##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 Quarterly Report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
 for the Quarterly Period Ended September 30, 2007,
 or
 Transition report pursuant to Section 13 or 15(d) Of the Exchange Act
 for the Transition Period from  to
 No. 000-25425
 
 (Commission File Number)
 MERCER INSURANCE GROUP, INC.
 
  PENNSYLVANIA
    
    23-2934601(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)10 North Highway 31, P.O. Box 278, Pennington, NJ
    
    08534(Address of principal executive offices)
    
    (Zip Code)
  
  
  þ o
  o þ o
 o þ
  Number of Shares Outstanding as of November 3, 2007COMMON STOCK (No Par Value)
    
    6,558,734(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
    
    
    18Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 4. Controls and Procedures
    
    
    34PART II. OTHER INFORMATION
    
    
    34Item 1. Legal Proceedings
    
    
    34Item 1A. Risk Factors
    
    
    34Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    34Item 3. Defaults Upon Senior Securities
    
    
    34Item 4. Submission of Matters to a Vote of Security Holders
    
    
    35Item 5. Other Information
    
    
    35Item 6. Exhibits
    
    
    35SIGNATURES
    
    
    36Exhibits:
 Exhibit No.
    
    Title3.1
    
    Articles of Incorporation of Mercer Insurance Group, Inc. (incorporated by reference herein to the
Companys Pre-effective Amendment No. 3 on Form S-1, SEC File No. 333-104897.)3.2
    
    Bylaws of Mercer Insurance Group, Inc. (incorporated by reference herein to the Companys Annual Report
on Form 10-K, SEC File No. 000-25425, for the fiscal year ended December 31, 2003.)31.1
    
    Certification of Chief Executive Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002Certification of Chief Executive OfficerCertification of Chief Financial OfficerCertification of Chief Executive Officer in accordance with Section 906Certification of Chief Financial Officer in accordance with Section 906
  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
 September 30,
    
    
    December 31,2007
    
    
    2006(Dollars in thousands)(Unaudited)AssetsInvestments, at fair value:Fixed-income securities, available for
sale, at fair value
(cost $309,289 and $274,769,
respectively)
    
    $
    308,204
    
    
    
    273,454Equity securities, at fair value (cost
$11,115 and $10,940,
respectively)
    
    
    17,351
    
    
    
    16,522Short-term investments, at cost, which
approximates fair value
    
    
    5,743
    
    
    
    7,692Total investments
    
    
    331,298
    
    
    
    297,668Cash and cash
equivalents
    
    
    14,963
    
    
    
    17,618Premiums receivable
    
    
    43,702
    
    
    
    38,030Reinsurance receivables
    
    
    93,217
    
    
    
    87,987Prepaid reinsurance premiums
    
    
    9,935
    
    
    
    16,383Deferred policy acquisition costs
    
    
    21,473
    
    
    
    16,708Accrued investment income
    
    
    3,668
    
    
    
    3,204Property and equipment, net
    
    
    12,152
    
    
    
    11,936Deferred income taxes
    
    
    8,129
    
    
    
    7,775Goodwill
    
    
    5,416
    
    
    
    5,625Other assets
    
    
    3,998
    
    
    
    4,033Total assets
    
    $
    547,951
    
    
    
    506,967Liabilities and EquityLiabilities:Losses and loss adjustment expenses
    
    $
    271,006
    
    
    
    250,455Unearned premiums
    
    
    92,232
    
    
    
    81,930Accounts payable and accrued expenses
    
    
    15,576
    
    
    
    13,442Other reinsurance balances
    
    
    18,504
    
    
    
    24,588Trust preferred securities
    
    
    15,554
    
    
    
    15,542Advances under line of credit
    
    
    3,000
    
    
    
    3,000Other liabilities
    
    
    3,321
    
    
    
    2,171Total liabilities
    
    
    419,193
    
    
    
    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 7,064,233 shares and 7,064,233
shares, outstanding
6,688,146 and 6,582,232 shares
    
    
    
    
    
    
    Additional paid-in capital
    
    
    69,965
    
    
    
    68,473Accumulated other comprehensive income:Unrealized gains in investments,
net of deferred income taxes
    
    
    3,400
    
    
    
    2,815Retained Earnings
    
    
    65,042
    
    
    
    54,629Unearned ESOP shares
    
    
    (3,288
    )
    
    
    (3,757
    )Treasury stock, 505,499 and 503,513 shares
    
    
    (6,361
    )
    
    
    (6,321
    )Total stockholders equity
    
    
    128,758
    
    
    
    115,839Total liabilities and stockholders equity
    
    $
    547,951
    
    
    
    506,967
  5




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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF EARNINGS
Nine Months Ended September 30, 2007 and 2006
 2007
    
