER OF THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING HEREOF OR THEREOF, AS THE CASE MAY BE, THAT EITHER (i) IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN, OR PLAN TO FINANCE SUCH PURCHASE, OR (ii) SUCH PURCHASE AND HOLDING WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION.

     IN CONNECTION WITH ANY TRANSFER, THE HOLDER OF THIS SECURITY WILL DELIVER TO THE TRANSFER AGENT SUCH CERTIFICATES AND INFORMATION AS MAY BE REQUIRED BY THE INDENTURE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS.

     THIS SECURITY WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN MINIMUM DENOMINATIONS OF $100,000 AND MULTIPLES OF $1,000 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF THIS SECURITY IN DENOMINATIONS OF LESS THAN $100,000 SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. ANY SUCH PURPORTED TRANSFEREE SHALL BE DEEMED NOT TO BE THE HOLDER OF THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN FOR ANY PURPOSE, INCLUDING, BUT NOT LIMITED TO, THE RECEIPT OF DISTRIBUTIONS ON THIS SECURITY OR ~SUCH INTEREST OR PARTICIPATION, AND SUCH PURPORTED TRANSFEREE SHALL BE DEEMED TO

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HAVE NO INTEREST WHATSOEVER IN THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN.

No. D-1

FIRST MERCURY FINANCIAL CORPORATION
FLOATING RATE JUNIOR SUBORDINATED DEBENTURE DUE 2034

$12,372,000

     First Mercury Financial Corporation, a Delaware corporation (the “Company”, which term includes any successor entity under the Indenture hereinafter referred to), for value received, hereby promises to pay to Wilmington Trust Company, as Institutional Trustee for First Mercury Capital Trust II, or registered assigns, the principal sum of Twelve Million Three Seventy Two Thousand Dollars ($12,372,000) on May 24, 2034, unless redeemed by the Company prior to the Stated Maturity in accordance with the terms specified herein and the Indenture. Capitalized terms used herein and not otherwise defined shall have the meanings assigned to such terms in the Indenture. The Company further promises to pay interest on said principal sum from May 26, 2004, or from the most recent Interest Payment Date (as defined below) to which interest has been paid or duly provided for, quarterly (subject to deferral as set forth herein) in arrears on February 24, May 24, August 24 and November 24 of each year commencing August 24, 2004 (each, an “Interest Payment Date”), at a rate per annum with respect to such Interest Payment Period (the “Interest Rate”) equal to LIBOR as determined on the Determination Date with respect to such Interest Payment Period, plus 4.00% (provided, that the Interest Rate for any Interest Payment Period prior to the Interest Payment Period commencing on the Interest Payment Date on May 24, 2009 may not exceed 12.50% per annum and provided further, that the Interest Rate for any Interest Payment Period shall not exceed the highest rate permitted by New York law, as the same may be modified by United States law of general applicability) until the principal hereof shall have become due and payable, and on any overdue principal and (to the extent enforceable under applicable law) on any overdue interest at the then applicable Interest Rate, compounded quarterly.

     The amount of interest payable on any Interest Payment Date shall be computed on the basis of a 360-day year and the actual number of days elapsed in such Interest Payment Period.

     In the event that any Interest Payment Date is not a Business Day, then any interest payable on such date will be paid on, and such Interest Payment Date will be moved to, the next succeeding Business Day, and additional interest will accrue for each day that such payment is delayed as a result thereof except that, if such next Business Day is in the next succeeding calendar month, such payment shall be made on the preceding Business Day, in each case with the same force and effect as if made on the date such payment otherwise would have been payable, provided, however, that in the event that the Stated Maturity date or earlier redemption date is not a Business Day, then payment of principal, interest and premium (if any) payable on such will be made on the next Business Day (and without any additional accrual of interest or other payment in respect of any such delay).

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     The interest installment so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture, be paid to the Person in whose name the Security (or one or more Predecessor Securities) is registered at the close of business on the relevant record dates, which will be the fifteenth calendar day preceding the relevant Interest Payment Date. Payments of interest may be deferred by the Company pursuant to the provisions of the Indenture. Any such interest installment not punctually paid or duly provided for shall forthwith cease to be payable to the Holders on such regular record date and may be paid to the Person whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a special record date to be fixed by the Trustee for the payment of such defaulted interest, notice whereof shall be given to the Holders of Debentures not less than 10 days prior to such special record date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Debentures may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture.

     The principal of and the interest on this Security shall be payable at the office or agency of the Trustee maintained for that purpose in Wilmington, Delaware in any coin or currency of the United States of America that at the time of payment is legal tender for payment of public and private debts; provided, however, that payment of interest on an Interest Payment Date may be made at the option of the Company by check mailed to the Holder at such address as shall appear in the Security Register or by wire transfer to an account appropriately designated by the Holder entitled thereto, while payments due at Stated Maturity or earlier redemption will be made by the Company in same-day funds against presentation and surrender of this Security. Notwithstanding the foregoing, so long as the Holder of this Security is the Institutional Trustee, the payment of the principal of; premium, if any, and interest on this Security will be made by the Company in same-day funds at such place and to such account as may be designated by the Institutional Trustee.

     The indebtedness evidenced by this Security is, to the extent provided in the Indenture, subordinate and junior in right of payment to the prior payment in full of all Senior Indebtedness and this Security is issued subject to the provisions of the Indenture with respect thereto. Each Holder of this Security, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his or her behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination so provided and (c) appoints the Trustee his or her attorney-in-fact for any and all such purposes. Each Holder hereof, by his or her acceptance hereof; hereby waives all notice of the acceptance of the subordination provisions contained herein and in the Indenture by each holder of Senior Indebtedness, whether now outstanding or hereafter incurred, and waives reliance by each such holder upon said provisions. Each Holder hereof, by his or her acceptance hereof, hereby agrees to treat this Security as indebtedness for all United States federal income tax purposes.

     This Security shall not be entitled to any benefit under the Indenture or be valid or some obligatory for any purpose until the Certificate of Authentication hereon shall have been signed by or on behalf of the Trustee.

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     The provisions of this Security are continued on the reverse side hereof and such continued provisions shall for all purposes have the same effect as though fully set forth at this place.

- 5 -

     IN WITNESS WHEREOF, the Company has caused this instrument to be executed.

FIRST MERCURY FINANCIAL CORPORATION
By:
	Name:
	Title:

- 6 -

(FORM OF CERTIFICATE OF AUTHENTICATION)
CERTIFICATE OF AUTHENTICATION

Dated                                         

     This is one of the Securities referred to in the within-mentioned Indenture.

WILMINGTON TRUST COMPANY,
as Trustee

By:
	Authorized Signatory

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(FORM OF REVERSE OF DEBENTURE)

     This Security is issued under and pursuant to an indenture, dated as of May 26, 2004, duly executed and delivered between the Company and Wilmington Trust Company, as trustee (the “Trustee”) (such indenture as amended or supplemented from time to time, the “Indenture”). The Securities of which this Security is a part is entitled the “Floating Rate Junior Subordinated Debentures due 2034”. These Securities are limited in aggregate principal amount to $12,372,000 as specified in said Indenture. Reference is hereby made to the Indenture and all indentures supplemental thereto for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the Holders of the Debentures.

     This Security is redeemable ‘prior to its Stated Maturity by the Company (I) in whole or in part on any Interest Payment Date after May 24, 2009 or (ii) in whole but not in part at any time prior to May 24, 2009 upon the occurrence and continuation of a Special Event. Any redemption pursuant to this paragraph will be made, upon not less than 30 days nor more than 60 days’ prior written notice, at a redemption price (the “Redemption Price”) equal to 100% of the principal amount to be redeemed plus any unpaid interest (including Additional Tax Sums and Compound Interest, if any) accrued thereon to the date of such redemption (the “Redemption Price”) provided (i) that the Company may not exercise its option to redeem with respect to a Special Event unless it fixes, not later than 90 days after the occurrence of such Special Event a date for redemption and mails a notice thereof to Holders and (ii) that the Company may not exercise its option to redeem with respect to a Special Event unless it pays a premium, in addition to the Redemption Price, in cash equal to the product of (y) 100% of the outstanding principal amount of such Security, and (z) the percentage specified below for the applicable date of redemption provided that the Company shall have received the prior approval of any applicable insurance regulatory authority therefor, if necessary:

Redemption During the 12-Month Period
Beginning May 24	Percentage of Principal Amount
2004	5%
2005	4%
2006	3%
2007	2%
2008	1%
2009 and thereafter	0%

     The Redemption Price and premium, if any, shall be paid prior to 10:00 a.m., New York City time, on the date of such redemption or at such earlier time as the Company determines. If the Securities are only partially redeemed by the Company, the Securities will be redeemed pro rata or by any other method utilized by the Trustee (in integral multiples of $1,000).

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     In the event of redemption of this Security in part only, a new Security or Securities for the unredeemed portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof.

     In case an Event of Default shall have occurred and be continuing, the principal of all of the Securities may be declared, and upon such declaration shall become, due and payable, in the manner with the effect and subject to the conditions provided in the Indenture.

     The Indenture contains provisions permitting the Company and the Trustee, with the consent of the Holders of a majority in aggregate principal amount of the Securities at the time outstanding to execute supplemental indentures for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of any supplemental indenture or of modifying in any manner the rights of the Holders; provided, however, that no such supplemental indenture shall without the consent of the Holders of each Security, (i) change the Stated Maturity of any such Security, or reduce the Interest Rate (or change the manner of calculation of the Interest Rate) or change any date on which interest thereon is payable, or reduce the principal amount thereof or any premium thereon, or change any redemption or repayment date or period or price, or make the principal thereof or any interest or premium thereon payable in any coin or currency other than that provided in the Securities, or impair or affect the right of any Securityholder to institute suit for payment thereof, (ii) reduce the aforesaid percentage of Securities the Holders of which are required to consent to any such supplemental indenture or (iii) otherwise materially and adversely affect the interests of the Holders of any such Security; provided, further, that if the Securities are held by the Trust or a trustee of the Trust, such supplemental indenture shall not be effective until the registered holders of a majority in aggregate liquidation amount of Trust Securities shall have consented to such supplemental indenture; provided further, that if the consent of the Holder of each outstanding Security is required, such supplemental indenture shall not be effective until each registered holder of the Trust Securities shall have consented to such supplemental indenture. The Indenture also contains provisions permitting the Holders of a majority in aggregate principal amount of the Securities at the time outstanding affected thereby, on behalf of all of the Holders of the Securities, to waive any past default in the performance of any of the covenants contained in the Indenture, or established pursuant to the Indenture, and its consequences, except a default in the payment of the principal of or premium, if any, or interest on any of the Securities. Any such consent or waiver by the Holder of this Security (unless revoked as Indenture) shall be conclusive and binding upon such Holder and upon all future Holders and owners of this Security and of any Security issued in exchange herefor or in place hereof (whether by registration of transfer or otherwise), irrespective of whether or not any notation of such consent or waiver is made upon this Security.

     No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, premium, if any, and interest on this Security at the time and place and at the rate and in the money herein prescribed.

     The Company shall have the right, on one or more occasions during the term of the Securities, to time to defer the payments of interests of such Securities for up to 20 consecutive quarterly periods (each, a “Deferral Period”); provided, that (i) no Deferral Period may exceed

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20 consecutive quarterly periods and (ii) no Deferral Period may extend beyond the Stated Maturity or the earlier redemption of the Securities. No interest shall be due and payable during a Deferral Period. At the end of each Deferral Period, the Company shall pay all interest then and unpaid (together with interest thereon, including any Compound Interest and Additional Tax Sums at the Interest Rate to the extent that payment of such interest is enforceable under applicable law). Before the termination of any such Deferral Period, the Company may further extend such Deferral Period, provided that such Deferral Period together with all such previous and further extensions within such Deferral Period shall not exceed 20 consecutive quarterly periods or extend beyond the Stated Maturity or earlier redemption of the Securities. At the termination of any Deferral Period and upon the payment of all accrued and unpaid interest, including any Additional Tax Sums and Compound Interest, the Company may commence a new Deferral Period, subject to the foregoing requirements.

     As provided in the Indenture and subject to certain limitations therein set forth, this Security is transferable by the Holder hereof on the Security Register, upon surrender of this Security for registration of transfer at the office or agency of the Trustee, accompanied by a written instrument or instruments of transfer in form satisfactory to the Company or the Trustee duly executed by the Holder hereof or such Holder’s attorney duly authorized in writing, and thereupon one or more new Securities of authorized denominations and for the same aggregate principal amount will be issued to the designated transferee or transferees. No service charge will be made for any such transfer, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in relation thereto.

     The Securities are issuable only in fully registered form without interest coupons in denominations of $100,000 and any integral multiple of $1,000 in excess thereof. As provided in the indenture and subject to certain limitations herein and therein set forth, Securities so issued are exchangeable for a like aggregate principal amount of Securities of a different authorized denomination as requested by the Holder surrendering the same.

     Prior to due presentment for registration of transfer of this Security, the Company, the Trustee, any Paying Agent, any transfer agent and any Security registrar may deem and treat the Holder hereof as the absolute owner hereof (whether or not this Security shall be overdue and notwithstanding any notice of ownership or writing hereon made by anyone other than a security registrar) for the purpose of receiving payment of or on account of the principal hereof and interest hereon, and for all other purposes, and none of the Company, the Trustee, any paying agent, any transfer agent or any security registrar shall be affected by any notice to the contrary.

     THIS SECURITY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES THEREOF (OTHER THAN SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW).

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EX-10.16

Exhibit 10.16

INDENTURE

Between

FIRST MERCURY FINANCIAL CORPORATION

and

WILMINGTON TRUST COMPANY

AS TRUSTEE

Dated as of April 29, 2004

FLOATING RATE JUNIOR SUBORDINATED DEBENTURES DUE 2034

TABLE OF CONTENTS

	Page
ARTICLE I DEFINITIONS		1
Section 1.01 Definitions		1
ARTICLE II SECURITIES		8
Section 2.01 Principal Amount; Maturity		8
Section 2.02 Form of Securities		8
Section 2.03 Form of Trustee’s Certificate of Authentication		9
Section 2.04 Authentication and Dating		9
Section 2.05 Date and Denomination of Securities		9
Section 2.06 Execution of Securities		11
Section 2.07 Exchange and Registration of Transfer of Securities		11
Section 2.08 Mutilated, Destroyed, Lost or Stolen Securities		14
Section 2.09 Temporary Securities		15
Section 2.10 Cancellation of Securities Paid, etc		15
Section 2.11 Interest		16
Section 2.12 Deferral of Interest Payments		17
Section 2.13 CUSIP Number		17
ARTICLE III PARTICULAR COVENANTS OF THE COMPANY		18
Section 3.01 Payment of Principal, Premium, if any, and Interest		18
Section 3.02 Offices for Notices and Payments, etc		18
Section 3.03 Appointments to Fill Vacancies in Trustee’s Office		19
Section 3.04 Provisions as to Paying Agent		19
Section 3.05 Certificate to Trustee		19
Section 3.06 Compliance with Consolidation Provisions		20
Section 3.07 Limitations on Dividends, etc		20
Section 3.08 Covenants as to the Trust		20
Section 3.09 Notice of Default		21
ARTICLE IV SECURITYHOLDERS’ LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE		21
Section 4.01 Securityholders’ Lists		21
Section 4.02 Preservation and Disclosure of Lists		21
Section 4.03 Reports by Company		22
Section 4.04 Financial and Other Information Under Certain Circumstances		23
ARTICLE V REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS ON EVENT OF DEFAULT		24
Section 5.01 Events of Default		24
Section 5.02 Payment of Securities on Default; Suit Therefor		26
Section 5.03 Application of Moneys Collected by Trustee		27

TABLE OF CONTENTS
(Continued)

	Page
Section 5.04 Proceedings by Securityholders		28
Section 5.05 Proceedings by Trustee		28
Section 5.06 Remedies Cumulative and Continuing		29
Section 5.07 Direction of Proceedings and Waiver of Defaults by Majority of Securityholders		29
Section 5.08 Notice of Defaults		30
Section 5.09 Undertaking to Pay Costs		30
Section 5.10 Delay or Omission Not Waiver		30
ARTICLE VI CONCERNING THE TRUSTEE		31
Section 6.01 Duties and Responsibilities of Trustee		31
Section 6.02 Reliance on Documents, Opinions, etc		32
Section 6.03 No Responsibility for Recitals, etc		33
Section 6.04 Trustee, Authenticating Agent, Paying Agents, Transfer Agents or Registrar May Own Securities		34
Section 6.05 Moneys to be Held in Trust		34
Section 6.06 Compensation and Expenses of Trustee		34
Section 6.07 Officers’ Certificate as Evidence		35
Section 6.08 Conflicting Interest of Trustee		35
Section 6.09 Eligibility of Trustee		35
Section 6.10 Resignation or Removal of Trustee		36
Section 6.11 Acceptance by Successor Trustee		37
Section 6.12 Succession by Merger, etc		37
Section 6.13 Authenticating Agents		38
ARTICLE VII CONCERNING THE SECURITYHOLDERS		39
Section 7.01 Action by Securityholders		39
Section 7.02 Proof of Execution by Securityholders		39
Section 7.03 Who Are Deemed Absolute Owners		40
Section 7.04 Securities Owned by Company Deemed Not Outstanding		40
Section 7.05 Revocation of Consents; Future Holders Bound		40
ARTICLE VIII SECURITYHOLDERS’ MEETINGS		41
Section 8.01 Purposes of Meetings		41
Section 8.02 Call of Meetings by Trustee		41
Section 8.03 Call of Meetings by Company or Securityholders		41
Section 8.04 Qualifications for Voting		41
Section 8.05 Regulations		42
Section 8.06 Voting		42
ARTICLE IX SUPPLEMENTAL INDENTURES		43
Section 9.01 Supplemental Indentures without Consent of Securityholders		43
- ii-

TABLE OF CONTENTS
(continued)
	Page
Section 9.02 Supplemental Indentures with Consent of Securityholders	44
Section 9.03 Notation on Securities	45
Section 9.04 Evidence of Compliance of Supplemental Indenture to be Furnished to Trustee	45
ARTICLE X CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE	45
Section 10.01 Company May Consolidate, etc., on Certain Terms	45
Section 10.02 Successor Entity to be Substituted for Company	46
Section 10.03 Opinion of Counsel to be Given to Trustee	47
ARTICLE XI SATISFACTION AND DISCHARGE OF INDENTURE	47
Section 11.01 Discharge of Indenture	47
Section 11.02 Deposited Moneys to be Held in Trust by Trustee	47
Section 11.03 Paying Agent to Repay Moneys Held	48
Section 11.04 Return of Unclaimed Moneys	48
ARTICLE XIII MMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS	48
Section 12.01 Indenture and Securities Solely Entity Obligations	48
ARTICLE XIII MISCELLANEOUS PROVISIONS	49
Section 13.01 Successors	49
Section 13.02 Official Acts by Successor Entity	49
Section 13.03 Surrender of Company Powers	49
Section 13.04 Addresses for Notices, etc	49
Section 13.05 Governing Law	49
Section 13.06 Submission to Jurisdiction	49
Section 13.07 Evidence of Compliance with Conditions Precedent	50
Section 13.08 Table of Contents, Headings, etc	50
Section 13.09 Execution in Counterparts	50
Section 13.10 Separability	50
ARTICLE XIV REDEMPTION OF SECURITIES	51
Section 14.01 Optional Redemption	51
Section 14.02 Notice of Redemption; Selection of Securities	51
Section 14.03 Payment of Securities Called for Redemption	52
ARTICLE XV SUBORDINATION OF SECURITIES	53
Section 15.01 Agreement to Subordinate	53
Section 15.02 Default on Senior Indebtedness	53
- iii-

TABLE OF CONTENTS
(continued)
	Page
Section 15.03 Liquidation; Dissolution; Bankruptcy	53
Section 15.04 Subrogation of Securityholders	55
Section 15.05 Trustee to Effectuate Subordination	56
Section 15.06 Notice by the Company	56
Section 15.07 Rights of the Trustee; Holders of Senior Indebtedness	56
Section 15.08 Subordination May Not Be Impaired	57
- iv-

     THIS INDENTURE, dated as of April 29, 2004, between First Mercury Financial Corporation, a Delaware corporation (hereinafter sometimes called the “Company”), and Wilmington Trust Company, a Delaware banking corporation, as trustee (hereinafter sometimes called the “Trustee”).

