##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from _______________ to _______________
 Commission File Number 001-33077
 FIRST MERCURY FINANCIAL CORPORATION
  Delaware
    
    38-3164336(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)29110 Inkster RoadSuite 100
    
    48034Southfield, Michigan
    
    (Zip Code)(Address of Principal Executive Offices)
  þ o
 o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ




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##### 



FIRST MERCURY FINANCIAL CORPORATION AND SUBSIDIARIES
 TABLE OF CONTENTS
 Item
    
    PagePART I  FINANCIAL INFORMATION1. Condensed Consolidated Financial StatementsCondensed Consolidated Balance Sheets
    
    
    3Condensed Consolidated Statements of Income
    
    
    4Condensed Consolidated Statements of Stockholders Equity
    
    
    5Condensed Consolidated Statements of Cash Flows
    
    
    6Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    72. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    233. Quantitative and Qualitative Disclosures about Market Risk
    
    
    434. Controls and Procedures
    
    
    43PART II  OTHER INFORMATION1. Legal Proceedings
    
    
    446. Exhibits
    
    
    44EX-31.AEX-31.BEX-32.AEX-32.B
  2




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##### Table of Contents



FIRST MERCURY FINANCIAL CORPORATION AND SUBSIDIARIES
 
 PART I.  FINANCIAL INFORMATION
 
 ITEM 1.
    
    Condensed Consolidated Financial Statements
 
 Condensed Consolidated Balance Sheets
 March 31,
    
    
    December 31,2010
    
    
    2009(Unaudited)(Dollars in thousands,except share and per share data)ASSETSInvestmentsDebt securities
    
    $
    666,975
    
    
    $
    648,522Equity securities and other
    
    
    38,707
    
    
    
    38,752Short-term
    
    
    45,531
    
    
    
    12,216Total Investments
    
    
    751,213
    
    
    
    699,490Cash and cash equivalents
    
    
    15,467
    
    
    
    14,275Premiums and reinsurance balances receivable
    
    
    52,603
    
    
    
    78,544Accrued investment income
    
    
    6,241
    
    
    
    6,248Accrued profit sharing commissions
    
    
    14,368
    
    
    
    14,661Reinsurance recoverable on paid and unpaid losses
    
    
    183,364
    
    
    
    172,711Prepaid reinsurance premiums
    
    
    57,999
    
    
    
    57,374Deferred acquisition costs
    
    
    26,172
    
    
    
    25,654Intangible assets, net of accumulated amortization
    
    
    36,588
    
    
    
    37,104Goodwill
    
    
    25,483
    
    
    
    25,483Other assets
    
    
    24,256
    
    
    
    26,049Total Assets
    
    $
    1,193,754
    
    
    $
    1,157,593LIABILITIES AND STOCKHOLDERS EQUITYLoss and loss adjustment expense reserves
    
    $
    511,828
    
    
    $
    488,444Unearned premium reserves
    
    
    147,922
    
    
    
    146,773Long-term debt
    
    
    67,013
    
    
    
    67,013Line of credit
    
    
    30,000
    
    
    
    4,000Funds held under reinsurance treaties
    
    
    74,148
    
    
    
    71,661Premiums payable to insurance companies
    
    
    28,426
    
    
    
    31,167Reinsurance payable on paid losses
    
    
    1,661
    
    
    
    958Deferred federal income taxes
    
    
    14,194
    
    
    
    13,844Accounts payable, accrued expenses, and other liabilities
    
    
    28,827
    
    
    
    17,649Total Liabilities
    
    
    904,019
    
    
    
    841,509Stockholders EquityCommon stock, $0.01 par value; authorized 100,000,000 shares; issued
and outstanding 17,635,206 and 17,181,106 shares
    
    
    176
    
    
    
    172Paid-in-capital
    
    
    156,050
    
    
    
    154,417Accumulated other comprehensive income
    
    
    18,769
    
    
    
    16,256Retained earnings
    
    
    116,588
    
    
    
    147,087Treasury stock; 130,600 and 130,600 shares
    
    
    (1,848
    )
    
    
    (1,848
    )Total Stockholders Equity
    
    
    289,735
    
    
    
    316,084Total Liabilities and Stockholders Equity
    
    $
    1,193,754
    
    
    $
    1,157,593
  3




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##### Table of Contents



FIRST MERCURY FINANCIAL CORPORATION AND SUBSIDIARIES
 
 Condensed Consolidated Statements of Income
(Unaudited)
 Three Months EndedMarch 31,2010
    
    
    2009(Dollars in thousands, except share andper share data)Operating RevenueNet earned premiums
    
    $
    51,673
    
    
    $
    52,594Commissions and fees
    
    
    7,802
    
    
    
    6,894Net investment income
    
    
    8,669
    
    
    
    6,434Net realized gains on investments
    
    
    4,185
    
    
    
    1,794Other-than-temporary impairment losses on investments:Total losses
    
    
    (947
    )
    
    
    (37
    )Portion of losses recognized in accumulated other
comprehensive income
    
    
    441
    
    
    
    Net impairment losses recognized in earnings
    
    
    (506
    )
    
    
    (37
    )Total Operating Revenues
    
    
    71,823
    
    
    
    67,679Operating ExpensesLosses and loss adjustment expenses, net
    
    
    34,011
    
    
    
    30,493Amortization of deferred acquisition expenses
    
    
    13,143
    
    
    
    13,329Underwriting, agency and other expenses
    
    
    11,161
    
    
    
    9,223Amortization of intangible assets
    
    
    516
    
    
    
    575Restructuring
    
    
    5,018
    
    
    
    Total Operating Expenses
    
    
    63,849
    
    
    
    53,620Operating Income
    
    
    7,974
    
    
    
    14,059Interest Expense
    
    
    1,386
    
    
    
    1,416Change in Fair Value of Derivative Instruments
    
    
    
    
    
    
    (106
    )Income Before Income Taxes
    
    
    6,588
    
    
    
    12,749Income Taxes
    
    
    1,376
    
    
    
    4,068Net Income
    
    $
    5,212
    
    
    $
    8,681Net Income Per Share:Basic
    
    $
    0.30
    
    
    $
    0.49Diluted
    
    $
    0.30
    
    
    $
    0.48Weighted Average Shares Outstanding:Basic
    
    
    17,105,376
    
    
    
    17,775,560Diluted
    
    
    17,383,667
    
    
    
    18,109,331
  4




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##### Table of Contents



FIRST MERCURY FINANCIAL CORPORATION AND SUBSIDIARIES
 
 Condensed Consolidated Statements of Stockholders Equity
(Unaudited)
 AccumulatedOtherCommon
    
