##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
 for the Quarterly Period Ended June 30, 2006,
 or
 o
    
    Transition report pursuant to Section 13 or 15(d) Of the Exchange Act
 for the Transition Period from  to
 No. 000-25425
 (Commission File Number)
 MERCER INSURANCE GROUP, INC.
  PENNSYLVANIA
    
    23-2934601(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)10 North Highway 31, P.O. Box 278, Pennington, NJ
    
    08534(Address of principal executive offices)
    
    (Zip Code)
 (Registrants telephone number, including area code)
 (Former name, former address and former fiscal year, if changed since last report)
 þ o
  o þ o
 o þ
  Number of Shares Outstanding as of August 7, 2006COMMON STOCK (No Par Value)
    
    6,550,720(Title of Class)
    
    (Outstanding Shares)




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##### 



TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    32Item 4. Controls and Procedures
    
    
    32PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    32Item 1A. Risk Factors
    
    
    32Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    32Item 3. Defaults Upon Senior Securities
    
    
    32Item 4. Submission of Matters to a Vote of Security Holders
    
    
    33Item 5. Other Information
    
    
    33Item 6. Exhibits
    
    
    33SIGNATURES
    
    
    34Exhibits:Certification 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
  Exhibit No.
    
    Title3.1
    
    Articles of Incorporation of Mercer Insurance Group, Inc. (incorporated by reference herein to the
Companys Pre-effective Amendment No. 3 on Form S-1, SEC File No. 333-104897.)3.2
    
    Bylaws of Mercer Insurance Group, Inc. (incorporated by reference herein to the Companys Annual Report
on Form 10-K, SEC File No. 000-25425, for the fiscal year ended December 31, 2003.)31.1
    
    Certification of Chief Executive Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002
 2




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Forward-looking Statements
                    3




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4




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Part I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEET
 June 30,
    
    
    December 31,2006
    
    
    2005(Dollars in thousands)(Unaudited)ASSETSInvestments:Fixed income securities, available-for-sale, at fair value (amortized cost of $261,172 and
$231,191, respectively)
    
    $
    255,283
    
    
    $
    229,129Equity securities, at fair value (cost of $10,588 and $8,599, respectively)
    
    
    15,719
    
    
    
    14,981Short-term investments, at cost, which approximates fair value
    
    
    2,397
    
    
    
    4,289Total investments
    
    
    273,399
    
    
    
    248,399Cash and cash equivalents
    
    
    13,113
    
    
    
    20,677Premiums receivable
    
    
    46,430
    
    
    
    37,497Reinsurance receivables
    
    
    84,769
    
    
    
    79,214Prepaid reinsurance premiums
    
    
    17,521
    
    
    
    21,554Deferred policy acquisition costs
    
    
    17,291
    
    
    
    10,789Accrued investment income
    
    
    2,783
    
    
    
    2,625Property and equipment, net
    
    
    11,949
    
    
    
    11,720Deferred income taxes
    
    
    9,115
    
    
    
    3,588Goodwill
    
    
    5,633
    
    
    
    5,633Other assets
    
    
    4,526
    
    
    
    5,002Total assets
    
    $
    486,529
    
    
    $
    446,698LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Losses and loss adjustment expenses
    
    $
    228,340
    
    
    $
    211,679Unearned premiums
    
    
    88,710
    
    
    
    78,982Accounts payable and accrued expenses
    
    
    15,884
    
    
    
    13,761Other reinsurance balances
    
    
    26,128
    
    
    
    18,574Trust preferred securities
    
    
    15,533
    
    
    
    15,525Advances under line of credit
    
    
    3,000
    
    
    
    3,000Other liabilities
    
    
    2,369
    
    
    
    1,778Total liabilities
    
    
    379,964
    
    
    
    343,299Stockholders 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 7,054,233 and 7,068,233
shares, outstanding 6,550,669 and 6,463,538 shares
    
    
    
    
    
    
    Additional paid-in capital
    
    
    67,341
    
    
    
    67,973Accumulated other comprehensive (loss) income:Unrealized (losses) gains in investments, net of deferred income taxes
    
    
    (500
    )
    
    
    2,851Retained earnings
    
    
    50,118
    
    
    
    44,896Unearned restricted stock compensation
    
    
    
    
    
    
    (1,654
    )Unearned ESOP shares
    
    
    (4,073
    )
    
    
    (4,383
    )Treasury stock, at cost, 503,513 and 501,563 shares
    
    
    (6,321
    )
    
    
    (6,284
    )Total stockholdersequity
    
    
    106,565
    
    
    
    103,399Total liabilities and stockholders equity
    
    $
    486,529
    
    
    $
    446,698
  5




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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF EARNINGS
Six Months Ended June 30, 2006 and 2005
 2006
    
    
    2005(Dollars in thousands, except pershare data)(Unaudited)Revenue:Net premiums earned
    
    $
    67,168
    
    
    $
    29,975Investment income, net of expenses
    
    
    4,460
    
    
    
    1,484Net realized investment gains
    
    
    605
    
    
    
    97Other revenue
    
    
    1,078
    
    
    
    172Total revenue
    
    
    73,311
    
    
    
    31,728Expenses:Losses and loss adjustment expenses
    
    
    42,195
    
    
    
    15,034Amortization of deferred policy
acquisition costs (related party
amounts of $614 and $634,
respectively)
    