    
    2006(Dollars in thousands, exceptper share data)(Unaudited)Revenue:Net premiums earned
    
    $
    106,367
    
    
    
    102,172Investment income, net of expenses
    
    
    9,592
    
    
    
    7,057Net realized investment gains
    
    
    267
    
    
    
    100Other revenue
    
    
    1,494
    
    
    
    1,605Total revenue
    
    
    117,720
    
    
    
    110,934Expenses:Losses and loss adjustment expenses
    
    
    65,398
    
    
    
    64,519Amortization of deferred policy acquisition costs (related party
amounts of $865 and $916, respectively)
    
    
    27,829
    
    
    
    24,187Other expenses
    
    
    7,530
    
    
    
    10,208Interest expense
    
    
    911
    
    
    
    913Total expenses
    
    
    101,668
    
    
    
    99,827Income before income taxes
    
    
    16,052
    
    
    
    11,107Income taxes
    
    
    4,697
    
    
    
    3,368Net income
    
    $
    11,355
    
    
    
    7,739Earnings per common share:Basic
    
    $
    1.85
    
    
    
    1.29Diluted
    
    $
    1.80
    
    
    
    1.25Weighted average shares:Basic
    
    
    6,125,654
    
    
    
    6,006,693Diluted
    
    
    6,318,029
    
    
    
    6,192,731
  6




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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended September 30, 2007 and 2006
 2007
    
    
    2006(Dollars in thousands, exceptper share data)(Unaudited)Revenue:Net premiums earned
    
    $
    37,303
    
    
    
    35,004Investment income, net of expenses
    
    
    2,880
    
    
    
    2,597Net realized investment losses
    
    
    (366
    )
    
    
    (505
    )Other revenue
    
    
    587
    
    
    
    527Total revenue
    
    
    40,404
    
    
    
    37,623Expenses:Losses and loss adjustment expenses
    
    
    22,768
    
    
    
    22,324Amortization of deferred policy acquisition costs (related party
amounts of $287 and $302, respectively)
    
    
    9,870
    
    
    
    9,047Other expenses
    
    
    3,315
    
    
    
    2,721Interest expense
    
    
    300
    
    
    
    312Total expenses
    
    
    36,253
    
    
    
    34,404Income before income taxes
    
    
    4,151
    
    
    
    3,219Income taxes
    
    
    1,139
    
    
    
    1,025Net income
    
    $
    3,012
    
    
    
    2,194Earnings per common share:Basic
    
    $
    0.49
    
    
    
    0.36Diluted
    
    $
    0.47
    
    
    
    0.35Weighted average shares:Basic
    
    
    6,174,842
    
    
    
    6,055,132Diluted
    
    
    6,345,865
    
    
    
    6,265,888
  7




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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
Nine months ended September 30, 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,355
    
    
    
    
    
    
    
    
    
    
    
    11,355Unrealized gains on securities:Unrealized holding gains arising
during period, net of related
income tax of $462
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    897
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    897Less reclassification adjustment for
gains included in net income, net of
related income tax expense of $161
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (312
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (312
    )Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    585Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,940Stock compensation plan
amortization
    
    
    
    
    
    
    
    
    
    
    876
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    876Tax benefit from stock compensation plan
    
    
    
    
    
    
    
    
    
    
    153
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    153ESOP shares committed
    
    
    
    
    
    
    
    
    
    
    423
    
    
    
    
    
    
    
    
    
    
    
    469
    
    
    
    
    
    
    
    892Issuance of common stock
    
    
    
    
    
    
    
    
    
    
    40
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40Treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (40
    )
    
    
    (40
    )Dividends to stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (942
    )
    
    
    
    
    
    
    
    
    
    
    (942
    )Balance, September 30, 2007
    
    $
    
    
    
    
    
    
    
    
    69,965
    
    
    
    3,400
    
    
    
    65,042
    
    
    
    (3,288
    )
    
    
    (6,361
    )
    
    
    128,758
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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2007 and 2006
 2007
    
    
    2006(Dollars in thousands)(Unaudited)Cash flows from operating activities:Net income
    
    $
    11,355
    
    
    
    7,739Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization of fixed assets
    
    
    1,605
    
    
    
    1,834Net amortization of premium
    
    
    938
    
    
    
    758Amortization of restricted stock compensation
    
    
    876
    
    
    
    995ESOP share commitment
    
    
    892
    
    
    
    904Net realized investment gains
    
    
    (267
    )
    
    
    (100
    )Deferred income tax
    
    
    (655
    )
    
    
    (4,490
    )Change in assets and liabilities:Premiums receivable
    
    
    (5,672
    )
    
    
    (6,619
    )Reinsurance receivables
    
    
    (5,230
    )
    
    
    (7,646
    )Prepaid reinsurance premiums
    
    
    6,448
    
    
    