    
    Paid-in
    
    
    Comprehensive
    
    
    Retained
    
    
    TreasuryStock
    
    
    Capital
    
    
    Income (Loss)
    
    
    Earnings
    
    
    Stock
    
    
    Total(Dollars in thousands)Balance, January 1, 2009
    
    $
    178
    
    
    $
    161,957
    
    
    $
    (3,027
    )
    
    $
    103,028
    
    
    $
    (499
    )
    
    $
    261,637Issuance of restricted stock
    
    
    1
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation expense
    
    
    
    
    
    
    613
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    613Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,681
    
    
    
    
    
    
    
    8,681Other comprehensive loss, net of taxUnrealized holding gains on securities
arising during the period, net of tax of ($1,899)
    
    
    
    
    
    
    
    
    
    
    3,527
    
    
    
    
    
    
    
    
    
    
    
    3,527Change in fair value of interest rate swap, net of tax of ($25)
    
    
    
    
    
    
    
    
    
    
    46
    
    
    
    
    
    
    
    
    
    
    
    46Less reclassification adjustment for
gains included in net income, net of tax of $64
    
    
    
    
    
    
    
    
    
    
    (120
    )
    
    
    
    
    
    
    
    
    
    
    (120
    )Total other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,453Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,134Balance, March 31, 2009
    
    $
    179
    
    
    $
    162,569
    
    
    $
    426
    
    
    $
    111,709
    
    
    $
    (499
    )
    
    $
    274,384Balance, January 1, 2010
    
    $
    172
    
    
    $
    154,417
    
    
    $
    16,256
    
    
    $
    147,087
    
    
    $
    (1,848
    )
    
    $
    316,084Issuance of restricted stock
    
    
    1
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    3
    
    
    
    1,076
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,079Stock-based compensation expense
    
    
    
    
    
    
    535
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    535Stock-based compensation excess tax benefits
    
    
    
    
    
    
    23
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23Payment of shareholder dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35,711
    )
    
    
    
    
    
    
    (35,711
    )Comprehensive income:
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,212
    
    
    
    
    
    
    
    5,212Other comprehensive income, net of taxUnrealized holding losses on securities arising during
the period having credit losses recognized in the condensed
consolidated statements of income, net of tax $(206)
    
    
    
    
    
    
    
    
    
    
    382
    
    
    
    
    
    
    
    
    
    
    
    382Unrealized holding gains on securities arising during the
period having no credit losses recognized in the condensed
consolidated statements of income, net of tax ($1,825)
    
    
    
    
    
    
    
    
    
    
    3,389
    
    
    
    
    
    
    
    
    
    
    
    3,389Change in fair value of interest rate swaps, net of tax of $78
    
    
    
    
    
    
    
    
    
    
    (144
    )
    
    
    
    
    
    
    
    
    
    
    (144
    )Less reclassification adjustment for
gains included in net income, net of tax of $600
    
    
    
    
    
    
    
    
    
    
    (1,114
    )
    
    
    
    
    
    
    
    
    
    
    (1,114
    )Total other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,513Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,725Balance, March 31, 2010
    
    $
    176
    
    
    $
    156,050
    
    
    $
    18,769
    
    
    $
    116,588
    
    
    $
    (1,848
    )
    
    $
    289,735
  5




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FIRST MERCURY FINANCIAL CORPORATION AND SUBSIDIARIES
 
 Condensed Consolidated Statements of Cash Flows
(Unaudited)
 Three Months EndedMarch 31,2010
    
    
    2009(Dollars in thousands)Cash Flows from Operating ActivitiesNet Income
    
    $
    5,212
    
    
    $
    8,681Adjustments
to reconcile net income to
net cash provided by operating activitiesDepreciation and amortization
    
    
    1,036
    
    
    
    998Net investment income on alternative investments
    
    
    (634
    )
    
    
    (385
    )Realized gains  on investments
    
    
    (4,185
    )
    
    
    (1,794
    )Other-than-temporary impairment losses on investments
    
    
    506
    
    
    
    37Deferrals of acquisition costs, net
    
    
    (518
    )
    
    
    222Deferred income taxes
    
    
    (1,004
    )
    
    
    2,575Stock-based compensation expense
    
    
    535
    
    
    
    613Increase (decrease) in cash resulting from changes in assets
and liabilitiesPremiums and reinsurance balances receivable
    
    
    25,941
    
    
    
    (532
    )Accrued investment income
    
    
    7
    
    
    
    (248
    )Accrued profit sharing commissions
    
    
    293
    
    
    
    (780
    )Reinsurance recoverable on paid and unpaid losses
    
    
    (10,653
    )
    
    
    (9,406
    )Prepaid reinsurance premiums
    
    
    (625
    )
    
    
    (2,981
    )Loss and loss adjustment expense reserves
    
    
    23,384
    
    
    
    27,431Unearned premium reserves
    
    
    1,149
    
    
    
    288Funds held under reinsurance treaties
    
    
    2,487
    
    
    
    6,448Reinsurance payable on paid losses
    
    
    703
    
    
    
    233Premiums payable to insurance companies
    
    
    (2,741
    )
    
    
    (552
    )Other
    
    
    12,228
    
    
    
    (5,151
    )Net Cash Provided By Operating Activities
    
    
    53,121
    
    
    
    25,697Cash Flows From Investing ActivitiesCost of short-term investments acquired
    
    
    (75,563
    )
    
    
    (127,598
    )Proceeds from disposals of short-term investments
    
    
    42,248
    
    
    
    121,202Cost of debt and equity securities acquired
    
    
    (55,705
    )
    
    
    (62,776
    )Proceeds from disposals of debt and equity securities
    
    
    45,700
    
    
    
    26,228Acquisition, net of cash acquired
    
    
    
    
    
    
    Net Cash Used In Investing Activities
    
    
    (43,320
    )
    
    
    (42,944
    )Cash Flows From Financing ActivitiesStock issued on stock options exercised
    
    
    1,079
    
    
    
    Payment of shareholder dividends
    
    
    (35,711
    )
    
    
    Cash retained on excess tax benefits
    
    
    23
    
    
    
    Net borrowings under credit facility
    
    
    26,000
    
    
    
    Net Cash Used In Financing Activities
    
    
    (8,609
    )
    
    
    Net Increase (Decrease) In Cash and Cash Equivalents
    
    
    1,192
    
    
    
    (17,247
    )Cash and Cash Equivalents, beginning of period
    
    
    14,275
    
    
    
