##### 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, 2009,
 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)
 (Registrants telephone number, including area code)
 (Former name, former address and former fiscal year, if changed since last report)
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o
 o þ
  Number of Shares Outstanding as of July 31, 2009COMMON STOCK (No Par Value)
    
    6,442,572(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
    
    
    23Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    39Item 4. Controls and Procedures
    
    
    42PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    42Item 1A. Risk Factors
    
    
    42Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    43Item 3. Defaults Upon Senior Securities
    
    
    43Item 4. Submission of Matters to a Vote of Security Holders
    
    
    44Item 5. Other Information
    
    
    44Item 6. Exhibits
    
    
    44SIGNATURES
    
    
    45Exhibits:
    
    
    4631.1 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 Sheets
June 30, 2009 and December 31, 2008
(Dollars in thousands, except share amounts)
 2009
    
    
    2008(Unaudited)AssetsInvestments, at fair value:Fixed-income securities, available for sale, at fair value
(cost $350,555 and $331,075, respectively)
    
    $
    360,391
    
    
    
    334,087Equity securities, at fair value (cost $7,462 and $9,232,
respectively)
    
    
    8,988
    
    
    
    10,203Total investments
    
    
    369,379
    
    
    
    344,290Cash and cash equivalents
    
    
    23,253
    
    
    
    37,043Premiums receivable
    
    
    39,634
    
    
    
    34,165Reinsurance receivables
    
    
    79,860
    
    
    
    86,443Prepaid reinsurance premiums
    
    
    6,188
    
    
    
    7,096Deferred policy acquisition costs
    
    
    19,586
    
    
    
    20,193Accrued investment income
    
    
    4,315
    
    
    
    3,901Property and equipment, net
    
    
    19,543
    
    
    
    16,144Deferred income taxes
    
    
    8,684
    
    
    
    9,814Goodwill
    
    
    5,416
    
    
    
    5,416Other assets
    
    
    4,951
    
    
    
    4,481Total assets
    
    $
    580,809
    
    
    
    568,986Liabilities and EquityLiabilities:Losses and loss adjustment expenses
    
    $
    304,041
    
    
    
    304,000Unearned premiums
    
    
    81,149
    
    
    
    80,408Accounts payable and accrued expenses
    
    
    10,594
    
    
    
    13,283Other reinsurance balances
    
    
    13,413
    
    
    
    11,509Trust preferred securities
    
    
    15,584
    
    
    
    15,576Advances under line of credit
    
    
    3,000
    
    
    
    3,000Other liabilities
    
    
    4,598
    
    
    
    3,940Total liabilities
    
    
    432,379
    
    
    
    431,716Stockholders 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 7,074,333 shares, outstanding
6,849,268 and 6,801,095 shares
    
    
    
    
    
    
    Additional paid-in capital
    
    
    71,777
    
    
    
    71,369Accumulated other comprehensive income
    
    
    7,367
    
    
    
    2,494Retained Earnings
    
    
    79,850
    
    
    
    74,138Unearned ESOP shares
    
    
    (2,195
    )
    
    
    (2,505
    )Treasury stock, 631,761 and 621,773 shares
    
    
    (8,369
    )
    
    
    (8,226
    )Total stockholders equity
    
    
    148,430
    
    
    
    137,270Total liabilities and stockholders equity
    
    $
    580,809
    
    
    
    568,986
   5




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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF EARNINGS
Six Months Ended June 30, 2009 and 2008
 2009
    
    
    2008(Dollars in thousands, except pershare data)(Unaudited)Revenues:Net premiums earned
    
    $
    70,534
    
    
    
    77,721Investment income, net of expenses
    
    
    7,228
    
    
    
    6,704Net realized investment lossesOther-than-temporary impairments (none allocated to Other
Comprehensive Income)
    
    
    (732
    )
    
    
    (671
    )Other net realized investment gains
    
    
    653
    
    
    
    8Total net realized investment losses
    
    
    (79
    )
    
    
    (663
    )Other revenue
    
    
    1,039
    
    
    
    1,019Total revenues
    
    
    78,722
    
    
    
    84,781Expenses:Losses and loss adjustment expenses
    
    
    42,960
    
    
    
    48,745Amortization of deferred policy acquisition costs (related party
amounts of $506 and $542, respectively)
    
    
    19,503
    
    
    
    20,703Other expenses
    
    
    6,569
    
    
    
    6,842Interest expense
    
    
    708
    
    
    
    633Total expenses
    
    
    69,740
    
    
    
    76,923Income before income taxes
    
    
    8,982
    
    
    
    7,858Income taxes
    
    
    2,341
    
    
    
    2,033Net income
    
    $
    6,641
    
    
    
    5,825Earnings per common share:Basic
    
    $
    1.07
    
    
    
    0.94Diluted
    
    $
    1.06
    
    
    
    0.91Weighted average shares:Basic
    
    
    6,188,313
    
    
    
    6,226,772Diluted
    
    
    6,262,612
    
    
    
    6,382,926
   6




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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended June 30, 2009 and 2008
 2009
    
    
    2008(Dollars in thousands, except pershare data)(Unaudited)Revenues:Net premiums earned
    
    $
    34,952
    
    
    
    38,644Investment income, net of expenses
    
    
    3,625
    
    
    
    3,343Net realized investment gainsOther-than-temporary impairments (none allocated to Other
Comprehensive Income)
    
    
    (197
    )
    
    
    (571
    )Other net realized investment gains
    
    
    599
    
    
    
    728Total net realized investment gains
    
    
    402
    
    
    
    157Other revenue
    
    
    551
    
    
    
    564Total revenues
    
    
    39,530
    
    
    
    42,708Expenses:Losses and loss adjustment expenses
    
    
    20,761
    
    
    
    23,975Amortization of deferred policy acquisition costs (related party
amounts of $252 and $268, respectively)
    
    
    9,598
    
    
    
    10,341Other expenses
    
    
    3,678
    
    
    
    3,647Interest expense
    
    
    356
    
    
    
    337Total expenses
    
    
    34,393
    
    
    
    38,300Income before income taxes
    
    
    5,137
    
    
    
    4,408Income taxes
    
    
    1,387
    
    
    
    1,175Net income
    
    $
    3,750
    
    
    
    3,233Earnings per common share:Basic
    
    $
    0.61
    
    
    
    0.52Diluted
    
    $
    0.60
    
    
    
    0.51Weighted average shares:Basic
    
    
    6,196,311
    
    
    
    6,233,796Diluted
    
    
    6,298,438
    
    
    
    6,387,750
   7




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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
Six months ended June 30, 2009
(Unaudited, dollars in thousands)
 AccumulatedAdditional
    
    
    other
    
    
    
    
    
    
    UnearnedPreferred
    
    
    Common
    
    
    paid-in
    
    
    comprehensive
    
    
    Retained
    
    
    ESOP
    
    
    Treasurystock
    
    
    stock
    
    
    capital
    
    
    income
    
    
    earnings
    
    
    shares
    
    
    stock
    
    
    TotalBalance, December 31, 2008
    
    $
    
    
    
    
    
    
    
    
    71,369
    
    
    
    2,494
    
    
    
    74,138
    
    
    
    (2,505
    )
    
    
    (8,226
    )
    
    
    137,270Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,641
    
    
    
    
    
    
    
    
    
    
    
    6,641Unrealized gains on securities:Unrealized holding gains arising
during period, net of related
income tax expense of $2310
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,484
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,484Less reclassification adjustment for
losses included in net income,
net of related income tax benefit
of $199
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    387
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    387Defined benefit pension plan, net of
related income tax of $1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,873Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,514Stock compensation plan amortization
    
