<PAGE>

                                        
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-Q

             [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) 
                     OF THE SECURITIES EXCHANGE ACT OF 1934

               For the quarterly period ended September 30, 1997
                        Commission File Number 33-83382

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

             Delaware                                 38-3164336
   (State or other jurisdiction          (I.R.S. Employer Identification No.)
of incorporation or organization)
                                        
      29621 Northwestern Highway, P.O. Box 5096 Southfield, Michigan 48086
              (Address of principal executive offices) (zip code)

       Registrant's telephone number, including area code: (248) 358-4010

                                        
     Indicate by check mark whether the registrant (1) has filed all reports 
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 
1934 during the preceding 12 months (or for such shorter period that the 
registrant was required to file such reports), and (2) has been subject to 
such filing requirements for the past 90 days.  Yes /X/   No / /

     The number of shares outstanding of the registrant's Common Stock, par 
value $.01, as of November 14, 1997 was 6,164.07.

                                        

<PAGE>
                                        
                      FIRST MERCURY FINANCIAL CORPORATION


                                     INDEX


PART I.   FINANCIAL INFORMATION                                       Page No.
                                                                     --------

          Item 1.  Financial Statements

            Condensed Consolidated Balance Sheets; 
              September 30, 1997 (Unaudited) and 
              December 31, 1996                                             2

            Condensed Consolidated Statements of 
              Operations (Unaudited); Three Months 
              and Nine Months Ended September 30, 
              1997 and 1996                                                 3

            Condensed Consolidated Statements of 
              Stockholders' Equity (Unaudited); Nine 
              Months Ended September 30, 1997 and 
              1996                                                          4

            Condensed Consolidated Statements of 
              Cash Flows (Unaudited); Nine Months 
              Ended September 30, 1997 and 1996                             5

            Notes to Condensed Consolidated 
              Financial Statements (Unaudited)                              6

          Item 2.  Management's Discussion and Analysis
                     of Financial Condition and Results
                     of Operations                                          7

Part II.  OTHER INFORMATION                                                13

                                        

<PAGE>

PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
                                        
                      FIRST MERCURY FINANCIAL CORPORATION
                     CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                              September 30,        December 31,
                         ASSETS                                                   1997                 1996    
                                                                                  ----                 ----    
                                                                               (Unaudited)                     
<S>                                                                            <C>                <C>          
Investments:
    Debt securities available for sale, at market value                       $65,579,190          71,871,818
    Preferred stocks, at market                                                 1,425,297           2,691,194
    Common stocks, at market                                                       54,180              52,200
    Short-term investments                                                      2,887,966           1,810,340
                                                                               ----------         -----------
        Total investments                                                      69,946,633          76,425,552

Cash and cash equivalents                                                       3,685,475           3,945,289
Premiums and reinsurance balances receivable                                    2,417,049           2,584,644
Accrued investment income receivable                                              915,719           1,078,346
Other receivables                                                                 300,000             300,000
Reinsurance recoverable on unpaid losses                                        9,513,442           8,484,364
Prepaid reinsurance premiums                                                      820,101           1,799,876
Deferred acquisition costs                                                        751,954             691,319
Deferred federal income taxes                                                   1,742,057           2,288,715
Federal income taxes recoverable                                                  810,797             571,541
Fixed assets, net of accumulated depreciation                                   1,785,639           1,667,317
Other assets                                                                    1,124,706           2,274,410
                                                                               ----------         -----------
        Total assets                                                          $93,813,572         102,111,373
                                                                               ----------         -----------
                                                                               ----------         -----------

