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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, 2009,
 or
 Transition report pursuant to Section 13 or 15(d) Of the Exchange Act
 for the Transition Period from  to
 No. 000-25425
 
 (Commission File Number)
 MERCER INSURANCE GROUP, INC.
  PENNSYLVANIA
    
    23-2934601(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)10 North Highway 31, P.O. Box 278, Pennington, NJ
    
    08534(Address of principal executive offices)
    
    (Zip Code)
  (Registrants telephone number, including area code)
 (Former name, former address and former fiscal year, if changed since last report)
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
  Number of Shares Outstanding as of November 6, 2009COMMON STOCK (No Par Value)
    
    6,442,257(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
    
    
    27Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    46Item 4. Controls and Procedures
    
    
    49PART
II. OTHER INFORMATION
    
    
    49Item 1.
Legal Proceedings
    
    
    49Item 1A.
Risk Factors
    
    
    49Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    49Item 3.
Defaults Upon Senior Securities
    
    
    49Item 4.
Submission of Matters to a Vote of Security Holders
    
    
    50Item 5.
Other Information
    
    
    50Item 6.
Exhibits
    
    
    50SIGNATURES
    
    
    51Exhibits:Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
  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 Sheets

September 30, 2009 and December 31, 2008
(Dollars in thousands, except share amounts)
 2009
    
    
    2008(Unaudited)AssetsInvestments, at fair value:Fixed-income securities, available for sale, at fair value
(cost $348,095 and $331,075, respectively)
    
    $
    368,429
    
    
    
    334,087Equity securities, at fair value (cost $7,243 and $9,232,
respectively)
    
    
    8,887
    
    
    
    10,203Total investments
    
    
    377,316
    
    
    
    344,290Cash and cash equivalents
    
    
    31,702
    
    
    
    37,043Premiums receivable
    
    
    38,131
    
    
    
    34,165Reinsurance receivables
    
    
    80,404
    
    
    
    86,443Prepaid reinsurance premiums
    
    
    5,829
    
    
    
    7,096Deferred policy acquisition costs
    
    
    19,416
    
    
    
    20,193Accrued investment income
    
    
    3,721
    
    
    
    3,901Property and equipment, net
    
    
    20,184
    
    
    
    16,144Deferred income taxes
    
    
    4,181
    
    
    
    9,814Goodwill
    
    
    5,416
    
    
    
    5,416Other assets
    
    
    8,544
    
    
    
    4,481Total assets
    
    $
    594,844
    
    
    
    568,986Liabilities and EquityLiabilities:Losses and loss adjustment expenses
    
    $
    308,846
    
    
    
    304,000Unearned premiums
    
    
    79,463
    
    
    
    80,408Accounts payable and accrued expenses
    
    
    11,657
    
    
    
    13,283Other reinsurance balances
    
    
    13,495
    
    
    
    11,509Trust preferred securities
    
    
    15,588
    
    
    
    15,576Advances under line of credit
    
    
    3,000
    
    
    
    3,000Other liabilities
    
    
    3,908
    
    
    
    3,940Total liabilities
    
    
    435,957
    
    
    
    431,716Stockholders Equity:Preferred stock, no par value, authorized 5,000,000
shares, no
shares issued and outstanding
    
    
    
    
    
    
    Common stock, no par value, authorized 15,000,000 shares,
issued 7,074,333 shares, outstanding
6,865,050 and 6,801,095 shares
    
    
    
    
    
    
    Additional paid-in capital
    
    
    71,979
    
    
    
    71,369Accumulated other comprehensive income
    
    
    14,374
    
    
    
    2,494Retained Earnings
    
    
    82,939
    
    
    
    74,138Unearned ESOP shares
    
    
    (2,036
    )
    
    
    (2,505
    )Treasury stock, 631,761 and 621,773 shares
    
    
    (8,369
    )
    
    
    (8,226
    )Total stockholders equity
    
    
    158,887
    
    
    
    137,270Total liabilities and stockholders equity
    
    $
    594,844
    
    
    
    568,986
  5




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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF EARNINGS
Nine Months Ended September 30, 2009 and 2008
 2009
    
    
    2008(Dollars in thousands, except per share data)(Unaudited)Revenues:Net premiums earned
    
    $
    105,215
    
    
    
    115,590Investment income, net of expenses
    
    
    10,833
    
    
    
    10,173Net realized investment gains (losses)Other-than-temporary impairments (none allocated
to Other Comprehensive Income)
    
    
    (787
    )
    
    
    (3,547
    )Other net realized investment gains
    
    
    1,180
    
    
    
    603Total net realized investment gains (losses)
    
    
    393
    
    
    
    (2,944
    )Other revenue
    
    
    1,555
    
    
    
    1,555Total revenues
    
    
    117,996
    
    
    
    124,374Expenses:Losses and loss adjustment expenses
    
    
    64,643
    
    
    
    71,564Amortization of deferred policy acquisition costs
(related party
amounts of $768 and $805, respectively)
    
    
    29,002
    
    
    
    31,163Other expenses
    
    
    9,438
    
    
    
    10,618Interest expense
    
    
    1,066
    
    
    
    961Total expenses
    
    
    104,149
    
    
    
    114,306Income before income taxes
    
    
    13,847
    
    
    
    10,068Income taxes
    
    
    3,652
    
    
    
    2,463Net income
    
    $
    10,195
    
    
    
    7,605Earnings per common share:Basic
    
    $
    1.64
    
    
    
    1.22Diluted
    
    $
    1.61
    
    
    
    1.19
  6




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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF EARNINGS

Three Months Ended September 30, 2009 and 2008
 2009
    
    
    2008(Dollars in thousands,
except per share data)(Unaudited)Revenues:Net premiums earned
    
    $
    34,681
    
    
    
    37,869Investment income, net of expenses
    
    
    3,605
    
    
    
    3,469Net realized investment gains (losses)Other-than-temporary impairments (none allocated
to Other Comprehensive Income)
    
    
    (55
    )
    
    
    (2,876
    )Other net realized investment gains
    
    
    527
    
    
    
    595Total net realized investment gains (losses)
    
    
    472
    
    
    
    (2,281
    )Other revenue
    
    
    516
    
    
    
    536Total revenues
    
    
    39,274
    
    
    
    39,593Expenses:Losses and loss adjustment expenses
    
    
    21,683
    
    
    
    22,819Amortization of deferred policy acquisition costs
(related party
amounts of $263 and $263, respectively)
    
    
    9,499
    
    
    
    10,460Other expenses
    
    
    2,869
    
    
    
    3,776Interest expense
    
    
    358
    
    
    
    328Total expenses
    
    
    34,409
    
    
    
    37,383Income before income taxes
    
    
    4,865
    
    
    
    2,210Income taxes
    
    
    1,311
    
    
    
    430Net income
    
    $
    3,554
    
    
    
    1,780Earnings per common share:Basic
    
    $
    0.57
    
    
    
    0.29Diluted
    
    $
    0.56
    
    
    
    0.28
  7




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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
Nine months ended September 30, 2009
(Unaudited, dollars in thousands)
 AccumulatedAdditional
    
    
    other
    
    
    
    
    
    
    UnearnedPreferred
    
    
    Common
    
    
    paid-in
    
    
    comprehensive
    
    
    Retained
    
    
    ESOP
    
    
    Treasurystock
    
    
    stock
    
    
    capital
    
    
    income
    
    
    earnings
    
    
    shares
    
    
    stock
    
    
    TotalBalance, December 31, 2008
    
    $
    
    
    
    
    
    
    
    
    71,369
    
    
    
    2,494
    
    
    
    74,138
    
    
    
    (2,505
    )
    
    
    (8,226
    )
    
    
    137,270Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,195
    
    
    
    
    
    
    
    
    