    
    
    
    
    
    
    
    
    
    249
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    249Tax benefit from stock compensation plan
    
    
    
    
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22ESOP shares committed
    
    
    
    
    
    
    
    
    
    
    137
    
    
    
    
    
    
    
    
    
    
    
    310
    
    
    
    
    
    
    
    447Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (143
    )
    
    
    (143
    )Dividends to stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (929
    )
    
    
    
    
    
    
    
    
    
    
    (929
    )Balance, June 30, 2009
    
    $
    
    
    
    
    
    
    
    
    71,777
    
    
    
    7,367
    
    
    
    79,850
    
    
    
    (2,195
    )
    
    
    (8,369
    )
    
    
    148,430
   8




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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2009 and 2008
 2009
    
    
    2008(Dollars in thousands)(Unaudited)Cash flows from operating activities:Net income
    
    $
    6,641
    
    
    
    5,825Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization of fixed assets
    
    
    1,545
    
    
    
    1,099Amortization of premium, net
    
    
    702
    
    
    
    742Amortization of stock compensation
    
    
    249
    
    
    
    259ESOP share commitment
    
    
    447
    
    
    
    540Net realized investment losses
    
    
    79
    
    
    
    663Deferred income tax
    
    
    (1,381
    )
    
    
    168Change in assets and liabilities:Premiums receivable
    
    
    (5,469
    )
    
    
    (3,408
    )Reinsurance receivables
    
    
    6,583
    
    
    
    (5,320
    )Prepaid reinsurance premiums
    
    
    908
    
    
    
    1,312Deferred policy acquisition costs
    
    
    607
    
    
    
    (404
    )Other assets
    
    
    151
    
    
    
    (1,596
    )Losses and loss adjustment expenses
    
    
    41
    
    
    
    19,141Unearned premiums
    
    
    741
    
    
    
    (744
    )Other reinsurance balances
    
    
    1,904
    
    
    
    (1,579
    )Other
    
    
    (3,066
    )
    
    
    (2,994
    )Net cash provided by operating activities
    
    
    10,682
    
    
    
    13,704Cash flows from investing activities:Purchase of fixed income securities, available for sale
    
    
    (46,366
    )
    
    
    (33,214
    )Purchase of equity securities
    
    
    
    
    
    
    (1,999
    )Sale and maturity of fixed income securities, available for sale
    
    
    26,172
    
    
    
    22,068Sale of equity securities
    
    
    1,717
    
    
    
    1,352Purchase of property and equipment, net
    
    
    (4,945
    )
    
    
    (2,881
    )Net cash used in investing activities
    
    
    (23,422
    )
    
    
    (14,674
    )Cash flows from financing activities:Purchase of treasury stock
    
    
    (143
    )
    
    
    (466
    )Tax benefit from stock compensation plans
    
    
    22
    
    
    
    31Dividends to stockholders
    
    
    (929
    )
    
    
    (781
    )Net cash used in financing activities
    
    
    (1,050
    )
    
    
    (1,216
    )Net decrease in cash and cash equivalents
    
    
    (13,790
    )
    
    
    (2,186
    )Cash and cash equivalents at beginning of period
    
    
    37,043
    
    
    
    21,580Cash and cash equivalents at end of period
    
    $
    23,253
    
    
    
    19,394Cash paid during the period for:Interest
    
    $
    700
    
    
    
    626Income taxes
    
    $
    2,870
    
    
    
    2,700
   9




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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Basis of Presentation
     Share-Based Compensation
     New Accounting Pronouncements
 Effective Date of FASB Statement No. 157 Fair Value Measurement
  10




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The Hierarchy of Generally Accepted Accounting
Principles
 Determining Whether
Instruments Granted in Share-Based Payment Transactions are Participating Securities
 Interim Disclosures about Fair Value of
Financial Instruments
 Recognition and Presentation of
Other-Than-Temporary Impairments
 Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That
Are Not Orderly
  , FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles  A Replacement of FASB Statement No. 162
  11




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(2)
    
    INVESTMENTSNet investment income, net realized investment gains (losses), and change in unrealized gains
(losses) on investment securities are as follows.Net investment income and net realized investment gains (losses):
 Three months ended
    
    
    Six months endedJune 30
    
    
    June 302009
    
    
    2008
    
    
    2009
    
    
    2008Investment income:Fixed income securities
    
    $
    4,023
    
    
    
    3,680
    
    
    
    7,960
    
    
    
    7,289Equity securities
    
    
    79
    
    
    
    82
    
    
    
    159
    
    
    
    167Cash and equivalents
    
    
    32
    
    
    
    83
    
    
    
    79
    
    
    
    253Gross investment income
    
    
    4,134
    
    
    
    3,845
    
    
    
    8,198
    
    
    
    7,709Less investment expenses
    
    
    509
    
    
    
    502
    
    
    
    970
    
    
    
    1,005Net investment income
    
    
    3,625
    
    
    
    3,343
    
    
    
    7,228
    
    
    
    6,704Net realized gains (losses):Fixed income securities
    
    
    7
    
    
    
    (459
    )
    
    
    (312
    )
    
    
    (459
    )Equity securities, net
    
    
    (31
    )
    
    
    (30
    )
    
    
    (274
    )
    
    
    (154
    )Mark-to-market valuation for interest rate swaps
    
    
    426
    
    
    
    646
    
    
    
    507
    
    
    
    (50
    )Net realized investment gains (losses)
    
    
    402
    
    
    
    157
    
    
    
    (79
    )
    
    
    (663
    )Net investment income and net realized investment gains
    
    $
    4,027
    
    
    
    3,500
    
    
    
    7,149
    
    
    
    6,041
   Change in Unrealized Gains and Losses:
 June 302009Fixed-income securities
    
    $
    6,824Equity securities
    
    
    555$
    7,379
  12




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##### Table of Contents



Gross
    
    
    Gross
    
    
    EstimatedUnrealized
    
    
    Unrealized
    
    
    FairCost (1)
    
    
    Gains
    
    
    Losses
    
    
    ValueAt June 30, 2009:Fixed-income securities, available for sale:U.S. government and government agencies (2)
    
    $
    77,260
    
    
    
    2,940
    
    
    
    46
    
    
    
    80,154Obligations of states and political
subdivisions
    
    
    141,235
    
    
    
    4,593
    
    
    
    528
    
    
    
    145,300Industrial and miscellaneous
    
    
    108,045
    
    
    
    3,803
    
    
    
    808
    
    
    
    111,040Mortgage-backed securities
    
    
    24,015
    
    
    
    681
    
    
    
    799
    
    
    
    23,897Total fixed maturities
    
    
    350,555
    
    
    
    12,017
    
    
    
    2,181
    
    
    
    360,391Equity securities:At estimated market value
    
    
    7,462
    
    
    
    1,667
    
    
    
    141
    
    
    
    8,988Total
    
    $
    358,017
    
    
    
    13,684
    
    
    
    2,322
    
    
    
    369,379
 
 (1)
    
    Original cost of equity and fixed-income securities adjusted for other than temporary
impairment writedowns and amortization of premium and accretion of discount.(2)
    
    Includes approximately $63,262 (fair value) of mortgage-backed securities implicitly or
explicitly backed by the U.S. government and government agencies as of June 30, 2009.  June 30, 2009
    
    
    December 31, 2008Cost (1)
    
    
    Fair Value
    
    
    Cost (1)
    
    
    Fair ValueIndustrial and miscellaneous:Fixed income securitiesRetail specialty
    
    $
    36,990
    
    
    $
    37,869
    
    
    $
    27,561
    
    
    $
    27,810Financial
    
    
    31,887
    
    
    
