##### 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, 2006,
or
 Transition
report pursuant to Section 13 or 15(d) Of the Exchange Act  for the Transition Period from

to
 No. 000-25425
 
 (Commission File
Number)
 MERCER INSURANCE GROUP, INC.
  PENNSYLVANIA
    
    23-2934601(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 10 North Highway 31, P.O. Box 278, Pennington, NJ
    
    08534(Address of principal executive offices)
    
    (Zip Code)
  
  
  þ o
  o þ o
 o þ
  Number of Shares Outstanding as of May 2, 2006COMMON STOCK (No Par Value)
    
    6,566,670(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
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 4. Controls and Procedures
    
    
    29PART II. OTHER INFORMATION
    
    
    30Item 1. Legal Proceedings
    
    
    30Item 1A. Risk Factors
    
    
    30Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    30Item 3. Defaults Upon Senior Securities
    
    
    30Item 4. Submission of Matters to a Vote of Security Holders
    
    
    30Item 5. Other Information
    
    
    31Item 6. Exhibits
    
    
    31SIGNATURES
    
    
    32CERTIFICATION OF CHIEF EXECUTIVE OFFICERCERTIFICATION OF CHIEF FINANCIAL OFFICERCERTIFICATION OF CHIEF EXECUTIVE OFFICERCERTIFICATION OF CHIEF FINANCIAL OFFICER
  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 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
 1




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##### Table of Contents



Forward-looking Statements
                 
 2
    Table of Contents  3
    Table of Contents  Part I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED BALANCE SHEET
 March 31,
    
    
    December 31,2006
    
    
    2005(Dollars in thousands)(Unaudited)ASSETSInvestments:Fixed income securities, available-for-sale, at fair value (amortized cost of
$227,297 and $231,191, respectively)
    
    $
    222,736
    
    
    $
    229,129Equity securities, at fair value (cost of $10,328 and $8,599, respectively)
    
    
    16,553
    
    
    
    14,981Short-term investments, at cost, which approximates fair value
    
    
    19,617
    
    
    
    4,289Total investments
    
    
    258,906
    
    
    
    248,399Cash and cash equivalents
    
    
    22,766
    
    
    
    20,677Premiums receivable
    
    
    38,267
    
    
    
    37,497Reinsurance receivables
    
    
    87,453
    
    
    
    79,214Prepaid reinsurance premiums
    
    
    15,000
    
    
    
    21,554Deferred policy acquisition costs
    
    
    14,271
    
    
    
    10,789Accrued investment income
    
    
    2,427
    
    
    
    2,625Property and equipment, net
    
    
    11,879
    
    
    
    11,720Deferred income taxes
    
    
    5,178
    
    
    
    3,588Goodwill
    
    
    5,633
    
    
    
    5,633Other assets
    
    
    4,037
    
    
    
    5,002Total assets
    
    $
    465,817
    
    
    $
    446,698LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Losses and loss adjustment expenses
    
    $
    222,808
    
    
    $
    211,679Unearned premiums
    
    
    78,586
    
    
    
    78,982Accounts payable and accrued expenses
    
    
    9,666
    
    
    
    13,761Other reinsurance balances
    
    
    20,303
    
    
    
    18,574Trust preferred securities
    
    
    15,529
    
    
    
    15,525Advances under line of credit
    
    
    3,000
    
    
    
    3,000Other liabilities
    
    
    11,006
    
    
    
    1,778Total liabilities
    
    
    360,898
    
    
    
    343,299Stockholders 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 7,068,233
shares, outstanding 6,478,976 and 6,463,538 shares
    
    
    
    
    
    
    Additional paid-in capital
    
    
    66,787
    
    
    
    67,973Accumulated other comprehensive income:Unrealized gains in investments, net of deferred income taxes
    
    
    1,099
    
    
    
    2,851Retained earnings
    
    
    47,546
    
    
    