    31,833Cash and Cash Equivalents, end of period
    
    $
    15,467
    
    
    $
    14,586Supplemental Disclosure of Cash Flow Information:Cash paid during the period for:Interest
    
    $
    1,348
    
    
    $
    1,372Income taxes
    
    $
    
    
    
    $
    
  6




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##### Table of Contents



FIRST MERCURY FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to Condensed Consolidated Financial Statements
(Unaudited)
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation
   Use of Estimates
  Recently Issued Accounting Standards
 Accounting Standards Codification
  Prospective Accounting Standards
  7




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FIRST MERCURY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (Concluded)
     8




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##### Table of Contents



FIRST MERCURY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 2. NET INCOME PER SHARE
   Three Months EndedMarch 31,2010
    
    
    2009(Dollars in thousands, except share andper share data)Net income as reported
    
    $
    5,212
    
    
    $
    8,681Net income allocated to unvested restricted stock shares
    
    
    (62
    )
    
    
    (28
    )Net income available to common
    
    $
    5,150
    
    
    $
    8,653Weighted-average number of common and common equivalent shares outstanding:Basic number of common shares outstanding
    
    
    17,105,376
    
    
    
    17,775,560Dilutive effect of stock options
    
    
    278,291
    
    
    
    333,669Dilutive effect of unvested restricted stock
    
    
    
    
    
    
    102Dilutive number of common and common equivalent shares outstanding
    
    
    17,383,667
    
    
    
    18,109,331Net Income Per Common Share:Basic
    
    $
    0.30
    
    
    $
    0.49Diluted
    
    $
    0.30
    
    
    $
    0.48Anti-dilutive shares excluded from diluted net income per common share
    
    
    1,095,188
    
    
    
    1,221,688
  3. INVESTMENTS
  Gross UnrealizedAmortized Cost
    
    
    Gains
    
    
    Losses
    
    
    Market Value(Dollars in thousands)Debt SecuritiesU.S. government securities
    
    $
    3,696
    
    
    $
    97
    
    
    $
    (8
    )
    
    $
    3,785Government agency mortgage-backed securities
    
    
    101,346
    
    
    
    4,596
    
    
    
    (29
    )
    
    
    105,913Government agency obligations
    
    
    983
    
    
    
    31
    
    
    
    
    
    
    
    1,014Collateralized mortgage obligations and other
asset-backed securities
    
    
    121,020
    
    
    
    9,140
    
    
    
    (1,609
    )
    
    
    128,551Obligations of states and political subdivisions
    
    
    194,663
    
    
    
    8,480
    
    
    
    (232
    )
    
    
    202,911Corporate bonds
    
    
    148,216
    
    
    
    11,743
    
    
    
    (71
    )
    
    
    159,888Total Debt Securities
    
    
    569,924
    
    
    
    34,087
    
    
    
    (1,949
    )
    
    
    602,062Preferred stocks
    
    
    1,416
    
    
    
    157
    
    
    
    (86
    )
    
    
    1,487Short-term investments
    
    
    45,531
    
    
    
    
    
    
    
    
    
    
    
    45,531Total
    
    $
    616,871
    
    
    $
    34,244
    
    
    $
    (2,035
    )
    
    $
    649,080
 9




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##### Table of Contents



FIRST MERCURY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 3. INVESTMENTS  (Concluded)
  Gross UnrealizedAmortized Cost
    
    
    Gains
    
    
    Losses
    
    
    Market Value(Dollars in thousands)Debt SecuritiesU.S. government securities
    
    $
    4,014
    
    
    $
    110
    
    
    $
    (3
    )
    
    $
    4,121Government agency mortgage-backed securities
    
    
    98,278
    
    
    
    3,820
    
    
    
    (16
    )
    
    
    102,082Government agency obligations
    
    
    986
    
    
    
    30
    
    
    
    
    
    
    
    1,016Collateralized mortgage obligations and other
asset-backed securities
    
    
    120,505
    
    
    
    8,142
    
    
    
    (3,033
    )
    
    
    125,614Obligations of states and political subdivisions
    
    
    198,252
    
    
    
    9,310
    
    
    
    (293
    )
    
    
    207,269Corporate bonds
    
    
    135,549
    
    
    
    10,596
    
    
    
    (505
    )
    
    
    145,640Total Debt Securities
    
    
    557,584
    
    
    
    32,008
    
    
    
    (3,850
    )
    
    
    585,742Preferred stocks
    
    
    1,416
    
    
    
    121
    
    
    
    (131
    )
    
    
    1,406Short-term investments
    
    
    12,216
    
    
    
    
    
    
    
    
    
    
    
    12,216Total
    
    $
    571,216
    
    
    $
    32,129
    
    
    $
    (3,981
    )
    
    $
    599,364
  Amortized Cost
    
    
    Market Value(Dollars in thousands)Due in one year or less
    
    $
    82,920
    
    
    $
    83,472Due after one year through five years
    
    
    156,995
    
    
    
    167,896Due after five years through ten years
    
    
    131,796
    
    
    
    139,671Due after ten years
    
    
    22,794
    
    
    
    23,577394,505
    
    
    
    414,616Government agency mortgage-backed securities
    
    
    101,346
    
    
    
    105,913Collateralized mortgage obligations and other asset-backed securities
    
    
    121,020
    
    
    
    128,551Total
    
    $
    616,871
    
    
    $
    649,080
  Alternative Investments
  10




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FIRST MERCURY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 4. OTHER THAN TEMPORARY IMPAIRMENTS OF INVESTMENT SECURITIES
 Impairment of Investment Securities
     11




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FIRST MERCURY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 4. OTHER THAN TEMPORARY IMPAIRMENTS OF INVESTMENT SECURITIES  (Continued)
  January 1, 2010
    
    
    Additions for
    
    
    Additions for
    
    
    Reductions Due
    
    
    
    
    
    
    March 31, 2010Cumulative
    
    
    OTTI Securities
    
    
    OTTI Securities
    
    
    to Sales or
    
    
    Adjustments to
    
    
    CumulativeOTTI Credit
    
    
    Where No Credit
    
    
    Where Credit
    
    
    Intend/Required
    
    
    Book Value of
    
    
    OTTI CreditLosses
    
    
    Losses Were
    
    
    Losses Have
    
    
    to Sell of
    
    
    Credit-Impaired
    
    
    LossesRecognized for
    
    
    Recognized Prior
    
    
    Been Recognized
    
    
    Credit-
    
    
    Securities due to
    
    
    Recognized forSecurities Still
    
    
    to
    
    
    Prior to
    
    
    Impaired
    
    
    Changes in Cash
    
    
    Securities StillHeld
    
    
    January 1, 2010
    
    
    January  1, 2010
    
    
    Securities
    
    
    Flows
    
    
    Held(Dollars in thousands)Debt securities:Mortgage-backed securities,
collateralized mortgage obligations
and passthrough securities
    