    
    
    10,195Unrealized gains on securities:Unrealized holding gains arising
during period, net of related
income tax expense of $6,126
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,892
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,892Less reclassification
adjustment for
gains included in net
income, net of related
income tax expense of $8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15
    )Defined benefit pension plan,
net of
related income tax of $1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,880Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,075Stock compensation plan amortization
    
    
    
    
    
    
    
    
    
    
    313
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    313Tax benefit from stock compensation plan
    
    
    
    
    
    
    
    
    
    
    29
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29ESOP shares committed
    
    
    
    
    
    
    
    
    
    
    268
    
    
    
    
    
    
    
    
    
    
    
    469
    
    
    
    
    
    
    
    737Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (143
    )
    
    
    (143
    )Dividends to stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,394
    )
    
    
    
    
    
    
    
    
    
    
    (1,394
    )Balance, September 30, 2009
    
    $
    
    
    
    
    
    
    
    
    71,979
    
    
    
    14,374
    
    
    
    82,939
    
    
    
    (2,036
    )
    
    
    (8,369
    )
    
    
    158,887
  8




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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2009 and 2008
 2009
    
    
    2008(Dollars in thousands)(Unaudited)Cash flows from operating activities:Net income
    
    $
    10,195
    
    
    
    7,605Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization of fixed assets
    
    
    2,358
    
    
    
    1,760Amortization of premium, net
    
    
    1,099
    
    
    
    1,123Amortization of stock compensation
    
    
    313
    
    
    
    390ESOP share commitment
    
    
    737
    
    
    
    808Net realized investment (gains) losses
    
    
    (393
    )
    
    
    2,944Deferred income tax
    
    
    (487
    )
    
    
    (321
    )Change in assets and liabilities:Premiums receivable
    
    
    (3,966
    )
    
    
    (3,092
    )Reinsurance receivables
    
    
    6,039
    
    
    
    (5,260
    )Prepaid reinsurance premiums
    
    
    1,267
    
    
    
    2,026Deferred policy acquisition costs
    
    
    777
    
    
    
    (674
    )Other assets
    
    
    (469
    )
    
    
    (784
    )Losses and loss adjustment expenses
    
    
    4,846
    
    
    
    24,592Unearned premiums
    
    
    (945
    )
    
    
    (1,753
    )Other reinsurance balances
    
    
    1,986
    
    
    
    (2,910
    )Other
    
    
    (1,646
    )
    
    
    (1,081
    )Net cash provided by operating activities
    
    
    21,711
    
    
    
    25,373Cash flows from investing activities:Purchase of fixed income securities, available for sale
    
    
    (61,825
    )
    
    
    (50,816
    )Purchase of equity securities
    
    
    (1,252
    )
    
    
    (2,904
    )Sale and maturity of fixed income securities, available for sale
    
    
    39,575
    
    
    
    34,819Sale of equity securities
    
    
    4,352
    
    
    
    2,981Purchase of short term investments, net
    
    
    
    
    
    
    (9,998
    )Purchase of property and equipment, net
    
    
    (6,394
    )
    
    
    (4,058
    )Net cash used in investing activities
    
    
    (25,544
    )
    
    
    (29,976
    )Cash flows from financing activities:Purchase of treasury stock
    
    
    (143
    )
    
    
    (1,078
    )Tax benefit from stock compensation plans
    
    
    29
    
    
    
    40Dividends to stockholders
    
    
    (1,394
    )
    
    
    (1,249
    )Net cash used in financing activities
    
    
    (1,508
    )
    
    
    (2,287
    )Net decrease in cash and cash equivalents
    
    
    (5,341
    )
    
    
    (6,890
    )Cash and cash equivalents at beginning of period
    
    
    37,043
    
    
    
    21,580Cash and cash equivalents at end of period
    
    $
    31,702
    
    
    
    14,690Cash paid during the period for:Interest
    
    $
    1,054
    
    
    
    934Income taxes
    
    $
    3,970
    
    
    
    2,758
  9




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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
 Basis of Presentation
      Share-Based Compensation
     10




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New Accounting Pronouncements
 , FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles  A Replacement of FASB Statement No. 162
 Effective Date of FASB Statement No. 157 Fair Value Measurement
 Interim Disclosures about Fair Value of
Financial Instruments
 Recognition and Presentation of
Other-Than-Temporary Impairments
 Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That
Are Not Orderly
  11




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(2) INVESTMENTS
   Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Investment income:Fixed income securities
    
    $
    4,026
    
    
    
    3,769
    
    
    
    11,986
    
    
    
    11,058Equity securities
    
    
    60
    
    
    
    87
    
    
    
    219
    
    
    
    254Cash and equivalents
    
    
    40
    
    
    
    103
    
    
    
    119
    
    
    
    356Gross investment income
    
    
    4,126
    
    
    
    3,959
    
    
    
    12,324
    
    
    
    11,668Less investment expenses
    
    
    521
    
    
    
    490
    
    
    
    1,491
    
    
    
    1,495Net investment income
    
    
    3,605
    
    
    
    3,469
    
    
    
    10,833
    
    
    
    10,173Net realized gains (losses):Fixed income securities
    
    
    34
    
    
    
    (2,767
    )
    
    
    (278
    )
    
    
    (3,226
    )Equity securities, net
    
    
    574
    
    
    
    640
    
    
    
    300
    
    
    
    486Mark-to-market valuation for interest rate swaps
    
    
    (136
    )
    
    
    (154
    )
    
    
    371
    
    
    
    (204
    )Net realized investment gains (losses)
    
    
    472
    
    
    
    (2,281
    )
    
    
    393
    
    
    
    (2,944
    )Net investment income and net realized investment gains
    
    $
    4,077
    
    
    
    1,188
    
    
    
    11,226
    
    
    
    7,229
   September 30,Change in Unrealized Gains and Losses:
    
    2009Fixed-income securities
    
    $
    17,322Equity securities
    
    
    673$
    17,995
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##### Table of Contents



Gross
    
    
    Gross
    
    
    EstimatedUnrealized
    
    
    Unrealized
    
    
    FairCost (1)
    
    
    Gains
    
    
    Losses
    
    
    ValueAt September 30, 2009:Fixed-income securities, available for sale:U.S. government and government agencies (2)
    
    $
    71,468
    
    
    
    3,669
    
    
    
    1
    
    
    
    75,136Obligations of states and political
subdivisions
    
    
    138,346
    
    
    
    8,503
    
    
    
    32
    
    
    
    146,817Industrial and miscellaneous
    
    
    113,868
    
    
    
    7,235
    
    
    
    75
    
    
    
    121,028Mortgage-backed securities
    
    
    24,413
    
    
    
    1,162
    
    
    
    127
    
    
    
    25,448Total fixed maturities
    
    
    348,095
    
    
    
    20,569
    
    
    
    235
    
    
    
    368,429Equity securities:At estimated market value
    
    
    7,243
    
    
    
    1,673
    
    
    
    29
    
    
    
    8,887Total
    
    $
    355,338
    
    
    
    22,242
    
    
    
    264
    
    
    
    377,316
 
 (1)
    
    Original cost of equity and fixed-income securities adjusted for other than temporary
impairment writedowns and amortization of premium and accretion of discount.(2)
    
    Includes approximately $59,925 (fair value) of mortgage-backed securities implicitly or
explicitly backed by the U.S. government and government agencies as of September 30, 2009.  September 30, 2009
    
    
    December 31, 2008Cost (1)
    
    
    Fair Value
    
    
    Cost (1)
    
    
    Fair ValueIndustrial and miscellaneous:Fixed income securitiesRetail specialty
    
    $
    37,575
    
    
    $
    39,862
    
    
    $
    27,561
    
    
    $
    27,810Financial
    
    
    29,917
    
    
    