    
    15,140
    
    
    
    7,801Other expense
    
    
    7,487
    
    
    
    6,021Interest expenses
    
    
    601
    
    
    
    Total expenses
    
    
    65,423
    
    
    
    28,856Income before income taxes
    
    
    7,888
    
    
    
    2,872Income taxes
    
    
    2,343
    
    
    
    814Net income
    
    $
    5,545
    
    
    $
    2,058Earnings per common share:Basic
    
    $
    0.93
    
    
    $
    0.35Diluted
    
    $
    0.90
    
    
    $
    0.33Weighted average shares:Basic
    
    
    5,982,071
    
    
    
    5,939,968Diluted
    
    
    6,154,893
    
    
    
    6,172,231
  6




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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended June 30, 2006 and 2005
 2006
    
    
    2005(Dollars in thousands, except pershare data)(Unaudited)Revenue:Net premiums earned
    
    $
    33,631
    
    
    $
    14,862Investment income, net of expenses
    
    
    2,369
    
    
    
    740Net realized investment gains
    
    
    298
    
    
    
    80Other revenue
    
    
    587
    
    
    
    87Total revenue
    
    
    36,885
    
    
    
    15,769Expenses:Losses and loss adjustment expenses
    
    
    21,549
    
    
    
    7,312Amortization of deferred policy
acquisition costs (related party
amounts of $307 and $316,
respectively)
    
    
    7,848
    
    
    
    3,902Other expense
    
    
    3,052
    
    
    
    3,063Interest expenses
    
    
    304
    
    
    
    Total expenses
    
    
    32,753
    
    
    
    14,277Income before income taxes
    
    
    4,132
    
    
    
    1,492Income taxes
    
    
    1,237
    
    
    
    427Net income
    
    $
    2,895
    
    
    $
    1,065Earnings per common share:Basic
    
    $
    0.48
    
    
    $
    0.18Diluted
    
    $
    0.47
    
    
    $
    0.17Weighted average shares:Basic
    
    
    5,994,228
    
    
    
    5,877,160Diluted
    
    
    6,191,449
    
    
    
    6,101,548
  7




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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
Six months ended June 30, 2006
(Unaudited, dollars in thousands)
 Accumulated
    
    
    
    
    
    
    UnearnedAdditional
    
    
    other
    
    
    
    
    
    
    restricted
    
    
    UnearnedPreferred
    
    
    Common
    
    
    paid-in
    
    
    comprehensive
    
    
    Retained
    
    
    stock
    
    
    ESOP
    
    
    Treasurystock
    
    
    stock
    
    
    capital
    
    
    income
    
    
    Earnings
    
    
    compensation
    
    
    shares
    
    
    stock
    
    
    TotalBalance,
December 31, 2005
    
    $
    
    
    
    
    
    
    
    
    67,973
    
    
    
    2,851
    
    
    
    44,896
    
    
    
    (1,654
    )
    
    
    (4,383
    )
    
    
    (6,284
    )
    
    $
    103,399Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,545
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,545Unrealized losses
on securities:Unrealized
holding losses
arising during
period, net of
related income
tax benefit
of $1,521
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,952
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,952
    )Less
reclassification
adjustment for
gains included
in net income,
net of related
income tax
expense of $206
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (399
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (399
    )Other
comprehensive
loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,351
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,194Reclassification of
unearned restricted
stock compensation
    
    
    
    
    
    
    
    
    
    
    (1,654
    )
    
    
    
    
    
    
    
    
    
    
    1,654
    
    
    
    
    
    
    
    
    
    
    
    Stock compensation
plan amortization
    
    
    
    
    
    
    
    
    
    
    650
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    650Tax benefit from
stock compensation
plan
    
    
    
    
    
    
    
    
    
    
    123
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    123ESOP shares
committed
    
    
    
    
    
    
    
    
    
    
    249
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    310
    
    
    
    
    
    
    
    559Treasury stock
purchased
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (37
    )
    
    
    (37
    )Dividends to
shareholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (323
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (323
    )Balance, June 30,
2006
    
    $
    
    
    
    
    
    
    
    
    67,341
    
    
    
    (500
    )
    
    
    50,118
    
    
    
    
    
    
    
    (4,073
    )
    
    
    (6,321
    )
    
    $
    106,565
  8




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MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2006 and 2005
 2006
    
    
    2005(Dollars in thousands)(Unaudited)Cash flows from operating activities:Net income
    
    $
    5,545
    
    
    $
    2,058Adjustments to reconcile net income to net cash provided (used) by operating activities:Depreciation and amortization
    
    
    1,259
    
    
    
    849Net amortization of premium
    
    
    520
    
    
    
    287Amortization of stock compensation
    
    
    650
    
    
    
    330ESOP share commitment
    
    
    559
    
    
    
    404Net realized investment gains
    
    
    (605
    )
    
    
    (97
    )Deferred income tax
    
    
    (3,800
    )
    
    
    (93
    )Change in assets and liabilities:Premiums receivable
    
    
    (8,933
    )
    
    
    (995
    )Reinsurance receivables
    
    
    (5,555
    )
    
    
    (571
    )Prepaid reinsurance premiums
    
    
    4,033
    
    
    
    (5
    )Deferred policy acquisition costs
    
    
    (6,502
    )
    
