##### 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 March 31, 2005, or Transition report pursuant to Section 13 or 15(d) Of the Exchange Act for the Transition Period from  to
 No. 000-25425 
  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)
 (609) 737-0426 
 
  
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes þ No o Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date. Number of Shares Outstanding as of May 2, 2005COMMON STOCK (No Par Value)
    
    6,553,233(Title of Class)
    
    (Outstanding Shares)




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TABLE OF CONTENTS PagePART I. FINANCIAL INFORMATION
    
    4Item 1. Financial Statements
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    12Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    26Item 4. Controls and Procedures
    
    26PART II. OTHER INFORMATION
    
    27Item 1. Legal Proceedings
    
    27Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    27Item 3. Defaults Upon Senior Securities
    
    27Item 4. Submission of Matters to a Vote of Security Holders
    
    27Item 5. Other Information
    
    28Item 6. Exhibits
    
    29SIGNATURES
    
    29Exhibits:CERTIFICATION OF CHIEF EXECUTIVE OFFICER IN ACCORDANCE WITH SECTION 302CERTIFICATION OF CHIEF FINANCIAL OFFICER IN ACCORDANCE WITH SECTION 302CERTIFICATION OF CHIEF EXECUTIVE OFFICER IN ACCORDANCE WITH SECTION 906CERTIFICATION OF CHIEF FINANCIAL OFFICER IN ACCORDANCE WITH SECTION 906
  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
 (i)




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Forward-looking Statements Mercer Insurance Group, Inc. (the Company) may from time to time make written or oral
forward-looking statements, including statements contained in the Companys filings with the
Securities and Exchange Commission (including this Quarterly Report on Form 10-Q and the exhibits
hereto and thereto), in its reports to shareholders and in other communications by the Company,
which are made in good faith by the Company pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements include statements with respect to the Companys beliefs,
plans, objectives, goals, expectations, anticipations, estimates and intentions, that are subject
to significant risks and uncertainties, and are subject to change based on various factors (some of
which are beyond the Companys control). The words may, could, should, would, believe,
anticipate, estimate, expect, intend, plan and similar expressions are intended to
identify forward-looking statements. The following factors, among others, could cause the Companys
financial performance to differ materially from the plans, objectives, expectations, estimates and
intentions expressed in such forward-looking statements:  
    future economic conditions in the regional and national markets in which the
Company competes which are less favorable than expected;
    the effects of weather-related and other catastrophic events;
    the concentration of insured accounts in New Jersey and Pennsylvania;
    the effect of legislative, judicial, economic, demographic and regulatory events
in the two states in which we do business;
    the continuation of an A.M. Best rating in the Excellent category;
    the ability to enter new markets successfully and capitalize on growth
opportunities either through acquisitions or the expansion of our producer network;
    financial market conditions, including, but not limited to, changes in interest
rates and the stock markets causing a reduction of investment income or investment
gains, an acceleration of the amortization of deferred policy acquisition costs,
reduction in the value of our investment portfolio or a reduction in the demand for
our products;
    the impact of acts of terrorism and acts of war;
    the effects of terrorist related insurance legislation and laws;
    inflation;
    the cost, availability and collectibility of reinsurance;
    estimates and adequacy of loss reserves and trends in losses and loss adjustment expenses;
    heightened competition, including specifically the intensification of price
competition, the entry of new competitors and the development of new products by new
and existing competitors;
    changes in the coverage terms selected by insurance customers, including higher
deductibles and lower limits; 2




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
    our inability to obtain regulatory approval of, or to implement, premium rate
increases;
    the potential impact on our reported net income that could result from the
adoption of future accounting standards issued by the Financial Accounting Standards
Board or other standard-setting bodies;
    inability to carry out marketing and sales plans, including, among others,
development of new products or changes to existing products and acceptance of the new
or revised products in the market;
    unanticipated changes in industry trends and ratings assigned by nationally
recognized rating organizations;
    adverse litigation or arbitration results;
    the ability to carry out our business plans; or
    adverse changes in applicable laws, regulations or rules governing insurance
holding companies and insurance companies, and environmental, tax or accounting
matters including limitations on premium levels, increases in minimum capital and
reserves, and other financial viability requirements, and changes that affect the
cost of, or demand for our products. The Company cautions that the foregoing list of important factors is not exclusive. Readers
are also cautioned not to place undue reliance on these forward-looking statements, which reflect
managements analysis only as of the date of this report. The Company does not undertake to update
any forward-looking statement, whether written or oral, that may be made from time to time by or on
behalf of the Company. 3




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Part I  FINANCIAL INFORMATION 
 Item 1. Financial Statements MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS March 31,
    
    
    December 31,2005
    
    
    2004(Dollars in thousands)(Unaudited)ASSETSInvestments:Fixed income securities, available-for-sale, at fair value (amortized cost of $102,065 and
$101,102, respectively)
    
    $
    100,073
    
    
    $
    100,657Equity securities, at fair value (cost of $16,157 and $16,145, respectively)
    
    
    23,720
    
    
    
    24,447Total investments
    
    
    123,793
    
    
    
    125,104Cash and cash equivalents
    
    
    10,427
    
    
    
    16,289Premiums receivable
    
    
    9,467
    
    
    
    11,217Reinsurance receivables
    
    
    3,487
    
    
    
    2,534Prepaid reinsurance premiums
    
    
    1,454
    
    
    
    1,573Deferred policy acquisition costs
    
    
    7,746
    
    
    
    8,014Accrued investment income
    
    
    917
    
    
    
    1,044Property and equipment, net
    
    
    9,593
    
    
    
    9,718Goodwill
    
    
    4,673
    
    
    
    4,673Other assets
    
    
    1,315
    
    
    
    1,112Total assets
    
    $
    172,872
    
    
    $
    181,278LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Losses and loss adjustment expenses
    
    $
    36,246
    
    
    $
    36,028Unearned premiums
    
    
    31,936
    
    
    
    34,007Accounts payable and accrued expenses
    
    
    5,254
    
    
    
    7,739Other reinsurance balances
    
    
    658
    
    
    
    861Other liabilities
    
    
    1,364
    
    
    
    1,089Deferred income taxes
    
    
    371
    
    
    
    1,146Total liabilities
    
    
    75,829
    
    
    
    80,870Stockholders 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 7,060,733 shares,
outstanding 6,360,282 and 6,344,844 shares
    
    
    
    
    
    
    Additional paid-in capital
    
    
    67,608
    
    
    
    67,651Accumulated other comprehensive income:Unrealized gains in investments, net of
deferred income taxes
    
    
    3,677
    
    
    
    5,186Retained earnings
    
    
    38,869
    
    
    
    37,876Unearned restricted stock compensation
    
    
    (1,992
    )
    
    
    (2,242
    )Unearned ESOP shares
    
    
    (4,855
    )
    
    
    (5,009
    )Treasury stock, at cost, 500,000 and 256,500 shares
    
    
    (6,264
    )
    
    
    (3,054
    )Total stockholdersequity
    
    
    97,043
    
    
    
    100,408Total liabilities and
stockholders equity
    
    $
    172,872
    
    
    $
    181,278
 See accompanying notes to condensed consolidated financial statements. 4




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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS Three Months Ended March 31, 2005 and 2004 2005
    
    
    2004(Dollars in thousands, exceptshares and per share data)(Unaudited)Revenue:Net premiums earned
    
    $
    15,113
    
    
    $
    13,862Investment income, net of expenses
    
    
    743
    
    
    
    668Net realized investment gains (losses)
    
    
    18
    
    
    
    (97
    )Other revenue
    
    
    86
    
    
    
    92Total revenue
    
    
    15,960
    
    
    
    14,525Expenses:Losses and loss adjustment expenses
    
    
    7,723
    
    
    
    8,323Amortization of deferred policy
acquisition costs (related party
amounts of $318 and $317,
respectively)
    
    
    3,899
    
    
    
    3,863Other expenses
    
    
    2,958
    
    
    
    2,070Total expenses
    
    
    14,580
    
    
    
    14,256Income before income taxes
    
    
    1,380
    
    
    
    269Income taxes
    
    
    387
    
    
    
    40Net income
    
    $
    993
    
    
    $
    229Earnings per common share:Basic
    
    $
    0.17
    
    
    $
    0.04Diluted
    
    $
    0.16
    
    
    $
    0.04Weighted average shares:Basic
    
    
    6,003,473
    
    
    
    6,290,102Diluted
    
    
    6,249,326
    
    
    
    6,290,102
 See accompanying notes to condensed consolidated financial statements. 5




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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
Three months ended March 31, 2005
(Unaudited, dollars in thousands) AccumulatedAdditional
    
    
    other
    
    
    
    
    
    
    Unearned
    
    
    UearnedPreferred
    
    
    Common
    
    
    paid-in
    
    
    comprehensive
    
    
    Retained
    
    
    restricted stock
    
    
    ESOP
    
    
    Treasurystock
    
    
    stock
    
    
    capital
    
    
    income
    
    
    Earnings
    
    
    compensation
    
    
    shares
    
    
    stock
    
    
    TotalBalance, December 31, 2004
    
    $
    
    
    
    
    
    
    
    
    67,651
    
    
    
    5,186
    
    
    
    37,876
    
    
    