    3,800Deferred policy acquisition costs
    
    
    (4,765
    )
    
    
    (6,971
    )Other assets
    
    
    (424
    )
    
    
    1,079Losses and loss adjustment expenses
    
    
    20,551
    
    
    
    30,676Unearned premiums
    
    
    10,302
    
    
    
    9,766Reinsurance balances payable
    
    
    (6,084
    )
    
    
    5,933Other
    
    
    4,383
    
    
    
    594Net cash provided by operating activities
    
    
    34,253
    
    
    
    38,252Cash flows from investing activities:Purchase of fixed income securities, available for sale
    
    
    (54,057
    )
    
    
    (163,045
    )Purchase of equity securities
    
    
    (2,471
    )
    
    
    (4,468
    )Sale of short-term investments, net
    
    
    1,949
    
    
    
    2,490Sale and maturity of fixed income securities, available for sale
    
    
    17,505
    
    
    
    116,848Sale of equity securities
    
    
    2,777
    
    
    
    2,792Purchase of property and equipment, net
    
    
    (1,822
    )
    
    
    (1,922
    )Net cash used in investing activities
    
    
    (36,119
    )
    
    
    (47,305
    )Cash flows from financing activities:Purchase of treasury stock
    
    
    (40
    )
    
    
    (37
    )Tax benefit from stock compensation plans
    
    
    153
    
    
    
    129Proceeds from issuance of common stock
    
    
    40
    
    
    
    Dividends to stockholders
    
    
    (942
    )
    
    
    (646
    )Net cash used in financing activities
    
    
    (789
    )
    
    
    (554
    )Net decrease in cash and cash equivalents
    
    
    (2,655
    )
    
    
    (9,607
    )Cash and cash equivalents at beginning of period
    
    
    17,618
    
    
    
    20,677Cash and cash equivalents at end of period
    
    $
    14,963
    
    
    
    11,070Cash paid during the period for:Interest
    
    $
    902
    
    
    
    988Income taxes
    
    $
    4,750
    
    
    
    3,400
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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
  10




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Segment Information
     11




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Nine Months Ended September 302007
    
    
    2006(In thousands)Revenues:Net premiums earned:Commercial lines
    
    $
    89,828
    
    
    $
    85,263Personal lines
    
    
    16,539
    
    
    
    16,909Total net premiums earned
    
    
    106,367
    
    
    
    102,172Net investment income
    
    
    9,592
    
    
    
    7,057Net realized investment gains
    
    
    267
    
    
    
    100Other
    
    
    1,494
    
    
    
    1,605Total revenues
    
    $
    117,720
    
    
    $
    110,934Income before income taxes:Underwriting income (loss):Commercial lines
    
    $
    6,489
    
    
    $
    4,468Personal lines
    
    
    (879
    )
    
    
    (1,210
    )Total underwriting income
    
    
    5,610
    
    
    
    3,258Net investment income
    
    
    9,592
    
    
    
    7,057Net realized investment gains
    
    
    267
    
    
    
    100Other
    
    
    583
    
    
    
    692Income before income taxes
    
    $
    16,052
    
    
    $
    11,107
 Three Months Ended September 302007
    
    
    2006(In thousands)Revenues:Net premiums earned:Commercial lines
    
    $
    31,867
    
    
    $
    29,336Personal lines
    
    
    5,436
    
    
    
    5,668Total net premiums earned
    
    
    37,303
    
    
    
    35,004Net investment income
    
    
    2,880
    
    
    
    2,597Net realized investment gains
    
    
    (366
    )
    
    
    (505
    )Other
    
    
    587
    
    
    
    527Total revenues
    
    $
    40,404
    
    
    $
    37,623Income before income taxes:Underwriting income (loss):Commercial lines
    
    $
    983
    
    
    $
    1,254Personal lines
    
    
    367
    
    
    
    (342
    )Total underwriting income
    
    
    1,350
    
    
    
    912Net investment income
    
    
    2,880
    
    
    
    2,597Net realized
investment losses
    
    
    (366
    )
    
    
    (505
    )Other
    
    
    287
    
    
    
    215Income before income taxes
    
    $
    4,151
    
    
    $
    3,219
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Reinsurance
     Comprehensive Income
  Nine months endedSeptember 302007
    
    
    2006(In thousands)Net income
    
    $
    11,355
    
    
    $
    7,739Other comprehensive income, net of tax:Unrealized gains (losses) on securities:Unrealized holding gains (losses) arising during period, net of related income tax
expense (benefit) of $462 and ($39)
    
    
    897
    
    
    
    (76
    )Less reclassification adjustment for gains included in net income, net of related income tax
expense of $161 and $5
    
    
    (312
    )
    
    
    (11
    )585
    
    
    