WITNESSETH:

     WHEREAS, for its lawful corporate purposes, the Company has duly authorized the issuance of its Floating Rate Junior Subordinated Debentures due 2034 (the “Securities”) in the aggregate principal amount of $8,248,000 and, to provide the terms and conditions upon which the Securities are to be authenticated, issued and delivered, the Company has duly authorized the execution, delivery and performance of this Indenture; and

     WHEREAS, all acts and things necessary to make this Indenture a valid and legally binding agreement according to its terms, have been done and performed;

     NOW, THEREFORE, This Indenture Witnesseth:

     In consideration of the premises, and the purchase of the Securities by the Securityholders (as defined below) thereof, the Company covenants and agrees with the Trustee for the benefit of the respective Securityholders from time to time, as follows:

ARTICLE I
DEFINITIONS

     Section 1.01 Definitions.

     The terms defined in this Section 1.01 (except as herein otherwise expressly provided or unless the context otherwise requires) for all purposes of this Indenture and any indenture supplemental hereto shall have the respective meanings specified in this Section 1.01. All accounting terms used but not expressly defined herein shall have the meanings assigned to such terms in accordance with accounting principles generally accepted in the United States and the term “generally accepted accounting principles” means such accounting principles as are generally accepted in the United States at the time of any computation. The words “herein”, “hereof” and “hereunder” and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. Any reference to the singular includes the plural and vice versa (unless the context otherwise requires).

     “Additional Tax Sums” has the meaning specified in Section 2.11(c).

     “Affiliate” means, with respect to a specified Person, (a) any Person directly or indirectly owning, controlling or holding with power to vote, 10% or more of the outstanding Voting Securities or other ownership interests of the specified Person, (b) any Person 10% or more of whose outstanding Voting Securities or other ownership interests are directly or indirectly owned, controlled or held with power to vote by the specified Person, (c) any Person directly or indirectly controlling, controlled by, or under common control with the specified Person, (d) a partnership in which the specified Person is a general partner, (e) any officer or director of the

specified Person, and if the specified Person is an individual, any entity of which the specified Person is an officer, director or general partner.

     “Authenticating Agent” means any agent or agents of the Trustee which at the time shall be appointed and acting pursuant to Section 6.13.

     “Bankruptcy Law” means Title 11, U.S. Code, or any similar Federal or State law for the relief of debtors.

     “Board of Directors” means the Board of Directors of the Company or any duly authorized committee thereof.

     “Board Resolution” means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification.

     “Business Day” means any day other than a Saturday, Sunday or other day on which commercial banking institutions in The City of New York or Wilmington, Delaware are authorized or obligated by law, executive order or regulation to close.

     “Calculation Agent” means an agent appointed to calculate LIBOR in respect of each interest Payment Date, initially the Trustee.

     “Certificate of Authentication” means the certificate issued by the Trustee or the Authenticating Agent authenticating a Security issued under the Indenture.

     “Commission” means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act or, if at any time after the execution of this Indenture such Commission is not existing and performing the duties now assigned to it under the Trust indenture Act, then the body performing such duties at such time.

     “Common Securities” means undivided beneficial interests in the assets of the Trust which rank pari passu with Preferred Securities issued by the Trust; provided, however, that upon the occurrence of an Event of Default, the rights of registered holders of Common Securities to payment in respect of distributions and payments upon liquidation, redemption and otherwise are subordinated to the rights of registered holders of Preferred Securities.

     “Company” means First Mercury Financial Corporation, a Delaware corporation, and, subject to the provisions of Article X hereof, shall include its successors and assigns.

     “Compound Interest” has the meaning set forth in Section 2.11(a).

     “Custodian” means any receiver, trustee, assignee, liquidator, or similar official under any Bankruptcy Law.

     “Declaration”, with respect to the Trust, shall mean the Amended and Restated Declaration of Trust of the Trust by and among the holders from time to time of the Preferred Securities the Company, Wilmington Trust Company, as Institutional Trustee and Delaware

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Trustee, and the other trustees named therein, as it may be modified, amended or supplemented from time to time.

     “Default” means any event, act or condition that, with notice or lapse of time, or both, would constitute an Event of Default.

     “Defaulted interest” has the meaning set forth in Section 2.05.

     “Deferral Period” has the meaning set forth in Section 2.12(a).

     “Deferred Interest” has the meaning set forth in Section 2.12(a).

     “Dekania” means Dekania CDO II, Ltd, a limited liability company formed pursuant to the laws of the Cayman Islands.

     “Determination Date” means two London Banking Days next preceding the applicable Interest Payment Date.

     “Event of Default” means any event, act or condition specified in Section 5.01, continued for the period of time, if any, and after the giving of the notice, if any, therein designated.

     “Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time, or any successor legislation.

     “Indenture” means this instrument as originally executed or, if amended or supplemented as herein provided, as so amended or supplemented, or both.

     “Institutional Trustee” has the meaning set forth in the Declaration.

     “Interest Payment Date” has the meaning set forth in Section 2.11(a).

     “Interest Payment Period” means the period from and including an Interest Payment Date or, in the case of the first Interest Payment Period, the original date of issuance of the Securities, to, but excluding, the next succeeding Interest Payment Date or, in the case of the last Interest Payment Period, the Stated Maturity or date of redemption.

     “Interest Rate” means, with respect to any Interest Payment Period, a per annum rate of interest equal to LIBOR, as determined on the Determination Date for such Interest Payment Period, plus 4% (provided, that the Interest Rate for any Interest Payment Period prior to the Interest Payment Period commencing on the Interest Payment Date on May 15, 2009 may not exceed 12.50% per annum and, provided further, that the Interest Rate for any Interest Payment Period may not exceed the highest rate permitted by New York law, as the same may be modified by United States law of general applicability).

     “Investment Company Act” means the Investment Company Act of 1940, as amended from time to time, or any successor legislation.

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     “Investment Company Event” means that the Regular Trustees shall have received an opinion of nationally recognized independent counsel experienced in such matters, who shall not be an officer or employee of the Company or any of its Affiliates, to the effect that, as a result of the occurrence of a change in law or regulation or a written change (including any announced prospective change) in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority, there is more than an insubstantial risk that the Trust is or will within 90 days of the date of such opinion be considered an “investment company” that is required to be registered under the Investment Company Act, which change or prospective change becomes effective or would become effective, as the case may be, on or after the date of the issuance of the Preferred Securities.

     “LIBOR” means, with respect to an Interest Payment Period commencing on an Interest Payment Date (in the following order of priority):

     (a) the rate (expressed as a percentage per annum) for Eurodollar deposits having a three-month maturity that appears on Telerate page 3750 as of 11:00 a.m. (London time) on the Determination Date;

     (b) if such rate does not appear on Telerate page 3750 as of 11:00 a.m. (London time) on the Determination Date, the Calculation Agent will request the principal London offices of four leading banks in the London interbank market as selected by the Calculation Agent to provide such banks’ offered quotations (expressed as percentages per annum) to prime banks in the London interbank market for Eurodollar deposits having a three-month maturity as of 11:00 a.m. (London time) on such Determination Date, and if at least two quotations are provided, LIBOR will be the arithmetic mean of such quotations;

     (c) if fewer than two such quotations are provided as requested in clause (b) above, the Calculation Agent will request four major New York City banks selected by the Calculation Agent to provide such banks’ offered quotations (expressed as percentages per annum) to leading European banks for loans in Eurodollars as of 11:00 a.m. (New York City time) on such Determination Date, and, if at least two quotations are provided, LIBOR will be the arithmetic mean of such quotations; and

     (d) if fewer than two such quotations are provided as requested in clause (c) above, LIBOR will be LIBOR as in effect during the preceding Interest Payment Period.

     “London Banking Day” means any day, other than a Saturday or Sunday, on which banks are open for business (including dealings in deposits in U.S. dollars) in London.

     “Officers’ Certificate” means a certificate signed by the Chairman of the Board (if an executive officer), the President, any Executive Vice President or any Vice President, and by the Chief Financial Officer, the Treasurer, an Assistant Treasurer, the Controller, an Assistant Controller, the Secretary or an Assistant Secretary of the Company and delivered to the Trustee. Each such certificate shall include the statements provided for in Section 13.07 if and to the extent provided by the provisions of such Section.

     “Opinion of Counsel” means an opinion signed by legal counsel experienced in the matters as to which such opinion is being delivered, who may be an employee of or counsel to

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the Company, or may be other counsel satisfactory to the Trustee. Each such opinion shall include the statements provided for in Section 13.07 if and to the extent required by the provisions of such Section.

     The term “outstanding” (except as otherwise provided in Section 7.01), when used with reference to Securities, means, subject to the provisions of Section 7.04, as of any particular time, all Securities authenticated and delivered by the Trustee or the Authenticating Agent under this Indenture, except

     (a) Securities theretofore cancelled by the Trustee or the Authenticating Agent or delivered to the Trustee for cancellation;

     (b) Securities, or portions thereof, for the payment or redemption of which moneys in the necessary amount shall have been deposited in trust with the Trustee or with any paying agent (other than the Company) or shall have been set aside and segregated in trust by the Company (if the Company shall act as its own paying agent); provided that, if such Securities, or portions thereof, are to be redeemed prior to maturity thereof, notice of such redemption shall have been given in accordance with Article XIV or provision satisfactory to the Trustee shall have been made for giving such notice; and

     (c) Securities paid pursuant to Section 2.10 or Securities in lieu of or in substitution for which other Securities shall have been authenticated and delivered pursuant to the terms of Section 2.08 unless proof satisfactory to the Company and the Trustee is presented that any such Securities are held by bona fide holders in due course.

     “Paying Agent” has the meaning set forth in Section 3.04.

     “Person” means any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof.

     “Predecessor Security” of any particular Security means every previous Security evidencing all or a portion of the same debt and as that evidenced by such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 2.08 in lieu of a lost, destroyed or stolen Security shall be deemed to evidence the same debt as the lost, destroyed or stolen Security.

     “Preferred Securities” means undivided beneficial interests in the assets of the Trust which rank pari passu with Common Securities issued by the Trust, whether or not designated for the purposes of identification as preferred securities or capital securities; provided, however, that upon the occurrence of an Event of Default, the rights of registered holders of Common Securities to payment in respect of distributions and payments upon liquidation, redemption and otherwise are subordinated to the rights of registered holders of Preferred Securities.

     “Preferred Securities Guarantee” means the guarantee agreement dated as of the date hereof entered that the Company may into contemporaneously herewith with Wilmington Trust Company for the benefit of registered holders of the Preferred Securities of the Trust, as amended or supplemented from time to time.

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     “Principal Office of the Trustee”, or other similar term, shall mean the principal office of the Trustee at which, at any particular time, its corporate trust business is administered.

     “Redemption Price” has the meaning set forth in Section 14.01

     “Regular Trustees” has the meaning set forth in the Declaration.

     “Resale Restriction Termination Date” means, with respect to any Security, the date which is the later of (i) two years (or such shorter period of time as permitted by Rule 144(k) under the Securities Act) after the later of (y) the date of original issuance of such Security and (z) the last date on which the Company or any Affiliate (as defined in Rule 405 under the Securities Act) of the Company was the holder of such Security (or any predecessor thereto) and (ii) such later date, if any, as may be required by any subsequent change in applicable law.

     “Responsible Officer” means, with respect to the Trustee, any officer within the corporate trust department of the Trustee, including any vice president, any assistant vice president, any assistant secretary, any assistant treasurer, any financial services officer or other officer or agent of the corporate trust department of the Trustee customarily performing functions similar to those performed by any of the above designated officers or agents and also means, with respect to a particular corporate trust matter, any other officer or agent to whom such matter is referred because of that officer’s or agent’s knowledge of and familiarity with the particular subject.

     “Securities Act” means the Securities Act of 1933, as amended from time to time, or any successor legislation.

     “Security” or “Securities” has the meaning stated in the first recital of this Indenture and, more particularly, means the debt security or securities, as the case may be, authenticated and delivered under this Indenture.

     “Security Register” has the meaning set forth in Section 2.07.

     “Securityholder”, “Holder of Securities”, or other similar terms, mean any person in whose name at the time a Security is registered in the Security Register.

     “Senior Indebtedness” means, with respect to the Company, (i) the principal, premium, if any, and interest in respect of (a) indebtedness of the Company for money borrowed and (b) indebtedness evidenced by securities, debentures, notes, bonds or other similar instruments issued by the Company; (ii) all capital lease obligations of the Company; (iii) all obligations of the Company issued or assumed as the deferred purchase price of property, all conditional sale obligations of the Company and all obligations of the Company under any title retention agreement (but excluding trade accounts payable arising in the ordinary course of business); (iv) all obligations of the Company for the reimbursement of any letter of credit, any banker’s acceptance, any security purchase facility, any repurchase agreement or similar arrangement, any interest rate swap, any other hedging agreement, any obligation under options or any similar credit or other transaction; (v) all obligations of the type referred to in clauses (i) through (iv) above of other persons for the payment of which the Company is responsible or liable as obligor, guarantor or otherwise; and (vi) all obligations of the type referred to in clauses (i) through (v) above of other persons secured by any lien on any property or asset of the Company (whether or

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not such obligation is assumed by the Company), whether incurred on or prior to the date of the this Indenture or thereafter incurred, unless such obligations are not superior or are pari passu in right of payment to the Securities.

     “Special Event” means either a Tax Event or an Investment Company Event.

     “Stated Maturity” means the date on which the Securities mature and on which the principal shall be due and payable, together with all accrued and unpaid interest, including Compound Interest and Additional Interest, if any, thereon, which date shall be April 29, 2034, unless accelerated to an earlier date as provided in Article XIV.

     “Subsidiary” means with respect to any Person, (i) any corporation a majority of the outstanding Voting Securities of which are owned, directly or indirectly, by such Person or by one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries, (ii) any general partnership, joint venture or similar entity a majority of whose outstanding partnership or similar ownership interests shall at the time be owned by such Person, or by one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries and (iii) any limited partnership of which such Person or any of its Subsidiaries is a general partner.

     “Swap Agreement” means any financial agreement designed to manage the Company’s exposure to fluctuations in interest rates or credit conditions, currency exchange rates or commodity prices, including, without limitation, swap agreements, option agreements, cap agreements, floor agreements, collar agreements, credit swaps and forward purchase agreements.

     “Tax Event” means that the Company and, if any Preferred Securities remain outstanding, the Regular Trustees shall have received an opinion of a nationally recognized independent tax counsel experienced in such matters to the effect that, as a result of (a) any amendment to, or change (including any announced prospective change) in, the laws or any regulations thereunder of the United States or any political subdivision or taxing authority thereof or therein or (b) any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations, which amendment or change is effective or which pronouncement or decision is announced on or after the date of the original issuance of the Securities, there is more than an insubstantial risk that (i) the Trust is, or will be within 90 days of the date of such opinion, subject to United States federal income tax with respect to income received or accrued on the Securities, (ii) interest payable by the Company on the Securities is not, or within 90 days of the date of such opinion will not be, deductible by the Company (assuming the Company is organized under the laws of any state of the United States or the District of Columbia), in whole or in part, for United States federal income tax purposes, or (iii) the Trust is, or will be within 90 days of the date of such opinion, subject to more than a de minimis amount of other taxes, duties or other governmental charges.

     “Trust” means Mercury Financial Capital Trust II, a Delaware statutory trust established by the Certificate of Trust filed with the Delaware Secretary of State and existing pursuant to the Declaration, or any other similar trust sponsored by the Company and created for the purpose of issuing its securities in connection with the issuance of Securities under this Indenture.

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     “Trustee” means the Person identified as “Trustee” in the first paragraph hereof, and, subject to the provisions of Article VI hereof, shall also include its successors and assigns as Trustee hereunder.

     “Trust Indenture Act” means the Trust Indenture Act of 1939, as amended from time to time, or any successor legislation.

     “Trust Securities” means the Common Securities and the Preferred Securities of the Trust.

     “Voting Securities” mean shares, interests, participations or other equivalents in the equity (however designated) in such Person having ordinary voting power for the election of a majority of the directors (or their equivalent) of such Person, other than shares, interests, participations or other equivalents having such power only by reason of the occurrence of a contingency.

