##### 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 June 30, 2005,
or
 Transition
report pursuant to Section 13 or 15(d) Of the Exchange
Act
 for
the Transition Period from ______________ to ______________
 No. 000-25425
 
 (Commission File
Number)
 MERCER INSURANCE GROUP, INC.
  PENNSYLVANIA
    
    23-2934601(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 10 North Highway 31, P.O. Box 278, Pennington, NJ
    
    08534(Address of principal executive offices)
    
    (Zip Code)
  
  
  þ o
 þ o
  Number of Shares Outstanding as of July 21,2005COMMON STOCK (No Par Value)
    
    6,556,670(Title of Class)
    
    (Outstanding Shares)




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TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATION
    
    
    4Item 1. Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    15Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    32Item 4. Controls and Procedures
    
    32PART II.OTHER INFORMATION
    
    33Item 1. Legal Proceedings
    
    33Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    33Item 3. Defaults Upon Senior Securities
    
    33Item 4. Submission of Matters to a Vote of Security Holders
    
    33Item 5. Other Information
    
    33Item 6. Exhibits
    
    34SIGNATURES
    
    34Exhibits:CERTIFICATION OF CHIEF EXECUTIVE OFFICERCERTIFICATION OF CHIEF FINANCIAL OFFICERCERTIFICATION OF CEO IN ACCORDANCE WITH SECTION 906CERTIFICATION OF CFO IN ACCORDANCE WITH SECTION 906
  Exhibit No.
    
    Title3.1
    
    Articles of Incorporation of Mercer Insurance Group, Inc.
(incorporated by reference herein to the Companys
Pre-effective Amendment No. 3 on Form S-1, SEC File No.
333-104897.)3.2
    
    Bylaws of Mercer Insurance Group, Inc. (incorporated by
reference herein to the Companys Annual Report on Form 10-K,
SEC File No. 000-25425, for the fiscal year ended December 31,
2003.)31.1
    
    Certification of Chief Executive Officer in accordance with
Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer in accordance with
Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer in accordance with
Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer in accordance with
Section 906 of the Sarbanes-Oxley Act of 2002




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Forward-looking Statements
   
    
    future economic conditions in the regional and national markets in which the
Company competes which are less favorable than expected;
    
    the effects of weather-related and other catastrophic events;
    
    the concentration of insured accounts in New Jersey and Pennsylvania;
    
    the effect of legislative, judicial, economic, demographic and regulatory events
in the two states in which we do business;
    
    the continuation of an A.M. Best rating in the Excellent category;
    
    the ability to enter new markets successfully and capitalize on growth
opportunities either through acquisitions or the expansion of our producer network;
    
    the ability to obtain regulatory approval for an acquisition,
to close the transaction, and to successfully integrate an
acquisition and its operations.
    
    financial market conditions, including, but not limited to, changes in interest
rates and the stock markets causing a reduction of investment income or investment
gains, an acceleration of the amortization of deferred policy acquisition costs,
reduction in the value of our investment portfolio or a reduction in the demand for
our products;
    
    the impact of acts of terrorism and acts of war;
    
    the effects of terrorist related insurance legislation and laws;
    
    inflation;
    
    the cost, availability and collectibility of reinsurance;
    
    estimates and adequacy of loss reserves and trends in losses and loss adjustment expenses;
    
    heightened competition, including specifically the intensification of price
competition, the entry of new competitors and the development of new products by new
and existing competitors;
    
    changes in the coverage terms selected by insurance customers, including higher
deductibles and lower limits;
 2




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
    
    our inability to obtain regulatory approval of, or to implement, premium rate
increases;
    
    the potential impact on our reported net income that could result from the
adoption of future accounting standards issued by the Financial Accounting Standards
Board or other standard-setting bodies;
    
    inability to carry out marketing and sales plans, including, among others,
development of new products or changes to existing products and acceptance of the new
or revised products in the market;
    
    unanticipated changes in industry trends and ratings assigned by nationally
recognized rating organizations;
    
    adverse litigation or arbitration results;
    
    the ability to carry out our business plans; or
    
    adverse changes in applicable laws, regulations or rules governing insurance
holding companies and insurance companies, and environmental, tax or accounting
matters including limitations on premium levels, increases in minimum capital and
reserves, and other financial viability requirements, and changes that affect the
cost of, or demand for our products.
  3




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##### Table of Contents



Part I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED BALANCE SHEET
 June 30,
    
    December 31,2005
    
    2004(Dollars in thousands)(Unaudited)ASSETSInvestments:Fixed income securities, available-for-sale, at fair value (amortized cost of
$81,162 and $101,102, respectively)
    
    $
    80,593
    
    
    $
    100,657Equity securities, at fair value (cost of $14,941 and $16,145, respectively)
    
    
    21,855
    
    
    
    24,447Short-term investments, at cost, which approximates fair value
    
    
    22,486
    
    
    
    Total investments
    
    
    124,934
    
    
    
    125,104Cash and cash equivalents
    
    
    10,000
    
    
    
    16,289Premiums receivable
    
    
    12,212
    
    
    
    11,217Reinsurance receivables
    
    
    3,105
    
    
    
    2,534Prepaid reinsurance premiums
    
    
    1,578
    
    
    
    1,573Deferred policy acquisition costs
    
    
    8,307
    
    
    
    8,014Accrued investment income
    
    
    800
    
    
    
    1,044Property and equipment, net
    
    
    9,698
    
    
    
    9,718Goodwill
    
    
    4,673
    
    
    