    32,526
    
    
    
    36,520
    
    
    
    36,065Energy
    
    
    23,981
    
    
    
    25,050
    
    
    
    9,680
    
    
    
    9,444Information Technology
    
    
    9,152
    
    
    
    9,286
    
    
    
    1,849
    
    
    
    1,860Pharmaceutical
    
    
    6,035
    
    
    
    6,309
    
    
    
    2,249
    
    
    
    2,320Total
    
    $
    108,045
    
    
    $
    111,040
    
    
    $
    77,859
    
    
    $
    77,499Equity securitiesRetail specialty
    
    $
    3,441
    
    
    $
    3,570
    
    
    $
    4,117
    
    
    $
    4,565Financial
    
    
    1,575
    
    
    
    2,254
    
    
    
    2,329
    
    
    
    2,343Information Technology
    
    
    1,009
    
    
    
    1,197
    
    
    
    1,246
    
    
    
    1,186Pharmaceutical
    
    
    886
    
    
    
    1,077
    
    
    
    794
    
    
    
    974Energy
    
    
    551
    
    
    
    890
    
    
    
    746
    
    
    
    1,135Total
    
    $
    7,462
    
    
    $
    8,988
    
    
    $
    9,232
    
    
    $
    10,203
  13




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Less than 12 Months
    
    
    12 Months or Longer
    
    
    TotalEstimated
    
    
    Unrealized
    
    
    Estimated
    
    
    Unrealized
    
    
    Estimated
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesU.S. Treasury securities and
obligations of U.S.
government corporations
and agencies
    
    $
    3,870
    
    
    $
    46
    
    
    $
    
    
    
    $
    
    
    
    $
    3,870
    
    
    $
    46Obligations of states and
political subdivisions
    
    
    19,019
    
    
    
    242
    
    
    
    2,370
    
    
    
    286
    
    
    
    21,389
    
    
    
    528Corporate securities
    
    
    9,277
    
    
    
    200
    
    
    
    8,145
    
    
    
    608
    
    
    
    17,422
    
    
    
    808Mortgage-backed securities
    
    
    378
    
    
    
    28
    
    
    
    6,220
    
    
    
    771
    
    
    
    6,598
    
    
    
    799Total fixed maturities
    
    
    32,544
    
    
    
    516
    
    
    
    16,735
    
    
    
    1,665
    
    
    
    49,279
    
    
    
    2,181Total equity securities
    
    
    1,778
    
    
    
    116
    
    
    
    371
    
    
    
    25
    
    
    
    2,149
    
    
    
    141Total securities in a
temporary unrealized loss
position
    
    $
    34,322
    
    
    $
    632
    
    
    $
    17,106
    
    
    $
    1,690
    
    
    $
    51,428
    
    
    $
    2,322
    Amortized
    
    
    EstimatedCost
    
    
    Fair ValueDue in one year or less
    
    $
    23,506
    
    
    
    23,774Due after one year through five years
    
    
    89,605
    
    
    
    93,106Due after five years through ten years
    
    
    124,473
    
    
    
    128,089Due after ten years
    
    
    28,099
    
    
    
    28,263265,683
    
    
    
    273,232Mortgage-backed securities
    
    
    84,872
    
    
    
    87,159$
    350,555
    
    
    
    360,391
  14




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##### Table of Contents



Three monthsendedJune 302009Beginning balance of cumulative credit loss for securities held at April 1, 2009
    
    $
    5,503Additional credit loss for securities previously other-than-temorarily impaired
    
    
    24credit loss for securities not previously other-than-temorarily impaired
    
    
    Reduction in credit loss for securities disposed or collected
    
    
    Reduction in credit loss for securities other-than-temporarily impaired which were
intended to be or were required of necessity to be sold
    
    
    Change in credit loss due to accretion of increase in cash flows for securities
previously other-than-temporarily impaired
    
    
    Ending balance June 30, 2009
    
    $
    5,527
  Three months ended
    
    
    Six months endedJune 30
    
    
    June 302009
    
    
    2009Gross realized gains
    
    $
    604
    
    
    
    823Gross realized losses
    
    
    (202
    )
    
    
    (902
    )$
    402
    
    
    
    (79
    )
   
    
    $286 relating to one residential mortgage-backed security. This charge resulted from increased delinquency and default rates.
    
    $70 relating to two asset-backed securities. These charges related to issuer-specific credit events that revolved around the
performance of the underlying collateral, which had deteriorated. In general, the underlying assets of these securities
experienced increased conditional default rates and expected loss severities.
  
    
    $237 on nine equity securities related to issuer-specific concerns in the underlying businesses.
    
    $139 on two preferred stock securities, with the charge attributable to weakening fundamentals in their underlying assets.
    15




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##### Table of Contents



Segment Information
      Six Months Ended June 30,2009
    
    
    2008(In thousands)Revenues:Net premiums earned:Commercial lines
    
    $
    60,874
    
    
    $
    67,689Personal lines
    
    
    9,660
    
    
    
    10,032Total net premiums earned
    
    
    70,534
    
    
    
    77,721Net investment income
    
    
    7,228
    
    
    
    6,704Net realized investment losses
    
    
    (79
    )
    
    
    (663
    )Other revenue
    
    
    1,039
    
    
    
    1,019Total revenues
    
    $
    78,722
    
    
    $
    84,781Income before income taxes:Underwriting income (loss):Commercial lines
    
    $
    2,361
    
    
    $
    2,240Personal lines
    
    
    (859
    )
    
    
    (809
    )Total underwriting income
    
    
    1,502
    
    
    
    1,431Net investment income
    
    
    7,228
    
    
    
    6,704Net realized investment losses
    
    
    (79
    )
    
    
    (663
    )Other
    
    
    331
    
    
    
    386Income before income taxes
    
    $
    8,982
    
    
    $
    7,858
  16




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##### Table of Contents



Three Months Ended June 30,2009
    
    
    2008(In thousands)Revenues:Net premiums earned:Commercial lines
    
    $
    30,170
    
    
    $
    33,658Personal lines
    
    
    4,782
    
    
    
    4,986Total net premiums earned
    
    
    34,952
    
    
    
    38,644Net investment income
    
    
    3,625
    
    
    
    3,343Net realized investment gains
    
    
    402
    
    
    
    157Other revenue
    
    
    551
    
    
    
    564Total revenues
    
    $
    39,530
    
    
    $
    42,708Income before income taxes:Underwriting income (loss):Commercial lines
    
    $
    1,041
    
    
    $
    1,468Personal lines
    
    
    (126
    )
    
    
    (787
    )Total underwriting income
    
    
    915
    
    
    
    681Net investment income
    
    
    3,625
    
    
    
    3,343Net realized investment gains
    
    
    402
    
    
    
    157Other
    
    
    195
    
    
    
    227Income before income taxes
    
    $
    5,137
    
    
    $
    4,408
  17




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Reinsurance
    Comprehensive Income
  Six Months Ended June 30,2009
    
    
    2008(In thousands)Net income
    
    $
    6,641
    
    
    $
    5,825Other comprehensive income (loss), net of tax:Unrealized gains (losses) on securities:Unrealized holding gains (losses) arising during period, net of related income tax
expense (benefit) of $2,310 and ($1,724)
    
    
    4,484
    
    
    
    (3,346
    )Less reclassification adjustment for losses included in net income, net of related
income tax benefit of $199 and $210
    
    
    387
    
    
    
    405Defined benefit pension plan, net of related income tax expense (benefit) of $1 and ($38)
    
    
    2
    
    
    
    (74
    )4,873
    
    
    