    (87
    )Comprehensive income
    
    $
    11,940
    
    
    $
    7,652
 Three months endedSeptember 302007
    
    
    2006(In thousands)Net income
    
    $
    3,012
    
    
    $
    2,194Other comprehensive income, net of tax:Unrealized gains on securities:Unrealized holding gains arising during period, net of related income tax
expense of $1,461 and $1,685
    
    
    2,836
    
    
    
    3,271Less reclassification adjustment for gains included in net income, net of
related income tax expense of $44 and $4
    
    
    (85
    )
    
    
    (7
    )2,751
    
    
    
    3,264Comprehensive income
    
    $
    5,763
    
    
    $
    5,458
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Share-based Compensation
    Weighted AverageNumber of
    
    
    Exercise PriceShares
    
    
    per ShareOutstanding at December 31, 2006
    
    
    636,700
    
    
    $
    13.21Granted  2007
    
    
    
    
    
    
    Exercised  2007
    
    
    (3,000
    )
    
    
    13.25Forfeited  2007
    
    
    (19,400
    )
    
    
    12.85Outstanding at September 30, 2007
    
    
    614,300
    
    
    $
    13.22Exercisable at:September 30, 2007
    
    
    497,300
    
    
    $
    12.24Weighted-average remaining contractual life
    
    
    
    
    
    7.1 yearsCompensation remaining to be recognized for unvested stock options at September 30, 2007 (millions)
    
    
    
    
    
    $
    0.6Weighted-average remaining amortization period
    
    
    
    
    
    
    2.5Aggregate Intrinsic Value of outstanding options, September 30, 2007 (millions)
    
    
    
    
    
    $
    3.1Aggregate Intrinsic Value of exercisable options, September 30, 2007 (millions)
    
    
    
    
    
    $
    2.7
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WeightedAverageNumber of
    
    
    Fair ValueShares
    
    
    per ShareUnvested restricted stock at December 31, 2006
    
    
    106,334
    
    
    $
    13.61Granted  2007
    
    
    
    
    
    
    Vested  2007
    
    
    (56,084
    )
    
    
    12.22Forfeited  2007
    
    
    (3,000
    )
    
    
    12.21Unvested restricted stock at September 30, 2007
    
    
    47,250
    
    
    $
    15.35Compensation remaining to be recognized for unvested restricted stock at September 30, 2007 (millions)
    
    
    
    
    
    $
    0.6Weighted-average remaining amortization period
    
    
    
    
    
    
    2.1
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Earnings per Share
  Nine months endedSeptember 302007
    
    
    2006(Dollars in thousands, except per share data)Numerator for basic and diluted earnings per share:Net income
    
    $
    11,355
    
    
    $
    7,739Denominator for basic earnings per share  weighted-average
shares
    
    
    6,125,654
    
    
    
    6,006,693Effect of stock incentive plans
    
    
    192,375
    
    
    
    186,038Denominator for diluted earnings per share
    
    
    6,318,029
    
    
    
    6,192,731Basic earnings per share
    
    $
    1.85
    
    
    $
    1.29Diluted earnings per share
    
    $
    1.80
    
    
    $
    1.25
 Three months endedSeptember 302007
    
    
    2006(Dollars in thousands, except per share data)Numerator for basic and diluted earnings per share:Net income
    
    $
    3,012
    
    
    $
    2,194Denominator for basic earnings per share  weighted-average shares
    
    
    6,174,842
    
    
    
    6,055,132Effect of stock incentive plans
    
    
    171,023
    
    
    
    210,756Denominator for diluted earnings per share
    
    
    6,345,865
    
    
    
    6,265,888Basic earnings per share
    
    $
    0.49
    
    
    $
    0.36Diluted earnings per share
    
    $
    0.47
    
    
    $
    0.35
  Income Taxes
  16




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##### Table of Contents



Retaliatory tax refund
   17




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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.
       18




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Critical Accounting Policies
 General.
 Liabilities for Loss and Loss Adjustment Expenses.
   19




---



##### Table of Contents



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
    
    September 30,
    
    September 30,
    
    December 31,
    
    December 31,Reinsurance
    
    2007
    
    2007 (1)
    
    2006
    
    2006 (1)(Dollars in thousands)(10.0)%
    
    $
    164,591
    
    
    
    9.4
    %
    
    $
    148,070
    
    
    
    9.4
    %(7.5)%
    
    
    169,163
    
    
    
    7.0
    %
    
    
    152,183
    
    
    
    7.0
    %(5.0)%
    
    
    173,735
    
    
    
    4.7
    %
    
    
    156,296
    
    
    
    4.7
    %(2.5)%
    
    
    178,306
    
    
    
    2.3
    %
    
    
    160,409
    
    
    
    2.3
    %Base
    
    
    182,878
    
    
    
    
    
    
    
    164,522
    
    
    