            LIABILITIES AND STOCKHOLDERS' EQUITY

Loss and loss adjustment expense reserves                                     $48,861,979          55,519,174
Unearned premium reserves                                                       4,740,767           5,656,660
Long-term debt                                                                  9,159,000           9,225,000
Ceded reinsurance payable                                                          52,500              87,373
Deferred revenue                                                                1,503,791           2,181,975
Accounts payable and accrued expenses                                           2,209,685           2,922,516
                                                                               ----------         -----------
        Total liabilities                                                      66,527,722          75,592,698
                                                                               ----------         -----------
Minority interest                                                                   2,966               3,278
                                                                               ----------         -----------
Stockholders' equity:
    Cumulative preferred stock, issued and outstanding 20,850 shares                  209                 209
    Common stock, issued and outstanding 6,164.07 shares                               62                  62
    Gross paid-in and contributed capital                                       3,437,372           3,437,372
    Unrealized gains on marketable securities, net of federal income taxes        554,961             183,780
    Retained earnings                                                          23,290,280          22,893,974
                                                                               ----------         -----------
        Total stockholders' equity                                             27,282,884          26,515,397
                                                                               ----------         -----------
        Total liabilities and stockholders' equity                            $93,813,572         102,111,373
                                                                               ----------         -----------
                                                                               ----------         -----------
</TABLE>
                                        2

<PAGE>
                                        
                      FIRST MERCURY FINANCIAL CORPORATION
                Condensed Consolidated Statements of Operations
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                   Three Months Ended             Nine Months Ended    
                                                                       September 30,                 September 30,     
                                                                -------------------------     -------------------------
                                                                   1997           1996           1997           1996
                                                                ----------     ----------     ----------     ----------
<S>                                                             <C>             <C>           <C>            <C>       
Net earned premiums                                             $2,372,490      3,639,467      6,914,041     18,116,994

Net investment income                                            1,106,769      1,294,354      3,521,734      4,004,187
Realized gains on the sale of investments                          233,556         63,070        482,099        293,328
Gain on assignment of non-standard automobile agency contracts          --       (634,814)            --        476,478
Miscellaneous income                                               255,229        472,952        838,136        590,592
                                                                ----------     ----------     ----------     ----------
    Total revenues and other income                              3,968,044      4,835,029     11,756,010     23,481,579
                                                                ----------     ----------     ----------     ----------
Losses and loss adjustment expenses, net                         1,691,795      2,198,670      5,029,094     14,613,139
Amortization of deferred acquisition expenses                      738,589        675,238      1,683,386      3,692,607
Other underwriting expenses                                      1,044,395        478,927      3,081,561      2,375,900
Interest expense                                                   274,876        298,809        829,466        904,700
                                                                ----------     ----------     ----------     ----------
    Total expenses                                               3,749,655      3,651,644     10,623,507     21,586,346
                                                                ----------     ----------     ----------     ----------
    Income before federal income taxes                             218,389      1,183,385      1,132,503      1,895,233

Federal income taxes                                                61,632        329,774        392,172        585,559
                                                                ----------     ----------     ----------     ----------
    Net income                                                  $  156,757        853,611        740,331      1,309,674
                                                                ----------     ----------     ----------     ----------
                                                                ----------     ----------     ----------     ----------
Per-share earnings                                              $    25.43         138.48         120.10         212.47
                                                                ----------     ----------     ----------     ----------
                                                                ----------     ----------     ----------     ----------
</TABLE>

                                        3

<PAGE>
                                        
                      FIRST MERCURY FINANCIAL CORPORATION
           Condensed Consolidated Statements of Stockholders' Equity
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                              Net Unrealized                            
                                                              Gross Paid-in   Gains (Losses),                           
                                          Preferred  Common  and Contributed  Net of Federal    Retained                
                                            Stock     Stock       Capital      Income Taxes     Earnings       Total    
                                            -----     -----       -------      ------------     --------       -----    
<S>                                           <C>        <C>     <C>            <C>            <C>           <C>        
Balance at December 31, 1995                  $209       62      3,474,872       1,270,614     21,655,479    26,401,236 
                                                                                                                        