    4,673Other assets
    
    
    1,568
    
    
    
    1,112Total assets
    
    $
    176,875
    
    
    $
    181,278LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Losses and loss adjustment expenses
    
    $
    35,678
    
    
    $
    36,028Unearned premiums
    
    
    33,978
    
    
    
    34,007Accounts payable and accrued expenses
    
    
    5,122
    
    
    
    7,739Other reinsurance balances
    
    
    982
    
    
    
    861Other liabilities
    
    
    1,605
    
    
    
    1,089Deferred income taxes
    
    
    538
    
    
    
    1,146Total liabilities
    
    
    77,903
    
    
    
    80,870Stockholders Equity:Preferred stock, no par value, authorized 5,000,000 shares, no shares issued
and outstanding
    
    
    
    
    
    
    Common stock, no par value, authorized 15,000,000 shares, issued 7,058,233
shares, outstanding 6,431,975 and 6,344,844 shares
    
    
    
    
    
    
    Additional paid-in capital
    
    
    67,716
    
    
    
    67,651Accumulated other comprehensive income:Unrealized gains in investments, net of deferred income taxes
    
    
    4,188
    
    
    
    5,186Retained earnings
    
    
    39,934
    
    
    
    37,876Unearned restricted stock compensation
    
    
    (1,884
    )
    
    
    (2,242
    )Unearned ESOP shares
    
    
    (4,698
    )
    
    
    (5,009
    )Treasury stock, at cost, 501,563 and 256,500 shares
    
    
    (6,284
    )
    
    
    (3,054
    )Total stockholdersequity
    
    
    98,972
    
    
    
    100,408Total liabilities and stockholders equity
    
    $
    176,875
    
    
    $
    181,278
  4




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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Six Months Ended June 30, 2005 and 2004
 2005
    
    2004(Dollars in thousands, exceptshares and per share data)(Unaudited)Revenue:Net premiums earned
    
    $
    29,975
    
    
    $
    27,585Investment income, net of expenses
    
    
    1,484
    
    
    
    1,294Net realized investment gains
    
    
    97
    
    
    
    99Other revenue
    
    
    172
    
    
    
    180Total revenue
    
    
    31,728
    
    
    
    29,158Expenses:Losses and loss adjustment expenses
    
    
    15,034
    
    
    
    14,930Amortization of deferred policy acquisition costs (related party amounts of
$634 and $663, respectively)
    
    
    7,801
    
    
    
    7,642Other expenses
    
    
    6,021
    
    
    
    4,839Total expenses
    
    
    28,856
    
    
    
    27,411Income before income taxes
    
    
    2,872
    
    
    
    1,747Income taxes
    
    
    814
    
    
    
    447Net income
    
    $
    2,058
    
    
    $
    1,300Earnings per common share:Basic
    
    $
    0.35
    
    
    $
    0.21Diluted
    
    $
    0.33
    
    
    $
    0.21Weighted average shares:Basic
    
    
    5,939,968
    
    
    
    6,297,886Diluted
    
    
    6,172,231
    
    
    
    6,315,606
  5




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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended June 30, 2005 and 2004
 2005
    
    2004(Dollars in thousands, exceptshares and per share data)(Unaudited)Revenue:Net premiums earned
    
    $
    14,862
    
    
    $
    13,723Investment income, net of expenses
    
    
    740
    
    
    
    626Net realized investment gains
    
    
    80
    
    
    
    196Other revenue
    
    
    87
    
    
    
    88Total revenue
    
    
    15,769
    
    
    
    14,633Expenses:Losses and loss adjustment expenses
    
    
    7,312
    
    
    
    6,607Amortization of deferred policy acquisition costs (related party amounts of
$316 and $346, respectively)
    
    
    3,902
    
    
    
    3,779Other expenses
    
    
    3,063
    
    
    
    2,769Total expenses
    
    
    14,277
    
    
    
    13,155Income before income taxes
    
    
    1,492
    
    
    
    1,478Income taxes
    
    
    427
    
    
    
    407Net income
    
    $
    1,065
    
    
    $
    1,071Earnings per common share:Basic
    
    $
    0.18
    
    
    $
    0.17Diluted
    
    $
    0.17
    
    
    $
    0.17Weighted average shares:Basic
    
    
    5,877,160
    
    
    
    6,305,669Diluted
    
    
    6,101,548
    
    
    
    6,341,109
  6




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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
Six months ended June 30, 2005
(Unaudited, dollars in thousands)
 AccumulatedAdditional
    
    other
    
    
    
    
    
    UnearnedPreferred
    
    Common
    
    paid-in
    
    comprehensive
    
    Retained
    
    restricted stock
    
    Unearned
    
    Treasurystock
    
    stock
    
    capital
    
    income
    
    Earnings
    
    compensation
    
    ESOP shares
    
    stock
    
    TotalBalance, December 31, 2004
    
    $
    
    
    
    
    
    
    
    
    67,651
    
    
    
    5,186
    
    
    
    37,876
    
    
    
    (2,242
    )
    
    
    (5,009
    )
    
    
    (3,054
    )
    
    $
    100,408Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,058
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,058Unrealized
losses on securities:Unrealized holding losses
arising during period, net
of related income tax
benefit of $481
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (934
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (934
    )Less reclassification
adjustment for (gains)
included in net income, net
of related income tax
expense of $33
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (64
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (64
    )Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (998
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,060Forfeiture of restricted stock grant
    
    
    
    
    
    
    
    
    
    
    (92
    )
    
    
    
    
    
    
    