    2.5%
    
    
    187,450
    
    
    
    (2.3
    %)
    
    
    168,635
    
    
    
    (2.3
    )%5.0%
    
    
    192,022
    
    
    
    (4.7
    %)
    
    
    172,748
    
    
    
    (4.7
    )%7.5%
    
    
    196,594
    
    
    
    (7.0
    %)
    
    
    176,861
    
    
    
    (7.0
    )%10.0%
    
    
    201,166
    
    
    
    (9.4
    %)
    
    
    180,974
    
    
    
    (9.4
    )%
 
 (1)
    
    Net of tax  20




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##### Table of Contents



September 30,
    
    
    December 31,2007
    
    
    2006(In thousands)Commercial lines:Commercial multi-peril
    
    $
    194,440
    
    
    $
    181,523Commercial automobile
    
    
    41,107
    
    
    
    36,647Other liability
    
    
    9,751
    
    
    
    8,462Workers compensation
    
    
    8,375
    
    
    
    8,107Surety
    
    
    6,040
    
    
    
    5,104Fire, allied, inland marine
    
    
    202
    
    
    
    222259,915
    
    
    
    240,065Personal lines:Homeowners
    
    
    7,500
    
    
    
    6,724Personal automobile
    
    
    2,013
    
    
    
    2,213Other liability
    
    
    1,166
    
    
    
    1,079Fire, allied, inland marine
    
    
    368
    
    
    
    333Workers compensation
    
    
    44
    
    
    
    4111,091
    
    
    
    10,390Total
    
    $
    271,006
    
    
    $
    250,455
 Investments.
     Policy Acquisition Costs.
 21




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##### Table of Contents



Reinsurance.
  Income Taxes.
 Results of Operations
      22




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##### Table of Contents



Nine and three month periods ended September 30, 2007, compared to the same periods in 2006:
  Nine months ended September 30,2007 vs. 2006 Income
    
    2007
    
    2006
    
    Change
    
    % Change(Dollars in thousands)Commercial lines underwriting income
    
    $
    6,489
    
    
    $
    4,468
    
    
    $
    2,021
    
    
    
    45.2
    %Personal lines underwriting loss
    
    
    (879
    )
    
    
    (1,210
    )
    
    
    331
    
    
    
    (27.4
    )%Total underwriting income
    
    
    5,610
    
    
    
    3,258
    
    
    
    2,352
    
    
    
    72.2
    %Net investment income
    
    
    9,592
    
    
    
    7,057
    
    
    
    2,535
    
    
    
    35.9
    %Net realized investment gains
    
    
    267
    
    
    
    100
    
    
    
    167
    
    
    
    167.0
    %Other
    
    
    1,494
    
    
    
    1,605
    
    
    
    (111
    )
    
    
    (6.9
    )%Interest expense
    
    
    (911
    )
    
    
    (913
    )
    
    
    2
    
    
    
    (0.2
    )%Income before income taxes
    
    
    16,052
    
    
    
    11,107
    
    
    
    4,945
    
    
    
    44.5
    %Income taxes
    
    
    4,697
    
    
    
    3,368
    
    
    
    1,329
    
    
    
    39.5
    %Net Income
    
    $
    11,355
    
    
    $
    7,739
    
    
    $
    3,616
    
    
    
    46.7
    %Loss/ LAE ratio (GAAP)
    
    
    61.5
    %
    
    
    63.1
    %
    
    
    (1.6
    )%Underwriting expense ratio (GAAP)
    
    
    33.2
    %
    
    
    33.7
    %
    
    
    (0.5
    )%Combined ratio (GAAP)
    
    
    94.7
    %
    
    
    96.8
    %
    
    
    (2.1
    )%Loss/ LAE ratio (Statutory)
    
    
    61.5
    %
    
    
    60.3
    %
    
    
    1.2
    %Underwriting expense ratio (Statutory)
    
    
    31.5
    %
    
    
    34.0
    %
    
    
    (2.5
    )%Combined ratio (Statutory)
    
    
    93.0
    %
    
    
    94.3
    %
    
    
    (1.3
    )%
 Three months ended September 30,2007 vs. 2006 Income
    
    2007
    
    2006
    
    Change
    
    % Change(Dollars in thousands)Commercial lines underwriting income
    
    $
    983
    
    
    $
    1,254
    
    
    $
    (271
    )
    
    
    (21.6
    )%Personal
lines underwriting gain (loss)
    
    
    367
    
    
    
    (342
    )
    
    
    709
    
    
    
    (207.3
    )%Total underwriting income
    
    
    1,350
    
    
    
    912
    
    
    
    438
    
    
    
    48.0
    %Net investment income
    
    
    2,880
    
    
    
    2,597
    
    
    
    283
    
    
    
