##### 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 September 30, 2005,
 or
 Transition report pursuant to Section 13 or 15(d) Of the Exchange Act
 for the Transition Period from  to
 No. 000-25425
 
 (Commission File Number)
 MERCER INSURANCE GROUP, INC.
  PENNSYLVANIA
    
    23-2934601(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 10 North Highway 31, P.O. Box 278, Pennington, NJ
    
    08534(Address of principal executive offices)
    
    (Zip Code)
  
  (Former name, former address and former fiscal year, if changed since last report)
 þ o
 þ o
 o o
  Number of Shares Outstanding as of October 31,2005COMMON STOCK (No Par Value)
    
    6,556,670(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
    
    15Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    32Item 4. Controls and Procedures
    
    33PART II. OTHER INFORMATION
    
    33Item 1. Legal Proceedings
    
    33Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    33Item 3. Defaults Upon Senior Securities
    
    33Item 4. Submission of Matters to a Vote of Security Holders
    
    33Item 5. Other Information
    
    33Item 6. Exhibits
    
    34SIGNATURES
    
    34Exhibits:
 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 2002Certification of Chief Executive OfficerCertification of Chief Financial OfficerCertification of Chief Executive Officer in accordance with Section 906Certification of Chief Financial Officer in accordance with Section 906




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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 geographic concentration of insured accounts;
    
    the effect of legislative, judicial, economic, demographic and regulatory events
in the two states in which we do business as of September 30, 2005;
    
    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;
    
    the ability to obtain regulatory approval for an acquisition, to close the
transaction, and to successfully integrate an acquisition and its operations.
    
    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;
 2




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
    
    changes in the coverage terms selected by insurance customers, including higher
deductibles and lower limits;
    
    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.
  3




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##### Table of Contents



Part I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED BALANCE SHEET
 September 30,
    
    
    December 31,2005
    
    
    2004(Dollars in thousands)ASSETS
    
    (Unaudited)Investments:Fixed income
securities, available-for-sale, at fair value (amortized cost of $73,303 and $101,102, respectively)
    
    $
    72,237
    
    
    $
    100,657Equity securities, at fair value (cost of $9,226 and $16,145, respectively)
    
    
    15,398
    
    
    
    24,447Short-term investments, at cost, which approximates fair value
    
    
    2,496
    
    
    
    Total investments
    
    
    90,131
    
    
    
    125,104Cash and cash equivalents
    
    
    47,849
    
    
    
    16,289Premiums receivable
    
    
    9,682
    
    
    
    11,217Reinsurance receivables
    
    
    3,723
    
    
    
    2,534Prepaid reinsurance premiums
    
    
    1,418
    
    
    
    1,573Deferred policy acquisition costs
    
    
    8,012
    
    
    
    8,014Accrued investment income
    
    
    739
    
    
    
    1,044Property and equipment, net
    
    
    9,587
    
    
    
    9,718Goodwill
    
    
    4,673
    
    
    
    4,673Other assets
    
    
    2,515
    
    
    
    1,394Total assets
    
    $
    178,329
    
    
    $
    181,560LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Losses and loss adjustment expenses
    
    $
    35,782
    
    
    $
    36,028Unearned premiums
    
    
    32,585
    
    
    
    34,007Accounts payable and accrued expenses
    
    
    6,341
    
    
    
    7,739Other reinsurance balances
    
    
    1,129
    
    
    
    861Other liabilities
    
    
    1,562
    
    
    
    1,371Deferred income taxes
    
    
    321
    
    
    
    1,146Total liabilities
    
    
    77,720
    
    
    
    81,152Stockholders 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 7,058,233
shares, outstanding 6,447,757 and 6,344,844 shares
    
    
    
    
    
    
    Additional paid-in capital
    
    
    67,776
    
    
    
    67,651Accumulated other comprehensive income:Unrealized gains in investments, net of deferred income taxes
    
    
    3,371
    
    
    
    5,186Retained earnings
    
    
    41,995
    
    
    
    37,876Unearned restricted stock compensation
    
    
    (1,708
    )
    
    
    (2,242
    )Unearned ESOP shares
    
    
    (4,541
    )
    
    
    (5,009
    )Treasury stock, at cost, 501,563 and 256,500 shares
    
    
    (6,284
    )
    
    
    (3,054
    )Total stockholdersequity
    
    
    100,609
    
    
    
    100,408Total liabilities and stockholders equity
    
    $
    178,329
    
    
    $
    181,560
  4




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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
 Nine Months Ended September 30, 2005 and 2004
 2005
    
    
    2004(Dollars in thousands, except pershare data)(Unaudited)Revenue:Net premiums earned
    
    $
    45,378
    
    
    $
    41,617Investment income, net of expenses
    
    
    2,254
    
    
    
