8-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): February 18, 2009

FIRST MERCURY FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)

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

29110 Inkster Road Suite 100 Southfield, Michigan	48034
(Address of Principal Executive Offices)	(Zip Code)

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

Not Applicable

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

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

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

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

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

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

Item 2.02 Results of Operations and Financial Condition

On February 18, 2009, First Mercury Financial Corporation issued a press release announcing its operating results for the fourth quarter and year ended December 31, 2008. A copy of the press release is attached as Exhibit 99.1 to this Form 8-K and incorporated herein by reference.

Item 9.01 Financial Statements and Exhibits

(d) Exhibits

99.1 Press Release dated February 18, 2009.

SIGNATURE

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

FIRST MERCURY FINANCIAL CORPORATION

DATE: February 18, 2009

BY: /s/ John A. Marazza                                           
John A. Marazza
Executive Vice President, Chief Financial Officer
and Corporate Secretary

EXHIBIT INDEX

99.1 Press Release dated February 18, 2009.

EX-99.1

Exhibit 99.1

FOR FURTHER INFORMATION:

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

FOR IMMEDIATE RELEASE
WEDNESDAY, FEBRUARY 18, 2009

FIRST MERCURY FINANCIAL CORPORATION ANNOUNCES
FOURTH QUARTER AND YEAR END 2008 FINANCIAL RESULTS

SOUTHFIELD, MI — February 18, 2009 — First Mercury Financial Corporation (NYSE: FMR) (“First Mercury” or the “Company”) today announced results for the fourth quarter and year ended December 31, 2008.

Highlights for the fourth quarter 2008 include:

• Premiums produced growth of 23.5 percent

• Net income of $2.4 million, or $0.13 per diluted share

• Operating net income of $7.9 million, or $0.43 per diluted share

• Net investment income growth of 25.7 percent

• Combined ratio of 87.8 percent

• Book value per share of $14.67, an increase of 15.0 percent from December 31, 2007

• Repurchase of 474,042 shares of common stock for $5.3 million at an average cost of $11.25 per share

Highlights for the year ended December 31, 2008 include:

• Premiums produced growth of 16.4 percent

• Net income of $40.8 million, or $2.19 per diluted share

• Operating net income of $31.4 million, or $1.68 per diluted share

• Net investment income growth of 32.8 percent

• Combined ratio of 83.7 percent

• Repurchase of 698,577 shares of common stock for $8.6 million at an average cost of $12.25 per share

• Successful completion of the sale of American Risk Pooling Consultants, Inc. (“ARPCO”) for a gain, net of taxes, of $20.9 million, or $1.12 per diluted share

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“We are pleased with our 15.0 percent growth in book value per share from December 31, 2007 amidst the unprecedented turmoil in the global financial markets and an economic downturn,” said Richard H. Smith, chairman and chief executive officer. “We enhanced the strength of our balance sheet through solid underwriting results as evidenced by our full year 2008 combined ratio of 83.7 percent, conservative investment strategies, and opportunistic capital management. Additionally, we are pleased with our growth in premiums produced, especially the contributions from all of our underwriting platforms,” added Smith.

Net income for the fourth quarter of 2008 was $2.4 million compared to $10.2 million for the same period of 2007. Net income for the year ended December 31, 2008 was $40.8 million compared to $41.7 million for the same period of 2007. Operating net income for the fourth quarter of 2008 was $7.9 million compared to $10.2 million for the same period of 2007. Operating net income for the year ended December 31, 2008 was $31.4 million compared to $37.6 million for the same period of 2007.

For the three months ended December 31, 2008, premiums produced were $83.2 million, a 23.5 percent increase from premiums produced during the same period in 2007. For the year ended December 31, 2008, premiums produced were $321.3 million, a 16.4 percent increase from premiums produced during the same period in 2007. Premiums produced consists of all of the premiums underwritten by the Company’s underwriting platforms including CoverX^®, First Mercury’s licensed wholesale insurance broker, for which the Company takes underwriting risk.

For the three months ended December 31, 2008, gross written premiums were $83.2 million, a 23.5 percent increase from the gross written premiums during the same period in 2007. For the year ended December 31, 2008, gross written premiums were $321.3 million, an 18.3 percent increase from the gross written premiums during the same period in 2007.

Net investment income earned during the three months ended December 31, 2008 was $6.0 million, up 25.7 percent from the same period of 2007. Net investment income earned during the year ended December 31, 2008 was $21.6 million, up 32.8 percent from the same period of 2007.