Net income                                      --       --             --              --      1,309,674     1,309,674 
Dividends paid to preferred stockholders        --       --             --              --       (344,025)     (344,025)
Change in market values of                                                                                              
    marketable investment securities            --       --             --      (1,381,502)            --    (1,381,502)
                                              ----       --      ---------       ---------     ----------    ---------- 
Balance at September 30, 1996                 $209       62      3,474,872        (110,888)    22,621,128    25,985,383 
                                              ----       --      ---------       ---------     ----------    ---------- 
                                              ----       --      ---------       ---------     ----------    ---------- 
                                                                                                                        
Balance at December 31, 1996                  $209       62      3,437,372         183,780     22,893,974    26,515,397 
                                                                                                                        
Net income                                      --       --             --              --        740,331       740,331 
Dividends paid to preferred stockholders        --       --             --              --       (344,025)     (344,025)
Change in market values of                      --       --                                                             
    marketable investment securities            --       --             --         371,181             --       371,181 
                                              ----       --      ---------       ---------     ----------    ---------- 
Balance at September 30, 1997                 $209       62      3,437,372         554,961     23,290,280    27,282,884 
                                              ----       --      ---------       ---------     ----------    ---------- 
                                              ----       --      ---------       ---------     ----------    ---------- 
</TABLE>

                                        4

<PAGE>
                                        
                      FIRST MERCURY FINANCIAL CORPORATION
                Condensed Consolidated Statements of Cash Flows
                                  (Unaudited)

                                                     Nine Months Ended     
                                                        September 30,      
                                                -------------------------- 
                                                    1997            1996   
                                                -----------    ----------- 
Net cash used in operating activities           $(6,022,020)      (578,786)
                                                -----------    -----------
Cash flows from investing activities:                                      
    Cost of short-term investments acquired     (22,617,550)   (24,609,445)
    Proceeds from disposals of short-term                                  
    investments                                  21,539,924     24,163,486 
    Cost of debt securities acquired            (14,876,513)   (12,588,095)
    Proceeds from maturities of debt securities  12,986,635      6,398,360 
    Proceeds from debt securities sold            8,877,465     10,299,246 
    Cost of equity securities acquired             (658,930)      (868,078)
    Proceeds from equity securities sold          2,188,420      1,288,984 
    Other, net                                     (508,220)      (470,204)
                                                -----------    ----------- 
      Net cash provided by investing activities   6,931,231      3,614,254 
                                                -----------    ----------- 
Cash flows used in financing activities:                                   
    Interest payments on senior subordinated notes (825,000)      (825,000)
    Dividends paid to preferred stockholders       (344,025)      (344,025)
                                                -----------    ----------- 
    Net cash used in financing activities        (1,169,025)    (1,169,025)
                                                -----------    ----------- 
Net increase (decrease) in cash and cash                                   
    equivalents                                    (259,814)     1,866,443 
                                                                           
Cash and cash equivalents at beginning of period  3,945,289      2,336,140 
                                                -----------    ----------- 
Cash and cash equivalents at end of period       $3,685,475      4,202,583 
                                                -----------    ----------- 
                                                -----------    ----------- 

                                        5

<PAGE>
                                        
                      FIRST MERCURY FINANCIAL CORPORATION

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

1.   The accompanying unaudited condensed consolidated financial statements 
     of First Mercury Financial Corporation and subsidiaries (the "Company") 
     have been prepared pursuant to the rules and regulations of the 
     Securities and Exchange Commission.  Certain information and note 
     disclosures normally included in financial statements prepared in 
     accordance with generally accepted accounting principles have been 
     condensed or omitted.  In management's opinion, all adjustments, 
     consisting of normal recurring adjustments, which are necessary for a 
     fair presentation of financial position and results of operations, have 
     been made.  It is recommended that these condensed consolidated 
     financial statements be read in conjunction with the consolidated 
     financial statements and notes related thereto included in the December 
     31, 1996 annual report on Form 10-K. 

     The results of operations for the nine month period ended September 30, 
     1997, are not necessarily indicative of the results to be expected for 
     the full year.

