##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
 for the Quarterly Period Ended March 31, 2007,
 or
 o
    
    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 þ o
 o þ
  Number of Shares Outstanding as of May 1, 2007COMMON STOCK (No Par Value)
    
    6,563,720(Title of Class)
    
    (Outstanding Shares)




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##### 



TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATION
    
    
    5Item 1. Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    27Item 4. Controls and Procedures
    
    
    28PART II. OTHER INFORMATION
    
    
    28Item 1. Legal Proceedings
    
    
    28Item 1A. Risk Factors
    
    
    28Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    28Item 3. Defaults Upon Senior Securities
    
    
    28Item 4. Submission of Matters to a Vote of Security Holders
    
    
    29Item 5. Other Information
    
    
    29Item 6. Exhibits
    
    
    29SIGNATURES
    
    
    30Exhibits:CERTIFICATION OF CHIEF EXECUTIVE OFFICERCERTIFICATION OF CHIEF FINANCIAL OFFICERCERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350CERTIFICATION OF CHIEF FINANCIAL OFFICER PURUSANT TO 18 U.S.C. SECTION 1350
  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
 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 SHEET
 March 31,
    
    
    December 31,2007
    
    
    2006(Dollars in thousands)(Unaudited)AssetsInvestments, at fair value:Fixed-income securities, available for sale, at fair
value (cost $287,951 and $274,769, respectively)
    
    $
    286,996
    
    
    
    273,454Equity securities, at fair value (cost $10,362 and
$10,940, respectively)
    
    
    15,921
    
    
    
    16,522Short-term investments, at cost, which approximates fair
value
    
    
    4,178
    
    
    
    7,692Total investments
    
    
    307,095
    
    
    
    297,668Cash and cash equivalents
    
    
    13,153
    
    
    
    17,618Premiums receivable
    
    
    35,295
    
    
    
    38,030Reinsurance receivables
    
    
    92,117
    
    
    
    87,987Prepaid reinsurance premiums
    
    
    12,068
    
    
    
    16,383Deferred policy acquisition costs
    
    
    17,628
    
    
    
    16,708Accrued investment income
    
    
    3,261
    
    
    
    3,204Property and equipment, net
    
    
    11,968
    
    
    
    11,936Deferred income taxes
    
    
    8,553
    
    
    
    7,775Goodwill
    
    
    5,416
    
    
    
    5,625Other assets
    
    
    4,077
    
    
    
    4,033Total assets
    
    $
    510,631
    
    
    
    506,967Liabilities and EquityLiabilities:Losses and loss adjustment expenses
    
    $
    258,464
    
    
    
    250,455Unearned premiums
    
    
    78,427
    
    
    
    81,930Accounts payable and accrued expenses
    
    
    10,311
    
    
    
    13,442Other reinsurance balances
    
    
    23,509
    
    
    
    24,588Trust preferred securities
    
    
    15,546
    
    
    
    15,542Advances under line of credit
    
    
    3,000
    
    
    
    3,000Other liabilities
    
    
    2,330
    
    
    
    2,171Total liabilities
    
    
    391,587
    
    
    
    391,128Stockholders 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 7,067,233 shares and 7,064,233 shares,
outstanding
6,600,670 and 6,582,232 shares
    
    
    
    
    
    
    Additional paid-in capital
    
    
    69,050
    
    
    
    68,473Accumulated other comprehensive income:Unrealized gains in investments, net of deferred income
taxes
    
    
    3,039
    
    
    
    2,815Retained Earnings
    
    
    56,878
    
    
    
    54,629Unearned ESOP shares
    
    
    (3,602
    )
    
    
    (3,757
    )Treasury stock, 503,513 shares
    
    
    (6,321
    )
    
    
    (6,321
    )Total stockholders equity
    
    
    119,044
    
    
    
    115,839Total liabilities and stockholders equity
    
    $
    510,631
    
    
    
    506,967
  5




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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended March 31, 2007 and 2006
 2007
    