    
    (293
    )Other assets
    
    
    916
    
    
    
    (212
    )Losses and loss adjustment expenses
    
    
    16,661
    
    
    
    (350
    )Unearned premiums
    
    
    9,728
    
    
    
    (29
    )Other
    
    
    10,241
    
    
    
    (1,980
    )Net cash provided (used) by operating activities
    
    
    24,717
    
    
    
    (697
    )Cash flows from investing activities:Purchase of fixed income securities, available-for-sale
    
    
    (104,084
    )
    
    
    (9,841
    )Purchase of equity securities
    
    
    (2,945
    )
    
    
    (908
    )Sale and maturity of fixed income securities, available-for-sale
    
    
    73,196
    
    
    
    29,083Sale of equity securities
    
    
    1,350
    
    
    
    2,618Sale (purchase) of short-term investments, net
    
    
    1,892
    
    
    
    (22,486
    )Purchase of property and equipment, net
    
    
    (1,453
    )
    
    
    (828
    )Net cash used by investing activities
    
    
    (32,044
    )
    
    
    (2,362
    )Cash flows from financing activities:Purchase of treasury stock
    
    
    (37
    )
    
    
    (3,230
    )Tax benefit from stock compensation plans
    
    
    123
    
    
    
    Dividends to shareholders
    
    
    (323
    )
    
    
    Net cash used by financing activities
    
    
    (237
    )
    
    
    (3,230
    )Net decrease in cash and cash equivalents
    
    
    (7,564
    )
    
    
    (6,289
    )Cash and cash equivalents at beginning of period
    
    
    20,677
    
    
    
    16,289Cash and cash equivalents at end of period
    
    $
    13,113
    
    
    $
    10,000Cash paid during the period for:Interest
    
    $
    616
    
    
    $
    21Income taxes
    
    $
    2,300
    
    
    $
    1,050
  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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Six monthsendedJune 30, 2005(In thousands,except pershare data)Net income, as reported
    
    $
    2,058Plus: Share-based compensation expense included in reported net income, net of related tax effects
    
    
    218Less: Total share-based compensation expense determined under fair value based method for all
awards, net of related tax effects
    
    
    (461
    )Pro forma net income
    
    $
    1,815Basic earnings per share:As reported
    
    $
    0.35Pro forma
    
    $
    0.31Diluted earnings per share:As reported
    
    $
    0.33Pro forma
    
    $
    0.29
 Three monthsendedJune 30, 2005(In thousands,except pershare data)Net income, as reported
    
    $
    1,065Plus: Share-based compensation expense included in reported net income, net of related tax effects
    
    
    113Less: Total share-based compensation expense determined under fair value based method for all
awards, net of related tax effects
    
    
    (228
    )Pro forma net income
    
    $
    950Basic earnings per share:As reported
    
    $
    0.18Pro forma
    
    $
    0.16Diluted earnings per share:As reported
    
    $
    0.17Pro forma
    
    $
    0.16
 11




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Segment Information
     Six Months Ended June 302006
    
    
    2005(In thousands)Revenue:Net premiums earned:Commercial lines
    
    $
    55,927
    
    
    $
    18,657Personal lines
    
    
    11,241
    
    
    
    11,318Total net premiums earned
    
    
    67,168
    
    
    
    29,975Net investment income
    
    
    4,460
    
    
    
    1,484Realized investment gains
    
    
    605
    
    
    
    97Other
    
    
    1,078
    
    
    
    172Total revenue
    
    
    73,311
    
    
    
    31,728Income before income taxes:Underwriting income (loss):Commercial lines
    
    
    3,214
    
    
    
    1,644Personal lines
    
    
    (868
    )
    
    
    (525
    )Total underwriting income
    
    
    2,346
    
    
    
    1,119Net investment income
    
    
    4,460
    
    
    
    1,484Realized investment gains
    
    
    605
    
    
    
    97Other
    
    
    477
    
    
    
    172Income before income taxes
    
    $
    7,888
    
    
    $
    2,872
 Three Months Ended June 302006
    
    
    2005(In thousands)Revenue:Net premiums earned:Commercial lines
    
    $
    28,073
    
    
    $
    9,476Personal lines
    
    
    5,558
    
    
    
    5,386Total net premiums earned
    
    
    33,631
    
    
    
    14,862Net investment income
    
    
    2,369
    
    
    
    740Realized investment gains
    
    
    298
    
    
    
    80Other
    
    
    587
    
    
    
    87Total revenue
    
    
    36,885
    
    
    
    15,769Income before income taxes:Underwriting income (loss):Commercial lines
    
    
    2,048
    
    
    
    1,004Personal lines
    
    
    (866
    )
    
    
    (419
    )Total underwriting income
    
    
    1,182
    
    
    
    585Net investment income
    
    
    2,369
    
    
    
    740Realized investment gains
    
    
    298
    
    
    
    80Other
    
    
    283
    
    
    
    87Income before income taxes
    
    $
    4,132
    
    
    $
    1,492
 12




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Reinsurance
     Comprehensive Income
  Six Months endedJune 302006
    
    
    2005(In thousands)Net income
    
    $
    5,545
    
    
    $
    2,058Other comprehensive loss, net of tax:Unrealized losses on securities:Unrealized holding losses arising during period, net of related income tax benefit of $1,521 and $481
    