ARTICLE II
SECURITIES

     Section 2.01 Principal Amount; Maturity.

     The Company may issue up to $8,248,000 aggregate principal amount of the Securities. The Securities shall mature on April 29, 2034; provided that the Company may redeem the Securities prior to their Stated Maturity in accordance with Article X1V.

     Section 2.02 Form of Securities.

     The Securities shall be substantially in the form of Exhibit A hereto. Definitive Securities shall be typed, printed, lithographed or engraved on steel engraved borders or may be produced in any other manner, all as determined by the officers of the Company executing such Securities, as conclusively evidenced by their execution of such Securities. The Securities shall be issued in registered form only. Principal of, and premium, if any, and interest on the Securities issued in registered form will be payable, the transfer of such Securities will be registrable and such Securities will be exchangeable for Securities bearing identical terms and provisions at the office or agency of the Trustee in Wilmington, Delaware; provided, however, that payment of interest on an Interest Payment Date may be made at the option of the Company by check mailed to the Holder entitled thereto at such address as shall appear in the Security Register or by wire transfer to an account appropriately designated by the Holder entitled thereto, while payments due at Stated Maturity or earlier redemption will be made by the Company in same-day funds against presentation and surrender of the related Securities. Notwithstanding the foregoing, so long as the Holder of any Securities is the Institutional Trustee, the payment of the principal of, premium, if any, and interest (including Compound Interest and Additional Interest, if any) on such Securities held by the Institutional Trustee will be made by the Company in same-day funds at such place and to such account as may be designated by the Institutional Trustee.

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     Section 2.03 Form of Trustee’s Certificate of Authentication.

     The Trustee’s Certificate of Authentication on all Securities shall be in substantially the following form:

     This is one of the Securities referred to in the within-mentioned Indenture.

     Wilmington Trust Company, as Trustee

By:

Authorized Signatory

     Section 2.04 uthentication and Dating.

     At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities not in excess of $8,248,000 aggregate principal amount to the Trustee for authentication, and the Trustee shall thereupon authenticate and deliver said Securities to or upon the written order of the Company, signed by its Chairman of the Board of Directors (if an executive officer), its Chief Executive Officer, President, one of its Executive Vice Presidents or one of its Vice Presidents and by its Chief Financial Officer, Treasurer, any Assistant Treasurer, Secretary or any Assistant Secretary, without any further action by the Company hereunder. In authenticating such Securities, and accepting the additional responsibilities under this Indenture in relation to such Securities, the Trustee shall be entitled to receive, and (subject to Section 6.01) shall be fully protected in relying upon, a copy of any Board Resolution or Resolutions relating thereto and, if applicable, an appropriate record of any action taken pursuant to such resolution, in each case certified by the Secretary or an Assistant Secretary of the Company.

     Section 2.05 Date and Denomination of Securities.

     The Securities shall be issuable in fully registered form without coupons and in minimum denominations of $l00,000 and any multiple of $1,000 in excess thereof. The Securities shall be numbered, lettered or otherwise distinguished in such manner or in accordance with such plans as the officers of the Company executing the same may determine with the approval of the Trustee, as conclusively evidenced by the execution and authentication thereof.

     Every Security shall be dated the date of its authentication and shall bear interest, if any, at the Interest Rate from such date. The interest on any Security that is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name said Security (or one or more Predecessor Securities) is registered at the close of business on the regular record date for such Interest Payment Period. In the event that any Security or portion thereof is called for redemption and the redemption date (i) falls after an Interest Payment Date, then interest on such Security payable on such Interest Payment Date shall be paid to the Holder on the related regular record date or (ii) is subsequent to a regular record date with respect to any Interest Payment Date and prior to such Interest Payment Date, then interest on such Security payable on such redemption date shall be paid upon presentation and surrender of such Security as provided in Section 3.01.

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     Any interest on any Security that is payable, but is not punctually paid or duly provided for, on any Interest Payment Date for any Security (herein called “Defaulted Interest”) shall forthwith cease to be payable to the Holder on the relevant regular record date by virtue of having been such Holder, and such Defaulted Interest shall be paid by the Company, at its election, as provided in clause (i) or clause (ii) below:

     (i) The Company may make payment of any Defaulted Interest on Securities to the Persons in whose names such Securities (or their respective Predecessor Securities) are registered at the close of business on a special record date for the payment of such Defaulted Interest, which shall be fixed in the following manner: the Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each such Security and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this clause provided. Thereupon the Trustee shall fix a special record date for the payment of such Defaulted Interest which shall not be more than 15 nor less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such special record date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the special record date therefor to be mailed, first class postage prepaid, to each Securityholder at his or her address as it appears in the Security Register, not less than 10 days prior to such special record date. Notice of the proposed payment of such Defaulted Interest and the special record date therefor having been mailed as aforesaid, such Defaulted Interest shall be paid to the Persons in whose names such Securities (or their respective Predecessor Securities) are registered on such special record date and shall be no longer payable pursuant to the following clause (ii).

     (ii) The Company may make payment of any Defaulted Interest on any Securities in any other lawful manner not inconsistent with the requirements of any securities exchange on which such Securities may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this clause, such manner of payment shall be deemed practicable by the Trustee.

     The term “regular record date” shall mean the fifteenth calendar day (whether or not a Business Day) preceding an Interest Payment Date.

     Subject to the foregoing provisions of this Section, each Security delivered under this Indenture upon transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, that were carried by such other Security.

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     Section 2.06 Execution of Securities.

     The Securities shall be signed in the name and on behalf of the Company by the manual or facsimile signature of its Chairman of the Board of Directors (if an executive officer), its Chief Executive Officer, President, one of its Executive Vice Presidents or one of its Vice Presidents and attested to by the manual or facsimile signature of its Chief Financial Officer, Treasurer, one of its Assistant Treasurers, Secretary or one of its Assistant Secretaries, by facsimile or otherwise. Only such Securities as shall bear thereon a Certificate of Authentication substantially in the form hereinbefore recited, executed by the Trustee or the Authenticating Agent, shall be entitled to the benefits of this Indenture or be valid or obligatory for any purpose. Such certificate by the Trustee or the Authenticating Agent upon any Security executed by the Company shall be conclusive evidence that the Security so authenticated has been duly authenticated and delivered hereunder and that the Holder is entitled to the benefits of this Indenture.

     In case any officer of the Company who shall have signed any of the Securities shall cease to be such officer before the Securities so signed shall have been authenticated and delivered by the Trustee or the Authenticating Agent, or disposed of by the Company, such Securities nevertheless may be authenticated and delivered or disposed of as though the person who signed such Securities had not ceased to be such officer of the Company; and any Security may be signed on behalf of the Company by such persons as, at the actual date of the execution of such Security, shall be the proper officers of the Company, although at the date of the execution of this Indenture any such person was not such an officer.

     Section 2.07 Exchange and Registration of Transfer of Securities.

     Securities may be exchanged for a like aggregate principal amount of Securities of other authorized denominations. Securities to be exchanged may be surrendered at the Principal Office of the Trustee or at any office or agency to be maintained by the Company for such purpose as provided in Section 3.02, and the Company or the Trustee shall execute and register and the Trustee or the Authenticating Agent shall authenticate and deliver in exchange therefor the Security or Securities which the Securityholder making the exchange shall be entitled to receive. Upon due presentment for registration of transfer of any Security at the principal office of the Trustee or at any office or agency of the Company maintained for such purpose as provided in Section 3.02, the Company or the Trustee shall execute and register and the Trustee or the Authenticating Agent shall authenticate and deliver in the name of the transferee or transferees a new Security or Securities for a like aggregate principal amount. Registration or registration of transfer of any Security by the Trustee or by any agent of the Company appointed pursuant to Section 3.02, and delivery of such Security, shall be deemed to complete the registration or registration of transfer of such Security.

     The Company or the Trustee shall keep, at the designated corporate trust office of the Trustee, a register for the Securities issued hereunder (the “Security Register”) in which, subject to such reasonable regulations as it may prescribe, the Company or the Trustee shall register ownership and transfer of ownership of all Securities and shall register the transfer of all Securities as in this Article II provided. The Security Register shall be in written form or in any other form capable of being converted into written form within a reasonable time.

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     All Securities presented for registration of transfer or for exchange shall (if so required by the Company, the Trustee or the Authenticating Agent) be duly endorsed by, or be accompanied by a written instrument or instruments of transfer in form satisfactory to the Company and either the Trustee or the Authenticating Agent duly executed by, the Holder of such Security or his attorney duly authorized in writing.

     No service charge shall be made for any exchange or registration of transfer of Securities, but the Company or the Trustee may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith.

     Neither the Company nor the Trustee shall be required to exchange or register a transfer of (a) any Security for a period of 15 days preceding the date of mailing of a notice of redemption of Securities, or (b) any Securities selected, called or being called for redemption in whole or in part, except in the case of any Securities to be redeemed in part, the portion thereof not to be so redeemed.

     Notwithstanding the foregoing, Securities may not be transferred prior to the Resale Restriction Termination Date except in compliance with the legend set forth below, unless otherwise determined by the Company in accordance with applicable law, which legend shall be placed on each Security:

     THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURIT1ES ACT. THE HOLDER OF THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN, BY ITS ACCEPTANCE HEREOF OR THEREOF, AS THE CASE MAY BE, AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN PRIOR TO THE DATE WHICH IS THE LATER OF (i) TWO YEARS (OR SUCH SHORTER PERIOD OF TIME AS PERMITTED BY RULE 144(k) UNDER THE SECURITIES ACT) AFTER THE LATER OF (Y) THE DATE OF ORIGINAL ISSUANCE HEREOF AND (Z) THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE (AS DEFINED IN RULE 405 UNDER THE SECURITIES ACT) OF THE COMPANY WAS THE HOLDER OF THIS SECURITY OR SUCH INTEREST OR PARTICIPATION (OR ANY PREDECESSOR THERETO) AND (ii) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY ANY SUBSEQUENT CHANGE IN APPLICABLE LAW, ONLY (A) TO THE COMPANY, (B) PURSUANT TO RULE 144A UNDER THE SECURITIES ACT (“RULE 144A”), TO A PERSON THE HOLDER REASONABLY BELIEVES IS A “QUALIFIED INSTITUTIONAL BUYER”, AS DEFINED IN RULE 144A, THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (C) PURSUANT TO AN EXEMPTION FROM THE

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REGISTRATION REQUIREMENTS OF THE SECURITIES ACT TO AN “ACCREDITED INVESTOR” WITHIN THE MEANING OF SUBPARAGRAPH (a) (1), (2), (3), (7) OR (8) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS SECURITY OR SUCH INTEREST OR PARTICIPATION FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, (D) PURSUANT TO OFFERS AND SALES TO NON-US PERSONS THAT OCCUR OUTSIDE THE UNITED STATES PURSUANT TO REGULATION S UNDER THE SECURITIES ACT OR (E) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY’S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (C) OR (E) ABOVE TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO IT IN ACCORDANCE WITH THE INDENTURE, A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY. THE HOLDER OF THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN, BY ITS ACCEPTANCE HEREOF OR THEREOF, AS THE CASE MAY BE, AGREES THAT IT WILL COMPLY WITH THE FOREGOING RESTRICTIONS.

     THE HOLDER OF THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN, BY ITS ACCEPTANCE HEREOF OR THEREOF, AS THE CASE MAY BE, ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT PLAN, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED (“ERISA”), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE “CODE”) (EACH A “PLAN”), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE “PLAN ASSETS” BY REASON OF ANY PLAN’S INVESTMENT IN THE ENTITY AND NO PERSON INVESTING “PLAN ASSETS” OF ANY PLAN MAY ACQUIRE OR HOLD THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR THE EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF THIS SECURITY OR SUCH INTEREST OR PARTICIPATION IS NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING. ANY PURCHASER OR HOLDER OF THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING HEREOF OR THEREOF, AS THE CASE MAY BE, THAT EITHER (i) IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (ii) SUCH PURCHASE AND HOLDING WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER

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SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION.

     IN CONNECTION WITH ANY TRANSFER, THE HOLDER OF THIS SECURITY WILL DELIVER TO THE TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS MAY BE REQUIRED BY THE INDENTURE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS.

     THIS SECURITY WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN MINIMUM DENOMINATIONS OF $100,000 AND MULTIPLES OF $1,000 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF THIS SECURITY IN DENOMINATIONS OF LESS THAN $100,000 SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. ANY SUCH PURPORTED TRANSFEREE SHALL BE DEEMED NOT TO BE THE HOLDER OF THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN FOR ANY PURPOSE, INCLUDING, BUT NOT LIMITED TO, THE RECEIPT OF DISTRIBUTIONS ON THIS SECURITY OR SUCH INTEREST OR PARTICIPATION, AND SUCH PURPORTED TRANSFEREE SHALL BE DEEMED TO HAVE NO INTEREST WHATSOEVER IN THIS SECURITY OR ANY INTEREST OR PARTICIPATION HEREIN.

     Section 2.08 Mutilated, Destroyed, Lost or Stolen Securities.

     In case any temporary or definitive Security shall become mutilated or be destroyed, lost or stolen, the Company shall execute, and upon its request the Trustee shall authenticate and deliver, a new Security bearing a number not contemporaneously outstanding, in exchange and substitution for the mutilated Security, or in lieu of and in substitution for the Security so destroyed, lost or stolen. In every case, the applicant for a substituted Security shall furnish to the Company and the Trustee such security or indemnity as may be reasonably required by them to save each of them harmless, and, in every case of destruction, loss or theft, the applicant shall also furnish to the Company and the Trustee evidence to their satisfaction of the destruction, loss or theft of such Security and of the ownership thereof.

     The Trustee may authenticate any such substituted Security and deliver the same upon the written request or authorization of any officer of the Company. Upon the issuance of any substituted Security, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses connected therewith. In case any Security which has matured or is about to mature or has been called for redemption in full shall become mutilated or be destroyed, lost or stolen, the Company may, instead of issuing a substitute Security, pay or authorize the payment of the same (without surrender thereof except in the case of a mutilated Security) if the applicant for such payment shall furnish to the Company and the Trustee such security or indemnity as may be reasonably required by them to save each of them harmless and, in case of destruction, loss or theft, evidence satisfactory to the Company and to the Trustee of the destruction, loss or theft of such Security and of the ownership thereof.

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     Every substituted Security issued pursuant to the provisions of this Section 2.08 by virtue of the fact that any such Security is destroyed, lost or stolen shall constitute an additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be found at any time, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities duly issued hereunder. All Securities shall be held and owned upon the express condition that, to the extent permitted by applicable law, the foregoing provisions are exclusive with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities and shall preclude any and all other rights or remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment of negotiable instruments or other securities without their surrender.

Section 2.09 Temporary Securities.

     Pending the preparation of definitive Securities, the Company may execute and the Trustee shall authenticate and deliver temporary Securities (typed, printed or lithographed). Temporary Securities shall be issuable in any authorized denomination, and substantially in the form of the definitive Securities but with such omissions, insertions and variations as may be appropriate for temporary Securities, all as may be determined by the Company. Every such temporary Security shall be executed by the Company and be authenticated by the Trustee upon the same conditions and in substantially the same manner, and with the same effect, as the definitive Securities. Without unreasonable delay, the Company will execute and deliver to the Trustee or the Authenticating Agent definitive Securities and, thereupon, any or all temporary Securities may be surrendered in exchange therefor at the Principal Office of the Trustee or at any office or agency maintained by the Company for such purpose as provided in Section 3.02, and the Trustee or the Authenticating Agent shall authenticate and deliver in exchange for such temporary Securities a like aggregate principal amount of such definitive Securities. Such exchange shall be made by the Company at its own expense and without any charge therefor except that in case of any such exchange involving a registration of transfer the Company may require payment of a sum sufficient to cover any tax, fee or other governmental charge that may be imposed in relation thereto. Until so exchanged, the temporary Securities shall in all respects be entitled to the same benefits under this Indenture as definitive Securities authenticated and delivered hereunder.

     Section 2.10 Cancellation of Securities Paid, etc.

     All Securities surrendered for the purpose of payment, redemption, exchange or registration of transfer, shall, if surrendered to the Company or any Paying Agent, be surrendered to the Trustee and promptly cancelled by it or, if surrendered to the Trustee or any Authenticating Agent, shall be promptly cancelled by it, and no Securities shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Indenture. All Securities cancelled by any Authenticating Agent shall be delivered to the Trustee. The Trustee shall dispose of cancelled Securities in accordance with its customary procedures. If the Company shall acquire any of the Securities, however, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Securities unless and until the same are surrendered to the Trustee for cancellation.

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     Section 2.11 Interest.

     (a) Each Security will bear interest at the then applicable interest Rate for each Interest Payment Period until the principal thereof becomes due and payable, and on any overdue principal and, to the extent that payment of such interest is enforceable under applicable law, on any overdue installment of interest at the then applicable Interest Rate (“Compound Interest”), compounded quarterly, payable quarterly in arrears on February 15, May 15, August 15 and November 15 of each year, commencing on August 15, 2004 (each, an “Interest Payment Date”), to the Person in whose name such Security or any Predecessor Security is registered at the close of business on the relevant record date, which will be the fifteenth calendar day (whether or not a Business Day) preceding the relevant Interest Payment Date, except as otherwise provided pursuant to the provisions of Section 2.12.

     (b) The amount of interest payable for any Interest Payment Period will be computed on the basis of a 360-day year and the actual number of days elapsed in such Interest Payment Period. In the event that any Interest Payment Date is not a Business Day, then any interest payable on such date will be paid on, and such interest Payment Date will be moved to, the next succeeding Business Day, and additional interest will accrue for each day that such payment is delayed as a result thereof, except that, if such next Business Day is in the next succeeding calendar month, such payment shall be made on the preceding Business Day, in each case with the same force and effect as if made on the date such payment otherwise would have been payable; provided, however, that in the event that the Stated Maturity date or earlier redemption date is not a Business Day, then payment of principal, interest and premium (if any) payable on such date will be made on the next Business Day (and without any additional accrual of interest or other payment in respect of any such delay).