    (2,242
    )
    
    
    (5,009
    )
    
    
    (3,054
    )
    
    $
    100,408Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    993
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    993Unrealized gains on securities:Unrealized holding losses arising
during period, net of related income
tax benefit of $771
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,497
    )
    
    
    
    
    
    
    
    
    
    
    

    
    
    
    
    
    
    
    (1,497
    )Less reclassification adjustment for
(gains) included in net income, net
of related income tax expense of $6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12
    )Other
comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,509
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (516
    )Forfeiture of restricted stock grant
    
    
    
    
    
    
    
    
    
    
    (92
    )
    
    
    
    
    
    
    
    
    
    
    92
    
    
    
    
    
    
    
    
    
    
    
    Amortization of restricted stock compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    158
    
    
    
    
    
    
    
    
    
    
    
    158ESOP shares committed
    
    
    
    
    
    
    
    
    
    
    49
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    154
    
    
    
    
    
    
    
    203Treasury stock purchased
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,210
    )
    
    
    (3,210
    )Balance, March 31, 2005
    
    $
    
    
    
    
    
    
    
    
    67,608
    
    
    
    3,677
    
    
    
    38,869
    
    
    
    (1,992
    )
    
    
    (4,855
    )
    
    
    (6,264
    )
    
    $
    97,043
 See accompanying notes to condensed consolidated financial statements. 6




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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, 2005 and 2004 2005
    
    
    2004(Dollars in thousands)(Unaudited)Cash flows from operating activities:Net income
    
    $
    993
    
    
    $
    229Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization of fixed assets
    
    
    407
    
    
    
    343Net amortization of premium or (accretion of discount)
    
    
    163
    
    
    
    (199
    )Amortization of restricted stock compensation
    
    
    158
    
    
    
    ESOP share commitment
    
    
    203
    
    
    
    207Net realized investment (gains) losses
    
    
    (18
    )
    
    
    97Deferred income tax
    
    
    2
    
    
    
    (256
    )Change in assets and liabilities:Premiums receivable
    
    
    1,750
    
    
    
    1,204Reinsurance receivables
    
    
    (1,804
    )
    
    
    (1,032
    )Prepaid reinsurance premiums
    
    
    119
    
    
    
    115Deferred policy acquisition costs
    
    
    268
    
    
    
    325Other assets
    
    
    (76
    )
    
    
    (293
    )Losses and loss adjustment expenses
    
    
    218
    
    
    
    1,179Unearned premiums
    
    
    (2,071
    )
    
    
    (1,058
    )Other
    
    
    (2,646
    )
    
    
    (2,891
    )Net cash used by operating activities
    
    
    (2,332
    )
    
    
    (2,030
    )Cash flows from investing activities:Purchase of fixed income securities, available-for- sale
    
    
    (3,458
    )
    
    
    (56,344
    )Purchase of equity securities
    
    
    (668
    )
    
    
    (1,644
    )Sale and maturity of fixed income securities, available-for-sale
    
    
    3,429
    
    
    
    19,045Sale of
equity securities
    
    
    659
    
    
    
    656Sale of
short-term investments, net
    
    
    
    
    
    
    54,396Purchase of property and equipment, net
    
    
    (282
    )
    
    
    (1,401
    )Net cash (used) provided by investing activities
    
    
    (320
    )
    
    
    14,708Cash flows from financing activities:Purchase of treasury stock
    
    
    (3,210
    )
    
    
    Net cash used by financing activities
    
    
    (3,210
    )
    
    
    Net (decrease) increase in cash and cash equivalents
    
    
    (5,862
    )
    
    
    12,678Cash and cash equivalents at beginning of period
    
    
    16,289
    
    
    
    15,350Cash and cash equivalents at end of period
    
    $
    10,427
    
    
    $
    28,028Cash paid during the period for:Interest
    
    $
    7
    
    
    $
    10Income taxes
    
    $
    250
    
    
    $
    
 See accompanying notes to condensed consolidated financial statements. 7




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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited) (1) Basis of Presentation The financial information for the interim periods included herein is unaudited; however,
such information reflects all adjustments which are, in the opinion of management, necessary to
a fair presentation of the financial position, results of operations, and cash flows for the
interim periods. The results of operations for interim periods are not necessarily indicative
of results to be expected for the full year. Certain amounts in the Companys prior year interim consolidated financial statements and
related footnotes have been reclassified to conform to the 2005 presentation. Such
reclassification had no effect on the Companys net income or stockholders equity. These financial statements should be read in conjunction with the financial statements and
notes for the year ended December 31, 2004 included in the Companys Annual Report on Form 10-K
filed with the Securities and Exchange Commission. (2) Segment Information The Company manages its business in three segments: commercial lines insurance, personal
lines insurance, and investments. The commercial lines insurance and personal lines insurance
segments are managed based on underwriting results determined in accordance with U.S. generally
accepted accounting principles, and the investment segment is managed based on after-tax
investment returns. Underwriting results for commercial lines and personal lines take into account premiums
earned, incurred losses and loss adjustment expenses, and underwriting expenses. The
investments segment is evaluated by consideration of net investment income (investment income
less investment expenses), and realized gains and losses. In determining the results of each segment, assets are not allocated to segments and are
reviewed in the aggregate for decision-making purposes. 8




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Financial data by segment is as follows for the three months ended March 31, 2005 and 2004: Three Months Ended March 312005
    
    
    2004(In thousands)Revenues:Net premiums earned:Commercial lines
    
    $
    9,181
    
    
    $
    8,025Personal lines
    
    
    5,932
    
    
    
    5,837Total net premiums earned
    
    
    15,113
    
    
    
    13,862Net investment income
    
    
    743
    
    
    
    668Realized investment gains
    
    
    18
    
    
    
    (97
    )Other
    
    
    86
    
    
    
    92Total revenues
    
    
    15,960
    
    
    
    14,525Income before income taxes:Underwriting income (loss):Commercial lines
    
    
    639
    
    
    
    2,242Personal lines
    
    
    (106
    )
    
    
    (2,636
    )Total underwriting income (loss)
    
    
    533
    
    
    
    (394
    )Net investment income
    
    
    743
    
    
    
    668Realized investment gains
    
    
    18
    
    
    
    (97
    )Other
    
    
    86
    
    
    
    92Income before income taxes
    
    $
    1,380
    
    
    $
    269
 (3) Reinsurance Premiums earned are net of amounts ceded of $1,719 and $2,019 for the three months ended March
31, 2005 and 2004, respectively. Losses and loss adjustment expenses are net of amounts ceded of
$320 and $383 for the three months ended March 31, 2005 and 2004, respectively. (4) Comprehensive Income The
Companys comprehensive (loss) income for the three month period ended March 31, 2005 and 2004 is
as follows: Three Months endedMarch 312005
    
    
    2004(In thousands)Net income
    
    $
    993
    
    
    $
    229Other comprehensive income, net of tax:Unrealized gains on securities:Unrealized holding (losses) gains
arising during period, net of related
income tax benefit (expense) of $771,
and ($364)
    
    
    (1,497
    )
    
    
    707Less reclassification adjustment for
(gains) losses included in net income,
net of related income tax expense
(benefit) of $6 and ($44)
    
    
    (12
    )
    
    
    64(1,509
    )
    
    
    771Comprehensive (loss) Income
    
    $
    (516
    )
    
    $
    1,000
 9




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(5) Stock-based Compensation Stock-based compensation plans are accounted for under the provisions of Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Accordingly, no compensation expense is recognized for fixed stock option grants.
Compensation expense would be recorded on the date of a stock option grant only if the current
market price of the underlying stock exceeded the exercise price. The following table illustrates
the effect on net income and earnings per share as if the provisions of Statement of Financial
Accounting Standards (SFAS) No. 123 (as amended by SFAS No. 148), Accounting for Stock-Based
Compensation, had been applied to all periods presented. Three months endedMarch 31,
    
    
    March 31,2005
    
    
    2004(In thousands,except per share data)Net income, as reported
    
    $
    993
    
    
    $
    229Plus: Stock-based employee compensation
expense included in reported net income,
net of related tax effects
    
    
    105
    
    
    
    0Less: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects
    
    
    (234
    )
    
    
    0Pro forma net income
    
    $
    864
    
    
    $
    229Basic earnings per share:As reported
    
    $
    0.17
    
    
    $
    0.04Pro forma
    
    $
    0.14
    
    
    $
    0.04Diluted earnings per share:As reported
    
    $
    0.16
    
    
    $
    0.04Pro forma
    
    $
    0.14
    
    
    $
    0.04
 In
December 2004, the Financial Accounting Standards Board issued
SFAS No. 123(R), Share-Based Payment, which is a
revision of SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS 123(R) requires that the compensation
cost related to share-based payment transactions be recognized in
financial statements. The compensation cost will be measured on the
fair value of the equity or liability instruments issued. The
Statement is effective as of the beginning of the first fiscal year
beginning after June 15, 2005. The impact of adopting
SFAS No. 123(R) on the net income and earnings per share is not
expected to be materially different from the pro forma amounts
disclosed above which includes all share-based payment transactions
through March 31, 2005. The impact that any future share-based
payment transactions will have on our financial position or results
of operations is not yet known. The Company adopted the Mercer Insurance Group, Inc. 2004 Stock Incentive Plan (the Plan)
on June 16, 2004. Awards may be made in the form of Incentive Stock Options, nonqualified stock
options, restricted stock or any combination to employees and non-employee Directors. At adoption,
the Plan limited to 250,000 the number of shares that may be awarded as restricted stock, and to
500,000 the number of shares for which incentive stock options may be granted. The total number of
shares authorized in the plan is 876,555 shares, with an annual increase equal to 1% of the shares
outstanding at the end of the previous year. The Plan provides that stock options and restricted
stock awards may include vesting restrictions and performance criteria at the discretion of the
Compensation Committee of the Board of Directors. The term of options may not exceed ten years for
incentive stock options, and ten years and 1 month for nonqualified stock options, and the option
price may not be less than fair market value on the date of grant. The 2004 grants have vesting
periods of 3 or 5 years on restricted stock, incentive stock options, and nonqualified stock
options. There have been no 2005 grants. 10




