##### 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, 2009,
 or
 Transition report pursuant to Section 13 or 15(d) Of the Exchange Act
 for the Transition Period from  to
 No. 000-25425  (Commission File Number)
 MERCER INSURANCE GROUP, INC.
  PENNSYLVANIA
    
    23-2934601(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)10 North Highway 31, P.O. Box 278, Pennington, NJ
    
    08534(Address of principal executive offices)
    
    (Zip Code)
 (Registrants telephone number, including area code)
 (Former name, former address and former fiscal year, if changed since last report)
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o
 o þ
  Number of Shares Outstanding as of May 1, 2009COMMON STOCK (No Par Value)
    
    6,443,560(Title of Class)
    
    (Outstanding Shares)




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##### 



TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 4. Controls and Procedures
    
    
    36PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    37Item 1A. Risk Factors
    
    
    37Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    37Item 3. Defaults Upon Senior Securities
    
    
    37Item 4. Submission of Matters to a Vote of Security Holders
    
    
    38Item 5. Other Information
    
    
    38Item 6. Exhibits
    
    
    38SIGNATURES
    
    
    39Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
  2




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Forward-looking Statements
                     3




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4




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Part I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 Consolidated Balance Sheets
March 31, 2009 and December 31, 2008
(Dollars in thousands, except share amounts)
 2009
    
    
    2008(Unaudited)AssetsInvestments, at fair value:Fixed-income securities, available for sale, at fair value
(cost $342,730 and $331,075, respectively)
    
    $
    349,798
    
    
    
    334,087Equity securities, at fair value (cost $8,083 and $9,232,
respectively)
    
    
    7,943
    
    
    
    10,203Total investments
    
    
    357,741
    
    
    
    344,290Cash and cash equivalents
    
    
    26,206
    
    
    
    37,043Premiums receivable
    
    
    33,126
    
    
    
    34,165Reinsurance receivables
    
    
    82,917
    
    
    
    86,443Prepaid reinsurance premiums
    
    
    5,934
    
    
    
    7,096Deferred policy acquisition costs
    
    
    18,761
    
    
    
    20,193Accrued investment income
    
    
    3,666
    
    
    
    3,901Property and equipment, net
    
    
    18,365
    
    
    
    16,144Deferred income taxes
    
    
    10,319
    
    
    
    9,814Goodwill
    
    
    5,416
    
    
    
    5,416Other assets
    
    
    3,770
    
    
    
    4,481Total assets
    
    $
    566,221
    
    
    
    568,986Liabilities and EquityLiabilities:Losses and loss adjustment expenses
    
    $
    304,062
    
    
    
    304,000Unearned premiums
    
    
    75,521
    
    
    
    80,408Accounts payable and accrued expenses
    
    
    9,737
    
    
    
    13,283Other reinsurance balances
    
    
    12,596
    
    
    
    11,509Trust preferred securities
    
    
    15,580
    
    
    
    15,576Advances under line of credit
    
    
    3,000
    
    
    
    3,000Other liabilities
    
    
    3,882
    
    
    
    3,940Total liabilities
    
    
    424,378
    
    
    
    431,716Stockholders Equity:Preferred stock, no par value, authorized 5,000,000 shares, no
shares issued and outstanding
    
    
    
    
    
    
    Common stock, no par value, authorized 15,000,000 shares,
issued 7,074,333 shares, outstanding
6,816,533 and 6,801,095 shares
    
    
    
    
    
    
    Additional paid-in capital
    
    
    71,542
    
    
    
    71,369Accumulated other comprehensive income
    
    
    4,439
    
    
    
    2,494Retained Earnings
    
    
    76,565
    
    
    
    74,138Unearned ESOP shares
    
    
    (2,351
    )
    
    
    (2,505
    )Treasury stock, 630,773 and 621,773 shares
    
    
    (8,352
    )
    
    
    (8,226
    )Total stockholders equity
    
    
    141,843
    
    
    
    137,270Total liabilities and stockholders equity
    
    $
    566,221
    
    
    
    568,986
   5




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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended March 31, 2009 and 2008
 2009
    
    
    2008(Dollars in thousands, except pershare data)(Unaudited)Revenues:Net premiums earned
    
    $
    35,582
    
    
    
    39,077Investment income, net of expenses
    
    
    3,603
    
    
    
    3,361Net realized investment losses
    
    
    (481
    )
    
    
    (820
    )Other revenue
    
    
    488
    
    
    
    455Total revenues
    
    
    39,192
    
    
    
    42,073Expenses:Losses and loss adjustment expenses
    
    
    22,199
    
    
    
    24,770Amortization of deferred policy acquisition costs (related party
amounts of $253 and $274, respectively)
    
    
    9,905
    
    
    
    10,362Other expenses
    
    
    2,891
    
    
    
    3,195Interest expense
    
    
    352
    
    
    
    296Total expenses
    
    
    35,347
    
    
    
    38,623Income before income taxes
    
    
    3,845
    
    
    
    3,450Income taxes
    
    
    954
    
    
    
    858Net income
    
    $
    2,891
    
    
    
    2,592Earnings per common share:Basic
    
    $
    0.47
    
    
    
    0.42Diluted
    
    $
    0.46
    
    
    
    0.41Weighted average shares:Basic
    
    
    6,180,227
    
    
    
    6,219,748Diluted
    
    
    6,233,044
    
    
    