    
    2006(Dollars in thousands, exceptper share data)(Unaudited)Revenue:Net premiums earned
    
    $
    33,988
    
    
    
    33,537Investment income, net of expenses
    
    
    2,941
    
    
    
    2,091Net realized investment (losses) gains
    
    
    (47
    )
    
    
    307Other revenue
    
    
    426
    
    
    
    491Total revenue
    
    
    37,308
    
    
    
    36,426Expenses:Losses and loss adjustment expenses
    
    
    20,809
    
    
    
    20,646Amortization of deferred policy acquisition
costs (related party
amounts of $288 and $307, respectively)
    
    
    8,777
    
    
    
    7,292Other expenses
    
    
    3,854
    
    
    
    4,434Interest expense
    
    
    307
    
    
    
    298Total expenses
    
    
    33,747
    
    
    
    32,670Income before income taxes
    
    
    3,561
    
    
    
    3,756Income taxes
    
    
    1,008
    
    
    
    1,106Net income
    
    $
    2,553
    
    
    
    2,650Earnings per common share:Basic
    
    $
    0.42
    
    
    
    0.44Diluted
    
    $
    0.41
    
    
    
    0.43Weighted average shares:Basic
    
    
    6,087,191
    
    
    
    5,969,780Diluted
    
    
    6,291,702
    
    
    
    6,100,889
  6




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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
Three months ended March 31, 2007
(Unaudited, dollars in thousands)
 AccumulatedAdditional
    
    
    other
    
    
    
    
    
    
    UnearnedPreferred
    
    
    Common
    
    
    paid-in
    
    
    comprehensive
    
    
    Retained
    
    
    ESOP
    
    
    Treasurystock
    
    
    stock
    
    
    capital
    
    
    income
    
    
    earnings
    
    
    shares
    
    
    stock
    
    
    TotalBalance, December 31, 2006
    
    $
    
    
    
    
    
    
    
    
    68,473
    
    
    
    2,815
    
    
    
    54,629
    
    
    
    (3,757
    )
    
    
    (6,321
    )
    
    
    115,839Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,553
    
    
    
    
    
    
    
    
    
    
    
    2,553Unrealized gains on securities:Unrealized holding gains arising
during period, net of related
income tax expense of $115
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    224
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    224Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    224Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,777Stock compensation plan
amortization
    
    
    
    
    
    
    
    
    
    
    395
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    395ESOP shares committed
    
    
    
    
    
    
    
    
    
    
    142
    
    
    
    
    
    
    
    
    
    
    
    155
    
    
    
    
    
    
    
    297Issuance of common stock
    
    
    
    
    
    
    
    
    
    
    40
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40Dividends to stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (304
    )
    
    
    
    
    
    
    
    
    
    
    (304
    )Balance, March 31, 2007
    
    $
    
    
    
    
    
    
    
    
    69,050
    
    
    
    3,039
    
    
    
    56,878
    
    
    
    (3,602
    )
    
    
    (6,321
    )
    
    
    119,044
  7




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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2007 and 2006
 2007
    
    
    2006(Dollars in thousands)(Unaudited)Cash flows from operating activities:Net income
    
    $
    2,553
    
    
    
    2,650Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization of fixed assets
    
    
    512
    
    
    
    592Net amortization of premium
    
    
    312
    
    
    
    289Amortization of restricted stock compensation
    
    
    395
    
    
    
    360ESOP share commitment
    
    
    297
    
    
    
    262Net realized
investment losses (gains)
    
    
    47
    
    
    
    (307
    )Deferred income tax
    
    
    (892
    )
    
    
    (688
    )Change in assets and liabilities:Premiums receivable
    
    
    2,735
    
    
    
    (770
    )Reinsurance receivables
    
    
    (4,130
    )
    
    
    (8,239
    )Prepaid reinsurance premiums
    
    
    4,315
    
    
    
    6,554Deferred policy acquisition costs
    
    
    (920
    )
    
    
    (3,482
    )Other assets
    
    
    540
    
    
    