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Information regarding fixed stock option activity in Mercer Insurance Groups plan is
presented below: Weighted AverageNumber
    
    
    Exercise Priceof shares
    
    
    Per ShareOutstanding at December 31, 2004
    
    
    537,700
    
    
    $
    12.21Granted - 2005
    
    
    0
    
    
    
    0.00Exercised - 2005
    
    
    0
    
    
    
    0.00Forfeited - 2005
    
    
    18,500
    
    
    
    12.21Outstanding at March 31, 2005
    
    
    519,200
    
    
    $
    12.21Exercisable at:March 31, 2005
    
    
    0
    
    
    $
    0.00Weighted-average remaining contractual life
    
    9.2 years
 The per share weighted-average fair value of options granted during 2004 was $4.19. The fair
value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions used for grants in 2004: dividend yield of
0%; expected volatility of 20.91%; risk-free interest rate of 4.73%, and an expected life of 6.5
years. Grants of 215,000 shares of restricted stock were awarded to employees and non-employee
Directors in 2004, with a forfeiture of 7,500 shares in 2005. The weighted average price per share
on the grant date was $12.21 per share. (6) Earnings per Share The computation of basic and diluted earnings per share is as follows: Three months endedMarch 31,2005
    
    
    2004(Dollars in thousands, except per share data)Numerator for basic and diluted earnings per share:Net income
    
    $
    993
    
    
    
    229Denominator for basic earnings per share -
weighted-average shares outstanding
    
    
    6,003,473
    
    
    
    6,290,102Effect of stock incentive plans
    
    
    245,853
    
    
    
    0Denominator for diluted earnings per share
    
    
    6,249,326
    
    
    
    6,290,102Basic earnings per share
    
    $
    0.17
    
    
    $
    0.04Diluted earnings per share
    
    $
    0.16
    
    
    $
    0.04
 11




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##### Table of Contents



(7) Subsequent Events The Company announced on May 2, 2005 that it has signed an Agreement and Plan of Merger for
Mercer to acquire all the outstanding stock of Financial Pacific Insurance Group, Inc. for
approximately $40.4 million in cash. The transaction will be effected through a merger of a wholly
owned subsidiary of Mercer into Financial Pacific. Consummation of the transaction between Mercer
and Financial Pacific is subject to regulatory approval. 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations The following presents managements discussion and analysis of our financial condition and
results of operations as of the dates and for the periods indicated. You should read this
discussion in conjunction with the condensed consolidated financial statements and notes thereto
included in this report. This discussion contains forward-looking information that involves risks
and uncertainties. Actual results could differ significantly from these forward-looking statements.
See Forward-Looking Statements. Overview THE CONVERSION TRANSACTION AND THE HOLDING COMPANY Mercer Insurance Group, Inc. (the Company or the Holding Company) is a holding company
owning all of the outstanding shares of Mercer Insurance Company, the company resulting from the
conversion of Mercer Mutual Insurance Company from the mutual to the stock form of organization on
December 15, 2003 (the Conversion). Prior to the Conversion, and since 1844, Mercer Mutual
Insurance Company was engaged in the business of selling property and casualty insurance. Our Business The Company and its subsidiaries underwrite property and casualty insurance in New Jersey and
Pennsylvania. Our consolidated operating insurance company subsidiaries are:  
    Mercer Insurance Company, a Pennsylvania property and casualty stock insurance
company offering insurance coverage to businesses and individuals in New Jersey and
Pennsylvania,
    Mercer Insurance Company of New Jersey, Inc., a New Jersey property and casualty
stock insurance company offering insurance coverage to businesses and individuals in
New Jersey; and
    Franklin Insurance Company, a property and casualty stock insurance company
offering private passenger automobile and homeowners insurance to individuals located
in Pennsylvania. The Company is subject to regulation by the Pennsylvania Insurance Department and the New
Jersey Department of Banking and Insurance as its primary regulators because it is the holding
company for Mercer Insurance Company, and, indirectly, Mercer Insurance Company of New Jersey, Inc.
and Franklin Insurance Company. We manage our business and report our operating results in three operating segments:
commercial lines insurance, personal lines insurance and the investment function. See Note 2 of
the notes to our condensed consolidated financial statements included in this report. However,
assets are not allocated to segments and are reviewed in the aggregate for decision-making
purposes. Our commercial lines insurance business consists primarily of multi-peril and general
liability and related coverages. Our personal lines insurance business consists primarily of
homeowners (in New Jersey and Pennsylvania) and private passenger automobile (in Pennsylvania only)
insurance coverages. We market both the commercial and personal insurance lines through
independent producers. 12




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##### Table of Contents



Our income is principally derived from insurance premiums received from insureds in the
commercial lines (businesses insured) and personal lines (individuals insured) segments, less the
costs of underwriting the insurance policies, the costs of settling and paying claims reported on
the policies, and from investment income reduced by investment expenses and gains or losses on
holdings in our investment portfolio. Variability in our income is caused by a variety of
circumstances, some within the control of our companies and some not within our control. Premium
volume is affected by, among other things, the availability and regular flow to our insurance
companies of quality, properly-priced risks being produced by our agents, the ability to retain on
renewal existing good-performing accounts, competition from other insurance companies, regulatory
rate approvals, our reputation, and other limitations created by the marketplace or regulators.
Our underwriting costs are affected by, among other things, the amount of commission and
profit-sharing commission we pay our agents to produce the underwriting risks for which we receive
premiums, the cost of issuing insurance policies and maintaining our customer and agent
relationships, marketing costs, taxes we pay to the states in which we operate on the amount of
premium we collect, and other assessments and charges imposed on our companies by the regulators in
the states in which we do business. Our claim and claim settlement costs are affected by, among
other things, the quality of our accounts, severe or extreme weather in our operating region, the
nature of the claim, the regulatory and legal environment in our territories, inflation in
underlying medical and property repair costs, and the availability and cost of reinsurance. Our
investment income and realized gains and losses are determined by, among other things, market
forces, the rates of interest and dividends paid on our investment portfolio holdings, the credit
or investment quality of the issuers and the success of their underlying businesses, the market
perception of the issuers, and other factors such as ratings by rating agencies and analysts. Critical Accounting Policies General.The Companys financial statements are prepared in conformity with U.S. generally
accepted accounting principles (GAAP). We are required to make estimates and assumptions in certain
circumstances that affect amounts reported in our consolidated financial statements and related
footnotes. We evaluate these estimates and assumptions on an on-going basis based on historical
developments, market conditions, industry trends and other information that we believe to be
reasonable under the circumstances. There can be no assurance that actual results will conform to
our estimates and assumptions, and that reported results of operations will not be materially
adversely affected by the need to make accounting adjustments to reflect changes in these estimates
and assumptions from time to time. We believe the following policies are the most sensitive to
estimates and judgments. Liabilities for Loss and Loss Adjustment Expenses.The liability for losses and loss
adjustment expenses represents estimates of the ultimate unpaid cost of all losses incurred,
including losses for claims that have not yet been reported to our insurance companies. The amount
of loss reserves for reported claims is based primarily upon a case-by-case evaluation of the type
of risk involved, knowledge of the circumstances surrounding each claim and the insurance policy
provisions relating to the type of loss. The amounts of loss reserves for unreported claims and
loss adjustment expenses are determined using historical information by line of insurance as
adjusted to current conditions. Inflation is implicitly provided for in the reserving function
through analysis of costs, trends and reviews of historical reserving results over multiple years. Reserves are closely monitored and are recomputed periodically using the most recent
information on reported claims and a variety of statistical techniques. Specifically, on a
quarterly basis, we review, by line of business, existing reserves, new claims, changes to existing
case reserves, and paid losses with respect to the current and prior accident years. We use
historical paid and incurred losses and accident year data to derive expected ultimate loss and
loss adjustment expense ratios by line of business. We then apply these expected loss and loss
adjustment expense ratios to in-force business to derive a reserve level for each line of business.
This amount, together with reserves required by new reported claims and changes to existing case
reserves, is compared to existing reserves to establish the adjustment to reserves that is
required. In connection with the determination of 13