    1,933Net realized investment gains
    
    
    1,273
    
    
    
    439Other revenue
    
    
    256
    
    
    
    266Total revenue
    
    
    49,161
    
    
    
    44,255Expenses:Losses and loss adjustment expenses
    
    
    21,596
    
    
    
    21,103Amortization of deferred policy acquisition costs (related party amounts of
$947 and $936, respectively)
    
    
    11,936
    
    
    
    11,509Other expenses
    
    
    9,725
    
    
    
    8,212Total expenses
    
    
    43,257
    
    
    
    40,824Income before income taxes
    
    
    5,904
    
    
    
    3,431Income taxes
    
    
    1,785
    
    
    
    1,010Net income
    
    $
    4,119
    
    
    $
    2,421Earnings per common share:Basic
    
    $
    0.69
    
    
    $
    0.39Diluted
    
    $
    0.67
    
    
    $
    0.38Weighted average shares:Basic
    
    
    5,939,436
    
    
    
    6,287,602Diluted
    
    
    6,155,328
    
    
    
    6,371,562
  5




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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
 Three Months Ended September 30, 2005 and 2004
 2005
    
    
    2004(Dollars in thousands, except pershare data)(Unaudited)Revenue:Net premiums earned
    
    $
    15,404
    
    
    $
    14,032Investment income, net of expenses
    
    
    770
    
    
    
    639Net realized investment gains
    
    
    1,175
    
    
    
    340Other revenue
    
    
    84
    
    
    
    86Total revenue
    
    
    17,433
    
    
    
    15,097Expenses:Losses and loss adjustment expenses
    
    
    6,562
    
    
    
    6,173Amortization of deferred policy acquisition costs (related party amounts of
$313 and $310, respectively)
    
    
    4,135
    
    
    
    3,867Other expenses
    
    
    3,704
    
    
    
    3,373Total expenses
    
    
    14,401
    
    
    
    13,413Income before income taxes
    
    
    3,032
    
    
    
    1,684Income taxes
    
    
    971
    
    
    
    563Net income
    
    $
    2,061
    
    
    $
    1,121Earnings per common share:Basic
    
    $
    0.35
    
    
    $
    0.18Diluted
    
    $
    0.34
    
    
    $
    0.17Weighted average shares:Basic
    
    
    5,938,388
    
    
    
    6,267,258Diluted
    
    
    6,120,774
    
    
    
    6,482,258
  6




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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
Nine months ended September 30, 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,119
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,119Unrealized losses on securities:Unrealized holding losses
arising during period, net
of related income tax
benefit of $503
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (975
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (975
    )Less reclassification
adjustment for (gains)
included in net income, net
of related income tax
expense of $433
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (840
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (840
    )Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,815
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,304Forfeiture of restricted stock grant
    
    
    
    
    
    
    
    
    
    
    (92
    )
    
    
    
    
    
    
    
    
    
    
    92
    
    
    
    
    
    
    
    
    
    
    
    Unearned restricted stock
compensation
    
    
    
    
    
    
    
    
    
    
    64
    
    
    
    
    
    
    
    
    
    
    
    (64
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of restricted stock
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    506
    
    
    
    
    
    
    
    
    
    
    
    506Tax benefit from stock compensation
plan
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11ESOP shares committed
    
    
    
    
    
    
    
    
    
    
    142
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    468
    
    
    
    
    
    
    
    610Treasury stock purchased
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,230
    )
    
    
    (3,230
    )Balance, September 30, 2005
    
    $
    
    
    
    
    
    
    
    
    67,776
    
    
    
    3,371
    
    
    
    41,995
    
    
    
    (1,708
    )
    
    
    (4,541
    )
    
    
    (6,284
    )
    
    $
    100,609
  7




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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2005 and 2004
 2005
    
    
    2004(Dollars in thousands)(Unaudited)Cash flows from operating activities:Net income
    
    $
    4,119
    
    
    $
    2,421Adjustments to reconcile net income to net cash provided (used) by operating
activities:Depreciation and amortization of fixed assets
    
    
    1,325
    
    
    
    1,087Net amortization of premium
    
    
    402
    
    
    
    67Amortization of restricted stock compensation
    
    
    517
    
    
    
    206ESOP share commitment
    
    
    610
    
    
    
    581Net realized investment gains
    
    
    (1,273
    )
    
    
    (439
    )Deferred income tax
    
    
    (120
    )
    
    
    115Change in assets and liabilities:Premiums receivable
    
    
    1,535
    
    
    
    (77
    )Reinsurance receivables
    
    
    (1,189
    )
    
    
    1,167Prepaid reinsurance premiums
    
    
    155
    
    
    
    177Deferred policy acquisition costs
    
    
    2
    
    
    
    (231
    )Other assets
    
    
    (1,098
    )
    