    
    (2,952
    )
    
    
    (934
    )Less reclassification adjustment for gains included in net income, net of related income tax expense of
$206 and $33
    
    
    (399
    )
    
    
    (64
    )(3,351
    )
    
    
    (998
    )Comprehensive income
    
    $
    2,194
    
    
    $
    1,060
 Three Months endedJune 302006
    
    
    2005(In thousands)Net income
    
    $
    2,895
    
    
    $
    1,065Other comprehensive (loss) income, net of tax:Unrealized (losses) gains on securities:Unrealized holding (losses) and gains
arising during period, net of related
income tax benefit (expense) of $723 and
($290)
    
    
    (1,403
    )
    
    
    563Less reclassification adjustment for gains
included in net income, net of related income
tax expense of $102 and $27
    
    
    (196
    )
    
    
    (52
    )(1,599
    )
    
    
    511Comprehensive income
    
    $
    1,296
    
    
    $
    1,576
 13




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Share-based Compensation
   Weighted AverageNumber
    
    
    Exercise Priceof shares
    
    
    Per ShareOptions outstanding at December 31, 2005
    
    
    659,200
    
    
    $
    12.42Granted  2006
    
    
    0
    
    
    
    Exercised  2006
    
    
    0
    
    
    
    Forfeited  2006
    
    
    (60,000
    )
    
    
    13.08Options outstanding at June 30, 2006
    
    
    599,200
    
    
    $
    12.35Exercisable at:June 30, 2006
    
    
    325,033
    
    
    $
    12.22Weighted-average remaining contractual life
    
    
    
    
    
    8.1  yearsCompensation remaining to be recognized for unvested stock options at June 30, 2006 (millions)
    
    
    
    
    
    $
    1.1Weighted-average remaining amortization period
    
    
    
    
    
    2.3 years
   Weighted AverageNumber
    
    
    Fair valueof shares
    
    
    Per ShareUnvested restricted stock at December 31, 2005
    
    
    166,417
    
    
    $
    12.29Granted  2006
    
    
    0
    
    
    
    Vested  2006
    
    
    (56,083
    )
    
    
    12.22Forfeited  2006
    
    
    (14,000
    )
    
    
    13.08Unvested restricted stock at June 30, 2006
    
    
    96,334
    
    
    $
    12.28Compensation remaining to be recognized for unvested restricted stock at June 30, 2006 (millions):
    
    
    
    
    
    $
    1.2Weighted-average remaining amortization period
    
    
    
    
    
    2.3 years
 Earnings per Share
  14




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##### Table of Contents



Six months endedJune 30,2006
    
    
    2005(Dollars in thousands,except per share data)Numerator for basic and diluted earnings per share:Net income
    
    $
    5,545
    
    
    $
    2,058Denominator
for basic earnings per share  weighted-average shares outstanding
    
    
    5,982,071
    
    
    
    5,939,968Effect of stock incentive plans
    
    
    172,822
    
    
    
    232,263Denominator for diluted earnings per share
    
    
    6,154,893
    
    
    
    6,172,231Basic earnings per share
    
    $
    0.93
    
    
    $
    0.35Diluted earnings per share
    
    $
    0.90
    
    
    $
    0.33
 Three months endedJune 30,2006
    
    
    2005(Dollars in thousands,except per share data)Numerator for basic and diluted earnings per share:Net income
    
    $
    2,895
    
    
    $
    1,065Denominator
for basic earnings per share  weighted-average shares outstanding
    
    
    5,994,228
    
    
    
    5,877,160Effect of stock incentive plans
    
    
    197,221
    
    
    
    224,388Denominator for diluted earnings per share
    
    
    6,191,449
    
    
    
    6,101,548Basic earnings per share
    
    $
    0.48
    
    
    $
    0.18Diluted earnings per share
    
    $
    0.47
    
    
    $
    0.17
 15




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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, 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., a New Jersey property and casualty stock
insurance company offering insurance coverages to businesses and individuals located in New
Jersey,
    
    Franklin Insurance Company, a Pennsylvania property and casualty stock insurance company
offering private passenger automobile and homeowners insurances to individuals located in
Pennsylvania, and
    
    Financial Pacific Insurance Company, a California property and casualty stock insurance
company offering insurance and surety products to small and medium sized commercial
businesses in California, Arizona, Nevada and Oregon, and direct mail surety products to
commercial businesses in various other states.
      16




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##### Table of Contents



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




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##### Table of Contents



AdjustmentChange in Loss and
    
    Adjusted Loss and
    
    
    
    
    
    Adjusted Loss and Loss
    
    Percentage ChangeLoss Adjustment
    
    Loss Reserves Net of
    
    Percentage Change in
    
    Adjustment Reserves Net
    
    in StockholdersReserves Net of
    
    Reinsurance as of
    
    Stockholders Equity as
    
    of Reinsurance as of
    
    Equity as ofReinsurance
    
    June 30, 2006
    
    of June 30, 2006 (1)
    
    December 31, 2005
    
    December 31, 2005 (1)(Dollars in thousands)(10.0)%
    
    $
    130,249
    
    
    
    9.0
    %
    
    $
    119,640
    
    
    
    8.5
    %(7.5)%
    
    
    133,867
    
    
    
    6.7
    %
    
    
    122,964
    
    
    