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##### Table of Contents



the reserves, we also consider other specific factors such as recent weather-related losses,
trends in historical paid losses, and legal and judicial trends with respect to theories of
liability. Because of the nature of our business, which generally provides coverage for short-term
risks, loss development is comparatively rapid and historical paid losses have been a reliable
predictive measure of future losses. Nevertheless, reserves are estimates because there are uncertainties inherent in the
determination of ultimate losses. Court decisions, regulatory changes and economic conditions can
affect the ultimate cost of claims that occurred in the past as well as create uncertainties
regarding future loss cost trends. Accordingly, the ultimate liability for unpaid losses and loss
settlement expenses will likely differ from the amount recorded at March 31, 2005. Changes in
estimates or differences between estimates and amounts ultimately paid are reflected in current
operations. Loss reserving techniques and assumptions have been consistently applied during the
periods presented. The table below summarizes the effect on net loss reserves and equity in the event of
reasonably likely changes in the variables considered in establishing loss and loss adjustment
expense reserves. The range of reasonably likely changes was established based on a review of
changes in accident year development by line of business and applied to loss reserves as a whole.
The selected range of changes does not indicate what could be the potential best or worst case or
likely scenarios: AdjustmentChange in Loss and
    
    
    Adjusted Loss and
    
    
    
    
    
    
    Adjusted Loss and Loss
    
    
    Percentage ChangeLoss Adjustment
    
    
    Loss Reserves Net of
    
    
    Percentage Change in
    
    
    Adjustment Reserves
    
    
    in StockholdersReserves Net of
    
    
    Reinsurance as of
    
    
    Stockholders' Equity as
    
    
    Net of Reinsurance as of
    
    
    Equity as ofReinsurance
    
    
    March 31, 2005
    
    
    of March 31, 2005(1)
    
    
    December 31, 2004
    
    
    December 31, 2004 (1)(Dollars in thousands)(10.0
    )%
    
    
    29,791
    
    
    
    2.3
    %
    
    
    29,669
    
    
    
    2.2
    %(7.5
    )%
    
    
    30,618
    
    
    
    1.7
    %
    
    
    30,493
    
    
    
    1.6
    %(5.0
    )%
    
    
    31,446
    
    
    
    1.1
    %
    
    
    31,317
    
    
    
    1.1
    %(2.5
    )%
    
    
    32,273
    
    
    
    0.6
    %
    
    
    32,141
    
    
    
    0.5
    %Base
    
    
    
    33,101
    
    
    
    
    
    
    
    32,965
    
    
    
    2.5
    %
    
    
    33,929
    
    
    
    (0.6
    )%
    
    
    33,789
    
    
    
    (0.5
    )%5.0
    %
    
    
    34,756
    
    
    
    (1.1
    )%
    
    
    34,613
    
    
    
    (1.1
    )%7.5
    %
    
    
    35,584
    
    
    
    (1.7
    )%
    
    
    35,437
    
    
    
    (1.6
    )%10.0
    %
    
    
    36,411
    

    
    
    (2.3
    )%
    
    
    36,262
    
    
    
    (2.2
    )%
   (1)
    
    Net of Tax The property and casualty industry has incurred substantial aggregate losses from claims
related to asbestos-related illnesses, environmental remediation, product and construction defect
liability, mold, and other uncertain exposures. We have not experienced significant losses from
these types of claims. 14




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##### Table of Contents



The table below summarizes loss and loss adjustment reserves by major line of business: March 31, 2005
    
    
    December 31, 2004(Dollars in thousands)Commercial lines:Commercial multi-peril
    
    $
    6,703
    
    
    $
    5,441Other liability
    
    
    9,380
    
    
    
    9,374Workers compensation
    
    
    4,710
    
    
    
    4,627Commercial automobile
    
    
    1,416
    
    
    
    1,456Fire, allied, inland marine
    
    
    785
    
    
    
    78122,994
    
    
    
    21,679Personal lines:Homeowners
    
    
    9,222
    
    
    
    10,095Personal automobile
    
    
    2,186
    
    
    
    2,283Fire, allied, inland marine
    
    
    346
    
    
    
    338Other liability
    
    
    1,408
    
    
    
    1,596Workers compensation
    
    
    90
    
    
    
    3713,252
    
    
    
    14,349Total
    
    $
    36,246
    
    
    $
    36,028
 Investments.Unrealized investment gains or losses on investments carried at fair value,
net of applicable income taxes, are reflected directly in stockholders equity as a component of
comprehensive income and, accordingly, have no effect on net income. A decline in fair value of an
investment below its cost that is deemed other than temporary is charged to earnings as a realized
loss. We monitor our investment portfolio and review investments that have experienced a decline
in fair value below cost to evaluate whether the decline is other than temporary. These
evaluations involve judgment and consider the magnitude and reasons for a decline and the prospects
for the fair value to recover in the near term. Adverse investment market conditions, or poor
operating results of underlying investments, could result in impairment charges in the future. The Companys policy on impairment of value of investments is as follows: if a security has a
market value below cost it is considered impaired. For any such security a review of the financial
condition and prospects of the company will be performed by the Investment Committee to determine
if the decline in market value is other than temporary. If it is determined that the decline in
market value is other than temporary, the carrying value of the security will be written down to
realizable value and the amount of the write down accounted for as a realized loss. Realizable
value is defined for this purpose as the market price of the security. Write-down to a value other
than the market price requires objective evidence in support of that value. In evaluating the potential impairment of fixed income securities, the Investment Committee
will evaluate relevant factors, including but not limited to the following: the issuers current
financial condition and ability to make future scheduled principal and interest payments, relevant
rating history, analysis and guidance provided by rating agencies and analysts, the degree to which
an issuer is current or in arrears in making principal and interest payments, and changes in price
relative to the market. In evaluating the potential impairment of equity securities, the Investment Committee will
evaluate certain factors, including but not limited to the following: the relationship of market
price per share versus carrying value per share at the date of acquisition and the date of
evaluation, the price-to-earnings ratio at the date of acquisition and the date of evaluation, any
rating agency announcements, the issuers financial condition and near-term prospects, including
any specific events that may influence the issuers operations, the independent auditors report
on the issuers financial statements; and any buy/sell/hold recommendations or price projections
by outside investment advisors. 15




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##### Table of Contents



We have one significant non-traded equity security, a non-voting common stock in Excess
Reinsurance Company, which is carried at $1.1 million. Its fair value is estimated at the statutory
book value as reported to the National Association of Insurance Commissioners (NAIC). Other
non-traded securities, which are not material in the aggregate, are carried at cost. Policy Acquisition Costs.We defer policy acquisition costs, such as commissions, premium
taxes and certain other underwriting expenses that vary with and are primarily related to the
production of business. These costs are amortized over the effective period of the related
insurance policies. The method followed in computing deferred policy acquisition costs limits the
amount of deferred costs to their estimated realizable value, which gives effect to the premium to
be earned, related investment income, loss and loss adjustment expenses, and certain other costs
expected to be incurred as the premium is earned. Future changes in estimates, the most
significant of which is expected loss and loss adjustment expenses, may require acceleration of the
amortization of deferred policy acquisition costs. Reinsurance.Amounts recoverable from property and casualty reinsurers are estimated in a
manner consistent with the claim liability associated with the reinsured policy. Amounts paid for
reinsurance contracts are expensed over the contract period during which insured events are covered
by the reinsurance contracts. Ceded unearned premiums and reinsurance balances recoverable on paid and unpaid loss and loss
adjustment expenses are reported separately as assets, instead of being netted with the appropriate
liabilities, because reinsurance does not relieve us of our legal liability to our policyholders.
Reinsurance balances recoverable are subject to credit risk associated with the particular
reinsurer. Additionally, the same uncertainties associated with estimating unpaid loss and loss
adjustment expenses affect the estimates for the ceded portion of these liabilities. We continually monitor the financial condition of our reinsurers. Income Taxes.We use the asset and liability method of accounting for income taxes. Deferred
income taxes are provided and arise from the recognition of temporary differences between financial
statement carrying amounts and the tax bases of our assets and liabilities. A valuation allowance
is provided when it is more likely than not that some portion of the deferred tax asset will not be
realized. The effect of a change in tax rates is recognized in the period of the enactment date. Results of Operations Our results of operations are influenced by factors affecting the property and casualty
insurance industry in general, which include potentially significant variations due to competition,
weather, catastrophic events, regulation, general economic conditions, judicial trends,
fluctuations in interest rates and other changes in the investment environment. Our growth in premiums and underwriting results have been, and continue to be, influenced by
market conditions. Pricing in the property and casualty insurance industry historically has been
and remains cyclical. During a soft market cycle, price competition is prevalent, which makes it
difficult to write and retain properly priced personal and commercial lines business. Our policy
is to maintain our disciplined underwriting and pricing standards during soft markets to the
greatest extent possible, declining business which is inadequately priced for its level of risk.
The hard market and related pricing power of the early part of the current decade has given way to
a much more competitive market recently, particularly in property exposures and package policies.
This has resulted in slower premium growth than the Company has achieved in recent years. 16




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##### Table of Contents



Quarter ended March 31, 2005 compared to quarter ended March 31, 2004. The components of income for 2005 and 2004, and the change and percentage change from year to
year, are shown in the charts below. The accompanying narrative refers to the statistical
information displayed in the chart immediately above the narrative. 2005 vs. 2004 Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    %(Dollars
in thousands)
    