    $
    796
    
    
    $
    
    
    
    $
    396
    
    
    $
    
    
    
    $
    
    
    
    $
    1,192All other corporate bonds
    
    
    569
    
    
    
    110
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    679Total debt securities
    
    $
    1,365
    
    
    $
    110
    
    
    $
    396
    
    
    $
    
    
    
    $
    
    
    
    $
    1,871
   Less than 12 Months
    
    
    Greater than 12 MonthsFair Value
    
    
    
    
    
    
    Fair Valueof
    
    
    
    
    
    
    ofInvestments
    
    
    
    
    
    
    InvestmentsWith
    
    
    Gross
    
    
    With
    
    
    GrossUnrealized
    
    
    Unrealized
    
    
    Unrealized
    
    
    UnrealizedLosses
    
    
    Losses
    
    
    Losses
    
    
    Losses(Dollars in thousands)Debt SecuritiesU.S. government securities
    
    $
    2,135
    
    
    $
    (8
    )
    
    $
    
    
    
    $
    Government agency mortgage-backed securities
    
    
    6,091
    
    
    
    (29
    )
    
    
    
    
    
    
    Government agency obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Collateralized mortgage obligations and other
asset-backed securities
    
    
    12,151
    
    
    
    (517
    )
    
    
    7,725
    
    
    
    (1,092
    )Obligations of states and political subdivisions
    
    
    13,554
    
    
    
    (170
    )
    
    
    1,232
    
    
    
    (62
    )Corporate bonds
    
    
    12,157
    
    
    
    (71
    )
    
    
    60
    
    
    
    Total Debt Securities
    
    
    46,088
    
    
    
    (795
    )
    
    
    9,017
    
    
    
    (1,154
    )Preferred Stocks
    
    
    
    
    
    
    
    
    
    
    420
    
    
    
    (86
    )Total
    
    $
    46,088
    
    
    $
    (795
    )
    
    $
    9,437
    
    
    $
    (1,240
    )
 12




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##### Table of Contents



FIRST MERCURY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 4. OTHER THAN TEMPORARY IMPAIRMENTS OF INVESTMENT SECURITIES  (Continued)
  Less than 12 Months
    
    
    Greater than 12 MonthsFair Value
    
    
    
    
    
    
    Fair Valueof
    
    
    
    
    
    
    ofInvestments
    
    
    
    
    
    
    InvestmentsWith
    
    
    Gross
    
    
    With
    
    
    GrossUnrealized
    
    
    Unrealized
    
    
    Unrealized
    
    
    UnrealizedLosses
    
    
    Losses
    
    
    Losses
    
    
    Losses(Dollars in thousands)Debt SecuritiesU.S. government securities
    
    $
    359
    
    
    $
    (3
    )
    
    $
    
    
    
    $
    Government agency mortgage-backed securities
    
    
    3,854
    
    
    
    (16
    )
    
    
    
    
    
    
    Government agency obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Collateralized mortgage obligations and other
asset-backed securities
    
    
    8,438
    
    
    
    (1,291
    )
    
    
    9,635
    
    
    
    (1,742
    )Obligations of states and political subdivisions
    
    
    14,044
    
    
    
    (237
    )
    
    
    1,179
    
    
    
    (56
    )Corporate bonds
    
    
    4,551
    
    
    
    (404
    )
    
    
    5,563
    
    
    
    (101
    )Total Debt Securities
    
    
    31,246
    
    
    
    (1,951
    )
    
    
    16,377
    
    
    
    (1,899
    )Preferred Stocks
    
    
    
    
    
    
    
    
    
    
    375
    
    
    
    (131
    )Total
    
    $
    31,246
    
    
    $
    (1,951
    )
    
    $
    16,752
    
    
    $
    (2,030
    )
  Amount ofUnrealizedLoss atSector
    
    March 31, 2010(Dollars in thousands)Debt SecuritiesU.S. Treasuries
    
    $
    (8
    )U.S. Agencies
    
    
    U.S. government securities
    
    
    (8
    )Government agency mortgage-backed securities
    
    
    (29
    )Government agency obligations
    
    
    MBS Passthroughs
    
    
    (18
    )CMOs
    
    
    (707
    )Asset Backed Securities
    
    
    (552
    )Commercial MBS
    
    
    (332
    )Collateralized mortgage obligations and other
asset-backed securities
    
    
    (1,609
    )Obligations of states and political subdivisions
    
    
    (232
    )Corporate Bonds
    
    
    (67
    )High Yield Bonds
    
    
    (4
    )Corporate Bonds
    
    
    (71
    )Total Debt Securities
    
    
    (1,949
    )Preferred Stocks
    
    
    (86
    )Short-term investments
    
    
    Total
    
    $
    (2,035
    )
 13




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##### Table of Contents



FIRST MERCURY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 4. OTHER THAN TEMPORARY IMPAIRMENTS OF INVESTMENT SECURITIES  (Concluded)
    % of Total
    
    
    Total
    
    
    Total
    
    
    Average Unrealized Loss
    
    
    % of LossAmortized Cost
    
    
    Amortized Cost
    
    
    Unrealized Losses
    
    
    as % of Amortized Cost
    
    
    > 12 Months(Dollars in thousands)Non Investment Grade
    
    
    10.6
    %
    
    $
    6,110
    
    
    $
    1,049
    
    
    
    17.2
    %
    
    
    57.8
    %Investment Grade
    
    
    89.4
    
    
    
    51,450
    
    
    
    986
    
    
    
    1.9
    
    
    
    64.3Total
    
    
    100.0
    %
    
    $
    57,560
    
    
    $
    2,035
    
    
    
    3.5
    %
    
    
    60.9
    %
    14




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##### Table of Contents



FIRST MERCURY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 5. FAIR VALUE MEASUREMENTS
   
 
 
  15




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##### Table of Contents



FIRST MERCURY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 5. FAIR VALUE MEASUREMENTS  (Continued)
  Fair Value Measurements UsingTotal
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3(Dollars in thousands)Available for sale investments:Fixed maturity securities
    
    $
    603,549
    
    
    $
    3,785
    
    
    $
    599,764
    
    
    $
    Equity securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Short-term investments
    