Net realized losses on investments during the three months ended December 31, 2008 were $8.3 million compared to net realized losses on investments of $0.5 million during the same period of 2007. Net realized losses on investments during the year ended December 31, 2008 were $20.7 million compared to net realized gains on investments of $0.6 million during the same period of 2007. The net realized losses for the three months ended December 31, 2008 included mark-to-market adjustments of $7.0 million on the Company’s convertible securities portfolio and high yield convertible fund, and $0.4 million of other-than-temporary impairments. The net realized losses for the year ended December 31, 2008 included mark-to-market adjustments of $14.6 million on the Company’s convertible securities portfolio and high yield convertible fund, and $4.1 million of other-than-temporary impairments.

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Total operating revenues for the three months ended December 31, 2008 increased 33.5 percent to $57.3 million compared to $42.9 million for the same period of 2007. Total operating revenues for the year ended December 31, 2008 increased 12.7 percent to $215.7 million compared to $191.4 million for the same period of 2007.

The combined ratio for the three months ended December 31, 2008 was 87.8 percent compared to 69.1 percent for the same period of 2007. The combined ratio for the three months ended December 31, 2008 includes a loss ratio of 57.1 percent and an expense ratio of 30.7 percent. These compare to a loss ratio of 52.5 percent and an expense ratio of 16.6 percent for the comparable period in 2007. The combined ratio for the year ended December 31, 2008 was 83.7 percent compared to 72.5 percent for the same period of 2007. The combined ratio for the year ended December 31, 2008 includes a loss ratio of 55.7 percent and an expense ratio of 28.0 percent. These compare to a loss ratio of 52.1 percent and an expense ratio of 20.4 percent for the comparable period in 2007. The anticipated increase in the expense ratio for the three months and year ended December 31, 2008 was primarily due to the impact of purchasing less quota share reinsurance, less profit sharing commissions, and the investment in underwriting assets.

The Company recorded net losses from Hurricane Ike of $2.9 million and $0.4 million of reinstatement premium expense during the year ended December 31, 2008. There were no changes to the Company’s estimated net losses from Hurricane Ike during the three months ended December 31, 2008. For the three months ended December 31, 2008, there was no net development of prior years’ loss and loss adjustment expense reserves. For the year ended December 31, 2008, there was $4.8 million of favorable development of prior years’ loss and loss adjustment expense reserves. For the three months and year ended December 31, 2007, there was $1.4 million of unfavorable development and $0.8 million of favorable development of prior years’ loss and loss adjustment expense reserves, respectively.

During the year ended December 31, 2008, the Company repurchased 698,577 shares of common stock for $8.6 million at an average cost of $12.25 per share. As of December 31, 2008, the Company has 801,423 shares of remaining capacity under the 1.5 million share repurchase program which expires on August 18, 2009.

Smith concluded, “Our solid underwriting results combined with our continued strong capital position allowed us to deliver a 47.0 percent increase in book value per share since December 31, 2006, our first quarter end as a public company. We believe this demonstrates our commitment to generating underwriting profits while prudently executing on our growth strategy. We look forward to discussing our expectations for 2009 on tomorrow’s call.”

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Conference Call Details

The Company will host a conference call on February 19, 2009 at 11:00 a.m. Eastern Time to discuss year end and fourth quarter results. The call can be accessed live by dialing 800-811-7286 or by visiting the Company’s website at www.firstmercury.com.

Investors may access a replay by dialing 888-203-1112, passcode 1684244, which will be available through February 26, 2009. The webcast replay will also be archived in the “Investor Relations” section of the Company’s website.

About First Mercury Financial Corporation

First Mercury Financial Corporation markets and underwrites specialty commercial insurance products, focusing on niche and underserved segments where the Company has underwriting expertise and other competitive advantages. During the Company’s 35 years of underwriting risks, First Mercury has established CoverX^® as a recognized brand among insurance agents and brokers. As primarily an excess and surplus (E&S) lines underwriter, First Mercury has developed the underwriting expertise and cost-efficient infrastructure which has enabled it to effectively underwrite such risks.

Non-GAAP Financial Measures

Operating net income and operating net income per share are non-GAAP financial measures, and management believes that investors’ understanding of core operating performance is enhanced by First Mercury’s disclosure of these financial measures. Operating net income consists of net income adjusted to exclude the impact of net realized gains (losses) on investments, the change in fair value of derivative instruments, income from discontinued operations, and taxes related to these adjustments. Definitions of these items may not be comparable to the definitions used by other companies. Net income and net income per share are the GAAP financial measures that are most directly comparable to operating net income and operating net income per share.