    2005
    
    
    2004
    
    
    Change
    
    
    ChangeCommercial lines underwriting income
    
    $
    639
    
    
    $
    2,242
    
    
    $
    (1,603
    )
    
    
    (71.5
    )%Personal lines underwriting loss
    
    
    (106
    )
    
    
    (2,636
    )
    
    
    2,530
    
    
    
    96.0
    %Total underwriting income (loss)
    
    
    533
    
    
    
    (394
    )
    
    
    927
    
    
    
    235.3
    %Net investment income
    
    
    743
    
    
    
    668
    
    
    
    75
    
    
    
    11.2
    %Realized investment gains (losses)
    
    
    18
    
    
    
    (97
    )
    
    
    115
    
    
    
    118.6
    %Other revenue
    
    
    86
    
    
    
    92
    
    
    
    (6
    )
    
    
    (6.5
    )%Income before income taxes
    
    
    1,380
    
    
    
    269
    
    
    
    1,111
    
    
    
    413.0
    %Income taxes
    
    
    387
    
    
    
    40
    
    
    
    347
    
    
    
    867.5
    %Net income
    
    $
    993
    
    
    $
    229
    
    
    $
    764
    
    
    
    333.6
    %Loss / LAE ratio (GAAP)
    
    
    51.1
    %
    
    
    60.0
    %
    
    
    (8.9
    )%Underwriting expense ratio (GAAP)
    
    
    45.4
    %
    
    
    42.8
    %
    
    
    2.6
    %Combined ratio (GAAP)
    
    
    96.5
    %
    
    
    102.8
    %
    
    
    (6.3
    )%Loss / LAE ratio (Statutory)
    
    
    51.1
    %
    
    
    60.1
    %
    
    
    (9.0
    )%Underwriting expense ratio (Statutory)
    
    
    47.1
    %
    
    
    41.3
    %
    
    
    5.8
    %Combined ratio (Statutory)
    
    
    98.3
    %
    
    
    101.4
    %
    
    
    (3.1
    )%
 Charts and discussion relating to each of our reporting segments (commercial lines
underwriting, personal lines underwriting, and the investments segment) follow below. Our underwriting performance improved significantly in the first quarter of 2005, as compared
to the similar period in 2004, driven by the presence of moderate weather in our operating
territories in the first quarter of 2005. In the similar period of 2004, the Company experienced a
significant number of losses resulting from a sustained period of harsh winter, which manifested
itself in a significantly higher number of claims, particularly in personal lines. In 2005, the
number of new claims was down significantly, however the Company sustained a slightly elevated
number of large fire losses, principally in the commercial lines segment. The Company had an
overall underwriting profit of $533,000 in the first quarter of 2005, as compared to an
underwriting loss of $394,000 in 2004. Our GAAP combined ratio improved to 96.5% in 2005 from
102.8%, and our statutory combined ratio improved in 2005 to 98.3% from 101.4%. Our net investment
income increased 11.2% to $743,000, primarily as a result of increased yields in the fixed-income
investment portfolio, a larger portion of which was held in cash equivalents in the first quarter
of 2004. Realized investment gains amounted to a gain of $18,000 in 2005, versus a loss of $97,000
in 2004. Our other income, primarily service charges recorded on insurance premiums paid over the
term of the policy instead of when the policy is issued, declined modestly in 2005. Net loss and loss adjustment expenses incurred decreased in the first quarter of 2005, as
compared to 2004, by $600,000, or 7%, to $7.7 million, reflecting lower claims frequency in 2005
over 2004, despite growth in our net premium earned of 9%. The lower loss and loss adjustment
expense ratio in 2005, as compared to 2004, resulted from lower claims frequency, offset by the
increased severity of fire claims noted above. 17




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##### Table of Contents



2005 vs. 2004 Revenue
    

    
    
    
    

    
    
    
    

    
    
    
    

    %(Dollars
in thousands)
    
        2005
    
    
    2004
    
    
    Change
    
    
        ChangeDirect premiums written
    
    $
    14,240
    
    
    $
    14,333
    
    
    $
    (93
    )
    
    
    (0.6
    )%Net premiums written
    
    
    13,161
    
    
    
    12,919
    
    
    
    242
    
    
    
    1.9
    %Net premiums earned

    
    
    15,113
    
    
    
    13,862
    
    
    
    1,251
    
    
    
    9.0
    %Net investment income

    
    
    743
    
    
    
    668
    
    
    
    75
    
    
    
    11.2
    %Realized investment gains

    
    
    18
    
    
    
    (97
    )
    
    
    115
    
    
    
    (118.6
    )%Other Revenue
        
    
    86



    92
    

    
    (6
    )
    
    
    (6.5
    )%Total Revenue
    
    $
    15,960
    
    
    $
    14,525
        
    
    $
    1,435
    
    
    
    9.9
    %
 Total revenues for the first quarter of 2005 were $16.0 million, which was 9.9% greater than
2004 revenues of $14.5 million. This increase was due primarily to a $1.3 million increase in net
premiums earned in 2005, and an 11.2% increase in net investment income to $743,000. Direct premiums written decreased 0.6% to $14.2 million in 2005, reflecting a more competitive
pricing posture in the marketplace and the Companys reluctance to accept underwriting risks which
are priced inappropriately, as well as a seasonality in renewals normally experienced in the first
quarter. Net premiums written increased 1.9% in 2005. Net premiums earned increased by 9.0% to
$15.1 million in the first quarter of 2005. Growth in Net Investment Income is discussed below. 2005 vs. 2004 Investment income andrealized gains(Dollars in thousands)
    
        2005
    
    
    2004
    
    
    Change
    
    
    % ChangeFixed income securities

    
    $
    946
    

    
    $
    781
    

    
    $
    165
    

    
    
    21.1
    %Dividends

    

    
    103
    

    
    
    107
    

    
    
    (4
    )

    
    
    (3.7
    )%Cash, cash equivalents & other

    
    
    122
    

    
    
    96
    

    
    
    26
    

    
    
    27.1
    %Gross investment income

    
    
    1,171
    

    
    
    984
    

    
    
    187
    

    
    
    19.0
    %Investment expenses

    
    
    (428
    )

    
    
    (316
    )

    
    
    112
    

    
    
    35.4
    %Net investment income

    
    $
    743
    

    
    $
    668
    

    
    $
    75
    

    
    
    11.2
    %Realized gains (losses) on fixed income

    
    $
    14
    

    
    $
    (108
    )

    
    $
    122
    

    
    
    113.0
    %Realized gains on equities

    
    
    4
    

    
    
    11
    

    
    
    (7
    )

    
    
    (63.6
    )%Net realized gains

    
    $
    18
    

    
    $
    (97
    )

    
    $
    115
    

    
    
    118.6
    %
 Net investment income increased $75,000, or 11.2% in the first quarter of 2005, due
principally to increased yields on the fixed income portfolio holdings. Effective January 1, 2004,
the Company engaged a new investment management firm for its fixed income securities portfolio, whose
responsibilities included investing the proceeds of the Conversion. Given a difficult interest rate
environment and fixed income securities market, this was not largely 18




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##### Table of Contents



completed until the second quarter of 2004. Consequently, a portion of the Conversion proceeds
earned a cash-equivalent yield during the first quarter of 2004. In implementing the investment policy guidelines and directions of the Investment Committee of
the Board of Directors, the fixed income securities managers during 2004 changed the composition of
the fixed income securities portfolio to be more heavily weighted in tax-exempt securities,
industrial and miscellaneous fixed income securities, and mortgage-backed securities, and less
heavily weighted towards U.S government and government agencies fixed income securities. Net realized gains for the first quarter of 2005 were $18,000, as compared to a loss of
$97,000 in the similar period in 2004. In 2005, net realized investment gains of $18,000 included
gains on securities sales of $52,000, offset by losses on securities sales of $34,000. The losses
from securities sales were comprised of $8,000 from the sale of fixed income securities and $26,000
from the sale of equities. The following table summarizes the period of time that equity securities sold at a loss during
2005 had been in a continuous unrealized loss position: FairPERIOD OF TIME IN AN
    
    Value on
    
    
    RealizedUNREALIZED LOSS POSITION
    
    Sale Date
    
    
    Loss(In thousands)0-6 months
    
    $
    339
    
    
    $
    267-12 months
    
    
    
    
    
    
    More than 12 months
    
    
    
    
    
    
    Total
    
    $
    339
    
    
    $
    26
 The equity securities sold at a loss had been expected to appreciate in value but after
reevaluation were sold so that sale proceeds could be reinvested. Securities were sold due to a
desire to reduce exposure to certain issuers and industries or in light of changing economic
conditions. The following table summarizes the length of time equity securities with unrealized losses at
March 31, 2005 have been in an unrealized loss position: Length of Unrealized LossFair
    
    
    Unrealized
    
    
    Less than
    
    
    6 to 12
    
    
    Over 12March 31, 2005
    
    Value
    
    
    Losses
    
    
    6 months
    
    
    Months
    
    
    Months(In thousands)Equity securities:Preferred stocks
    
    $
    1,308
    
    
    $
    167
    
    
    $
    167
    
    
    $
    0
    
    
    $
    0Common stocks
    
    
    1,703
    
    
    
    101
    
    
    
    83
    
    
    
