##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 Quarterly Report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
 for the Quarterly Period Ended June 30, 2007,
 or
 Transition report pursuant to Section 13 or 15(d) Of the Exchange Act
 for the Transition Period from  to
 No. 000-25425
 (Commission File Number)
 MERCER INSURANCE GROUP, INC.
  PENNSYLVANIA
    
    23-2934601(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)10 North Highway 31, P.O. Box 278, Pennington, NJ
    
    08534(Address of principal executive offices)
    
    (Zip Code)
  
  
  þ o
  o þ o
 o þ
  Number of Shares Outstanding as of August 1, 2007COMMON STOCK (No Par Value)
    
    6,561,734(Title of Class)
    
    (Outstanding Shares)




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##### 



TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 4. Controls and Procedures
    
    
    34PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    34Item 1A. Risk Factors
    
    
    34Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    34Item 3. Defaults Upon Senior Securities
    
    
    34Item 4. Submission of Matters to a Vote of Security Holders
    
    
    35Item 5. Other Information
    
    
    35Item 6. Exhibits
    
    
    35SIGNATURES
    
    
    36Exhibits:CERTIFICATION OF CHIEF EXECUTIVE OFFICERCERTIFICATION OF CHIEF FINANCIAL OFFICERCERTIFICATION OF CHIEF EXECUTIVE OFFICERCERTIFICATION OF CHIEF FINANCIAL OFFICER
  Exhibit No.
    
    Title3.1
    
    Articles of Incorporation of Mercer Insurance Group, Inc. (incorporated by reference herein to the
Companys Pre-effective Amendment No. 3 on Form S-1, SEC File No. 333-104897.)3.2
    
    Bylaws of Mercer Insurance Group, Inc. (incorporated by reference herein to the Companys Annual Report
on Form 10-K, SEC File No. 000-25425, for the fiscal year ended December 31, 2003.)31.1
    
    Certification of Chief Executive Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002
 2




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Forward-looking Statements
                    3




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4




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Part I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEET
 June 30,
    
    
    December 31,2007
    
    
    2006(Dollars in thousands)(Unaudited)AssetsInvestments, at fair value:Fixed-income securities, available for sale, at fair value (cost $299,889 and $274,769,
respectively)
    
    $
    295,101
    
    
    
    273,454Equity
securities, at fair value (cost $11,225 and $10,940, respectively)
    
    
    16,998
    
    
    
    16,522Short-term investments, at cost, which approximates fair value
    
    
    360
    
    
    
    7,692Total investments
    
    
    312,459
    
    
    
    297,668Cash and cash equivalents
    
    
    15,112
    
    
    
    17,618Premiums receivable
    
    
    44,697
    
    
    
    38,030Reinsurance receivables
    
    
    92,970
    
    
    
    87,987Prepaid reinsurance premiums
    
    
    11,109
    
    
    
    16,383Deferred policy acquisition costs
    
    
    20,433
    
    
    
    16,708Accrued investment income
    
    
    3,815
    
    
    
    3,204Property and equipment, net
    
    
    12,314
    
    
    
    11,936Deferred income taxes
    
    
    9,450
    
    
    
    7,775Goodwill
    
    
    5,416
    
    
    
    5,625Other assets
    
    
    3,633
    
    
    
    4,033Total assets
    
    $
    531,408
    
    
    
    506,967Liabilities and EquityLiabilities:Losses and loss adjustment expenses
    
    $
    263,309
    
    
    
    250,455Unearned premiums
    
    
    89,598
    
    
    
    81,930Accounts payable and accrued expenses
    
    
    13,885
    
    
    
    13,442Other reinsurance balances
    
    
    20,976
    
    
    
    24,588Trust preferred securities
    
    
    15,550
    
    
    
    15,542Advances under line of credit
    
    
    3,000
    
    
    
    3,000Other liabilities
    
    
    2,210
    
    
    
    2,171Total liabilities
    
    
    408,528
    
    
    
    391,128Stockholders Equity:Preferred stock, no par value, authorized 5,000,000 shares, no shares issued and outstanding
    
    
    
    
    
    
    Common stock, no par value, authorized 15,000,000 shares, issued 7,067,233 shares and
7,064,233 shares, outstanding 6,672,364 and 6,582,232 shares
    
    
    
    
    
    
    Additional paid-in capital
    
    
    69,697
    
    
    
    68,473Accumulated other comprehensive income:Unrealized gains in investments, net of deferred income taxes
    
    
    649
    
    
    
    2,815Retained Earnings
    
    
    62,341
    
    
    
    54,629Unearned ESOP shares
    
    
    (3,446
    )
    
    
    (3,757
    )Treasury stock, 505,499 and 503,513 shares
    
    
    (6,361
    )
    
    
    (6,321
    )Total stockholders equity
    
    
    122,880
    
    
    
    115,839Total liabilities and stockholders equity
    
    $
    531,408
    
    
    
    506,967
  5




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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF EARNINGS
Six Months Ended June 30, 2007 and 2006
 2007
    
    
    2006(Dollars in thousands,except per share data)(Unaudited)Revenue:Net premiums earned
    
    $
    69,064
    
    
    
    67,168Investment income, net of expenses
    
    
    6,712
    
    
    
    4,460Net realized investment gains
    
    
    633
    
    
    