    44,896Unearned restricted stock compensation
    
    
    
    
    
    
    (1,654
    )Unearned ESOP shares
    
    
    (4,229
    )
    
    
    (4,383
    )Treasury stock, at cost, 501,563 shares
    
    
    (6,284
    )
    
    
    (6,284
    )Total stockholdersequity
    
    
    104,919
    
    
    
    103,399Total liabilities and stockholders equity
    
    $
    465,817
    
    
    $
    446,698
  4
    Table of Contents  MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended March 31, 2006 and 2005
 2006
    
    
    2005(Dollars in thousands, except pershare data)(Unaudited)Revenue:Net premiums earned
    
    $
    33,537
    
    
    $
    15,113Investment income, net of expenses
    
    
    2,091
    
    
    
    743Net realized investment gains
    
    
    307
    
    
    
    18Other revenue
    
    
    491
    
    
    
    86Total revenue
    
    
    36,426
    
    
    
    15,960Expenses:Losses and loss adjustment expenses
    
    
    20,646
    
    
    
    7,723Amortization of deferred policy acquisition costs (related party amounts of
$307 and $318, respectively)
    
    
    5,508
    
    
    
    3,899Other expense
    
    
    6,218
    
    
    
    2,958Interest expenses
    
    
    298
    
    
    
    Total expenses
    
    
    32,670
    
    
    
    14,580Income before income taxes
    
    
    3,756
    
    
    
    1,380Income taxes
    
    
    1,106
    
    
    
    387Net income
    
    $
    2,650
    
    
    $
    993Earnings per common share:Basic
    
    $
    0.44
    
    
    $
    0.17Diluted
    
    $
    0.43
    
    
    $
    0.16Weighted average shares:Basic
    
    
    5,969,780
    
    
    
    6,003,473Diluted
    
    
    6,100,889
    
    
    
    6,249,326
  5
    Table of Contents  MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
Three months ended March 31, 2006
(Unaudited, dollars in thousands)
 Accumulated
    
    
    
    
    
    
    UnearnedAdditional
    
    
    other
    
    
    
    
    
    
    restricted
    
    
    UnearnedPreferred
    
    
    Common
    
    
    paid-in
    
    
    comprehensive
    
    
    Retained
    
    
    stock
    
    
    ESOP
    
    
    Treasurystock
    
    
    stock
    
    
    capital
    
    
    income
    
    

Earnings
    
    
    compensation
    
    
    shares
    
    
    stock
    
    
    TotalBalance, December 31, 2005
    
    $
    
    
    
    
    
    
    
    
    67,973
    
    
    
    2,851
    
    
    
    44,896
    
    
    
    (1,654
    )
    
    
    (4,383
    )
    
    
    (6,284
    )
    
    $
    103,399Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,650
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,650Unrealized losses on securities:Unrealized holding losses
arising during period, net
of related income tax
benefit of $798
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,549
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,549
    )Less reclassification
adjustment for gains
included in net income, net
of related income tax
expense of $104
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (203
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (203
    )Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,752
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    898Reclassification of unearned
restricted stock compensation
    
    
    
    
    
    
    
    
    
    
    (1,654
    )
    
    
    
    
    
    
    
    
    
    
    1,654
    
    
    
    
    
    
    
    
    
    
    
    Stock compensation plan amortization
    
    
    
    
    
    
    
    
    
    
    360
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    360ESOP shares committed
    
    
    
    
    
    
    
    
    
    
    108
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    154
    
    
    
    
    
    
    
    262Balance, March 31, 2006
    
    $
    
    
    
    
    
    
    
    
    66,787
    
    
    
    1,099
    
    
    
    47,546
    
    
    
    
    
    
    
    (4,229
    )
    
    
    (6,284
    )
    
    $
    104,919
  6
    Table of Contents  MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2006 and 2005
 2006
    
    
    2005(Dollars in thousands)(Unaudited)Cash flows from operating activities:Net income
    