2.   Per share earnings are computed by dividing net income by the weighted 
     average number of shares of common stock outstanding during the period.

3.   Certain reclassifications have been made to the 1996 consolidated 
     financial statements in order to conform to the 1997 presentation.

                                        6

<PAGE>
                                        
ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
          RESULTS OF OPERATIONS

     First Mercury Financial Corporation ("Mercury") is an insurance holding 
     company incorporated in Delaware in December 1993 and engaged, through 
     its subsidiaries, in the underwriting of specialty commercial lines and 
     non-standard automobile insurance for individuals.  Mercury's 
     subsidiaries are First Mercury Insurance Company ("FMIC"), an Illinois 
     property and casualty insurance company and successor to First Mercury 
     Syndicate, Inc. (the "Syndicate"),  All Nation Insurance Company ("All 
     Nation") and its wholly owned subsidiary, National Family Insurance 
     Corporation ("National Family"), both Minnesota property and casualty 
     insurance companies. Mercury and its subsidiaries are referred to herein 
     as the "Company."

     National Family has been in liquidation under the oversight of the 
     Ramsey County District Court in Minnesota since December 1996.  Prior to 
     the liquidation order, National Family was in rehabilitation for over 30 
     years. The Company became affiliated with National Family upon its 
     purchase of All Nation in 1992.  Under generally accepted accounting 
     principles, because All Nation lacks voting control over National Family 
     and is not liable for National Family's debts, the financial statements 
     of National Family are not consolidated with the financial statements of 
     the Company.

     Prior to its withdrawal from the Illinois Insurance Exchange ("IIE") in 
     December 1996, the Syndicate operated as an underwriting member of the 
     IIE. Under the eligibility of the IIE, the Syndicate wrote general 
     liability insurance, allied property and auto physical damage coverage 
     in 44 states, the District of Columbia, and the U.S. Virgin Islands.  On 
     June 28, 1996, the Syndicate formed FMIC as an Illinois property and 
     casualty insurance subsidiary with an initial capitalization of $5 
     million and a subsequent $15 million contribution to surplus.  The 
     formation of FMIC, a licensed Illinois insurer, provided the Syndicate 
     with an affiliated company in which to potentially place coverages 
     offered by the Syndicate and in which to reinsure certain of the 
     Syndicate's outstanding liabilities.  Under a loss portfolio transfer, 
     on June 28, 1996, the Syndicate transferred approximately $35 million in 
     loss and loss adjustment expense reserves and corresponding assets to 
     FMIC.  In conjunction with the formation of FMIC and the loss portfolio 
     transfer, on July 8, 1996, the Syndicate notified the IIE of its 
     intention to withdraw from the IIE.  On November 7, 1996, the Syndicate 
     and the IIE executed a withdrawal agreement.  Subsequent to the 
     Syndicate's withdrawal, the Syndicate was merged into FMIC on December 
     16, 1996.  Due to its withdrawal from the IIE, the Syndicate lost its 
     ability to write direct premium under the eligibility of the IIE.   As a 
     result, FMIC has aggressively applied for eligibility to write premiums 
     in many states.  As of September 30, 1997, FMIC is eligible to write 
     direct premium in 23 states, primarily on a surplus lines basis.  In the 
     interim, FMIC and Empire Fire and Marine Insurance Company and Empire 
     Indemnity Company ("Empire") entered into a quota share reinsurance 
     agreement effective July 18, 1996 whereby Empire writes on a direct 
     basis the coverages previously offered by the Syndicate and cedes 50 
     percent of such business to FMIC.