    1,163Losses and loss adjustment expenses
    
    
    8,009
    
    
    
    11,129Unearned premiums
    
    
    (3,503
    )
    
    
    (396
    )Other reinsurance balances
    
    
    (1,079
    )
    
    
    1,728Other
    
    
    (2,968
    )
    
    
    (3,366
    )Net cash provided by operating activities
    
    
    6,223
    
    
    
    7,479Cash flows from investing activities:Purchase of fixed income securities, available for sale
    
    
    (21,365
    )
    
    
    (5,610
    )Purchase of equity securities
    
    
    
    
    
    
    (1,950
    )Sale (purchase) of short-term investments, net
    
    
    3,514
    
    
    
    (15,328
    )Sale and maturity of fixed income securities, available for sale
    
    
    7,393
    
    
    
    17,845Sale of equity securities
    
    
    579
    
    
    
    386Purchase of property and equipment, net
    
    
    (545
    )
    
    
    (733
    )Net cash used in investing activities
    
    
    (10,424
    )
    
    
    (5,390
    )Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    40
    
    
    
    Dividends to stockholders
    
    
    (304
    )
    
    
    Net cash used in financing activities
    
    
    (264
    )
    
    
    Net (decrease) increase in cash and cash equivalents
    
    
    (4,465
    )
    
    
    2,089Cash and cash equivalents at beginning of period
    
    
    17,618
    
    
    
    20,677Cash and cash equivalents at end of period
    
    $
    13,153
    
    
    
    22,766Cash paid during the period for:Interest
    
    $
    302
    
    
    
    302Income taxes
    
    $
    
    
    
    
    
  8




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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Basis of Presentation
      Share-Based Compensation
     Recent Accounting Pronouncements
 9




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Segment Information
     10




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Three Months Ended March 312007
    
    
    2006(In thousands)Revenues:Net premiums earned:Commercial lines
    
    $
    28,365
    
    
    $
    27,854Personal lines
    
    
    5,623
    
    
    
    5,683Total net premiums earned
    
    
    33,988
    
    
    
    33,537Net investment income
    
    
    2,941
    
    
    
    2,091Net realized investment (losses) gains
    
    
    (47
    )
    
    
    307Other
    
    
    426
    
    
    
    491Total revenues
    
    $
    37,308
    
    
    $
    36,426Income before income taxes:Underwriting income (loss):Commercial lines
    
    $
    1,669
    
    
    $
    1,210Personal lines
    
    
    (1,113
    )
    
    
    (2
    )Total underwriting income
    
    
    556
    
    
    
    1,208Net investment income
    
    
    2,941
    
    
    
    2,091Net realized investment (losses) gains
    
    
    (47
    )
    
    
    307Other
    
    
    111
    
    
    
    150Income before income taxes
    
    $
    3,561
    
    
    $
    3,756
 11




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Reinsurance
     Comprehensive Income
  Three months endedMarch 312007
    
    
    2006(In thousands)Net income
    
    $
    2,553
    
    
    $
    2,650Other comprehensive income, net of tax:Unrealized gains on securities:Unrealized holding gains and (losses)
arising during period, net of related
income tax
(expense) benefit of $(115) and $889
    
    
    224
    
    
    
    (1,726
    )Less reclassification adjustment for gains
included in net income, net of related
income tax
expense of $0 and $14
    
    
    
    
    
    
    (26
    )224
    
    
    
    (1,752
    )Comprehensive income
    
    $
    2,777
    
    
    $
    898
 Share-based Compensation
  12




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##### Table of Contents



Weighted AverageNumber of
    
    
    Exercise PriceShares
    
    
    per ShareOutstanding at December 31, 2006
    
    
    636,700
    
    
    $
    13.21Granted - 2007
    
    
    0
    
    
    
    0.00Exercised - 2007
    
    
    (3,000
    )
    
    
    13.25Forfeited - 2007
    
    
    (12,000
    )
    