    605Other revenue
    
    
    907
    
    
    
    1,078Total revenue
    
    
    77,316
    
    
    
    73,311Expenses:Losses and loss adjustment expenses
    
    
    42,630
    
    
    
    42,195Amortization of deferred policy acquisition
costs (related party amounts of $579 and
$614, respectively)
    
    
    17,959
    
    
    
    15,140Other expenses
    
    
    4,215
    
    
    
    7,487Interest expense
    
    
    611
    
    
    
    601Total expenses
    
    
    65,415
    
    
    
    65,423Income before income taxes
    
    
    11,901
    
    
    
    7,888Income taxes
    
    
    3,558
    
    
    
    2,343Net income
    
    $
    8,343
    
    
    
    5,545Earnings per common share:Basic
    
    $
    1.37
    
    
    
    0.93Diluted
    
    $
    1.32
    
    
    
    0.90Weighted average shares:Basic
    
    
    6,100,652
    
    
    
    5,982,071Diluted
    
    
    6,307,075
    
    
    
    6,154,893
  6




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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended June 30, 2007 and 2006
 2007
    
    
    2006(Dollars in thousands,except per share data)(Unaudited)Revenue:Net premiums earned
    
    $
    35,076
    
    
    
    33,631Investment income, net of expenses
    
    
    3,771
    
    
    
    2,369Net realized investment gains
    
    
    680
    
    
    
    298Other revenue
    
    
    481
    
    
    
    587Total revenue
    
    
    40,008
    
    
    
    36,885Expenses:Losses and loss adjustment expenses
    
    
    21,821
    
    
    
    21,549Amortization of deferred policy
acquisition costs (related party
amounts of $291 and $307, respectively)
    
    
    9,182
    
    
    
    7,848Other expenses
    
    
    361
    
    
    
    3,052Interest expense
    
    
    304
    
    
    
    304Total expenses
    
    
    31,668
    
    
    
    32,753Income before income taxes
    
    
    8,340
    
    
    
    4,132Income taxes
    
    
    2,550
    
    
    
    1,237Net income
    
    $
    5,790
    
    
    
    2,895Earnings per common share:Basic
    
    $
    0.95
    
    
    
    0.48Diluted
    
    $
    0.92
    
    
    
    0.47Weighted average shares:Basic
    
    
    6,113,966
    
    
    
    5,994,228Diluted
    
    
    6,324,737
    
    
    
    6,191,449
  7




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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
Six months ended June 30, 2007
(Unaudited, dollars in thousands)
 AccumulatedAdditional
    
    
    other
    
    
    
    
    
    
    UnearnedPreferred
    
    
    Common
    
    
    paid-in
    
    
    comprehensive
    
    
    Retained
    
    
    ESOP
    
    
    Treasurystock
    
    
    stock
    
    
    capital
    
    
    income
    
    
    earnings
    
    
    shares
    
    
    stock
    
    
    TotalBalance, December 31, 2006
    
    $
    
    
    
    
    
    
    
    
    68,473
    
    
    
    2,815
    
    
    
    54,629
    
    
    
    (3,757
    )
    
    
    (6,321
    )
    
    
    115,839Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,343
    
    
    
    
    
    
    
    
    
    
    
    8,343Unrealized losses on securities:Unrealized holding losses
arising during period, net of
related income tax benefit of $999
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,939
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,939
    )Less reclassification adjustment
for gains included in net
income, net of related
income tax expense of $116
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (227
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (227
    )Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,166
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,177Stock compensation plan amortization
    
    
    
    
    
    
    
    
    
    
    747
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    747Tax benefit from stock compensation plan
    
    
    
    
    
    
    
    
    
    
    153
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    153ESOP shares committed
    
    
    
    
    
    
    
    
    
    
    284
    
    
    
    
    
    
    
    
    
    
    
    311
    
    
    
    
    
    
    
    595Issuance of common stock
    
    
    
    
    
    
    
    
    
    
    40
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40Treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (40
    )
    
    
    (40
    )Dividends to stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (631
    )
    
    
    
    
    
    
    
    
    
    
    (631
    )Balance, June 30, 2007
    
    $
    
    
    
    
    
    
    
    
    69,697
    
    
    
    649
    
    
    
    62,341
    
    
    
    (3,446
    )
    
    
    (6,361
    )
    
    
    122,880
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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2007 and 2006
 2007
    
    
    2006(Dollars in thousands)(Unaudited)Cash flows from operating activities:Net income
    
    $
    8,343
    
    
    
    5,545Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization of fixed assets
    
    
    1,024
    
    
    
    1,259Net amortization of premium
    
    
    627
    
    
    
    520Amortization of stock compensation
    
    
    747
    
    
    
    650ESOP share commitment
    
    
    595
    
    
    
    559Net realized investment gains
    
    
    (633
    )
    
    
    (605
    )Deferred income tax
    
    
    (560
    )
    
    
    (3,800
    )Change in assets and liabilities:Premiums receivable
    
    
    (6,667
    )
    
    
    (8,933
    )Reinsurance receivables
    
    
    (4,983
    )
    
    
    (5,555
    )Prepaid reinsurance premiums
    
    
    5,274
    
    
    
    4,033Deferred policy acquisition costs
    
    
    (3,725
    )
    
