First Mercury Financial Corporation Announces Acquisition of Valiant Insurance Group, Inc.

SOUTHFIELD, Mich., July 1 /PRNewswire-FirstCall/ -- First Mercury Financial Corporation (NYSE: FMR) ("First Mercury" or the "Company") today announced that it entered into a definitive agreement whereby its principal insurance subsidiary, First Mercury Insurance Company, will acquire Valiant Insurance Group, Inc. ("Valiant"), a subsidiary of Ariel Holdings, Ltd. ("Ariel").  

First Mercury will purchase Valiant for an amount equal to Valiant's tangible book value, which is anticipated to be approximately $55 million at closing.  The Company will use cash from its insurance subsidiaries to complete the transaction.  Under the terms of the agreement, Ariel has agreed to provide First Mercury with full protection related to the runoff of Valiant's net loss and loss adjustment expense reserves and unearned premium reserves reflected on the closing date balance sheet.  The transaction is subject to customary closing conditions and regulatory approvals and is anticipated to close in the fourth quarter of 2010.

The components of Valiant's existing underwriting platform to be retained by First Mercury include primary and excess casualty, professional and management liability and marine classes of business.  First Mercury intends to retain Valiant's experienced underwriting teams that produce these classes of business.  Classes of Valiant business that are not consistent with First Mercury's specialty niche underwriting focus will be discontinued.  Through May 31, 2010, gross written premiums for Valiant were approximately $34 million.  In the twelve months following the closing of the transaction, First Mercury anticipates that Valiant will write approximately $50 to $60 million of gross written premiums.  Consistent with past practice to prudently use reinsurance on newer lines of business, First Mercury intends to retain approximately 33 percent of Valiant's anticipated gross written premiums.  The acquisition is expected to be accretive to First Mercury's book value per share immediately at closing.  First Mercury does not expect the transaction to have a material effect on 2010 earnings and expects the transaction to be modestly accretive to earnings in 2011.

"For some time, we have been evaluating opportunities to enter the admitted market.  Valiant provides us with an attractive opportunity to gain admitted licensing, expand our resources in professional and management liability and selected specialty casualty underwriting classes, while adding marine underwriting capabilities to take advantage of improving market conditions in this line," said Richard H. Smith, Chairman, President and Chief Executive Officer of First Mercury.  Smith added, "We are pleased to have Gary Dubois, President and Chief Executive Officer of Valiant, and Scott Bayer, Senior Vice President of Valiant, join First Mercury.  Gary and Scott bring significant experience and capabilities in their leadership roles leading Valiant's experienced and well regarded underwriting teams and will become an integral part of First Mercury."

Gary Dubois said, "We look forward to joining the First Mercury team and immediately contributing to the profitable growth of the Company."

BofA Merrill Lynch acted as exclusive financial advisor to First Mercury on the transaction, and McDermott Will & Emery LLP acted as First Mercury’s legal advisor.  Aon Benfield Securities, Inc. acted as exclusive financial advisor to Ariel on the transaction, and Katten Muchin Rosenman LLP acted as Ariel’s legal advisor.

About First Mercury Financial Corporation

First Mercury Financial Corporation provides insurance products and services primarily to the specialty commercial insurance markets, focusing on niche and underserved segments where we believe that we have underwriting expertise and other competitive advantages. During the Company's 37 years of underwriting risks, First Mercury has developed the underwriting expertise and cost-efficient infrastructure which has enabled us to effectively underwrite such risks.  Our risk-taking subsidiaries offer insurance products through our distribution subsidiaries: CoverX®, FM Emerald and AMC, which are recognized brands among insurance producers.

Safe Harbor Statement

This release contains forward-looking statements that relate to future periods and includes statements regarding our anticipated performance.  Generally, the words "anticipates," "believes," "expects," "intends," "estimates," "projects," "plans" and similar expressions identify forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements or industry results to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. These risks, uncertainties and other important factors include, among others: recent and future events and circumstances impacting financial, stock, and capital markets, and the responses to such events by governments and the financial communities; the impact of catastrophic events and the occurrence of significant severe weather conditions on our operating results; our ability to maintain or the lowering or loss of one of our financial or claims-paying ratings; our actual incurred losses exceeding our loss and loss adjustment expense reserves; the failure of reinsurers to meet their obligations; our estimates for accrued profit sharing commissions are based on loss ratio performance and could be reduced if the underlying loss ratios deteriorate; our inability to obtain reinsurance coverage at reasonable prices; the failure of any loss limitations or exclusions or changes in claims or coverage; our lack of long-term operating history in certain specialty classes of insurance; our ability to acquire and retain additional underwriting expertise and capacity; the concentration of our insurance business in relatively few specialty classes; the increasingly competitive property and casualty marketplace; fluctuations and uncertainty within the excess and surplus lines insurance industry; the extensive regulations to which our business is subject and our failure to comply with these regulations; our ability to maintain our risk-based capital at levels required by regulatory authorities; our inability to realize our investment objectives; an economic downturn or other economic conditions adversely affecting our financial position; and the risks identified in our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K.  Given these uncertainties, you are cautioned not to place undue reliance on these forward-looking statements.  We assume no obligation to update or revise them or provide reasons why actual results may differ.  

The Company uses the Investor Relations page of its website at www.firstmercury.com to make information available to its investors and the public.

SOURCE First Mercury Financial Corporation