    
    13.25Outstanding at March 31, 2007
    
    
    621,700
    
    
    $
    13.20Exercisable at:March 31, 2007
    
    
    334,533
    
    
    $
    12.25Weighted-average remaining contractual life
    
    
    
    
    
    7.5 yearsCompensation remaining to be recognized for unvested stock
options at March 31, 2007 (millions)
    
 
    
    
    
    $
    0.9Weighted-average remaining amortization period
    
    
    
    
    
    1.5 yearsAggregate Intrinsic Value of outstanding options, March 31, 2007 (millions)
    
    
    
    
    
    $
    4.4Aggregate Intrinsic Value of exercisable options, March 31, 2007 (millions)
    
    
    
    
    
    $
    2.6
   WeightedAverageNumber of
    
    
    Fair ValueShares
    
    
    per ShareUnvested restricted stock at December 31, 2006
    
    
    106,334
    
    
    $
    13.61Granted - 2007
    
    
    0
    
    
    
    0.00Vested - 2007
    
    
    0
    
    
    
    0.00Forfeited - 2007
    
    
    0
    
    
    
    0.00Unvested restricted stock at March 31, 2007
    
    
    106,334
    
    
    $
    13.61Compensation remaining to be recognized for unvested restricted stock at March 31, 2007 (millions)
    
    
    
    
    
    $
    0.9Weighted-average remaining amortization period
    
    
    
    
    
    1.7 years
 13




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Earnings per Share
  Three months endedMarch 312007
    
    
    2006(Dollars in thousands, except per share data)Numerator for basic and diluted earnings per share:Net income
    
    $
    2,553
    
    
    $
    2,650Denominator for basic earnings per share -
weighted-average shares
outstanding
    
    
    6,087,191
    
    
    
    5,969,780Effect of stock incentive plans
    
    
    204,511
    
    
    
    131,109Denominator for diluted earnings per share
    
    
    6,291,702
    
    
    
    6,100,889Basic earnings per share
    
    $
    0.42
    
    
    $
    0.44Diluted earnings per share
    
    $
    0.41
    
    
    $
    0.43
  Income Taxes
  Contingencies and Subsequent Event
    14




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
  
    
    Mercer Insurance Company (MIC), a Pennsylvania property and casualty stock insurance
company offering insurance coverages to businesses and individuals in New Jersey 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;
    
    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.
       15




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




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Adjusted Loss and
    
    
    
    
    
    Adjusted Loss andChange in Loss
    
    Loss Adjustment
    
    Percentage
    
    Loss Adjustment
    
    Percentageand Loss
    
    Reserves Net of
    
    Change in
    
    Reserves Net of
    
    Change inAdjustment
    
    Reinsurance as of
    
    Equity as of
    
    Reinsurance as of
    
    Equity as ofReserves Net of
    
    March 31,
    
    March 31,
    
    December 31,
    
    December 31,Reinsurance
    
    2007
    
    2007 (1)
    
    2006
    
    2006 (1)(Dollars in thousands)(10.0
    )%
    
    $
    152,906
    
    
    
    9.4
    %
    
    $
    148,070
    
    
    
    9.4
    %(7.5
    )%
    
    
    157,153
    
    
    
    7.1
    %
    
    
    152,183
    
    
    
    7.0
    %(5.0
    )%
    
    
    161,400
    
    
    
    4.7
    %
    
    
    156,296
    
    
    
    4.7
    %(2.5
    )%
    
    
    165,648
    
    
    
    2.4
    %
    
    
    160,409
    
    
    
    2.3
    %Base
    
    
    
    169,895
    
    
    
    
    
    
    
    164,522
    
    
    
    2.5
    %
    
    
    174,142
    
    
    
    (2.4
    %)
    
    
    168,635
    
    
    
    (2.3
    )%5.0
    %
    
    
    178,390
    
    
    
    (4.7
    %)
    
    
    172,748
    
    
    
    (4.7
    )%7.5
    %
    
    
    182,637
    
    
    
    (7.1
    %)
    
    
    176,861
    
    
    