Safe Harbor Statement

This release contains forward-looking statements that relate to future periods and includes statements regarding our anticipated performance. Generally, the words “anticipates,” “believes,” “expects,” “intends,” “estimates,” “projects,” “plans” and similar expressions identify forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements or industry results to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. These risks, uncertainties and other important factors include, among others: recent and future events and circumstances impacting financial, stock, and capital markets, and the responses to such events by governments and the financial communities; the impact of catastrophic events and the occurrence of significant severe weather conditions on our operating results; our ability to maintain or the lowering or loss of one of our financial or claims-paying ratings; our actual incurred losses exceeding our loss and loss adjustment expense reserves; the failure of reinsurers to meet their obligations; our inability to obtain

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reinsurance coverage at reasonable prices; the failure of any loss limitations or exclusions or changes in claims or coverage; our lack of long-term operating history in certain specialty classes of insurance; our ability to acquire and retain additional underwriting expertise and capacity; the concentration of our insurance business in relatively few specialty classes; the increasingly competitive property and casualty marketplace; fluctuations and uncertainty within the excess and surplus lines insurance industry; the extensive regulations to which our business is subject and our failure to comply with these regulations; our ability to maintain our risk-based capital at levels required by regulatory authorities; our inability to realize our investment objectives; an economic downturn or other economic conditions adversely affecting our financial position; and the risks identified in our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K. Given these uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. We assume no obligation to update or revise them or provide reasons why actual results may differ.

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

Financial Tables Follow...

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

	Three Months Ended						Twelve Months Ended
	December 31,						December 31,
	2008			2007			2008			2007
	(Dollars in thousands, except share and per share data)
Operating Revenue
Net earned premiums	$	54,522		$	39,484		$	193,744		$	169,139
Commissions and fees		5,093			(800	)		20,989			5,343
Net investment income		5,997			4,772			21,633			16,295
Net realized gains (losses) on investments		(8,271	)		(515	)		(20,687	)		602
Total Operating Revenues		57,341			42,941			215,679			191,379
Operating Expenses
Losses and loss adjustment expenses, net		31,127			20,745			107,840			88,073
Amortization of deferred acquisition expenses		13,057			6,840			41,164			30,706
Underwriting, agency and other expenses		7,756			(820	)		34,355			10,328
Amortization of intangible assets		572			167			2,038			667
Total Operating Expenses		52,512			26,932			185,397			129,774
Operating Income		4,829			16,009			30,282			61,605
Interest Expense		1,440			1,431			5,820			4,453
Change in Fair Value of Derivative Instruments		202			284			312			559
Income from Continuing Operations Before Income Taxes		3,187			14,294			24,150			56,593
Income Taxes		823			4,570			6,414			18,922
Income from Continuing Operations		2,364			9,724			17,736			37,671
Income from Discontinued Operations, Net of Income Taxes		—			490			23,105			4,060
Net Income	$	2,364		$	10,214		$	40,841		$	41,731
Basic Net Income Per Share:
Income from Continuing Operations	$	0.13		$	0.54		$	0.98		$	2.13
Income from Discontinued Operations		—			0.03			1.27			0.23
Total	$	0.13		$	0.57		$	2.25		$	2.36
Diluted Net Income Per Share:
Income from Continuing Operations	$	0.13		$	0.51		$	0.95		$	2.03
Income from Discontinued Operations		—			0.03			1.24			0.22
Total	$	0.13		$	0.54		$	2.19		$	2.25
Weighted Average Shares Outstanding:
Basic		17,944,321			18,032,959			18,129,386			17,710,080
Diluted		18,357,259			18,882,596			18,674,689			18,551,362
GAAP Underwriting Ratios:
Loss ratio		57.1	%		52.5	%		55.7	%		52.1	%
Expense ratio		30.7	%		16.6	%		28.0	%		20.4	%
Combined ratio		87.8	%		69.1	%		83.7	%		72.5	%

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First Mercury Financial Corporation
Condensed Consolidated Balance Sheets
(Unaudited)