    6,378,247
   6




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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
Three months ended March 31, 2009
(Unaudited, dollars in thousands)
 AccumulatedAdditional
    
    
    other
    
    
    
    
    
    
    UnearnedPreferred
    
    
    Common
    
    
    paid-in
    
    
    comprehensive
    
    
    Retained
    
    
    ESOP
    
    
    Treasurystock
    
    
    stock
    
    
    capital
    
    
    income
    
    
    earnings
    
    
    shares
    
    
    stock
    
    
    TotalBalance, December 31, 2008
    
    $
    
    
    
    
    
    
    
    
    71,369
    
    
    
    2,494
    
    
    
    74,138
    
    
    
    (2,505
    )
    
    
    (8,226
    )
    
    
    137,270Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,891
    
    
    
    
    
    
    
    
    
    
    
    2,891Unrealized gains on securities:Unrealized holding gains arising
during period, net of related
income tax expense of $810
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,573
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,573Less reclassification adjustment for
losses included in net income,
net of related income tax benefit
of $191
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    371
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    371Defined benefit pension plan, net of
related income tax of $1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,945Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,836Stock compensation plan amortization
    
    
    
    
    
    
    
    
    
    
    117
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    117ESOP shares committed
    
    
    
    
    
    
    
    
    
    
    56
    
    
    
    
    
    
    
    
    
    
    
    154
    
    
    
    
    
    
    
    210Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (126
    )
    
    
    (126
    )Dividends to stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (464
    )
    
    
    
    
    
    
    
    
    
    
    (464
    )Balance,March 31, 2009
    
    $
    
    
    
    
    
    
    
    
    71,542
    
    
    
    4,439
    
    
    
    76,565
    
    
    
    (2,351
    )
    
    
    (8,352
    )
    
    
    141,843
   7




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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2009 and 2008
 2009
    
    
    2008(Dollars in thousands)(Unaudited)Cash flows from operating activities:Net income
    
    $
    2,891
    
    
    
    2,592Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization of fixed assets
    
    
    770
    
    
    
    530Net amortization of premium
    
    
    342
    
    
    
    356Amortization of stock compensation
    
    
    117
    
    
    
    129ESOP share commitment
    
    
    210
    
    
    
    273Net realized investment losses
    
    
    481
    
    
    
    820Deferred income tax
    
    
    (1,507
    )
    
    
    187Change in assets and liabilities:Premiums receivable
    
    
    1,039
    
    
    
    2,390Reinsurance receivables
    
    
    3,526
    
    
    
    (3,669
    )Prepaid reinsurance premiums
    
    
    1,162
    
    
    
    1,659Deferred policy acquisition costs
    
    
    1,432
    
    
    
    944Other assets
    
    
    217
    
    
    
    (481
    )Losses and loss adjustment expenses
    
    
    62
    
    
    
    13,097Unearned premiums
    
    
    (4,887
    )
    
    
    (6,197
    )Other reinsurance balances
    
    
    1,087
    
    
    
    (2,520
    )Other
    
    
    (3,599
    )
    
    
    (5,731
    )Net cash provided by operating activities
    
    
    3,343
    
    
    
    4,379Cash flows from investing activities:Purchase of fixed income securities, available for sale
    
    
    (28,185
    )
    
    
    (21,790
    )Purchase of equity securities
    
    
    
    
    
    
    (931
    )Sale and maturity of fixed income securities, available for sale
    
    
    15,869
    
    
    
    15,940Sale of equity securities
    
    
    1,717
    
    
    
    497Purchase of property and equipment, net
    
    
    (2,991
    )
    
    
    (1,249
    )Net cash used in investing activities
    
    
    (13,590
    )
    
    
    (7,533
    )Cash flows from financing activities:Purchase of treasury stock
    
    
    (126
    )
    
    
    Dividends to stockholders
    
    
    (464
    )
    
    
    (312
    )Net cash used in financing activities
    
    
    (590
    )
    
    
    (312
    )Net decrease in cash and cash equivalents
    
    
    (10,837
    )
    
    
    (3,466
    )Cash and cash equivalents at beginning of period
    
    
    37,043
    
    
    
    21,580Cash and cash equivalents at end of period
    
    $
    26,206
    
    
    
    18,114Cash paid during the period for:Interest
    
    $
    348
    
    
    
    293Income taxes
    
    $
    
    
    
    
    250
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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Basis of Presentation
     Share-Based Compensation
    New Accounting Pronouncements
 Effective Date of FASB Statement No. 157 Fair Value Measurement
  9




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The Hierarchy of Generally Accepted Accounting
Principles
 Determining Whether
Instruments Granted in Share-Based Payment Transactions are Participating Securities
 Interim Disclosures about Fair Value of
Financial Instruments
 Recognition and Presentation of
Other-Than-Temporary Impairments
 Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That
Are Not Orderly
 Segment Information
      10




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Three Months Ended March 31,2009
    
    
    2008(In thousands)Revenues:Net premiums earned:Commercial lines
    
    $
    30,704
    
    
    $
    34,031Personal lines
    
    
    4,878
    
    
    
    5,046Total net premiums earned
    
    
    35,582
    
    
    
    39,077Net investment income
    
    
    3,603
    
    
    
    3,361Net realized investment losses
    
    
    (481
    )
    
    
    (820
    )Other revenue
    
    
    488
    
    
    
    455Total revenues
    
    $
    39,192
    
    
    $
    42,073Income before income taxes:Underwriting income (loss):Commercial lines
    