    $
    2,650
    
    
    $
    993Adjustments to reconcile net income to net cash provided (used) by
operating activities:Depreciation and amortization of fixed assets
    
    
    592
    
    
    
    407Net amortization of premium
    
    
    289
    
    
    
    163Amortization of stock compensation
    
    
    360
    
    
    
    158ESOP share commitment
    
    
    262
    
    
    
    203Net realized investment gains
    
    
    (307
    )
    
    
    (18
    )Deferred income tax
    
    
    (688
    )
    
    
    2Change in assets and liabilities:Premiums receivable
    
    
    (770
    )
    
    
    1,750Reinsurance receivables
    
    
    (8,239
    )
    
    
    (1,804
    )Prepaid reinsurance premiums
    
    
    6,554
    
    
    
    119Deferred policy acquisition costs
    
    
    (3,482
    )
    
    
    268Other assets
    
    
    1,163
    
    
    
    (76
    )Losses and loss adjustment expenses
    
    
    11,129
    
    
    
    218Unearned premiums
    
    
    (396
    )
    
    
    (2,071
    )Other
    
    
    (1,638
    )
    
    
    (2,644
    )Net cash provided (used) by operating activities
    
    
    7,479
    
    
    
    (2,332
    )Cash flows from investing activities:Purchase of fixed income securities, available-for-sale
    
    
    (5,610
    )
    
    
    (3,458
    )Purchase of equity securities
    
    
    (1,950
    )
    
    
    (668
    )Sale and maturity of fixed income securities, available-for-sale
    
    
    17,845
    
    
    
    3,429Sale of equity securities
    
    
    386
    
    
    
    659Purchase of short-term investments, net
    
    
    (15,328
    )
    
    
    Purchase of property and equipment, net
    
    
    (733
    )
    
    
    (282
    )Net cash used by investing activities
    
    
    (5,390
    )
    
    
    (320
    )Cash flows from financing activities:Purchase of treasury stock
    
    
    
    
    
    
    (3,210
    )Net cash used by financing activities
    
    
    
    
    
    
    (3,210
    )Net increase (decrease) in cash and cash equivalents
    
    
    2,089
    
    
    
    (5,862
    )Cash and cash equivalents at beginning of period
    
    
    20,677
    
    
    
    16,289Cash and cash equivalents at end of period
    
    $
    22,766
    
    
    $
    10,427Cash paid during the period for:Interest
    
    $
    302
    
    
    $
    7Income taxes
    
    $
    
    
    
    $
    250
  7
    Table of Contents  MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
 Basis of Presentation
     Share-based compensation
      8
    Table of Contents  Three monthsendedMarch 31, 2005(In thousands,except pershare data)Net income, as reported
    
    $
    993Plus: Share-based compensation expense included in
reported net income, net of related tax effects
    
    
    105Less: Total share-based compensation expense determined
under fair value based method for all awards, net of
related tax effects
    
    
    (234
    )Pro forma net income
    
    $
    864Basic earnings per share:As reported
    
    $
    0.17Pro forma
    
    $
    0.14Diluted earnings per share:As reported
    
    $
    0.16Pro forma
    
    $
    0.14
 Segment Information
    9
    Table of Contents  Three Months Ended March 312006
    
    
    2005(In thousands)Revenue:Net premiums earned:Commercial lines
    
    $
    27,854
    
    
    $
    9,181Personal lines
    
    
    5,683
    
    
    
    5,932Total net premiums earned
    
    
    33,537
    
    
    
    15,113Net investment income
    
    
    2,091
    
    
    
    743Realized investment gains
    
    
    307
    
    
    
    18Other
    
    
    491
    
    
    
    86Total revenue
    
    
    36,426
    
    
    
    15,960Income before income taxes:Underwriting income (loss):Commercial lines
    
    
    1,167
    
    
    
    639Personal lines
    
    
    (2
    )
    