     On May 1, 1996, an agreement was entered into between Mercury, All 
     Nation, Allstate Insurance Company ("Allstate") and its wholly owned 
     subsidiary, Deerbrook Insurance 

                                        7

<PAGE>
                                        
     Company ("Deerbrook"), for the assignment of All Nation's independent 
     agent contracts to Deerbrook and the ceding of associated prospective 
     premium to Allstate on the agency-produced non-standard automobile 
     business of All Nation.  The agreement also included a three year 
     non-compete clause and various financial guarantees by Mercury. Under 
     the agreement, All Nation continues to write agency non-standard 
     automobile coverages and cedes 100 percent of the written business to 
     Allstate under a quota share reinsurance agreement for a period of up to 
     two years, as Deerbrook is taking over the direct writing and servicing 
     responsibility from All Nation on a state-by-state basis over the 
     two-year period.  In addition, All Nation provided underwriting and 
     administrative services for the ceded business on a percentage of 
     premiums basis until May 1997.  The agreements do not include All 
     Nation's agency-produced non-standard automobile business written prior 
     to May 1, 1996 or its direct response non-standard automobile business. 

RESULTS OF OPERATIONS

         The following table reflects revenues of the Company for the three 
     month and nine month periods ended September 30, 1997 and 1996:

<TABLE>
<CAPTION>
                                    Three Months Ended September 30,          Nine Months Ended September 30,      
                                       1997                 1996                 1997                 1996         
                                       ----                 ----                 ----                 ----         
                                 Amount    Percent    Amount    Percent    Amount    Percent    Amount    Percent  
                                 ------    -------    ------    -------    ------    -------    ------    -------  
                                                            (Dollars in Thousands)                                 
<S>                              <C>        <C>       <C>        <C>       <C>        <C>      <C>         <C>     
Net Premiums Earned:                                                                                               
Specialty commercial lines:                                                                                        
    Security, fire and alarm     $1,437      60.6%     2,158      59.3%    $4,546      65.8%     6,347      35.0%  
    Police                            0       0.0        146       4.0         19       0.3        654       3.6   
    Public officials                 52       2.2        145       4.0        216       3.1        501       2.8   
    Other                           616      26.0        331       9.1      1,346      19.5        844       4.7   
Non-standard automobile lines:                                                                                     
    Agency auto liability             0       0.0        400      11.0          1       0.0      6,782      37.4   
    Direct auto liability           167       7.0        171       4.7        490       7.1        566       3.1   
    Agency auto physical damage       0       0.0        176       4.8         10       0.1      2,028      11.2   
    Direct auto physical damage     100       4.2        112       3.1        286       4.1        395       2.2   
                                 ------    -------    ------    -------    ------    -------    ------    -------  
Total net premiums earned        $2,372     100.0%    $3,639     100.0%    $6,914     100.0%   $18,117     100.0%  
                                 ------    -------    ------    -------    ------    -------    ------    -------  
                                 ------    -------    ------    -------    ------    -------    ------    -------  
</TABLE>

                                        8

<PAGE>
                                        
NET PREMIUMS EARNED

     Net premiums earned for the three months ended September 30, 1997 and 
     the nine months ended September 30, 1997 declined 34.8% and 61.8%, 
     respectively, in comparison to the year earlier periods.  The Company's 
     specialty commercial lines, including security, fire, alarm, police, 
     public official and miscellaneous commercial coverages, decreased 24.3% 
     and 26.6%, respectively, for the three months and nine months ended 
     September 30, 1997 versus the comparable periods in 1996.  This decrease 
     occurred principally due to the quota share reinsurance arrangement 
     entered into with Empire, and the Company's decision to non-renew a 
     substantial amount of the police business beginning in the first quarter
     of 1996.  Although net  premiums earned for the Company's specialty 
     commercial lines have been declining, the Company has experienced
     average rate increases in excess of 10% on this book of business in the 
     first three quarters of  1997.  Effective July 1, 1997, the Company has 
     entered into a 100 percent quota share reinsurance arrangement with 
     Reliance Insurance Company of Illinois ("Reliance") to offer liability 
     coverage to non-profit entities and day care facilities. In addition,  
     the Company has been  pursuing a workers' compensation program as a 
     complementary product to the security, fire and alarm coverages 
     currently provided. The increase in other commercial lines reflects
     the growth in All Nation's agency commercial multi-peril program.