    
    
    
    92
    
    
    
    
    
    
    
    
    
    
    
    Unearned restricted stock
compensation
    
    
    
    
    
    
    
    
    
    
    64
    
    
    
    
    
    
    
    
    
    
    
    (64
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of restricted stock
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    330
    
    
    
    
    
    
    
    
    
    
    
    330ESOP shares committed
    
    
    
    
    
    
    
    
    
    
    93
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    311
    
    
    
    
    
    
    
    404Treasury stock purchased
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,230
    )
    
    
    (3,230
    )Balance, June 30, 2005
    
    $
    
    
    
    
    
    
    
    
    67,716
    
    
    
    4,188
    
    
    
    39,934
    
    
    
    (1,884
    )
    
    
    (4,698
    )
    
    
    (6,284
    )
    
    $
    98,972
  7




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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2005 and 2004
 2005
    
    2004(Dollars in thousands)(Unaudited)Cash flows from operating activities:Net income
    
    $
    2,058
    
    
    $
    1,300Adjustments to reconcile net income to net cash provided (used) by operating
activities:Depreciation and amortization of fixed assets
    
    
    849
    
    
    
    694Net amortization of premium or (accretion of discount)
    
    
    287
    
    
    
    (69
    )Amortization of restricted stock compensation
    
    
    330
    
    
    
    33ESOP share commitment
    
    
    404
    
    
    
    395Net realized investment gains
    
    
    (97
    )
    
    
    (99
    )Deferred income tax
    
    
    (93
    )
    
    
    (77
    )Change in assets and liabilities:Premiums receivable
    
    
    (995
    )
    
    
    (1,067
    )Reinsurance receivables
    
    
    (571
    )
    
    
    1,731Prepaid reinsurance premiums
    
    
    (5
    )
    
    
    (93
    )Deferred policy acquisition costs
    
    
    (293
    )
    
    
    (360
    )Other assets
    
    
    (212
    )
    
    
    (353
    )Losses and loss adjustment expenses
    
    
    (350
    )
    
    
    671Unearned premiums
    
    
    (29
    )
    
    
    1,280Other
    
    
    (1,980
    )
    
    
    (1,751
    )Net cash (used) provided by operating activities
    
    
    (697
    )
    
    
    2,235Cash flows from investing activities:Purchase of fixed income securities, available-for- sale
    
    
    (9,841
    )
    
    
    (67,173
    )Purchase of equity securities
    
    
    (908
    )
    
    
    (1,593
    )Sale and maturity of fixed income securities, available-for-sale
    
    
    29,083
    
    
    
    22,814Sale of equity securities
    
    
    2,618
    
    
    
    1,973(Purchase) sale of short-term investments, net
    
    
    (22,486
    )
    
    
    38,601Purchase of property and equipment, net
    
    
    (828
    )
    
    
    (2,816
    )Net cash used by investing activities
    
    
    (2,362
    )
    
    
    (8,194
    )Cash flows from financing activities:Purchase of treasury stock
    
    
    (3,230
    )
    
    
    Net cash used by financing activities
    
    
    (3,230
    )
    
    
    Net decrease in cash and cash equivalents
    
    
    (6,289
    )
    
    
    (5,959
    )Cash and cash equivalents at beginning of period
    
    
    16,289
    
    
    
    15,350Cash and cash equivalents at end of period
    
    $
    10,000
    
    
    $
    9,391Cash paid during the period for:Interest
    
    $
    21
    
    
    $
    19Income taxes
    
    $
    1,050
    
    
    $
    
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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
 Basis of Presentation
      9




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Six months endedJune 30,
    
    June 30,2005
    
    2004(In thousands,except per share data)Net income, as reported
    
    $
    2,058
    
    
    $
    1,300Plus: Stock-based employee compensation expense included in
reported net income, net of related tax effects
    
    
    218
    
    
    
    22Less: Total stock-based employee compensation expense
determined under fair value based method for all awards, net of
related tax effects
    
    
    (461
    )
    
    
    (44
    )Pro forma net income
    
    $
    1,815
    
    
    $
    1,278Basic earnings per share:As reported
    
    $
    0.35
    
    
    $
    0.21Pro forma
    
    $
    0.31
    
    
    $
    0.20Diluted earnings per share:As reported
    
    $
    0.33
    
    
    $
    0.21Pro forma
    
    $
    0.29
    
    
    $
    0.20
 Three months endedJune 30,
    
    June 30,2005
    
    2004(In thousands,except per share data)Net income, as reported
    
    $
    1,065
    
    
    $
    1,071Plus: Stock-based employee compensation expense included in
reported net income, net of related tax effects
    
    
    113
    
    
    
    22Less: Total stock-based employee compensation expense
determined under fair value based method for all awards, net of
related tax effects
    
    
    (228
    )
    
    
    (44
    )Pro forma net income
    
    $
    950
    
    
    $
    1,049Basic earnings per share:As reported
    
    $
    0.18
    
    
    $
    0.17Pro forma
    
    $
    0.16
    
    
    $
    0.17Diluted earnings per share:As reported
    
    $
    0.17
    
    
    $
    0.17Pro forma
    
    $
    0.16
    
    
    $
    0.17
  10




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Segment Information
     Six Months Ended June 302005
    
    2004(In thousands)Revenues:Net premiums earned:Commercial lines
    
    $
    18,657
    
    
    $
    15,855Personal lines
    
    
    11,318
    
    
    
    11,730Total net premiums earned
    
    
    29,975
    
    
    