    10.9
    %Net realized
investment losses
    
    
    (366
    )
    
    
    (505
    )
    
    
    139
    
    
    
    (27.5
    )%Other
    
    
    587
    
    
    
    527
    
    
    
    60
    
    
    
    11.4
    %Interest expense
    
    
    (300
    )
    
    
    (312
    )
    
    
    12
    
    
    
    (3.8
    )%Income before income taxes
    
    
    4,151
    
    
    
    3,219
    
    
    
    932
    
    
    
    29.0
    %Income taxes
    
    
    1,139
    
    
    
    1,025
    
    
    
    114
    
    
    
    11.1
    %Net Income
    
    $
    3,012
    
    
    $
    2,194
    
    
    $
    818
    
    
    
    37.3
    %Loss/ LAE ratio (GAAP)
    
    
    61.0
    %
    
    
    63.8
    %
    
    
    (2.8
    )%Underwriting expense ratio (GAAP)
    
    
    35.4
    %
    
    
    33.6
    %
    
    
    1.8
    %Combined ratio (GAAP)
    
    
    96.4
    %
    
    
    97.4
    %
    
    
    (1.0
    )%Loss/ LAE ratio (Statutory)
    
    
    61.1
    %
    
    
    62.8
    %
    
    
    (1.7
    )%Underwriting expense ratio (Statutory)
    
    
    33.9
    %
    
    
    33.2
    %
    
    
    0.7
    %Combined ratio (Statutory)
    
    
    94.9
    %
    
    
    96.0
    %
    
    
    (1.1
    )%
 23




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24




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##### Table of Contents



Nine months ended September 30,2007 vs. 2006 Revenue
    
    2007
    
    2006
    
    Change
    
    % Change(In thousands)Direct premiums written
    
    $
    140,506
    
    
    $
    146,470
    
    
    $
    (5,964
    )
    
    
    (4.1
    )%Net premiums written
    
    
    123,116
    
    
    
    115,738
    
    
    
    7,378
    
    
    
    6.4
    %Net premiums earned
    
    
    106,367
    
    
    
    102,172
    
    
    
    4,195
    
    
    
    4.1
    %Net investment income
    
    
    9,592
    
    
    
    7,057
    
    
    
    2,535
    
    
    
    35.9
    %Net realized investment gains
    
    
    267
    
    
    
    100
    
    
    
    167
    
    
    
    167.0
    %Other revenue
    
    
    1,494
    
    
    
    1,605
    
    
    
    (111
    )
    
    
    (6.9
    )%Total revenue
    
    $
    117,720
    
    
    $
    110,934
    
    
    $
    6,786
    
    
    
    6.1
    %
 Three months ended September 30,2007 vs. 2006 Revenue
    
    2007
    
    2006
    
    Change
    
    % Change(In thousands)Direct premiums written
    
    $
    47,027
    
    
    $
    45,749
    
    
    $
    1,278
    
    
    
    2.8
    %Net premiums written
    
    
    41,110
    
    
    
    34,809
    
    
    
    6,301
    
    
    
    18.1
    %Net premiums earned
    
    
    37,303
    
    
    
    35,004
    
    
    
    2,299
    
    
    
    6.6
    %Net investment income
    
    
    2,880
    
    
    
    2,597
    
    
    
    283
    
    
    
    10.9
    %Net realized investment losses
    
    
    (366
    )
    
    
    (505
    )
    
    
    139
    
    
    
    (27.5
    )%Other revenue
    
    
    587
    
    
    
    527
    
    
    
    60
    
    
    
    11.4
    %Total revenue
    
    $
    40,404
    
    
    $
    37,623
    
    
    $
    2,781
    
    
    
    7.4
    %
       25




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26




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##### Table of Contents



Nine months ended September 30,2007 vs. 2006 Investment Income andRealized Gains
    
    2007
    
    2006
    
    Change
    
    % Change(In thousands)Fixed income securities
    
    $
    9,627
    
    
    $
    7,961
    
    
    $
    1,666
    
    
    
    20.9
    %Dividends
    
    
    219
    
    
    
    213
    
    
    
    6
    
    
    
    2.8
    %Cash, cash equivalents & other
    
    
    1,458
    
    
    
    710
    
    
    
    748
    
    
    
    105.4
    %Gross investment income
    
    
    11,304
    
    
    
    8,884
    
    
    
    2,420
    
    
    
    27.2
    %Investment expenses
    
    
    (1,712
    )
    
    
    (1,827
    )
    
    
    115
    
    
    
    6.3
    %Net investment income
    
    $
    9,592
    
    
    $
    7,057
    
    
    $
    2,535
    
    
    
    35.9
    %Realized losses  fixed income securities
    
    $
    (8
    )
    
    $
    (385
    )
    
    $
    377
    
    
    