    $
    1,320
    
    
    $
    772Personal lines
    
    
    (733
    )
    
    
    (22
    )Total underwriting income
    
    
    587
    
    
    
    750Net investment income
    
    
    3,603
    
    
    
    3,361Net realized investment losses
    
    
    (481
    )
    
    
    (820
    )Other
    
    
    136
    
    
    
    159Income before income taxes
    
    $
    3,845
    
    
    $
    3,450
  11




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Reinsurance
    Comprehensive Income
  Three Months Ended March 31,2009
    
    
    2008(In thousands)Net income
    
    $
    2,891
    
    
    $
    2,592Other comprehensive income, net of tax:Unrealized gains on securities:Unrealized holding gains arising during period, net of related income tax
expense of $810 and $239, respectively
    
    
    1,573
    
    
    
    464Less reclassification adjustment for losses included in net income, net of related
income tax benefit of $191 and $42, respectively
    
    
    371
    
    
    
    82Defined benefit pension plan, net of related income tax of $1
    
    
    1
    
    
    
    1,945
    
    
    
    546Comprehensive income
    
    $
    4,836
    
    
    $
    3,138
 Share-based Compensation
   12




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Weighted AverageNumber of
    
    
    Exercise PriceShares
    
    
    per ShareOutstanding at December 31, 2008
    
    
    600,700
    
    
    $
    13.24Granted  2009
    
    
    
    
    
    
    Exercised
 2009
    
    
    
    
    
    
    Forfeited
 2009
    
    
    (10,000
    )
    
    
    12.21Outstanding at March 31, 2009
    
    
    590,700
    
    
    $
    13.26Exercisable at:March 31, 2009
    
    
    535,867
    
    
    $
    12.87Weighted-average remaining contractual life
    
    
    
    
    
    5.3 yearsCompensation remaining to be recognized for unvested stock options at March 31, 2009 (millions)
    
    
    
    
    
    $
    0.2Weighted-average remaining amortization period
    
    
    
    
    
    1.1 yearsAggregate Intrinsic Value of outstanding options, March 31, 2009 (millions)
    
    
    
    
    
    $
    1.1Aggregate Intrinsic Value of exercisable options, March 31, 2009 (millions)
    
    
    
    
    
    $
    1.0
   Weighted AverageNumber of
    
    
    Fair ValueShares
    
    
    per ShareUnvested restricted stock at December 31, 2008
    
    
    22,792
    
    
    $
    15.26Granted  2009
    
    
    
    
    
    
    Vested  2009
    
    
    
    
    
    
    Forfeited
 2009
    
    
    
    
    
    
    Unvested restricted stock at March 31, 2009
    
    
    22,792
    
    
    $
    15.26Compensation remaining to be recognized for unvested restricted stock at March 31, 2009 (millions)
    
    
    
    
    
    $
    0.2Weighted-average remaining amortization period
    
    
    
    
    
    0.6 years
  13




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Earnings per Share
  Three Months Ended March 31,2009
    
    
    2008(Dollars in thousands,except per share data)Numerator for basic and diluted earnings per share:Net income
    
    $
    2,891
    
    
    $
    2,592Denominator for basic earnings per share  weighted-average shares
outstanding
    
    
    6,180,227
    
    
    
    6,219,748Effect of stock incentive plans
    
    
    52,817
    
    
    
    158,499Denominator for diluted earnings per share
    
    
    6,233,044
    
    
    
    6,378,247Basic earnings per share
    
    $
    0.47
    
    
    $
    0.42Diluted earnings per share
    
    $
    0.46
    
    
    $
    0.41
  (7) Fair Value of Assets and Liabilities
  
    
    Level 1  Valuations based on unadjusted quoted market prices in active markets for
identical assets that the Group has the ability to access. Since the valuations are based
on quoted prices that are readily and regularly available in an active market, valuation of
these securities does not entail a significant amount or degree of judgment.
 
    
    Level 2  Valuations based on quoted prices for similar assets in active markets; quoted
prices for identical or similar assets in inactive markets; or valuations based on models
where the significant inputs are observable (e.g., interest rates, yield curves, prepayment
speeds, default rates, loss severities, etc.) or can be corroborated by observable market
data.
 
    
    Level 3  Valuations that are derived from techniques in which one or more of the
significant inputs are unobservable, including broker quotes which are non-binding.
    14




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March 31, 2009QuotedPrices inActive
    
    
    SignificantMarkets for
    
    
    Other
    
    
    SignificantIdentical
    
    
    Observable
    
    
    UnobservableAssets
    
    
    Inputs
    
    
    Inputs(in thousands)
    
    Total
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Fixed-income securities, available for sale
    
    $
    349,798
    
    
    $
    4,399
    
    
    $
    343,934
    
    
    $
    1,465Equity securities
    
    
    7,943
    
    
    
    7,652
    
    
    
    245
    
    
    
    46Total assets
    
    $
    357,741
    
    
    $
    12,051
    
    
    $
    344,179
    
    
    $
    1,511Other liabilities
    
    $
    1,797
    
    
    $
    
    
    
    $
    1,797
    
    
    $
    Total liabilities
    
    $
    1,797
    
    
    $
    
    
    
    $
    1,797
    
    
    $
    
  For the Three Months EndedMarch 31, 2009Fixed-incomesecurities,available
    
    
    Equity(in thousands)
    
    for sale
    
    
    securitiesBalance, beginning of period
    
    $
    1,767
    
    
    $
    46Total net losses included in net income
    
    
    (285
    )
    