    
    (6,502
    )Other assets
    
    
    443
    
    
    
    916Losses and loss adjustment expenses
    
    
    12,854
    
    
    
    16,661Unearned premiums
    
    
    7,668
    
    
    
    9,728Reinsurance balances payable
    
    
    (3,612
    )
    
    
    7,554Other
    
    
    337
    
    
    
    2,687Net cash provided by operating activities
    
    
    17,732
    
    
    
    24,717Cash flows from investing activities:Purchase of fixed income securities, available for sale
    
    
    (37,102
    )
    
    
    (104,084
    )Purchase of equity securities
    
    
    (1,494
    )
    
    
    (2,945
    )Sale of short-term investments, net
    
    
    7,332
    
    
    
    1,892Sale and maturity of fixed income securities, available for sale
    
    
    11,356
    
    
    
    73,196Sale of equity securities
    
    
    1,552
    
    
    
    1,350Purchase of property and equipment, net
    
    
    (1,404
    )
    
    
    (1,453
    )Net cash used in investing activities
    
    
    (19,760
    )
    
    
    (32,044
    )Cash flows from financing activities:Purchase of treasury stock
    
    
    (40
    )
    
    
    (37
    )Tax benefit from stock compensation plans
    
    
    153
    
    
    
    123Proceeds from issuance of common stock
    
    
    40
    
    
    
    Dividends to stockholders
    
    
    (631
    )
    
    
    (323
    )Net cash used in financing activities
    
    
    (478
    )
    
    
    (237
    )Net decrease in cash and cash equivalents
    
    
    (2,506
    )
    
    
    (7,564
    )Cash and cash equivalents at beginning of period
    
    
    17,618
    
    
    
    20,677Cash and cash equivalents at end of period
    
    $
    15,112
    
    
    
    13,113Cash paid during the period for:Interest
    
    $
    603
    
    
    
    616Income taxes
    
    $
    2,375
    
    
    
    2,300
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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Basis of Presentation
     Share-Based Compensation
     Recent Accounting Pronouncements
  10




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Segment Information
     11




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Six Months Ended June 302007
    
    
    2006(In thousands)Revenues:Net premiums earned:Commercial lines
    
    $
    57,961
    
    
    $
    55,927Personal lines
    
    
    11,103
    
    
    
    11,241Total net premiums earned
    
    
    69,064
    
    
    
    67,168Net investment income
    
    
    6,712
    
    
    
    4,460Net realized investment gains
    
    
    633
    
    
    
    605Other
    
    
    907
    
    
    
    1,078Total revenues
    
    $
    77,316
    
    
    $
    73,311Income before income taxes:Underwriting income (loss):Commercial lines
    
    $
    5,506
    
    
    $
    3,214Personal lines
    
    
    (1,246
    )
    
    
    (868
    )Total underwriting income
    
    
    4,260
    
    
    
    2,346Net investment income
    
    
    6,712
    
    
    
    4,460Net realized investment gains
    
    
    633
    
    
    
    605Other
    
    
    296
    
    
    
    477Income before income taxes
    
    $
    11,901
    
    
    $
    7,888
 Three Months Ended June 302007
    
    
    2006(In thousands)Revenues:Net premiums earned:Commercial lines
    
    $
    29,596
    
    
    $
    28,073Personal lines
    
    
    5,480
    
    
    
    5,558Total net premiums earned
    
    
    35,076
    
    
    
    33,631Net investment income
    
    
    3,771
    
    
    
    2,369Net realized investment gains
    
    
    680
    
    
    
    298Other
    
    
    481
    
    
    
    587Total revenues
    
    $
    40,008
    
    
    $
    36,885Income before income taxes:Underwriting income (loss):Commercial lines
    
    $
    3,845
    
    
    $
    2,048Personal lines
    
    
    (133
    )
    
    
    (866
    )Total underwriting income
    
    
    3,712
    
    
    
    1,182Net investment income
    
    
    3,771
    
    
    
    2,369Net realized investment gains
    
    
    680
    
    
    
    298Other
    
    
    177
    
    
    
    283Income before income taxes
    
    $
    8,340
    
    
    $
    4,132
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Reinsurance
     Comprehensive Income
  Six months endedJune 302007
    
    
    2006(In thousands)Net income
    
    $
    8,343
    
    
    $
    5,545Other comprehensive income, net of tax:Unrealized losses on securities:Unrealized holding losses arising during
period, net of related income tax benefit
of $999 and $1,521
    
    
    (1,939
    )
    
    
    (2,952
    )Less reclassification adjustment for gains
included in net income, net of related
income tax expense of $116 and $206
    
    
    (227
    )
    
    
    (399
    )(2,166
    )
    
    
    (3,351
    )Comprehensive income
    
    $
    6,177
    
    
    $
    2,194
 13




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Three months endedJune 302007
    
    
    2006(In thousands)Net income
    
    $
    5,790
    
    
    $
    2,895Other comprehensive income, net of tax:Unrealized losses on securities:Unrealized holding losses arising during
period, net of related income tax benefit
of $1,114 and $723
    
    
    (2,163
    )
    
    
    (1,403
    )Less reclassification adjustment for gains
included in net income, net of related
income tax expense of $116 and $102
    
    
    (227
    )
    