    N/MRealized gains  equity securities
    
    
    481
    
    
    
    401
    
    
    
    80
    
    
    
    N/MMark-to-market valuation for interest rate swaps
    
    
    (206
    )
    
    
    84
    
    
    
    (290
    )
    
    
    N/MNet realized gains
    
    $
    267
    
    
    $
    100
    
    
    $
    167
    
    
    
    167.0
    %
 Three months ended September 30,2007 vs. 2006 Investment Income andRealized Gains
    
    2007
    
    2006
    
    Change
    
    % Change(In thousands)Fixed income securities
    
    $
    3,209
    
    
    $
    2,818
    
    
    $
    391
    
    
    
    13.9
    %Dividends
    
    
    72
    
    
    
    68
    
    
    
    4
    
    
    
    5.9
    %Cash, cash equivalents & other
    
    
    396
    
    
    
    307
    
    
    
    89
    
    
    
    29.0
    %Gross investment income
    
    
    3,677
    
    
    
    3,193
    
    
    
    484
    
    
    
    15.2
    %Investment expenses
    
    
    (797
    )
    
    
    (596
    )
    
    
    (201
    )
    
    
    (33.7
    )%Net investment income
    
    $
    2,880
    
    
    $
    2,597
    
    
    $
    283
    
    
    
    10.9
    %Realized losses  fixed income securities
    
    $
    (8
    )
    
    $
    
    
    
    $
    (8
    )
    
    
    N/MRealized gains  equity securities
    
    
    138
    
    
    
    11
    
    
    
    127
    
    
    
    N/MMark-to-market valuation for interest rate swaps
    
    
    (496
    )
    
    
    (516
    )
    
    
    20
    
    
    
    N/MNet realized losses
    
    $
    (366
    )
    
    $
    (505
    )
    
    $
    139
    
    
    
    (27.5
    )%
         27




---



##### Table of Contents



Less than 12 Months
    
    
    12 Months or Longer
    
    
    TotalEstimated
    
    
    Unrealized
    
    
    Estimated
    
    
    Unrealized
    
    
    Estimated
    
    
    UnrealizedSeptember 30, 2007
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses(In Thousands)U.S. Treasury securities and
obligations of U.S.
government corporations
and agencies
    
    $
    15,223
    
    
    $
    46
    
    
    $
    36,264
    
    
    $
    507
    
    
    $
    51,487
    
    
    $
    553Obligations of states and
political subdivisions
    
    
    41,386
    
    
    
    284
    
    
    
    39,600
    
    
    
    326
    
    
    
    80,986
    
    
    
    610Corporate securities
    
    
    4,618
    
    
    
    121
    
    
    
    41,416
    
    
    
    639
    
    
    
    46,034
    
    
    
    760Mortgage-backed securities
    
    
    8,666
    
    
    
    42
    
    
    
    9,113
    
    
    
    112
    
    
    
    17,779
    
    
    
    154Total fixed maturities
    
    
    69,893
    
    
    
    493
    
    
    
    126,393
    
    
    
    1,584
    
    
    
    196,286
    
    
    
    2,077Total equity securities
    
    
    1,791
    
    
    
    115
    
    
    
    
    
    
    
    
    
    
    
    1,791
    
    
    
    115Total securities in a
temporary unrealized loss
position
    
    $
    71,684
    
    
    $
    608
    
    
    $
    126,393
    
    
    $
    1,584
    
    
    $
    198,077
    
    
    $
    2,192
   28




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##### Table of Contents



Nine months ended September 30,2007 vs. 2006 Commercial Lines (CL)
    
    2007
    
    2006
    
    Change
    
    % Change(Dollars in thousands)CL Direct premiums written
    
    $
    123,245
    
    
    $
    128,170
    
    
    $
    (4,925
    )
    
    
    (3.8
    )%CL Net premiums written
    
    $
    107,353
    
    
    $
    98,842
    
    
    $
    8,511
    
    
    
    8.6
    %CL Net premiums earned
    
    $
    89,828
    
    
    $
    85,263
    
    
    $
    4,565
    
    
    
    5.4
    %CL Loss/ LAE expense ratio (GAAP)
    
    
    59.6
    %
    
    
    62.2
    %
    
    
    (2.6)
    %CL Expense ratio (GAAP)
    
    
    33.2
    %
    
    
    32.6
    %
    
    
    0.6
    %CL Combined ratio (GAAP)
    
    
    92.8
    %
    
    
    94.8
    %
    
    
    (2.0)
    %
 Three months ended September 30,2007 vs. 2006 Commercial Lines (CL)
    
    2007
    
    2006
    
    Change
    
    % Change(Dollars in thousands)CL Direct premiums written
    
    $
    40,871
    
    
    $
    39,332
    
    
    $
    1,539
    
    
    