    
    334Losses and loss adjustment expenses
    
    
    (246
    )
    
    
    (34
    )Unearned premiums
    
    
    (1,422
    )
    
    
    399Other
    
    
    (422
    )
    
    
    (449
    )Net cash provided by operating activities
    
    
    2,895
    
    
    
    5,324Cash flows from investing activities:Purchase of fixed income securities, available-for- sale
    
    
    (17,814
    )
    
    
    (74,287
    )Purchase of equity securities
    
    
    (1,020
    )
    
    
    (2,532
    )Sale and maturity of fixed income securities, available-for-sale
    
    
    44,718
    
    
    
    25,459Sale of equity securities
    
    
    9,701
    
    
    
    2,857(Purchase) sale of short-term investments, net
    
    
    (2,496
    )
    
    
    43,797Purchase of property and equipment
    
    
    (1,194
    )
    
    
    (3,870
    )Net cash provided (used by) investing activities
    
    
    31,895
    
    
    
    (8,576
    )Cash flows from financing activities:Purchase of treasury stock
    
    
    (3,230
    )
    
    
    (2,975
    )Net cash used by financing activities
    
    
    (3,230
    )
    
    
    (2,975
    )Net increase (decrease) in cash and cash equivalents
    
    
    31,560
    
    
    
    (6,227
    )Cash and cash equivalents at beginning of period
    
    
    16,289
    
    
    
    15,350Cash and cash equivalents at end of period
    
    $
    47,849
    
    
    $
    9,123Cash paid during the period for:Interest
    
    $
    28
    
    
    $
    35Income taxes
    
    $
    1,650
    
    
    $
    
  8




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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
 Basis of Presentation
      Nine months endedSeptember 30,
    
    
    September 30,2005
    
    
    2004(In thousands,except per share data)Net income, as reported
    
    $
    4,119
    
    
    $
    2,421Plus: Stock-based employee compensation expense included in
reported net income, net of related tax effects
    
    
    334
    
    
    
    136Less: Total stock-based employee compensation expense
determined under fair value based method for all awards, net of
related tax effects
    
    
    (708
    )
    
    
    (289
    )Pro forma net income
    
    $
    3,745
    
    
    $
    2,268Basic earnings per share:As reported
    
    $
    0.69
    
    
    $
    0.39Pro forma
    
    $
    0.63
    
    
    $
    0.36Diluted earnings per share:As reported
    
    $
    0.67
    
    
    $
    0.38Pro forma
    
    $
    0.61
    
    
    $
    0.36
 9




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Three months endedSeptember 30,
    
    
    September 30,2005
    
    
    2004(In thousands,except per share data)Net income, as reported
    
    $
    2,061
    
    
    $
    1,121Plus: Stock-based employee compensation expense included in
reported net income, net of related tax effects
    
    
    116
    
    
    
    114Less: Total stock-based employee compensation expense
determined under fair value based method for all awards, net of
related tax effects
    
    
    (247
    )
    
    
    (246
    )Pro forma net income
    
    $
    1,930
    
    
    $
    989Basic earnings per share:As reported
    
    $
    0.35
    
    
    $
    0.18Pro forma
    
    $
    0.33
    
    
    $
    0.16Diluted earnings per share:As reported
    
    $
    0.34
    
    
    $
    0.17Pro forma
    
    $
    0.32
    
    
    $
    0.15
  Segment Information
    10




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Nine Months Ended September 302005
    
    
    2004(In thousands)Revenues:Net premiums earned:Commercial lines
    
    $
    28,517
    
    
    $
    24,150Personal lines
    
    
    16,861
    
    
    
    17,467Total net premiums earned
    
    
    45,378
    
    
    
    41,617Net investment income
    
    
    2,254
    
    
    
    1,933Realized investment gains
    
    
    1,273
    
    
    
    439Other
    
    
    256
    
    
    
    266Total revenues
    
    
    49,161
    
    
    
    44,255Income before income taxes:Underwriting income (loss):Commercial lines
    
    
    3,242
    
    
    
    5,384Personal lines
    
    
    (1,121
    )
    
    
    (4,591
    )Total underwriting income
    
    
    2,121
    
    
    
    793Net investment income
    
    
    2,254
    
    
    
    1,933Realized investment gains
    
    
    1,273
    
    
    
    439Other
    
    
    256
    
    
    
    266Income before income taxes
    
    $
    5,904
    
    
    $
    3,431
  Three Months EndedSeptember 302005
    
    
    2004(In thousands)Revenues:Net premiums earned:Commercial lines
    
    $
    9,860
    
    
    $
    8,295Personal lines
    
    
    5,544
    
    
    
    5,737Total net premiums earned
    
    
    15,404
    
    
    
    14,032Net investment income
    
    
    770
    
    
    