    
    (196
    )(2,390
    )
    
    
    (1,599
    )Comprehensive income
    
    $
    3,400
    
    
    $
    1,296
 Share-based Compensation
    Weighted AverageNumber of
    
    
    Exercise PriceShares
    
    
    per ShareOutstanding at December 31, 2006
    
    
    636,700
    
    
    $
    13.21Granted - 2007
    
    
    
    
    
    
    Exercised - 2007
    
    
    (3,000
    )
    
    
    13.25Forfeited - 2007
    
    
    (12,000
    )
    
    
    13.25Outstanding at June 30, 2007
    
    
    621,700
    
    
    $
    13.20Exercisable at:June 30, 2007
    
    
    497,300
    
    
    $
    12.24Weighted-average remaining contractual life
    
    
    
    
    
    7.3 yearsCompensation remaining to be recognized for unvested stock options at June
30, 2007 (millions)
    
    
    
    
    
    $
    0.7Weighted-average remaining amortization period
    
    
    
    
    
    
    2.7Aggregate Intrinsic Value of outstanding options, June 30, 2007 (millions)
    
    
    
    
    
    $
    4.4Aggregate Intrinsic Value of exercisable options, June 30, 2007 (millions)
    
    
    
    
    
    $
    3.8
 14




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##### Table of Contents



Weighted AverageNumber of
    
    
    Fair ValueShares
    
    
    per ShareUnvested restricted stock at December 31, 2006
    
    
    106,334
    
    
    $
    13.61Granted - 2007
    
    
    
    
    
    
    Vested - 2007
    
    
    (56,084
    )
    
    
    12.22Forfeited - 2007
    
    
    
    
    
    
    Unvested restricted stock at June 30, 2007
    
    
    50,250
    
    
    $
    15.16Compensation remaining to be recognized for unvested restricted
stock at June 30, 2007 (millions)
    
    
    
    
    
    $
    0.7Weighted-average remaining amortization period
    
    
    
    
    
    
    2.3
 15




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Earnings per Share
  Six months endedJune 302007
    
    
    2006(Dollars in thousands, except per share data)Numerator for basic and diluted earnings per share:Net income
    
    $
    8,343
    
    
    $
    5,545Denominator for basic earnings per share -
weighted-average shares outstanding
    
    
    6,100,652
    
    
    
    5,982,071Effect of stock incentive plans
    
    
    206,423
    
    
    
    172,822Denominator for diluted earnings per share
    
    
    6,307,075
    
    
    
    6,154,893Basic earnings per share
    
    $
    1.37
    
    
    $
    0.93Diluted earnings per share
    
    $
    1.32
    
    
    $
    0.90
 Three months endedJune 302007
    
    
    2006(Dollars in thousands, except per share data)Numerator for basic and diluted earnings per share:Net income
    
    $
    5,790
    
    
    $
    2,895Denominator for basic earnings per share -
weighted-average shares
outstanding
    
    
    6,113,966
    
    
    
    5,994,228Effect of stock incentive plans
    
    
    210,771
    
    
    
    197,221Denominator for diluted earnings per share
    
    
    6,324,737
    
    
    
    6,191,449Basic earnings per share
    
    $
    0.95
    
    
    $
    0.48Diluted earnings per share
    
    $
    0.92
    
    
    $
    0.47
  Income Taxes
  Retaliatory tax refund
  16




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17




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
  
    
    Mercer Insurance Company (MIC), a Pennsylvania property and casualty stock insurance
company offering insurance coverages to businesses and individuals in New Jersey and
Pennsylvania;
    
    Mercer Insurance Company of New Jersey, Inc. (MICNJ), a New Jersey property and casualty
stock insurance company offering insurance coverages to businesses and individuals located
in New Jersey;
    
    Franklin Insurance Company (FIC), a Pennsylvania property and casualty stock insurance
company offering private passenger automobile and homeowners insurance to individuals
located in Pennsylvania; and
    
    Financial Pacific Insurance Company (FPIC), a California property and casualty stock
insurance company offering insurance and surety products to small and medium sized
commercial businesses in Arizona, California, Nevada and Oregon, and direct mail surety
products to commercial businesses in various other states.
       18




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##### Table of Contents



Critical Accounting Policies
 General.
 Liabilities for Loss and Loss Adjustment Expenses.
   19




---



##### Table of Contents



Adjusted Loss and
    
    
    
    
    
    Adjusted Loss andChange in Loss
    
    Loss Adjustment
    
    Percentage
    
    Loss Adjustment
    
    Percentageand Loss
    
    Reserves Net of
    
    Change in
    
    Reserves Net of
    
    Change inAdjustment
    
    Reinsurance as of
    
    Equity as of
    
    Reinsurance as of
    
    Equity as ofReserves Net of
    
    June 30,
    
    June 30,
    
    December 31,
    
    December 31,Reinsurance
    
    2007
    
    2007 (1)
    
    2006
    
    2006 (1)(Dollars in thousands)(10.0
    )%
    
    $
    157,744
    
    
    
    9.4
    %
    
    $
    148,070
    
    
    
    9.4
    %(7.5
    )%
    
    
    162,125
    
    
    
    7.1
    %
    
    
    152,183
    
    
    
    7.0
    %(5.0
    )%
    
    
    166,507
    
    
    