    
    Total net losses included in other comprehensive income
    
    
    (15
    )
    
    
    Purchases, sales, issuances and settlements, net
    
    
    (2
    )
    
    
    Balance, end of period
    
    $
    1,465
    
    
    $
    46
  16




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(8) Derivative Instruments and Hedging Activities
  Accounting for
Derivative Instruments and Hedging Activities Accounting for Certain
Derivative Instruments and Certain Hedging Activities Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FASB
Statement No. 133
    17




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March 31,
    
    
    December 31,2009
    
    
    2008Balance
    
    
    
    
    
    BalanceSheet
    
    Fair Value
    
    
    Sheet
    
    Fair ValueLocation
    
    asset (liability)
    
    
    Location
    
    asset (liability)Interest rate swaps:Union Bank of California
(Trust I)
    
    Other liabilities
    
    $
    (534
    )
    
    Other liabilities
    
    $
    (546
    )Union Bank of California
(Trust II)
    
    Other liabilities
    
    
    (353
    )
    
    Other liabilities
    
    
    (366
    )Union Bank of California
(Trust III)
    
    Other liabilities
    
    
    (911
    )
    
    Other liabilities
    
    
    (967
    )Total derivatives
    
    
    
    $
    (1,798
    )
    
    
    
    $
    (1,879
    )
  March 31,
    
    
    March 31,2009
    
    
    2008Amount of Gain
    
    
    
    
    Amount of (Loss)Location of Gain Recognized in
    
    Recognized in
    
    
    Location of (Loss) Recognized in
    
    Recognized inIncome
    
    Income
    
    
    Income
    
    IncomeInterest rate swaps:Union Bank of California
(Trust I)
    
    Realized investment losses
    
    $
    12
    
    
    Realized investment losses
    
    $
    (223
    )Union Bank of California
(Trust II)
    
    Realized investment losses
    
    
    13
    
    
    Realized investment losses
    
    
    (121
    )Union Bank of California
(Trust III)
    
    Realized investment losses
    
    
    56
    
    
    Realized investment losses
    
    
    (352
    )Total derivatives
    
    
    
    $
    81
    
    
    
    
    $
    (696
    )
  18




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
  
    
    Mercer Insurance Company (MIC), a Pennsylvania property and casualty stock insurance
company offering insurance coverages to businesses and individuals in New Jersey, New York
and Pennsylvania;
 
    
    Mercer Insurance Company of New Jersey, Inc. (MICNJ), a New Jersey property and casualty
stock insurance company offering insurance coverages to businesses and individuals located
in New Jersey and businesses located in New York;
 
    
    Franklin Insurance Company (FIC), a Pennsylvania property and casualty stock insurance
company offering private passenger automobile and homeowners insurance to individuals
located in Pennsylvania; and
 
    
    Financial Pacific Insurance Company (FPIC), a California property and casualty stock
insurance company offering insurance and surety products to small and medium sized
commercial businesses in Arizona, California, Nevada and Oregon, and direct mail surety
products to commercial businesses in various other states.
        19




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Critical Accounting Policies
 General.
 Liabilities for Loss and Loss Adjustment Expenses.
    20




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21




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March 31,
    
    
    December 31,2009
    
    
    2008(In thousands)Commercial lines:Commercial multi-peril
    
    $
    227,010
    
    
    $
    224,444Commercial automobile
    
    
    39,598
    
    
    
    42,230Surety
    
    
    10,658
    
    
    
    10,606Other liability
    
    
    8,601
    
    
    
    8,018Workers compensation
    
    
    8,166
    
    
    
    8,150Fire, allied, inland marine
    
    
    153
    
    
    
    163294,186
    
    
    
    293,611Personal lines:Homeowners
    
    
    7,064
    
    
    
    7,215Personal automobile
    
    
    1,823
    
    
    
    1,795Other liability
    
    
    529
    
    
    
    1,008Fire, allied, inland marine
    
    
    458
    
    
    
    335Workers compensation
    
    
    2
    
    
    
    369,876
    
    
    
    10,389Total
    
    $
    304,062
    
    
    $
    304,000
 Investments.
      22




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##### Table of Contents



Policy Acquisition Costs.
 Reinsurance.
  Income Taxes.
 Results of Operations
      23




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##### Table of Contents



Three months ended March 31, 2009 compared to three months ended March 31, 2008
  Three months ended March 31,2009 vs. 2008 Income
    
    2009
    
    
    2008
    
    
    Change
    
    
    % Change(Dollars in thousands)Commercial lines underwriting income
    
    $
    1,320
    
    
    $
    772
    
    
    $
    548
    
    
    
    71.0
    %Personal lines underwriting loss
    
    
    (733
    )
    
    
    (22
    )
    
    
    (711
    )
    
    
    N/MTotal underwriting income
    
    
    587
    
    
    
    750
    
    
    
    (163
    )
    
    
    (21.7
    )%Net investment income
    
    
    3,603
    
    
    
    3,361
    
    
    
    242
    
    
    
    7.2
    %Net realized investment losses
    
    
    (481
    )
    
    
    (820
    )
    
    
    339
    
    
    
    N/MOther
    
    
    488
    
    
    
    455
    
    
    
    33
    
    
    
    7.3
    %Interest expense
    
    
    (352
    )
    