    6.4
    %(5.0)%
    
    
    137,485
    
    
    
    4.5
    %
    
    
    126,287
    
    
    
    4.2
    %(2.5)%
    
    
    141,103
    
    
    
    2.2
    %
    
    
    129,610
    
    
    
    2.1
    %Base
    
    
    144,721
    
    
    
    
    
    
    
    132,934
    
    
    
    2.5%
    
    
    148,339
    
    
    
    -2.2
    %
    
    
    136,257
    
    
    
    -2.1
    %5.0%
    
    
    151,957
    
    
    
    -4.5
    %
    
    
    139,581
    
    
    
    -4.2
    %7.5%
    
    
    155,575
    
    
    
    -6.7
    %
    
    
    142,904
    
    
    
    -6.4
    %10.0%
    
    $
    159,193
    
    
    
    -9.0
    %
    
    $
    146,227
    
    
    
    -8.5
    %
 
 (1)
    
    Net of tax   June 30, 2006
    
    
    December 31, 2005(Dollars in thousands)Commercial lines:Commercial multi-peril
    
    $
    160,540
    
    
    $
    147,041Commercial automobile
    
    
    33,480
    
    
    
    32,581Other liability
    
    
    9,455
    
    
    
    9,632Workers compensation
    
    
    7,108
    
    
    
    6,058Surety
    
    
    6,164
    
    
    
    5,304Fire, allied, inland marine
    
    
    375
    
    
    
    318217,122
    
    
    
    200,934Personal lines:Homeowners
    
    
    8,028
    
    
    
    7,595Personal automobile
    
    
    1,899
    
    
    
    1,840Other liability
    
    
    956
    
    
    
    900Fire, allied, inland marine
    
    
    245
    
    
    
    344Workers compensation
    
    
    90
    
    
    
    6611,218
    
    
    
    10,745Total
    
    $
    228,340
    
    
    $
    211,679
 Investments.
 18




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##### Table of Contents



Policy Acquisition Costs.
 Reinsurance.
     19




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##### Table of Contents



Income Taxes.
 Results of Operations
     Six and three month periods ended June 30, 2006 compared to six and three month periods ended June
30, 2005
  Six months ended June 30,2006 vs. 2005 Income(Dollars in thousands)
    
    2006
    
    2005
    
    Change
    
    % ChangeCommercial lines underwriting income
    
    $
    3,214
    
    
    $
    1,644
    
    
    $
    1,570
    
    
    
    95.5
    %Personal lines underwriting loss
    
    
    (868
    )
    
    
    (525
    )
    
    
    (343
    )
    
    
    (65.3
    %)Total underwriting income
    
    
    2,346
    
    
    
    1,119
    
    
    
    1,227
    
    
    
    109.7
    %Net investment income
    
    
    4,460
    
    
    
    1,484
    
    
    
    2,976
    
    
    
    200.5
    %Net realized investment gains
    
    
    605
    
    
    
    97
    
    
    
    508
    
    
    
    N/MOther revenue
    
    
    1,078
    
    
    
    172
    
    
    
    906
    
    
    
    526.7
    %Interest expense
    
    
    (601
    )
    
    
    
    
    
    
    (601
    )
    
    
    N/MIncome before income taxes
    
    
    7,888
    
    
    
    2,872
    
    
    
    5,016
    
    
    
    174.7
    %Income taxes
    
    
    2,343
    
    
    
    814
    
    
    
    1,529
    
    
    
    187.8
    %Net income
    
    $
    5,545
    
    
    $
    2,058
    
    
    $
    3,487
    
    
    
    169.4
    %Loss / LAE ratio (GAAP)
    
    
    62.8
    %
    
    
    50.2
    %
    
    
    12.6
    %Underwriting expense ratio (GAAP)
    
    
    33.6
    %
    
    
    46.1
    %
    
    
    (12.5
    )%Combined ratio (GAAP)
    
    
    96.4
    %
    
    
    96.3
    %
    
    
    0.1
    %Loss / LAE ratio (Statutory)
    
    
    59.1
    %
    
    
    50.2
    %
    
    
    8.9
    %Underwriting expense ratio (Statutory)
    
    
    34.3
    %
    
    
    45.0
    %
    
    
    (10.7
    )%Combined ratio (Statutory)
    
    
    93.4
    %
    
    
    95.2
    %
    
    
    (1.8
    )%
 20




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Three months ended June 30,2006 vs. 2005 Income(Dollars in thousands)
    
    2006
    
    2005
    
    Change
    
    % ChangeCommercial lines underwriting income
    
    $
    2,048
    
    
    $
    1,004
    
    
    $
    1,044
    
    
    
    104.0
    %Personal lines underwriting loss
    
    
    (866
    )
    
    
    (419
    )
    
    
    (447
    )
    
    
    (106.7
    %)Total underwriting income
    
    
    1,182
    
    
    
    585
    
    
    
    597
    
    
    
    102.1
    %Net investment income
    
    
    2,369
    
    
    
    740
    
    
    
    1,629
    
    
    
    220.1
    %Net realized investment gains
    
    
    298
    
    
    
    80
    
    
    
    218
    
    
    
    N/MOther revenue
    
    
    587
    
    
    
    87
    
    
    
    500
    
    
    
    574.7
    %Interest expense
    
    
    (304
    )
    
    
    
    
    
    
    (304
    )
    