    4.7
    %
    
    
    156,296
    
    
    
    4.7
    %(2.5
    )%
    
    
    170,889
    
    
    
    2.4
    %
    
    
    160,409
    
    
    
    2.3
    %Base
    
    
    175,271
    
    
    
    
    
    
    
    164,522
    
    
    
    2.5
    %
    
    
    179,652
    
    
    
    (2.4
    %)
    
    
    168,635
    
    
    
    (2.3
    )%5.0
    %
    
    
    184,034
    
    
    
    (4.7
    %)
    
    
    172,748
    
    
    
    (4.7
    )%7.5
    %
    
    
    188,416
    
    
    
    (7.1
    %)
    
    
    176,861
    
    
    
    (7.0
    )%10.0
    %
    
    
    192,798
    
    
    
    (9.4
    %)
    
    
    180,974
    
    
    
    (9.4
    )%
 
 (1)
    
    Net of tax   20




---



##### Table of Contents



June 30,
    
    
    December 31,2007
    
    
    2006(In thousands)Commercial lines:Commercial multi-peril
    
    $
    188,991
    
    
    $
    181,523Commercial automobile
    
    
    40,028
    
    
    
    36,647Other liability
    
    
    8,406
    
    
    
    8,462Workers compensation
    
    
    8,077
    
    
    
    8,107Surety
    
    
    5,872
    
    
    
    5,104Fire, allied, inland marine
    
    
    341
    
    
    
    222251,715
    
    
    
    240,065Personal lines:Homeowners
    
    
    8,075
    
    
    
    6,724Personal automobile
    
    
    2,013
    
    
    
    2,213Other liability
    
    
    1,158
    
    
    
    1,079Fire, allied, inland marine
    
    
    312
    
    
    
    333Workers compensation
    
    
    36
    
    
    
    4111,594
    
    
    
    10,390Total
    
    $
    263,309
    
    
    $
    250,455
 Investments.
     Policy Acquisition Costs.
 21




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##### Table of Contents



Reinsurance.
  Income Taxes.
 Results of Operations
     22




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##### Table of Contents



Six and three month periods ended June 30, 2007 compared to six and three month periods ended June
30, 2006
  Six months ended June 30,2007 vs. 2006 Income
    
    2007
    
    2006
    
    Change
    
    % Change(Dollars in thousands)Commercial lines underwriting
income
    
    $
    5,506
    
    
    $
    3,214
    
    
    $
    2,292
    
    
    
    71.3
    %Personal lines underwriting
loss
    
    
    (1,246
    )
    
    
    (868
    )
    
    
    (378
    )
    
    
    43.5
    %Total underwriting income
    
    
    4,260
    
    
    
    2,346
    
    
    
    1,914
    
    
    
    81.6
    %Net investment income
    
    
    6,712
    
    
    
    4,460
    
    
    
    2,252
    
    
    
    50.5
    %Net realized investment gains
    
    
    633
    
    
    
    605
    
    
    
    28
    
    
    
    4.6
    %Other
    
    
    907
    
    
    
    1,078
    
    
    
    (171
    )
    
    
    (15.9
    )%Interest expense
    
    
    (611
    )
    
    
    (601
    )
    
    
    (10
    )
    
    
    1.7
    %Income before income taxes
    
    
    11,901
    
    
    
    7,888
    
    
    
    4,013
    
    
    
    50.9
    %Income taxes
    
    
    3,558
    
    
    
    2,343
    
    
    
    1,215
    
    
    
    51.9
    %Net Income
    
    $
    8,343
    
    
    $
    5,545
    
    
    $
    2,798
    
    
    
    50.5
    %Loss/ LAE ratio (GAAP)
    
    
    61.7
    %
    
    
    62.8
    %
    
    
    (1.1
    )%Underwriting expense ratio (GAAP)
    
    
    32.1
    %
    
    
    33.6
    %
    
    
    (1.5
    )%Combined ratio (GAAP)
    
    
    93.8
    %
    
    
    96.4
    %
    
    
    (2.6
    )%Loss/ LAE ratio (Statutory)
    
    
    61.7
    %
    
    
    59.1
    %
    
    
    2.6
    %Underwriting expense ratio
(Statutory)
    
    
    30.3
    %
    
    
    34.3
    %
    
    
    (4.0
    )%Combined ratio (Statutory)
    
    
    92.0
    %
    
    
    93.4
    %
    
    
    (1.4
    )%
 Three months ended June 30,2007 vs. 2006 Income
    
    2007
    
    2006
    
    Change
    
    % Change(Dollars in thousands)Commercial lines underwriting
income
    
    $
    3,845
    
    
    $
    2,048
    
    
    $
    1,797
    
    
    
    87.7
    %Personal lines underwriting
loss
    
    
    (133
    )
    
    
    (866
    )
    
    
    733
    
    
    
    (84.6
    )%Total underwriting
income
    
    
    3,712
    
    
    
    1,182
    
    
    
    2,530
    
    
    
    214.0
    %Net investment income
    
    
    3,771
    
    
    
    2,369
    
    
    
    1,402
    
    
    
    59.2
    %Net realized investment gains
    
    
    680
    
    
    
    298
    
    
    
    382
    
    
    
    128.2
    %Other
    
    
    481
    
    
    