    639Realized investment gains
    
    
    1,175
    
    
    
    340Other
    
    
    84
    
    
    
    86Total revenues
    
    
    17,433
    
    
    
    15,097Income before income taxes:Underwriting income (loss):Commercial lines
    
    
    1,599
    
    
    
    1,880Personal lines
    
    
    (596
    )
    
    
    (1,261
    )Total underwriting income
    
    
    1,003
    
    
    
    619Net investment income
    
    
    770
    
    
    
    639Realized investment gains
    
    
    1,175
    
    
    
    340Other
    
    
    84
    
    
    
    86Income before income taxes
    
    $
    3,032
    
    
    $
    1,684
 11




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Reinsurance
  Comprehensive Income
  Nine Months endedSeptember 302005
    
    
    2004(In thousands)Net income
    
    $
    4,119
    
    
    $
    2,421Other comprehensive income, net of tax:Unrealized( losses) gains on securities:Unrealized holding (losses) gains arising during period, net of related
income tax benefit (expense) of $503, and $(25)
    
    
    (975
    )
    
    
    49Less reclassification adjustment for gains included in net income, net
of related income tax expense of $433 and $149
    
    
    (840
    )
    
    
    (290
    )(1,815
    )
    
    
    (241
    )Comprehensive Income
    
    $
    2,304
    
    
    $
    2,180
  Three Months endedSeptember 302005
    
    
    2004(In thousands)Net income
    
    $
    2,061
    
    
    $
    1,121Other comprehensive income, net of tax:Unrealized (losses) gains on securities:Unrealized holding (losses) gains arising during period, net of related
income tax benefit (expense) of $22, and $(611)
    
    
    (41
    )
    
    
    1,186Less reclassification adjustment for gains included in net income, net
of related income tax expense of $400 and $116
    
    
    (776
    )
    
    
    (224
    )(817
    )
    
    
    962Comprehensive Income
    
    $
    1,244
    
    
    $
    2,083
 Stock-based Compensation
  12




---



##### Table of Contents



Weighted AverageNumber
    
    
    Exercise Priceof shares
    
    
    Per ShareOutstanding at December 31, 2004
    
    
    537,700
    
    
    $
    12.21Granted  2005
    
    
    15,000
    
    
    
    12.80Exercised  2005
    
    
    0
    
    
    
    0.00Forfeited  2005
    
    
    18,500
    
    
    
    12.21Outstanding at September 30, 2005
    
    
    534,200
    
    
    $
    12.23Exercisable at:September 30, 2005
    
    
    162,267
    
    
    $
    12.21Weighted-average remaining contractual life
    
    8.75 years
   13




---



##### Table of Contents



Earnings per Share
  Nine months endedSeptember 30,2005
    
    
    2004(Dollars in thousands, except per share data)Numerator for basic and diluted earnings per share:Net income
    
    $
    4,119
    
    
    $
    2,421Denominator for basic earnings per share 
weighted-average shares outstanding
    
    
    5,939,436
    
    
    
    6,287,602Effect of stock incentive plans
    
    
    215,892
    
    
    
    83,960Denominator for diluted earnings per share
    
    
    6,155,328
    
    
    
    6,371,562Basic earnings per share
    
    $
    0.69
    
    
    $
    0.39Diluted earnings per share
    
    $
    0.67
    
    
    $
    0.38
 Three months endedSeptember 30,2005
    
    
    2004(Dollars in thousands, except per share data)Numerator for basic and diluted earnings per share:Net income
    
    $
    2,061
    
    
    $
    1,121Denominator for basic earnings per share 
weighted-average shares outstanding
    
    
    5,938,388
    
    
    
    6,267,258Effect of stock incentive plans
    
    
    182,386
    
    
    
    215,000Denominator for diluted earnings per share
    
    
    6,120,774
    
    
    
    6,482,258Basic earnings per share
    
    $
    0.35
    
    
    $
    0.18Diluted earnings per share
    
    $
    0.34
    
    
    $
    0.17
 Subsequent Event  Acquisitions
   14




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
 THE CONVERSION TRANSACTION AND THE HOLDING COMPANY
  Our Business
  
    
    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.
    15




---



##### Table of Contents



Critical Accounting Policies
 General.
 Liabilities for Loss and Loss Adjustment Expenses.
 16




---



##### Table of Contents



Adjustment
    
    Adjusted Loss andChange in Loss and
    
    Loss Reserves Net of
    
    Percentage Change in
    
    Adjusted Loss and Loss
    
    Percentage ChangeLoss Adjustment
    
    Reinsurance as of
    
    Stockholders Equity as
    
    Adjustment Reserves
    
    in StockholdersReserves Net of
    
    September 30,
    
    of September 30,
    
    Net of Reinsurance as of
    
    Equity as ofReinsurance
    
    2005
    
    2005(1)
    
