First Mercury Financial Corporation Announces Third Quarter Results

SOUTHFIELD, Mich., Nov. 9  /PRNewswire-FirstCall/ -- First Mercury Financial Corporation (NYSE:FMR) today announced results for the third quarter and nine months ended September 30, 2006.  Subsequent to the end of the quarterly reporting period, the Company successfully completed its initial public offering ("IPO") on October 23, 2006.

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

  -- Pro forma net income increased 26% to $8.5 million
  -- Net income increased 16% to $6.9 million
  -- Annualized return on average stockholders' equity of 35.1%
  -- Combined ratio of 65.3% compared to 75.8% in 2005
  -- Premiums produced increased 17% to $53.3 million
  -- October IPO generated net proceeds of approximately $174.0 million




Highlights for the year-to-date, nine-month period ended September 30, 2006 versus same period 2005 include:

  -- Pro forma net income increased 22% to $22.7 million
  -- Net income increased 2% to $18.3 million
  -- Annualized return on average stockholders' equity of 33%
  -- Combined ratio of 69.7% compared to 70.8% in 2005
  -- Premiums produced increased 27% to $172.4 million




"Strong underwriting results, combined with the earnings from our non-risk bearing insurance services business, and growth in our security and specialty classes, led to record third quarter performance," said Richard Smith, president and chief executive officer.  "Our ability to deliver this kind of performance while preparing for First Mercury's initial public offering is a testament to the dedication and focus of our outstanding team."

For the three months ended September 30, 2006, premiums produced were $53.3 million, a 17 percent increase over premiums produced during the same period in 2005.  For the nine months ended September 30, 2006, premiums produced were $172.4 million, a 27 percent increase over premiums produced during the same period in 2005.  Premiums produced consists of all of the premiums billed by CoverX(R), First Mercury's licensed wholesale insurance broker, which produces and underwrites all of the Company's business.

First Mercury's combined ratio for the third quarter was 65.3 percent compared with 75.8 percent for the year-ago period.  The Company's combined ratio was 69.7 percent for the nine months compared with 70.8 percent for the year-ago period.

Net investment income earned in the third quarter was $2.4 million, up 38 percent from the third quarter of 2005.  Net investment income earned for the nine months was $6.7 million, a 34 percent increase over the same period in 2005.

Net income for the third quarter increased 16 percent to $6.9 million compared to $6.0 million for the same period in 2005. Net income for the nine months increased 2 percent to $18.3 million compared to $17.9 million for the same period in 2005.

Pro forma net income for the third quarter was $8.5 million compared to $6.7 million for the year-ago period, an increase of 26 percent from the third quarter of 2005.  Pro forma net income for the nine months was $22.7 million compared to $18.6 million, an increase of 22 percent from the year-ago period. Pro forma net income represents net earnings excluding the impact of interest expense, net of taxes, on senior notes which were issued in August 2005 and repaid in October 2006 with proceeds from First Mercury's IPO.

Mr. Smith concluded, "With the proceeds from our IPO, we anticipate continued growth in our annual revenues in excess of 20 percent for 2007 to result in a return on average stockholders' equity for 2007 of over 20 percent."

  Pro Forma Net Income Reconciliation

                                      Three Months           Nine Months
                                   ended September 30,   ended September 30,
   ($ in thousands)                 2006     2005(2)       2006      2005(2)

  Net income                       $6,925     $5,968     $18,271     $17,884
  Interest expense on senior
   notes, net of taxes              1,543        754       4,455         754
  Pro Forma net income (1)         $8,468     $6,722     $22,726     $18,638

  Pro Forma Stockholders' Equity ($ in thousands)

  Stockholders' equity at September 30, 2006                        $83,453
  Net proceeds from issuance of common stock                        173,967
  Redemption of preferred stock                                     (63,567)
  Repurchase of Glencoe common stock                                (24,691)
  Expenses related to repayment of $65 million of senior notes       (4,728)
  Pro forma stockholders' equity (3)                               $164,434


  Conference Call Details


The company will host a conference call today at 10:00 a.m. Eastern Time to discuss third quarter results.  The call can be accessed live by dialing 888-802-2225 or by visiting First Mercury Financial Corporation's website at http://www.firstmercury.com/ .

Investors may access a replay by dialing 888-203-1112, passcode 1526054, which will be available through November 16, 2006.  The webcast replay will also be archived in the "Investor Relations" section of the company's website.

About First Mercury Financial Corporation

First Mercury Financial Corporation markets and underwrites specialty commercial insurance products, focusing on niche and underserved segments where the company has underwriting expertise and other competitive advantages. During the company's 33 years of underwriting risks, First Mercury has established CoverX(R) 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 underwrite such risks profitably.