    
    (296
    )
    
    
    (56
    )
    
    
    18.9
    %Income before income taxes
    
    
    3,845
    
    
    
    3,450
    
    
    
    395
    
    
    
    11.4
    %Income taxes
    
    
    954
    
    
    
    858
    
    
    
    96
    
    
    
    11.2
    %Net Income
    
    
    2,891
    
    
    
    2,592
    
    
    
    299
    
    
    
    11.5
    %Loss/ LAE ratio (GAAP)
    
    
    62.4
    %
    
    
    63.4
    %
    
    
    (1.0
    )%Underwriting expense ratio (GAAP)
    
    
    36.0
    %
    
    
    34.7
    %
    
    
    1.3
    %Combined ratio (GAAP)
    
    
    98.4
    %
    
    
    98.1
    %
    
    
    0.3
    %Loss/ LAE ratio (Statutory)
    
    
    62.4
    %
    
    
    63.4
    %
    
    
    (1.0
    )%Underwriting expense ratio (Statutory)
    
    
    36.1
    %
    
    
    35.6
    %
    
    
    0.5
    %Combined ratio (Statutory)
    
    
    98.5
    %
    
    
    99.0
    %
    
    
    (0.5
    )%
       24




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##### Table of Contents



Three Months Ended March 31,2009 vs. 2008 Revenue
    
    2009
    
    
    2008
    
    
    Change
    
    
    % Change(In thousands)Direct premiums written
    
    $
    34,993
    
    
    $
    38,297
    
    
    $
    (3,304
    )
    
    
    (8.6)
    %Net premiums written
    
    
    31,856
    
    
    
    34,539
    
    
    
    (2,683
    )
    
    
    (7.8)
    %Net premiums earned
    
    
    35,582
    
    
    
    39,077
    
    
    
    (3,495
    )
    
    
    (8.9)
    %Net investment income
    
    
    3,603
    
    
    
    3,361
    
    
    
    242
    
    
    
    7.2
    %Net realized investment losses
    
    
    (481
    )
    
    
    (820
    )
    
    
    339
    
    
    
    N/MOther revenue
    
    
    488
    
    
    
    455
    
    
    
    33
    
    
    
    7.3
    %Total revenue
    
    $
    39,192
    
    
    $
    42,073
    
    
    $
    (2,881
    )
    
    
    (6.8)
    %
        25




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##### Table of Contents



Three Months Ended March 31,2009 vs. 2008 Investment Income and Realized Losses
    
    2009
    
    
    2008
    
    
    Change
    
    
    % Change(In thousands)Fixed income securities
    
    $
    3,937
    
    
    $
    3,609
    
    
    $
    328
    
    
    
    9.1
    %Dividends
    
    
    80
    
    
    
    85
    
    
    
    (5
    )
    
    
    (5.9)
    %Cash, cash equivalents & other
    
    
    47
    
    
    
    170
    
    
    
    (123
    )
    
    
    (72.4)
    %Gross investment income
    
    
    4,064
    
    
    
    3,864
    
    
    
    200
    
    
    
    5.2
    %Investment expenses
    
    
    (461
    )
    
    
    (503
    )
    
    
    42
    
    
    
    8.3
    %Net investment income
    
    $
    3,603
    
    
    $
    3,361
    
    
    $
    242
    
    
    
    7.2
    %Realized losses  fixed income securities
    
    $
    (319
    )
    
    $
    
    
    
    $
    (319
    )
    
    
    N/MRealized losses  equity securities
    
    
    (243
    )
    
    
    (124
    )
    
    
    (119
    )
    
    
    N/MMark-to-market valuation for interest rate swaps
    
    
    81
    
    
    
    (696
    )
    
    
    777
    
    
    
    N/MNet realized losses
    
    $
    (481
    )
    
    $
    (820
    )
    
    $
    339
    
    
    
    N/M
      26




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##### Table of Contents



At March 31, 2009
    
    
    At December 31, 2008Cost (2)
    
    
    Fair Value
    
    
    Cost (2)
    
    
    Fair Value(In thousands)Fixed income securities (1):United States government and
government agencies (3)
    
    $
    79,961
    
    
    $
    83,620
    
    
    $
    84,747
    
    
    $
    87,975Obligations of states and
political subdivisions
    
    
    141,660
    
    
    
    146,563
    
    
    
    143,042
    
    
    
    145,125Industrial and miscellaneous
    
    
    97,896
    
    
    
    97,153
    
    
    
    77,859
    
    
    
    77,499Mortgage-backed securities
    
    
    23,213
    
    
    
    22,462
    
    
    
    25,427
    
    
    
    23,488Total fixed income securities
    
    
    342,730
    
    
    
    349,798
    
    
    
    331,075
    
    
    
    334,087Equity securities
    
    
    8,083
    
    
    
    7,943
    
    
    
    9,232
    
    
    
    10,203Total
    
    $
    350,813
    
    
    $
    357,741
    
    
    $
    340,307
    
    
    $
    344,290
 
 (1)
    
    In our consolidated financial statements, investments are carried at fair value.(2)
    
    Original cost of equity and fixed income securities adjusted for other than temporary
impairment write downs and amortization of premium and accretion of discount.(3)
    
    Includes approximately $62,777 and $66,576 (cost) and $65,652 and $68,696 (estimated fair
value) of mortgage-backed securities backed by the U.S. government and government agencies as
of March 31, 2009 and December 31, 2008, respectively.  27