     (c) If, at any time while the Institutional Trustee is the Holder of any Securities, the Trust or the institutional Trustee is required to pay any taxes, duties, assessments or governmental charges of whatever nature (other than withholding taxes) imposed by the United States, or any other taxing authority, then, in any such case, the Company will pay as additional interest (“Additional Tax Sums”) on the Securities held by the Institutional Trustee such additional amounts as shall be required so that the net amounts received and retained by the Institutional Trustee after paying such taxes, duties, assessments or other governmental charges will be equal to the amounts the Institutional Trustee would have received had no such taxes, duties, assessments or other governmental charges been imposed.

     (d) All percentages resulting from any calculations on the Securities will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with five one-millionths of a percentage point rounded upward (e.g., 7.553455% (or .07553455) being rounded to 7.553460% (or         .0755346)), and all dollar amounts used in or resulting from such calculation will be rounded to the nearest cent (with one-half cent being rounded upward).

     (e) On each Determination Date, the Calculation Agent will calculate, and will give notice in writing to the Company and the Paying Agent of, the applicable Interest Rate for the related Interest Payment Period and shall give such notice in writing to any Holder of Securities that so requests. Absent manifest error, the Calculation Agent’s determination of LIBOR and its calculation of the applicable Interest Rate for any Interest Payment Period will be final and

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binding. The Company shall, from time to time, provide any necessary information to the Paying Agent relating to any original issue discount and interest on the Securities that is included in any payment and reportable for taxable income calculation purposes.

     Section 2.12 Deferral of Interest Payments.

     (a) So long as no Event of Default under this Indenture has occurred and is continuing, the Company shall have the right, at any time and from time to time during the term of the Securities, to defer payments of interest for a period (each of which periods shall end on an Interest Payment Date, each a “Deferral Period”); provided, that (i) no Deferral Period may exceed 20 consecutive quarterly periods and (ii) no Deferral Period may extend beyond the Stated Maturity or the earlier redemption of the Securities. No interest shall be due and payable during a Deferral Period. To the extent permitted by applicable law, interest, the payment of which has been deferred during a Deferral Period pursuant to this Section 2.12, will bear interest thereon at the applicable Interest Rate compounded quarterly for each quarter of any Deferral Period. At the end of each Deferral Period, the Company shall pay all interest, including any Additional Tax Sums and Compound Interest (collectively, “Deferred Interest”), accrued and unpaid on the Securities that shall be payable to the Holders in whose names the Securities are registered in the Security Register on the record date for the first Interest Payment Date after the end of such Deferral Period. Before the termination of any Deferral Period, the Company may extend such period, provided that such period, together with all such previous and further extensions within such Deferral Period, shall not exceed 20 consecutive quarterly periods or extend beyond the Stated Maturity or earlier redemption of the Securities. Upon the termination of any Deferral Period and upon the payment of all Deferred Interest then due, the Company may commence a new Deferral Period, subject to the foregoing requirements. No interest shall be due and payable during a Deferral Period, except at the end thereof, but the Company may prepay at any time all or any portion of the interest accrued during a Deferral Period.

     (b) If the Institutional Trustee is the only Holder of Securities at the time the Company selects a Deferral Period, the Company shall give written notice to the Regular Trustees, the Institutional Trustee and the Trustee of its establishment or extension of such Deferral Period not later than one Business Day before the next succeeding date on which Distributions (as defined in the Declaration) on the Trust Securities issued by the Trust are payable. If the Institutional Trustee is not the only Holder at the time the Company selects or extends a Deferral Period, the Company shall give the Holders of the Securities and the Trustee written notice of its selection of such Deferral Period at least ten Business Days before the next succeeding Interest Payment Date. The quarterly period in which any notice is given pursuant to this Section 2.12 shall be counted as one of the 20 quarterly periods permitted in the longest Deferral Period permitted under this Section 2.12.

     Section 2.13 CUSIP Number.

     The Company in issuing the Securities may use a “CUSIP” number (if then generally in use), and, if so, the Trustee shall use such “CUSIP” number in notices of redemption as a convenience to Holders; provided that any such notice may state that no representation is made as to the correctness of such number either as printed on the Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers

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printed on the Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. The Company will promptly notify the Trustee of any change in the “CUSIP” number.

ARTICLE III
PARTICULAR COVENANTS OF THE COMPANY

     Section 3.01 Payment of Principal, Premium, if any, and Interest. Premium if any, and Interest.

     The Company covenants and agrees for the benefit of the Holders of the Securities that it will duly and punctually pay or cause to be paid the principal of, and premium, if any, and interest on, the Securities at the place, at the times and in the manner provided in the Securities. Each installment of interest on the Securities may be paid at the option of the Company by check mailed to the Holder entitled thereto at such address as shall appear in the Security Register or by wire transfer to an account appropriately designated by the Holder of Securities entitled thereto, while payments due at Stated Maturity or earlier redemption will be made by the Company in same-day funds against presentation and surrender of the related Securities. Notwithstanding the foregoing, so long as the Holder of any Securities is the Institutional Trustee, the payment of the principal of and interest (including Compound Interest and Additional Tax Sums, if any) on such Securities held by the Institutional Trustee will be made by the Company in same-day funds at such place and to such account as may be designated by the Institutional Trustee.

     Section 3.02 Offices for Notices and Payments, etc.

     So long as any of the Securities remain outstanding, the Company will maintain in Wilmington, Delaware or Southfield, Michigan, an office or agency where the Securities may be presented for payment, for registration of transfer and for exchange as in this Indenture provided and where notices and demands to or upon the Company in respect of the Securities or this Indenture may be served. The Company will give to the Trustee written notice of the location of any such office or agency and of any change of location thereof. Until otherwise designated from time to time by the Company in a notice to the Trustee, any such office or agency for all of the above purposes shall be the Principal Office of the Trustee. In case the Company shall fail to maintain any such office or agency in Wilmington, Delaware or Southfield, Michigan, or shall fail to give such notice of the location or of any change in the location thereof, presentations and demands may be made and notices may be served at the designated corporate trust office of the Trustee.

     In addition to any such office or agency, the Company may from time to time designate one or more offices or agencies outside Wilmington, Delaware or Southfield, Michigan, where the Securities may be presented for registration of transfer and for exchange in the manner provided in this Indenture, and the Company may from time to time rescind such designation, as the Company may deem desirable or expedient; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain any such office or agency in Wilmington, Delaware or Southfield, Michigan, for the purposes above mentioned. The Company will give to the Trustee prompt written notice of any such designation or rescission thereof.

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     Section 3.03 Appointments to Fill Vacancies in Trustee’s Office.

     The Company, whenever necessary to avoid or fill a vacancy in the office of Trustee, will appoint, in the manner provided in Section 6.10, a Trustee, so that there shall at all times be a Trustee hereunder.

     Section 3.04 Provisions as to Paying Agent.

     (a) If the Company shall appoint a paying agent other than the Trustee with respect to the Securities (a “Paying Agent”), it will cause such Paying Agent to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section 3.04:

     (1) that it will hold all sums held by it as such agent for the payment of the principal of, and premium, if any, or interest, if any, on, the Securities (whether such sums have been paid to it by the Company or by any other obligor on the Securities) in trust for the benefit of the Holders of the Securities; and

     (2) that it will the Trustee notice of any failure by the Company (or by any other obligor on the Securities) to make any payment of the principal of, and premium, if any, or interest, if any, on, the Securities when the same shall be due and payable.

     (b) If the Company shall act as its own Paying Agent, it will, on or before each due date of the principal of and premium, if any, or interest on the Securities, set aside, segregate and hold in trust for the benefit of the Holders of the Securities a sum sufficient to pay such principal, premium or interest so becoming due and will notify the Trustee of any failure to take such action and of any failure by the Company (or by any other obligor under the Securities) to make any payment of the principal of, and premium, if any, or interest on, the Securities when the same shall become due and payable.

     (c) Anything in this Section 3.04 to the contrary notwithstanding, the Company may, at any time, for the purpose of obtaining a satisfaction and discharge with respect to the Securities hereunder, or for any other reason, pay or cause to be paid to the Trustee all sums held in trust by the Company or any paying agent hereunder, as required by this Section 3.04, such sums to be held by the Trustee upon the trusts herein contained.

     (d) Anything in this Section 3.04 to the contrary notwithstanding, the agreement to hold sums in trust as provided in this Section 3.04 is subject to Sections 11.03 and 11.04.

     (e) The Company hereby appoints the Trustee as the initial Paying Agent for the Securities.

     Section 3.05 Certificate to Trustee.

     The Company will deliver to the Trustee, within 120 days after the end of each fiscal year, so long as Securities are outstanding hereunder, a certificate from the principal executive, financial or accounting officer of the Company stating that in the course of the performance by

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the signers of their duties as officers of the Company they would normally have knowledge of any default by the Company in the performance of any covenants contained herein, stating whether or not they have knowledge of any such default and, if so, specifying each such default of which the signers have knowledge and the nature thereof, all without regard to periods of grace or notice requirements.

     Section 3.06 Compliance with Consolidation Provisions.

     The Company will not, while any of the Securities remain outstanding, consolidate with, merge into or merge into itself, or sell, convey, transfer or otherwise dispose of all or substantially all of its property or assets to any other entity unless the provisions of Article X hereof are complied with.

     Section 3.07 Limitations on Dividends, etc.

     If Securities are issued to the Trust or a trustee of the Trust in connection with the issuance of Trust Securities by such Trust and (i) there shall have occurred a Default or an Event of Default, (ii) the Company shall be in default under the Preferred Securities Guarantee, or (iii) the Company has given notice of its election, pursuant to Section 2.12, to defer payments of interest on the Securities and the period of such deferral is continuing, then the Company shall not (a) declare or pay any dividend on, make any distribution or other payment with respect to, or redeem, purchase, acquire or make a liquidation payment with respect to, any of its capital stock (other than (i) repurchases, redemptions or other acquisitions of shares of capital stock in connection with the satisfaction by the Company of its obligations under any employee benefit plans, (ii) as a result of an exchange or conversion of one class or series of the Company’s capital stock for another class or series of the Company’s capital stock, (iii) the purchase of fractional interests in shares of the Company’s capital stock pursuant to the conversion or exchange provisions of such Company capital stock or the security being converted or exchanged, (iv) any declaration of a dividend in connection with any shareholders’ rights plan or the redemption or repurchase of rights pursuant thereto or (v) any dividend or distribution in the form of capital stock or rights to acquire capital stock where the rights of the capital stock being issued, or issuable pursuant to such rights, rank pari passu or junior to the capital stock as to which such dividend or distribution is paid), (b) make any payment of interest, principal or premium, if any, on or repay, repurchase or redeem any debt securities issued by the Company that rank pari passu with or junior to the Securities or (c) make any guarantee payments with respect to the foregoing (other than pursuant to the Preferred Securities Guarantee).

     Section 3.08 Covenants as to the Trust.

     For so long as Trust Securities remain outstanding, the Company will (i) maintain 100% direct or indirect ownership of the Common Securities of the Trust; provided, however, that any permitted successor of the Company under this Indenture may succeed to the Company’s ownership of the Common Securities; (ii) use its best efforts to cause the Trust (a) to remain a statutory trust, except in connection with a distribution of Securities to the registered holders of Trust Securities in liquidation of the Trust, the redemption of all of the Trust Securities of the Trust or certain mergers, consolidations or amalgamations, in each case, as permitted by the Declaration, and (b) to continue to be treated as a grantor trust, and not an association or publicly

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traded partnership taxable as a corporation, for United States federal income tax purposes; (iii) use its best efforts to cause each registered holder of Trust Securities to be treated as owning an individual beneficial interest in the Securities; and (iv) not cause, as sponsor of the Trust, or permit, as registered holder of the Common Securities of the Trust, the termination of the Trust, except as permitted by the Declaration.

     Section 3.09 Notice of Default.

     The Company shall file with the Trustee written notice of the occurrence of any Event of Default within 5 Business Days of its becoming aware of any such Event of Default.

ARTICLE IV
SECURITYHOLDERS’ LISTS AND REPORTS BY THE
COMPANY AND THE TRUSTEE

     Section 4.01 Securityholders’ Lists.

     The Company covenants and agrees that it will furnish or cause to be furnished to the Trustee:

     (a) on each regular record date for the Securities, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders of the Securities as of such record date; and

     (b) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished;

     except that no such lists need be furnished so long as the Trustee is in possession thereof by reason of its acting as Security registrar for the Securities.

     Section 4.02 Preservation and Disclosure of Lists.

     (a) The Trustee shall preserve, in as current a form as is reasonably practicable, all information as to the names and addresses of the Holders of Securities (1) contained in the most recent list furnished to it as provided in Section 4.01 or (2) received by it in the capacity of Securities registrar (if so acting) hereunder. The Trustee may destroy any list furnished to it as provided in Section 4.01 upon receipt of a new list so furnished.

     (b) In case three or more Holders of Securities (hereinafter referred to as “applicants”) apply in writing to the Trustee and furnish to the Trustee reasonable proof that each such applicant has owned a Security for a period of at least 6 months preceding the date of such application, and such application states that the applicants desire to communicate with other Holders of Securities with respect to their rights under this Indenture or under such Securities and is accompanied by a copy of the form of proxy or other communication which such applicants propose to transmit, then the Trustee shall, within 5 Business Days after the receipt of such application, at its election, either:

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          (1) afford such applicants access to the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.02; or

          (2) inform such applicants as to the approximate number of Holders of Securities, as the case may be, whose names and addresses appear in the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.02, and as to the approximate cost of mailing to such Securityholders the form of proxy or other communication, if any, specified in such application.

     If the Trustee shall elect not to afford such applicants access to such information, the Trustee shall, upon the written request of such applicants, mail to each Securityholder whose name and address appear in the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.02 a copy of the form of proxy or other communication which is specified in such request with reasonable promptness after a tender to the Trustee of the material to be mailed and of payment, or provision for the payment, of the reasonable expenses of mailing, unless within 5 days after such tender, the Trustee shall mail to such applicants (and file with the Commission, if permitted or required under applicable law, together with a copy of the material to be mailed), a written statement to the effect that, in the opinion of the Trustee, such mailing would be contrary to the best interests of the Holders of Securities or would be in violation of applicable law. Such written statement shall specify the basis of such opinion. If the Commission, if permitted or required under applicable law, after opportunity for a hearing upon the objections specified in the written statement so filed, shall enter an order refusing to sustain any of such objections or if, after the entry of an order sustaining one or more of such objections, the Commission shall find, after notice and opportunity for hearing, that all the objections so sustained have been met and shall enter an order so declaring, the Trustee shall mail copies of such material to all such Securityholders with reasonable promptness after the entry of such order and the renewal of such tender; otherwise the Trustee shall be relieved of any obligation or duty to such applicants respecting their application.

     (c) Each and every Holder of Securities, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any Paying Agent shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the Holders of Securities in accordance with the provisions of subsection (b) of this Section 4.02, regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under said subsection (b).

     Section 4.03 Reports by Company.

     (a) The Company covenants and agrees to file with the Trustee, (i) within 15 days after the Company is required to file the same with the Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may from time to time by rules and regulations prescribe) which

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the Company may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Exchange Act; or (ii) if the Company is not required to file information, documents or reports pursuant to either of such sections, then to file with the Trustee the information required to be provided pursuant to Rule 1 44A(d)(4) under the Securities Act.

     (b) The Company covenants and agrees to file with the Trustee and the Commission, in accordance with the rules and regulations prescribed from time to time by the Commission, such additional information, documents and reports with respect to compliance by the Company with the conditions and covenants provided for in this Indenture as may be required from time to time by such rules and regulations.

     (c) The Company covenants and agrees to transmit by mail to Dekania within 5 days after the filing thereof with the Trustee, copies of all information, documents and reports filed with the Trustee.

     (d) Delivery of such reports, information and documents to the Trustee is for informational purposes only and the Trustee’s receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company’s compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers’ Certificates).

     Section 4.04 Financial and Other Information Under Certain Circumstances.

     If at any time the Trust ceases to exist for whatever reason or is no longer the Holder of the Securities, the Company shall:

     (a) Deliver to each Holder (i) each report on Form 10-K and Form l0-Q prepared by Company and filed with the Commission in accordance with the Exchange Act within 15 days after the filing thereof, (ii) if the Company is at any time neither subject to Section 13 or 15(d) of the Exchange Act nor exempt from reporting pursuant to Rule 12g3-2(b) thereunder, the information required to be provided by Rule 144A(d)(4) under the Securities Act and (iii) within 30 days after the end of the fiscal year of the Company Form 1099 or such other annual U.S. federal income tax information statement required by the Internal Revenue Code of 1986, as amended (the “Code”), containing such information with regard to the Securities held by such Securityholder as is required by the Code and the income tax regulations of the U.S. Treasury thereunder; and

     (b) If, and for so long as, the Trust, or a trustee thereof, is a Holder of the Securities, deliver to such Holder copies of the annual and quarterly financial statements of the Company or its Affiliates that are filed with the insurance regulator in the State in which the Company or any such Affiliate is incorporated, promptly following their filing.

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ARTICLE V
REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS
ON EVENT OF DEFAULT

     Section 5.01 Events of Default.

     If one or more of the following events shall have occurred and be continuing, such event shall constitute an event of default hereunder (each, an “Event of Default”):

     (a) default in the payment of any interest upon any Securities when it becomes due and payable, and continuance of such default for a period of 30 days; provided, however, that a valid deferral of an Interest Payment Period by the Company in accordance with the terms of Section 2.12 shall not constitute a default in the payment of interest for this purpose; or

     (b) default in the payment of all or any part of the principal of, or premium, if any, on, any Securities as and when the same shall become due and payable, whether at maturity, upon redemption, by declaration or otherwise; or

     (c) default in the performance, or breach, of any covenant or warranty of the Company in this Indenture (other than a covenant or warranty a default in whose performance or whose breach is elsewhere in this Section 5.01 specifically addressed), and continuance of such default or breach for a period of 90 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the outstanding Securities, a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a “Notice of Default” hereunder; or

     (d) a court having jurisdiction in the premises shall enter a decree or order for relief in respect of the Company in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, Custodian, trustee, sequestrator (or similar official) of the Company or for all or any substantial part of its property, or ordering the winding-up or liquidation of its affairs and such decree or order shall remain unstayed and in effect for a period of 90 consecutive days; or

     (e) the Company shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, shall consent to the entry of an order for relief in an involuntary case under any such law, or shall consent to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, Custodian, sequestrator or other similar official of the Company or for all or any substantial part of its property, or shall make any general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due; or

     (f) the Trust shall have voluntarily or involuntarily dissolved or liquidated, wound-up its business or otherwise terminated its existence except in connection with (i) the distribution of Securities to holders of Trust Securities in liquidation of their interests in the Trust, (ii) the redemption of all of the outstanding Trust Securities of the Trust or (iii) certain mergers, consolidations or amalgamations, in each case, as permitted by the Declaration.