    27,585Net investment income
    
    
    1,484
    
    
    
    1,294Realized investment gains
    
    
    97
    
    
    
    99Other
    
    
    172
    
    
    
    180Total revenues
    
    
    31,728
    
    
    
    29,158Income before income taxes:Underwriting income (loss):Commercial lines
    
    
    1,644
    
    
    
    3,504Personal lines
    
    
    (525
    )
    
    
    (3,330
    )Total underwriting income
    
    
    1,119
    
    
    
    174Net investment income
    
    
    1,484
    
    
    
    1,294Realized investment gains
    
    
    97
    
    
    
    99Other
    
    
    172
    
    
    
    180Income before income taxes
    
    $
    2,872
    
    
    $
    1,747
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Three Months Ended June 302005
    
    2004(In thousands)Revenues:Net premiums earned:Commercial lines
    
    $
    9,476
    
    
    $
    7,830Personal lines
    
    
    5,386
    
    
    
    5,893Total net premiums earned
    
    
    14,862
    
    
    
    13,723Net investment income
    
    
    740
    
    
    
    626Realized investment gains
    
    
    80
    
    
    
    196Other
    
    
    87
    
    
    
    88Total revenues
    
    
    15,769
    
    
    
    14,633Income before income taxes:Underwriting income (loss):Commercial lines
    
    
    1,004
    
    
    
    1,262Personal lines
    
    
    (419
    )
    
    
    (694
    )Total underwriting income
    
    
    585
    
    
    
    568Net investment income
    
    
    740
    
    
    
    626Realized investment gains
    
    
    80
    
    
    
    196Other
    
    
    87
    
    
    
    88Income before income taxes
    
    $
    1,492
    
    
    $
    1,478
 Reinsurance
  Comprehensive Income
  Six Months endedJune 302005
    
    2004(In thousands)Net income
    
    $
    2,058
    
    
    $
    1,300Other comprehensive income, net of tax:Unrealized losses on securities:Unrealized holding losses arising during period, net of related
income tax benefit of $481, and $586
    
    
    (934
    )
    
    
    (1,138
    )Less reclassification adjustment for gains included in net income, net
of related income tax expense of $33 and $34
    
    
    (64
    )
    
    
    (65
    )(998
    )
    
    
    (1,203
    )Comprehensive Income
    
    $
    1,060
    
    
    $
    97
 12




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Three Months endedJune 302005
    
    2004(In thousands)Net income
    
    $
    1,065
    
    
    $
    1,071Other comprehensive income, net of tax:Unrealized gains on securities:Unrealized holding gains (losses) arising during period, net of related
income tax (expense) benefit of $(290), and $950
    
    
    563
    
    
    
    (1,844
    )Less reclassification adjustment for gains included in net income, net
of related income tax expense of $27 and $67
    
    
    (52
    )
    
    
    (130
    )511
    
    
    
    (1,974
    )Comprehensive Income (loss)
    
    $
    1,576
    
    
    $
    (903
    )
 Stock-based Compensation
   13




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Weighted AverageNumber
    
    Exercise Priceof shares
    
    Per ShareOutstanding at December 31, 2004
    
    
    537,700
    
    
    $
    12.21Granted  2005
    
    
    15,000
    
    
    
    12.80Exercised  2005
    
    
    0
    
    
    
    0.00Forfeited  2005
    
    
    18,500
    
    
    
    12.21Outstanding at June 30, 2005
    
    
    534,200
    
    
    $
    12.23Exercisable at:June 30, 2005
    
    
    162,267
    
    
    $
    12.21Weighted-average remaining contractual life
    
    9.0 years
   Earnings per Share
  Six months endedJune 30,2005
    
    2004(Dollars in thousands, except per share data)Numerator for basic and diluted earnings per share:Net income
    
    $
    2,058
    
    
    
    1,300Denominator for basic earnings per share 
weighted-average shares outstanding
    
    
    5,939,968
    
    
    
    6,297,886Effect of stock incentive plans
    
    
    232,263
    
    
    
    17,720Denominator for diluted earnings per share
    
    
    6,172,231
    
    
    
    6,315,606Basic earnings per share
    
    $
    0.35
    
    
    $
    0.21Diluted earnings per share
    
    $
    0.33
    
    
    $
    0.21
 14




---



##### Table of Contents



Three months endedJune 30,2005
    
    2004(Dollars in thousands, except per share data)Numerator for basic and diluted earnings per share:Net income
    
    $
    1,065
    
    
    
    1,071Denominator for basic earnings per share 
weighted-average shares outstanding
    
    
    5,877,160
    
    
    
    6,305,669Effect of stock incentive plans
    
    
    224,388
    
    
    
    35,440Denominator for diluted earnings per share
    
    
    6,101,548
    
    
    
    6,341,109Basic earnings per share
    
    $
    0.18
    
    
    $
    0.17Diluted earnings per share
    
    $
    0.17
    
    
    $
    0.17
 Acquisitions
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
 THE CONVERSION TRANSACTION AND THE HOLDING COMPANY
  Our Business
  
    
    Mercer Insurance Company, a Pennsylvania property and casualty stock insurance
company offering insurance coverage to businesses and individuals in New Jersey and
Pennsylvania,
 15




---



##### Table of Contents




    
    Mercer Insurance Company of New Jersey, Inc., a New Jersey property and casualty
stock insurance company offering insurance coverage to businesses and individuals in
New Jersey; and
    
    Franklin Insurance Company, a property and casualty stock insurance company
offering private passenger automobile and homeowners insurance to individuals located
in Pennsylvania.
     16