    31,689
    
    
    
    36,520
    
    
    
    36,065Energy
    
    
    25,225
    
    
    
    27,236
    
    
    
    9,680
    
    
    
    9,444Information Technology
    
    
    11,274
    
    
    
    11,850
    
    
    
    1,849
    
    
    
    1,860Pharmaceutical
    
    
    9,877
    
    
    
    10,391
    
    
    
    2,249
    
    
    
    2,320Total
    
    $
    113,868
    
    
    $
    121,028
    
    
    $
    77,859
    
    
    $
    77,499Equity securitiesRetail specialty
    
    $
    3,285
    
    
    $
    3,820
    
    
    $
    4,117
    
    
    $
    4,565Financial
    
    
    1,293
    
    
    
    1,516
    
    
    
    2,329
    
    
    
    2,343Information Technology
    
    
    995
    
    
    
    1,294
    
    
    
    1,246
    
    
    
    1,186Pharmaceutical
    
    
    1,190
    
    
    
    1,474
    
    
    
    794
    
    
    
    974Energy
    
    
    480
    
    
    
    783
    
    
    
    746
    
    
    
    1,135Total
    
    $
    7,243
    
    
    $
    8,887
    
    
    $
    9,232
    
    
    $
    10,203
 13




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Less than 12 Months
    
    
    12 Months or Longer
    
    
    TotalEstimated
    
    
    Unrealized
    
    
    Estimated
    
    
    Unrealized
    
    
    Estimated
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesU.S. Treasury securities and
obligations of U.S.
government corporations
and agencies
    
    $
    2,213
    
    
    $
    1
    
    
    $
    
    
    
    $
    
    
    
    $
    2,213
    
    
    $
    1Obligations of states and
political subdivisions
    
    
    
    
    
    
    
    
    
    
    1,543
    
    
    
    32
    
    
    
    1,543
    
    
    
    32Corporate securities
    
    
    1,081
    
    
    
    4
    
    
    
    2,201
    
    
    
    71
    
    
    
    3,282
    
    
    
    75Mortgage-backed securities
    
    
    
    
    
    
    
    
    
    
    4,049
    
    
    
    127
    
    
    
    4,049
    
    
    
    127Total fixed maturities
    
    
    3,294
    
    
    
    5
    
    
    
    7,793
    
    
    
    230
    
    
    
    11,087
    
    
    
    235Total equity securities
    
    
    894
    
    
    
    24
    
    
    
    391
    
    
    
    5
    
    
    
    1,285
    
    
    
    29Total securities in a
temporary unrealized loss
position
    
    $
    4,188
    
    
    $
    29
    
    
    $
    8,184
    
    
    $
    235
    
    
    $
    12,372
    
    
    $
    264
    Amortized
    
    
    EstimatedCost
    
    
    Fair ValueDue in one year or less.
    
    $
    22,428
    
    
    
    22,779Due after one year through five years
    
    
    93,441
    
    
    
    98,519Due after five years through ten years
    
    
    132,618
    
    
    
    142,286Due after ten years
    
    
    18,382
    
    
    
    19,472266,869
    
    
    
    283,056Mortgage-backed securities.
    
    
    81,226
    
    
    
    85,373$
    348,095
    
    
    
    368,429
 14




---



##### Table of Contents



Three months
    
    
    April 1ended
    
    
    toSeptember 30
    
    
    September 302009
    
    
    2009Beginning balance of cumulative credit loss for securities held
    
    $
    5,649
    
    
    $
    5,625Additional credit loss for securities previously other-than-temporarily impaired
    
    
    23
    
    
    
    47credit loss
for securities not previously other-than-temporarily impaired
    
    
    
    
    
    
    Reduction in credit loss for securities disposed or collected
    
    
    (1,960
    )
    
    
    (1,960
    )Reduction in credit loss for securities other-than-temporarily impaired which
were intended to be or were required of necessity to be sold
    
    
    
    
    
    
    Change in credit loss due to accretion of increase in cash flows for securities
previously other-than-temporarily impaired
    
    
    
    
    
    
    Ending balance September 30, 2009
    
    $
    3,712
    
    
    $
    3,712
  Three months ended
    
    
    Nine months endedSeptember 30
    
    
    September 302009
    
    
    2009Gross realized gains
    
    $
    807
    
    
    
    1,493Gross realized losses
    
    
    (335
    )
    
    
    (1,100
    )$
    472
    
    
    
    393
   
    
    $308 relating to one residential mortgage-backed security. This charge
resulted from increased delinquency and default rates.
    
    $71 relating to two asset-backed securities. These charges related to
issuer-specific credit events that revolved around the performance of
the underlying collateral, which had deteriorated. In general, the
underlying assets of these securities experienced increased
conditional default rates and expected loss severities.
  
    
    $269 on thirteen equity securities related to issuer-specific concerns in the underlying businesses.
    
    $139 on two preferred stock securities, with the charge attributable to weakening fundamentals in
their underlying assets.
   Segment Information
  15




---



##### Table of Contents



Nine Months Ended September 30,2009
    
    
    2008(In thousands)Revenues:Net premiums earned:Commercial lines.
    
    $
    90,611
    
    
    $
    100,496Personal lines
    
    
    14,604
    
    
    
    15,094Total net premiums earned
    
    
    105,215
    
    
    
    115,590Net investment income
    
    
    10,833
    
    
    
    10,173Net realized investment gains (losses)
    
    
    393
    
    
    
    (2,944
    )Other revenue
    
    
    1,555
    
    
    
    1,555Total revenues
    
    $
    117,996
    
    
    $
    124,374Income before income taxes:Underwriting income (loss):Commercial lines.
    
    $
    3,059
    
    
    $
    2,981Personal lines
    
    
    (927
    )
    
    
    (736
    )Total underwriting income
    
    
    2,132
    
    
    
    2,245Net investment income
    
    
    10,833
    
    
    
    10,173Net realized investment gains (losses)
    
    
    393
    
    
    
    (2,944
    )Other
    
    
    489
    
    
    
    594Income before income taxes
    
    $
    13,847
    
    
    $
    10,068
 16




---



##### Table of Contents



Three Months EndedSeptember 30,2009
    
    
    2008(In thousands)Revenues:Net premiums earned:Commercial lines
    
    $
    29,737
    
    
    $
    32,807Personal lines
    
    
    4,944
    
    
    
    5,062Total net premiums earned
    
    
    34,681
    
    
    
    37,869Net investment income
    
    
    3,605
    
    
    
    3,469Net realized investment gains (losses)
    
    
    472
    
    
    
    (2,281
    )Other revenue
    
    
    516
    
    
    
    536Total revenues
    
    $
    39,274
    
    
    $
    39,593Income before income taxes:Underwriting income (loss):Commercial lines
    
    $
    698
    
    
    $
    741Personal lines
    
    
    (68
    )
    
    
    73Total underwriting income
    
    
    630
    
    
    
    814Net investment income
    
    
    3,605
    
    
    
    3,469Net realized investment gains (losses)
    
    
    472
    
    
    
    (2,281
    )Other
    
    
    158
    
    
    
    208Income before income taxes
    
    $
    4,865
    
    
    $
    2,210
 17




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##### Table of Contents



Reinsurance
    Comprehensive Income
  Nine months endedSeptember 30,2009
    
    
    2008(In thousands)Net income
    
    $
    10,195
    
    
    $
    7,605Other comprehensive income (loss), net of tax:Unrealized gains (losses) on securities:Unrealized holding gains (losses) arising during period, net of related income tax
expense (benefit) of $6,126 and ($4,465)
    
    
    11,892
    
    
    
    (8,667
    )Less reclassification adjustment for (gains) losses included in net income, net of related
income tax expense (benefit) of $8 and ($932)
    