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     If an Event of Default occurs and is continuing, and in each and every such case, unless the principal of all of the Securities shall have already become due and payable, either the Trustee or the Holders of not less than 25% in aggregate principal amount of the Securities then outstanding hereunder, by notice in writing to the Company (and to the Trustee if given by Securityholders), may declare the entire principal of, premium (if any) and accrued, but unpaid, interest on the Securities to be due and payable immediately, and upon any such declaration the same shall become immediately due and payable, provided that, if, upon an Event of Default, the Trustee or the Holders of at least 25% in aggregate principal amount of the Securities then outstanding fail to declare the principal amount of all the Securities to be due and immediately payable, the registered holders of at least 25% in aggregate liquidation amount of the Preferred Securities then outstanding of the Trust shall have such right by a notice in writing to the Company and the Trustee. If an Event of Default referenced under clause (d), (e) or (f) of this Section 5.01 shall have occurred, the principal of, premium, if any, and accrued, but unpaid, interest on the Securities will automatically become immediately due and payable without further action.

     The foregoing provisions, however, are subject to the condition that if, at any time after the principal of the Securities shall have been so declared due and payable, and before any judgment or decree for the payment of the moneys due shall have been obtained or entered as hereinafter provided, the Company shall pay or shall deposit with the Trustee a sum sufficient to pay all matured installments of interest upon all the Securities arid the principal of and premium, if any, on any and all Securities which shall have become due otherwise than by acceleration (with interest upon such principal and premium, if any, and, to the extent that payment of such interest is enforceable under applicable law, on overdue installments of interest, at the same rate as the rate of interest then borne by the Securities, to the date of such payment or deposit) and such amount as shall be sufficient to cover compensation to the Trustee and each predecessor Trustee, their respective agents, attorneys and counsel, and all other expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee except as a result of negligence or bad faith, and if any and all Events of Default under the Indenture, other than the non-payment of the principal of or premium, if any, on Securities which shall have become due by acceleration, shall have been cured, waived or otherwise remedied as provided in this Indenture, then and in every such case the Holders of a majority in aggregate principal amount of the Securities then outstanding, by written notice to the Company and to the Trustee, may waive all defaults and rescind and annul such declaration and its consequences, but no such waiver or rescission and annulment shall extend to or shall affect any subsequent default or shall impair any right consequent thereon. If the Holders of a majority in aggregate principal amount of the Securities then outstanding fail to rescind and annul such declaration and its consequences, the registered holders of a majority in aggregate liquidation amount of the Preferred Securities then outstanding of the Trust shall have such right by written notice to the Company and the Trustee, subject to the satisfaction of the conditions set forth above.

     In case the Trustee shall have proceeded to enforce any right under this Indenture and such proceedings shall have been discontinued or abandoned because of such rescission or annulment or for any other reason or shall have been determined adversely to the Trustee, then and in every such case the Company, the Trustee, the Holders of the Securities and the registered holders of any Preferred Securities shall be restored respectively to their several positions and rights hereunder, and all rights, remedies and powers of the Company, the Trustee, the Holders

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of the Securities and the registered holders of any Preferred Securities shall continue as though no such proceeding had been taken.

     Section 5.02 Payment of Securities on Default; Suit Therefor.

     The Company covenants that in case an Event of Default under Section 5.01(a), (b), (c) or (f) shall have occurred and be continuing, then, upon demand of the Trustee, the Company will pay to the, Trustee, for the benefit of the Holders of the Securities, the whole amount that then shall have become due and payable on all Securities for principal and premium, if any, and interest, or both, as the case may be, with interest upon the overdue principal and premium, if any, and (to the extent that payment of such interest is enforceable under applicable law and, if the Securities are held by the Trust or a trustee of such trust, without duplication of any other amounts paid by the Trust or a trustee in respect thereof) upon the overdue installments of interest at the rate borne by the Securities; and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including a reasonable compensation to the Trustee, its agents, attorneys and counsel, and any expenses or liabilities incurred by the Trustee hereunder other than through its negligence or bad faith.

     In case the Company shall fail forthwith to pay such amounts upon such demand, the Trustee, in its own name and as trustee of an express trust, shall be entitled and empowered to institute any actions or proceedings at law or in equity for the collection of the sums so due and unpaid, and may prosecute any such action or proceeding to judgment or final decree, and may enforce any such judgment or final decree against the Company or any other obligor on the Securities and collect in the manner provided by law out of the property of the Company or any other obligor on the Securities wherever situated the moneys adjudged or decreed to be payable.

     In case an Event of Default under Section 5.01(d) or (e) shall have occurred, the Trustee, irrespective of whether the principal of the Securities shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand pursuant to the provisions of this Section 5.02, shall be entitled and empowered, by intervention in such proceedings or otherwise, (a) to file and prove a claim or claims for the whole amount of principal and interest owing and unpaid in respect of the Securities and, in case of any judicial proceedings, to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for reasonable compensation to the Trustee and each predecessor Trustee, and their respective agents, attorneys and counsel, and for reimbursement of all expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee, except as a result of negligence or bad faith) and of the Securityholders allowed in such judicial proceedings relative to the Company or any other obligor on the Securities, or to the creditors or property of the Company or such other obligor, unless prohibited by applicable law and regulations, (b) to vote on behalf of the Holders of the Securities in any election of a trustee or a standby trustee in arrangement, reorganization, liquidation or other bankruptcy or insolvency proceedings (or of a person performing similar functions in comparable proceedings) and (c) to collect and receive any moneys or other property payable or deliverable on any such claims, and to distribute the same after the deduction of its charges and expenses; and any receiver, assignee or trustee in bankruptcy or reorganization is hereby authorized by each of the Securityholders to make such payments to the Trustee, and, in the event that the Trustee shall consent to the making of such

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payments directly to the Securityholders, to pay to the Trustee such amounts as shall be sufficient to cover reasonable compensation to the Trustee, each predecessor Trustee and their respective agents, attorneys and counsel, and all other expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee except as a result of negligence or bad faith.

     Nothing herein contained shall be construed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Securityholder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of any Securityholder in any such proceeding.

     All rights of action and of asserting claims under this Indenture, or under any of the Securities, may be enforced by the Trustee without the possession of any of the Securities, or the production thereof on any trial or other proceeding relative thereto, and any such suit or proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall be for the ratable benefit of the Holders of the Securities.

     In any proceedings brought by the Trustee (and also any proceedings involving the interpretation of any provision of this Indenture to which the Trustee shall be a party) the Trustee shall be held to represent all the Holders of the Securities, and it shall not be necessary to make any Holders of the Securities parties to any such proceedings.

     Section 5.03 Application of Moneys Collected by Trustee.

     Any moneys collected by the Trustee pursuant to this Article V shall be applied in the following order, at the date or dates fixed by the Trustee for the distribution of such moneys, upon presentation of the several Securities in respect of which moneys have been collected, and stamping thereon the payment if only partially paid, and upon surrender thereof if fully paid:

     First: To the payment of costs and expenses of collection applicable to the Securities and compensation to the Trustee, its agents, attorneys and counsel, and of all other expenses and liabilities incurred, and all advances made, by the Trustee except as a result of its negligence or bad faith;

     Second: To the payment of all Senior Indebtedness of the Company if and to the extent required by Article XV hereof;

     Third: To the payment of the amounts then due and unpaid upon Securities for principal of (and premium, if any) and interest on the Securities, in respect of which or for the benefit of which money has been collected, ratably, without preference or priority of any kind, according to the amounts due on Securities for principal (and premium, if any) and interest, respectively; and

     Fourth: The balance, if any, to the Person or Persons entitled thereto.

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     Section 5.04 Proceedings by Securityholders.

     No Holder of any Security shall have any right by virtue of or by availing of any provision of this Indenture to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Indenture or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless such Holder previously shall have given to the Trustee written notice of an Event of Default and of the continuance thereof with respect to the Securities specifying such Event of Default, as hereinbefore provided, and unless also the Holders of not less than 25% in aggregate principal amount of the Securities then outstanding shall have made written request upon the Trustee to institute such action, suit or proceeding in its own name as Trustee hereunder and shall have offered to the Trustee security or indemnity reasonably satisfactory to the Trustee as it may require against the costs, expenses and liabilities to be incurred therein or thereby, and the Trustee for 60 days after its receipt of such notice and such notice has not been rescinded, request and offer of indemnity shall have failed to institute any such action, suit or proceeding, it being understood and intended, and being expressly covenanted by the taker and Holder of every Security with every other taker and Holder and the Trustee, that no one or more Holders of Securities shall have any right in any manner whatever by virtue of or by availing of any provision of this Indenture to affect, disturb or prejudice the rights of any other Holder of Securities, or to obtain or seek to obtain priority over or preference to any other such Holder, or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all Holders of Securities.

     Notwithstanding any other provisions in this Indenture, the right of any Holder of any Security to receive payment of the principal of (and premium, if any) and interest, if any, on such Security on or after the same shall have become due and payable, or to institute suit for the enforcement of any such payment, shall not be impaired or affected without the consent of such Holder. For the protection and enforcement of the provisions of this Section, each and every Securityholder and the Trustee shall be entitled to such relief as can be given either at law or in equity.

     If the Institutional Trustee of the Trust fails to enforce its rights under this Indenture as the Holder of Securities held as the assets of the Trust, any registered holder of Preferred Securities may, to the extent permitted by applicable law, institute legal proceedings directly against the Company to enforce such Institutional Trustee’s rights under this Indenture without first instituting any legal proceedings against such Institutional Trustee or any other person or entity. Notwithstanding the foregoing, the Company and the Trustee acknowledge that the Declaration may entitle registered holders of the Preferred Securities, in the circumstances and subject to the limitations set forth therein, to commence a Direct Action (as defined therein) with respect to any Event of Default under Section 5.01(a) or (b) and, if such registered holders are so entitled, the Company acknowledges their right to institute a Direct Action against the Company.

     Section 5.05 Proceedings by Trustee.

     In case of an Event of Default, the Trustee may, in its discretion, proceed to protect and enforce the rights vested in it by this Indenture by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any of such rights, either by suit in equity or by action at law or by proceeding in bankruptcy or otherwise, whether for the specific

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enforcement of any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted in this Indenture, or to enforce any other legal or equitable right vested in the Trustee by this Indenture or by law.

     Section 5.06 Remedies Cumulative and Continuing.

     Except as otherwise provided in the last paragraph of Section 2.08 with respect to the replacement or payment of mutilated, lost or stolen Securities, all powers and remedies given by this Article V to the Trustee or to the Securityholders shall, to the extent permitted by law, be deemed cumulative and not exclusive of any other powers and remedies available to the Trustee, the Holders of the Securities or any registered holder of any Preferred Securities, by judicial proceedings or otherwise, to enforce the performance or observance of the covenants and agreements contained in this Indenture, and no delay or omission of the Trustee, any Holder of any of the Securities or any registered holder of any Preferred Securities to exercise any right or power accruing upon any Event of Default occurring and continuing as aforesaid shall impair any such right or power, or shall be construed to be a waiver of any such default or an acquiescence therein; and, subject to the provisions of Section 5.04, every power and remedy given by this Article V or by law to the Trustee or to the Securityholders may be exercised from time to time, and as often as shall be deemed expedient, by the Trustee or by the Securityholders.

     Section 5.07 Direction of Proceedings and Waiver of Defaults by Majority of Securityholders.

     The Holders of a majority in aggregate principal amount of the Securities at the time outstanding shall have the right to direct the time, method and place of conducting any proceeding for an remedy available to the Trustee, or exercising any trust or power conferred on the Trustee, in respect of the Securities; provided, however, that (subject to the provisions of Section 6.01) the Trustee shall have the right to decline to follow any such direction if the Trustee shall determine that the action so directed would be unjustly prejudicial to the Holders that are entitled but fail to take part in such direction or if the Trustee being advised by counsel determines that the action or proceeding so directed may not lawfully be taken or if the Trustee in good faith by its board of directors or trustees, executive committee or a trust committee of directors or trustees and/or Responsible Officers shall determine that the action or proceedings so directed would involve the Trustee in personal liability. Prior to any declaration accelerating the maturity of the Securities, the Holders of a majority in aggregate principal amount of the Securities at the time outstanding may on behalf of the Holders of all of the Securities waive any past default or Event of Default, and its consequences, except a default (a) in the payment of principal of, or premium, if any, or interest on any of the Securities, (b) in respect of covenants or provisions hereof which cannot be modified or amended without the consent of the Holder of each Security affected, or (c) a default of the covenants contained in Section 3.06; provided, that such waiver or modification to such waiver shall not be effective until the registered holders of a majority in aggregate liquidation amount of Preferred Securities then outstanding of the Trust shall have consented to such waiver or modification to such waiver; provided further, that if the consent of the Holder of each outstanding Security is required, such waiver or modification to such waiver shall not be effective until each registered holder of the Preferred Securities then outstanding of the Trust shall have consented to such waiver. Upon any such waiver, the default covered thereby shall be deemed to be cured for all purposes of this Indenture and the Company,

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the Trustee and the Holders of Securities shall be restored to their former positions and rights hereunder, respectively; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. Whenever any default or Event of Default hereunder shall have been waived as permitted by this Section 5.07, said default or Event of Default shall for all purposes of the Securities and this Indenture be deemed to have been cured and to be not continuing.

     Section 5.08 Notice of Defaults.

     The Trustee shall, within 60 days after the occurrence of a default with respect to the Securities, mail to all Securityholders, as the names and addresses of such Holders appear upon the Security Register, notice of all defaults known to the Trustee, unless such defaults shall have been cured before the giving of such notice (the term “defaults” for the purpose of this Section 5.08 being hereby defined to be the events specified in clauses (a), (b), (c), (d), (e) and (f) of Section 5.01, not including periods of grace, if any, provided for therein, and irrespective of the giving of any written notice provided for therein); and provided that, except in the case of default in the payment of the principal of, or premium, if any, or interest on any of the Securities, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee, or a trust committee of directors and/or Responsible Officers of the Trustee in good faith determines that the withholding of such notice is in the interests of the Securityholders, and provided further, that in the case of any default of the character specified in Section 5.01(c), no such notice to Securityholders shall be given until at least 60 days after the Trustee has notified the Company of such occurrence but shall be given within 90 days after such occurrence.

     Section 5.09 Undertaking to Pay Costs.

     All parties to this Indenture agree, and each Holder of any Security by such Holder’s acceptance thereof shall be deemed to have agreed, that any court may, in its discretion, require in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys’ fees and expenses, against any party litigant in such suit having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section 5.09 shall not apply to any suit instituted by the Trustee, to any suit instituted by any Securityholder, or group of Securityholders, holding in the aggregate 10% or more in aggregate principal amount of the Securities outstanding, or to any suit instituted by any Securityholder for the enforcement of the payment of the principal of (or premium, if any) or interest on any Security against the Company on or after the same shall have become due and payable.

     Section 5.10 Delay or Omission Not Waiver.

     No delay or omission of the Trustee, any Holder of any Securities or any holder of any Preferred Security to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article V or by law to the Trustee or

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to the Holders and the right and remedy given to the holders of Preferred Securities in Section 5.07 may be exercised from time to time, and as often as may be deemed expedient, by the Trustee, the Holders or the holders of Preferred Securities, as the case may be.

ARTICLE VI
CONCERNING THE TRUSTEE

     Section 6.01 Duties and Responsibilities of Trustee.

     With respect to the Holders of Securities issued hereunder, the Trustee, prior to the occurrence of an Event of Default and after the curing or waiving of all Events of Default which may have occurred, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture. In case an Event of Default has occurred (which has not been cured or waived) the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of such person’s affairs.

     No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that:

     (a) prior to the occurrence of an Event of Default and after the curing or waiving of all Events of Default which may have occurred

     (1) the duties and obligations of the Trustee with respect to the Securities shall be determined solely by the express provisions of this Indenture, and the Trustee shall not be liable except for the performance of such duties and obligations with respect to the Securities as are specifically set forth in this Indenture, and no implied covenants or obligations, shall be read into this indenture against the Trustee; and

     (2) in the absence of bad faith on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but, in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture;

     (b) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; and

     (c) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith, in accordance with the direction of the Securityholders pursuant to Section 5.07, relating to the time, method and place of conducting any proceeding for any

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remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture.

     None of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if there is reasonable ground for believing that the repayment of such funds or liability is not reasonably assured to it under the terms of this Indenture or adequate indemnity against such risk is not reasonably assured to it. Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the eligibility of affording protection to the Trustee shall be subject to the provisions of this Section 6.01.

     Section 6.02 Reliance on Documents, Opinions, etc.