---



##### Table of Contents



Critical Accounting Policies
 General.
 Liabilities for Loss and Loss Adjustment Expenses.
   17




---



##### Table of Contents



Adjustment
    
    
    
    
    
    
    
    
    
    Adjusted Loss andChange in Loss and
    
    Adjusted Loss and
    
    Percentage Change in
    
    Loss
    
    Percentage ChangeLoss Adjustment
    
    Loss Reserves Net of
    
    Stockholders
    
    Adjustment Reserves
    
    in StockholdersReserves Net of
    
    Reinsurance as of
    
    Equity as
    
    Net of Reinsurance as of
    
    Equity as ofReinsurance
    
    June 30, 2005
    
    of June 30, 2005(1)
    
    December 31, 2004
    
    December 31, 2004 (1)(Dollars in thousands)(10.0
    )%
    
    
    29,457
    
    
    
    2.2
    %
    
    
    29,669
    
    
    
    2.2
    %(7.5
    )%
    
    
    30,276
    
    
    
    1.6
    %
    
    
    30,493
    
    
    
    1.6
    %(5.0
    )%
    
    
    31,094
    
    
    
    1.1
    %
    
    
    31,317
    
    
    
    1.1
    %(2.5
    )%
    
    
    31,912
    
    
    
    0.5
    %
    
    
    32,141
    
    
    
    0.5
    %Base
    
    
    
    32,730
    
    
    
    
    
    
    
    32,965
    
    
    
    2.5
    %
    
    
    33,549
    
    
    
    (0.5
    )%
    
    
    33,789
    
    
    
    (0.5
    )%5.0
    %
    
    
    34,367
    
    
    
    (1.1
    )%
    
    
    34,613
    
    
    
    (1.1
    )%7.5
    %
    
    
    35,185
    
    
    
    (1.6
    )%
    
    
    35,437
    
    
    
    (1.6
    )%10.0
    %
    
    
    36,003
    
    
    
    (2.2
    )%
    
    
    36,262
    
    
    
    (2.2
    )%
 
 (1)
    
    Net of tax   June 30, 2005
    
    December 31, 2004(Dollars in thousands)Commercial lines:Other Liability
    
    $
    9,694
    
    
    $
    9,374Commercial multi-peril
    
    
    6,515
    
    
    
    5,441Workers compensation
    
    
    4,825
    
    
    
    4,627Commercial automobile
    
    
    1,295
    
    
    
    1,456Fire, allied, inland marine
    
    
    702
    
    
    
    78123,031
    
    
    
    21,679Personal lines:Homeowners
    
    
    9,030
    
    
    
    10,095Personal automobile
    
    
    2,109
    
    
    
    2,283Other liability
    
    
    1,136
    
    
    
    1,596Fire, allied, inland marine
    
    
    282
    
    
    
    338Workers compensation
    
    
    90
    
    
    
    3712,647
    
    
    
    14,349Total
    
    $
    35,678
    
    
    $
    36,028
 Investments.
 18




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##### Table of Contents



Policy Acquisition Costs.
 Reinsurance.
  19




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##### Table of Contents



Income Taxes.
 Results of Operations
   Six months and three months ended June 30, 2005 compared to six months and three months ended June
30, 2004.
  Six months ended June 30,2005 vs. 2004 Income(Dollars in thousands)
    
    2005
    
    2004
    
    Change
    
    % ChangeCommercial lines underwriting income
    
    $
    1,644
    
    
    $
    3,504
    
    
    $
    (1,860
    )
    
    
    (53.1
    )%Personal lines underwriting loss
    
    
    (525
    )
    
    
    (3,330
    )
    
    
    2,805
    
    
    
    84.2
    %Total underwriting income
    
    
    1,119
    
    
    
    174
    
    
    
    945
    
    
    
    543.1
    %Net investment income
    
    
    1,484
    
    
    
    1,294
    
    
    
    190
    
    
    
    14.7
    %Realized investment gains
    
    
    97
    
    
    
    99
    
    
    
    (2
    )
    
    
    (2.0
    )%Other revenue
    
    
    172
    
    
    
    180
    
    
    
    (8
    )
    
    
    (4.4
    )%Income before income taxes
    
    
    2,872
    
    
    
    1,747
    
    
    
    1,125
    
    
    
    64.4
    %Income taxes
    
    
    814
    
    
    
    447
    
    
    
    367
    
    
    
    82.1
    %Net income
    
    $
    2,058
    
    
    $
    1,300
    
    
    $
    758
    
    
    
    58.3
    %Loss / LAE ratio (GAAP)
    
    
    50.2
    %
    
    
    54.1
    %
    
    
    (3.9
    )%Underwriting expense ratio (GAAP)
    
    
    46.1
    %
    
    
    45.3
    %
    
    
    0.8
    %Combined ratio (GAAP)
    
    
    96.3
    %
    
    
    99.4
    %
    
    
    (3.1
    )%Loss / LAE ratio (Statutory)
    
    
    50.2
    %
    
    
    54.2
    %
    
    
    (4.0
    )%Underwriting expense ratio (Statutory)
    
    
    45.0
    %
    
    
    43.6
    %
    
    
    1.4
    %Combined ratio (Statutory)
    
    
    95.2
    %
    
    
    97.8
    %
    
    
    (2.6
    )%
 20




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##### Table of Contents



Three months ended June 30,2005 vs. 2004 Income(Dollars in thousands)
    
