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Announcement:

Moody's affirms First Mercury's ratings, changes outlook to positive

31 Oct 2010

New York, October 31, 2010 -- Moody's Investors Service has affirmed the Ba2 long-term issuer rating of First Mercury Financial Corporation (NYSE: FMR; First Mercury) and the Baa2 insurance financial strength (IFS) rating of First Mercury Insurance Company following the group's announcement that it will be acquired by Fairfax Financial Holdings for approximately $294 million. The outlook for the ratings has been changed to positive from negative given the anticipated benefits from being part of a larger, more diversified group. The transaction is expected to close in the first quarter of 2011, subject to customary conditions, including approval by First Mercury's stockholders and regulatory approvals.

Commenting on the acquisition, Moody's analyst Enrico Leo said, "The positive outlook reflects the benefits that First Mercury could realize over time from being a part of a larger organization with greater flexibility and financial resources." Moody's also expects that First Mercury's market presence could improve over time.

First Mercury's ratings reflect the company's established position in providing general liability insurance for the security industry, its modest catastrophe exposure, good profit margins in its core business, and commission and fee income from certain subsidiaries. These strengths are partly offset by its modest scale, risks associated with recent growth (both organic and via acquisitions), and the company's focus on medium-tail casualty business -- which results in uncertainty with respect to the adequacy of loss reserves. During the third quarter of 2010, First Mercury recorded $11.4 million of adverse reserve development on prior accident years, or about 2.5% (after-tax) of shareholders' equity, in the company's primary general liability and professional liability lines of business. Moody's believes that while the company has increased its pricing, reserving, and risk management functions in recent years, the company's rapid growth during the recent soft market could make reserves more volatile in future periods.

While this transaction is expected to broaden Crum & Forster's surplus lines and specialty platform, the companies are expected to operate somewhat autonomously. The ratings of Crum & Forster Holdings and its operating subsidiaries (Baa1 IFS) were not affected by this action.

The following ratings have been affirmed with a positive outlook:

First Mercury Insurance Company -- insurance financial strength at Baa2;

First Mercury Financial Corporation -- long-term issuer rating at Ba2;

First Mercury Financial Corporation (NYSE: FMR), headquartered in Southfield, Michigan, is the holding company for two insurance operating companies, a wholesale insurance broker (CoverX Corporation), and a managing general agency (American Management Corporation). Its insurance subsidiaries provide specialty insurance products and services to the excess and surplus lines market in the United States, with particular expertise in the security industry (e.g., security guards, etc.). For the first nine months of 2010, First Mercury reported $203 million in revenue, $7.3 million in net income, and a 113.9% combined ratio. Shareholders' equity was $302 million as of September 30, 2010.

The last rating action on First Mercury was on July 6, 2010, when Moody's affirmed its Ba2 long-term issuer rating and Baa2 IFS rating of its insurance subsidiary and changed its outlook to negative following its announcement to purchase Valiant Insurance Group.

The principal methodology used in rating First Mercury is "Moody's Global Rating Methodology for Property and Casualty Insurers," which can be found at www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating First Mercury can also be found in the Rating Methodologies sub-directory on Moody's website.

Please see the ratings tab on the First Mercury page on Moodys.com for the last rating action and the rating history.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Moody's insurance financial strength ratings are opinions of the ability of insurance companies to pay punctually senior policyholder claims and obligations. For more information, visit our website at www.moodys.com/insurance.

New York
Enrico Leo
Analyst
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Robert Riegel
MD - Insurance
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.

Moody's affirms First Mercury's ratings, changes outlook to positive
No Related Data.
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