     Except as otherwise provided in Section 6.01:

     (a) the Trustee may conclusively rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, note, debenture or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties;

     (b) any request, direction, order or demand of the Company mentioned herein shall be sufficiently evidenced an Officers’ Certificate (unless other evidence in respect thereof be herein specifically prescribed); and any Board Resolution may be evidenced to the Trustee by a copy thereof certified b the Secretary or an Assistant Secretary of the Company;

     (c) the Trustee may consult with counsel of its selection, and any advice or Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with such advice or Opinion of Counsel;

     (d) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the Securityholders, pursuant to the provisions of this Indenture, unless such Securityholders shall have offered to the Trustee security or indemnity satisfactory to the Trustee against the costs, expenses and liabilities which may be incurred herein or thereby;

     (e) the Trustee shall not be liable for any action taken or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture; nothing contained herein shall, however, relieve the Trustee of the obligation, upon the occurrence of an Event of Default (that has not been cured or waived) to exercise with respect to Securities such of the rights and powers vested in it by this Indenture, and to use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of such person’s own affairs;

     (f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, debenture, coupon or other paper or document, unless requested

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in writing to do so by the Holders of not less than a majority in principal amount of the outstanding Securities; provided, however, that if the payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this indenture, the Trustee may require indemnity satisfactory to the Trustee against such expense or liability as a condition to so proceeding;

     (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents (including any Authenticating Agent), custodians, nominees or attorneys, and the Trustee shall not be responsible for any misconduct or negligence on the part of any such agent or attorney appointed by it with due care;

     (h) the Trustee shall not be liable for any action taken, suffered, or omitted to be taken by it in good faith and reasonably believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture;

     (i) the Trustee shall not be deemed to have notice of any Default or Event of Default unless a Responsible Officer of the Trustee has actual knowledge thereof or unless written notice of any event which is in fact such a default is received by the Trustee at the designated corporate trust office of the Trustee, and such notice references the Securities and this Indenture;

     (j) the rights, privileges, protections, immunities and benefits given to the Trustee, including, without limitation, its right to be indemnified, are extended to, and shall be enforceable by, the Trustee in each of its capacities hereunder, and to each agent, custodian and other Person employed to act hereunder;

     (k) the Trustee may request that the Company deliver an Officers’ Certificate setting forth the names of individuals and/or titles of officers authorized at such time to take specified actions pursuant to this Indenture, which Officers’ Certificate may be signed by any person authorized to sign an Officers’ Certificate, including any person specified as so authorized in any such certificate previously delivered and not superseded; and

     (l) the Trustee shall be under no obligation to institute any suit, or to take any remedial proceeding under this Indenture, or to enter any appearance or in any way defend in any suit in which it may be made defendant, or in the enforcement of any rights and powers hereunder, if the Trustee reasonably believes that it will not be adequately indemnified as provided in this Indenture.

     Section 6.03 No Responsibility for Recitals, etc.

     The recitals contained herein and in the Securities (except in the Certificate of Authentication of the Trustee or the Authenticating Agent) shall be taken as the statements of the Company, and the Trustee and the Authenticating Agent assume no responsibility for the correctness of the same. The Trustee and the Authenticating Agent make no representations as to the validity or sufficiency of this Indenture or of the Securities. The Trustee and the Authenticating Agent shall not be accountable for the use or application by the Company of the proceeds of any Securities authenticated and delivered by the Trustee or the Authenticating Agent in conformity with the provisions of this Indenture.

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     Section 6.04 Trustee, Authenticating Agent, Paying Agents, Transfer Agents or Registrar May Own Securities.

     The Trustee or any Authenticating Agent or any Paying Agent or any transfer ‘agent or any Security registrar, in its individual or any other capacity, may become the owner or pledgee of Securities with the same rights it would have if it were not Trustee, Authenticating Agent, Paying Agent, transfer agent or Security registrar.

     Section 6.05 Moneys to be Held in Trust.

     Subject to the provisions of Section 11.04, all moneys received by the Trustee or any paying agent shall, until used or applied as herein provided, be held in trust for the purpose for which they were received, but need not be segregated from other funds except to the extent required by law. The Trustee and any paying agent shall be under no liability for interest on any money received by it hereunder except as otherwise agreed in writing with the Company. So long as no Event of Default shall have occurred and be continuing, all interest allowed on any such moneys shall be paid from time to time to the Company or its order upon the written order of the Company, signed by the Chairman of the Board of Directors (if an executive officer) the Chief Executive Officer, the President, any Executive Vice President, any Vice President, and its Chief Financial Officer the Treasurer or any Assistant Treasurer of the Company.

     Section 6.06 Compensation and Expenses of Trustee.

     The Company covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to, such compensation as shall be agreed in writing between the Company and the Trustee (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust), and the Company will pay or reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any of the provisions of this Indenture (including the reasonable compensation and the expenses and disbursements of its counsel and of all persons not regularly in its employ and any amounts paid by the Trustee to any Authenticating Agent pursuant to Section 6.13) except any such expense, disbursement or advance as may arise from its negligence or bad faith. The Company also covenants to indemnify each of the Trustee and any predecessor Trustee (and its officers, agents, directors and employees) for, and to hold it harmless against, any and all loss, liability, damages, claim, action, suit, cost or expense, including taxes (other than taxes based on the income of the Trustee) of any kind and nature whatsoever incurred without negligence or bad faith on the part of the Trustee and arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim (whether asserted by the Company, a Holder of Securities or any other Person) of liability in the premises. The obligations of the Company under this Section 6.06 to compensate and indemnify the Trustee and to pay or reimburse the Trustee for expenses, disbursements and advances shall constitute additional indebtedness hereunder and shall survive the resignation or removal of the Trustee and the termination of this Indenture. Such additional indebtedness shall be secured by a lien prior to that of the Securities upon all property and funds held or collected by the Trustee as such, except funds held in trust for the benefit of the Holders of particular Securities.

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     When the Trustee incurs expenses or renders services in connection with an Event of Default specified in Section 5.01(d) or Section 5.01(e), the expenses (including the reasonable charges and expenses of its counsel) and the compensation for the services are intended to constitute expenses of administration under any applicable Federal or State bankruptcy, insolvency or other similar law.

     The provisions of this Section shall survive the termination of this Indenture.

     Section 6.07 Officers’ Certificate as Evidence.

     Except as otherwise provided in Sections 6.01 and 6.02; whenever in the administration of the provisions of this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or omitting any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of negligence or bad faith on the part of the Trustee, be deemed to be conclusively proved and established by an Officers’ Certificate delivered to the Trustee, and such certificate, in the absence of negligence or bad faith on the part of the Trustee, shall be full warrant to the Trustee for any action taken or omitted by it under the provisions of this Indenture upon the faith thereof.

     Section 6.08 Conflicting Interest of Trustee.

     If the Trustee has or shall acquire any “conflicting interest” within the meaning of Section 310(b) of the Trust Indenture Act, the Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to this Indenture.

     Section 6.09 Eligibility of Trustee.

     The Trustee hereunder shall at all times be a corporation organized and doing business under the laws of the United States of America or any State or territory thereof or of the District of Columbia or a corporation or other Person permitted to act as trustee by the Commission authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least $50,000,000 and subject to supervision or examination by federal, State, territorial or District of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section 6.09, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published.

     The Company may not, nor may any Person directly or indirectly controlling, controlled by or under common control with the Company, serve as Trustee.

     In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section 6.09, the Trustee shall resign immediately in the manner and with the effect specified in Section 6.10.

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     Section 6.10 Resignation or Removal of Trustee.

     (a) The Trustee, or any trustee or trustees hereafter appointed, may, at any time, resign by giving written notice of such resignation to the Company and by mailing notice thereof to the Holders of Securities at their addresses as they shall appear on the Security Register. Upon receiving such notice of resignation, the Company shall promptly appoint a successor trustee or trustees by written instrument, in duplicate, executed by order of its Board of Directors, one copy of which instrument shall be delivered to the resigning Trustee and one copy to the successor trustee. If no successor trustee shall have been so appointed and have accepted appointment within 30 days after the mailing of such notice of resignation to the Securityholders, the resigning Trustee may petition, at the expense of the Company, any court of competent jurisdiction for the appointment of a successor trustee, or any Securityholder who has been a bona fide Holder of a Security or Securities for at least six months may, subject to the provisions of Section 5.09, on behalf of himself or herself and all others similarly situated, petition any such court for the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, appoint a successor Trustee.

     (b) In case at any time any of the following shall occur:

     (i) the Trustee shall fail to comply with the provisions of Section 6.08 after written request therefor by the Company or by any Securityholder who has been a bona fide Holder of a Security or Securities for at least six months, or

     (ii) the Trustee shall cease to be eligible in accordance with the provisions of Section 6.09 and shall fail to resign after written request therefor by the Company or by any such Securityholder, or

     (iii) the Trustee shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation.

then, in any such case, the Company may remove the Trustee and appoint a successor trustee by written instrument, in duplicate, executed by order of the Board of Directors, one copy of which instrument shall be delivered to the Trustee so removed and one copy to the successor trustee, or, subject to the provisions of Section 5.09, any Securityholder who has been a bona fide Holder of a Security or Securities for at least six months may, on behalf of himself or herself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor trustee.

     (c) The Holders of a majority in aggregate principal amount of the Securities at the time outstanding may at any time remove the Trustee and nominate a successor trustee which shall be deemed appointed as successor trustee unless, within 10 days after such nomination, the Company objects thereto, in which case the Trustee so removed or any Securityholder, upon the terms and conditions and otherwise as provided in subsection (a) of this Section 6.10, may

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petition, at the expense of the Company, any court of competent jurisdiction for an appointment of a successor trustee.

     (d) Any resignation or removal of the Trustee and appointment of a successor trustee pursuant to any of the provisions of this Section 6.10 shall become effective upon acceptance of appointment by the successor trustee as provided in Section 6.11.

     Section 6.11 Acceptance by Successor Trustee.

     Any successor trustee appointed as provided in Section 6.10 shall execute, acknowledge and deliver to the Company and to its predecessor trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the retiring trustee shall become effective and such successor trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, duties and obligations with respect to the Securities of its predecessor hereunder, with like effect as if originally named as trustee herein; but, nevertheless, on the written request of the Company or of the successor trustee, the trustee ceasing to act shall, upon payment of any amounts then due it pursuant to the provisions of Section 6.06, execute and deliver an instrument transferring to such successor trustee all the rights and powers of the trustee so ceasing to act and shall duly assign, transfer and deliver to such successor trustee all property and money held by such retiring trustee thereunder. Upon request of any such successor trustee, the Company shall execute any and all instruments in writing for more fully and certainly vesting in and confirming to such successor trustee all such rights and powers. Any trustee ceasing to act shall, nevertheless, retain a lien upon all property or funds held or collected by such trustee to secure any amounts then due it pursuant to the provisions of Section 6.06.

     No successor trustee shall accept appointment as provided in this Section 6.11 unless, at the time of such acceptance, such successor trustee shall be qualified under the provisions of Section 6.08 and eligible under the provisions of Section 6.09.

     Upon acceptance of appointment by a successor trustee as provided in this Section 6.11, the Company shall mail notice of the succession of such trustee hereunder to the Holders of Securities at their addresses as they shall appear on the Security Register. If the Company fails to mail such notice within 10 days after the acceptance of appointment by the successor trustee, the successor trustee shall cause such notice to be mailed at the expense of the Company.

     Section 6.12 Succession by Merger, etc.

     Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto.

     In case at the time such successor to the Trustee shall succeed to the trusts created by this Indenture any of the Securities shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor trustee

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and deliver such Securities so authenticated; and in case at that time any of the Securities shall not have been authenticated, any successor to the Trustee may authenticate such Securities either in the name of any predecessor hereunder or in the name of the successor trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Securities or in this Indenture provided that the certificate of the Trustee shall have; provided, however, that the right to adopt the certificate of authentication of any predecessor Trustee or authenticate Securities in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation.

     Section 6.13 Authenticating Agents.

     There may be one or more Authenticating Agents appointed by the Trustee upon the request of the Company with power to act on its behalf and subject to its direction in the authentication and delivery of Securities issued upon exchange or transfer thereof as fully to all intents and purposes as though any such Authenticating Agent had been expressly authorized to authenticate and deliver Securities; provided, that the Trustee shall have no liability to the Company for any acts or omissions of the Authenticating Agent with respect to the authentication and delivery of Securities. Any such Authenticating Agent shall at all times be a corporation organized and doing business under the laws of the United States or of any State or territory thereof or of the District of Columbia authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of at least $50,000,000 and being subject to supervision or examination by Federal, State, territorial or District of Columbia authority. If such corporation publishes reports of condition at least annually pursuant to law or the requirements of such authority, then, for the purposes of this Section 6.13, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect herein specified in this Section.

     Any corporation into which any Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, consolidation or conversion to which any Authenticating Agent shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of any Authenticating Agent, shall be the successor of such Authenticating Agent hereunder, if such successor corporation is otherwise eligible under this Section 6.13 without the execution or filing of any paper or any further act on the part of the parties hereto or such Authenticating Agent.

     Any Authenticating Agent may, at any time, resign by giving written notice of resignation to the Trustee and to the Company. The Trustee may, at any time, terminate the agency of any Authenticating Agent by giving written notice of termination to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time any Authenticating Agent shall cease to be eligible under this Section 6.13, the Trustee may, and upon the request of the Company shall, promptly appoint a successor Authenticating Agent eligible under this Section 6.13, shall give written notice of such appointment to the Company and shall mail notice of such appointment to all Holders of the Securities as the names and addresses of such Holders appear on the Security Register. Any successor Authenticating Agent upon acceptance of its appointment hereunder

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shall become vested with all rights, powers, duties and responsibilities of its predecessor hereunder, with like effect as if originally named as Authenticating Agent herein.

     The Company agrees to pay to any Authenticating Agent from time to time reasonable compensation for its services. Any Authenticating Agent shall have no responsibility or liability for any action taken by it as such in accordance with the directions of the Trustee.

ARTICLE VII
CONCERNING THE SECURITYHOLDERS

     Section 7.01 Action by Securityholders.

     Whenever in this Indenture it is provided that the Holders of a specified percentage in aggregate principal amount of the Securities may take any action (including the making of any demand or request, the giving of any notice, consent or waiver or the taking of any other action), the fact that at the time of taking any such action the Holders of such specified percentage have joined therein may be evidenced (a) by any instrument or any number of instruments of similar tenor executed by such Securityholders in person or by agent or proxy appointed in writing, or (b) by the record of such Holders of Securities voting in favor thereof at any meeting of such Securityholders duly called and held in accordance with the provisions of Article VIII hereof or (c) by a combination of such instrument or instruments and any such record of such a meeting of such Securityholders.

     If the Company shall solicit from the Securityholders any request, demand, authorization, direction, notice, consent, waiver or other action, the Company may, at its option, as evidenced by an Officers’ Certificate, fix in advance a record date for the determination of Securityholders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other action, but the Company shall have no obligation to do so. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other action may be given before or after the record date, but only the Securityholders of record at the close of business on the record date shall be deemed to be Securityholders for the purposes of determining whether Securityholders of the requisite proportion of outstanding Securities have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other action, and for that purpose the outstanding Securities shall be computed as of the record date; provided, however, that no such authorization, agreement or consent by such Securityholders on the record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than six months after the record date.

     Section 7.02 Proof of Execution by Securityholders.

     Subject to the provisions of Sections 6.01, 6.02 and 8.05, proof of the execution of any instrument by a Securityholder or his agent or proxy shall be sufficient if made in accordance with such reasonable rules and regulations as may be prescribed by the Trustee or in such manner as shall be satisfactory to the Trustee. The ownership of Securities shall be proved by the Security Register or by a certificate of the Security registrar. The Trustee may require such additional proof of any matter referred to in this Section as it shall deem necessary.

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     The record of any Securityholders’ meeting shall be proved in the manner provided in Section 8.06.

     Section 7.03 Who Are Deemed Absolute Owners.

     Prior to due presentment for registration of transfer of any Security, the Company, the Trustee, any Authenticating Agent, any Paying Agent, any transfer agent and any Security registrar may deem the person in whose name such Security shall be registered upon the Security Register to be, and may treat such person as, the absolute owner of such Security (whether or not such Security shall be overdue) for the purpose of receiving payment of or on account of the principal of, and premium, if any, and interest on, such Security and for all other purposes; and neither the Company, the Trustee, any Authenticating Agent, any Paying Agent, any transfer agent nor any Security registrar shall be affected by any notice to the contrary.

     Section 7.04 Securities Owned by Company Deemed Not Outstanding.

     In determining whether the Holders of the requisite aggregate principal amount of Securities have concurred in any direction, consent or waiver under this Indenture, Securities which are owned by the Company or any other obligor on the Securities or by any person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any other obligor on the Securities shall be disregarded and deemed not to be outstanding for the purpose of any such determination; provided that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, consent or waiver, only Securities which a Responsible Officer of the Trustee actually knows are so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as outstanding for the purposes of this Section 7.04 if the pledgee shall establish to the satisfaction of the Trustee the pledgee’s right to vote such Securities and that the pledgee is not the Company or any such other obligor or person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any such other obligor. In the case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel shall be full protection to the Trustee.

     Section 7.05 Revocation of Consents; Future Holders Bound.

     At any time prior to (but not after) the evidencing to the Trustee, as provided in Section 7.01, of the taking of any action by the Holders of the percentage in aggregate principal amount of the Security specified in this Indenture in connection with such action, any Holder of a Security (or any Security issued in whole or in part in exchange or substitution therefor) the serial number of which is shown by the evidence to be included in the Securities the Holders of which have consented to such action may, by filing written notice with the Trustee at its Principal Office and upon proof of holding as provided in Section 7.02, revoke such action so far as concerns such Security (or so far as concerns the principal amount represented by any exchanged or substituted Security). Except as aforesaid, any such action taken by the Holder of any Security shall be conclusive and binding upon such Holder and upon all future Holders and owners of such Security, and of any Security issued in exchange or substitution therefor, irrespective of whether or not any notation in regard thereto is made upon such Security or any Security issued in exchange or substitution therefor.

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ARTICLE VIII
SECURITYHOLDERS’ MEETINGS

     Section 8.01 Purposes of Meetings.

     A meeting of Securityholders may be called at any time and from time to time pursuant to the provisions of this Article VIII for any of the following purposes:

     (a) to give any notice to the Company or to the Trustee, to give any directions to the Trustee, to consent to the waiving of any default hereunder and its consequences or to take any other action authorized to be taken by Securityholders pursuant to any of the provisions of Article V hereof;

     (b) to remove the Trustee and nominate a successor trustee pursuant to the provisions of Article VI hereof;

     (c) to consent to the execution of an indenture or indentures supplemental hereto pursuant to the provisions of Section 9.02; or

     (d) to take any other action authorized to be taken by or on behalf of the Holders of any specified aggregate principal amount of the Securities under any other provision of this Indenture or under applicable law.

     Section 8.02 Call of Meetings by Trustee.

     The Trustee may, at any time, call a meeting of Securityholders to take any action specified in Section 8.01, to be held at such time and at such place in the Borough of Manhattan, The City of New York, or in Wilmington, Delaware, as the Trustee shall determine. Notice of every meeting of the Securityholders, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be mailed to Holders of Securities at their addresses as they shall appear on the Securities Register. Such notice shall be mailed not less than 20 nor more than 180 days prior to the date fixed for the meeting.