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: our ability to maintain or the lowering or loss of one of our financial or claims-paying ratings; our actual incurred losses exceeding our loss and loss adjustment expense reserves; the failure of reinsurers to meet their obligations; our inability to obtain reinsurance coverage at reasonable prices; the failure of any loss limitations or exclusions or changes in claims or coverage; our lack of long-term operating history in certain specialty classes of insurance; our ability to acquire and retain additional underwriting expertise and capacity; the concentration of our insurance business in relatively few specialty classes; competition risk; fluctuations and uncertainty within the excess and surplus lines insurance industry; the extensive regulations to which our business is subject and our failure to comply with these regulations; our ability to maintain our risk-based capital at levels required by regulatory authorities; our inability to realize our investment objectives; and the risks identified in our filings with the Securities and Exchange Commission, including our Registration Statement on Form S-1.  Given these uncertainties, you are cautioned not to place undue reliance on these forward-looking statements.  We assume no obligation to update or revise them or provide reasons why actual results may differ.

For more information on the company, please visit the company's website at
                      http://www.firstmercury.com/ .



           FIRST MERCURY FINANCIAL CORPORATION AND SUBSIDIARIES (4)
           Condensed Interim Consolidated Statements of Operations
                                 (Unaudited)

                          Successor    Successor   Predecessor  Combined(2)
                         Three Month   August 17      July 1    Three Months
                            Ended         to            to         Ended
                          September    September     August 16,   September
                          30, 2006      30, 2005       2005       30, 2005
  Operating Revenue
    Net earned premiums  $26,947,350  $12,656,906  $13,219,435  $25,876,341
    Commissions and fees   3,715,587    3,167,966    3,308,765    6,476,731
    Net investment
     income                2,445,774      871,326      897,247    1,768,573
    Net realized gains
     (losses) on
     investments             467,403       16,163       16,881       33,044

  Total Operating
   Revenues               33,576,114   16,712,361   17,442,328   34,154,689

  Operating Expenses
    Losses and loss
     adjustment
     expenses, net        13,224,626    6,537,310    6,827,858   13,365,168
    Amortization of
     deferred acquisition
     expenses              3,545,679    2,683,362    2,802,622    5,485,984
    Underwriting, agency
     and other expenses    2,492,884    3,405,552    1,171,767    4,577,319
    Amortization of
     intangible assets       291,667      142,663      149,004      291,667

  Total Operating
   Expenses               19,554,856   12,768,887   10,951,251   23,720,138

  Operating Income        14,021,258    3,943,474    6,491,077   10,434,551
  Interest Expense         2,840,042    1,367,844      307,373    1,675,217
  Change In Fair Value
   of Derivative
   Instruments               336,405     (186,939)    (193,791)    (380,730)

  Income Before Income
   Taxes                  10,844,811    2,762,569    6,377,495    9,140,064
  Income Taxes             3,919,612    1,000,814    2,171,468    3,172,282

  Net Income              $6,925,199   $1,761,755   $4,206,027   $5,967,782

  Earnings Per
   Share:(5)(6)
  Basic                        $1.42        $0.32        $0.30
  Diluted                      $0.55        $0.15        $0.21
  Weighted Average
   Shares
   Outstanding:(5)(6)
  Basic                    4,220,045    4,141,454   12,536,224
  Diluted                 12,621,422   11,963,540   20,093,596

  GAAP Underwriting
   Ratios:
  Loss ratio                    49.1%        51.7%        51.7%        51.7%
  Expense ratio                 16.2%        30.1%        18.4%        24.1%
  Combined ratio                65.3%        81.8%        70.1%        75.8%

  Other Data:
  Annual Return on
   average
   stockholders'
   equity(7)                    35.1%           -            -         35.7%



           FIRST MERCURY FINANCIAL CORPORATION AND SUBSIDIARIES (4)
           Condensed Interim Consolidated Statements of Operations
                                 (Unaudited)

                          Successor    Successor   Predecessor  Combined(2)
                         Nine Months   August 17    January 1   Nine Months
                            Ended         to           to          Ended
                          September    September    August 16,   September
                          30, 2006      30, 2005      2005       30, 2005
  Operating Revenue
    Net earned premiums  $83,804,218  $12,656,906  $57,575,789  $70,232,695
    Commissions and fees  12,478,369    3,167,966   13,649,492   16,817,458
    Net investment
     income                6,716,564      871,326    4,118,590    4,989,916
    Net realized gains
     (losses) on
     investments             (14,250)      16,163      (57,919)     (41,756)

  Total Operating
   Revenues              102,984,901   16,712,361   75,285,952   91,998,313

  Operating Expenses
    Losses and loss
     adjustment
     expenses, net        43,186,133    6,537,310   28,072,054   34,609,364
    Amortization of
     deferred acquisition
     expenses             12,637,962    2,683,362   12,675,827   15,359,189
    Underwriting, agency
     and other expenses    9,871,557    3,405,552    7,758,250   11,163,802
    Amortization of
     intangible assets       875,000      142,663      732,337      875,000

  Total Operating
   Expenses               66,570,652   12,768,887   49,238,468   62,007,355

  Operating Income        36,414,249    3,943,474   26,047,484   29,990,958
  Interest Expense         8,235,513    1,367,844    1,518,649    2,886,493
  Change In Fair Value
   of Derivative
   Instruments               (50,667)    (186,939)    (230,291)    (417,230)