    (7.0
    )%10.0
    %
    
    
    186,885
    
    
    
    (9.4
    %)
    
    
    180,974
    
    
    
    (9.4
    )%
 
 (1)
    
    Net of tax  17




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##### Table of Contents



March 31,
    
    
    December 31,2007
    
    
    2006(In thousands)Commercial lines:Commercial multi-peril
    
    $
    184,738
    
    
    $
    181,523Commercial automobile
    
    
    37,902
    
    
    
    36,647Other liability
    
    
    10,738
    
    
    
    8,462Workers compensation
    
    
    8,059
    
    
    
    8,107Surety
    
    
    4,898
    
    
    
    5,104Fire, allied, inland marine
    
    
    564
    
    
    
    222246,899
    
    
    
    240,065Personal lines:Homeowners
    
    
    7,794
    
    
    
    6,724Personal automobile
    
    
    2,012
    
    
    
    2,213Other liability
    
    
    1,139
    
    
    
    1,079Fire, allied, inland marine
    
    
    585
    
    
    
    333Workers compensation
    
    
    35
    
    
    
    4111,565
    
    
    
    10,390Total
    
    $
    258,464
    
    
    $
    250,455
 Investments.
     Policy Acquisition Costs.
 18




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##### Table of Contents



Reinsurance.
  Income Taxes.
 Results of Operations
     19




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##### Table of Contents



Three months ended March 31, 2007 compared to three months ended March 31, 2006
  2007 vs. 2006 Income
    
    2007
    
    2006
    
    Change
    
    % Change(Dollars in thousands)Commercial lines underwriting income
    
    $
    1,669
    
    
    $
    1,210
    
    
    $
    459
    
    
    
    37.9
    %Personal lines underwriting loss
    
    
    (1,113
    )
    
    
    (2
    )
    
    
    (1,111
    )
    
    
    N/MTotal underwriting income
    
    
    556
    
    
    
    1,208
    
    
    
    (652
    )
    
    
    (54.0
    )%Net investment income
    
    
    2,941
    
    
    
    2,091
    
    
    
    850
    
    
    
    40.7
    %Net realized investment (losses)
gains
    
    
    (47
    )
    
    
    307
    
    
    
    (354
    )
    
    
    (115.3
    )%Other
    
    
    418
    
    
    
    448
    
    
    
    (30
    )
    
    
    (6.7
    )%Interest expense
    
    
    (307
    )
    
    
    (298
    )
    
    
    (9
    )
    
    
    3.0
    %Income before income taxes
    
    
    3,561
    
    
    
    3,756
    
    
    
    (195
    )
    
    
    (5.2
    )%Income taxes
    
    
    1,008
    
    
    
    1,106
    
    
    
    (98
    )
    
    
    (8.9
    )%Net Income
    
    $
    2,553
    
    
    $
    2,650
    
    
    $
    (97
    )
    
    
    (3.7
    )%Loss/ LAE ratio (GAAP)
    
    
    61.2
    %
    
    
    61.6
    %
    
    
    (0.4
    )%Underwriting expense ratio
(GAAP)
    
    
    37.2
    %
    
    
    34.8
    %
    
    
    2.4
    %Combined ratio (GAAP)
    
    
    98.4
    %
    
    
    96.4
    %
    
    
    2.0
    %Loss/ LAE ratio
(Statutory)
    
    
    61.2
    %
    
    
    57.0
    %
    
    
    4.2
    %Underwriting expense ratio
(Statutory)
    
    
    37.3
    %
    
    
    36.9
    %
    
    
    0.4
    %Combined ratio
(Statutory)
    
    
    98.5
    %
    
    
    93.9
    %
    
    
    4.6
    %
 
 (N/M means not meaningful)   20




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##### Table of Contents



2007 vs. 2006 Revenue
    
    2007
    
    2006
    
    Change
    
    % Change(In thousands)Direct premiums written
    
    $
    39,272
    
    
    $
    45,397
    
    
    $
    (6,125
    )
    