    
    (106
    )Total underwriting income
    
    
    1,165
    
    
    
    533Net investment income
    
    
    2,091
    
    
    
    743Realized investment gains
    
    
    307
    
    
    
    18Other
    
    
    193
    
    
    
    86Income before income taxes
    
    $
    3,756
    
    
    $
    1,380
 Reinsurance
     Comprehensive Income
 10
    Table of Contents  Three Months endedMarch 312006
    
    
    2005(In thousands)Net income
    
    $
    2,650
    
    
    $
    993Other comprehensive income, net of tax:Unrealized losses on securities:Unrealized holding losses arising during period, net of related
income tax benefit of $798 and $771
    
    
    (1,549
    )
    
    
    (1,497
    )Less reclassification adjustment for gains included in net income, net
of related income tax expense of $104 and $6
    
    
    (203
    )
    
    
    (12
    )(1,752
    )
    
    
    (1,509
    )Comprehensive income (loss)
    
    $
    898
    
    
    $
    (516
    )
 Share-based Compensation
   11
    Table of Contents  Weighted AverageNumber
    
    
    Exercise Priceof shares
    
    
    Per ShareOptions outstanding at December 31, 2005
    
    
    659,200
    
    
    $
    12.42Granted  2006
    
    
    0
    
    
    
    Exercised
 2006
    
    
    0
    
    
    
    Forfeited
 2006
    
    
    0
    
    
    
    Options outstanding at March 31, 2006
    
    
    659,200
    
    
    $
    12.42Exercisable at:March 31, 2006
    
    
    162,267
    
    
    $
    12.21Weighted-average remaining contractual life
    
    
    
    
    
    8.5 yearsCompensation remaining to be recognized for
unvested stock options at March 31, 2006 (millions)
    
    
    
    
    
    $
    1.4Weighted-average remaining amortization period
    
    
    
    
    
    2.2 years
   Weighted AverageNumber
    
    
    Fair valueof shares
    
    
    Per ShareUnvested restricted stock at December 31, 2005
    
    
    166,417
    
    
    $
    12.29Granted  2006
    
    
    0
    
    
    
    Exercised
 2006
    
    
    0
    
    
    
    Forfeited
 2006
    
    
    0
    
    
    
    Unvested restricted stock at March 31, 2006
    
    
    166,417
    
    
    $
    12.29Compensation remaining to be recognized for
unvested restricted stock at March 31, 2006
(millions):
    
    
    
    
    
    $
    1.4Weighted-average remaining amortization period
    
    
    
    
    
    2.3 years
  Earnings per Share
  12
    Table of Contents  Three months endedMarch 31,2006
    
    
    2005(Dollars in thousands, except per share data)Numerator for basic and diluted earnings per share:Net income
    
    $
    2,650
    
    
    $
    993Denominator for basic earnings per share 
weighted-average shares outstanding
    
    
    5,969,780
    
    
    
    6,003,473Effect of stock incentive plans
    
    
    131,109
    
    
    
    245,853Denominator for diluted earnings per share
    
    
    6,100,889
    
    
    
    6,249,326Basic earnings per share
    
    $
    0.44
    
    
    $
    0.17Diluted earnings per share
    
    $
    0.43
    
    
    $
    0.16
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
  
    
    Mercer Insurance Company, a Pennsylvania property and casualty stock insurance company
offering insurance coverages to businesses and individuals in New Jersey and Pennsylvania,
    
    Mercer Insurance Company of New Jersey, Inc., a New Jersey property and casualty stock
insurance company offering insurance coverages to businesses and individuals located in New
Jersey,
    
    Franklin Insurance Company, a Pennsylvania property and casualty stock insurance
company offering private passenger automobile and homeowners insurances to individuals
located in Pennsylvania, and
    
    Financial Pacific Insurance Company, a California property and casualty stock insurance
company offering insurance and surety products to small and medium sized commercial
businesses in California, Arizona, Nevada and Oregon, and direct mail surety products to
commercial businesses in various other states.
  13