    18
    
    
    
    0Total
    
    $
    3,011
    
    
    $
    268
    
    
    $
    250
    
    
    $
    18
    
    
    $
    0
 The estimated fair value and unrealized loss for all fixed income and equity securities in a
temporary unrealized loss position as of March 31, 2005 are as follows : 19




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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
    
    $
    11,036
    
    
    $
    194
    
    
    $
    5,293
    
    
    $
    220
    
    
    $
    16,329
    
    
    $
    414Obligations of states and
political subdivisions
    
    
    20,308
    
    
    
    370
    
    
    
    11,872
    
    
    
    344
    
    
    
    32,180
    
    
    
    714Corporate securities
    
    
    15,891
    
    
    
    487
    
    
    
    1,433
    
    
    
    36
    
    
    
    17,324
    
    
    
    523Mortgage-backed securities
    
    
    16,494
    
    
    
    248
    
    
    
    6
    
    
    
    268
    
    
    
    16,500
    
    
    
    516Total fixed maturities
    
    
    63,729
    
    
    
    1,299
    
    
    
    18,604
    
    
    
    868
    
    
    
    82,333
    
    
    
    2,167Preferred stocks
    
    
    1,308
    
    
    
    167
    
    
    
    0
    
    
    
    0
    
    
    
    1,308
    
    
    
    167Common stocks
    
    
    1,703
    
    
    
    101
    
    
    
    0
    
    
    
    0
    
    
    
    1,703
    
    
    
    101Total equity securities
    
    
    3,011
    
    
    
    268
    
    
    
    0
    
    
    
    0
    
    
    
    3,011
    
    
    
    268Total securities in a temporary
unrealized loss position
    
    $
    66,740
    
    
    $
    1,567
    
    
    $
    18,604
    
    
    $
    868
    
    
    $
    85,344
    
    
    $
    2,435
 The unrealized losses on fixed maturity investments were primarily due to changes in the
interest rate environment. The Company has 33 fixed maturity securities which have been in an
unrealized loss position for more than twelve months. Of the 33 fixed maturity securities with
unrealized losses greater than twelve months, 29 have fair values greater than 96% of cost, with
three greater than 92% and one greater than 78%. The Company has reviewed these securities and
believes these declines are temporary. There are 12 equity securities that are in an unrealized loss position on March 31, 2005.
Eleven of these securities have been in an unrealized loss position for less than six months. The
remaining equity security has been in an unrealized loss position for less than twelve months. The
Company has reviewed these securities and believes these declines are temporary. Results of our Commercial Lines segment were as follows: 2005 vs. 2004 Commercial lines (CL)(Dollars
in thousands)
    
    2005
    
    
    2004
    
    
    Change
    
    
    % ChangeCL Direct premiums written

    

    $
    8,935
    

    
    $
    8,644
    

    
    $
    291
    

    
    
    3.4
    %CL Net premiums written

    
    $
    7,955
    

    
    $
    7,708
    

    
    $
    247
    

    
    
    3.2
    %CL Net premiums earned

    
    $
    9,181
    

    
    $
    8,025
    

    
    $
    1,156
    

    
    
    14.4
    %CL Loss / LAE expense ratio (GAAP)

    
    
    45.5
    %

    
    
    28.0
    %

    
    
    17.5
    %CL Expense ratio (GAAP)

    
    
    47.5
    %

    
    
    44.1
    %

    
    
    3.4
    %CL Combined ratio (GAAP)

    
    
    93.0
    %

    
    
    72.1
    %

    
    
    20.9
    %
 Our commercial lines direct premiums written increased by $291,000, or 3.4% in the first
quarter of 2005 as compared to the same period in 2004, and our commercial lines net written
premiums increased $247,000, or 3.2%. Our premiums written growth rates reflect both a more
competitive marketplace as well as the seasonality inherent in our renewals. We continue to focus
our growth goals on the commercial lines book, working with our agents to target classes of
business within our underwriting appetite, which includes certain types of religious institution
risks, small business risks and property risks. 20




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##### Table of Contents



In the commercial lines segment for the first quarter of 2005, we had an underwriting gain of
$639,000, a GAAP combined ratio of 93.0%, a GAAP loss and loss adjustment expense ratio of 45.5%
and a GAAP underwriting expense ratio of 47.5%, compared to an underwriting gain of $2.2 million, a
GAAP combined ratio of 72.1%, a GAAP loss and loss adjustment expense ratio of 28.0% and an
underwriting expense ratio of 44.1% for the same period in 2004. Our commercial lines loss ratio
for the first quarter of 2005 was impacted adversely by a modestly higher amount of large fire
losses as compared to the first quarter of 2004. Results of our Personal Lines segment were as follows: 2005 vs. 2004 Personal lines (PL)(Dollars in thousands)
    
        2005
    
    
    2004
    
    
    Change
    
    
    % ChangePL Direct premiums written

    
    $
    5,305
    

    
    $
    5,689
    

    
    $
    (384
    )

    
    
    (6.7
    )%PL Net premiums written

    
    $
    5,206
    

    
    $
    5,211
    

    
    $
    (5
    )

    
    
    (0.1
    )%PL Net premiums earned

    
    $
    5,932
    

    
    $
    5,837
    

    
    $
    95
    

    
    
    1.6
    %PL Loss / LAE expense ratio (GAAP)

    
    
    59.7
    %

    
    
    104.1
    %

    
    
    (44.4
    )%PL Expense ratio (GAAP)

    
    
    42.1
    %

    
    
    41.1
    %

    
    
    1.0
    %PL Combined ratio (GAAP)

    
    
    101.8
    %

    
    
    145.2
    %

    
    
    (43.4
    )%
 In the personal lines segment for the first quarter of 2005, we had an underwriting loss of
$106,000, a GAAP combined ratio of 101.8%, a GAAP loss and loss adjustment expense ratio of 59.7%
and a GAAP underwriting expense ratio of 42.1%, compared to an underwriting loss of $2.6 million, a
GAAP combined ratio of 145.2%, a GAAP loss and loss adjustment expense ratio of 104.1% and a GAAP
underwriting expense ratio of 41.1% for the first quarter of 2004. The personal lines performance in the first quarter of 2005 was impacted by a significantly
lower frequency of losses and by a lower severity of losses as compared to the first quarter of
2004. The 2004 losses were significantly higher than usual, and were attributable to harsh weather
conditions which resulted in a high number of losses from frozen pipes, structural collapses, more
frequent automobile losses and accidents, and other losses of the type caused by an extended period
of harsh weather. Besides the more moderate weather in the first quarter of 2005, the personal lines book
benefited from the underwriting initiatives undertaken in both the homeowners and Pennsylvania
personal automobile lines in the last two years. These initiatives included the reclassification of
certain homeowners risks from our preferred program to our standard program, resulting in a higher
premium, as well as modified underwriting standards related to the types of Pennsylvania personal
automobile risks the Company will write. The Company is seeking a rate increase for the homeowners
line in New Jersey, based on an MSO form, which, if approved, will result in an increase in
premiums written for this line. Although the Company expects to continue growing its personal lines book, it will continue to
devote greater focus to growth in the commercial lines book. 21




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##### Table of Contents



2005 vs. 2004 Expenses and expense ratio(Dollars
in thousands)
    
        2005
    
    
        2004
    
    
        Change
    
    
        % ChangeAmortization of DAC

    
    $
    3,899
    

    
    $
    3,863
    

    
    $
    36
    

    
    
    0.9
    %As a % of net premiums earned

    
    
    25.8
    %

    
    
    27.9
    %

    
    
    (2.1
    )%Other underwriting expenses

    
    
    2,958
    

    
    
    2,070
    

    
    
    888
    

    
    
    42.9
    %Total expenses excluding losses/LAE

    
    $
    6,857
    

    
    $
    5,933
    

    
    $
    924
    

    
    
    15.6
    %Underwriting expense ratio

    
    
    45.4
    %

    
    
    42.8
    %

    
    
    2.6
    %

    
    
    N/M(N/M means not meaningful)
 Underwriting expenses increased by $924,000, or 15.6%, to $6.9 million for the first quarter
of 2005, as compared to the same period in 2004. This increase was principally attributable to an
increase in other underwriting expenses, growth in commissions resulting from higher earned premium
volume, and increased charges relating to corporate expenses and compensation expenses, including
bonuses and agents profit-sharing, which were at higher levels than the first quarter of 2004. In
2005, the Company had pre-tax costs associated with Sarbanes  Oxley compliance of $242,000, and
pre-tax costs of $159,000 associated with grants of restricted stock, for both of which there were
no costs in the first quarter of 2004. The Company maintains Agency Profit Sharing plans, which, in addition to base commissions,
annually rewards agents for the growth and profitability of the business they produce while
representing the Company. The additional commission is computed only on the aggregate growth and
profitability of the book of business they produce each year. The Company does not have any
marketing services agreements, placement services agreements, or similar arrangements. We are currently in the process of converting our information system. When completed, we
expect some costs to moderate as implementation costs and costs associated with operating dual
systems end. These reduced costs will be offset by some higher staffing costs, but we also should
be positioned to expand premium volume in the near term without material incremental expense
because of increased processing capacity. In the first quarter of 2004, a disputed retaliatory tax assessment was paid, leaving an
unneeded accrual of $300,000 which was then reversed and served to reduce premium tax expense
accordingly. This reversal, when offset against otherwise accruing retaliatory tax, resulted in a
negative retaliatory expense of $139,000 in the first quarter of 2004. In the third quarter of 2004, we began renewing most of our New Jersey policies in our Mercer
Insurance Company of New Jersey, Inc. subsidiary, thus eliminating the Companys liability for
retaliatory premium taxes. Accordingly, the results for the first quarter of 2005 do not reflect
any expense for retaliatory taxes, as compared to the negative expense described above which was
included in the results for the first quarter of 2004. See the Liquidity and Capital Resources
section for additional information regarding the retaliatory tax matter. 2005 vs. 2004 Income taxes(Dollars
in thousands)
    