    2005
    
    2004
    
    Change
    
    % ChangeCommercial lines underwriting income
    
    $
    1,004
    
    
    $
    1,262
    
    
    $
    (258
    )
    
    
    (20.4
    )%Personal lines underwriting loss
    
    
    (419
    )
    
    
    (694
    )
    
    
    275
    
    
    
    39.6
    %Total underwriting income
    
    
    585
    
    
    
    568
    

    
    
    17
    
    
    
    2.9
    %Net investment income
    
    
    740
    
    
    
    626
    
    
    
    114
    
    
    
    18.2
    %Realized investment gains
    
    
    80
    
    
    
    196
    
    
    
    (116
    )
    
    
    (59.2
    )%Other revenue
    
    
    87
    
    
    
    88
    
    
    
    (1
    )
    
    
    (1.1
    )%Income before income taxes
    
    
    1,492
    
    
    
    1,478
    
    
    
    14
    
    
    
    0.9
    %Income taxes
    
    
    427
    
    
    
    407
    
    
    
    20
    
    
    
    4.9
    %Net income
    
    $
    1,065
    
    
    $
    1,071
    
    
    $
    (6
    )
    
    
    (0.6
    )%Loss / LAE ratio (GAAP)
    
    
    49.2
    %
    
    
    48.2
    %
    
    
    1.0
    %Underwriting expense ratio (GAAP)
    
    
    46.9
    %
    
    
    47.7
    %
    
    
    (0.8
    )%Combined ratio (GAAP)
    
    
    96.1
    %
    
    
    95.9
    %
    
    
    0.2
    %Loss / LAE ratio (Statutory)
    
    
    49.2
    %
    
    
    48.2
    %
    
    
    1.0
    %Underwriting expense ratio (Statutory)
    
    
    43.4
    %
    
    
    45.5
    %
    
    
    (2.1
    )%Combined ratio (Statutory)
    
    
    92.6
    %
    
    
    93.7
    %
    
    
    (1.1
    )%
    21




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##### Table of Contents



Six months ended June 30,2005 vs. 2004 Revenue(Dollars in thousands)
    
    2005
    
    2004
    
    Change
    
    % ChangeDirect premiums written
    
    $
    32,735
    
    
    $
    32,239
    
    
    $
    496
    
    
    
    1.5
    %Net premiums written
    
    
    29,941
    
    
    
    28,773
    
    
    
    1,168
    
    
    
    4.1
    %Net premiums earned
    
    
    29,975
    
    
    
    27,585
    
    
    
    2,390
    
    
    
    8.7
    %Net investment income
    
    
    1,484
    
    
    
    1,294
    
    
    
    190
    
    
    
    14.7
    %Realized investment gains
    
    
    97
    
    
    
    99
    
    
    
    (2
    )
    
    
    (2.0
    )%Other Revenue
    
    
    172
    
    
    
    180
    
    
    
    (8
    )
    
    
    (4.4
    )%Total Revenue
    
    $
    31,728
    
    
    $
    29,158
    
    
    $
    2,570
    
    
    
    8.8
    %
 Three months ended June 30,2005 vs. 2004 Revenue(Dollars in thousands)
    
    2005
    
    2004
    
    Change
    
    % ChangeDirect premiums written
    
    $
    18,495
    
    
    $
    17,906
    
    
    $
    589
    
    
    
    3.3
    %Net premiums written
    
    
    16,780
    
    
    
    15,854
    
    
    
    926
    
    
    
    5.8
    %Net premiums earned
    
    
    14,862
    
    
    
    13,723
    
    
    
    1,139
    
    
    
    8.3
    %Net investment income
    
    
    740
    
    
    
    626
    
    
    
    114
    
    
    
    18.2
    %Realized investment gains
    
    
    80
    
    
    
    196
    
    
    
    (116
    )
    
    
    (59.2
    )%Other Revenue
    
    
    87
    
    
    
    88
    
    
    
    (1
    )
    
    
    (1.1
    )%Total Revenue
    
    $
    15,769
    
    
    $
    14,633
    
    
    $
    1,136
    
    
    
    7.8
    %
    22




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##### Table of Contents



Six months ended June 30,2005 vs. 2004 Investment income andrealized gains(Dollars in thousands)
    
    2005
    
    2004
    
    Change
    
    % ChangeFixed income securities
    
    $
    1,845
    
    
    $
    1,641
    
    
    $
    204
    
    
    
    12.4
    %Dividends
    
    
    209
    
    
    
    203
    
    
    
    6
    
    
    
    3.0
    %Cash, cash equivalents & other
    
    
    260
    
    
    
    169
    
    
    
    91
    
    
    
    53.8
    %Gross investment income
    
    
    2,314
    
    
    
    2,013
    
    
    
    301
    
    
    
    15.1
    %Investment expenses
    
    
    (830
    )
    
    
    (719
    )
    
    
    111
    
    
    
    15.4
    %Net investment income
    
    $
    1,484
    
    
    $
    1,294
    
    
    $
    190
    
    
    
    14.7
    %Realized losses on fixed income
    
    $
    (410
    )
    
    $
    (108
    )
    
    $
    (302
    )
    
    NM %Realized gains on equities
    
    
    507
    
    
    
    207
    
    
    
    300
    
    
    NM %Net realized gains
    
    $
    97
    
    
    $
    99
    
    
    $
    (2
    )
    