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14




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##### Table of Contents



Critical Accounting Policies
 General.
 Liabilities for Loss and Loss Adjustment Expenses.
   15




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##### Table of Contents



AdjustmentChange in Loss and
    
    Adjusted Loss and
    
    
    
    
    Adjusted Loss and Loss
    
    Percentage ChangeLoss Adjustment
    
    Loss Reserves Net of
    
    Percentage Change in
    
    Adjustment Reserves Net
    
    in StockholdersReserves Net of
    
    Reinsurance as of
    
    Stockholders Equity as
    
    of Reinsurance as of
    
    Equity as ofReinsurance
    
    March 31, 2006
    
    of March 31, 2006(1)
    
    December 31, 2005
    
    December 31, 2005(1)(Dollars in thousands)(10.0)%
    
    $125,779
    
    
    8.8%
    
    
    $119,640
    
    
    8.5%(7.5)%
    
    129,273
    
    
    6.6%
    
    
    122,964
    
    
    6.4%(5.0)%
    
    132,767
    
    
    4.4%
    
    
    126,287
    
    
    4.2%(2.5)%
    
    136,261
    
    
    2.2%
    
    
    129,610
    
    
    2.1%Base
    
    139,755
    
    
    
    
    
    132,934
    
    
    2.5%
    
    143,249
    
    
    -2.2%
    
    
    136,257
    
    
    -2.1%5.0%
    
    146,743
    
    
    -4.4%
    
    
    139,581
    
    
    -4.2%7.5%
    
    150,237
    
    
    -6.6%
    
    
    142,904
    
    
    -6.4%10.0%
    
    $153,730
    
    
    -8.8%
    
    
    $146,227
    
    
    -8.5%
 
 (1)
    
    Net of tax   March 31, 2006
    
    
    December 31, 2005(Dollars in thousands)Commercial lines:Commercial multi-peril
    
    $
    156,941
    
    
    $
    147,041Commercial automobile
    
    
    32,750
    
    
    
    32,581Other liability
    
    
    9,774
    
    
    
    9,632Workers compensation
    
    
    6,658
    
    
    
    6,058Surety
    
    
    5,531
    
    
    
    5,304Fire, allied, inland marine
    
    
    415
    
    
    
    318212,069
    
    
    
    200,934Personal lines:Homeowners
    
    
    7,771
    
    
    
    7,595Personal automobile
    
    
    1,742
    
    
    
    1,840Other liability
    
    
    911
    
    
    
    900Fire, allied, inland marine
    
    
    229
    
    
    
    344Workers compensation
    
    
    86
    
    
    
    6610,739
    
    
    
    10,745Total
    
    $
    222,808
    
    
    $
    211,679
 Investments.
 16




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##### Table of Contents



Policy Acquisition Costs.
 Reinsurance.
  17




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##### Table of Contents



Income Taxes.
 Results of Operations
    18




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##### Table of Contents



Three months ended March 31, 2006 compared to three months ended March 31, 2005
  2006 vs. 2005 Income
    
    2006
    
    2005
    
    Change
    
    % ChangeCommercial lines underwriting income
    
    $
    1,167
    
    
    $
    639
    
    
    $
    528
    
    
    
    82.6
    %Personal lines underwriting loss
    
    
    (2
    )
    
    
    (106
    )
    
    
    104
    
    
    
    N/MTotal underwriting income
    
    
    1,165
    
    
    
    533
    
    
    
    632
    
    
    
    118.6
    %Net investment income
    
    
    2,091
    
    
    
    743
    
    
    
    1,348
    
    
    
    181.4
    %Net realized investment gains
    
    
    307
    
    
    
    18
    
    
    
    289
    
    
    
    N/MOther revenue
    
    
    491
    
    
    
    86
    
    
    
    405
    
    
    