        2005
    
    
        2004
    
    
        Change
    
    
        % ChangeIncome before income taxes

    
    $
    1,380
    

    
    $
    269
    

    
    $
    1,111
    

    
    
    N/MIncome taxes
    
    
    387
    

    
    
    40
    

    
    
    347
    

    
    
    N/MNet income

    
    $
    993
    

    
    $
    229
    

    
    $
    764
    

    
    
    N/MEffective tax rate

    
    
    28.0
    %

    
    
    14.9
    %

    
    
    13.1
    %(N/M means not meaningful)
 22




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##### Table of Contents



Federal income tax expense was $387,000 for the first quarter of 2005, an effective rate of 28.0%,
compared to $40,000, or an effective rate of 14.9%, in the same period in 2004. The increase in the
effective tax rate in 2005 is primarily attributable to the fact that tax-exempt investment income
and dividend income (which reduce the effective tax rate) represented a smaller percentage of net
income in 2005 than in 2004, with ordinary income taxed at the higher regular rates representing a
larger portion of the 2005 income. LIQUIDITY AND CAPITAL RESOURCES Our insurance companies generate sufficient funds from their operations to meet their
obligations and to maintain a high degree of liquidity in their investment portfolios. The primary
source of funds to meet the demands of claim settlements and operating expenses are premium
collections, investment earnings and maturing investments. Mercer Insurance Company in 2004
completed an expansion of its facilities in Pennington, New Jersey, at a cost of at $2.9 million.
These improvements are fully paid for and will not require any further use of operating cash flow. We are also in the process of building an information system platform that will allow our
producers to conduct their business through the Internet. As of March 31, 2005, we have spent $3.2 million on the development of this
platform, which includes license fees for software used in the platform. It is anticipated to be
completed in mid 2006, at an additional cost of $1.0 million. Mercer Insurance Company possesses
sufficient resources for these future expenditures without incurring any debt. Our insurance companies maintain investment and reinsurance programs that are intended to
provide sufficient funds to meet their obligations without forced sales of investments. They ladder
the maturity of their portfolios and thereby maintain a portion of their investment portfolio in
relatively short-term and highly liquid assets to ensure the availability of funds. The principal source of liquidity for Mercer Insurance Group is the net proceeds it retained
from the Conversion stock offering, and dividend payments (when allowed by regulators) and other
fees received from Mercer Insurance Company or other subsidiaries (but see below the description of
the proposed acquisition) . For a period of three years after the Conversion (which took place on
December 15, 2003), Mercer Insurance Company may not declare or pay any dividend to Mercer
Insurance Group without the approval of the Pennsylvania Insurance Department. After this
three-year period, Mercer Insurance Company will be restricted by the insurance laws of
Pennsylvania as to the amount of dividends or other distributions it may pay to its holding
company. Under Pennsylvania law, there is a maximum amount that may be paid by Mercer Insurance
Company during any twelve-month period after notice to, but without prior approval of, the
Pennsylvania Insurance Department. This limit is the greater of 10% of Mercer Insurance Companys
statutory surplus as reported on its most recent annual statement filed with the Pennsylvania
Insurance Department, or the net income of Mercer Insurance Company for the period covered by such
annual statement. If the dividend restrictions imposed on Mercer Insurance Company related to the Conversion
were not in effect, then as of December 31, 2004, the amounts available for payment of dividends
from Mercer Insurance Company in 2005, without the prior approval of the Pennsylvania Insurance
Department would have been approximately $6.2 million. Similar restrictions apply to the insurance
subsidiaries of Mercer Insurance Company and their ability to pay dividends upstream to it. Total
assets decreased 4.6%, or $8.4 million to $172.9 million, at March 31, 2005 from
December 31, 2004. Cash balances were reduced $5.9 million from December 31, 2004 amounts, to $10.4
million, due to the payment of seasonally higher obligations due in the first quarter, including
agents profit sharing, reinsurance premiums, employees retirement and bonus plan funding, and
other similar items, as well as the repurchase of Company stock during the quarter for $3.2
million. Decreased premium volume (as compared to the fourth quarter of 2004) drove 23




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##### Table of Contents



decreases in premium receivables of $1.8 million, or 15.6%, deferred policy acquisition costs
of $268,000, or 3.3%, and prepaid reinsurance premiums of $119,000, or 7.6%. Reinsurance
receivables increased $953,000, or 37.6%, due principally to a decrease in ceded balances
payable. Investments decreased $1.3 million, or 1.0%, to $123.8 million, principally as a
result of market value changes. Other assets increased $203,000, or 18.3%, to $1.3 million,
principally due to receivables in connection with the sale of investment securities. Total
liabilities decreased 16.2%, or $5.0 million, in the first quarter of 2005, to $75.8
million. Decreased premium volume is primarily responsible for the decrease in unearned premium
reserves of $2.1 million, or 6.1% and the decrease in other
reinsurance balances of 203,000 or 23.6%. Loss and loss expense reserves were relatively unchanged from
December 31, 2004. Total stockholders equity decreased by $3.4 million, or 3.4%, due principally to the purchase
of treasury stock during the first quarter in the amount of $3.2 million. Unrealized gains on the
investment portfolio decreased $1.5 million (after tax), due principally to changes in the value of
the Companys equities portfolio, and retained earnings grew by the amount of net income, or
$993,000. The Company maintains an ESOP, which purchased 626,111 shares from the Company at the time of
the Conversion in return for a note bearing interest at 4% on the principal amount of $6,261,110.
Mercer Insurance Company makes annual contributions to the ESOP sufficient for it to make its
required annual payment under the terms of the loan from the Company. It is anticipated that
approximately 10% of the original ESOP shares will be allocated annually to employee participants
of the ESOP. An expense charge will be booked ratably during each year for the shares committed to
be allocated to participants that year, determined with reference to the fair market value of the
Companys stock at the time the commitment to allocate the shares is accrued and recognized. The
issuance of the shares to the ESOP was fully recognized in the Additional Paid-in Capital account
at Conversion, with a contra account entitled Unearned ESOP Shares established in the Stockholders
Equity section of the balance sheet for the unallocated shares at an amount equal to their
original per-share purchase price. Mercer Insurance Group, Inc. adopted a stock-based incentive plan at its 2004 annual meeting
of shareholders. Pursuant to that plan, Mercer Insurance Group may issue a total of 876,555
shares, which amount will increase automatically each year by 1% of the number of shares
outstanding at the end of the preceding year. The fair market value of any common stock used for
restricted stock awards will initially represent unearned compensation, and will be amortized
ratably. As Mercer Insurance Group accrues compensation expense to reflect the vesting of such
shares, unearned compensation will be reduced accordingly. This compensation expense will be
deductible for federal income tax purposes upon vesting under current law. During 2004, the Company
made grants of 215,000 shares of restricted stock, grants of 173,000 Incentive Stock Options, and
grants of 364,700 non-qualified stock options. In 2005, 7,500 shares of restricted stock and 18,500
stock options were forfeited. On October 20, 2004, the Companys Board of Directors authorized the repurchase of up to
250,000 additional shares of its common stock (in addition to the 250,000 share repurchase
authorized June 16, 2004 and previously completed). The repurchase of the additional 250,000 shares
was completed on March 2, 2005. The repurchased shares will be held as treasury shares available
for issuance in connection with Mercer Insurance Groups 2004 Stock Incentive Plan. In the
aggregate, 500,000 shares have been repurchased since the Conversion, at an aggregate cost of $6.3
million, or $12.53 per share, with 2005 purchases totaling $3.2 million, or $13.18 per share. In connection with a continuing retaliatory tax controversy, in 2003 and 2004 the Company paid an
aggregate of $3.2 million, plus interest, to the New Jersey Division of Taxation (the Division)
in retaliatory tax. The retaliatory tax generally is imposed on foreign insurers when the foreign
companys home state (i.e., its state of incorporation or domicile) has a higher rate of premium
tax than the state imposing the tax, in this case New Jersey. The payments were made in response
to notices of deficiency issued by the Division to the Company. 24




