##### 



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 March 31, 2008,
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
(Do not check if a smaller reporting company)

  
  Smaller reporting company
o
 o þ
  Number of Shares Outstanding as of May 2, 2008COMMON STOCK (No Par Value)
    
    6,569,519(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

29Item 4. Controls and Procedures

31PART II. OTHER INFORMATIONItem 1. Legal Proceedings

31Item 1A. Risk Factors

31Item 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

33SIGNATURESExhibits:
  Exhibit No.
    
    Title3.1
    
    Articles of Incorporation of Mercer Insurance Group, Inc. (incorporated by reference herein to the
Companys Pre-effective Amendment No. 3 on Form S-1, SEC File No. 333-104897.)3.2
    
    Bylaws of Mercer Insurance Group, Inc. (incorporated by reference herein to the Companys Annual Report
on Form 10-K, SEC File No. 000-25425, for the fiscal year ended December 31, 2003.)31.1
    
    Certification of Chief Executive Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002
 2




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Forward-looking Statements
                    3




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##### 



4




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##### 



Part I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEET
 March 31,
    
    
    December 31,2008
    
    
    2007(Dollars in thousands)(Unaudited)AssetsInvestments:Fixed-income securities, available for sale, at fair value
(cost $327,473 and $321,978, respectively)
    
    $
    331,447
    
    
    
    324,238Equity securities, at fair value (cost $12,413 and $12,500,
respectively)
    
    
    16,957
    
    
    
    17,930Total investments
    
    
    348,404
    
    
    
    342,168Cash and cash equivalents
    
    
    18,114
    
    
    
    21,580Premiums receivable
    
    
    33,949
    
    
    
    36,339Reinsurance receivables
    
    
    87,513
    
    
    
    83,844Prepaid reinsurance premiums
    
    
    7,827
    
    
    
    9,486Deferred policy acquisition costs
    
    
    19,584
    
    
    
    20,528Accrued investment income
    
    
    3,520
    
    
    
    3,582Property and equipment, net
    
    
    13,779
    
    
    
    13,056Deferred income taxes
    
    
    7,202
    
    
    
    7,670Goodwill
    
    
    5,416
    
    
    
    5,416Other assets
    
    
    2,611
    
    
    
    2,766Total assets
    
    $
    547,919
    
    
    
    546,435Liabilities and EquityLiabilities:Losses and loss adjustment expenses
    
    $
    287,496
    
    
    
    274,399Unearned premiums
    
    
    81,827
    
    
    
    88,024Accounts payable and accrued expenses
    
    
    8,802
    
    
    
    14,622Other reinsurance balances
    
    
    12,214
    
    
    
    14,734Trust preferred securities
    
    
    15,563
    
    
    
    15,559Advances under line of credit
    
    
    3,000
    
    
    
    3,000Other liabilities
    
    
    2,383
    
    
    
    2,691Total liabilities
    
    
    411,285
    
    
    
    413,029Stockholders 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 7,075,333 shares and 7,075,333 shares, outstanding
6,733,260 and 6,717,693 shares
    
    
    
    
    
    
    Additional paid-in capital
    
    
    70,640
    
    
    
    70,394Accumulated other comprehensive income
    
    
    5,442
    
    
    
    4,896Retained earnings
    
    
    69,893
    
    
    
    67,613Unearned ESOP shares
    
    
    (2,975
    )
    
    
    (3,131
    )Treasury stock, 505,814 shares
    
    
    (6,366
    )
    
    
    (6,366
    )Total stockholders equity
    
    
    136,634
    
    
    
    133,406Total liabilities and stockholders equity
    
    $
    547,919
    
    
    
    546,435
  5




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##### 



MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended March 31, 2008 and 2007
 2008
    
    
    2007(Dollars in thousands,except per share data)(Unaudited)Revenues:Net premiums earned
    
    $
    39,077
    
    
    
    33,988Investment income, net of expenses
    
    
    3,361
    
    
    
    2,941Net realized investment losses
    
    
    (820
    )
    
    
    (47
    )Other revenue
    
    
    455
    
    
    
    426Total revenues
    
    
    42,073
    
    
    