    470.9
    %Interest expense
    
    
    (298
    )
    
    
    
    
    
    
    (298
    )
    
    
    N/MIncome before income taxes
    
    
    3,756
    
    
    
    1,380
    
    
    
    2,376
    
    
    
    172.2
    %Income taxes
    
    
    1,106
    
    
    
    387
    
    
    
    719
    
    
    
    185.8
    %Net income
    
    $
    2,650
    
    
    $
    993
    
    
    $
    1,657
    
    
    
    166.9
    %Loss / LAE ratio (GAAP)
    
    
    61.6
    %
    
    
    51.1
    %
    
    
    10.5
    %Underwriting expense ratio (GAAP)
    
    
    34.8
    %
    
    
    45.4
    %
    
    
    (10.6
    )%Combined ratio (GAAP)
    
    
    96.4
    %
    
    
    96.5
    %
    
    
    (0.1
    )%Loss / LAE ratio (Statutory)
    
    
    57.0
    %
    
    
    51.2
    %
    
    
    5.8
    %Underwriting expense ratio (Statutory)
    
    
    36.9
    %
    
    
    47.1
    %
    
    
    (10.2
    )%Combined ratio (Statutory)
    
    
    93.9
    %
    
    
    98.3
    %
    
    
    (4.4
    )%
 
 N/M means Not Meaningful   19




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##### Table of Contents



2006 vs. 2005 Revenue
    
    2006
    
    
    2005
    
    
    Change
    

    % ChangeDirect premiums written
    
    $
    45,397
    
    
    $
    14,240
    
    
    $
    31,157
    
    
    218.8
    %Net premiums written
    
    
    39,695
    
    
    
    13,161
    
    
    
    26,534
    
    
    201.6
    %Net premiums earned
    
    
    33,537
    
    
    
    15,113
    
    
    
    18,424
    
    
    121.9
    %Net investment income
    
    
    2,091
    
    
    
    743
    
    
    
    1,348
    
    
    181.4
    %Realized investment gains
    
    
    307
    
    
    
    18
    
    
    
    289
    
    
    N/MOther revenue
    
    
    491
    
    
    
    86
    
    
    
    405
    
    
    N/MTotal Revenue
    
    $
    36,426
    
    
    $
    15,960
    
    
    $
    20,466
    
    
    128.2
    %
 
 N/M
    
    means Not Meaningful    20




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##### Table of Contents



2006 vs. 2005 Investment income and realized gains
    
    2006
    
    
    2005
    
    
    Change
    
    
    % ChangeFixed income securities
    
    $
    2,496
    
    
    $
    946
    
    
    $
    1,550
    
    
    
    163.8
    %Dividends
    
    
    64
    
    
    
    103
    
    
    
    (39
    )
    
    
    (37.9
    )%Cash, cash equivalents & other
    
    
    180
    
    
    
    122
    
    
    
    58
    
    
    
    47.5
    %Gross investment income
    
    
    2,740
    
    
    
    1,171
    
    
    
    1,569
    
    
    
    134.0
    %Investment expenses
    
    
    (649
    )
    
    
    (428
    )
    
    
    (221
    )
    
    
    51.6
    %Net investment income
    
    $
    2,091
    
    
    $
    743
    
    
    $
    1,348
    
    
    
    181.4
    %Realized losses on fixed income
    
    $
    (122
    )
    
    $
    14
    
    
    $
    (136
    )
    
    
    N/MRealized gains on equities
    
    
    162
    
    
    
    4
    
    
    
    158
    
    
    
    N/MRealized
gains  other
    
    
    267
    
    
    
    
    
    
    
    267
    
    
    
    N/MNet realized gains
    
    $
    307
    
    
    $
    18
    
    
    $
    289
    
    
    