    
    45,531
    
    
    
    45,531
    
    
    
    Hybrid securities
    
    
    69,763
    
    
    
    
    
    
    
    69,763
    
    
    
    Alternative investments
    
    
    32,370
    
    
    
    
    
    
    
    12,942
    
    
    
    19,428Total
    
    $
    751,213
    
    
    $
    49,316
    
    
    $
    682,469
    
    
    $
    19,428
  Fair Value Measurements UsingTotal
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3(Dollars in thousands)Available for sale investments:Fixed maturity securities
    
    $
    587,148
    
    
    $
    4,121
    
    
    $
    583,027
    
    
    $
    Equity securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Short-term investments
    
    
    12,216
    
    
    
    12,216
    
    
    
    Hybrid securities
    
    
    69,525
    
    
    
    
    
    
    
    69,525
    
    
    
    Alternative investments
    
    
    30,601
    
    
    
    
    
    
    
    12,427
    
    
    
    18,174Total
    
    $
    699,490
    
    
    $
    16,337
    
    
    $
    664,979
    
    
    $
    18,174
   16




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##### Table of Contents



FIRST MERCURY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 5. FAIR VALUE MEASUREMENTS  (Concluded)
 Quarter EndedMarch 31,2010Level 3 investments, beginning of period
    
    $
    18,174Purchases
    
    
    Transfer to Level 2
    
    
    Transfer to Level 3
    
    
    Increase in market value
    
    
    1,254Level 3 investments as of March 31, 2010
    
    $
    19,428
   6. INCOME TAXES
    17




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##### Table of Contents



FIRST MERCURY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 7. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
  Three Months EndedMarch 31,2010
    
    
    2009(Dollars in thousands)Balance,beginning of period
    
    $
    488,444
    
    
    $
    372,721Less reinsurance recoverables
    
    
    164,488
    
    
    
    128,552Net Balance,beginning of period
    
    
    323,956
    
    
    
    244,169Incurred Related ToCurrent year
    
    
    34,011
    
    
    
    31,243Prior years
    
    
    
    
    
    
    (750
    )Total Incurred
    
    
    34,011
    
    
    
    30,493Paid Related ToCurrent year
    
    
    3,590
    
    
    
    906Prior years
    
    
    17,808
    
    
    
    12,547Total Paid
    
    
    21,398
    
    
    
    13,453Net Balance
    
    
    336,569
    
    
    
    261,209Plus reinsurance recoverables
    
    
    175,259
    
    
    
    138,943Balance,end of period
    
    $
    511,828
    
    
    $
    400,152
 8. REINSURANCE
  Three Months EndedMarch 31,2010
    
    
    2009(Dollars in thousands)Written PremiumsDirect
    
    $
    75,158
    
    
    $
    73,120Assumed
    
    
    8,576
    
    
    
    4,758Ceded
    
    
    (31,151
    )
    
    
    (28,053
    )Net Written Premiums
    
    $
    52,583
    
    
    $
    49,825Earned PremiumsDirect
    
    $
    74,742
    
    
    $
    73,304Assumed
    
    
    7,843
    
    
    
    4,287Ceded
    
    
    (30,526
    )
    
    
    (25,072
    )Earned but unbilled premiums
    
    
    (386
    )
    
    
    75Net Earned Premiums
    
    $
    51,673
    
    
    $
    52,594
   18




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##### Table of Contents



FIRST MERCURY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 8. REINSURANCE  (Concluded)
   9. SHARE REPURCHASE PROGRAM
  10. SPECIAL DIVIDEND
  11. STOCK COMPENSATION PLANS
    19




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##### Table of Contents



FIRST MERCURY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 11. STOCK COMPENSATION PLANS  (Continued)
   1998 Plan
    
    
    Omnibus PlanNumber of
    
    
    Weighted Average
    
    
    Number of
    
    
    Weighted AverageOptions
    
    
    Exercise Price
    
    
    Options
    
    
    Exercise PriceOutstanding at January 1, 2009
    
    
    431,050
    
    
    $
    2.82
    
    
    
    932,188
    
    
    $
    17.93Granted during the period
    
    
    
    
    
    
    
    
    
    
    197,500
    
    
    
    13.01Forfeited during the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised during the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cancelled during the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at March 31, 2009
    
    
    431,050
    
    
    $
    2.82
    
    
    
    1,129,688
    
    
    $
    17.07Outstanding at January 1, 2010
    
    
    419,762
    
    
    $
    2.83
    
    
    
    1,112,688
    
    
    $
    17.00Granted during the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited during the period
    
    
    
    
    
    
    
    
    
    
    (13,000
    )
    
    
    15.17Exercised during the period
    
    
    (362,600
    )
    
    
    2.81
    
    
    
    (4,500
    )
    
    
    13.01Cancelled during the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at March 31, 2010
    
    
    57,162
    
    
    $
    2.96
    
    
    
    1,095,188
    
    
    $
    17.04Exercisable at:March 31, 2009
    
    
    431,050
    
    
    $
    2.82
    
    
    
    379,465
    
    
    $
    18.43March 31, 2010
    
    
    57,162
    
    
    
    2.96
    
    
    
    731,184
    
    
    
    17.79
    Options Outstanding
    
    Options ExercisableWeighted-Average
    
    
    Weighted-Average
    
    
    
    
    
    
    Weighted-AverageRange of
    
    Outstanding as of
    
    
    Remaining
    
    
    Exercise Price Per
    
    
    Exercisable as of
    
    
    Exercise Price PerExercisable Price
    
    March 31, 2010
    
    
    Contractual Life
    
    
    Share
    
    
    March 31, 2010
    
    
    Share1998 Plan$1.51  $1.95
    
    
    34,223
    
    

    1.72 Years
    
    $
    1.68
    
    
    
    34,223
    
    
    $
    1.68$4.86  $6.49
    
    
    22,939
    
    

    4.64
    
    
    
    4.86
    
    
    
    22,939
    
    
    
    4.86Total
    
    
    57,162
    
    

    2.89
    
    
    
    2.96
    
    
    
    57,162
    
    
    
    2.96Omnibus Plan$10.98  $14.93
    
    
    350,000
    
    

    8.57 Years
    
    $
    13.72
    
    
    
    577,017
    
    
    $
    18.78$17.00  $20.75
    
    
    745,188
    
    

    6.26
    
    
    
    18.60
    
    
    
    154,167
    
    
    
    14.10Total
    
    
    1,095,188
    
    

    6.99
    
    
    