    
    (15
    )
    
    
    1,809Defined benefit pension plan, net of related income tax expense (benefit) of $1 and ($57)
    
    
    3
    
    
    
    (111
    )11,880
    
    
    
    (6,969
    )Comprehensive income
    
    $
    22,075
    
    
    $
    636
 18




---



##### Table of Contents



Three months endedSeptember 30,2009
    
    
    2008(In thousands)Net income
    
    $
    3,554
    
    
    $
    1,780Other comprehensive income (loss), net of tax:Unrealized gains (losses) on securities:Unrealized holding gains (losses) arising during period, net of related income tax expense
(benefit) of $3,816 and ($2,741)
    
    
    7,408
    
    
    
    (5,321
    )Less reclassification adjustment for (gains) losses included in net income, net of related
income tax expense (benefit) of $207 and ($722)
    
    
    (402
    )
    
    
    1,404Defined benefit pension plan, net of related income tax expense (benefit) of $0 and ($19)
    
    
    1
    
    
    
    (37
    )7,007
    
    
    
    (3,954
    )Comprehensive income (loss)
    
    $
    10,561
    
    
    $
    (2,174
    )
 Share-based Compensation
    19




---



##### Table of Contents



Weighted AverageNumber of
    
    
    Exercise PriceShares
    
    
    per ShareOutstanding at December 31, 2008
    
    
    600,700
    
    
    $
    13.24Granted - 2009
    
    
    
    
    
    
    Exercised - 2009
    
    
    
    
    
    
    Forfeited - 2009
    
    
    (10,000
    )
    
    
    12.21Outstanding at September 30, 2009
    
    
    590,700
    
    
    $
    13.26Exercisable at:September 30, 2009
    
    
    546,366
    
    
    $
    12.86Weighted-average remaining contractual life
    
    
    
    
    
    4.9 yearsCompensation remaining to be recognized for unvested stock options at
September 30, 2009 (millions)
    
    
    
    
    
    $
    0.1Weighted-average remaining amortization period
    
    
    
    
    
    0.9 yearsAggregate Intrinsic Value of outstanding options, September 30, 2009 (millions)
    
    
    
    
    
    $
    3.2Aggregate Intrinsic Value of exercisable options, September 30, 2009 (millions)
    
    
    
    
    
    $
    3.0
   Weighted AverageNumber of
    
    
    Fair ValueShares
    
    
    per ShareUnvested restricted stock at December 31, 2008
    
    
    22,792
    
    
    $
    15.26Granted - 2009
    
    
    
    
    
    
    Vested - 2009
    
    
    (17,125
    )
    
    
    12.24Forfeited - 2009
    
    
    
    
    
    
    Unvested restricted stock at September 30, 2009
    
    
    5,667
    
    
    $
    24.39Compensation remaining to be recognized for unvested restricted stock at September 30, 2009 (millions)
    
    
    
    
    
    $
    0.1Weighted-average remaining amortization period
    
    
    
    
    
    1.0 years
 20




---



##### Table of Contents



Earnings per Share
  Nine months endedSeptember 30,2009
    
    
    2008(Dollars in thousands, except per share data)Numerator for basic and diluted earnings per share:Net income
    
    $
    10,195
    
    
    $
    7,605Denominator for basic earnings per share  weighted-average shares
    
    
    6,200,840
    
    
    
    6,230,476Effect of stock incentive plans
    
    
    120,225
    
    
    
    152,264Denominator for diluted earnings per share
    
    
    6,321,065
    
    
    
    6,382,740Basic earnings per share
    
    $
    1.64
    
    
    $
    1.22Diluted earnings per share
    
    $
    1.61
    
    
    $
    1.19
 Three months endedSeptember 30,2009
    
    
    2008(Dollars in thousands, except per share data)Numerator for basic and diluted earnings per share:Net income
    
    $
    3,554
    
    
    $
    1,780Denominator for basic earnings per share  weighted-average shares
    
    
    6,225,483
    
    
    
    6,237,804Effect of stock incentive plans
    
    
    164,246
    
    
    
    144,609Denominator for diluted earnings per share
    
    
    6,389,729
    
    
    
    6,382,413Basic earnings per share
    
    $
    0.57
    
    
    $
    0.29Diluted earnings per share
    
    $
    0.56
    
    
    $
    0.28
  (8) Fair Value of Assets and Liabilities
  
    
    Level 1 -Valuations based on unadjusted quoted market prices in active markets for
identical assets that the Group has the ability to access. Since the valuations are based
on quoted prices that are readily and regularly available in an active market, valuation of
these securities does not entail a significant amount or degree of judgment.
    
    Level 2 -Valuations based on quoted prices for similar assets in active markets; quoted
prices for identical or similar assets in inactive markets; or valuations based on models
where the significant inputs are observable (e.g., interest rates, yield curves, prepayment
speeds, default rates, loss severities, etc.) or can be corroborated by observable market
data.
 21




---



##### Table of Contents




    
    Level 3 -Valuations that are derived from techniques in which one or more of the
significant inputs are unobservable, including broker quotes which are non-binding.
           22




---



##### Table of Contents



September 30, 2009QuotedPrices inActive
    
    
    SignificantMarkets for
    
    
    Other
    
    
    SignificantIdentical
    
    
    Observable
    
    
    UnobservableAssets
    
    
    Inputs
    
    
    Inputs(in thousands)
    
    Total
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Fixed-income securities, available for sale
    
    $
    368,429
    
    
    $
    4,267
    
    
    $
    362,659
    
    
    $
    1,503Equity securities
    
    
    8,887
    
    
    
    8,841
    
    
    
    
    
    
    
    46Total assets
    
    $
    377,316
    
    
    $
    13,108
    
    
    $
    362,659
    
    
    $
    1,549Other liabilities
    
    $
    1,508
    
    
    $
    
    
    
    $
    1,508
    
    
    $
    Total liabilities
    
    $
    1,508
    
    
    $
    
    
    
    $
    1,508
    
    
    $
    
  For the Nine Months EndedSeptember 30, 2009Fixed-incomesecurities,available
    
    
    Equity(in thousands)
    
    for sale
    
    
    securitiesBalance, beginning of period
    
    $
    1,767
    
    
    $
    46Total net loss included in net income
    
    
    (301
    )
    
    
    Total net gain included in other comprehensive income
    
    
    46
    
    
    
    Purchases, sales, issuances and settlements, net
    
    
    (9
    )
    
    
    Balance, end of period
    
    $
    1,503
    
    
    $
    46
 23




---



##### Table of Contents



For the Three Months EndedSeptember 30, 2009Fixed-incomesecurities,available
    
    
    Equity(in thousands)
    
    for sale
    
    
    securitiesBalance, beginning of period
    
    $
    1,414
    
    
    $
    46Total net loss included in net income
    
    
    (18
    )
    
    
    Total net gain included in other comprehensive income
    
    
    112
    
    
    
    Purchases, sales, issuances and settlements, net
    
    
    (5
    )
    
    
    Balance, end of period
    
    $
    1,503
    
    
    $
    46
  (9) Derivative Instruments and Hedging Activities
  Accounting for
Derivative Instruments and Hedging Activities Accounting for Certain
Derivative Instruments and Certain Hedging Activities Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FASB
Statement No. 133
    24




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##### Table of Contents



September 30,
    
    
    December 31,2009
    
    
    2008Balance
    
    
    
    
    
    
    BalanceSheet
    
    
    
    
    
    
    SheetLocation
    
    
    Fair Value liability
    
    
    Location
    
    
    Fair Value liabilityInterest rate swaps:Union Bank of California
(Trust I)
    
    Other liabilities
    
    $
    (457
    )
    
    Other liabilities
    
    $
    (546
    )Union Bank of California
(Trust II)
    