    (3,015
    )Comprehensive income
    
    $
    11,514
    
    
    $
    2,810
  18




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##### Table of Contents



Three Months Eended June 30,2009
    
    
    2008(In thousands)Net income
    
    $
    3,750
    
    
    $
    3,233Other comprehensive income (loss), net of tax:Unrealized gains (losses) on securities:Unrealized holding gains (losses) arising during period, net of related income tax expense
(benefit) of $1,500 and ($1,963)
    
    
    2,911
    
    
    
    (3,810
    )Less reclassification adjustment for losses included in net income, net of related
income tax benefit of $8 and $167
    
    
    16
    
    
    
    323Defined benefit pension plan, net of related income tax expense (benefit) of $1 and ($38)
    
    
    1
    
    
    
    (74
    )2,928
    
    
    
    (3,561
    )Comprehensive income (loss)
    
    $
    6,678
    
    
    $
    (328
    )
 (6)
    
    Share-based Compensation    19




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##### Table of Contents



WeightedAverageNumber of
    
    
    Exercise PriceShares
    
    
    per ShareOutstanding at December 31, 2008
    
    
    600,700
    
    
    $
    13.24Granted - 2009
    
    
    
    
    
    
    Exercised - 2009
    
    
    
    
    
    
    Forfeited - 2009
    
    
    (10,000
    )
    
    
    12.21Outstanding at June 30, 2009
    
    
    590,700
    
    
    $
    13.26Exercisable at:June 30, 2009
    
    
    546,366
    
    
    $
    12.86Weighted-average remaining contractual life
    
    
    
    
    
    5.2 yearsCompensation remaining to be recognized for unvested stock options at June 30, 2009 (millions)
    
    
    
    
    
    $
    0.2Weighted-average remaining amortization period
    
    
    
    
    
    0.9 yearsAggregate Intrinsic Value of outstanding options, June 30, 2009 (millions)
    
    
    
    
    
    $
    2.0Aggregate Intrinsic Value of exercisable options, June 30, 2009 (millions)
    
    
    
    
    
    $
    1.9
   WeightedAverageNumber of
    
    
    Fair ValueShares
    
    
    per ShareUnvested restricted stock at December 31, 2008
    
    
    22,792
    
    
    $
    15.26Granted - 2009
    
    
    
    
    
    
    Vested - 2009
    
    
    (17,125
    )
    
    
    12.24Forfeited - 2009
    
    
    
    
    
    
    Unvested restricted stock at June 30, 2009
    
    
    5,667
    
    
    $
    24.39Compensation remaining to be recognized for unvested restricted stock at June 30, 2009 (millions)
    
    
    
    
    
    $
    0.1Weighted-average remaining amortization period
    
    
    
    
    
    1.4 years
  20




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##### Table of Contents



Earnings per Share
  Six Months Ended June 30,2009
    
    
    2008(Dollars in thousands, except per share data)Numerator for basic and diluted earnings per share:Net income
    
    $
    6,641
    
    
    $
    5,825Denominator for basic earnings per share  weighted-average shares
outstanding
    
    
    6,188,313
    
    
    
    6,226,772Effect of stock incentive plans
    
    
    74,299
    
    
    
    156,154Denominator for diluted earnings per share
    
    
    6,262,612
    
    
    
    6,382,926Basic earnings per share
    
    $
    1.07
    
    
    $
    0.94Diluted earnings per share
    
    $
    1.06
    
    
    $
    0.91
 Three Months Ended June 30,2009
    
    
    2008(Dollars in thousands, except per share data)Numerator for basic and diluted earnings per share:Net income
    
    $
    3,750
    
    
    $
    3,233Denominator for basic earnings per share 
weighted-average shares outstanding
    
    
    6,196,311
    
    
    
    6,233,796Effect of stock incentive plans
    
    
    102,127
    
    
    
    153,954Denominator for diluted earnings per share
    
    
    6,298,438
    
    
    
    6,387,750Basic earnings per share
    
    $
    0.61
    
    
    $
    0.52Diluted earnings per share
    
    $
    0.60
    
    
    $
    0.51
  (8) Fair Value of Assets and Liabilities
  
    
    Level 1 Valuations based on unadjusted quoted market prices in active markets for
identical assets that the Group has the ability to access. Since the valuations are based
on quoted prices that are readily and regularly available in an active market, valuation of
these securities does not entail a significant amount or degree of judgment.
 
    
    Level 2 Valuations based on quoted prices for similar assets in active markets; quoted
prices for identical or similar assets in inactive markets; or valuations based on models
where the significant inputs are observable (e.g., interest rates, yield curves, prepayment
speeds, default rates, loss severities, etc.) or can be corroborated by observable market
data.
 
    
    Level 3 Valuations that are derived from techniques in which one or more of the
significant inputs are unobservable, including broker quotes which are non-binding.
  21




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22




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##### Table of Contents



June 30, 2009QuotedPrices inActive
    
    
    SignificantMarkets for
    
    
    Other
    
    
    SignificantIdentical
    
    
    Observable
    
    
    UnobservableAssets
    
    
    Inputs
    
    
    Inputs(in thousands)
    
    Total
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Fixed-income securities, available for sale
    
    $
    360,391
    
    
    $
    4,220
    
    
    $
    354,757
    
    
    $
    1,414Equity securities
    
    
    8,988
    
    
    
    8,162
    
    
    
    780
    
    
    
    46Total assets
    
    $
    369,379
    
    
    $
    12,382
    
    
    $
    355,537
    
    
    $
    1,460Other liabilities
    
    $
    1,371
    
    
    $
    
    
    
    $
    1,371
    
    
    $
    Total liabilities
    
    $
    1,371
    
    
    $
    
    
    
    $
    1,371
    
    
    $
    
  For the Six Months EndedJune 30, 2009Fixed-incomesecurities,available
    
    
    Equity(in thousands)
    
    for sale
    
    
    securitiesBalance, beginning of period
    
    $
    1,767
    
    
    $
    46Total net losses included in net income
    
    
    (283
    )
    
    
    Total net losses included in other comprehensive income
    
    
    (66
    )
    
    
    Purchases, sales, issuances and settlements, net
    
    
    (4
    )
    
    
    Balance, end of period
    
    $
    1,414
    
    
    $
    46
  23




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##### Table of Contents



For the Three Months EndedJune 30, 2009Fixed-incomesecurities,available
    
    
    Equity(in thousands)
    
    for sale
    
    
    securitiesBalance, beginning of period
    
    $
    1,465
    
    
    $
    46Total net gain included in net income
    
    
    2
    
    
    
    Total net losses included in other comprehensive income
    
    
    (51
    )
    
    
    Purchases, sales, issuances and settlements, net
    
    
    (2
    )
    
    
    Balance, end of period
    
    $
    1,414
    
    
    $
    46
  (9) Derivative Instruments and Hedging Activities
  Accounting for
Derivative Instruments and Hedging Activities Accounting for Certain
Derivative Instruments and Certain Hedging Activities Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FASB
Statement No. 133
    24




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##### Table of Contents



June 30,
    
    
    December 31,2009
    
    
    2008Balance
    
    
    
    
    
    BalanceSheet
    
    Fair Value
    
    
    Sheet
    
    Fair ValueLocation
    
    asset (liability)
    
    
    Location
    
    asset (liability)Interest rate swaps:Union Bank of California
(Trust I)
    
    Other liabilities
    
    $
    (423
    )
    
    Other liabilities
    
    $
    (546
    )Union Bank of California
(Trust II)
    
    Other liabilities
    
    
    (273
    )
    