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##### Table of Contents



In conjunction with making such payments, the Company filed notices of protest with the Division
with respect to the retaliatory tax imposed. The basis for the protests was that the Divisions
imposition of the retaliatory tax was unconstitutional and based on an incorrect interpretation of
the law which denied the Company the ability to take advantage of New Jerseys premium tax cap,
which limits the premiums tax to the lesser of the Companys New Jersey premiums or 12.5 percent of
the Companys total premiums received from both New Jersey and out-of-state policyholders. The
protests currently are pending with the Divisions Conferences and Appeals branch. Concurrent with the processing of the Companys protests of the retaliatory tax, other foreign
insurers have been litigating virtually identical issues in New Jersey courts. On March 9, 2005,
the Appellate Division of the New Jersey Superior Court reversed a decision of the New Jersey Tax
Court that had sustained the Divisions imposition of the retaliatory tax against a foreign
insurer. The Division has since appealed the decision of the Appellate Division to the New Jersey
Supreme Court, which must decide whether it will grant the Divisions request to take the case
before it decides the substantive issues. The Company expects that the Divisions ruling on the
Companys protest will be based on the ultimate resolution of the case now being appealed to the
New Jersey Supreme Court. It is not known how the New Jersey Supreme Court will address this case,
and therefore the Company is unable to determine whether all, or any portion, of the retaliatory
tax will be refunded. Any such refund would be reduced by related Federal Income Tax. Due to the
contingencies involved, the Company has not accrued any refund of the retaliatory tax. SUBSEQUENT EVENTS The Company announced on May 2, 2005 that it has signed an Agreement and Plan of Merger for Mercer
to acquire all the outstanding stock of Financial Pacific Insurance Group, Inc. for approximately
$40.4 million in cash (the press release and agreement were filed on a Form 8-K on May 3, 2005).
The transaction will be effected through a merger of a wholly owned subsidiary of Mercer into
Financial Pacific. Consummation of the transaction between Mercer and Financial Pacific is subject
to regulatory approval. The acquisition will allow the Company to continue growing its commercial lines segment and to
achieve product and geographic diversification through the acquisition of a specialty writer of
commercial lines. Financial Pacific currently focuses on four western states and is licensed in
another fifteen states outside the Companys present focus areas. As of and for the year ended
December 31, 2004, Financial Pacific reported GAAP stockholders
equity of $35.4 million, operating income of $4.6 million and net income of $5.9 million. In 2004,
Financial Pacific generated approximately $107 million of direct premiums primarily in California,
Nevada, Oregon and Arizona through approximately 300 independent agents. IMPACT OF INFLATION Inflation increases an insureds need for property and casualty insurance coverage. Inflation
also increases the cost of claims incurred by property and casualty insurers as property repairs,
replacements and medical expenses increase. These cost increases reduce profit margins to the
extent that rate increases are not implemented on an adequate and timely basis. We establish
property and casualty insurance premiums levels before the amount of losses and loss expenses, or
the extent to which inflation may affect these expenses, are known. Therefore, our insurance
companies attempt to anticipate the potential impact of inflation when establishing rates. Because
inflation has remained relatively low in recent years, financial results have not been
significantly affected by inflation. 25




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##### Table of Contents



Inflation also often results in increases in the general level of interest rates, and,
consequently, generally results in increased levels of investment income derived from our
investments portfolio, although increases in investment income will generally lag behind increases
in loss costs caused by inflation. OFF BALANCE SHEET COMMITMENTS AND CONTRACTUAL OBLIGATIONS The Company was not a party to any unconsolidated arrangement or financial instrument with
special purpose entities or other vehicles at March 31, 2005 which would give rise to previously
undisclosed market, credit or financing risk. The Company and its subsidiaries have no significant contractual obligations at March 31,
2005, other than its insurance obligations under its policies of insurance. Projected cash
disbursements pertaining to these insurance obligations have not materially changed since December
31, 2004, and the Company expects to have the cash to pay these obligations as they come due. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk General.Market risk is the risk that we will incur losses due to adverse changes in market
rates and prices. We have exposure to three principal types of market risk through our investment
activities: interest rate risk, credit risk and equity risk. Our primary market risk exposure is
to changes in interest rates. We have not entered, and do not plan to enter, into any derivative
financial instruments for hedging, trading or speculative purposes. Interest Rate Risk.Interest rate risk is the risk that we will incur economic losses due to
adverse changes in interest rates. Our exposure to interest rate changes primarily results from
our significant holdings of fixed rate investments. Fluctuations in interest rates have a direct
impact on the market valuation of these securities. Our available-for-sale portfolio of
fixed-income securities is carried on the balance sheet at fair value. Therefore, an adverse
change in market prices of these securities would result in losses reflected in the balance sheet. Credit Risk.The quality of our interest-bearing investments is generally good. Our fixed
maturity securities at March 31, 2005 have an average rating of AA. Equity Risk.Equity price risk is the risk that we will incur economic losses due to adverse
changes in equity prices. Our exposure to changes in equity prices primarily results from our
holdings of common stocks, mutual funds and other equities. Our portfolio of equity securities is
carried on the balance sheet at fair value. Therefore, an adverse change in market prices of these
securities would result in losses reflected in the balance sheet. There have been no material changes in market risk from the end of the most recent fiscal year
ended December 31, 2004, and the information disclosed in connection therewith. 
 Item 4. Controls and Procedures Under the supervision and with the participation of our management, including the President
and Chief Executive Officer and the Senior Vice President and Chief Financial Officer, we have
evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act
Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, the
President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer
have concluded that these disclosure controls and procedures are effective. There were no changes
in our internal control over financial reporting during the quarter ended March 31, 2005 that have
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting. 26




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##### Table of Contents



Part II  OTHER INFORMATION 
 Item 1. Legal Proceedings. None 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. Total Number of Shares
    
    
    
    Maximum Number of SharesTotal Number
    
    
    
    Average
    
    
    
    Purchased as Part of Publicly
    
    
    
    That May Yet Be Purchasedof Shares
    
    
    
    Price Paid
    
    
    
    Announced Plans or Programs
    
    
    
    Under The Plans or ProgramsPeriod
    
    
    Purchased
    
    
    
    per Share
    
    
    
    (Note 1)
    
    
    
    (Note 1)January 1-31, 2005
    
    
    
    18,800
    
    
    
    $
    13.36
    
    
    
    
    18,800
    
    
    
    
    224,700February 1-28, 2005
    
    
    None
    
    
    
    N/A
    
    
    
    
    N/A
    
    
    
    
    224,700March 1-31, 2005
    
    
    
    224,700
    
    
    
    $
    13.17
    
    
    
    
    224,700
    
    
    
    NoneTotal
    
    
    
    243,500
    
    
    
    $
    13.18
    
    
    
    
    243,500
    
    
    
    None
 Note 1  On October 20, 2004, the Companys Board of Directors authorized the repurchase of up to
250,000 additional shares of its common stock (in addition to the 250,000 share repurchase
authorized June 16, 2004 and previously completed). The repurchase of the additional 250,000 shares
was completed on March 2, 2005 (6,500 of the shares were repurchased in 2004, and 243,500 of the
shares were repurchased in 2005). The repurchased shares will be held as treasury shares available
for issuance in connection with Mercer Insurance Groups 2004 Stock Incentive Plan. In the
aggregate, 500,000 shares have been repurchased since the Conversion, at an aggregate cost of $6.3
million, or $12.53 per share. 
 Item 3. Defaults Upon Senior Securities None 
 Item 4. Submission of Matters to Vote of Security Holders  (a)
    The Company held its Annual Meeting of Shareholders on April 20, 2005.(b)
    The names of each director elected at the Annual Meeting of Shareholders are as follows: 27




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##### Table of Contents



No. of Votes
    
    
    No. of Votes
    
    
    No. of Votes
    
    
    BrokerFor
    
    
    Withheld
    
    
    Abstaining
    
    
    Non-VotesRoland D. Boehm
    
    
    6,122,323
    
    
    
    48,550
    
    
    
    0
    
    
    
    0H. Thomas Davis, Jr.
    
    
    5,921,749
    
    
    
    249,124
    
    
    
    0
    
    
    
    0William V.R. Fogler
    
    
    5,918,609
    
    
    
    252,264
    
    
    
    0
    
    
    
    0
 The following directors are serving terms of office that continue through 2006 and 2007,
as noted: Year TermDirector
    
    ExpiresWilliam C. Hart
    
    
    2006Richard U. Niedt
    
    
    2006Richard G. Van Noy
    
    
    2006Andrew R. Speaker
    
    
    2007George T. Hornyak, Jr.
    
    
    2007Samuel J. Malizia
    
    
    2007
  (c)
    One additional proposal was submitted for a vote, with the following results: No. of Votes
    
    
    No. of Votes
    
    
    No. of Votes
    
    
    BrokerFor
    
    
    Against
    
    
    Abstaining
    
    
    Non-VotesRatification
of the appointment
of KPMG LLP as
independent
registered public
accounting firm of
the Company for the
year ending
December 31, 2005.
    
    
    6,114,306
    
    
    
    45,710
    
    
    
    10,857
    
    
    
    0
 
 Item 5. Other Information None 28




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##### Table of Contents



Item 6. Exhibits Exhibits 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 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)
 
 SIGNATURES In accordance with the requirements of the Exchange Act, the Registrant caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized. MERCER INSURANCE GROUP, INC. (Registrant)Dated: May 10, 2005
    By:
    /s/ Andrew R. SpeakerAndrew R. Speaker,President and Chief Executive Officer Dated: May 10, 2005
    By:
    /s/ David B. MercleanDavid B. Merclean,Chief Financial Officer 29