	December 31,			December 31,
	2008			2007
	(Unaudited)
	(Dollars in thousands,
	except share and per share data)
ASSETS
Investments
Debt securities	$	495,799		$	402,418
Equity securities and other		15,089			4,529
Short-term		32,142			52,341
Total Investments		543,030			459,288
Cash and cash equivalents		31,833			18,432
Premiums and reinsurance balances receivable		56,398			38,278
Accrued investment income		5,400			4,481
Accrued profit sharing commissions		11,315			14,220
Reinsurance recoverable on paid and unpaid losses		135,617			96,995
Prepaid reinsurance premiums		48,921			52,718
Deferred acquisition costs		27,369			14,257
Intangible assets, net of accumulated amortization		39,351			36,651
Goodwill		25,483			—
Deferred federal income taxes		2,161			—
Other assets		16,775			11,964
Total Assets	$	943,653		$	747,284
LIABILITIES AND STOCKHOLDERS’ EQUITY
Loss and loss adjustment expense reserves	$	372,721		$	272,365
Unearned premium reserves		147,849			123,469
Long-term debt		67,013			67,013
Funds held under reinsurance treaties		49,419			35,799
Premiums payable to insurance companies		27,831			2,163
Reinsurance payable on paid losses		1,167			3,958
Deferred federal income taxes		—			217
Accounts payable, accrued expenses, and other liabilities		16,016			12,920
Total Liabilities		682,016			517,904
Stockholders’ Equity
Common stock, $0.01 par value; authorized 100,000,000 shares; issued and outstanding 17,836,337 and 17,972,353 shares		178			180
Paid-in-capital		161,957			165,836
Accumulated other comprehensive income (loss)		(3,027	)		1,177
Retained earnings		103,028			62,187
Treasury stock; 33,600 and 0 shares		(499	)		—
Total Stockholders’ Equity		261,637			229,380
Total Liabilities and Stockholders’ Equity	$	943,653		$	747,284
Book Value Per Share	$	14.67		$	12.76

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First Mercury Financial Corporation
Summary Financial Data

	Three Months Ended						Twelve Months Ended
	December 31,						December 31,
	2008			2007			2008			2007
	(Dollars in thousands)						(Dollars in thousands)
Premiums Produced:
Security	$	16,788		$	16,653		$	66,652		$	66,687
Specialty		31,041			32,642			142,041			155,847
Contract Underwriting		16,680			16,685			63,763			52,170
FM Emerald		16,874			1,329			42,142			1,329
AUIC		1,772			—			6,667			—
Premiums produced	$	83,155		$	67,309		$	321,265		$	276,033
Gross Written Premiums:
Security	$	16,788		$	16,602		$	66,652		$	66,672
Specialty		31,041			32,208			142,041			155,829
Contract Underwriting		16,682			17,170			63,774			47,671
FM Emerald		16,874			1,329			42,142			1,329
AUIC		1,772			—			6,667			—
Gross written premiums	$	83,157		$	67,309		$	321,276		$	271,501
Net Written Premiums:
Security	$	11,902		$	10,754		$	47,887		$	38,944
Specialty		23,135			21,813			105,467			93,431
Contract Underwriting		15,601			8,734			42,877			22,941
FM Emerald		7,250			256			17,053			256
AUIC		1,772			—			6,667			—
Net written premiums	$	59,660		$	41,557		$	219,951		$	155,572
Commissions and Fees:
Insurance underwriting commissions and fees	$	(818	)	$	(800	)	$	1,318		$	5,343
Insurance services commissions and fees		5,911			—			19,671			—
Total commissions and fees	$	5,093		$	(800	)	$	20,989		$	5,343
Cash and Cash Equivalents:
Net cash provided by operating activities — continuing operations	$	29,071		$	16,589		$	120,783		$	121,924
Net cash provided by operating activities — discontinued operations		—			953			1,928			4,808
Net cash used in investing activities — continuing operations		(14,828	)		(28,875	)		(143,013	)		(155,026	)
Net cash provided by investing activities — discontinued operations		—			—			41,830			—
Net cash provided by (used in) financing activities		(5,005	)		(477	)		(8,128	)		32,391
Net increase (decrease) in cash and cash equivalents	$	9,238		$	(11,810	)	$	13,400		$	4,097
Operating Net Income: (1)
Net Income	$	2,364		$	10,214		$	40,841		$	41,731
Adjust for Net realized gains and losses on investments, net of tax		5,376			335			13,447			(391	)
Adjust for Change in fair value of derivative instruments, net of tax		131			185			203			363
Adjust for Discontinued operations, net of tax		—			(490	)		(23,105	)		(4,060	)
Operating net income	$	7,871		$	10,244		$	31,386		$	37,643
Operating Net Income Per Share: (1)
Diluted	$	0.43		$	0.54		$	1.68		$	2.03

FOOTNOTES

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

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