    587
    
    
    
    (106
    )
    
    
    (18.1
    )%Interest expense
    
    
    (304
    )
    
    
    (304
    )
    
    
    
    
    
    
    
    %Income before
income taxes
    
    
    8,340
    
    
    
    4,132
    
    
    
    4,208
    
    
    
    101.8
    %Income taxes
    
    
    2,550
    
    
    
    1,237
    
    
    
    1,313
    
    
    
    106.1
    %Net
Income
    
    $
    5,790
    
    
    $
    2,895
    
    
    $
    2,895
    
    
    
    100.0
    %Loss/ LAE ratio (GAAP)
    
    
    62.2
    %
    
    
    64.1
    %
    
    
    (1.9
    )%Underwriting expense ratio (GAAP)
    
    
    27.2
    %
    
    
    32.3
    %
    
    
    (5.1
    )%Combined ratio
(GAAP)
    
    
    89.4
    %
    
    
    96.4
    %
    
    
    (7.0
    )%Loss/ LAE ratio (Statutory)
    
    
    62.2
    %
    
    
    61.1
    %
    
    
    1.1
    %Underwriting expense ratio
(Statutory)
    
    
    25.1
    %
    
    
    31.9
    %
    
    
    (6.8
    )%Combined ratio
(Statutory)
    
    
    87.3
    %
    
    
    93.0
    %
    
    
    (5.7
    )%
  23




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Six months ended June 30,2007 vs. 2006 Revenue
    
    2007
    
    2006
    
    Change
    
    % Change(In thousands)Direct premiums written
    
    $
    93,479
    
    
    $
    100,721
    
    
    $
    (7,242
    )
    
    
    (7.2
    )%Net premiums written
    
    
    82,007
    
    
    
    80,929
    
    
    
    1,078
    
    
    
    1.3
    %Net premiums earned
    
    
    69,064
    
    
    
    67,168
    
    
    
    1,896
    
    
    
    2.8
    %Net investment income
    
    
    6,712
    
    
    
    4,460
    
    
    
    2,252
    
    
    
    50.5
    %Net realized investment (losses)
gains
    
    
    633
    
    
    
    605
    
    
    
    28
    
    
    
    4.6
    %Other revenue
    
    
    907
    
    
    
    1,078
    
    
    
    (171
    )
    
    
    (15.9
    )%Total revenue
    
    $
    77,316
    
    
    $
    73,311
    
    
    $
    4,005
    
    
    
    5.5
    %
 24




---



##### Table of Contents



Three months ended June 30,2007 vs. 2006 Revenue
    
    2007
    
    2006
    
    Change
    
    % Change(In thousands)Direct premiums written
    
    $
    54,207
    
    
    $
    55,324
    
    
    $
    (1,117
    )
    
    
    (2.0
    )%Net premiums written
    
    
    47,206
    
    
    
    41,234
    
    
    
    5,972
    
    
    
    14.5
    %Net premiums earned
    
    
    35,076
    
    
    
    33,631
    
    
    
    1,445
    
    
    
    4.3
    %Net investment income
    
    
    3,771
    
    
    
    2,369
    
    
    
    1,402
    
    
    
    59.2
    %Net realized investment (losses)
gains
    
    
    680
    
    
    
    298
    
    
    
    382
    
    
    
    128.2
    %Other revenue
    
    
    481
    
    
    
    587
    
    
    
    (106
    )
    
    
    (18.1
    )%Total
revenue
    
    $
    40,008
    
    
    $
    36,885
    
    
    $
    3,123
    
    
    
    8.5
    %
       25




---



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Six months ended June 30,2007 vs. 2006 Investment Income andRealized Gains
    
    2007
    
    2006
    
    Change
    
    % Change(In thousands)Fixed income securities
    
    $
    6,418
    
    
    $
    5,143
    
    
    $
    1,275
    
    
    
    24.8
    %Dividends
    
    
    147
    
    
    
    145
    
    
    
    2
    
    
    
    1.4
    %Cash, cash equivalents & other
    
    
    1,062
    
    
    
    403
    
    
    
    659
    
    
    
    163.5
    %Gross investment
income
    
    
    7,627
    
    
    
    5,691
    
    
    
    1,936
    
    
    
    34.0
    %Investment expenses
    
    
    (915
    )
    
    
    (1,231
    )
    
    
    316
    
    
    
    25.7
    %Net investment
income
    
    $
    6,712
    
    
    $
    4,460
    
    
    $
    2,252
    
    
    
    50.5
    %Realized losses  fixed income securities
    
    $
    
    
    
    $
    (385
    )
    
    $
    385
    
    
    
    N/MRealized gains  equity securities
    
    
    343
    
    
    
    390
    
    
    
    (47
    )
    
    
    N/MMark-to-market valuation for interest rate swaps
    
    
    290
    
    
    
    600
    
    
    
    (310
    )
    
    
    N/MNet realized
gains
    
    $
    633
    
    
    $
    605
    
    
    $
    28
    
    
    
    4.6
    %
 26




---



##### Table of Contents



Three months ended June 30,2007 vs. 2006 Investment Income andRealized Gains
    
    2007
    
    2006
    
    Change
    
    % Change(In thousands)Fixed income securities
    
    $
    3,266
    
    
    $
    2,647
    
    
    $
    619
    
    
    