    3.9
    %CL Net premiums written
    
    $
    35,490
    
    
    $
    28,879
    
    
    $
    6,611
    
    
    
    22.9
    %CL Net premiums earned
    
    $
    31,867
    
    
    $
    29,336
    
    
    $
    2,531
    
    
    
    8.6
    %CL Loss/ LAE expense ratio (GAAP)
    
    
    62.0
    %
    
    
    63.1
    %
    
    
    (1.1
    )%CL Expense ratio (GAAP)
    
    
    34.9
    %
    
    
    32.6
    %
    
    
    2.3
    %CL Combined ratio (GAAP)
    
    
    96.9
    %
    
    
    95.7
    %
    
    
    1.2
    %
      29




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##### Table of Contents



Nine months ended September 30,2007 vs. 2006 Personal Lines (PL)
    
    2007
    
    2006
    
    Change
    
    % Change(Dollars in thousands)PL Direct premiums written
    
    $
    17,261
    
    
    $
    18,300
    
    
    $
    (1,039
    )
    
    
    (5.7)
    %PL Net premiums written
    
    $
    15,763
    
    
    $
    16,896
    
    
    $
    (1,133
    )
    
    
    (6.7
    )%PL Net premiums earned
    
    $
    16,539
    
    
    $
    16,909
    
    
    $
    (370
    )
    
    
    (2.2
    )%PL Loss/ LAE expense ratio (GAAP)
    
    
    71.5
    %
    
    
    68.1
    %
    
    
    3.4
    %PL Expense ratio (GAAP)
    
    
    33.8
    %
    
    
    39.1
    %
    
    
    (5.3
    )%PL Combined ratio (GAAP)
    
    
    105.3
    %
    
    
    107.2
    %
    
    
    (1.9
    )%
 Three months ended September 30,2007 vs. 2006 Personal Lines (PL)
    
    2007
    
    2006
    
    Change
    
    % Change(Dollars in thousands)PL Direct premiums written
    
    $
    6,156
    
    
    $
    6,417
    
    
    $
    (261
    )
    
    
    (4.1)
    %PL Net premiums written
    
    $
    5,620
    
    
    $
    5,930
    
    
    $
    (310
    )
    
    
    (5.2)
    %PL Net premiums earned
    
    $
    5,436
    
    
    $
    5,668
    
    
    $
    (232
    )
    
    
    (4.1)
    %PL Loss/ LAE expense ratio (GAAP)
    
    
    55.5
    %
    
    
    67.1
    %
    
    
    (11.6
    )%PL Expense ratio (GAAP)
    
    
    37.8
    %
    
    
    38.9
    %
    
    
    (1.1)
    %PL Combined ratio (GAAP)
    
    
    93.3
    %
    
    
    106.0
    %
    
    
    (12.7
    )%
     30




---



##### Table of Contents



Nine months ended September 302007 vs. 2006 Expenses and Expense Ratio
    
    2007
    
    2006
    
    Change
    
    % Change(Dollars in thousands)Amortization of Deferred Acquisition Costs
    
    $
    27,829
    
    
    $
    24,187
    
    
    $
    3,642
    
    
    
    15.1
    %As a % of net premiums earned
    
    
    26.2
    %
    
    
    23.7
    %
    
    
    2.5
    %Other underwriting expenses
    
    $
    7,530
    
    
    $
    10,208
    
    
    
    (2,678
    )
    
    
    (26.2
    )%Total expenses excluding losses/ LAE
    
    $
    35,359
    
    
    $
    34,395
    
    
    $
    964
    
    
    
    2.8
    %Underwriting expense ratio
    
    
    33.2
    %
    
    
    33.7
    %
    
    
    (0.5
    )%
   2007 vs. 2006 Income Taxes
    
    2007
    
    2006
    
    Change
    
    % Change(Dollars in thousands)Income before income taxes
    
    $
    16,052
    
    
    $
    11,107
    
    
    $
    4,945
    
    
    
    44.5
    %Income taxes
    
    $
    4,697
    
    
    $
    3,368
    
    
    $
    1,329
    
    
    
    39.5
    %Net income
    
    $
    11,355
    
    
    $
    7,739
    
    
    $
    3,616
    
    
    
    46.7
    %Effective tax rate
    
    
    29.3
    
    
    
    30.3
    %
    
    
    (1.1
    )%
  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.
 33




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##### Table of Contents



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
  34




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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)
 35




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##### Table of Contents



SIGNATURES
  MERCER INSURANCE GROUP, INC. (Registrant)Dated: November 09, 2007
    By:
    /s/ Andrew R. SpeakerAndrew R. Speaker,President and Chief Executive OfficerDated: November 09, 2007
    By:
    /s/ David B. MercleanDavid B. Merclean,Senior Vice President and Chief Financial Officer 36