    
    N/MIncome before income taxes
    
    
    4,132
    
    
    
    1,492
    
    
    
    2,640
    
    
    
    176.9
    %Income taxes
    
    
    1,237
    
    
    
    427
    
    
    
    810
    
    
    
    189.7
    %Net income
    
    $
    2,895
    
    
    $
    1,065
    
    
    $
    1,830
    
    
    
    171.8
    %Loss / LAE ratio (GAAP)
    
    
    64.1
    %
    
    
    49.2
    %
    
    
    14.9
    %Underwriting expense ratio (GAAP)
    
    
    32.3
    %
    
    
    46.9
    %
    
    
    (14.6
    )%Combined ratio (GAAP)
    
    
    96.4
    %
    
    
    96.1
    %
    
    
    0.3
    %Loss / LAE ratio (Statutory)
    
    
    61.1
    %
    
    
    49.2
    %
    
    
    11.9
    %Underwriting expense ratio (Statutory)
    
    
    31.9
    %
    
    
    43.4
    %
    
    
    (11.5
    )%Combined ratio (Statutory)
    
    
    93.0
    %
    
    
    92.6
    %
    
    
    0.4
    %
 
 N/M means Not Meaningful 21




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Six months ended June 30,2006 vs. 2005 Revenue(Dollars in thousands)
    
    2006
    
    2005
    
    Change
    
    % ChangeDirect premiums written
    
    $
    100,721
    
    
    $
    32,735
    
    
    $
    67,986
    
    
    
    207.7
    %Net premiums written
    
    
    80,929
    
    
    
    29,941
    
    
    
    50,988
    
    
    
    170.3
    %Net premiums earned
    
    
    67,168
    
    
    
    29,975
    
    
    
    37,193
    
    
    
    124.1
    %Net investment income
    
    
    4,460
    
    
    
    1,484
    
    
    
    2,976
    
    
    
    200.5
    %Realized investment gains
    
    
    605
    
    
    
    97
    
    
    
    508
    
    
    
    N/MOther revenue
    
    
    1,078
    
    
    
    172
    
    
    
    906
    
    
    
    N/MTotal Revenue
    
    $
    73,311
    
    
    $
    31,728
    
    
    $
    41,583
    
    
    
    131.1
    %
 Three months ended June 30,2006 vs. 2005 Revenue(Dollars in thousands)
    
    2006
    
    2005
    
    Change
    
    % ChangeDirect premiums written
    
    $
    55,324
    
    
    $
    18,495
    
    
    $
    36,829
    
    
    
    199.1
    %Net premiums written
    
    
    41,234
    
    
    
    16,780
    
    
    
    24,454
    
    
    
    145.7
    %Net premiums earned
    
    
    33,631
    
    
    
    14,862
    
    
    
    18,769
    
    
    
    126.3
    %Net investment income
    
    
    2,369
    
    
    
    740
    
    
    
    1,629
    
    
    
    220.1
    %Realized investment gains
    
    
    298
    
    
    
    80
    
    
    
    218
    
    
    
    N/MOther revenue
    
    
    587
    
    
    
    87
    
    
    
    500
    
    
    
    N/MTotal Revenue
    
    $
    36,885
    
    
    $
    15,769
    
    
    $
    21,116
    
    
    
    133.9
    %
 
 N/M means Not Meaningful 22




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23




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Six months ended June 30,2006 vs. 2005 Investment income andrealized gains(Dollars in thousands)
    
    2006
    
    2005
    
    Change
    
    % ChangeFixed income securities
    
    $
    5,143
    
    
    $
    1,845
    
    
    $
    3,298
    
    
    
    178.8
    %Dividends
    
    
    145
    
    
    
    209
    
    
    
    (64
    )
    
    
    (30.6
    )%Cash, cash equivalents & other
    
    
    403
    
    
    
    260
    
    
    
    143
    
    
    
    55.0
    %Gross investment income
    
    
    5,691
    
    
    
    2,314
    
    
    
    3,377
    
    
    
    145.9
    %Investment expenses
    
    
    (1,231
    )
    
    
    (830
    )
    
    
    401
    
    
    
    48.3
    %Net investment income
    
    $
    4,460
    
    
    $
    1,484
    
    
    $
    2,976
    
    
    
    200.5
    %Realized losses on fixed income
    
    $
    (385
    )
    
    $
    (410
    )
    
    $
    25
    
    
    
    N/MRealized gains on equities
    
    
    390
    
    
    
    507
    
    
    
    (117
    )
    
    
    N/MRealized gains  other
    
    
    600
    
    
    
    
    
    
    
    600
    
    
    
    N/MNet realized gains
    
    $
    605
    
    
    $
    97
    
    
    $
    508
    
    
    
    N/M
 Three months ended June 30,2006 vs. 2005 Investment income andrealized gains(Dollars in thousands)
    
    2006
    
    2005
    
    Change
    
    % ChangeFixed income securities
    
    $
    2,647
    
    
    $
    898
    
    
    $
    1,749
    
    
    
    194.8
    %Dividends
    
    
    81
    
    
    
    106
    
    
    
    (25
    )
    
    
    (23.6
    )%Cash, cash equivalents & other
    
    
    224
    
    
    
    138
    
    
    
    86
    
    
    
    62.3
    %Gross investment income
    
    
    2,952
    
    
    