     Section 8.03 Call of Meetings by Company or Securityholders.

     In case at any time the Company pursuant to a resolution of the Board of Directors, or the Holders of at least 10% in aggregate principal amount of the Securities then outstanding, shall have requested the Trustee to call a meeting of Securityholders, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have mailed the notice of such meeting within 20 days after receipt of such request, then the Company or such Securityholders may determine the time and the place in said Borough of Manhattan, The City of New York, or Wilmington, Delaware for such meeting and may call such meeting to take any action authorized in Section 8.01, by mailing notice thereof as provided in Section 8.02.

     Section 8.04 Qualifications for Voting.

     To be entitled to vote at any meeting of Securityholders a person shall (a) be a Holder of one or more Securities or (b) a person appointed by an instrument in writing as proxy by a

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Holder of one or more such Securities. The only persons who shall be entitled to be present or to speak at any meeting of Securityholders shall be the persons entitled to vote at such meeting and their counsel and any representatives of the Trustee and its counsel and any representatives of the Company and its counsel.

     Section 8.05 Regulations.

     Notwithstanding any other provisions of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Securityholders, in regard to proof of the holding of Securities and of the appointment of proxies, the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote and such other matters concerning the conduct of the meeting as it shall think fit.

     The Trustee shall, by an instrument in writing, appoint a temporary chair of the meeting, unless the meeting shall have been called by the Company or by Securityholders as provided in Section 8.03, in which case the Company or the Securityholders calling the meeting, as the case may be, shall in like manner appoint a temporary chair. A permanent chair and a permanent secretary of the meeting shall be elected by majority vote of the meeting.

     Subject to the provisions of Section 7.04, at any meeting of Securityholders, each Holder of Securities with respect to which such meeting is being held or proxy therefor shall be entitled to one vote for each $1,000 principal amount of Securities held or represented by such Holder; provided, however, that no vote shall be cast or counted at any meeting in respect of any Security challenged as not outstanding and ruled by the chair of the meeting to be not outstanding. The chair of the meeting shall have no right to vote other than by virtue of Securities held by him or her or instruments in writing as aforesaid duly designating him or her as the person to vote on behalf of other Securityholders. Any meeting of Securityholders duly called pursuant to the provisions of Section 8.02 or 8.03 may be adjourned from time to time by a majority of those present, whether or not constituting a quorum, and the meeting may be held as so adjourned without further notice.

     Section 8.06 Voting.

     The vote upon any resolution submitted to any meeting of Holders of Securities shall be by written ballots on which shall be subscribed the signatures of such Holders or of their representatives by proxy and the serial number or numbers of the Securities held or represented by them. The permanent chair of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in triplicate of all votes cast at the meeting. A record in duplicate of the proceedings of each meeting of Securityholders shall be prepared by the secretary of the meeting and there shall he attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice was mailed as provided in Section 8.02. The record shall show the serial numbers of the Securities voting in favor of or against any resolution. The record shall be signed and verified by the affidavits of the permanent chair and secretary of the meeting and one of the

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duplicates shall be delivered to the Company and the other to the Trustee to be preserved by the Trustee, the latter to have attached thereto the ballots voted at the meeting.

     Any record so signed and verified shall be conclusive evidence of the matters therein stated.

ARTICLE IX
SUPPLEMENTAL INDENTURES

     Section 9.01 Supplemental Indentures without Consent of Securityholders.

     The Company and the Trustee may, from time to time, and at any time enter into an indenture or indentures supplemental hereto (which shall conform to the provisions of the Trust Indenture Act as then in effect applicable to indentures qualified thereunder), without the consent of the Securityholders, for one or more of the following purposes:

     (a) to evidence the succession of another entity to the Company, or successive successions, and the assumption by the successor entity of the covenants, agreements and obligations of the Company pursuant to Article X hereof;

     (b) to add to the covenants of the Company such further covenants, restrictions or conditions for the protection of the Holders of Securities as the Board of Directors and the Trustee shall consider to be for the protection of the Holders of Securities, and to make the occurrence, or the occurrence and continuance, of a default in any of such additional covenants, restrictions or conditions a default or an Event of Default permitting the enforcement of all or any of the several remedies provided in this Indenture as herein set forth; provided, however, that in respect of any such additional covenant, restriction or condition such supplemental indenture may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults) or may provide for an immediate enforcement upon such default or may limit the remedies available to the Trustee upon such default;

     (c) to cure any ambiguity or to correct or supplement any provision contained herein or in any supplemental indenture which may be defective or inconsistent with any other provision contained herein or in any supplemental indenture, or to make such other provisions in regard to matters or questions arising under this Indenture; provided that any such action shall not adversely affect the interests of the Holders of the Securities in any material respect;

     (d) to add to, delete from or revise the terms of Securities, including, without limitation, any terms relating to the issuance, exchange, registration or transfer of Securities; provided, that no such action shall adversely affect the interests of Holders of outstanding Securities;

     (e) to evidence and provide for the acceptance of appointment hereunder by a successor trustee with respect to the Securities and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one trustee, pursuant to the requirements of Section 6.11;

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     (f) to make any change that does not adversely affect the rights of any Securityholder in any material respect; or

     (g) to provide for the issuance of and establish the form and terms and conditions of the Securities, to establish the form of any certifications required to be furnished pursuant to the terms of this Indenture or to add to the rights of the Holders of Securities.

     The Trustee is hereby authorized to join with the Company in the execution of any such supplemental indenture, to make any further appropriate agreements and stipulations which may be therein contained and to accept the conveyance, transfer and assignment of any property thereunder, but the Trustee shall not be obligated to, but may in its discretion, enter into any such supplemental indenture which affects the Trustee’s own rights, duties or immunities under this Indenture or otherwise.

     Any supplemental indenture authorized by the provisions of this Section 9.01 may be executed by the Company and the Trustee without the consent of the Holders of any of the Securities at the time outstanding, notwithstanding any of the provisions of Section 9.02.

     Section 9.02 Supplemental Indentures with Consent of Securityholders.

     With the consent (evidenced as provided in Section 7.01) of the Holders of a majority in aggregate principal amount of the Securities at the time outstanding, the Company, when authorized by a Board Resolution, and the Trustee may, from time to time and at any time, enter into an indenture or indentures supplemental hereto (which shall conform to the provisions of the Trust Indenture Act then in effect applicable to indentures qualified thereunder) for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or of modifying in any manner the rights of the Holders of the Securities; provided, however, that no such supplemental indenture shall, without the consent of the Holders of each Security, (i) change the Stated Maturity of any such Security, or reduce the Interest Rate (or change the manner of calculation of the Interest Rate) or change any date on which interest thereon is payable, or reduce the principal amount thereof or any premium thereon, or change any redemption or repayment date or period or price, or make the principal thereof or any interest or premium thereon payable in any coin or currency other than that provided in the Securities, or impair or affect the right of any Securityholder to institute suit for payment thereof (ii) reduce the aforesaid percentage of Securities the Holders of which are required to consent to any such supplemental indenture or (iii) otherwise materially and adversely affect the interests of the Holders of any such Security; provided, further, that if the Securities are held by the Trust or a trustee of the Trust, such supplemental indenture shall not be effective until the registered holders of a majority in aggregate liquidation amount of Trust Securities shall have consented to such supplemental indenture; provided further, that if the consent of the Holder of each outstanding Security is required, such supplemental indenture shall not be effective until each registered holder of the Trust Securities shall have consented to such supplemental indenture.

     Upon the request of the Company accompanied by a copy of a resolution of the Board of Directors certified by its Secretary or Assistant Secretary authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of

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Securityholders (and holders of Trust Securities as provided in this Section 9.02) as aforesaid, the Trustee shall join with the Company in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee’s own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture. The Trustee may receive an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant to this Article is authorized or permitted by, and conforms to, the terms of this Article and that it is proper for the Trustee under the provisions of this Article to join in the execution thereof.

     Promptly after the execution by the Company and the Trustee of any supplemental indenture pursuant to the provisions of this Section, the Trustee shall transmit by mail, first class postage prepaid, a notice, to be prepared by the Company, setting forth in general terms the substance of such supplemental indenture, to the Securityholders as their names and addresses appear upon the Security Register. Any failure of the Trustee to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture.

     It shall not be necessary for the consent of the Securityholders under this Section 9.02 to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof.

     Section 9.03 Notation on Securities.

     Securities authenticated and delivered after the execution of any supplemental indenture affecting the Securities pursuant to the provisions of this Article IX may bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company or the Trustee shall so determine, new Securities so modified as to conform, in the opinion of the Trustee and the Board of Directors, to any modification of this Indenture contained in any such supplemental indenture may be prepared and executed by the Company, authenticated by the Trustee or the Authenticating Agent and delivered in exchange for the Securities then outstanding.

     Section 9.04 Evidence of Compliance of Supplemental Indenture to be Furnished to Trustee.

     The Trustee, subject to the provisions of Sections 6.01 and 6.02, may receive an Officers’ Certificate and an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant hereto complies with the requirements of this Article IX.

ARTICLE X
CONSOLIDATION, MERGER, SALE,
CONVEYANCE AND LEASE

     Section 10.01 Company May Consolidate, etc., on Certain Terms.

     Nothing contained in this Indenture or in any of the Securities shall prevent any consolidation or merger of the Company with or into any other Person (whether or not affiliated with the Company, as the case may be), or successive consolidations or mergers in which the

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Company or its successor or successors, as the case may be, shall be a party or parties, or shall prevent any sale, conveyance, transfer or lease of the property of the Company, or its successor or successors, as the case may be, as an entirety, or substantially as an entirety, to any other Person (whether or not affiliated with the Company or its successor or successors, as the ;case may be) authorized to acquire and operate the same; provided, that (a) the Company is the surviving entity, or the entity formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, conveyance, transfer or lease of property is made is a corporation, partnership, trust or other entity organized and existing under the laws of the United States or any State thereof or the District of Columbia, (b) if the Company is not the surviving entity, upon any such consolidation, merger, sale, conveyance, transfer or lease, the due and punctual payment of the principal of and interest on the Securities according to their tenor, and the due and punctual performance and observance of all the covenants and conditions of this Indenture to be kept or performed by the Company shall be expressly assumed by the surviving entity, by supplemental indenture (which shall conform to the provisions of the Trust Indenture Act as then in effect applicable to indentures qualified thereunder) satisfactory in form to the Trustee executed and delivered to the Trustee by the entity formed by such consolidation, or into which the Company shall have been merged, or by the entity which shall have acquired such property, as the case may be, (c) after giving effect to such consolidation, merger, sale, conveyance, transfer or lease, no Default or Event of Default shall have occurred and be continuing, (d) such consolidation, merger, sale, conveyance, transfer or lease is permitted under the Declaration and Preferred Securities Guarantee and does not give rise to any breach or violation of the Declaration or Preferred Securities Guarantee, and (e) each company that is an insurance subsidiary of the Company immediately prior to the transaction shall, immediately after such transaction, have an A.M. Best financial strength rating equal to or higher than the rating assigned to such subsidiary immediately prior to the transaction.

     Section 10.02 Successor Entity to be Substituted for Company.

     In case of any such consolidation, merger, conveyance or transfer and upon the assumption by the successor entity, by supplemental indenture, executed and delivered to the Trustee and satisfactory in form to the Trustee, of the due and punctual payment of the principal of and premium, if any, and interest on all of the Securities and the due and punctual performance and observance of all of the covenants and conditions of this Indenture to be performed or observed by the Company, such successor entity shall succeed to and be substituted for the Company, with the same effect as if it had been named herein as the party of the first part, and the Company thereupon shall be relieved of any further liability or obligation hereunder or upon the Securities. Such successor entity thereupon may cause to be signed, and may issue either in its own name or in the name of the Company, any or all of the Securities issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee or the Authenticating Agent; and, upon the order of such successor entity instead of the Company and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee or the Authenticating Agent shall authenticate and deliver any Securities which previously shall have been signed and delivered by the officers of the Company to the Trustee or the Authenticating Agent for authentication, and any Securities which such successor entity thereafter shall cause to be signed and delivered to the Trustee or the Authenticating Agent for that purpose. All the Securities so issued shall in all respects have the same legal rank and benefit under this Indenture as the Securities theretofore or thereafter issued in accordance with the

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terms of this Indenture as though all of such Indentures had been issued at the date of the execution hereof.

     Section 10.03 Opinion of Counsel to be Given to Trustee.

     The Trustee, subject to the provisions of Sections 6.01 and 6.02, may receive an Opinion of Counsel as conclusive evidence that any consolidation, merger, conveyance or transfer, and any assumption, permitted or required by the terms of this Article X complies with the provisions of this Article X.

ARTICLE XI
SATISFACTION AND DISCHARGE OF INDENTURE

     Section 11.01 Discharge of Indenture.

     When (a) the Company shall deliver to the Trustee for cancellation all Securities theretofore authenticated (other than any Securities which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 2.08) and not theretofore cancelled or (b) all the Securities not theretofore cancelled or delivered to the Trustee for cancellation shall have become due and payable, or are by their terms to become due and payable within one year or are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption, and the Company shall deposit with the Trustee, in trust, immediately available funds sufficient to pay at maturity or upon redemption all of the Securities (other than any Securities which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 2.08) not theretofore cancelled or delivered to the Trustee for cancellation, including principal of, premium, if any, and interest (including Compound Interest and Additional Tax Sums, if any) due or to become due to such date of maturity or redemption date, as the case may be, but excluding, however, the amount of any moneys for the payment of principal of, and premium, if any, or interest on the Securities (1) theretofore repaid to the Company in accordance with the provisions of Section 11.04, or (2) paid to any State or to the District of Columbia pursuant to its unclaimed property or similar laws, and if, in either case, the Company shall also pay or cause to be paid all other sums payable hereunder by the Company, then this Indenture shall cease to be of further effect, except that the provisions of Sections 2.05, 2.07, 2.08, 3.01, 3.02, 3.04, 6.06, 6.10 and 11.04 hereof shall survive until such Securities shall mature and be paid. Thereafter, Sections 6.06 and 11.04 shall survive, and the Trustee, on demand of the Company accompanied by any Officers’ Certificate and an Opinion of Counsel and at the cost and expense of the Company, shall execute proper instruments acknowledging satisfaction of and discharging this Indenture, the Company, however, hereby agreeing to reimburse the Trustee for any costs or expenses thereafter reasonably and properly incurred by the Trustee in connection with this Indenture or the Securities.

     Section 11.02 Deposited Moneys to be Held in Trust by Trustee.

     Subject to the provisions of Section 11.04, all moneys deposited with the Trustee pursuant to Section 11.01 shall be held in trust and applied by it to the payment, either directly or through any Paying Agent (including the Company if acting as its own Paying Agent), to the

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Holders of the particular Securities for the payment of which such moneys have been deposited with the Trustee, of all sums due and to become due thereon for principal, premium, if any, and interest.

     Section 11.03 Paying Agent to Repay Moneys Held.

     Upon the satisfaction and discharge of this Indenture all moneys then held by any Paying Agent of the Securities (other than the Trustee) shall, upon written demand of the Company, be repaid to it or paid to the Trustee, and thereupon, such Paying Agent shall be released from all further liability with respect to such moneys.

     Section 11.04 Return of Unclaimed Moneys.

     Any moneys deposited with or paid to the Trustee or any Paying Agent for payment of the principal of, and premium, if any, or interest on Securities and not applied but remaining unclaimed by the Holders of Securities for two years after the date upon which the principal of, and premium, if any, or interest on such Securities, as the case may be, shall have become due and payable, shall be repaid to the Company by the Trustee or such Paying Agent on written demand; and the Holder of any of the Securities shall thereafter look only to the Company for any payment which such Holder may be entitled to collect and all liability of the Trustee or such Paying Agent with respect to such moneys shall thereupon cease.

ARTICLE XII
IMMUNITY OF INCORPORATORS, STOCKHOLDERS,
OFFICERS AND DIRECTORS

     Section 12.01 Indenture and Securities Solely Entity Obligations.

     No recourse for the payment of the principal of or premium, if any, or interest on any Security, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in this Indenture or in any supplemental indenture, or in any Security, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, member, partner, officer or director, as such, past, present or future, of the Company or of any successor entity of the Company, either directly or through the Company or any successor entity of the Company, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that all such liability is hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of the Securities.

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ARTICLE XIII
MISCELLANEOUS PROVISIONS

     Section 13.01 Successors.

     All the covenants, stipulations, promises and agreements in this Indenture made by the Company shall bind its successors and assigns whether so expressed or not.

     Section 13.02 Official Acts by Successor Entity.

     Any act or proceeding by any provision of this Indenture authorized or required to be done or performed by any board, committee or officer of the Company shall and may be done and performed with like force and effect by the like board, committee or officer of any entity that shall at the time be the lawful sole successor of the Company.

     Section 13.03 Surrender of Company Powers.

     The Company by instrument in writing executed by authority of at least 2/3 (two-thirds) of its Board of Directors and delivered to the Trustee may surrender any of the powers reserved to the Company, and thereupon such power so surrendered shall terminate both as to the Company and as to any successor entity.

     Section 13.04 Addresses for Notices, etc.

     Any notice or demand which by any provision of this Indenture is required or permitted to be given or served by the Trustee or by the Holders of Securities on the Company may be given or served by being deposited postage prepaid by first class mail in a post office letter box addressed (until another address is filed by the Company with the Trustee for the purpose) to the Company, 29621 Northwestern Highway, Southfield, Michigan, 48034, Attention: Richard H. Smith. Any notice, direction, request or demand by any Securityholder to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or made in writing at the office of the Trustee, addressed to the Trustee, Wilmington Trust Company, Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001, Attention: Corporate Trust Administration.

     Section 13.05 Governing Law.

     THIS INDENTURE AND EACH SECURITY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES THEREOF (OTHER THAN SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW).

     Section 13.06 Submission to Jurisdiction.

     The Company and the Trustee each irrevocably and unconditionally submits to the nonexclusive jurisdiction of the courts of the State of New York and the federal courts of the United States located in the Borough of Manhattan, The City of New York (and any courts having jurisdiction over appeals therefrom) in respect of any action, suit or proceeding arising

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out of this Indenture or the Securities or any of the transactions contemplated thereby and waives to the extent permitted by law any objection to venue in respect thereof (based on inconvenient forum or otherwise). Unless the Company or the Trustee, as the case may be, maintains a registered agent in the State of New York, each such party agrees that process in any such suit may be served by mailing the relevant process, by registered or certified mail, return receipt requested, to the address of such party then specified pursuant to Section 13.04.