    23.4
    %Dividends
    
    
    73
    
    
    
    81
    
    
    
    (8
    )
    
    
    (9.9
    )%Cash, cash equivalents & other
    
    
    859
    
    
    
    224
    
    
    
    635
    
    
    
    283.5
    %Gross investment income
    
    
    4,198
    
    
    
    2,952
    
    
    
    1,246
    
    
    
    42.2
    %Investment expenses
    
    
    (427
    )
    
    
    (583
    )
    
    
    156
    
    
    
    26.8
    %Net investment income
    
    $
    3,771
    
    
    $
    2,369
    
    
    $
    1,402
    
    
    
    59.2
    %Realized losses  fixed income securities
    
    $
    28
    
    
    $
    (263
    )
    
    $
    291
    
    
    
    N/MRealized
gains - equity securities
    
    
    314
    
    
    
    228
    
    
    
    86
    
    
    
    N/MMark - to - market valuation for interest rate swaps
    
    
    338
    
    
    
    333
    
    
    
    5
    
    
    
    N/MNet realized
gains
    
    $
    680
    
    
    $
    298
    
    
    $
    382
    
    
    
    128.2
    %
 
        27




---



##### Table of Contents



Less than 12 Months
    
    
    12 Months or Longer
    
    
    TotalEstimated
    
    
    Unrealized
    
    
    Estimated
    
    
    Unrealized
    
    
    Estimated
    
    
    UnrealizedJune 30, 2007
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses(In Thousands)U.S. Treasury securities and
obligations of U.S.
government corporations
and agencies
    
    $
    22,445
    
    
    $
    235
    
    
    $
    48,641
    
    
    $
    1,134
    
    
    $
    71,086
    
    
    $
    1,369Obligations of states and
political subdivisions
    
    
    70,032
    
    
    
    1,362
    
    
    
    39,209
    
    
    
    867
    
    
    
    109,241
    
    
    
    2,229Corporate securities
    
    
    9,716
    
    
    
    140
    
    
    
    41,644
    
    
    
    996
    
    
    
    51,360
    
    
    
    1,136Mortgage-backed securities
    
    
    12,870
    
    
    
    168
    
    
    
    10,725
    
    
    
    141
    
    
    
    23,595
    
    
    
    309Total fixed maturities
    
    
    115,063
    
    
    
    1,905
    
    
    
    140,219
    
    
    
    3,138
    
    
    
    255,282
    
    
    
    5,043Total equity securities
    
    
    1,844
    
    
    
    58
    
    
    
    
    
    
    
    
    
    
    
    1,844
    
    
    
    58Total securities in a
temporary unrealized loss
position
    
    $
    116,907
    
    
    $
    1,963
    
    
    $
    140,219
    
    
    $
    3,138
    
    
    $
    257,126
    
    
    $
    5,101
    Six months ended June 30,2007 vs. 2006 Commercial Lines (CL)
    
    2007
    
    2006
    
    Change
    
    % Change(Dollars in thousands)CL Direct premiums written
    
    $
    82,374
    
    
    $
    88,838
    
    
    $
    (6,464
    )
    
    
    (7.3
    )%CL Net premiums written
    
    $
    71,864
    
    
    $
    69,963
    
    
    $
    1,901
    
    
    
    2.7
    %CL Net premiums earned
    
    $
    57,961
    
    
    $
    55,927
    
    
    $
    2,034
    
    
    
    3.6
    %CL Loss/ LAE expense ratio (GAAP)
    
    
    58.3
    %
    
    
    61.7
    %
    
    
    (3.4
    )%CL Expense ratio (GAAP)
    
    
    32.2
    %
    
    
    32.6
    %
    
    
    (0.4
    )%CL Combined ratio (GAAP)
    
    
    90.5
    %
    
    
    94.3
    %
    
    
    (3.8
    )%
 28




---



##### Table of Contents



Three months ended June 30,2007 vs. 2006 Commercial Lines (CL)
    
    2007
    
    2006
    
    Change
    
    % Change(Dollars in thousands)CL Direct premiums written
    
    $
    48,273
    
    
    $
    48,974
    
    
    $
    (701
    )
    
    
    (1.4
    )%CL Net premiums written
    
    $
    41,891
    
    
    $
    35,450
    
    
    $
    6,441
    
    
    
    18.2
    %CL Net premiums earned
    
    $
    29,596
    
    
    $
    28,073
    
    
    $
    1,523
    
    
    
    5.4
    %CL Loss/ LAE expense ratio (GAAP)
    
    
    59.8
    %
    
    
    61.7
    %
    
    
    (1.9
    )%CL Expense ratio (GAAP)
    
    
    27.2
    %
    
    
    31.0
    %
    
    
    (3.8
    )%CL Combined ratio (GAAP)
    
    
    87.0
    %
    
    
    92.7
    %
    
    
    (5.7
    )%
       29




---



##### Table of Contents



Six months ended June 30,2007 vs. 2006 Personal Lines (PL)
    
    2007
    
    2006
    
    Change
    
    % Change(Dollars in thousands)PL Direct premiums written
    
    $
    11,105
    
    
    $
    11,882
    
    
    $
    (777
    )
    