    N/M
 
 (N/M
    
    means not meaningful)       21




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##### Table of Contents



Length of Unrealized LossFair
    
    Unrealized
    
    Less than
    
    6 to 12
    
    Over 12Value
    
    Losses
    
    6 months
    
    Months
    
    MonthsMarch 31, 2006
    
    
    
    
    
    (In thousands)Equity securities:Preferred stocks
    
    $
    559
    
    
    
    20
    
    
    
    4
    
    
    
    16
    
    
    $
    Common stocks
    
    
    733
    
    
    
    18
    
    
    
    18
    
    
    
    
    
    
    
    Total equities
    
    $
    1.292
    
    
    
    38
    
    
    
    22
    
    
    
    16
    
    
    $
    
  Less than 12 Months
    
    
    12 Months or Longer
    
    
    TotalEstimated
    
    
    Unrealized
    
    
    Estimated
    
    
    Unrealized
    
    
    Estimated
    
    
    UnrealizedMarch 31, 2006
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesU.S. Treasury securities
and obligations of U.S.
government corporations
and agencies
    
    $
    30,996
    
    
    $
    546
    
    
    $
    38,449
    
    
    $
    979
    
    
    $
    69,445
    
    
    $
    1,525Obligations of states and
political subdivisions
    
    
    44,288
    
    
    
    758
    
    
    
    29,036
    
    
    
    626
    
    
    
    73,324
    
    
    
    1,384Corporate securities
    
    
    21,966
    
    
    
    635
    
    
    
    32,870
    
    
    
    792
    
    
    
    54,836
    
    
    
    1,427Mortgage-backed securities
    
    
    7,088
    
    
    
    188
    
    
    
    9,180
    
    
    
    102
    
    
    
    16,268
    
    
    
    290Total fixed maturities
    
    
    104,338
    
    
    
    2,127
    
    
    
    109,535
    
    
    
    2,499
    
    
    
    213,873
    
    
    
    4,626Total equity securities
    
    
    1,292
    
    
    
    38
    
    
    
    
    
    
    
    
    
    
    
    1,292
    
    
    
    38Total securities in a
temporary unrealized loss
position
    
    $
    105,630
    
    
    $
    2,165
    
    
    $
    109,535
    
    
    $
    2,499
    
    
    $
    215,165
    
    
    $
    4,664
  22




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##### Table of Contents



2006 vs. 2005 Commercial lines (CL)
    
    2006
    
    2005
    
    Change
    
    % ChangeCL Direct premiums written
    
    $
    39,864
    
    
    $
    8,935
    
    
    $
    30,929
    
    
    
    346.2
    %CL Net premiums written
    
    $
    34,514
    
    
    $
    7,955
    
    
    $
    26,559
    
    
    
    333.9
    %CL Net premiums earned
    
    $
    27,854
    
    
    $
    9,181
    
    
    $
    18,673
    
    
    
    203.4
    %CL Loss / LAE expense ratio (GAAP)
    
    
    61.6
    %
    
    
    45.5
    %
    
    
    16.1
    %CL Expense ratio (GAAP)
    
    
    34.2
    %
    
    
    47.5
    %
    
    
    (13.3
    )%CL Combined ratio (GAAP)
    
    
    95.8
    %
    
    
    93.0
    %
    
    
    2.8
    %
     23




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##### Table of Contents



2006 vs. 2005 Personal lines (PL)
    
    2006
    
    
    2005
    
    
    Change
    
    
    % ChangePL Direct premiums written
    
    $
    5,533
    
    
    $
    5,305
    
    
    $
    228
    
    
    
    4.3
    %PL Net premiums written
    
    $
    5,182
    
    
    $
    5,206
    
    
    $
    (24
    )
    
    
    (0.5
    )%PL Net premiums earned
    
    $
    5,683
    
    
    $
    5,932
    
    
    $
    (249
    )
    
    
    (4.2
    )%PL Loss / LAE expense ratio (GAAP)
    
    
    61.4
    %
    
    
    59.7
    %
    
    
    1.7
    %PL Expense ratio (GAAP)
    