    Other liabilities
    
    
    (366
    )Union Bank of California
(Trust III)
    
    Other liabilities
    
    
    (675
    )
    
    Other liabilities
    
    
    (967
    )Total derivatives
    
    
    
    $
    (1,371
    )
    
    
    
    $
    (1,879
    )
  Six
Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008Location of Gain
    
    Amount of Gain
    
    
    Location of Gain
    
    Amount of GainRecognized in
    
    Recognized in
    
    
    Recognized in
    
    Recognized inIncome
    
    Income
    
    
    Income
    
    IncomeInterest rate swaps:Union Bank of California
(Trust I)
    
    Net realized investment losses
    
    $
    124
    
    
    Net realized investment losses
    
    $
    (12
    )Union Bank of California
(Trust II)
    
    Net realized investment losses
    
    
    92
    
    
    Net realized investment losses
    
    
    (2
    )Union Bank of California
(Trust III)
    
    Net realized investment losses
    
    
    291
    
    
    Net realized investment losses
    
    
    (36
    )Total derivatives
    
    
    
    $
    507
    
    
    
    
    $
    (50
    )
  25




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##### Table of Contents



Three
Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008Location of Gain
    
    Amount of Gain
    
    
    Location of Gain
    
    Amount of GainRecognized in
    
    Recognized in
    
    
    Recognized in
    
    Recognized inIncome
    
    Income
    
    
    Income
    
    IncomeInterest rate swaps:Union Bank of California
(Trust I)
    
    Net realized investment gains
    
    $
    111
    
    
    Net realized investment gains
    
    $
    211Union Bank of California
(Trust II)
    
    Net realized investment gains
    
    
    80
    
    
    Net realized investment gains
    
    
    119Union Bank of California
(Trust III)
    
    Net realized investment gains
    
    
    235
    
    
    Net realized investment gains
    
    
    316Total derivatives
    
    
    
    $
    426
    
    
    
    
    $
    646
  26




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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, New York
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 and businesses located in New York;
 
    
    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.
       27




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##### Table of Contents



Critical Accounting Policies
 General.
 Liabilities for Loss and Loss Adjustment Expenses.
    28




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##### Table of Contents



29




---



##### Table of Contents



June 30,
    
    
    December 31,2009
    
    
    2008(In thousands)Commercial lines:Commercial multi-peril
    
    $
    227,639
    
    
    $
    224,444Commercial automobile
    
    
    38,037
    
    
    
    42,230Surety
    
    
    10,397
    
    
    
    10,606Other liability
    
    
    9,305
    
    
    
    8,018Workers compensation
    
    
    8,083
    
    
    
    8,150Fire, allied, inland marine
    
    
    152
    
    
    
    163293,613
    
    
    
    293,611Personal lines:Homeowners
    
    
    7,656
    
    
    
    7,215Personal automobile
    
    
    1,698
    
    
    
    1,795Other liability
    
    
    659
    
    
    
    1,008Fire, allied, inland marine
    
    
    389
    
    
    
    335Workers compensation
    
    
    26
    
    
    
    3610,428
    
    
    
    10,389Total
    
    $
    304,041
    
    
    $
    304,000
 Investments.
     30




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##### Table of Contents



Policy Acquisition Costs.
 Reinsurance.
  Income Taxes.
 Results of Operations
      31




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##### Table of Contents



Six and three months ended June 30, 2009 compared to six and three months ended June 30, 2008
  Six Months Ended June 30,2009 vs. 2008 Income
    
    2009
    
    
    2008
    
    
    Change
    
    
    % Change(Dollars in thousands)Commercial lines underwriting income
    
    $
    2,361
    
    
    $
    2,240
    
    
    $
    121
    
    
    
    5.4
    %Personal lines underwriting loss
    
    
    (859
    )
    
    
    (809
    )
    
    
    (50
    )
    
    
    6.2
    %Total underwriting income
    
    
    1,502
    
    
    
    1,431
    
    
    
    71
    
    
    
    5.0
    %Net investment income
    
    
    7,228
    
    
    
    6,704
    
    
    
    524
    
    
    
    7.8
    %Net realized investment losses
    
    
    (79
    )
    
    
    (663
    )
    
    
    584
    
    
    
    N/MOther
    
    
    1,039
    
    
    
    1,019
    
    
    
    20
    
    
    
    2.0
    %Interest expense
    
    
    (708
    )
    
    
    (633
    )
    
    
    (75
    )
    
    
    11.8
    %Income before income taxes
    
    
    8,982
    
    
    
    7,858
    
    
    
    1,124
    
    
    
    14.3
    %Income taxes
    
    
    2,341
    
    
    
    2,033
    
    
    
    308
    
    
    
    15.2
    %Net Income
    
    
    6,641
    
    
    
    5,825
    
    
    
    816
    
    
    
    14.0
    %Loss/ LAE ratio (GAAP)
    
    
    60.9
    %
    
    
    62.8
    %
    
    
    (1.9
    )%Underwriting expense ratio (GAAP)
    
    
    37.0
    %
    
    
    35.4
    %
    
    
    1.6
    %Combined ratio (GAAP)
    
    
    97.9
    %
    
    
    98.2
    %
    
    
    (0.3
    )%Loss/ LAE ratio (Statutory)
    
    
    60.9
    %
    
    
    62.8
    %
    
    
    (1.9
    )%Underwriting expense ratio (Statutory)
    
    
    35.6
    %
    
    
    35.0
    %
    
    
    0.6
    %Combined ratio (Statutory)
    
    
    96.5
    %
    
    
    97.8
    %
    
    
    (1.3
    )%
 Three Months Ended June 30,2009 vs. 2008 Income
    
    2009
    
    
    2008
    
    
    Change
    
    
    % Change(Dollars in thousands)Commercial lines underwriting income
    
    $
    1,041
    
    
    $
    1,468
    
    
    $
    (427
    )
    
    
    (29.1)
    %Personal lines underwriting loss
    
    
    (126
    )
    
    
    (787
    )
    
    
    661
    
    
    
    N/MTotal underwriting income
    
    
    915
    
    
    
    681
    
    
    
    234
    
    
    
    34.4
    %Net investment income
    
    
    3,625
    
    
    
    3,343
    
    
    
    282
    
    
    
    8.4
    %Net realized investment gains
    
    
    402
    
    
    
    157
    
    
    
    245
    
    
    
    N/MOther
    
    
    551
    
    
    
    564
    
    
    
    (13
    )
    
    
    (2.3)
    %Interest expense
    
    
    (356
    )
    
    
    (337
    )
    
    
    (19
    )
    
    
    5.6
    %Income before income taxes
    
    
    5,137
    
    
    
    4,408
    
    
    
    729
    
    
    
    16.5
    %Income taxes
    
    
    1,387
    
    
    
    1,175
    
    
    
    212
    
    
    
    18.0
    %Net Income
    
    
    3,750
    
    
    
    3,233
    
    
    
    517
    
    
    
    16.0
    %Loss/ LAE ratio (GAAP)
    
    
    59.4
    %
    
    
    62.0
    %
    
    
    (2.6
    )%Underwriting expense ratio (GAAP)
    
    
    38.0
    %
    
    
    36.2
    %
    
    
    1.8
    %Combined ratio (GAAP)
    
    
    97.4
    %
    
    
    98.2
    %
    
    
    (0.8
    )%Loss/ LAE ratio (Statutory)
    
    
    59.4
    %
    
    
    62.0
    %
    
    
    (2.6
    )%Underwriting expense ratio (Statutory)
    
    
    35.2
    %
    
    
    34.6
    %
    
    
    0.6
    %Combined ratio (Statutory)
    