    NM%
 
 (N/M means not meaningful)     23




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FairPERIOD OF TIME IN AN
    
    Value on
    
    RealizedUNREALIZED LOSS POSITION
    
    Sale Date
    
    Loss(In thousands)0-6 months
    
    $
    725
    
    
    $
    987-12 months
    
    
    
    
    
    
    More than 12 months
    
    
    
    
    
    
    Total
    
    $
    725
    
    
    $
    98
   Length of Unrealized LossFair
    
    Unrealized
    
    Less than
    
    6 to 12
    
    Over 12June 30, 2005
    
    Value
    
    Losses
    
    6 months
    
    Months
    
    Months(In thousands)Equity securities:Common stocks
    
    $
    2,105
    
    
    $
    136
    
    
    $
    136
    
    
    $
    0
    
    
    $
    0
  Less than 12 Months
    
    12 Months or Longer
    
    TotalEstimated
    
    Unrealized
    
    Estimated
    
    Unrealized
    
    Estimated
    
    UnrealizedFair Value
    
    Losses
    
    Fair Value
    
    Losses
    
    Fair Value
    
    Losses(In thousands)U.S. Treasury securities and
obligations of U.S. government
corporations and agencies
    
    $
    3,688
    
    
    $
    43
    
    
    $
    8,160
    
    
    $
    138
    
    
    $
    11,848
    
    
    $
    181Obligations of states and
political subdivisions
    
    
    2,405
    
    
    
    12
    
    
    
    9,829
    
    
    
    67
    
    
    
    12,234
    
    
    
    79Corporate securities
    
    
    5,170
    
    
    
    47
    
    
    
    5,840
    
    
    
    124
    
    
    
    11,010
    
    
    
    171Mortgage-backed securities
    
    
    13,852
    
    
    
    58
    
    
    
    5,825
    
    
    
    70
    
    
    
    19,677
    
    
    
    128Total fixed maturities
    
    
    25,115
    
    
    
    160
    
    
    
    29,654
    
    
    
    399
    
    
    
    54,769
    
    
    
    559Common stocks
    
    
    2,105
    
    
    
    136
    
    
    
    
    
    
    
    
    
    
    
    2,105
    
    
    
    136Total equity securities
    
    
    2,105
    
    
    
    136
    
    
    
    
    
    
    
    
    
    
    
    2,105
    
    
    
    136Total securities in a temporary
unrealized loss position
    
    $
    27,220
    
    
    $
    296
    
    
    $
    29,654
    
    
    $
    399
    
    
    $
    56,874
    
    
    $
    695
  24




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##### Table of Contents



Six months ended June 30,2005 vs. 2004 Commercial lines (CL)(Dollars in thousands)
    
    2005
    
    2004
    
    Change
    
    % ChangeCL Direct premiums written
    
    $
    21,728
    
    
    $
    20,076
    
    
    $
    1,652
    
    
    
    8.2
    %CL Net premiums written
    
    $
    19,611
    
    
    $
    17,622
    
    
    $
    1,989
    
    
    
    11.3
    %CL Net premiums earned
    
    $
    18,657
    
    
    $
    15,856
    
    
    $
    2,801
    
    
    
    17.7
    %CL Loss / LAE expense ratio (GAAP)
    
    
    42.4
    %
    
    
    29.6
    %
    
    
    12.8
    %CL Expense ratio (GAAP)
    
    
    48.8
    %
    
    
    48.3
    %
    
    
    0.5
    %CL Combined ratio (GAAP)
    
    
    91.2
    %
    
    
    77.9
    %
    
    
    13.3
    %
 Three months ended June 30,2005 vs. 2004 Commercial lines (CL)(Dollars in thousands)
    
    2005
    
    2004
    
    Change
    

%
ChangeCL Direct premiums written
    
    $
    12,794
    
    
    $
    11,432
    
    
    $
    1,362
    
    
    
    11.9
    %CL Net premiums written
    
    $
    11,656
    
    
    $
    9,914
    
    
    $
    1,742
    
    
    
    17.6
    %CL Net premiums earned
    
    $
    9,476
    
    
    $
    7,831
    
    
    $
    1,645
    
    
    
    21.0
    %CL Loss / LAE expense ratio (GAAP)
    
    
    39.3
    %
    
    
    31.3
    %
    
    
    8.0
    %CL Expense ratio (GAAP)
    
    
    50.1
    %
    
    
    52.6
    %
    
    
    (2.5
    )%CL Combined ratio (GAAP)
    
    
    89.4
    %
    
    
    83.9
    %
    
    
    5.5
    %
    25




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##### Table of Contents



Six months ended June 30,2005 vs. 2004 Personal lines (PL)(Dollars in thousands)
    
    2005
    
    2004
    
    Change
    
    % ChangePL Direct premiums written
    
    $
    11,006
    
    
    $
    12,162
    
    
    $
    (1,156
    )
    
    
    (9.5
    )%PL Net premiums written
    
    $
    10,329
    
    
    $
    11,152
    
    
    $
    (823
    )
    
    
    (7.4
    )%PL Net premiums earned
    
    $
    11,318
    
    
    $
    11,730
    
    
    $
    (412
    )
    
    
    (3.5
    )%PL Loss / LAE expense ratio (GAAP)
    
    
    63.0
    %
    
    
    87.2
    %
    
    
    (24.2
    )%PL Expense ratio (GAAP)
    
    
    41.6
    %
    
    
    41.2
    %
    
    
    0.4
    %PL Combined ratio (GAAP)
    
    
    104.6
    %
    
    
    128.4
    %
    
    
    (23.8
    )%
 Three months ended June 30,2005 vs. 2004 Personal lines (PL)(Dollars in thousands)
    