    37,308Expenses:Losses and loss adjustment expenses
    
    
    24,770
    
    
    
    20,809Amortization of deferred policy
acquisition costs (related party
amounts of $274 and $288, respectively)
    
    
    10,362
    
    
    
    8,777Other expenses
    
    
    3,195
    
    
    
    3,854Interest expense
    
    
    296
    
    
    
    307Total expenses
    
    
    38,623
    
    
    
    33,747Income before income taxes
    
    
    3,450
    
    
    
    3,561Income taxes
    
    
    858
    
    
    
    1,008Net income
    
    $
    2,592
    
    
    
    2,553Earnings per common share:Basic
    
    $
    0.42
    
    
    
    0.42Diluted
    
    $
    0.41
    
    
    
    0.41Weighted average shares:Basic
    
    
    6,219,748
    
    
    
    6,087,191Diluted
    
    
    6,378,247
    
    
    
    6,291,702
  6




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##### 



MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
Three months ended March 31, 2008
(Unaudited, dollars in thousands)
 AccumulatedAdditional
    
    
    other
    
    
    
    
    
    
    UnearnedPreferred
    
    
    Common
    
    
    paid-in
    
    
    comprehensive
    
    
    Retained
    
    
    ESOP
    
    
    Treasurystock
    
    
    stock
    
    
    capital
    
    
    income
    
    
    earnings
    
    
    shares
    
    
    stock
    
    
    TotalBalance, December 31, 2007
    
    $
    
    
    
    
    
    
    
    
    70,394
    
    
    
    4,896
    
    
    
    67,613
    
    
    
    (3,131
    )
    
    
    (6,366
    )
    
    
    133,406Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,592
    
    
    
    
    
    
    
    
    
    
    
    2,592Unrealized gains on securities:Unrealized holding
gains arising
during period,
net of related
income tax of $239
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    464
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    464Less
reclassification
adjustment for
losses included
in net income,
net of related
income tax
benefit of $42
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    82
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    82Other
comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    546Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,138Stock compensation plan amortization
    
    
    
    
    
    
    
    
    
    
    129
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    129ESOP shares committed
    
    
    
    
    
    
    
    
    
    
    117
    
    
    
    
    
    
    
    
    
    
    
    156
    
    
    
    
    
    
    
    273Dividends to stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (312
    )
    
    
    
    
    
    
    
    
    
    
    (312
    )Balance, March 31, 2008
    
    $
    
    
    
    
    
    
    
    
    70,640
    
    
    
    5,442
    
    
    
    69,893
    
    
    
    (2,975
    )
    
    
    (6,366
    )
    
    
    136,634
  7




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##### 



MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2008 and 2007
 2008
    
    
    2007(Dollars in thousands)(Unaudited)Cash flows from operating activities:Net income
    
    $
    2,592
    
    
    
    2,553Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization of fixed assets
    
    
    530
    
    
    
    512Net amortization of premium
    
    
    356
    
    
    
    312Amortization of restricted stock compensation
    
    
    129
    
    
    
    395ESOP share commitment
    
    
    273
    
    
    
    297Net realized investment losses
    
    
    820
    
    
    
    47Deferred income tax
    
    
    187
    
    
    
    (892
    )Change in assets and liabilities:Premiums receivable
    
    
    2,390
    
    
    
    2,735Reinsurance receivables
    
    
    (3,669
    )
    
    
    (4,130
    )Prepaid reinsurance premiums
    
    
    1,659
    
    
    
    4,315Deferred policy acquisition costs
    
    
    944
    
    
    
    (920
    )Other assets
    
    
    (481
    )
    
    
    540Losses and loss adjustment expenses
    
    
    13,097
    
    
    
    8,009Unearned premiums
    
    
    (6,197
    )
    
    
    (3,503
    )Other reinsurance balances
    
    
    (2,520
    )
    
    
    (1,079
    )Other
    
    
    (5,731
    )
    
    
    (2,968
    )Net cash provided by operating activities
    
    
    4,379
    
    
    
    6,223Cash flows from investing activities:Purchase of fixed income securities, available for sale
    
    
    (21,790
    )
    
    
    (21,365
    )Purchase of equity securities
    
    
    (931
    )
    