    
    94.6
    %
    
    
    96.6
    %
    
    
    (2.0
    )%
   32




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##### Table of Contents



Six Months Ended June 30,2009 vs. 2008 Revenue
    
    2009
    
    
    2008
    
    
    Change
    
    
    % Change(In thousands)Direct premiums written
    
    $
    79,611
    
    
    $
    87,377
    
    
    $
    (7,766
    )
    
    
    (8.9
    )%Net premiums written
    
    
    72,182
    
    
    
    78,288
    
    
    
    (6,106
    )
    
    
    (7.8
    )%Net premiums earned
    
    
    70,534
    
    
    
    77,721
    
    
    
    (7,187
    )
    
    
    (9.2
    )%Net investment income
    
    
    7,228
    
    
    
    6,704
    
    
    
    524
    
    
    
    7.8
    %Net realized investment losses
    
    
    (79
    )
    
    
    (663
    )
    
    
    584
    
    
    
    N/MOther revenue
    
    
    1,039
    
    
    
    1,019
    
    
    
    20
    
    
    
    2.0
    %Total revenue
    
    $
    78,722
    
    
    $
    84,781
    
    
    $
    (6,059
    )
    
    
    (7.1
    )%
 Three Months Ended June 30,2009 vs. 2008 Revenue
    
    2009
    
    
    2008
    
    
    Change
    
    
    % Change(In thousands)Direct premiums written
    
    $
    44,619
    
    
    $
    49,080
    
    
    $
    (4,461
    )
    
    
    (9.1
    )%Net premiums written
    
    
    40,326
    
    
    
    43,749
    
    
    
    (3,423
    )
    
    
    (7.8
    )%Net premiums earned
    
    
    34,952
    
    
    
    38,644
    
    
    
    (3,692
    )
    
    
    (9.6
    )%Net investment income
    
    
    3,625
    
    
    
    3,343
    
    
    
    282
    
    
    
    8.4
    %Net realized investment gains
    
    
    402
    
    
    
    157
    
    
    
    245
    
    
    
    N/MOther revenue
    
    
    551
    
    
    
    564
    
    
    
    (13
    )
    
    
    (2.3
    )%Total revenue
    
    $
    39,530
    
    
    $
    42,708
    
    
    $
    (3,178
    )
    
    
    (7.4
    )%
    33




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##### Table of Contents



34




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##### Table of Contents



Six Months Ended June 30,2009 vs. 2008 Investment Income and Realized Losses
    
    2009
    
    
    2008
    
    
    Change
    
    
    % Change(In thousands)Fixed income securities
    
    $
    7,960
    
    
    $
    7,289
    
    
    $
    671
    
    
    
    9.2
    %Dividends
    
    
    159
    
    
    
    167
    
    
    
    (8
    )
    
    
    (4.8
    )%Cash, cash equivalents & other
    
    
    79
    
    
    
    253
    
    
    
    (174
    )
    
    
    (68.8
    )%Gross investment income
    
    
    8,198
    
    
    
    7,709
    
    
    
    489
    
    
    
    6.3
    %Investment expenses
    
    
    (970
    )
    
    
    (1,005
    )
    
    
    35
    
    
    
    3.5
    %Net investment income
    
    
    7,228
    
    
    
    6,704
    
    
    $
    524
    
    
    
    7.8
    %Realized losses  fixed income securities
    
    
    (312
    )
    
    
    (459
    )
    
    $
    147
    
    
    
    N/MRealized losses  equity securities
    
    
    (274
    )
    
    
    (154
    )
    
    
    (120
    )
    
    
    N/MMark-to-market valuation for interest rate swaps
    
    
    507
    
    
    
    (50
    )
    
    
    557
    
    
    
    N/MNet realized losses
    
    
    (79
    )
    
    
    (663
    )
    
    $
    584
    
    
    
    N/M
 Three Months Ended June 30,2009 vs. 2008 Investment Income and Realized Gains
    
    2009
    
    
    2008
    
    
    Change
    
    
    % Change(In thousands)Fixed income securities
    
    $
    4,023
    
    
    $
    3,680
    
    
    $
    343
    
    
    
    9.3
    %Dividends
    
    
    79
    
    
    
    82
    
    
    
    (3
    )
    
    
    (3.7
    )%Cash, cash equivalents & other
    
    
    32
    
    
    
    83
    
    
    
    (51
    )
    
    
    (61.4
    )%Gross investment income
    
    
    4,134
    
    
    
    3,845
    
    
    
    289
    
    
    
    7.5
    %Investment expenses
    
    
    (509
    )
    
    
    (502
    )
    
    
    (7
    )
    
    
    (1.4
    )%Net investment income
    
    
    3,625
    
    
    
    3,343
    
    
    $
    282
    
    
    
    8.4
    %Realized gains/(losses)  fixed income securities
    
    
    7
    
    
    
    (459
    )
    
    $
    466
    
    
    
    N/MRealized losses  equity securities
    
    
    (31
    )
    
    
    (30
    )
    
    
    (1
    )
    
    
    N/MMark-to-market valuation for interest rate swaps
    
    
    426
    
    
    
    646
    
    
    
    (220
    )
    
    
    N/MNet realized gains
    
    
    402
    
    
    
    157
    
    
    $
    245
    
    
    
    N/M
     35




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##### Table of Contents



June 30, 2009
    
    
    December 31, 2008Cost (2)
    
    
    Fair Value
    
    
    Cost (2)
    
    
    Fair Value(In thousands)Fixed income securities (1)United States government and government agencies (3)
    
    $
    77,260
    
    
    $
    80,154
    
    
    $
    84,747
    
    
    $
    87,975Obligations of states and political subdivisions
    
    
    141,235
    
    
    
    145,300
    
    
    
    143,042
    
    
    
    145,125Industrial and miscellaneous
    
    
    108,045
    
    
    
    111,040
    
    
    
    77,859
    
    
    
    77,499Mortgage-backed certificates
    
    
    24,015
    
    
    
    23,897
    
    
    
    25,427
    
    
    
    23,488Total fixed income securities
    
    
    350,555
    
    
    
    360,391
    
    
    
    331,075
    
    
    
    334,087Equity securities
    
    
    7,462
    
    
    
    8,988
    
    
    
    9,232
    
    
    
    10,203Total
    
    $
    358,017
    
    
    $
    369,379
    
    
    $
    340,307
    
    
    $
    344,290
 
 (1)
    
    In our consolidated financial statements, investments are carried at fair value.(2)
    
    Original cost of equity and fixed income securities adjusted for other than temporary
impairment write downs and amortization of premium and accretion of discount.(3)
    
    Includes approximately $60,857 and $66,576 (cost) and $63,262 and $68,696 (estimated fair
value) of mortgage-backed securities backed by the U.S. government and government agencies as
of June 30, 2009 and December 31, 2008, respectively.  36




---



##### Table of Contents



June 30, 2009
    
    
    December 31, 2008Cost (1)
    
    
    Fair Value
    
    
    Cost (1)
    
    
    Fair Value(In thousands)Industrial and miscellaneous:Fixed income securitiesRetail specialty
    
    $
    36,990
    
    
    $
    37,869
    
    
    $
    27,561
    
    
    $
    27,810Financial
    
    
    31,887
    
    
    
    32,526
    
    
    
    36,520
    
    
    
    36,065Energy
    
    
    23,981
    
    
    
    25,050
    
    
    
    9,680
    
    
    
    9,444Information Technology
    
    
    9,152
    
    
    
    9,286
    
    
    
    1,849
    
    
    
    1,860Pharmaceutical
    
    
    6,035
    
    
    