    
    (6.5
    )%PL Net premiums written
    
    $
    10,143
    
    
    $
    10,966
    
    
    $
    (823
    )
    
    
    (7.5
    )%PL Net premiums earned
    
    $
    11,103
    
    
    $
    11,241
    
    
    $
    (138
    )
    
    
    (1.2
    )%PL Loss/ LAE expense ratio (GAAP)
    
    
    79.4
    %
    
    
    68.5
    %
    
    
    10.9
    %PL Expense ratio (GAAP)
    
    
    31.8
    %
    
    
    39.2
    %
    
    
    (7.4
    )%PL Combined ratio (GAAP)
    
    
    111.2
    %
    
    
    107.7
    %
    
    
    3.5
    %
 Three months ended June 30,2007 vs. 2006 Personal Lines (PL)
    
    2007
    
    2006
    
    Change
    
    % Change(Dollars in thousands)PL Direct premiums written
    
    $
    5,934
    
    
    $
    6,350
    
    
    $
    (416
    )
    
    
    (6.6
    )%PL Net premiums written
    
    $
    5,315
    
    
    $
    5,784
    
    
    $
    (469
    )
    
    
    (8.1
    )%PL Net premiums earned
    
    $
    5,480
    
    
    $
    5,558
    
    
    $
    (78
    )
    
    
    (1.4
    )%PL Loss/ LAE expense ratio (GAAP)
    
    
    75.0
    %
    
    
    75.8
    %
    
    
    (0.8
    )%PL Expense ratio (GAAP)
    
    
    27.5
    %
    
    
    39.8
    %
    
    
    (12.3
    )%PL Combined ratio
(GAAP)
    
    
    102.5
    %
    
    
    115.6
    %
    
    
    (13.1
    )%
     30




---



##### Table of Contents



Six
months ended June 30,2007 vs. 2006 Expenses and Expense Ratio
    
    2007
    
    2006
    
    Change
    
    % Change(Dollars in thousands)Amortization of Deferred Acquisition Costs
    
    $
    17,959
    
    
    $
    15,140
    
    
    $
    2,819
    
    
    
    18.6
    %As a % of net premiums earned
    
    
    26.0
    %
    
    
    22.5
    %
    
    
    3.5
    %Other underwriting expenses
    
    
    4,215
    
    
    
    7,487
    
    
    
    (3,272
    )
    
    
    (43.7
    )%Total expenses excluding losses/ LAE
    
    $
    22,174
    
    
    $
    22,627
    
    
    $
    (453
    )
    
    
    (2.0
    )%Underwriting expense ratio
    
    
    32.1
    %
    
    
    33.6
    %
    
    
    (1.5
    )%
   Six
months ended June 30,2007 vs. 2006 Income Taxes
    
    2007
    
    2006
    
    Change
    
    % Change(Dollars in thousands)Income before income taxes
    
    $
    11,901
    
    
    $
    7,888
    
    
    $
    4,013
    
    
    
    50.9
    %Income taxes
    
    
    3,558
    
    
    
    2,343
    
    
    
    1,215
    
    
    
    51.9
    %Net income
    
    $
    8,343
    
    
    $
    5,545
    
    
    $
    2,798
    
    
    
    50.5
    %Effective tax rate
    
    
    29.9
    %
    
    
    29.7
    %
    
    
    0.2
    %
  LIQUIDITY AND CAPITAL RESOURCES
     31




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##### Table of Contents



32




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##### Table of Contents



IMPACT OF INFLATION
   OFF BALANCE SHEET COMMITMENTS AND CONTRACTUAL OBLIGATIONS
   
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 General.
 33




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##### Table of Contents



Interest Rate Risk.
 Credit Risk.
 Equity Risk.
  
 Item 4. Controls and Procedures
  
 Part II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 1A. Risk Factors.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3. Defaults Upon Senior Securities
  34




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##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 Exhibits
 Exhibit No.
    
    Title3.1
    
    Articles of Incorporation of Mercer Insurance Group, Inc.
(incorporated by reference herein to the Groups
Pre-effective Amendment No. 3 on Form S-1, SEC File No.
333-104897.)3.2
    
    Bylaws of Mercer Insurance Group, Inc. (incorporated by
reference herein to the Groups Annual Report on Form
10-K, SEC File No. 000-25425, for the fiscal year ended
December 31, 2003.)31.1
    
    Certification of Chief Executive Officer in accordance
with Section 302 of the Sarbanes-Oxley Act of 2002, (filed
herewith)31.2
    
    Certification of Chief Financial Officer in accordance
with Section 302 of the Sarbanes-Oxley Act of 2002, (filed
herewith)32.1
    
    Certification of Chief Executive Officer in accordance
with Section 906 of the Sarbanes-Oxley Act of 2002, (filed
herewith)32.2
    
    Certification of Chief Financial Officer in accordance
with Section 906 of the Sarbanes-Oxley Act of 2002, (filed
herewith)
 35




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##### Table of Contents



SIGNATURES
  MERCER INSURANCE GROUP, INC. (Registrant)Dated: August 09, 2007
    By:
    /s/ Andrew R. SpeakerAndrew R. Speaker,President and Chief Executive OfficerDated: August 09, 2007
    By:
    /s/ David B. MercleanDavid B. Merclean,Senior Vice President and Chief Financial Officer 36