    December 31, 2004
    
    December 31, 2004(1)(Dollars in thousands)(10.0)%
    
    
    29,005
    
    
    
    2.1
    %
    
    
    29,669
    
    
    
    2.2
    %(7.5)%
    
    
    29,810
    
    
    
    1.6
    %
    
    
    30,493
    
    
    
    1.6
    %(5.0)%
    
    
    30,616
    
    
    
    1.1
    %
    
    
    31,317
    
    
    
    1.1
    %(2.5)%
    
    
    31,422
    
    
    
    0.5
    %
    
    
    32,141
    
    
    
    0.5
    %Base
    
    
    32,227
    
    
    
    
    
    
    
    32,965
    
    
    
    2.5%
    
    
    33,033
    
    
    
    (0.5
    )%
    
    
    33,789
    
    
    
    (0.5
    )%5.0%
    
    
    33,839
    
    
    
    (1.1
    )%
    
    
    34,613
    
    
    
    (1.1
    )%7.5%
    
    
    34,644
    
    
    
    (1.6
    )%
    
    
    35,437
    
    
    
    (1.6
    )%10.0%
    
    
    35,450
    
    
    
    (2.1
    )%
    
    
    36,262
    
    
    
    (2.2
    )%
 
 (1)
    
    Net of tax 17




---



##### Table of Contents



September 30, 2005
    
    
    December 31, 2004(Dollars in thousands)Commercial lines:Other Liability
    
    $
    9,908
    
    
    $
    9,374Commercial multi-peril
    
    
    7,240
    
    
    
    5,441Workers compensation
    
    
    5,451
    
    
    
    4,627Commercial automobile
    
    
    947
    
    
    
    1,456Fire, allied, inland marine
    
    
    701
    
    
    
    78124,247
    
    
    
    21,679Personal lines:Homeowners
    
    
    8,147
    
    
    
    10,095Personal automobile
    
    
    1,975
    
    
    
    2,283Other liability
    
    
    1,076
    
    
    
    1,596Fire, allied, inland marine
    
    
    262
    
    
    
    338Workers compensation
    
    
    75
    
    
    
    3711,535
    
    
    
    14,349Total
    
    $
    35,782
    
    
    $
    36,028
 Investments.
    18




---



##### Table of Contents



Policy Acquisition Costs.
 Reinsurance.
   Income Taxes.
 Results of Operations
   19




---



##### Table of Contents



Nine months and three months ended September 30, 2005 compared with nine months and three months
ended September 30, 2004.
  Nine months ended September 30,2005 vs. 2004 Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    %(Dollars in thousands)
    
    2005
    
    
    2004
    
    
    Change
    
    
    ChangeCommercial lines underwriting income
    
    $
    3,242
    
    
    $
    5,384
    
    
    $
    (2,142
    )
    
    
    (39.8
    )%Personal lines underwriting loss
    
    
    (1,121
    )
    
    
    (4,591
    )
    
    
    3,470
    
    
    
    75.6
    %Total underwriting income
    
    
    2,121
    
    
    
    793
    
    
    
    1,328
    
    
    
    167.5
    %Net investment income
    
    
    2,254
    
    
    
    1,933
    
    
    
    321
    
    
    
    16.6
    %Realized investment gains
    
    
    1,273
    
    
    
    439
    
    
    
    834
    
    
    
    190.0
    %Other revenue
    
    
    256
    
    
    
    266
    
    
    
    (10
    )
    
    
    (3.8
    )%Income before income taxes
    
    
    5,904
    
    
    
    3,431
    
    
    
    2,473
    
    
    
    72.1
    %Income taxes
    
    
    1,785
    
    
    
    1,010
    
    
    
    775
    
    
    
    76.7
    %Net income
    
    $
    4,119
    
    
    $
    2,421
    
    
    $
    1,698
    
    
    
    70.1
    %Loss / LAE ratio (GAAP)
    
    
    47.6
    %
    
    
    50.7
    %
    
    
    (3.1
    )%Underwriting expense ratio (GAAP)
    
    
    47.7
    %
    
    
    47.4
    %
    
    
    0.3
    %Combined ratio (GAAP)
    
    
    95.3
    %
    
    
    98.1
    %
    
    
    (2.8
    )%Loss / LAE ratio (Statutory)
    
    
    47.6
    %
    
    
    50.7
    %
    
    
    (3.1
    )%Underwriting expense ratio (Statutory)
    
    
    47.1
    %
    
    
    45.8
    %
    
    
    1.3
    %Combined ratio (Statutory)
    
    
    94.7
    %
    
    
    96.5
    %
    
    
    (1.8
    )%
 20




---



##### Table of Contents



Three months ended September 30,2005 vs. 2004 Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    %(Dollars in thousands)
    