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##### Table of Contents



March 31, 2009
    
    
    December 31, 2008Cost (1)
    
    
    Fair Value
    
    
    Cost (1)
    
    
    Fair Value(In thousands)Industrial and miscellaneous:Fixed income securitiesRetail specialty
    
    $
    34,087
    
    
    $
    34,598
    
    
    $
    27,561
    
    
    $
    27,810Financial
    
    
    32,903
    
    
    
    31,341
    
    
    
    36,520
    
    
    
    36,065Energy
    
    
    20,432
    
    
    
    20,567
    
    
    
    9,680
    
    
    
    9,444Information Technology
    
    
    5,756
    
    
    
    5,755
    
    
    
    1,849
    
    
    
    1,860Pharmaceutical
    
    
    4,718
    
    
    
    4,892
    
    
    
    2,249
    
    
    
    2,320Total
    
    $
    97,896
    
    
    $
    97,153
    
    
    $
    77,859
    
    
    $
    77,499Equity securitiesRetail specialty
    
    $
    3,500
    
    
    $
    3,228
    
    
    $
    4,117
    
    
    $
    4,565Financial
    
    
    1,861
    
    
    
    1,561
    
    
    
    2,329
    
    
    
    2,343Information Technology
    
    
    1,182
    
    
    
    1,250
    
    
    
    1,246
    
    
    
    1,186Pharmaceutical
    
    
    794
    
    
    
    875
    
    
    
    794
    
    
    
    974Energy
    
    
    746
    
    
    
    1,029
    
    
    
    746
    
    
    
    1,135Total
    
    $
    8,083
    
    
    $
    7,943
    
    
    $
    9,232
    
    
    $
    10,203
 
 (1)
    
    Original cost of equity securities; original cost of fixed income securities adjusted
for amortization of premium and accretion of discount, as well as any impairment
write-downs.    28




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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
    
    $
    498
    
    
    $
    2
    
    
    $
    286
    
    
    $
    2
    
    
    $
    784
    
    
    $
    4Obligations of states and
political subdivisions
    
    
    9,902
    
    
    
    145
    
    
    
    2,181
    
    
    
    481
    
    
    
    12,083
    
    
    
    626Corporate securities
    
    
    23,859
    
    
    
    1,326
    
    
    
    7,947
    
    
    
    1,280
    
    
    
    31,806
    
    
    
    2,606Mortgage-backed securities
    
    
    4,594
    
    
    
    74
    
    
    
    7,104
    
    
    
    1,011
    
    
    
    11,698
    
    
    
    1,085Total fixed maturities
    
    
    38,853
    
    
    
    1,547
    
    
    
    17,518
    
    
    
    2,774
    
    
    
    56,371
    
    
    
    4,321Total equity securities
    
    
    3,838
    
    
    
    844
    
    
    
    364
    
    
    
    32
    
    
    
    4,202
    
    
    
    876Total securities in a
temporary unrealized loss
position
    
    $
    42,691
    
    
    $
    2,391
    
    
    $
    17,882
    
    
    $
    2,806
    
    
    $
    60,573
    
    
    $
    5,197
    Three Months Ended March 31,2009 vs. 2008 Commercial Lines (CL)
    
    2009
    
    
    2008
    
    
    Change
    
    
    % Change(Dollars in thousands)CL Direct premiums written
    
    $
    30,237
    
    
    $
    33,333
    
    
    $
    (3,096
    )
    
    
    (9.3)
    %CL Net premiums written
    
    $
    27,590
    
    
    $
    30,126
    
    
    $
    (2,536
    )
    
    
    (8.4)
    %CL Net premiums earned
    
    $
    30,704
    
    
    $
    34,031
    
    
    $
    (3,327
    )
    
    
    (9.8)
    %CL Loss/ LAE expense ratio (GAAP)
    
    
    59.9
    %
    
    
    63.4
    %
    
    
    (3.5)
    %CL Expense ratio (GAAP)
    
    
    35.8
    %
    
    
    34.3
    %
    
    
    1.5
    %CL Combined ratio (GAAP)
    
    
    95.7
    %
    
    
    97.7
    %
    
    
    (2.0)
    %
   29




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##### Table of Contents



Three Months Ended March 31,2009 vs. 2008 Personal Lines (PL)
    
    2009
    
    
    2008
    
    
    Change
    
    
    % Change(Dollars in thousands)PL Direct premiums written
    
    $
    4,755
    
    
    $
    4,964
    
    
    $
    (209
    )
    
    
    (4.2)
    %PL Net premiums written
    
    $
    4,266
    
    
    $
    4,413
    
    
    $
    (147
    )
    
    
    (3.3)
    %PL Net premiums earned
    
    $
    4,878
    
    
    $
    5,046
    
    
    $
    (168
    )
    
    
    (3.3)
    %PL Loss/ LAE expense ratio (GAAP)
    
    
    78.3
    %
    
    
    63.2
    %
    
    
    15.1
    %PL Expense ratio (GAAP)
    
    
    36.7
    %
    
    
    37.3
    %
    
    
    (0.6)
    %PL Combined ratio (GAAP)
    
    
    115.0
    %
    
    
    100.5
    %
    
    
    14.5
    %
    Three Months Ended March 31,2009 vs. 2008 Expenses and Expense Ratio
    