    2005
    
    2004
    
    Change
    
    % ChangePL Direct premiums written
    
    $
    5,701
    
    
    $
    6,473
    
    
    $
    (772
    )
    
    
    (11.9
    )%PL Net premiums written
    
    $
    5,124
    
    
    $
    5,940
    
    
    $
    (816
    )
    
    
    (13.7
    )%PL Net premiums earned
    
    $
    5,386
    
    
    $
    5,892
    
    
    $
    (506
    )
    
    
    (8.6
    )%PL Loss / LAE expense ratio (GAAP)
    
    
    66.7
    %
    
    
    70.5
    %
    
    
    (3.8
    )%PL Expense ratio (GAAP)
    
    
    41.1
    %
    
    
    41.3
    %
    
    
    (0.2
    )%PL Combined ratio (GAAP)
    
    
    107.8
    %
    
    
    111.8
    %
    
    
    (4.0
    )%
  26




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##### Table of Contents



Six months ended June 30,2005 vs. 2004 Expenses and expense ratio(Dollars in thousands)
    
    2005
    
    2004
    
    Change
    
    % ChangeAmortization of DAC
    
    $
    7,801
    
    
    $
    7,642
    
    
    $
    159
    
    
    
    2.1
    %As a % of net premiums earned
    
    
    26.0
    %
    
    
    27.7
    %
    
    
    (1.7
    )%Other underwriting expenses
    
    
    6,021
    
    
    
    4,839
    
    
    
    1,182
    
    
    
    24.4
    %Total expenses excluding losses/LAE
    
    $
    13,822
    
    
    $
    12,481
    
    
    $
    1,341
    
    
    
    10.7
    %Underwriting expense ratio
    
    
    46.1
    %
    
    
    45.3
    %
    
    
    0.8
    %
    
    
    N/M
 
 (N/M means not meaningful)  27




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##### Table of Contents



Six months ended June 30,2005 vs. 2004 Income taxes(Dollars in thousands)
    
    2005
    
    2004
    
    Change
    
    % ChangeIncome before income taxes
    
    $
    2,872
    
    
    $
    1,747
    
    
    $
    1,125
    
    
    
    N/MIncome taxes
    
    
    814
    
    
    
    447
    
    
    
    367
    
    
    
    N/MNet income
    
    $
    2,058
    
    
    $
    1,300
    
    
    $
    758
    
    
    
    N/MEffective tax rate
    
    
    28.3
    %
    
    
    25.6
    %
    
    
    2.7
    %
 
 (N/M means not meaningful)  LIQUIDITY AND CAPITAL RESOURCES
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ACQUISITIONS
     IMPACT OF INFLATION
   OFF BALANCE SHEET COMMITMENTS AND CONTRACTUAL OBLIGATIONS
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
 General.
 Interest Rate Risk.
 Credit Risk.
 Equity Risk.
  
 Item 4. Controls and Procedures
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Part II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 Total Number of
    
    Maximum Number ofShares Purchased as
    
    Shares That May YetPart of Publicly
    
    Be Purchased UnderTotal Number of
    
    Average Price Paid
    
    Announced Plans or
    
    The Plans orPeriod
    
    Shares Purchased
    
    per Share
    
    Programs (Note 1)
    
    Programs (Note 1)April 1-30, 2005
    
    
    0
    
    
    
    N/A
    
    
    
    N/A
    
    
    NoneMay 1-31, 2005
    
    
    0
    
    
    
    N/A
    
    
    
    N/A
    
    
    NoneJune 1-30,
2005 (Note 1)
    
    
    1,563
    
    
    $
    12.80
    
    
    
    0
    
    
    NoneTotal
    
    
    1,563
    
    
    $
    12.80
    
    
    
    0
    
    
    None
 
 Note 1  
    
    1,563 shares of the Companys stock were purchased
from employees in connection with the vesting of restricted stock and
their need to satisfy the related tax withholding obligations. 
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to Vote of Security Holders
  
 Item 5. Other Information
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Item 6. Exhibits
 Exhibits
 Exhibit No.
    
    Title3.1
    
    Articles of Incorporation of Mercer Insurance Group, Inc.
(incorporated by reference herein to the Companys
Pre-effective Amendment No. 3 on Form S-1, SEC File No.
333-104897.)3.2
    
    Bylaws of Mercer Insurance Group, Inc. (incorporated by
reference herein to the Companys Annual Report on Form 10-K,
SEC File No. 000-25425, for the fiscal year ended December 31,
2003.)31.1
    
    Certification of Chief Executive Officer in accordance with
Section 302 of the Sarbanes-Oxley Act of 2002, (filed
herewith)31.2
    
    Certification of Chief Financial Officer in accordance with
Section 302 of the Sarbanes-Oxley Act of 2002, (filed
herewith)32.1
    
    Certification of Chief Executive Officer in accordance with
Section 906 of the Sarbanes-Oxley Act of 2002, (filed
herewith)32.2
    
    Certification of Chief Financial Officer in accordance with
Section 906 of the Sarbanes-Oxley Act of 2002, (filed
herewith)
 
 SIGNATURES
  MERCER INSURANCE GROUP, INC. (Registrant)Dated: August 9, 2005
    
    By:
    
    /s/ Andrew R. SpeakerAndrew R. Speaker,President and Chief Executive OfficerDated: August 9, 2005
    
    By:
    
    /s/ David B. MercleanDavid B. Merclean,Chief Financial Officer
 34