    
    (13.5
    )%Net premiums written
    
    
    34,801
    
    
    
    39,695
    
    
    
    (4,894
    )
    
    
    (12.3
    )%Net premiums earned
    
    
    33,988
    
    
    
    33,537
    
    
    
    451
    
    
    
    1.3
    %Net investment income
    
    
    2,941
    
    
    
    2,091
    
    
    
    850
    
    
    
    40.7
    %Net realized investment (losses)
gains
    
    
    (47
    )
    
    
    307
    
    
    
    (354
    )
    
    
    (115.3
    )%Other revenue
    
    
    426
    
    
    
    491
    
    
    
    (65
    )
    
    
    (13.2
    )%Total revenue
    
    $
    37,308
    
    
    $
    36,426
    
    
    $
    882
    
    
    
    2.4
    %
          21




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##### Table of Contents



2007 vs. 2006 Investment Income and Realized Gains
    
    2007
    
    2006
    
    Change
    
    % Change(In thousands)Fixed income securities
    
    $
    3,152
    
    
    $
    2,496
    
    
    $
    656
    
    
    
    26.3
    %Dividends
    
    
    74
    
    
    
    64
    
    
    
    10
    
    
    
    15.6
    %Cash, cash equivalents & other
    
    
    203
    
    
    
    180
    
    
    
    23
    
    
    
    12.8
    %Gross investment income
    
    
    3,429
    
    
    
    2,740
    
    
    
    689
    
    
    
    25.1
    %Investment expenses
    
    
    (488
    )
    
    
    (649
    )
    
    
    161
    
    
    
    24.8
    %Net investment income
    
    $
    2,941
    
    
    $
    2,091
    
    
    $
    850
    
    
    
    40.7
    %Realized losses  fixed income securities
    
    $
    (28
    )
    
    $
    (122
    )
    
    $
    94
    
    
    
    N/MRealized gains  equity securities
    
    
    29
    
    
    
    162
    
    
    
    (133
    )
    
    
    N/MMark-to-market valuation for interest rate swaps
    
    
    (48
    )
    
    
    267
    
    
    
    (315
    )
    
    
    N/MNet realized (losses) gains
    
    $
    (47
    )
    
    $
    307
    
    
    $
    (354
    )
    
    
    (115.3
    )%
 
 (N/M means not meaningful)      22




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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
    
    $
    4,552
    
    
    $
    6
    
    
    $
    49,423
    
    
    $
    651
    
    
    $
    53,975
    
    
    $
    657Obligations of states and
political
subdivisions
    
    
    36,277
    
    
    
    141
    
    
    
    40,796
    
    
    
    516
    
    
    
    77,073
    
    
    
    657Corporate securities
    
    
    3,961
    
    
    
    18
    
    
    
    38,521
    
    
    
    537
    
    
    
    42,482
    
    
    
    555Mortgage-backed securities
    
    
    2,742
    
    
    
    9
    
    
    
    11,894
    
    
    
    124
    
    
    
    14,636
    
    
    
    133Total fixed maturities
    
    
    47,532
    
    
    
    174
    
    
    
    140,634
    
    
    
    1,828
    
    
    
    188,166
    
    
    
    2,002Total equity securities
    
    
    1,732
    
    
    
    66
    
    
    
    
    
    
    
    
    
    
    
    1,732
    
    
    
    66Total securities in a
temporary unrealized loss
position
    
    $
    49,264
    
    
    $
    240
    
    
    $
    140,634
    
    
    $
    1,828
    
    
    $
    189,898
    
    
    $
    2,068
    2007 vs. 2006 Commercial Lines (CL)
    
    2007
    
    2006
    
    Change
    
    % Change(Dollars in thousands)CL Direct premiums written
    
    $
    34,101
    
    
    $
    39,864
    
    
    $
    (5,763
    )
    
    
    (14.5
    )%CL Net premiums written
    
    $
    29,973
    
    
    $
    34,514
    
    
    $
    (4,541
    )
    