    2009
    
    
    2008
    
    
    Change
    
    
    % Change(Dollars in thousands)Amortization of Deferred Acquisition Costs
    
    $
    9,905
    
    
    $
    10,362
    
    
    $
    (457
    )
    
    
    (4.4)
    %As a % of net premiums earned
    
    
    27.8
    %
    
    
    26.5
    %
    
    
    1.3
    %Other underwriting expenses
    
    
    2,891
    
    
    
    3,195
    
    
    
    (304
    )
    
    
    (9.5)
    %Underwriting expenses
    
    $
    12,796
    
    
    $
    13,557
    
    
    $
    (761
    )
    
    
    (5.6)
    %Underwriting expense ratio
    
    
    36.0
    %
    
    
    34.7
    %
    
    
    1.3
    %
  30




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##### Table of Contents



Three Months Ended March 31,2009 vs. 2008 Income Taxes
    
    2009
    
    
    2008
    
    
    Change
    
    
    % Change(Dollars in thousands)Income before income taxes
    
    $
    3,845
    
    
    $
    3,450
    
    
    $
    395
    
    
    
    11.4
    %Income taxes
    
    
    954
    
    
    
    858
    
    
    
    96
    
    
    
    11.2
    %Net income
    
    $
    2,891
    
    
    $
    2,592
    
    
    $
    299
    
    
    
    11.5
    %Effective tax rate
    
    
    24.8
    %
    
    
    24.9
    %
    
    
    (0.1)
    %
  LIQUIDITY AND CAPITAL RESOURCES
         31




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##### Table of Contents



32




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##### Table of Contents



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




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##### Table of Contents



Credit Risk.
  Municipal Bond Holding Exposure.
  
    
    AA+ including insurance enhancement
    
    AA excluding insurance enhancement
 
    
    99% of the underlying ratings are A- or better
    
    88% of the underlying ratings are AA- or better
  
    
    The average credit quality with insurance enhancement is AA
 
    
    The average credit quality of the underlying, excluding insurance enhancement, is AA
 
    
    Each municipal fixed income investment is evaluated based on its underlying
credit fundamentals, irrespective of credit enhancement provided by bond insurers
  
    
    The average credit quality of those securities without enhancement is AA+
  % of TotalAverage Credit
    
    Market
    
    
    Muni
    
    
    UnrealizedRating
    
    Value
    
    
    Portfolio
    
    
    Gain(dollars in thousands)Uninsured Securities
    
    AA+
    
    $
    41,618,449
    
    
    
    28
    %
    
    $
    1,095,225Securities with Insurance Enhancement
    
    AA
    
    
    104,944,434
    
    
    
    72
    %
    
    
    3,807,666Total
    
    
    
    $
    146,562,883
    
    
    
    100
    %
    
    $
    4,902,891
  34




---



##### Table of Contents



MarketCredit Enhancement
    
    Value
    
    
    % of Total(dollars in thousands)AMBAC
    
    $
    11,097,819
    
    
    
    8
    %FGIC
    
    
    1,002,910
    
    
    
    1
    %FSA
    
    
    30,345,010
    
    
    
    21
    %None
    
    
    32,931,500
    
    
    
    22
    %Other Enhancement
    
    
    6,050,245
    
    
    
    5
    %Natl Pub Finance
    
    
    27,427,782
    
    
    
    19
    %National Re FGIC
    
    
    28,455,498
    
    
    
    19
    %Escrowed to Maturity
    
    
    9,252,119
    
    
    
    6
    %Grand Total
    
    $
    146,562,883
    
    
    
    100
    %
  Total Municipal
    
    
    Total MunicipalUnderlying Rating
    
    
    Fixed Income
    
    
    Fixed IncomeInsurance
    
    
    of Insurance
    
    
    Portfolio
    
    
    PortfolioUninsured
    
    
    Enhanced
    
    
    Enhanced
    
    
    (with Insurance
    
    
    (without InsuranceSecurities
    
    
    Securities
    
    
    Securities
    
    
    Enhancement)
    
    
    Enhancement)(1)
    
    
    (2)
    
    
    (3)
    
    
    (1) + (2)
    
    
    (1) + (3)(dollars in thousands)S&P or
    
    Market
    
    
    % of
    
    
    Market
    
    
    % of
    
    
    Market
    
    
    % of
    
    
    Market
    
    
    % of
    
    
    Market
    
    
    % ofequivalent ratings
    
    Value
    
    
    Total
    
    
    Value
    
    
    Total
    
    
    Value
    
    
    Total
    
    
    Value
    
    
    Total
    
    
    Value
    
    
    TotalAAA
    
    $
    25,074,110
    
    
    
    60
    %
    
    $
    39,035,042
    
    
    
    37
    %
    
    $
    12,068,280
    
    
    
    11
    %
    
    $
    64,109,152
    
    
    
    44
    %
    
    $
    37,142,390
    
    
    
    25
    %AA+
    
    
    3,313,759
    
    
    
    8
    %
    
    
    20,584,735
    
    
    
    20
    %
    
    
    27,018,136
    
    
    
    26
    %
    
    
    23,898,494
    
    
    
    16
    %
    
    
    30,331,895
    
    
    
    21
    %AA
    
    
    10,992,560
    
    
    
    26
    %
    
    
    25,996,635
    
    
    
    25
    %
    
    
    32,736,094
    
    
    
    31
    %
    
    
    36,989,195
    
    
    
    25
    %
    
    
    43,728,654
    
    
    