    Other liabilities
    
    
    (301
    )
    
    Other liabilities
    
    
    (366
    )Union Bank of California
(Trust III)
    
    Other liabilities
    
    
    (750
    )
    
    Other liabilities
    
    
    (967
    )Total derivatives
    
    
    
    
    
    $
    (1,508
    )
    
    
    
    
    
    $
    (1,879
    )
  Nine months endedSeptember 30,
    
    
    September 30,2009
    
    
    2008Amount ofGainLocation of Gain Recognized
    
    
    Recognized in
    
    
    Location of (Loss)
    
    
    Amount of (Loss)in Income
    
    
    Income
    
    
    Recognized in Income
    
    
    Recognized in IncomeInterest rate swaps:Union Bank of California
(Trust I)
    
    Net realized investment gains
    
    $
    89
    
    
    Net realized investment losses
    
    $
    (50
    )Union Bank of California
(Trust II)
    
    Net realized investment gains
    
    
    66
    
    
    Net realized investment losses
    
    
    (27
    )Union Bank of California
(Trust III)
    
    Net realized investment gains
    
    
    216
    
    
    Net realized investment losses
    
    
    (127
    )Total derivatives
    
    
    
    
    
    $
    371
    
    
    
    
    
    
    $
    (204
    )
 25




---



##### Table of Contents



Three months endedSeptember 30,
    
    
    September 30,2009
    
    
    2008Amount of
    
    
    
    
    
    
    Amount of(loss)
    
    
    
    
    
    
    (loss)Location of (loss) Recognized
    
    
    Recognized
    
    
    Location of (loss) Recognized
    
    
    Recognizedin Income
    
    
    in Income
    
    
    in Income
    
    
    in IncomeInterest rate swaps:Union Bank of California
(Trust I)
    
    Net realized investment gains
    
    $
    (35
    )
    
    Net realized investment losses
    
    $
    (39
    )Union Bank of California
(Trust II)
    
    Net realized investment gains
    
    
    (27
    )
    
    Net realized investment losses
    
    
    (25
    )Union Bank of California
(Trust III)
    
    Net realized investment gains
    
    
    (74
    )
    
    Net realized investment losses
    
    
    (90
    )Total derivatives
    
    
    
    
    
    $
    (136
    )
    
    
    
    
    
    $
    (154
    )
 26




---



##### 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, New York
and Pennsylvania;
    
    Mercer Insurance Company of New Jersey, Inc. (MICNJ), a New Jersey property and casualty
stock insurance company offering insurance coverages to businesses and individuals located
in New Jersey and businesses located in New York;
    
    Franklin Insurance Company (FIC), a Pennsylvania property and casualty stock insurance
company offering private passenger automobile and homeowners insurance to individuals
located in Pennsylvania; and
    
    Financial Pacific Insurance Company (FPIC), a California property and casualty stock
insurance company offering insurance and surety products to small and medium sized
commercial businesses in Arizona, California, Nevada and Oregon, and direct mail surety
products to commercial businesses in various other states.
       27




---



##### Table of Contents



Critical Accounting Policies
 General.
 Liabilities for Loss and Loss Adjustment Expenses.
    28




---



##### Table of Contents



29




---



##### Table of Contents



September 30,
    
    
    December 31,2009
    
    
    2008(In thousands)Commercial
lines:Commercial multi-peril
    
    $
    234,265
    
    
    $
    224,444Commercial automobile
    
    
    38,052
    
    
    
    42,230Surety
    
    
    11,352
    
    
    
    10,606Other liability
    
    
    7,536
    
    
    
    8,018Workers compensation
    
    
    8,311
    
    
    
    8,150Fire, allied, inland marine
    
    
    129
    
    
    
    163299,645
    
    
    
    293,611Personal
lines:Homeowners
    
    
    6,377
    
    
    
    7,215Personal automobile
    
    
    1,737
    
    
    
    1,795Other liability
    
    
    659
    
    
    
    1,008Fire, allied, inland marine
    
    
    403
    
    
    
    335Workers compensation
    
    
    25
    
    
    
    369,201
    
    
    
    10,389Total
    
    $
    308,846
    
    
    $
    304,000
 Investments.
   30




---



##### Table of Contents



Policy Acquisition Costs.
 Reinsurance.
  Income Taxes.
 Results of Operations
     31




---



##### Table of Contents



Nine and three months ended September 30, 2009 compared to nine and three months ended
September 30, 2008
  Nine months ended September 30,2009 vs. 2008 Income
    
    2009
    
    2008
    
    Change
    
    % Change(Dollars in thousands)Commercial lines underwriting income
    
    $
    3,059
    
    
    $
    2,981
    
    
    $
    78
    
    
    
    2.6
    %Personal lines underwriting loss
    
    
    (927
    )
    
    
    (736
    )
    
    
    (191
    )
    
    
    (26.0
    )%Total underwriting income
    
    
    2,132
    
    
    
    2,245
    
    
    
    (113
    )
    
    
    (5.0
    )%Net investment income
    
    
    10,833
    
    
    
    10,173
    
    
    
    660
    
    
    
    6.5
    %Net realized investment gains (losses)
    
    
    393
    
    
    
    (2,944
    )
    
    
    3,337
    
    
    
    N/MOther
    
    
    1,555
    
    
    
    1,555
    
    
    
    
    
    
    
    
    %Interest expense
    
    
    (1,066
    )
    
    
    (961
    )
    
    
    (105
    )
    
    
    10.9
    %Income before income taxes
    
    
    13,847
    
    
    
    10,068
    
    
    
    3,779
    
    
    
    37.5
    %Income taxes
    
    
    3,652
    
    
    
    2,463
    
    
    
    1,189
    
    
    
    48.3
    %Net Income
    
    
    10,195
    
    
    
    7,605
    
    
    
    2,590
    
    
    
    34.1
    %Loss/ LAE ratio (GAAP)
    
    
    61.4
    %
    
    
    61.9
    %
    
    
    (0.5
    )%Underwriting expense ratio (GAAP)
    
    
    36.6
    %
    
    
    36.1
    %
    
    
    0.5
    %Combined ratio (GAAP)
    
    
    98.0
    %
    
    
    98.0
    %
    
    
    
    %Loss/ LAE ratio (Statutory)
    
    
    61.5
    %
    
    
    61.9
    %
    
    
    (0.4
    )%Underwriting expense ratio (Statutory)
    
    
    35.9
    %
    
    
    35.9
    %
    
    
    
    %Combined ratio (Statutory)
    
    
    97.4
    %
    
    
    97.8
    %
    
    
    (0.4
    )%
 Three months ended September 30,2009 vs. 2008 Income
    
    2009
    
    2008
    
    Change
    
    % Change(Dollars in thousands)Commercial lines underwriting income
    
    $
    698
    
    
    $
    741
    
    
    $
    (43
    )
    
    
    (5.8)
    %Personal lines underwriting (loss) income
    
    
    (68
    )
    
    
    73
    
    
    
    (141
    )
    
    
    N/MTotal underwriting income
    
    
    630
    
    
    
    814
    
    
    
    (184
    )
    
    
    (22.6)
    %Net investment income
    
    
    3,605
    
    
    
    3,469
    
    
    
    136
    
    
    
    3.9
    %Net realized investment gains (losses)
    
    
    472
    
    
    
    (2,281
    )
    
    
    2,753
    
    
    
    N/MOther
    
    
    516
    
    
    
    536
    
    
    
    (20
    )
    
    
    (3.7)
    %Interest expense
    
    
    (358
    )
    
    
    (328
    )
    
    
    (30
    )
    
    
    9.1
    %Income before income taxes
    
    
    4,865
    
    
    
    2,210
    
    
    
    2,655
    
    
    