    Due to the sale of All Nation's independent agent contracts to Deerbrook 
    effective May 1, 1996, net premiums earned for private passenger 
    non-standard automobile coverages decreased 68.9% and 91.9%, 
    respectively, for the three and nine months ended September 30, 1997 
    versus the comparable periods in 1996.   Net premiums earned for  direct 
    response non-standard automobile coverages have declined in 1997 due to a 
    management decision to suspend advertising while the Company implemented 
    rate increases for the direct response business in Iowa and Illinois in
    early June 1997 and August 1997, respectively.   The Company began actively
    marketing this program in Iowa and Illinois in mid June and August, 
    respectively. The Company continues to evaluate the effectiveness of the 
    marketing programs.

NET INVESTMENT INCOME AND REALIZED INVESTMENT GAINS (LOSSES)

     Net investment income decreased approximately $188,000, or 14.5%, for 
     the three months ended September 30, 1997 as compared to the three 
     months ended September 30, 1996.  For the nine months ended September 
     30, 1997, net investment income decreased $482,000 or 12.0% in 
     comparison to the same period of the preceding year.  The decrease 
     resulted from a decline in the Company's average invested assets.  
     Invested assets were impacted by  the reduction in premium revenues  at 
     both All Nation and FMIC under the quota share reinsurance agreements 
     with Allstate and Empire, respectively.

     For the three months ended September 30, 1997, the Company realized a 
     net gain on the sale of investments of $234,000 versus a net gain of 
     $63,000 for the same period in the prior year.  The Company recognized a 
     net gain on the sale of investments of $482,000 for the nine months 
     ended September 30, 1997 as compared to a $293,000 net gain for the 
     comparable period in 1996. 

     At September 30, 1997, the unrealized gain on investments available for 
     sale, net of deferred taxes, was $555,000 in comparison to a $184,000 
     unrealized gain as of December 31, 1996.  Changes in unrealized gains 
     reflect the increase in fair values of available for sale debt and 
     equity securities.  Unrealized values of the underlying portfolio 
     investments will continue to 

                                        9

<PAGE>
                                        
     be volatile as market prices of debt and equity securities fluctuate with
     changes in interest rates and market conditions.

GAIN ON ASSIGNMENT OF AGENCY CONTRACTS

     The gain on the assignment of the All Nation agency contracts of 
     $476,000 was recognized in  1996.  The gain recognized represents the 
     net present value of the related payments from Deerbrook reduced by All 
     Nation's estimated liability for losses under the quota share 
     reinsurance contract and costs attendant with the sale.

LOSS AND LOSS ADJUSTMENT EXPENSES

     Loss and loss adjustment expenses incurred decreased 23.1% to $1.7 
     million for the three months ended September 30, 1997 from $2.2 million 
     for the three months ended September 30, 1996.  For the nine months 
     ended September 30, 1997, loss and loss adjustment expenses incurred 
     decreased 65.6% versus the comparable period in the preceding year, 
     principally due to the decline in premium revenues under the quota share 
     reinsurance agreements with Allstate and Empire.  The loss and loss 
     adjustment expense ratio for private passenger automobile coverages 
     decreased to 70.3% for the nine months ended September 30, 1997 as 
     compared to 83.1% for the nine months ended September 30, 1996.  This 
     decrease reflects the impact of rate increases taken in both Iowa and 
     Illinois.  Within the specialty commercial lines, the loss and loss 
     adjustment expense ratio decreased to 63.0% for the nine months ended 
     September 30, 1997 versus 74.7% for the comparable period in the 
     preceding  year.  The 1997 loss ratio reflects a release of reserve 
     redundancies approximating $600,000.  There were no reserve redundancy 
     releases in the first nine months of 1996.