    17.04
    
    
    
    731,184
    
    
    
    17.79
 20




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##### Table of Contents



FIRST MERCURY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 11. STOCK COMPENSATION PLANS  (Concluded)
  Number ofRestricted SharesOutstanding at January 1, 2009
    
    
    62,166Shares granted
    
    
    93,500Shares vested
    
    
    (5,001
    )Shares forfeited
    
    
    Outstanding at March 31, 2009
    
    
    150,665Outstanding at January 1, 2010
    
    
    155,499Shares granted
    
    
    89,000Shares vested
    
    
    (36,167
    )Shares forfeited
    
    
    (2,000
    )Outstanding at March 31, 2010
    
    
    206,332
  Three Months EndedMarch 31,2010
    
    2009Omnibus PlanExpected term
    
    
    N/A
    
    
    6 yearsExpected stock price volatility
    
    
    N/A
    
    
    
    41.11
    %Risk-free interest rate
    
    
    N/A
    
    
    
    2.16
    %Expected dividend yield
    
    
    N/A
    
    
    
    Estimated fair value per option
    
    
    N/A
    
    
    $
    5.53
    21




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##### Table of Contents



FIRST MERCURY FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 12. ACCUMULATED OTHER COMPREHENSIVE INCOME
  March 31,2010
    
    
    2009(Dollars in thousands)Unrealized holding losses on securities having
credit losses recognized in the condensed consolidated
statements of income, net of tax
    
    $
    (1,286
    )
    
    $
    Unrealized holding gains on securities having no
credit losses recognized in the condensed consolidated
statements of income, net of tax
    
    
    21,984
    
    
    
    1,956Fair value of interest rate swaps, net of tax
    
    
    (1,929
    )
    
    
    (1,530
    )Total accumulated other comprehensive income
    
    $
    18,769
    
    
    $
    426
 13. INSURANCE REGULATION
  14. RESTRUCTURING
  15. SUBSEQUENT EVENT
  22




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   Overview
 ®
     23




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##### Table of Contents



GAAP and Non-GAAP Financial Performance Metrics
   Gross written premiums.
 Net written premiums.
 Combined ratio.
 Critical Accounting Policies
   Use of Estimates
  24




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##### Table of Contents



Loss and Loss Adjustment Expense Reserves
    
    
    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.
    March 31,
    
    
    December 31,2010
    
    
    2009(Dollars in thousands)GrossCase reserves
    
    $
    145,055
    
    
    $
    125,561IBNR and ULAE reserves
    
    
    366,773
    
    
    
    362,883Total reserves
    
    $
    511,828
    
    
    $
    488,444Net of reinsuranceCase reserves
    
    $
    96,532
    
    
    $
    83,911IBNR and ULAE reserves
    
    
    240,037
    
    
    
    240,045Total
    
    $
    336,569
    
    
    $
    323,956
 Revenue Recognition
 Premiums
 25




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##### Table of Contents



Commissions and Fees
 Investments
   
 
 26




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##### Table of Contents




   Impairment of Investment Securities
     27




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##### Table of Contents



Deferred Policy Acquisition Costs
  Goodwill and Intangible Assets
    28




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##### Table of Contents



Results of Operations
 Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009
  Three Months EndedMarch 31,2010
    
    
    2009
    
    
    Change(Dollars in thousands)Operating RevenueNet earned premiums
    
    $
    51,673
    
    
    $
    52,594
    
    
    
    (2
    )%Commissions and fees
    
    
    7,802
    
    
    
    6,894
    
    
    
    13Net investment income
    
    
    8,669
    
    
    
    6,434
    
    
    
    35Net realized gains on investments
    
    
    4,185
    
    
    
    1,794
    
    
    
    133Other-than-temporary impairment losses
on investments
    
    
    (506
    )
    
    
    (37
    )
    
    
    1,268Total Operating Revenues
    
    
    71,823
    
    
    
    67,679
    
    
    
    6Operating ExpensesLosses and loss adjustment expenses, net
    
    
    34,011
    
    
    
    30,493
    
    
    
    12Amortization of intangible assets
    
    
    516
    
    
    
    575
    
    
    
    (10
    )Other operating expenses
    
    
    24,304
    
    
    
    22,552
    
    
    
    8Restructuring
    
    
    5,018
    
    
    
    
    
    
    
    N/MTotal Operating Expenses
    
    
    63,849
    
    
    
    53,620
    
    
    
    19Operating Income
    
    
    7,974
    
    
    
    14,059
    
    
    
    (43
    )Interest Expense
    
    
    1,386
    
    
    
    1,310
    
    
    
    6Income Before Income Taxes
    
    
    6,588
    
    
    
    12,749
    
    
    
    (48
    )Income Taxes
    
    
    1,376
    
    
    
    4,068
    
    
    
    66Net Income
    
    $
    5,212
    
    
    $
    8,681
    
    
    
    (40
    )%Loss Ratio
    
    
    65.8
    %
    
    
    58.0
    %
    
    7.8 pointsUnderwriting Expense Ratio
    
    
    43.2
    %
    
    
    30.4
    %
    
    12.8 pointsCombined Ratio
    
    
    109.0
    %
    
    
    88.4
    %
    
    20.6 points
 29




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##### Table of Contents



Operating Revenue
 Net Earned Premiums
 Three Months EndedMarch 31,2010
    
    
    2009
    
    
    Change(Dollars in thousands)Written premiumsDirect
    
    $
    75,158
    
    
    $
    73,120
    
    
    
    3
    %Assumed
    
    
    8,576
    
    
    
    4,758
    
    
    
    80Ceded
    
    
    (31,151
    )
    
    
    (28,053
    )
    
    
    11Net written premiums
    
    $
    52,583
    
    
    $
    49,825
    
    
    
    6
    %Earned premiumsDirect
    
    $
    74,742
    
    
    $
    73,304
    
    
    
    2
    %Assumed
    
    
    7,843
    
    
    
    4,287
    
    
    
    83Ceded
    
    
    (30,526
    )
    
    
    (25,072
    )
    
    
    22Earned but
unbilled premiums
    
    
    (386
    )
    
    
    75
    
    
    
    (615
    )Net earned premiums
    
    $
    51,673
    
    
    $
    52,594
    
    
    
    (2
    )%
     30




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##### Table of Contents



Commissions and Fees
 Three Months EndedMarch 31,2010
    
    
    2009
    
    
    Change(Dollars in thousands)Insurance underwriting commissions and
fees
    
    $
    1,469
    
    
    $
    1,357
    
    
    