    120.1
    %Income taxes
    
    
    1,311
    
    
    
    430
    
    
    
    881
    
    
    
    204.9
    %Net Income
    
    
    3,554
    
    
    
    1,780
    
    
    
    1,774
    
    
    
    99.7
    %Loss/ LAE ratio (GAAP)
    
    
    62.5
    %
    
    
    60.3
    %
    
    
    2.2
    %Underwriting expense ratio (GAAP)
    
    
    35.7
    %
    
    
    37.6
    %
    
    
    (1.9
    )%Combined ratio (GAAP)
    
    
    98.2
    %
    
    
    97.9
    %
    
    
    0.3
    %Loss/ LAE ratio (Statutory)
    
    
    62.5
    %
    
    
    60.3
    %
    
    
    2.2
    %Underwriting expense ratio (Statutory)
    
    
    36.7
    %
    
    
    37.6
    %
    
    
    (0.9
    )%Combined ratio (Statutory)
    
    
    99.2
    %
    
    
    97.9
    %
    
    
    1.3
    %
 
 (N/M means not meaningful) 32




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33




---



##### Table of Contents



Revenues
 Nine Months Ended September 30,2009 vs. 2008 Revenue
    
    2009
    
    2008
    
    Change
    
    % Change(In thousands)Direct premiums written
    
    $
    116,986
    
    
    $
    129,538
    
    
    $
    (12,552
    )
    
    
    (9.7
    )%Net premiums written
    
    
    105,537
    
    
    
    115,863
    
    
    
    (10,326
    )
    
    
    (8.9
    )%Net premiums earned
    
    
    105,215
    
    
    
    115,590
    
    
    
    (10,375
    )
    
    
    (9.0
    )%Net investment income
    
    
    10,833
    
    
    
    10,173
    
    
    
    660
    
    
    
    6.5
    %Net realized investment gains (losses)
    
    
    393
    
    
    
    (2,944
    )
    
    
    3,337
    
    
    
    N/MOther revenue
    
    
    1,555
    
    
    
    1,555
    
    
    
    
    
    
    
    
    %Total revenue
    
    $
    117,996
    
    
    $
    124,374
    
    
    $
    (6,378
    )
    
    
    (5.1
    )%
 Three Months Ended September 30,2009 vs. 2008 Revenue
    
    2009
    
    2008
    
    Change
    
    % Change(In thousands)Direct premiums written
    
    $
    37,374
    
    
    $
    42,161
    
    
    $
    (4,787
    )
    
    
    (11.4
    )%Net premiums written
    
    
    33,355
    
    
    
    37,575
    
    
    
    (4,220
    )
    
    
    (11.2
    )%Net premiums earned
    
    
    34,681
    
    
    
    37,869
    
    
    
    (3,188
    )
    
    
    (8.4
    )%Net investment income
    
    
    3,605
    
    
    
    3,469
    
    
    
    136
    
    
    
    3.9
    %Net realized investment gains (losses)
    
    
    472
    
    
    
    (2,281
    )
    
    
    2,753
    
    
    
    N/MOther revenue
    
    
    516
    
    
    
    536
    
    
    
    (20
    )
    
    
    (3.7
    )%Total revenue
    
    $
    39,274
    
    
    $
    39,593
    
    
    $
    (319
    )
    
    
    (0.8
    )%
 
 (N/M means not meaningful)    34




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35




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##### Table of Contents



Investment segment
 Nine Months Ended September 30,2009 vs. 2008 Investment Income and Realized Gains (Losses)
    
    2009
    
    2008
    
    Change
    
    % Change(In thousands)Fixed income securities
    
    $
    11,987
    
    
    $
    11,058
    
    
    $
    929
    
    
    
    8.4
    %Dividends
    
    
    219
    
    
    
    254
    
    
    
    (35
    )
    
    
    (13.8
    )%Cash, cash equivalents & other
    
    
    119
    
    
    
    356
    
    
    
    (237
    )
    
    
    (66.6
    )%Gross investment income
    
    
    12,325
    
    
    
    11,668
    
    
    
    657
    
    
    
    5.6
    %Investment expenses
    
    
    (1,492
    )
    
    
    (1,495
    )
    
    
    3
    
    
    
    0.2
    %Net investment income
    
    
    10,833
    
    
    
    10,173
    
    
    $
    660
    
    
    
    6.5
    %Realized losses  fixed income securities
    
    
    (278
    )
    
    
    (3,226
    )
    
    $
    2,948
    
    
    
    N/MRealized gains  equity securities
    
    
    300
    
    
    
    486
    
    
    
    (186
    )
    
    
    N/MMark-to-market valuation for interest rate swaps
    
    
    371
    
    
    
    (204
    )
    
    
    575
    
    
    
    N/MNet realized gains (losses)
    
    
    393
    
    
    
    (2,944
    )
    
    $
    3,337
    
    
    
    N/M
 Three Months Ended September 30,2009 vs. 2008 Investment Income and Realized Gains (losses)
    
    2009
    
    
    2008
    
    
    Change
    
    
    % Change(In thousands)Fixed income securities
    
    $
    4,027
    
    
    $
    3,769
    
    
    $
    258
    
    
    
    6.8
    %Dividends
    
    
    60
    
    
    
    87
    
    
    
    (27
    )
    
    
    (31.0
    )%Cash, cash equivalents & other
    
    
    40
    
    
    
    103
    
    
    
    (63
    )
    
    
    (61.2
    )%Gross investment income
    
    
    4,127
    
    
    
    3,959
    
    
    
    168
    
    
    
    4.2
    %Investment expenses
    
    
    (522
    )
    
    
    (490
    )
    
    
    (32
    )
    
    
    (6.5
    )%Net investment income
    
    
    3,605
    
    
    
    3,469
    
    
    $
    136
    
    
    
    3.9
    %Realized gains (losses)  fixed income securities
    
    
    34
    
    
    
    (2,767
    )
    
    $
    2,801
    
    
    
    N/MRealized gains  equity securities
    
    
    574
    
    
    
    640
    
    
    
    (66
    )
    
    
    N/MMark-to-market valuation for interest rate swaps
    
    
    (136
    )
    
    
    (154
    )
    
    
    18
    
    
    
    N/MNet realized gains (losses)
    
    
    472
    
    
    
    (2,281
    )
    
    $
    2,753
    
    
    
    N/M
 
 (N/M means not meaningful)    36




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September 30, 2009
    
    December 31, 2008Cost (2)
    
    Fair Value
    
    Cost (2)
    
    Fair Value(In thousands)Fixed income securities (1)United States government and government
agencies (3)
    
    $
    71,468
    
    
    $
    75,136
    
    
    $
    84,747
    
    
    $
    87,975Obligations of states and political subdivisions
    
    
    138,346
    
    
    
    146,817
    
    
    
    143,042
    
    
    
    145,125Industrial and miscellaneous
    
    
    113,868
    
    
    
    121,028
    
    
    
    77,859
    
    
    
    77,499Mortgage-backed certificates
    
    
    24,413
    
    
    
    25,448
    
    
    
    25,427
    
    
    
    23,488Total fixed income securities
    
    
    348,095
    
    
    
    368,429
    
    
    
    331,075
    
    
    
    334,087Equity securities
    
    
    7,243
    
    
    
    8,887
    
    
    
    9,232
    
    
    
    10,203Total
    
    $
    355,338
    
    
    $
    377,316
    
    
    $
    340,307
    
    
    $
    344,290
 
 (1)
    
    In our consolidated financial statements, investments are carried at fair value.(2)
    
    Original cost of equity and fixed income securities adjusted for other than temporary
impairment write downs and amortization of premium and accretion of discount.(3)
    