    2005
    
    
    2004
    
    
    Change
    
    
    ChangeCommercial lines underwriting income
    
    $
    1,599
    
    
    $
    1,880
    
    
    $
    (281
    )
    
    
    (14.9
    )%Personal lines underwriting loss
    
    
    (596
    )
    
    
    (1,261
    )
    
    
    665
    
    
    
    52.7
    %Total underwriting income
    
    
    1,003
    
    
    
    619
    
    
    
    384
    
    
    
    62.0
    %Net investment income
    
    
    770
    
    
    
    639
    
    
    
    131
    
    
    
    20.5
    %Realized investment gains
    
    
    1,175
    
    
    
    340
    
    
    
    835
    
    
    
    245.6
    %Other revenue
    
    
    84
    
    
    
    86
    
    
    
    (2
    )
    
    
    (2.3
    )%Income before income taxes
    
    
    3,032
    
    
    
    1,684
    
    
    
    1,348
    
    
    
    80.0
    %Income taxes
    
    
    971
    
    
    
    563
    
    
    
    408
    
    
    
    72.5
    %Net income
    
    $
    2,061
    
    
    $
    1,121
    
    
    $
    940
    
    
    
    83.9
    %Loss / LAE ratio (GAAP)
    
    
    42.6
    %
    
    
    44.0
    %
    
    
    (1.4
    )%Underwriting expense ratio (GAAP)
    
    
    50.9
    %
    
    
    51.6
    %
    
    
    (0.7
    )%Combined ratio (GAAP)
    
    
    93.5
    %
    
    
    95.6
    %
    
    
    (2.1
    )%Loss / LAE ratio (Statutory)
    
    
    42.6
    %
    
    
    44.0
    %
    
    
    (1.4
    )%Underwriting expense ratio (Statutory)
    
    
    51.4
    %
    
    
    50.5
    %
    
    
    0.9
    %Combined ratio (Statutory)
    
    
    94.0
    %
    
    
    94.5
    %
    
    
    (0.5
    )%
    21




---



##### Table of Contents



Nine months ended September 30,2005 vs. 2004 Revenue(Dollars in thousands)
    
    2005
    
    
    2004
    
    
    Change
    
    
    % ChangeDirect premiums written
    
    $
    48,004
    
    
    $
    46,883
    
    
    $
    1,121
    
    
    
    2.4
    %Net premiums written
    
    
    44,112
    
    
    
    42,193
    
    
    
    1,919
    
    
    
    4.5
    %Net premiums earned
    
    
    45,378
    
    
    
    41,617
    
    
    
    3,761
    
    
    
    9.0
    %Net investment income
    
    
    2,254
    
    
    
    1,933
    
    
    
    321
    
    
    
    16.6
    %Realized investment gains
    
    
    1,273
    
    
    
    439
    
    
    
    834
    
    
    
    190.0
    %Other Revenue
    
    
    256
    
    
    
    266
    
    
    
    (10
    )
    
    
    (3.8
    )%Total Revenue
    
    $
    49,161
    
    
    $
    44,255
    
    
    $
    4,906
    
    
    
    11.1
    %
 Three months ended September 30,2005 vs. 2004 Revenue(Dollars in thousands)
    
    2005
    
    
    2004
    
    
    Change
    
    
    % ChangeDirect premiums written
    
    $
    15,270
    
    
    $
    14,644
    
    
    $
    626
    
    
    
    4.3
    %Net premiums written
    
    
    14,171
    
    
    
    13,420
    
    
    
    751
    
    
    
    5.6
    %Net premiums earned
    
    
    15,404
    
    
    
    14,032
    
    
    
    1,372
    
    
    
    9.8
    %Net investment income
    
    
    770
    
    
    
    639
    
    
    
    131
    
    
    
    20.5
    %Realized investment gains
    
    
    1,175
    
    
    
    340
    
    
    
    835
    
    
    
    245.6
    %Other Revenue
    
    
    84
    
    
    
    86
    
    
    
    (2
    )
    
    
    (2.3
    )%Total Revenue
    
    $
    17,433
    
    
    $
    15,097
    
    
    $
    2,336
    
    
    
    15.5
    %
    22




---



##### Table of Contents



Nine months ended September 30,2005 vs. 2004 Investment income andrealized gains(Dollars in thousands)
    
    2005
    
    
    2004
    
    
    Change
    
    
    % ChangeFixed income securities
    
    $
    2,651
    
    
    $
    2,471
    
    
    $
    180
    
    
    
    7.3
    %Dividends
    
    
    303
    
    
    
    303
    
    
    
    0
    
    
    
    0.0
    %Cash, cash equivalents & other
    
    
    582
    
    
    
    279
    
    
    
    303
    
    
    