    8
    %Insurance services commissions and fees
    
    
    6,333
    
    
    
    5,537
    
    
    
    14Total commissions and fees
    
    $
    7,802
    
    
    $
    6,894
    
    
    
    13
    %
  Net Investment Income and Realized Gains on Investments
  Other-Than-Temporary Impairment Losses on Investments.
 Operating Expenses
 Losses and Loss Adjustment Expenses
 31




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##### Table of Contents



Other Operating Expenses
 Three Months EndedMarch 31,2010
    
    
    2009
    
    
    Change(Dollars in thousands)Amortization of deferred acquisition
expenses
    
    $
    13,143
    
    
    $
    13,329
    
    
    
    (1
    )%Other underwriting and operating expenses
    
    
    11,161
    
    
    
    9,223
    
    
    
    21Other operating expenses
    
    $
    24,304
    
    
    $
    22,552
    
    
    
    8
    %
  Restructuring .
 Interest Expense
 Income Taxes
 Liquidity and Capital Resources
 Sources and Uses of Funds
 FMFC
 Insurance Subsidiaries
  Non-insurance Subsidiaries
 32




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##### Table of Contents



Cash Flows
  Three Months EndedMarch 31,2010
    
    
    2009(Dollars in thousands)Cash and cash equivalents provided by (used
in):Operating activities
    
    $
    53,121
    
    
    $
    25,697Investing activities
    
    
    (43,320
    )
    
    
    (42,944
    )Financing activities
    
    
    (8,609
    )
    
    
    Change in cash and cash equivalents
    
    $
    1,192
    
    
    $
    (17,247
    )
     Stockholders Equity
  33




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##### Table of Contents



March 31,
    
    
    December 31,2010
    
    
    2009(Dollars in thousands, except share and per sharedata)Total stockholders equity
    
    $
    289,735
    
    
    $
    316,084Intangible assets, net
    
    
    (36,588
    )
    
    
    (37,104
    )Deferred tax liability  intangible assets, net
    
    
    12,432
    
    
    
    12,613Goodwill
    
    
    (25,483
    )
    
    
    (25,483
    )Tangible stockholders equity attributable to
common shareholders
    
    $
    240,096
    
    
    $
    266,110Common shares outstanding
    
    
    17,635,206
    
    
    
    17,181,106Book value per share
    
    $
    16.43
    
    
    $
    18.40Tangible book value per share
    
    $
    13.61
    
    
    $
    15.49
  Long-term debt
 Junior Subordinated Debentures
 Credit Agreement
 34




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##### Table of Contents



Derivative Financial Instruments
 Cash and Invested Assets
  Market Value
    
    
    % of Portfolio(Dollars in thousands)Short Term Investments
    
    $
    45,531
    
    
    
    6.1
    %U.S. Treasuries
    
    
    3,785
    
    
    
    0.5
    %U.S. Agencies
    
    
    1,014
    
    
    
    0.1
    %Municipal Bonds
    
    
    194,412
    
    
    
    25.9
    %Taxable Municipal Bonds
    
    
    8,499
    
    
    
    1.1
    %Corporate Bonds
    
    
    139,364
    
    
    
    18.6
    %High Yield Bonds
    
    
    20,524
    
    
    
    2.7
    %MBS Passthroughs
    
    
    55,085
    
    
    
    7.3
    %CMOs
    
    
    96,403
    
    
    
    12.8
    %Asset Backed Securities
    
    
    23,165
    
    
    
    3.1
    %Commercial MBS
    
    
    59,811
    
    
    
    8.0
    %Convertible Securities
    
    
    69,763
    
    
    
    9.3
    %High Yield Convertible Fund
    
    
    19,428
    
    
    
    2.6
    %Structured Finance Fund
    
    
    12,942
    
    
    
    1.7
    %Preferred Stocks
    
    
    1,487
    
    
    
    0.2
    %Total
    
    $
    751,213
    
    
    
    100.0
    %
  % of TotalAverage Life
    
    InvestmentLess than one year
    
    
    16.6
    %One to two years
    
    
    11.2
    %Two to three years
    
    
    14.7
    %Three to four years
    
    
    18.8
    %Four to five years
    
    
    10.8
    %Five to seven years
    
    
    11.7
    %More than seven years
    
    
    16.2
    %Total
    
    
    100.0
    %
 35




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##### Table of Contents



% of TotalS&P Rating
    
    InvestmentsAAA
    
    
    47.1
    %AA
    
    
    13.7
    %A
    
    
    13.5
    %BBB
    
    
    10.6
    %BB
    
    
    7.1
    %B
    
    
    1.9
    %CCC
    
    
    5.7
    %CC
    
    
    0.4
    %Total
    
    
    100.0
    %
     36




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##### Table of Contents



Gross UnrealizedAmortized Cost
    
    
    Gains
    
    
    Losses
    
    
    Market Value(Dollars in thousands)Debt SecuritiesU.S. government securities
    
    $
    3,696
    
    
    $
    97
    
    
    $
    (8
    )
    
    $
    3,785Government agency mortgage-backed securities
    
    
    101,346
    
    
    
    4,596
    
    
    
    (29
    )
    
    
    105,913Government agency obligations
    
    
    983
    
    
    
    31
    
    
    
    
    
    
    
    1,014Collateralized mortgage obligations and other
asset-backed securities
    
    
    121,020
    
    
    
    9,140
    
    
    
    (1,609
    )
    
    
    128,551Obligations of states and political subdivisions
    
    
    194,663
    
    
    
    8,480
    
    
    
    (232
    )
    
    
    202,911Corporate bonds
    
    
    148,216
    
    
    
    11,743
    
    
    
    (71
    )
    
    
    159,888Total Debt Securities
    
    
    569,924
    
    
    
    34,087
    
    
    
    (1,949
    )
    
    
    602,062Preferred stocks
    
    
    1,416
    
    
    
    157
    
    
    
    (86
    )
    
    
    1,487Short-term investments
    
    
    45,531
    
    
    
    
    
    
    
    
    
    
    
    45,531Total
    
    $
    616,871
    
    
    $
    34,244
    
    
    $
    (2,035
    )
    
    $
    649,080
  37




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##### Table of Contents



Less than 12 Months
    
    
    Greater than 12 MonthsFair Value
    
    
    
    
    
    
    Fair Valueof
    
    
    
    
    
    
    ofInvestments
    
    
    
    
    