    
    (13.2
    )%CL Net premiums earned
    
    $
    28,365
    
    
    $
    27,854
    
    
    $
    511
    
    
    
    1.8
    %CL Loss/ LAE expense ratio (GAAP)
    
    
    56.7
    %
    
    
    61.6
    %
    
    
    (4.9
    )%CL Expense ratio (GAAP)
    
    
    37.4
    %
    
    
    34.2
    %
    
    
    3.2
    %CL Combined ratio (GAAP)
    
    
    94.1
    %
    
    
    95.8
    %
    
    
    (1.7
    )%
  23




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##### Table of Contents



2007 vs. 2006 Personal Lines (PL)
    
    2007
    
    2006
    
    Change
    
    % Change(Dollars in thousands)PL Direct premiums written
    
    $
    5,171
    
    
    $
    5,533
    
    
    $
    (362
    )
    
    
    (6.5
    )%PL Net premiums written
    
    $
    4,828
    
    
    $
    5,182
    
    
    $
    (354
    )
    
    
    (6.8
    )%PL Net premiums earned
    
    $
    5,623
    
    
    $
    5,683
    
    
    $
    (60
    )
    
    
    (1.1
    )%PL Loss/ LAE expense ratio (GAAP)
    
    
    83.8
    %
    
    
    61.4
    %
    
    
    22.4
    %PL Expense ratio (GAAP)
    
    
    36.0
    %
    
    
    38.6
    %
    
    
    (2.6
    )%PL Combined ratio (GAAP)
    
    
    119.8
    %
    
    
    100.0
    %
    
    
    19.8
    %
    24




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##### Table of Contents



2007 vs. 2006 Expenses and Expense Ratio
    
    2007
    
    2006
    
    Change
    
    % Change(Dollars in thousands)Amortization of Deferred Acquisition
Costs
    
    $
    8,777
    
    
    $
    7,292
    
    
    $
    1,485
    
    
    
    20.4
    %As a % of net premiums earned
    
    
    25.8
    %
    
    
    21.7
    %
    
    
    4.1
    %Other underwriting expenses
    
    
    3,854
    
    
    
    4,434
    
    
    
    (580
    )
    
    
    (13.1
    )%Total expenses
excluding losses/
LAE
    
    $
    12,631
    
    
    $
    11,726
    
    
    $
    905
    
    
    
    7.7
    %Underwriting expense ratio
    
    
    37.2
    %
    
    
    34.8
    %
    
    
    2.4
    %
   2007 vs. 2006 Income Taxes
    
    2007
    
    2006
    
    Change
    
    % Change(Dollars in thousands)Income before income
taxes
    
    $
    3,561
    
    
    $
    3,756
    
    
    $
    (195
    )
    
    
    (5.2
    )%Income taxes
    
    
    1,008
    
    
    
    1,106
    
    
    
    (98
    )
    
    
    (8.9
    )%Net income
    
    $
    2,553
    
    
    $
    2,650
    
    
    $
    (97
    )
    
    
    (3.7
    )%Effective tax rate
    
    
    28.3
    %
    
    
    29.4
    %
    
    
    (1.1
    )%
  LIQUIDITY AND CAPITAL RESOURCES
    25




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##### Table of Contents



26




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##### Table of Contents



IMPACT OF INFLATION
   OFF BALANCE SHEET COMMITMENTS AND CONTRACTUAL OBLIGATIONS
   27




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
 General.
 Interest Rate Risk.
 Credit Risk.
 Equity Risk.
  
 Item 4. Controls and Procedures
  
 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
  28




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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)
 29




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##### Table of Contents



SIGNATURES
  MERCER INSURANCE GROUP, INC. (Registrant)Dated: May 10, 2007
    By:
    /s/ Andrew R. SpeakerAndrew R. Speaker,President and Chief Executive OfficerDated: May 10, 2007
    By:
    /s/ David B. MercleanDavid B. Merclean,Senior Vice President and Chief Financial Officer 30