    108.6
    %Gross investment income
    
    
    3,536
    
    
    
    3,053
    
    
    
    483
    
    
    
    15.8
    %Investment expenses
    
    
    (1,282
    )
    
    
    (1,120
    )
    
    
    162
    
    
    
    14.5
    %Net investment income
    
    $
    2,254
    
    
    $
    1,933
    
    
    $
    321
    
    
    
    16.6
    %Realized losses on fixed income
    
    $
    (498
    )
    
    $
    (146
    )
    
    $
    (352
    )
    
    NM
    %Realized gains on equities
    
    
    1,771
    
    
    
    590
    
    
    
    1,181
    
    
    NM
    %Realized losses  other
    
    
    
    
    
    
    (5
    )
    
    
    5
    
    
    NM
    %Net realized gains
    
    $
    1,273
    
    
    $
    439
    
    
    $
    834
    
    
    NM
    %
 
 (N/M means not meaningful)      FairPERIOD OF TIME IN AN
    
    Value on
    
    
    RealizedUNREALIZED LOSS POSITION
    
    Sale Date
    
    
    Loss(In thousands)0-6 months
    
    $
    1,746
    
    
    $
    1657-12 months
    
    
    360
    
    
    
    38More than 12 months
    
    
    
    
    
    
    Total
    
    $
    2,106
    
    
    $
    203
 23




---



##### Table of Contents



Length of Unrealized LossFair
    
    
    Unrealized
    
    
    Less than
    
    
    6 to 12
    
    
    Over 12September 30, 2005
    
    Value
    
    
    Losses
    
    
    6 months
    
    
    Months
    
    
    Months(In thousands)Equity securities:Preferred stocks
    
    $
    1,154
    
    
    $
    51
    
    
    $
    51
    
    
    $
    0
    
    
    $
    0
  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
    
    $
    5,661
    
    
    $
    92
    
    
    $
    6,761
    
    
    $
    188
    
    
    $
    12,422
    
    
    $
    280Obligations of states and
political subdivisions
    
    
    12,518
    
    
    
    144
    
    
    
    9,669
    
    
    
    194
    
    
    
    22,187
    
    
    
    338Corporate securities
    
    
    4,063
    
    
    
    120
    
    
    
    6,734
    
    
    
    163
    
    
    
    10,797
    
    
    
    283Mortgage-backed securities
    
    
    8,874
    
    
    
    115
    
    
    
    6,203
    
    
    
    136
    
    
    
    15,077
    
    
    
    251Total fixed maturities
    
    
    31,116
    
    
    
    471
    
    
    
    29,367
    
    
    
    681
    
    
    
    60,482
    
    
    
    1,152Total equity securities
    
    
    1,154
    
    
    
    51
    
    
    
    
    
    
    
    
    
    
    
    1,154
    
    
    
    51Total securities in a temporary
unrealized loss position
    
    $
    32,270
    
    
    $
    522
    
    
    $
    29,367
    
    
    $
    681
    
    
    $
    61,637
    
    
    $
    1,203
    24




---



##### Table of Contents



Nine months ended September 30,2005 vs. 2004 Commercial lines (CL)(Dollars in thousands)
    
    2005
    
    2004
    
    Change
    
    % ChangeCL Direct premiums written
    
    $
    30,832
    
    
    $
    28,125
    
    
    $
    2,707
    
    
    
    9.6
    %CL Net premiums written
    
    $
    28,005
    
    
    $
    24,965
    
    
    $
    3,040
    
    
    
    12.2
    %CL Net premiums earned
    
    $
    28,517
    
    
    $
    24,150
    
    
    $
    4,367
    
    
    
    18.1
    %CL Loss / LAE expense ratio (GAAP)
    
    
    39.1
    %
    
    
    28.3
    %
    
    
    10.8
    %CL Expense ratio (GAAP)
    
    
    49.5
    %
    
    
    49.4
    %
    
    
    0.1
    %CL Combined ratio (GAAP)
    
    
    88.6
    %
    
    
    77.7
    %
    
    
    10.9
    %
 Three months ended September 30,2005 vs. 2004 Commercial lines (CL)(Dollars in thousands)
    
    2005
    
    2004
    
    Change
    
    % ChangeCL Direct premiums written
    
    $
    9,104
    
    
    $
    8,048
    
    
    $
    1,056
    
    
    
    13.1
    %CL Net premiums written
    
    $
    8,393
    
    
    $
    7,343
    
    
    $
    1,050
    
    
    
    14.3
    %CL Net premiums earned
    
    $
    9,860
    
    
    $
    8,294
    
    
    $
    1,566
    
    
    
    18.9
    %CL Loss / LAE expense ratio (GAAP)
    
    
    33.0
    %
    
    
    25.7
    %
    
    
    7.3
    %CL Expense ratio (GAAP)
    