    
    38.6
    %
    
    
    42.1
    %
    
    
    (3.5
    )%PL Combined ratio (GAAP)
    
    
    100.0
    %
    
    
    101.8
    %
    
    
    (1.8
    )%
      2006 vs. 2005 Expenses and expense ratio
    
    2006
    
    
    2005
    
    
    Change
    
    
    % ChangeAmortization of DAC
    
    $
    5,508
    
    
    $
    3,899
    
    
    $
    1,609
    
    
    
    41.3
    %As a % of net premiums earned
    
    
    16.4
    %
    
    
    25.8
    
    
    
    (9.4
    )%Other underwriting expenses
    
    
    6,218
    
    
    
    2,958
    
    
    
    3,260
    
    
    
    110.2
    %Total expenses excluding losses/LAE
    
    $
    11,726
    
    
    $
    6,857
    
    
    $
    4,869
    
    
    
    71.0
    %Underwriting expense ratio
    
    
    34.8
    %
    
    
    45.4
    
    
    
    (10.6
    )%
  24




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##### Table of Contents



2006 vs. 2005 Income taxes
    
    2006
    
    
    2005
    
    
    Change
    
    
    % ChangeIncome before income taxes
    
    $
    3,756
    
    
    $
    1,380
    
    
    $
    2,376
    
    
    
    172.2
    %Income taxes
    
    
    1,106
    
    
    
    387
    
    
    
    719
    
    
    
    185.8
    %Net income
    
    $
    2,650
    
    
    $
    993
    
    
    $
    1,657
    
    
    
    166.9
    %Effective tax rate
    
    
    29.4
    %
    
    
    28.0
    %
    
    
    1.4
    %
  LIQUIDITY AND CAPITAL RESOURCES
    25




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##### Table of Contents



26




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##### Table of Contents



27




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##### Table of Contents



IMPACT OF INFLATION
   28




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##### Table of Contents



OFF BALANCE SHEET COMMITMENTS AND CONTRACTUAL OBLIGATIONS
   
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 General.
 Interest Rate Risk.
 Credit Risk.
 Equity Risk.
  
 Item 4. Controls and Procedures
  29




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##### Table of Contents



Part II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 1A. Risk Factors.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to Vote of Security Holders
   No. of Votes
    
    No. of Votes
    
    No. of Votes
    
    BrokerFor
    
    Withheld
    
    Abstaining
    
    Non-VotesWilliam C. Hart
    
    
    5,919,546
    
    
    
    117,078
    
    
    
    0
    
    
    
    0Richard U. Niedt
    
    
    6,031,611
    
    
    
    5,013
    
    
    
    0
    
    
    
    0Richard B. Van Noy
    
    
    6,033,611
    
    
    
    3,013
    
    
    
    0
    
    
    
    0
  Year TermDirector
    
    ExpiresAndrew R. Speaker
    
    
    2007George T. Hornyak, Jr.
    
    
    2007Samuel J. Malizia
    
    
    2007Roland D. Boehm
    
    
    2008H. Thomas Davis, Jr.
    
    
    2008William V. R. Fogler
    
    
    2008
  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, 2006.
    

    6,005,139
    
    
    1,050
    
    
    30,405
    
    
    0
 30




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##### Table of Contents



Item 5. Other Information
  
 Item 6. Exhibits
 Exhibits
 Exhibit No.
    
    Title3.1
    
    Articles of Incorporation of Mercer Insurance Group, Inc.
(incorporated by reference herein to the 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)
 31




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##### Table of Contents



SIGNATURES
  MERCER INSURANCE GROUP, INC. (Registrant)Dated: May 10, 2006
    By:
    /s/ Andrew R. SpeakerAndrew R. Speaker,President and Chief Executive OfficerDated: May 10, 2006
    By:
    /s/ David B. MercleanDavid B. Merclean,Chief Financial Officer 32