    6,309
    
    
    
    2,249
    
    
    
    2,320Total
    
    $
    108,045
    
    
    $
    111,040
    
    
    $
    77,859
    
    
    $
    77,499Equity securitiesRetail specialty
    
    $
    3,441
    
    
    $
    3,570
    
    
    $
    4,117
    
    
    $
    4,565Financial
    
    
    1,575
    
    
    
    2,254
    
    
    
    2,329
    
    
    
    2,343Information Technology
    
    
    1,009
    
    
    
    1,197
    
    
    
    1,246
    
    
    
    1,186Pharmaceutical
    
    
    886
    
    
    
    1,077
    
    
    
    794
    
    
    
    974Energy
    
    
    551
    
    
    
    890
    
    
    
    746
    
    
    
    1,135Total
    
    $
    7,462
    
    
    $
    8,988
    
    
    $
    9,232
    
    
    $
    10,203
 
 (1)
    
    Original cost of equity securities; original cost of fixed income securities adjusted
for amortization of premium and accretion of discount, as well as any impairment
write-downs.    37




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##### Table of Contents



Less than 12 Months
    
    
    12 Months or Longer
    
    
    TotalEstimated
    
    
    Unrealized
    
    
    Estimated
    
    
    Unrealized
    
    
    Estimated
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses(In Thousands)U.S. Treasury securities and
obligations of U.S.
government corporations
and agencies
    
    $
    3,870
    
    
    $
    46
    
    
    $
    
    
    
    $
    
    
    
    $
    3,870
    
    
    $
    46Obligations of states and
political subdivisions
    
    
    19,019
    
    
    
    242
    
    
    
    2,370
    
    
    
    286
    
    
    
    21,389
    
    
    
    528Corporate securities
    
    
    9,277
    
    
    
    200
    
    
    
    8,145
    
    
    
    608
    
    
    
    17,422
    
    
    
    808Mortgage-backed securities
    
    
    378
    
    
    
    28
    
    
    
    6,220
    
    
    
    771
    
    
    
    6,598
    
    
    
    799Total fixed maturities
    
    
    32,544
    
    
    
    516
    
    
    
    16,735
    
    
    
    1,665
    
    
    
    49,279
    
    
    
    2,181Total equity securities
    
    
    1,778
    
    
    
    116
    
    
    
    371
    
    
    
    25
    
    
    
    2,149
    
    
    
    141Total securities in a
temporary unrealized loss
position
    
    $
    34,322
    
    
    $
    632
    
    
    $
    17,106
    
    
    $
    1,690
    
    
    $
    51,428
    
    
    $
    2,322
    Six Months Ended June 30,2009 vs. 2008 Commercial Lines (CL)
    
    2009
    
    
    2008
    
    
    Change
    
    
    % Change(Dollars in thousands)CL Direct premiums written
    
    $
    69,244
    
    
    $
    76,634
    
    
    $
    (7,390
    )
    
    
    (9.6
    )%CL Net premiums written
    
    $
    62,936
    
    
    $
    68,665
    
    
    $
    (5,729
    )
    
    
    (8.3
    )%CL Net premiums earned
    
    $
    60,874
    
    
    $
    67,689
    
    
    $
    (6,815
    )
    
    
    (10.1
    )%CL Loss/ LAE expense ratio (GAAP)
    
    
    59.2
    %
    
    
    61.6
    %
    
    
    (2.4
    )%CL Expense ratio (GAAP)
    
    
    36.9
    %
    
    
    35.1
    %
    
    
    1.8
    %CL Combined ratio (GAAP)
    
    
    96.1
    %
    
    
    96.7
    %
    
    
    (0.6
    )%
  38




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##### Table of Contents



Three Months Ended June 30,2009 vs. 2008 Commercial Lines (CL)
    
    2009
    
    
    2008
    
    
    Change
    
    
    % Change(Dollars in thousands)CL Direct premiums written
    
    $
    39,007
    
    
    $
    43,300
    
    
    $
    (4,293
    )
    
    
    (9.9
    )%CL Net premiums written
    
    $
    35,346
    
    
    $
    38,539
    
    
    $
    (3,193
    )
    
    
    (8.3
    )%CL Net premiums earned
    
    $
    30,171
    
    
    $
    33,658
    
    
    $
    (3,487
    )
    
    
    (10.4
    )%CL Loss/ LAE expense ratio (GAAP)
    
    
    58.6
    %
    
    
    59.8
    %
    
    
    (1.2
    )%CL Expense ratio (GAAP)
    
    
    37.9
    %
    
    
    35.9
    %
    
    
    2.0
    %CL Combined ratio (GAAP)
    
    
    96.5
    %
    
    
    95.7
    %
    
    
    0.8
    %
       39




---



##### Table of Contents



Six Months Ended June 30,2009 vs. 2008 Personal Lines (PL)
    
    2009
    
    
    2008
    
    
    Change
    
    
    % Change(Dollars in thousands)PL Direct premiums written
    
    $
    10,367
    
    
    $
    10,743
    
    
    $
    (376
    )
    
    
    (3.5
    )%PL Net premiums written
    
    $
    9,246
    
    
    $
    9,623
    
    
    $
    (377
    )
    
    
    (3.9
    )%PL Net premiums earned
    
    $
    9,660
    
    
    $
    10,032
    
    
    $
    (372
    )
    
    
    (3.7
    )%PL Loss/ LAE expense ratio (GAAP)
    
    
    71.4
    %
    
    
    70.2
    %
    
    
    1.2
    %PL Expense ratio (GAAP)
    
    
    37.5
    %
    
    
    37.8
    %
    
    
    (0.3
    )%PL Combined ratio (GAAP)
    
    
    108.9
    %
    
    
    108.0
    %
    
    
    0.9
    %
 Three Months Ended June 30,2009 vs. 2008 Personal Lines (PL)
    
    2009
    
    
    2008
    
    
    Change
    
    
    % Change(Dollars in thousands)PL Direct premiums written
    
    $
    5,612
    
    
    $
    5,780
    
    
    $
    (168
    )
    
    
    (2.9
    )%PL Net premiums written
    
    $
    4,980
    
    
    $
    5,210
    
    
    $
    (230
    )
    
    
    (4.4
    )%PL Net premiums earned
    
    $
    4,781
    
    
    $
    4,986
    
    
    $
    (205
    )
    
    
    (4.1
    )%PL Loss/ LAE expense ratio (GAAP)
    
    
    64.3
    %
    
    
    77.4
    %
    
    
    (13.1
    )%PL Expense ratio (GAAP)
    
    
    38.4
    %
    
    
    38.4
    %
    
    
    
    %PL Combined ratio (GAAP)
    
    
    102.7
    %
    
    
    115.8
    %
    
    
    (13.1
    )%
     Six Months Ended June 30,2009 vs. 2008 Expenses and Expense Ratio
    
    2009
    
    
    2008
    
    
    Change
    
    
    % Change(Dollars in thousands)Amortization of Deferred Acquisition Costs
    
    $
    19,503
    
    
    $
    20,703
    
    
    $
    (1,200
    )
    
    
    (5.8
    )%As a % of net premiums earned
    
    
    27.7
    %
    
    
    26.6
    %
    
    
    1.1
    %Other underwriting expenses
    
    
    6,569
    
    
    
    6,842
    
    
    
    (273
    )
    
    
    (4.0
    )%Underwriting expenses
    
    $
    26,072
    
    
    $
    27,545
    
    
    $
    (1,473
    )
    
    
    (5.3
    )%Underwriting expense ratio
    
    
    37.0
    %
    
    
    35.4
    %
    
    
    1.6
    %
  40




---



##### Table of Contents



Six Months Ended June 30,2009 vs. 2008 Income Taxes
    
    2009
    
    
    2008
    
    
    Change
    
    
    % Change(Dollars in thousands)Income before income taxes
    
    $
    8,982
    
    
    $
    7,858
    
    
    $
    1,124
    
    
    
    14.3
    %Income taxes
    
    
    2,341
    
    
    
    2,033
    
    
    
    308
    
    
    
    15.2
    %Net income
    
    $
    6,641
    
    
    $
    5,825
    
    
    $
    816
    
    
    
    14.0
    %Effective tax rate
    
    
    26.1
    %
    
    
    25.9
    %
    
    
    27.4
    %
  LIQUIDITY AND CAPITAL RESOURCES
         41




---



##### Table of Contents



42




---



##### Table of Contents



IMPACT OF INFLATION
   OFF BALANCE SHEET COMMITMENTS AND CONTRACTUAL OBLIGATIONS
   
 Item 3.
    