    
    InvestmentsWith
    
    
    Gross
    
    
    With
    
    
    GrossUnrealized
    
    
    Unrealized
    
    
    Unrealized
    
    
    UnrealizedLosses
    
    
    Losses
    
    
    Losses
    
    
    Losses(Dollars in thousands)Debt SecuritiesU.S. government securities
    
    $
    2,135
    
    
    $
    (8
    )
    
    $
    
    
    
    $
    Government agency mortgage-backed securities
    
    
    6,091
    
    
    
    (29
    )
    
    
    
    
    
    
    Government agency obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Collateralized mortgage obligations and other
asset-backed securities
    
    
    12,151
    
    
    
    (517
    )
    
    
    7,725
    
    
    
    (1,092
    )Obligations of states and political subdivisions
    
    
    13,554
    
    
    
    (170
    )
    
    
    1,232
    
    
    
    (62
    )Corporate bonds
    
    
    12,157
    
    
    
    (71
    )
    
    
    60
    
    
    
    Total Debt Securities
    
    
    46,088
    
    
    
    (795
    )
    
    
    9,017
    
    
    
    (1,154
    )Preferred Stocks
    
    
    
    
    
    
    
    
    
    
    420
    
    
    
    (86
    )Total
    
    $
    46,088
    
    
    $
    (795
    )
    
    $
    9,437
    
    
    $
    (1,240
    )
  Less than 12 Months
    
    
    Greater than 12 MonthsFair Value
    
    
    
    
    
    
    Fair Valueof
    
    
    
    
    
    
    ofInvestments
    
    
    
    
    
    
    InvestmentsWith
    
    
    Gross
    
    
    With
    
    
    GrossUnrealized
    
    
    Unrealized
    
    
    Unrealized
    
    
    UnrealizedLosses
    
    
    Losses
    
    
    Losses
    
    
    Losses(Dollars in thousands)Debt SecuritiesU.S. government securities
    
    $
    359
    
    
    $
    (3
    )
    
    $
    
    
    
    $
    Government agency mortgage-backed securities
    
    
    3,854
    
    
    
    (16
    )
    
    
    
    
    
    
    Government agency obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Collateralized mortgage obligations and other
asset-backed securities
    
    
    8,438
    
    
    
    (1,291
    )
    
    
    9,635
    
    
    
    (1,742
    )Obligations of states and political subdivisions
    
    
    14,044
    
    
    
    (237
    )
    
    
    1,179
    
    
    
    (56
    )Corporate bonds
    
    
    4,551
    
    
    
    (404
    )
    
    
    5,563
    
    
    
    (101
    )Total Debt Securities
    
    
    31,246
    
    
    
    (1,951
    )
    
    
    16,377
    
    
    
    (1,899
    )Preferred Stocks
    
    
    
    
    
    
    
    
    
    
    375
    
    
    
    (131
    )Total
    
    $
    31,246
    
    
    $
    (1,951
    )
    
    $
    16,752
    
    
    $
    (2,030
    )
  38




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##### Table of Contents



Amount ofUnrealized Loss atSector
    
    March 31, 2010(Dollars in thousands)Short Term Investments
    
    $
    U.S. Treasuries
    
    
    (8
    )U.S. Agencies
    
    
    Municipal Bonds
    
    
    (189
    )Taxable Municipal Bonds
    
    
    (43
    )Corporate Bonds
    
    
    (67
    )High Yield Bonds
    
    
    (4
    )MBS Passthroughs
    
    
    (18
    )CMOs
    
    
    (736
    )Asset Backed Securities
    
    
    (552
    )Commercial MBS
    
    
    (332
    )Convertible Securities
    
    
    High Yield Convertible Fund
    
    
    Structured Finance Fund
    
    
    Preferred Stocks
    
    
    (86
    )Common Stocks
    
    
    $
    (2,035
    )
   % of Total
    
    
    Total
    
    
    Total
    
    
    Average Unrealized Loss
    
    
    % of LossAmortized Cost
    
    
    Amortized Cost
    
    
    Unrealized Losses
    
    
    as % of Amortized Cost
    
    
    > 12 Months(Dollars in thousands)Non Investment Grade
    
    
    10.6
    %
    
    $
    6,110
    
    
    $
    1,049
    
    
    
    17.2
    %
    
    
    57.8
    %Investment Grade
    
    
    89.4
    
    
    
    51,450
    
    
    
    986
    
    
    
    1.9
    
    
    
    64.3Total
    
    
    100.0
    %
    
    $
    57,560
    
    
    $
    2,035
    
    
    
    3.5
    %
    
    
    60.9
    %
    39




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##### Table of Contents



Deferred Policy Acquisition Costs
  Reinsurance
  Three Months EndedMarch 31,2010
    
    
    2009(Dollars in thousands)Direct written premiums
    
    $
    75,158
    
    
    $
    73,120Ceded written premiums
    
    
    31,151
    
    
    
    28,053Net written premiums
    
    $
    44,007
    
    
    $
    45,067Ceded written premiums as percentage of
direct written premiums
    
    
    41.4
    %
    
    
    38.4
    %
  Three Months EndedMarch 31,2010
    
    2009(Dollars in thousands)Ceded written premiums
    
    $
    31,151
    
    
    $
    28,053Ceded premiums earned
    
    
    30,526
    
    
    
    25,072Losses and loss adjustment expenses
ceded
    
    
    17,776
    
    
    
    17,608Ceding commissions
    
    
    7,733
    
    
    
    6,666
   40




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##### Table of Contents



Recent Accounting Pronouncements
 Accounting Standards Codification
  Prospective Accounting Standards
    41




---



##### Table of Contents



42




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
  43




---



##### Table of Contents



PART II.  OTHER INFORMATION
 
 Item 1. Legal Proceedings
   
 Item 6. Exhibits
  44




---



##### Table of Contents



SIGNATURES
  FIRST MERCURY FINANCIAL CORPORATIONBy:
    /s/ RICHARD  H. SMITHRichard H. SmithChairman, President and Chief Executive OfficerBy:
    /s/ JOHN A. MARAZZAJohn A. MarazzaDate:
    Executive Vice President and Chief Financial Officer


May 10, 2010 45




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##### Table of Contents



INDEX OF EXHIBITS
 ExhibitNumber
    
    Note
    
    Description31 (a)
    
    
    (1
    )
    
    Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act
of 193431 (b)
    
    
    (1
    )
    
    Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act
of 193432 (a)
    
    
    (1
    )
    
    Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(b) of the
Securities Exchange Act of 193432 (b)
    
    
    (1
    )
    
    Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(b) of the
Securities Exchange Act of 1934
 
 (1)
    
    - Filed herewith 46