    1,142
    
    
    
    1,810
    
    
    
    158.5
    %Investment expenses
    
    
    (583
    )
    
    
    (402
    )
    
    
    (181
    )
    
    
    45.0
    %Net investment income
    
    $
    2,369
    
    
    $
    740
    
    
    $
    1,629
    
    
    
    220.1
    %Realized losses on fixed income
    
    $
    (263
    )
    
    $
    (424
    )
    
    $
    161
    
    
    
    N/MRealized gains on equities
    
    
    228
    
    
    
    504
    
    
    
    (276
    )
    
    
    N/MRealized gains  other
    
    
    333
    
    
    
    
    
    
    
    333
    
    
    
    N/MNet realized gains
    
    $
    298
    
    
    $
    80
    
    
    $
    218
    
    
    
    N/M
 
 (N/M means not meaningful)     24




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Length of Unrealized LossJune 30, 2006
    
    Fair
    
    
    Unrealized
    
    
    Less than
    
    
    6 to 12
    
    
    Over 12(in thousands)
    
    Value
    
    
    Losses
    
    
    6 months
    
    
    Months
    
    
    MonthsEquity securities:Preferred stocks
    
    $
    669
    
    
    
    59
    
    
    
    5
    
    
    
    54
    
    
    $
    Common stocks
    
    
    1,959
    
    
    
    150
    
    
    
    150
    
    
    
    
    
    
    
    Total equities
    
    $
    2,628
    
    
    
    209
    
    
    
    155
    
    
    
    54
    
    
    $
    
  Less than 12 Months
    
    
    12 Months or Longer
    
    
    TotalEstimated
    
    
    Unrealized
    
    
    Estimated
    
    
    Unrealized
    
    
    Estimated
    
    
    UnrealizedJune 30, 2006
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesU.S. Treasury
securities and
obligations of U.S.
government corporations
and agencies
    
    $
    21,719
    
    
    $
    598
    
    
    $
    37,206
    
    
    $
    1,343
    
    
    $
    58,925
    
    
    $
    1,941Obligations of states and
political subdivisions
    
    
    42,706
    
    
    
    1,086
    
    
    
    34,539
    
    
    
    971
    
    
    
    77,245
    
    
    
    2,057Corporate securities
    
    
    16,304
    
    
    
    758
    
    
    
    30,085
    
    
    
    948
    
    
    
    46,389
    
    
    
    1,706Mortgage-backed securities
    
    
    5,442
    
    
    
    156
    
    
    
    10,082
    
    
    
    168
    
    
    
    15,524
    
    
    
    324Total fixed maturities
    
    
    86,171
    
    
    
    2,598
    
    
    
    111,912
    
    
    
    3,430
    
    
    
    198,083
    
    
    
    6,028Total equity securities
    
    
    2,628
    
    
    
    209
    
    
    
    
    
    
    
    
    
    
    
    2,628
    
    
    
    209Total securities in a
temporary unrealized loss
position
    
    $
    88,799
    
    
    $
    2,807
    
    
    $
    111,912
    
    
    $
    3,430
    
    
    $
    200,711
    
    
    $
    6,237
    Six months ended June 30,2006 vs. 2005 Commercial lines (CL)(Dollars in thousands)
    
    2006
    
    2005
    
    Change
    
    % ChangeCL Direct premiums written
    
    $
    88,838
    
    
    $
    21,728
    
    
    $
    67,110
    
    
    
    308.9
    %CL Net premiums written
    
    $
    69,963
    
    
    $
    19,611
    
    
    $
    50,352
    
    
    
    256.8
    %CL Net premiums earned
    
    $
    55,927
    
    
    $
    18,657
    
    
    $
    37,270
    
    
    
    199.8
    %
 25




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##### Table of Contents



Six months ended June 30,2006 vs. 2005 Commercial lines (CL)(Dollars in thousands)
    
    2006
    
    2005
    
    Change
    
    % ChangeCL Loss / LAE expense ratio (GAAP)
    
    
    61.7
    %
    
    
    42.4
    %
    
    
    19.3
    %CL Expense ratio (GAAP)
    
    
    32.6
    %
    
    
    48.8
    %
    
    
    (16.2
    )%CL Combined ratio (GAAP)
    
    
    94.3
    %
    
    
    91.2
    %
    
    
    3.1
    %
 Three months ended June 30,2006 vs. 2005 Commercial lines (CL)(Dollars in thousands)
    
    2006
    
    2005
    
    Change
    
    % ChangeCL Direct premiums written
    
    $
    48,974
    
    
    $
    12,794
    
    
    $
    36,180
    
    
    
    282.8
    %CL Net premiums written
    
    $
    35,450
    
    
    $
    11,656
    
    
    $
    23,794
    
    
    
    204.1
    %CL Net premiums earned
    
    $
    28,073
    
    
    $
    9,476
    
    
    $
    18,597
    
    
    
    196.3
    %CL Loss / LAE expense ratio (GAAP)
    
    
    61.7
    %
    
    
    39.3
    %
    
    
    22.4
    %CL Expense ratio (GAAP)
    
    
    31.0
    %
    
    
    50.1
    %
    
    
    (19.1
    )%CL Combined ratio (GAAP)
    