    Includes approximately $56,813 and $66,576 (cost) and $59,925 and $68,696 (estimated fair
value) of mortgage-backed securities 37




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##### Table of Contents



backed by the U.S. government and government agencies as
of September 30, 2009 and December 31, 2008, respectively.  September 30, 2009
    
    
    December 31, 2008Cost (1)
    
    
    Fair Value
    
    
    Cost (1)
    
    
    Fair Value(In thousands)Industrial and miscellaneous:Fixed income securitiesRetail specialty
    
    $
    37,575
    
    
    $
    39,862
    
    
    $
    27,561
    
    
    $
    27,810Financial
    
    
    29,917
    
    
    
    31,689
    
    
    
    36,520
    
    
    
    36,065Energy
    
    
    25,225
    
    
    
    27,236
    
    
    
    9,680
    
    
    
    9,444Information Technology
    
    
    11,274
    
    
    
    11,850
    
    
    
    1,849
    
    
    
    1,860Pharmaceutical
    
    
    9,877
    
    
    
    10,391
    
    
    
    2,249
    
    
    
    2,320Total
    
    $
    113,868
    
    
    $
    121,028
    
    
    $
    77,859
    
    
    $
    77,499Equity securitiesRetail specialty
    
    $
    3,285
    
    
    $
    3,820
    
    
    $
    4,117
    
    
    $
    4,565Financial
    
    
    1,293
    
    
    
    1,516
    
    
    
    2,329
    
    
    
    2,343Information Technology
    
    
    995
    
    
    
    1,294
    
    
    
    1,246
    
    
    
    1,186Pharmaceutical
    
    
    1,190
    
    
    
    1,474
    
    
    
    794
    
    
    
    974Energy
    
    
    480
    
    
    
    783
    
    
    
    746
    
    
    
    1,135Total
    
    $
    7,243
    
    
    $
    8,887
    
    
    $
    9,232
    
    
    $
    10,203
 
 (1)
    
    Original cost of equity securities; original cost of fixed income securities adjusted
for amortization of premium and accretion of discount, as well as any impairment
write-downs.  38




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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
    
    $
    2,213
    
    
    $
    1
    
    
    $
    
    
    
    $
    
    
    
    $
    2,213
    
    
    $
    1Obligations of states and
political subdivisions
    
    
    
    
    
    
    
    
    
    
    1,543
    
    
    
    32
    
    
    
    1,543
    
    
    
    32Corporate securities
    
    
    1,081
    
    
    
    4
    
    
    
    2,201
    
    
    
    71
    
    
    
    3,282
    
    
    
    75Mortgage-backed securities
    
    
    
    
    
    
    
    
    
    
    4,049
    
    
    
    127
    
    
    
    4,049
    
    
    
    127Total fixed maturities.
    
    
    3,294
    
    
    
    5
    
    
    
    7,793
    
    
    
    230
    
    
    
    11,087
    
    
    
    235Total equity securities
    
    
    894
    
    
    
    24
    
    
    
    391
    
    
    
    5
    
    
    
    1,285
    
    
    
    29Total securities in a
temporary unrealized loss
position
    
    $
    4,188
    
    
    $
    29
    
    
    $
    8,184
    
    
    $
    235
    
    
    $
    12,372
    
    
    $
    264
     39




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##### Table of Contents



Commercial Lines segment
 Nine Months Ended September 30,2009 vs. 2008 Commercial Lines (CL)
    
    2009
    
    2008
    
    Change
    
    % Change(Dollars in thousands)CL Direct premiums written
    
    $
    100,825
    
    
    $
    112,871
    
    
    $
    (12,046
    )
    
    
    (10.7
    )%CL Net premiums written
    
    $
    91,006
    
    
    $
    100,852
    
    
    $
    (9,846
    )
    
    
    (9.8
    )%CL Net premiums earned
    
    $
    90,611
    
    
    $
    100,496
    
    
    $
    (9,885
    )
    
    
    (9.8
    )%CL Loss/ LAE expense ratio (GAAP)
    
    
    60.0
    %
    
    
    61.1
    %
    
    
    (1.1
    )%CL Expense ratio (GAAP)
    
    
    36.6
    %
    
    
    35.9
    %
    
    
    0.7
    %CL Combined ratio (GAAP)
    
    
    96.6
    %
    
    
    97.0
    %
    
    
    (0.4
    )%
 Three Months Ended September 30,2009 vs. 2008 Commercial Lines (CL)
    
    2009
    
    2008
    
    Change
    
    % Change(Dollars in thousands)CL Direct premiums written
    
    $
    31,581
    
    
    $
    36,237
    
    
    $
    (4,656
    )
    
    
    (12.8
    )%CL Net premiums written
    
    $
    28,070
    
    
    $
    32,187
    
    
    $
    (4,117
    )
    
    
    (12.8
    )%CL Net premiums earned
    
    $
    29,737
    
    
    $
    32,807
    
    
    $
    (3,070
    )
    
    
    (9.4
    )%CL Loss/ LAE expense ratio (GAAP)
    
    
    61.7
    %
    
    
    59.9
    %
    
    
    1.8
    %CL Expense ratio (GAAP)
    
    
    36.0
    %
    
    
    37.7
    %
    
    
    (1.7
    )%CL Combined ratio (GAAP)
    
    
    97.7
    %
    
    
    97.6
    %
    
    
    0.1
    %
    40




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41




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##### Table of Contents



Personal Lines segment
 Nine Months Ended September 30,2009 vs. 2008 Personal Lines (PL)
    
    2009
    
    2008
    
    Change
    
    % Change(Dollars in thousands)PL Direct premiums written
    
    $
    16,160
    
    
    $
    16,667
    
    
    $
    (507
    )
    
    
    (3.0
    )%PL Net premiums written
    
    $
    14,531
    
    
    $
    15,011
    
    
    $
    (480
    )
    
    
    (3.2
    )%PL Net premiums earned
    
    $
    14,604
    
    
    $
    15,094
    
    
    $
    (490
    )
    
    
    (3.2
    )%PL Loss/ LAE expense ratio (GAAP)
    
    
    70.2
    %
    
    
    67.3
    %
    
    
    2.9
    %PL Expense ratio (GAAP)
    
    
    36.2
    %
    
    
    37.6
    %
    
    
    (1.4
    )%PL Combined ratio (GAAP)
    
    
    106.4
    %
    
    
    104.9
    %
    
    
    1.5
    %
 Three Months Ended September 30,2009 vs. 2008 Personal Lines (PL)
    
    2009
    
    2008
    
    Change
    
    % Change(Dollars in thousands)PL Direct premiums written
    
    $
    5,794
    
    
    $
    5,924
    
    
    $
    (130
    )
    
    
    (2.2
    )%PL Net premiums written
    
    $
    5,285
    
    
    $
    5,388
    
    
    $
    (103
    )
    
    
    (1.9
    )%PL Net premiums earned
    
    $
    4,944
    
    
    $
    5,062
    
    
    $
    (118
    )
    
    
    (2.3
    )%PL Loss/ LAE expense ratio (GAAP)
    
    
    67.8
    %
    
    
    62.8
    %
    
    
    5.0
    %PL Expense ratio (GAAP)
    
    
    33.6
    %
    
    
    36.9
    %
    
    
    (3.3
    )%PL Combined ratio (GAAP)
    
    
    101.4
    %
    
    
    99.7
    %
    
    
    1.7
    %
     42




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##### Table of Contents



Underwriting Expenses and the Expense Ratio
 Nine Months Ended September 30,2009 vs. 2008 Expenses and Expense Ratio
    
    2009
    
    2008
    
    Change
    
    % Change(Dollars in thousands)Amortization of Deferred Acquisition Costs
    
    $
    29,002
    
    
    $
    31,163
    
    
    $
    (2,161
    )
    