  Income Before Income
   Taxes                  28,229,403    2,762,569   24,759,126   27,521,695
  Income Taxes             9,958,871    1,000,814    8,636,398    9,637,212

  Net Income             $18,270,532   $1,761,755  $16,122,728  $17,884,483

  Earnings Per
   Share:(5)(6)
  Basic                        $3.69        $0.32        $1.12
  Diluted                      $1.48        $0.15        $0.80
  Weighted Average
   Shares
   Outstanding:(5)(6)
  Basic                    4,206,556    4,141,454   12,536,224
  Diluted                 12,315,035   11,963,540   20,093,596

  GAAP Underwriting
   ratios:
  Loss ratio                    51.5%        51.7%        48.8%        49.3%
  Expense ratio                 18.2%        30.1%        19.6%        21.5%
  Combined ratio                69.7%        81.8%        68.4%        70.8%

  Other Data:
  Annual Return on
   average
     stockholders'
      equity (7)                33.0%           -            -         38.6%



          FIRST MERCURY FINANCIAL CORPORATION AND SUBSIDIARIES  (4)
                Condensed Interim Consolidated Balance Sheets

                                            (Unaudited)
                                            September 30,     December 31,
                  ASSETS                        2006              2005
  Investments
    Debt securities                          $219,570,997     $182,679,565
    Equity securities and other                 3,105,965        3,332,816
    Short-term                                 26,139,947       25,012,499
  Total Investments                           248,816,909      211,024,880
    Cash and cash equivalents                   7,693,227        8,399,598
    Premiums and reinsurance balances
     receivable                                14,084,459       17,573,531
    Accrued profit sharing commissions          9,593,923        9,606,916
    Reinsurance recoverable on paid and
     unpaid losses                             57,251,799       22,482,855
    Prepaid reinsurance premiums               49,517,959       36,879,714
    Deferred acquisition costs                  5,433,712        9,700,457
    Intangible assets, net of accumulated
     amortization                              38,272,724       30,645,143
    Other assets                               12,446,877       19,284,117
  Total Assets                               $443,111,589     $365,597,211

       LIABILITIES AND STOCKHOLDERS' EQUITY
    Loss and loss adjustment expense
     reserves                                $172,068,573     $113,863,642
    Unearned premium reserves                  92,216,904       84,476,255
    Senior notes                               65,000,000       65,000,000
    Long-term debt                             20,620,000       20,620,000
    Other liabilities                           9,753,084       17,310,666
  Total Liabilities                           359,658,561      301,270,563


  Stockholders' Equity:(5)
    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 55,130,000 shares; issued
     and outstanding 4,484,209 and
     4,178,454 shares                              44,842           41,785
    Paid-in capital                            59,610,919       58,857,245
    Accumulated other comprehensive loss         (587,547)      (1,284,164)
    Treasury stock                               (597,500)               -
    Retained earnings                          24,982,310        6,711,778
  Total Stockholders' Equity                   83,453,028       64,326,648
  Total Liabilities and Stockholders'
   Equity                                    $443,111,589     $365,597,211



                                Footnotes
  (1) Pro Forma net income represents net income excluding the impact of
      interest expense, net of taxes, on senior notes which were issued in
      August 2005 and repaid in October 2006.

  (2) The Combined amounts for three months ended September 30, 2005
      represent the mathematical addition of the historical results for (i)
      the predecessor period from July 1, 2005 through August 16, 2005, and
      (ii) the successor period from August 17, 2005 through September 30,
      2005. The Combined amounts for the nine months ended September 30,
      2005 represent the mathematical addition of the historical results for
      (i) the predecessor period from January 1, 2005 through August 16,
      2005, and (ii) the successor period from August 17, 2005 through
      September 30, 2005. This approach is not consistent with generally
      accepted accounting principles and yields results that are not
      comparable on a period-to-period basis. However, we believe it is the
      most meaningful way to discuss our operating results for 2005 when
      comparing them to our operating results for 2006.

  (3) Pro Forma amounts reflect the impact on the September 30, 2006
      Stockholders' Equity as if the IPO which was completed on October 23,
      2006, had been completed as of September 30, 2006.

  (4) First Mercury Holdings, Inc. was merged into First Mercury Financial
      Corporation on October 16, 2006. Reflects amount applicable to First
      Mercury Holdings, Inc. and consolidated subsidiaries at September 30,
      2006.

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

  (6) Earnings per share and shares outstanding are not provided for the
      Combined three months and nine months ended September 30, 2005 due to
      First Mercury Holdings, Inc.'s purchase and exchange of shares on
      August 17, 2005.

  (7) Annual return on average stockholders' equity was provided for the
      2005 Combined column only because we do not believe the separate
      predecessor and successor stub periods ending August 16 and beginning
      August 17 are meaningful.


DATASOURCE: First Mercury Financial Corporation



CONTACT:  Bill Kindorf, VP - Corporate Development, of First Mercury

Financial, [phone], or , or Analysts-

Investors, Leslie Loyet of Financial Relations Board, [phone], or

 



Web site:  http://www.firstmercury.com/ 

Copyright