    Quantitative and
Qualitative Disclosures About Market Risk.
 General.
  Interest Rate Risk.
  Credit Risk.
   43




---



##### Table of Contents



Municipal Bond Holding Exposure.
  
    
    AA+ including insurance enhancement
    
    AA excluding insurance enhancement (using underlying ratings)
 
    
    99% of the underlying ratings are A- or better
    
    90% of the underlying ratings are AA- or better
  
    
    The average credit quality with insurance enhancement is AA
    
    The average credit quality of the underlying, excluding insurance enhancement, is AA
    
    Each municipal fixed income investment is evaluated based on its underlying
credit fundamentals, irrespective of credit enhancement provided by bond insurers
  
    
    The average credit quality of those securities without enhancement is AA+
  % of TotalAverage Credit
    
    
    Market
    
    
    Muni
    
    
    UnrealizedRating
    
    
    Value
    
    
    Portfolio
    
    
    GainUninsured Securities
    
    AA+
    
    $
    49,113,739
    
    
    
    34
    %
    
    $
    1,325,369Securities with Insurance Enhancement
    
    AA
    
    
    96,186,360
    
    
    
    66
    %
    
    
    2,739,393Total
    
    
    
    
    
    $
    145,300,099
    
    
    
    100
    %
    
    $
    4,064,762
  44




---



##### Table of Contents



Total Municipal
    
    
    Total MunicipalUnderlying Rating
    
    
    Fixed Income
    
    
    Fixed IncomeInsurance
    
    
    of Insurance
    
    
    Portfolio
    
    
    PortfolioUninsured
    
    
    Enhanced
    
    
    Enhanced
    
    
    (with Insurance
    
    
    (without InsuranceSecurities
    
    
    Securities
    
    
    Securities
    
    
    Enhancement)
    
    
    Enhancement)(1)
    
    
    (2)
    
    
    (3)
    
    
    (1) + (2)
    
    
    (1) + (3)S&P orequivalent
    
    Market
    
    
    % of
    
    
    Market
    
    
    % of
    
    
    Market
    
    
    % of
    
    
    Market
    
    
    % of
    
    
    Market
    
    
    % ofratings
    
    Value
    
    
    Total
    
    
    Value
    
    
    Total
    
    
    Value
    
    
    Total
    
    
    Value
    
    
    Total
    
    
    Value
    
    
    TotalAAA
    
    $
    32,477,547
    
    
    
    66
    %
    
    $
    34,204,241
    
    
    
    36
    %
    
    $
    9,171,972
    
    
    
    10
    %
    
    $
    66,681,788
    
    
    
    46
    %
    
    $
    41,649,519
    
    
    
    29
    %AA+
    
    
    3,086,200
    
    
    
    6
    %
    
    
    20,400,940
    
    
    
    21
    %
    
    
    26,769,881
    
    
    
    28
    %
    
    
    23,487,140
    
    
    
    16
    %
    
    
    29,856,081
    
    
    
    21
    %AA
    
    
    10,845,961
    
    
    
    22
    %
    
    
    23,523,474
    
    
    
    24
    %
    
    
    29,190,574
    
    
    
    30
    %
    
    
    34,369,435
    
    
    
    24
    %
    
    
    40,036,535
    
    
    
    28
    %AA-
    
    
    1,352,065
    
    
    
    3
    %
    
    
    13,213,612
    
    
    
    14
    %
    
    
    17,996,702
    
    
    
    19
    %
    
    
    14,565,677
    
    
    
    10
    %
    
    
    19,348,767
    
    
    
    13
    %A+
    
    
    
    
    
    
    
    
    
    
    1,738,213
    
    
    
    2
    %
    
    
    3,369,733
    
    
    
    3
    %
    
    
    1,738,213
    
    
    
    1
    %
    
    
    3,369,733
    
    
    
    2
    %A
    
    
    1,351,966
    
    
    
    3
    %
    
    
    2,087,660
    
    
    
    2
    %
    
    
    5,724,743
    
    
    
    6
    %
    
    
    3,439,626
    
    
    
    2
    %
    
    
    7,076,709
    
    
    
    5
    %A-
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,944,535
    
    
    
    3
    %
    
    
    
    
    
    
    
    
    
    
    2,944,535
    
    
    
    2
    %BBB-
    
    
    
    
    
    
    
    
    
    
    1,018,220
    
    
    
    1
    %
    
    
    1,018,220
    
    
    
    1
    %
    
    
    1,018,220
    
    
    
    1
    %
    
    
    1,018,220
    
    
    
    1
    %Total
    
    $
    49,113,739
    
    
    
    100
    %
    
    $
    96,186,360
    
    
    
    100
    %
    
    $
    96,186,360
    
    
    
    100
    %
    
    $
    145,300,099
    
    
    
    100
    %
    
    $
    145,300,099
    
    
    
    100
    %Average Rating
    
    AA+
    
    
    AA
    
    
    AA
    
    
    AA+
    
    
    AA
   Section 3:
 Structured Product Exposure.
     45




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##### Table of Contents



Equity Risk.
  
 Item 4.
    
    Controls and Procedures.
  
 Part II  OTHER INFORMATION
 
 Item 1.
    
    Legal Proceedings.
  
 Item 1A.
    
    Risk Factors.
   46




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##### Table of Contents



Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds.
 Total Number of Shares Purchased as Part
    
    
    Maximum Number of Shares That MayTotal Number of
    
    
    Average Price
    
    
    of Publicly Announced Plans or
    
    
    Yet Be Purchased Under The Plans orPeriod
    
    Shares Purchased
    
    
    Paid per Share
    
    
    Programs (Note 1)
    
    
    Programs (Note 1)April 1-30, 2009
    
    
    0
    
    
    
    N/A
    
    
    
    0
    
    
    
    205,176May 1-31, 2009
    
    
    0
    
    
    
    N/A
    
    
    
    0
    
    
    
    205,176June 1-30, 2009
    
    
    0
    
    
    
    N/A
    
    
    
    0
    
    
    
    205,176Total
    
    
    0
    
    
    
    N/A
    
    
    
    0
    
    
    
    205,176
  
 Item 3.
    
    Defaults Upon Senior
Securities.
   47




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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)
  48




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##### Table of Contents



SIGNATURES
  MERCER INSURANCE GROUP, INC. (Registrant)Dated: August 10, 2009
    By:
    /s/ Andrew R. SpeakerAndrew R. Speaker,President and Chief Executive OfficerDated: August 10, 2009
    By:
    /s/ David B. MercleanDavid B. Merclean,Senior Vice President and Chief Financial Officer  49




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##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Title31.1
    
    
    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)
  50