    
    92.7
    %
    
    
    89.4
    %
    
    
    3.3
    %
        26




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##### Table of Contents



Six months ended June 30,2006 vs. 2005 Personal lines (PL)(Dollars in thousands)
    
    2006
    
    2005
    
    Change
    
    % ChangePL Direct premiums written
    
    $
    11,882
    
    
    $
    11,006
    
    
    $
    876
    
    
    
    8.0
    %PL Net premiums written
    
    $
    10,966
    
    
    $
    10,329
    
    
    $
    637
    
    
    
    6.2
    %PL Net premiums earned
    
    $
    11,241
    
    
    $
    11,318
    
    
    $
    (77
    )
    
    
    (0.7
    )%PL Loss / LAE expense ratio (GAAP)
    
    
    68.5
    %
    
    
    63.0
    %
    
    
    5.5
    %PL Expense ratio (GAAP)
    
    
    39.2
    %
    
    
    41.6
    %
    
    
    (2.4
    )%PL Combined ratio (GAAP)
    
    
    107.7
    %
    
    
    104.6
    %
    
    
    3.1
    %
 Three months ended June 30,2006 vs. 2005 Personal lines (PL)(Dollars in thousands)
    
    2006
    
    2005
    
    Change
    
    % ChangePL Direct premiums written
    
    $
    6,350
    
    
    $
    5,701
    
    
    $
    649
    
    
    
    11.4
    %PL Net premiums written
    
    $
    5,784
    
    
    $
    5,124
    
    
    $
    660
    
    
    
    12.9
    %PL Net premiums earned
    
    $
    5,558
    
    
    $
    5,386
    
    
    $
    172
    
    
    
    3.2
    %PL Loss / LAE expense ratio (GAAP)
    
    
    75.8
    %
    
    
    66.7
    %
    
    
    9.1
    %PL Expense ratio (GAAP)
    
    
    39.8
    %
    
    
    41.1
    %
    
    
    (1.3
    )%PL Combined ratio (GAAP)
    
    
    115.6
    %
    
    
    107.8
    %
    
    
    (7.8
    )%
       27




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##### Table of Contents



2006 vs. 2005 Expenses and expense ratio
    
    2006
    
    2005
    
    Change
    
    % ChangeAmortization of DAC
    
    $
    15,140
    
    
    $
    7,801
    
    
    $
    7,339
    
    
    
    94.1
    %As a % of net premiums earned
    
    
    22.5
    %
    
    
    26.0
    
    
    
    (3.5
    )%Other underwriting expenses
    
    
    7,487
    
    
    
    6,021
    
    
    
    1,466
    
    
    
    24.3
    %Total expenses excluding losses/LAE and interest expense
    
    $
    22,627
    
    
    $
    13,822
    
    
    $
    8,805
    
    
    
    63.7
    %Underwriting expense ratio
    
    
    33.7
    %
    
    
    46.1
    %
    
    
    (12.4
    )%
    28




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##### Table of Contents



2006 vs. 2005 Income taxes
    
    2006
    
    2005
    
    Change
    
    % ChangeIncome before income taxes
    
    $
    7,888
    
    
    $
    2,872
    
    
    $
    5,016
    
    
    
    N/MIncome taxes
    
    
    2,343
    
    
    
    814
    
    
    
    1,529
    
    
    
    N/MNet income
    
    $
    5,545
    
    
    $
    2,058
    
    
    $
    3,487
    
    
    
    N/MEffective tax rate
    
    
    29.7
    %
    
    
    28.3
    %
    
    
    1.4
    %
   LIQUIDITY AND CAPITAL RESOURCES
        29




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##### Table of Contents



30




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##### Table of Contents



IMPACT OF INFLATION
   OFF BALANCE SHEET COMMITMENTS AND CONTRACTUAL OBLIGATIONS
   31




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
 General.
 Interest Rate Risk.
 Credit Risk.
 Equity Risk.
  
 Item 4. Controls and Procedures
  
 Part II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 1A. Risk Factors.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3. Defaults Upon Senior Securities
  32




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##### Table of Contents



Item 4. Submission of Matters to 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 Companys
Pre-effective Amendment No. 3 on Form S-1, SEC File No.
333-104897.)3.2
    
    Bylaws of Mercer Insurance Group, Inc. (incorporated by
reference herein to the Companys Annual Report on Form
10-K, SEC File No. 000-25425, for the fiscal year ended
December 31, 2003.)31.1
    
    Certification of Chief Executive Officer in accordance
with Section 302 of the Sarbanes-Oxley Act of 2002, (filed
herewith)31.2
    
    Certification of Chief Financial Officer in accordance
with Section 302 of the Sarbanes-Oxley Act of 2002, (filed
herewith)32.1
    
    Certification of Chief Executive Officer in accordance
with Section 906 of the Sarbanes-Oxley Act of 2002, (filed
herewith)32.2
    
    Certification of Chief Financial Officer in accordance
with Section 906 of the Sarbanes-Oxley Act of 2002, (filed
herewith)
 33




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##### Table of Contents



SIGNATURES
  MERCER INSURANCE GROUP, INC. (Registrant)Dated: August 9, 2006
    By:
    /s/ Andrew R. SpeakerAndrew R. Speaker,President and Chief Executive OfficerDated: August 9, 2006
    By:
    /s/ David B. MercleanDavid B. Merclean,Senior Vice President and Chief Financial Officer 34