    30
    %AA-
    
    
    1,059,530
    
    
    
    3
    %
    
    
    17,236,600
    
    
    
    16
    %
    
    
    16,834,585
    
    
    
    16
    %
    
    
    18,296,130
    
    
    
    12
    %
    
    
    17,894,115
    
    
    
    12
    %A+
    
    
    
    
    
    
    
    
    
    
    1,088,512
    
    
    
    1
    %
    
    
    6,364,609
    
    
    
    6
    %
    
    
    1,088,512
    
    
    
    1
    %
    
    
    6,364,609
    
    
    
    4
    %A
    
    
    1,178,490
    
    
    
    3
    %
    
    
    
    
    
    
    
    
    
    
    5,897,882
    
    
    
    6
    %
    
    
    1,178,490
    
    
    
    1
    %
    
    
    7,076,372
    
    
    
    5
    %A-
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,021,938
    
    
    
    3
    %
    
    
    
    
    
    
    
    
    
    
    3,021,938
    
    
    
    2
    %BBB-
    
    
    
    
    
    
    
    
    
    
    1,002,910
    
    
    
    1
    %
    
    
    1,002,910
    
    
    
    1
    %
    
    
    1,002,910
    
    
    
    1
    %
    
    
    1,002,910
    
    
    
    1
    %Total
    
    $
    41,618,449
    
    
    
    100
    %
    
    $
    104,944,434
    
    
    
    100
    %
    
    $
    104,944,434
    
    
    
    100
    %
    
    $
    146,562,883
    
    
    
    100
    %
    
    $
    146,562,883
    
    
    
    100
    %Average Rating
    
    AA+
    
    AA
    
    AA
    
    AA+
    
    AA
    35




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##### Table of Contents



Structured Product Exposure.
        Equity Risk.
  
 Item 4. Controls and Procedures
   36




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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
 Total Number of Shares Purchased as
    
    
    Maximum Number of Shares ThatTotal Number of
    
    
    Average Price
    
    
    Part of Publicly Announced Plans or
    
    
    May Yet Be Purchased Under ThePeriod
    
    Shares Purchased
    
    
    Paid per Share
    
    
    Programs (Note 1)
    
    
    Plans or Programs (Note 1)January 1-31, 2009
    
    
    9,000
    
    
    $
    14.05
    
    
    
    9,000
    
    
    
    205,176February 1-28, 2009
    
    
    0
    
    
    
    N/A
    
    
    
    0
    
    
    
    205,176March 1-31, 2009
    
    
    0
    
    
    
    N/A
    
    
    
    0
    
    
    
    205,176Total
    
    
    9,000
    
    
    $
    14.05
    
    
    
    9,000
    
    
    
    205,176
  
 Item 3. Defaults Upon Senior Securities
   37




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##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 Exhibits
 Exhibit No.
    
    Title3.1
    
    
    Articles of Incorporation of Mercer Insurance Group, Inc.
(incorporated by reference herein to the Groups Pre-effective
Amendment No. 3 on Form S-1, SEC File No. 333-104897.)3.2
    
    
    Bylaws of Mercer Insurance Group, Inc. (incorporated by
reference herein to the Groups Annual Report on Form 10-K,
SEC File No. 000-25425, for the fiscal year ended December 31,
2003.)31.1
    
    
    Certification of Chief Executive Officer in accordance with
Section 302 of the Sarbanes-Oxley Act of 2002, (filed
herewith)31.2
    
    
    Certification of Chief Financial Officer in accordance with
Section 302 of the Sarbanes-Oxley Act of 2002, (filed
herewith)32.1
    
    
    Certification of Chief Executive Officer in accordance with
Section 906 of the Sarbanes-Oxley Act of 2002, (filed
herewith)32.2
    
    
    Certification of Chief Financial Officer in accordance with
Section 906 of the Sarbanes-Oxley Act of 2002, (filed
herewith)
  38




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##### Table of Contents



SIGNATURES
  MERCER INSURANCE GROUP, INC. 
(Registrant)Dated: May 11, 2009
    By:
    /s/ Andrew R. SpeakerAndrew R. Speaker,President and Chief Executive OfficerDated: May 11, 2009
    By:
    /s/ David B. MercleanDavid B. Merclean,Senior Vice President and Chief Financial Officer  39




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##### Table of Contents



EXHIBIT
INDEX
  Exhibit No.
    
    Title3.1
    
    
    Articles of Incorporation of Mercer Insurance Group, Inc.
(incorporated by reference herein to the Groups Pre-effective
Amendment No. 3 on Form S-1, SEC File No. 333-104897.)3.2
    
    
    Bylaws of Mercer Insurance Group, Inc. (incorporated by
reference herein to the Groups Annual Report on Form 10-K,
SEC File No. 000-25425, for the fiscal year ended December 31,
2003.)31.1
    
    
    Certification of Chief Executive Officer in accordance with
Section 302 of the Sarbanes-Oxley Act of 2002, (filed
herewith)31.2
    
    
    Certification of Chief Financial Officer in accordance with
Section 302 of the Sarbanes-Oxley Act of 2002, (filed
herewith)32.1
    
    
    Certification of Chief Executive Officer in accordance with
Section 906 of the Sarbanes-Oxley Act of 2002, (filed
herewith)32.2
    
    
    Certification of Chief Financial Officer in accordance with
Section 906 of the Sarbanes-Oxley Act of 2002, (filed
herewith)
  40