     Section 13.07 Evidence of Compliance with Conditions Precedent.

     Upon any application or demand by the Company to the Trustee to take any action under any of the provisions of this Indenture, the Company shall furnish to the Trustee an Officers’ Certificate stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with.

     Each certificate or opinion provided for in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant provided for in this Indenture shall include (1) a statement that the person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with.

     Section 13.08 Table of Contents, Headings, etc.

     The table of contents and the titles and headings of the articles and sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof and shall in no way modify or restrict any of the terms or provisions hereof.

     Section 13.09 Execution in Counterparts.

     This Indenture may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute but one and the same instrument.

     Section 13.10 Separability.

     In case any one or more of the provisions contained in this Indenture or in the Securities shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Indenture or of such Securities, but this Indenture and such Securities shall be construed as if such invalid or illegal or unenforceable provision had never been contained herein or therein.

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ARTICLE XIV
REDEMPTION OF SECURITIES

     Section 14.01 Optional Redemption.

     The Securities are redeemable prior to their Stated Maturity at the option of the Company (i) in whole or in part, from time to time, on or after April 29, 2009 on an Interest Payment Date or (ii) at any time prior to April 29, 2009, in whole but not in part, upon the occurrence and continuation of a Special Event, in either case at a redemption price (the “Redemption Price”) equal to 100% of the principal amount thereof, plus unpaid interest thereon (including Additional Interest and Compound Interest, if any) accrued to the date of redemption; provided, (i) that the Company may not exercise its option to redeem with respect to a Special Event unless it fixes, not later than 90 days after the occurrence of such Special Event, a date for redemption and mails a notice thereof to Holders pursuant to Section 14.02 and (ii) that the Company may not exercise its option to redeem with respect to a Special Event unless it pays a premium, in addition to the Redemption Price, in cash equal to the product of (y) 100% of the outstanding principal amount of such Security, and (z) the percentage specified below for the applicable date of redemption provided that the Company shall have received prior approval of any applicable insurance regulatory authority therefor, if necessary:

Redemption During the 12-Month
Period Beginning April 29,	Percentage of Principal Amount
2004	5%
2005	4%
2006	3%
2007	2%
2008	1%
2009 and thereafter	0%

     Section 14.02 Notice of Redemption; Selection of Securities.

     In case the Company shall desire to exercise the right to redeem all, or, as the case may be, any part of the Securities in accordance with their terms, it shall evidence its election in a board resolution, fix a date for redemption and shall mail a notice of such redemption at least 30 and not more than 60 days prior to the date fixed for redemption to the Holders of Securities so to be redeemed as a whole or in part at their last addresses as the same appear on the Security Register, with a copy to the Trustee. Such mailing shall be by first class mail. The notice if mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the Holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the Holder of any Security designated for redemption as a whole or in part shall not affect the validity of the proceedings for the redemption of any other Security.

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     Each such notice of redemption shall identify the Securities to be redeemed (including CUSIP number), specify the date fixed for redemption, the redemption price and premium, if any, at which Securities are to be redeemed, the place or places of payment, that payment will be made upon presentation and surrender of such Securities, that interest accrued to the date fixed for redemption will be paid as specified in said notice and that on and after said date interest thereon or on the portions thereof to be redeemed will cease to accrue. If less than all the Securities are to be redeemed, the notice of redemption shall specify the numbers of the Securities to be redeemed. In case any Security is to be redeemed in part only, the notice of redemption shall state the portion of the principal amount thereof to be redeemed and shall state that on and after the date fixed for redemption, upon surrender of such Security, a new Security or Securities in principal amount equal to the unredeemed portion thereof will be issued.

     Prior to 10:00 a.m. New York City time on the redemption date specified in the notice of redemption given as provided in this Section, the Company will deposit with the Trustee or with one or more paying agents an amount of money sufficient to redeem on the redemption date all the Securities so called for redemption at the appropriate redemption price and premium, if any, together with accrued interest to the date fixed for redemption.

     If the Securities are to be redeemed, the Company will give the Trustee notice not less than 60 days prior to the redemption date as to the aggregate principal amount of Securities to be redeemed and, in the case of a partial redemption, the Trustee shall select, in such manner as in its sole discretion it shall deem appropriate and fair, the Securities or portions thereof (in integral multiples of $1,000) to be redeemed.

     Section 14.03 Payment of Securities Called for Redemption.

     If notice of redemption has been given as provided in Section 14.02, the Securities or portions of Securities with respect to which such notice has been given shall become due and payable on the date and at the place or places stated in such notice at the applicable redemption price and premium, if any, together with interest accrued to the date fixed for redemption, and on and after said date (unless the Company shall default in the payment of such Securities at the redemption price and premium, if any, together with interest accrued to said date) interest on the Securities or portions of Securities so called for redemption shall cease to accrue. On presentation and surrender of such Securities at a place of payment specified in said notice, the said Securities or the specified portions thereof shall be paid and redeemed by the Company at the applicable redemption price and premium (if any), together with interest accrued thereon to the date fixed for redemption.

     Upon presentation of any Security redeemed in part only, the Company shall execute and the Trustee shall authenticate and deliver to the Holder thereof, at the expense of the Company, a new Security or Securities of authorized denominations, in principal amount equal to the unredeemed portion of the Security so presented.

     If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal of and any premium on such Security shall, until paid, bear interest from the date fixed for redemption at the rate prescribed therefor in the Security.

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ARTICLE XV
SUBORDINATION OF SECURITIES

     Section 15.01 Agreement to Subordinate.

     The Company covenants and agrees, and each Holder of Securities issued hereunder, by such Securityholder’s acceptance thereof, likewise covenants and agrees, that all Securities shall be issued subject to the provisions of this Article XV; and each Holder of a Security, whether upon original issue or upon transfer or assignment thereof, accepts and agrees to be bound by such provisions.

     The payment by the Company of the principal of, premium, if any, and interest (including Compound Interest and Additional Interest, if any) on all Securities issued hereunder shall, to the extent and in the manner hereinafter set forth, be subordinated and junior in right of payment to the prior payment in full of all Senior Indebtedness of the Company and rank pari passu and equivalent to creditor obligations of those holding general unsecured claims not entitled to statutory priority under the United States Bankruptcy Code or otherwise, in each case whether outstanding at the date of this Indenture or thereafter incurred.

     No provision of this Article XV shall prevent the occurrence of any Default or Event of Default hereunder.

     Section 15.02 Default on Senior Indebtedness.

     No payment may be made of the principal of, premium, if any, or interest on the Securities, or in respect of any redemption, retirement, purchase or other acquisition of any of the Securities, at any time when (i) there is a default, after giving effect to any applicable grace period, in the payment of the principal of; premium, if any, interest on or otherwise in respect of any Senior Indebtedness, whether at maturity or at a date fixed for prepayment or by declaration or otherwise, or (ii) the maturity of any Senior Indebtedness of the Company has been accelerated because of a default and such acceleration has not been rescinded or canceled and such Senior Indebtedness has not been paid in full.

     In the event that, notwithstanding the foregoing, any payment shall be received by the Trustee when such payment is prohibited by the preceding paragraph of this Section 15.02, such payment shall be held in trust for the benefit of, and shall be paid over or delivered to, the holders of Senior Indebtedness or their respective representatives, or to the trustee or trustees under any indenture pursuant to which any of such Senior Indebtedness may have been issued, as their respective interests may appear, but only to the extent that the holders of the Senior Indebtedness (or their representative or representatives or a trustee) notify the Trustee in writing within 90 days of such payment of the amounts then due and owing on the Senior Indebtedness and only the amounts specified in such notice to the Trustee shall be paid to the holders of Senior Indebtedness.

     Section 15.03 Liquidation; Dissolution; Bankruptcy.

     Upon any payment by the Company or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon any dissolution, winding-

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up, liquidation or reorganization of the Company, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, all amounts due upon all Senior Indebtedness of the Company shall first be paid in full, or payment thereof provided for in money in accordance with their terms, before any payment is made by the Company on account of the principal or interest (including Compound Interest and Additional Interest, if any) on the Securities; and upon any such dissolution or winding-up or liquidation or reorganization, any payment by the Company, or distribution of assets of the Company of any kind or character, whether in cash, property or securities, which the Securityholders or the Trustee would be entitled to receive from the Company, except under the provisions of this Article XV, shall be paid by the Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such payment or distribution, or by the Securityholders or by the Trustee under the Indenture if received by them or it, directly to the holders of Senior Indebtedness of the Company (pro rata to such holders on the basis of the respective amounts of Senior Indebtedness held by such holders, as calculated by the Company) or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Senior Indebtedness may have been issued, as their respective interests may appear, to the extent necessary to pay such Senior Indebtedness in full, in money or money’s worth, after giving effect to any concurrent payment or distribution to or for the holders of such Senior Indebtedness, before any payment or distribution is made to the Securityholders or to the Trustee.

     In the event that, notwithstanding the foregoing, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, prohibited by the foregoing, shall be received by the Trustee before all Senior Indebtedness of the Company is paid in full, or provision is made for such payment in money in accordance with its terms, such payment or distribution shall be held in trust for the benefit of and shall be paid over or delivered to the holders of such Senior Indebtedness or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Senior Indebtedness may have been issued, as their respective interests may appear, as calculated by the Company, in each case, for application to the payment of all Senior Indebtedness of the Company remaining unpaid to the extent necessary to pay such Senior Indebtedness in full in money in accordance with its terms, after giving effect to any concurrent payment or distribution to or for the benefit of the holders of such Senior Indebtedness.

     For purposes of this Article XV, the words “cash, property or securities” shall not be deemed to include (a) shares of stock of the Company as reorganized or readjusted, or (b) securities of the Company or any other entity provided for by a plan of reorganization or readjustment, the payment of which is subordinated at least to the extent provided in this Article XV with respect to the Securities to the payment of all Senior indebtedness of the Company that may at the time be outstanding, provided, in each case, that (i) all Senior Indebtedness of the Company is assumed by the new entity, if any, resulting from any such reorganization or readjustment, and (ii) the rights of the holders of such Senior Indebtedness are not, without the consent of such holders, altered by such reorganization or readjustment. The consolidation of the Company with, or the merger of the Company into, another entity or the liquidation or dissolution of the Company following the conveyance or transfer of its property as an entirety, or substantially as an entirety, to another Person upon the terms and conditions provided for in Article X of this Indenture shall not be deemed a dissolution, winding-up, liquidation or reorganization for the purposes of this Section 15.03 if such other Person shall, as a part of such

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consolidation, merger, conveyance or transfer, comply with the conditions stated in Article X of this Indenture. Nothing in Section 15.02 or in this Section 15.03 shall apply to claims of, or payments to, the Trustee under or pursuant to Section 6.06 of this Indenture.

     Section 15.04 Subrogation of Securityholders.

     Subject to the payment in full of all Senior Indebtedness of the Company, the Securityholders shall be subrogated to the rights of the holders of the Senior Indebtedness to receive payments or distributions of cash, property or securities of the Company, as the case may be, applicable to the Senior Indebtedness until all amounts owing on the Securities shall be paid in full; and, for the purposes of such subrogation, no payments or distributions to the holders of such Senior Indebtedness of any cash, property or securities to which the Securityholders or the Trustee would be entitled except under the provisions of this Article XV, and no payment over pursuant to the provisions of this Article XV to or for the benefit of the holders of such Senior Indebtedness by Securityholders or the Trustee, shall, as between the Company, its creditors (other than holders of Senior Indebtedness of the Company) and the Holders of the Securities, be deemed to be a payment by the Company to or on account of such Senior Indebtedness. It is understood that the provisions of this Article XV are and are intended solely for the purposes of defining the relative rights of the Holders of the Securities, on the one hand, and the holders of such Senior Indebtedness, on the other hand.

     Nothing contained in this Article XV or elsewhere in this Indenture or in the Securities is intended to or shall impair, as between the Company, its creditors (other than the holders of Senior Indebtedness of the Company) and the Holders of the Securities, the obligation of the Company, which is absolute and unconditional, to pay to the Holders of the Securities the principal of, premium, if any, and interest (including Compound Interest and Additional Interest, if any) on, the Securities as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the Holders of the Securities and creditors of the Company, as the case may be, other than the holders of Senior Indebtedness of the Company, as the case may be, nor shall anything herein or therein prevent the Trustee or the Holder of any Security from exercising all remedies otherwise permitted by applicable law upon default under the Indenture, subject to the rights, if any, under this Article XV of the holders of such Senior Indebtedness in respect of cash, property or securities of the Company, as the case may be, received upon the exercise of any such remedy.

     Upon any payment or distribution of assets of the Company referred to in this Article XV, the Trustee, subject to the provisions of Article VI of this Indenture, and the Securityholders shall be entitled to conclusively rely upon any order or decree made by any court of competent jurisdiction in which such dissolution, winding-up, liquidation or reorganization proceedings are pending, or a certificate of the receiver, trustee in bankruptcy, liquidation trustee, agent or other Person making such payment or distribution, delivered to the Trustee or to the Securityholders, for the purposes of ascertaining (i) the Persons entitled to participate in such payment or distribution, (ii) the holders of Senior Indebtedness and other indebtedness of the Company, (iii) the amount of any payment or distribution made or payable to any such Persons, and (iv) all other facts pertinent thereto or to this Article XV in connection therewith.

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     Section 15.05 Trustee to Effectuate Subordination.

     Each Securityholder by such Securityholder’s acceptance of the Securities authorizes and directs the Trustee on such Securityholder’s behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article XV and appoints the Trustee such Securityholder’s attorney-in-fact for any and all such purposes.

     Section 15.06 Notice by the Company.

     The Company shall give prompt written notice to a Responsible Officer of any fact known to the Company that would prohibit the making of any payment of monies to or by the Trustee in respect of the Securities pursuant to the provisions of this Article XV. Notwithstanding the provisions of this Article XV or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment of monies to or by the Trustee in respect of the Securities pursuant to the provisions of this Article XV, unless and until a Responsible Officer shall ha e received written notice thereof from the Company or a holder or holders of Senior Indebtedness or from any trustee therefor; and before the receipt of any such written notice, the Trustee, subject to the provisions of Article VI of this Indenture, shall be entitled in all respects to assume that no such facts exist; provided, however, that if the Trustee shall not have received the notice provided for in this Section 15.06 at least two Business Days prior to the date upon which by the terms hereof any money may become payable for any purpose (including, without limitation, the payment of the principal of or interest on any Security), then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such money and to apply the same to the purposes for which they were received, and shall not be affected by any notice to the contrary that may be received by it within two Business Days prior to such date.

     The Trustee, subject to the provisions of Article VI of this Indenture, shall be entitled to conclusively rely on the delivery to it of a written notice by a Person representing himself or herself to be a holder of Senior Indebtedness of the Company, as the case may be (or a trustee on behalf of such holder), to establish that such notice has been given by a holder of such Senior Indebtedness or a trustee on behalf of any such holder or holders. In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of such Senior Indebtedness to participate in any payment or distribution pursuant to this Article XV, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of such Senior Indebtedness held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article XV, and, if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment.

     Section 15.07 Rights of the Trustee; Holders of Senior Indebtedness.

     The Trustee, in its individual capacity, shall be entitled to all the rights set forth in this Article XV in respect of any Senior Indebtedness at any time held by it to the same extent as any other holder of Senior Indebtedness, and nothing in this Indenture shall deprive the Trustee of any of its rights as such holder.

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     Nothing in this Article XV shall apply to claims of, or payments to, the Trustee under or pursuant to Section 6.06.

     With respect to the holders of Senior Indebtedness of the Company, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article XV, and no implied covenants or obligations with respect to the holders of such Senior Indebtedness shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of such Senior Indebtedness and, subject to the provisions of Article VI of this Indenture, the Trustee shall not be liable to any holder of such Senior Indebtedness if it shall pay over or deliver to Securityholders, the Company or any other Person money or assets to which any holder of such Senior Indebtedness shall be entitled by virtue of this Article XV or otherwise.

     Section 15.08 Subordination May Not Be Impaired.

     No right of any present or future holder of any Senior Indebtedness of the Company to enforce subordination as herein provided shall, at any time or in any way, be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act, in good faith, by any such holder or by any noncompliance by the Company with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof that any such holder may have or otherwise be charged with.

     Without in any way limiting the generality of the foregoing paragraph, the holders of Senior Indebtedness of the Company may, at any time and from time to time, without the consent of or notice to the Trustee or the Securityholders, without incurring responsibility to the Securityholders and without impairing or releasing the subordination provided in this Article XV or the obligations hereunder of the Holders of the Securities to the holders of such Senior Indebtedness, do any one or more of the following: (i) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, such Senior Indebtedness, or otherwise amend or supplement in any manner such Senior Indebtedness or any instrument evidencing the same or any agreement under which such Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing such Senior Indebtedness; (iii) release any Person liable in any manner for the collection of such Senior Indebtedness; and (iv) exercise or refrain from exercising any rights against the Company or any other Person.

     Wilmington Trust Company hereby accepts the trusts in this Indenture declared and provided, upon the terms and conditions hereinabove set forth.

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     IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed by their respective officers or agents thereunto duly authorized, all as of the day and year first above written.

Attest	First Mercury Financial Corporation
/s/ James M. Thomas	By:	/s/ Richard H. Smith
Name:		Name:  Richard H. Smith
Title:		Title:  President
	WILMINGTON TRUST COMPANY,
	as Trustee
	By:	/s/ Janel R. Havrilla
		Name:  Janel R. Havrilla
		Title:  Financial Services Officer

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EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

First Mercury Holdings, Inc.
Southfield, Michigan

We hereby consent to the use in the Prospectus and in part II of the Registration Statement, both constituting parts of this Registration Statement (Amendment No. 2 to Form S-1), of our report dated May 24, 2006, relating to the consolidated financial statements and schedules of First Mercury Holdings, Inc.

We also consent to the reference to us under the caption “Experts” in the Prospectus.

/s/ BDO Seidman, LLP
BDO Seidman, LLP
Troy, Michigan

August 22, 2006

CORRESP

corresp