AMORTIZATION OF DEFERRED ACQUISITION COSTS, OTHER UNDERWRITING EXPENSES AND 
INTEREST EXPENSE

     Amortization of deferred acquisition costs and other underwriting 
     expenses represent the Company's costs to generate premium volume.  For 
     the third quarter of 1997, acquisition costs and other underwriting 
     expenses increased approximately 54.5% to $ 1.8 million for the three 
     months ended September 30, 1997 as compared to $1.2 million for the same 
     period in the preceding year.  For the nine months ended September 30,
     1997, acquisition and other underwriting expenses decreased 24.8% to
     $4.8 million, while Company's underwriting expense ratio 
     increased to 56.2% for the nine months ended September 30, 1997 in 
     comparison to 40.4% for the nine months ended September 30, 1996.  The 
     increase in the expense ratio principally occurred due to the decline in 
     net premiums written in the first nine months of 1997 in comparison to 
     the Company's fixed costs of its insurance operations.  In addition, the 
     Company incurred approximately $500,000 of expenses in 1997 for the 
     implementation of  new rate filings and marketing costs for the 
     re-introduction of the direct response private passenger auto program 
     and approximately $250,000 for the evaluation of potential business 
     acquisitions.

     The Company realized $838,000 of miscellaneous income in the first nine 
     of 1997 as compared to $591,000 in the first nine months of 1996 
     primarily due to increase in income from the non-competition agreement and
     somewhat offset by the reduction of service fees associated with policies
     sold to Deerbrook in 1996 .  

     The Company incurred $829,000 and $904,000 of interest expense related 
     to the $9.2 and $10.0

                                        10

<PAGE>
                                        
     million senior subordinated notes during the nine months ended September 
     30, 1997 and 1996, respectively.  The decrease in interest expense 
     resulted from the Company's repurchase of $841,000 of its own senior 
     subordinated notes during 1996 and 1997.

FEDERAL INCOME TAXES

     The effective tax rate for the nine ended September 30, 1997 of 34.6% 
     has increased from the effective tax rate for the first three quarters 
     of 1996 of 30.9%.  The Company has eliminated all tax-exempt interest 
     since the first quarter of 1997.

NET INCOME

     Pre-tax net income for the nine months ended September 30, 1997 was $1.1 
    million versus $1.9 million for the nine months ended September 30, 1996. 
     Net income for the first three quarters of 1997 includes $600,000 
    related to the release of reserve redundancies, increase in realized 
    investment gains of $189,000, and an increase of $500,000 in revenue 
    under the non-compete clause.  These increases were offset by $750,000 of 
    non-recurring acquisition and other underwriting  costs relating to the 
    re-introduction of the direct response personal automobile program and 
    evaluation of potential business acquisitions, $270,000 for the reduction 
    of service fees associated with policies sold to Deerbrook in 1996, the 
    gain on the assignment of All Nation's agency contracts in the amount of 
    $476,000 recognized in 1996, and reduction of net investment income of 
    $482,000.  Pre-tax net income for the three months ended September 30, 
    1997 was $219,000 compared to $1.2 million for the same period in the 
    preceding year.  The decrease in pre-tax income reflects increases in 
    1997 in acquisition and other underwriting costs related to the 
    re-introduction of the direct response personal automobile program, while 
    the third quarter 1996 results reflect the impact of favorable loss 
    experience from rate increases taken during early 1996 in the personal 
    automobile line.

LIQUIDITY AND CAPITAL RESOURCES

     Mercury is a holding company whose principal assets are its investment 
     in the capital stock of FMIC and All Nation.  Generally, Mercury is 
     dependent upon the receipt of dividends from FMIC and All Nation to fund 
     any necessary cash requirements, including debt service requirements.  
     FMIC and All Nation are restricted by regulation as to the amount of 
     dividends they may pay without regulatory approval.  No dividends were 
     paid by FMIC or All Nation to Mercury in the first nine months of 1997.  
     Mercury anticipates cash payments from Deerbrook of $1.2 million in 1997 
     for the non-compete agreement.  In addition, Mercury receives annual 
     payments from its subsidiaries when appropriate pursuant to a tax 
     allocation agreement between Mercury and its subsidiaries.  The Company 
     believes these amounts are sufficient to meet Mercury's current cash 
     flow requirements.