    
    (6.9
    )%As a % of net premiums earned
    
    
    27.6
    %
    
    
    27.0
    %
    
    
    0.6
    %Other underwriting expenses
    
    
    9,438
    
    
    
    10,618
    
    
    
    (1,180
    )
    
    
    (11.1
    )%Underwriting expenses
    
    $
    38,440
    
    
    $
    41,781
    
    
    $
    (3,341
    )
    
    
    (8.0
    )%Underwriting expense ratio
    
    
    36.6
    %
    
    
    36.1
    %
    
    
    0.5
    %
   Federal income tax
 Nine Months Ended September 302009 vs. 2008 Income Taxes
    
    2009
    
    2008
    
    Change
    
    % Change(Dollars in thousands)Income before income taxes
    
    $
    13,847
    
    
    $
    10,068
    
    
    $
    3,779
    
    
    
    37.5
    %Income taxes
    
    
    3,652
    
    
    
    2,463
    
    
    
    1,189
    
    
    
    48.3
    %Net income
    
    $
    10,195
    
    
    $
    7,605
    
    
    $
    2,590
    
    
    
    34.1
    %Effective tax rate
    
    
    26.4
    %
    
    
    24.5
    %
    43




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
          44




---



##### Table of Contents



IMPACT OF INFLATION
  45




---



##### Table of Contents



OFF BALANCE SHEET COMMITMENTS AND CONTRACTUAL OBLIGATIONS
   
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 General.
  Interest Rate Risk.
  Credit Risk.
  Municipal Bond Holding Exposure.
  
    
    AA+ including insurance enhancement
    
    AA excluding insurance enhancement (using underlying ratings)
 
    
    99% of the underlying ratings are A- or better
    
    90% of the underlying ratings are AA- or better
  
    
    The average credit quality with insurance enhancement is AA
 46




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##### Table of Contents




    
    The average credit quality of the underlying, excluding insurance enhancement, is AA
    
    Each municipal fixed income investment is evaluated based on its underlying
credit fundamentals, irrespective of credit enhancement provided by bond insurers
  
    
    The average credit quality of those securities without enhancement is AA+
  Average Credit
    
    
    Market
    
    
    % of Total Muni
    
    
    UnrealizedRating
    
    
    Value
    
    
    Portfolio
    
    
    GainUninsured Securities
    
    AA+
    
    $
    48,750,999
    
    
    
    33
    %
    
    $
    2,613,307Securities with
Insurance
Enhancement
    
    AA
    
    
    98,065,828
    
    
    
    67
    %
    
    
    5,857,733Total
    
    
    
    
    
    $
    146,816,827
    
    
    
    100
    %
    
    $
    8,471,040
  Total Municipal
    
    
    Total MunicipalUnderlying Rating
    
    
    Fixed Income
    
    
    Fixed IncomeInsurance
    
    
    of Insurance
    
    
    Portfolio
    
    
    PortfolioUninsured
    
    
    Enhanced
    
    
    Enhanced
    
    
    (with Insurance
    
    
    (without InsuranceSecurities
    
    
    Securities
    
    
    Securities
    
    
    Enhancement)
    
    
    Enhancement)(1)
    
    
    (2)
    
    
    (3)
    
    
    (1) + (2)
    
    
    (1) + (3)S&P or
    
    Market
    
    
    % of
    
    
    Market
    
    
    % of
    
    
    Market
    
    
    % of
    
    
    Market
    
    
    % of
    
    
    Market
    
    
    % ofequivalent ratings
    
    Value
    
    
    Total
    
    
    Value
    
    
    Total
    

    Value
        
    Total
    

    Value
        
    Total
    

    Value
    
    
    TotalAAA
    
    $
    31,779,222
    
    
    
    65
    %
    
    $
    35,367,201
    
    
    
    36
    %
    
    $
    9,367,187
    
    
    
    10
    %
    
    $
    67,146,423
    
    
    
    46
    %
    
    $
    41,146,409
    
    
    
    28
    %AA+
    
    
    2,657,473
    
    
    
    5
    %
    
    
    21,181,831
    
    
    
    22
    %
    
    
    27,668,959
    
    
    
    28
    %
    
    
    23,839,304
    
    
    
    16
    %
    
    
    30,326,432
    
    
    
    21
    %AA
    
    
    11,411,001
    
    
    
    23
    %
    
    
    24,924,508
    
    
    
    25
    %
    
    
    30,832,875
    
    
    
    31
    %
    
    
    36,335,509
    
    
    
    25
    %
    
    
    42,243,876
    
    
    
    29
    %AA-
    
    
    1,360,583
    
    
    
    3
    %
    
    
    11,700,642
    
    
    
    12
    %
    
    
    16,591,987
    
    
    
    17
    %
    
    
    13,061,225
    
    
    
    9
    %
    
    
    17,952,570
    
    
    
    12
    %A+
    
    
    
    
    
    
    
    
    
    
    1,735,976
    
    
    
    2
    %
    
    
    3,449,562
    
    
    
    3
    %
    
    
    1,735,976
    
    
    
    1
    %
    
    
    3,449,562
    
    
    
    2
    %A
    
    
    1,542,720
    
    
    
    3
    %
    
    
    2,074,550
    
    
    
    2
    %
    
    
    5,947,153
    
    
    
    6
    %
    
    
    3,617,270
    
    
    
    2
    %
    
    
    7,489,873
    
    
    
    5
    %A-
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,126,985
    
    
    
    3
    %
    
    
    
    
    
    
    
    
    
    
    3,126,985
    
    
    
    2
    %BBB-
    
    
    
    
    
    
    
    
    
    
    1,081,120
    
    
    
    1
    %
    
    
    1,081,120
    
    
    
    1
    %
    
    
    1,081,120
    
    
    
    1
    %
    
    
    1,081,120
    
    
    
    1
    %Total
    
    $
    48,750,999
    
    
    
    100
    %
    
    $
    98,065,828
    
    
    
    100
    %
    
    $
    98,065,828
    
    
    
    99
    %
    
    $
    146,816,827
    
    
    
    100
    %
    
    $
    146,816,827
    
    
    
    100
    %Average Rating
    
    AA+
    
    
    
    
    
    AA
    
    
    
    
    
    AA
    
    
    
    
    
    AA+
    
    
    
    
    
    AA
 47




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##### Table of Contents



Section 3:
 Structured Product Exposure.
        48




---



##### Table of Contents



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.
 Total Number of Shares Purchased as

    
    Maximum Number of Shares ThatTotal Number of
    
    Average Price
    
    Part of Publicly Announced Plans or
    
    May Yet Be Purchased UnderPeriod
    
    Shares Purchased

    
    Paid per Share

    
    Programs (Note 1)

    
    The Plans or Programs (Note 1)July 1-31,
2009
    
    
    0
    
    
    
    N/A
    
    
    
    0
    
    
    
    205,176August 1-31,
2009
    
    
    0
    
    
    
    N/A
    
    
    
    0
    
    
    
    205,176September 1-
30, 2009
    
    
    0
    
    
    
    N/A
    
    
    
    0
    
    
    
    205,176Total
    
    
    0
    
    
    
    N/A
    
    
    
    0
    
    
    
    205,176
  
 Item 3.
    
    Defaults Upon Senior Securities
 49




---



##### Table of Contents



NoneItem 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)
 50




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##### Table of Contents



SIGNATURES
  MERCER INSURANCE GROUP, INC. (Registrant)Dated: November 9, 2009
    By:
    /s/ Andrew R. SpeakerAndrew R. Speaker,President and Chief Executive OfficerDated: November 9, 2009
    By:
    /s/ David B. MercleanDavid B. Merclean,Senior Vice President and Chief Financial Officer(Principal Financial and Accounting
Officer) 51