    
    50.8
    %
    
    
    51.6
    %
    
    
    (0.9
    )%CL Combined ratio (GAAP)
    
    
    83.8
    %
    
    
    77.3
    %
    
    
    6.5
    %
     25




---



##### Table of Contents



Nine months ended September 30,2005 vs. 2004 Personal lines (PL)(Dollars in thousands)
    
    2005
    
    2004
    
    Change
    
    % ChangePL Direct premiums written
    
    $
    17,172
    
    
    $
    18,758
    
    
    $
    (1,586
    )
    
    
    (8.5)
    %PL Net premiums written
    
    $
    16,107
    
    
    $
    17,229
    
    
    $
    (1,122
    )
    
    
    (6.5)
    %PL Net premiums earned
    
    $
    16,861
    
    
    $
    17,467
    
    
    $
    (606
    )
    
    
    (3.5)
    %PL Loss / LAE expense ratio (GAAP)
    
    
    61.9
    %
    
    
    81.7
    %
    
    
    (19.8)
    %PL Expense ratio (GAAP)
    
    
    44.7
    %
    
    
    44.6
    %
    
    
    0.1
    %PL Combined ratio (GAAP)
    
    
    106.6
    %
    
    
    126.3
    %
    
    
    (19.7)
    %
 Three months ended September 30,2005 vs. 2004 Personal lines (PL)(Dollars in thousands)
    
    2005
    
    2004
    
    Change
    
    % ChangePL Direct premiums written
    
    $
    6,166
    
    
    $
    6,596
    
    
    $
    (430
    )
    
    
    (6.5
    )%PL Net premiums written
    
    $
    5,778
    
    
    $
    6,077
    
    
    $
    (299
    )
    
    
    (4.9
    )%PL Net premiums earned
    
    $
    5,543
    
    
    $
    5,737
    
    
    $
    (194
    )
    
    
    (3.4
    )%PL Loss / LAE expense ratio (GAAP)
    
    
    59.7
    %
    
    
    70.5
    %
    
    
    (10.8
    )%PL Expense ratio (GAAP)
    
    
    51.0
    %
    
    
    51.5
    %
    
    
    (0.5
    )%PL Combined ratio (GAAP)
    
    
    110.7
    %
    
    
    122.0
    %
    
    
    (11.3
    )%
   26




---



##### Table of Contents



Nine months ended September 30,2005 vs. 2004 Expenses and expense ratio(Dollars in thousands)
    
    2005
    
    2004
    
    Change
    
    % ChangeAmortization of DAC
    
    $
    11,936
    
    
    $
    11,509
    
    
    $
    427
    
    
    
    3.7
    %As a % of net premiums earned
    
    
    26.3
    %
    
    
    27.7
    %
    
    
    (1.4)
    %Other underwriting expenses
    
    
    9,725
    
    
    
    8,212
    
    
    
    1,513
    
    
    
    18.4
    %Total expenses excluding losses/LAE
    
    $
    21,661
    
    
    $
    19,721
    
    
    $
    1,940
    
    
    
    9.8
    %Underwriting expense ratio
    
    
    47.7
    %
    
    
    47.4
    %
    
    
    0.3
    %
    
    
    N/M(N/M means not meaningful)
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Nine months ended September 30,2005 vs. 2004 Income taxes(Dollars in thousands)
    
    2005
    
    2004
    
    Change
    
    % ChangeIncome before income taxes
    
    $
    5,904
    
    
    $
    3,431
    
    
    $
    2,473
    
    
    
    72.1
    %Income taxes
    
    
    1,785
    
    
    
    1,010
    
    
    
    775
    
    
    
    76.7
    %Net income
    
    $
    4,119
    
    
    $
    2,421
    
    
    $
    1,698
    
    
    
    70.1
    %Effective tax rate
    
    
    30.2
    %
    
    
    29.4
    %
    
    
    0.8
    %
 
 (N/M means not meaningful)  LIQUIDITY AND CAPITAL RESOURCES
   28




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SUBSEQUENT EVENT  ACQUISITIONS
     31




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IMPACT OF INFLATION
   OFF BALANCE SHEET COMMITMENTS AND CONTRACTUAL OBLIGATIONS
   
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 General.
 Interest Rate Risk.
 Credit Risk.
 Equity Risk.
  32




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Item 4. Controls and Procedures
  
 Part II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to Vote of Security Holders
  
 Item 5. Other Information
  33




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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
  MERCER INSURANCE GROUP, INC. (Registrant)Dated: November 9, 2005
    By:
    /s/ Andrew R. SpeakerAndrew R. Speaker,President and Chief Executive OfficerDated: November 9, 2005
    By:
    /s/ David B. MercleanDavid B. Merclean,Chief Financial Officer 34