     The Company's subsidiaries' primary sources of cash are from premiums 
     collected and amounts earned from the investment of this cash flow.  The 
     principal uses of funds are the payment of claims and related expenses, 
     other operating expenses and interest expense.  The Company's insurance 
     operations utilized cash in operations of $6,022,000 during the nine 
     months ended September 30, 1997 as compared to $579,000 in the first 
     three quarters of 1996.  The decreased cash flow resulted primarily from 
     a decline in premium revenues at both All Nation and FMIC under the 
     quota share reinsurance agreements with Allstate and Empire.

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<PAGE>
                                        
     At September 30, 1997, the insurance subsidiaries maintained cash and 
     cash equivalents and short-term investments of $4.9 million to meet 
     short-term payment obligations.  In addition, the Company's investment 
     portfolio is heavily weighted toward short-term fixed maturities and a 
     portion of the portfolio could be liquidated without material adverse 
     financial impact should further liquidity be necessary.

     As part of its investment strategy, and as required by debt covenants, 
     the Company establishes a level of cash and highly liquid short- and 
     intermediate-term securities which, combined with expected cash flow, is 
     believed adequate to meet foreseeable payment obligations.  As part of 
     this strategy, the Company attempts to maintain an appropriate 
     relationship between the average duration of the investment portfolio 
     and the approximate duration of its liabilities.  The weighted average 
     maturity of the Company's fixed income portfolio as of September 30, 
     1997 was approximately three years.

     Under IIE regulations, the Syndicate maintained a $1,000,000 deposit in 
     a Guaranty Fund Trust Account prior to its withdrawal from the IIE which 
     required at least 50 percent of the deposit to be in cash and/or 
     marketable securities.  Under the terms of the Syndicate's withdrawal 
     agreement with the IIE, a $1,000,000 deposit must be maintained in the 
     Guaranty Fund Trust Account of the IIE for a period of three years from 
     November 7, 1996.

     The Syndicate's withdrawal agreement also required FMIC to establish a 
     trust fund for the payment of claims under insurance policies issued and 
     reinsurance agreements entered into by the Syndicate.  Investments held 
     in trust for payment of Syndicate claims approximated $28.9 million at 
     September 30, 1997.

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<PAGE>
                                        
                      FIRST MERCURY FINANCIAL CORPORATION
                                        
                          PART II.  OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

     The Company's subsidiaries are subject to routine legal proceedings in 
     connection with their property and casualty insurance business. Neither 
     Mercury nor any of its subsidiaries are involved in any pending or 
     threatened legal proceedings which reasonably could be expected to have 
     a material adverse impact on the Company's financial condition or 
     results of operations.

ITEM 2.   CHANGES IN SECURITIES

     Not applicable.

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

     Not applicable.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matters were submitted to a vote of security holders during the 
     third quarter of 1997.

ITEM 5.   OTHER INFORMATION

     Not applicable.

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

a. EXHIBITS

     27        Financial Data Schedule.

b. REPORTS ON FORM 8-K

     No report on Form 8-K was filed by the Registrant during the quarter 
     ended September 30, 1997.

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<PAGE>
                                        
                                   SIGNATURE


Pursuant to the requirements of the Securities Exchange Act of 1934, the 
Registrant has duly caused this report to be signed on its behalf by the 
undersigned thereunto duly authorized.


                      FIRST MERCURY FINANCIAL CORPORATION
                                        


Date: November 14, 1997                 By:    /s/    William S. Weaver 
                                               -------------------------
                                               William S. Weaver
                                               Chief Financial Officer
                                               (Principal Financial Officer
                                               and duly authorized to sign on 
                                               behalf of the Registrant)

                                        14