    
    Sale of short-term investments, net
    
    
    
    
    
    
    3,514Sale and maturity of fixed income securities, available for sale
    
    
    15,940
    
    
    
    7,393Sale of equity securities
    
    
    497
    
    
    
    579Purchase of property and equipment, net
    
    
    (1,249
    )
    
    
    (545
    )Net cash used in investing activities
    
    
    (7,533
    )
    
    
    (10,424
    )Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    
    
    
    
    40Dividends to stockholders
    
    
    (312
    )
    
    
    (304
    )Net cash used in financing activities
    
    
    (312
    )
    
    
    (264
    )Net decrease in cash and cash equivalents
    
    
    (3,466
    )
    
    
    (4,465
    )Cash and cash equivalents at beginning of period
    
    
    21,580
    
    
    
    17,618Cash and cash equivalents at end of period
    
    $
    18,114
    
    
    
    13,153Cash paid during the period for:Interest
    
    $
    293
    
    
    
    302Income taxes
    
    $
    250
    
    
    
    
  8




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##### 



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




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##### 



Effective Date of FASB Statement No. 157
  Fair Value Option for Financial Assets and Financial Liabilities
 The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of FASB Statement No. 115
 New Accounting Pronouncements
 Disclosures about Derivative Instruments and
Hedging Activities, an Amendment of FASB Statement No. 133
 Segment Information
    10




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##### 



Three Months Ended March 312008
    
    
    2007(In thousands)Revenues:Net premiums earned:Commercial lines
    
    $
    34,031
    
    
    $
    28,540Personal lines
    
    
    5,046
    
    
    
    5,448Total net premiums earned
    
    
    39,077
    
    
    
    33,988Net investment income
    
    
    3,361
    
    
    
    2,941Net realized investment losses
    
    
    (820
    )
    
    
    (47
    )Other
    
    
    455
    
    
    
    426Total revenues
    
    $
    42,073
    
    
    $
    37,308Income before income taxes:Underwriting income (loss):Commercial lines
    
    $
    772
    
    
    $
    1,501Personal lines
    
    
    (22
    )
    
    
    (945
    )Total underwriting income
    
    
    750
    
    
    
    556Net investment income
    
    
    3,361
    
    
    
    2,941Net realized investment losses
    
    
    (820
    )
    
    
    (47
    )Other
    
    
    159
    
    
    
    111Income before income taxes
    
    $
    3,450
    
    
    $
    3,561
 11




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Reinsurance
    Comprehensive Income
  Three months endedMarch 312008
    
    
    2007(In thousands)Net income
    
    $
    2,592
    
    
    $
    2,553Other comprehensive income, net of tax:Unrealized gains on securities:Unrealized holding gains arising during period, net of related income tax
expense of $239 and $115
    
    
    464
    
    
    
    224Less reclassification adjustment for losses included in net income, net of related income tax
benefit of $42 and $0
    
    
    82
    
    
    
    546
    
    
    
    224Comprehensive income
    
    $
    3,138
    
    
    $
    2,777
 Share-based Compensation
  12




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##### 



Weighted AverageNumber of
    
    
    Exercise PriceShares
    
    
    per ShareOutstanding at December 31, 2007
    
    
    603,200
    
    
    $
    13.24Granted - 2008
    
    
    
    
    
    
    Exercised - 2008
    
    
    
    
    
    
    Forfeited - 2008
    
    
    
    
    
    
    Outstanding at March 31, 2008
    
    
    603,200
    
    
    $
    13.24Exercisable at:March 31, 2008
    
    
    509,533
    
    
    $
    12.57Weighted-average remaining contractual life
    
    
    
    
    
    6.4 yearsCompensation remaining to be recognized for unvested stock options at March 31, 2008 (millions)
    
    
    
    
    
    $
    0.4Weighted-average remaining amortization period
    
    
    
    
    
    2.0 yearsAggregate Intrinsic Value of outstanding options, March 31, 2008 (millions)
    
    
    
    
    
    $
    2.8Aggregate Intrinsic Value of exercisable options, March 31, 2008 (millions)
    
    
    
    
    
    $
    2.6
   Weighted AverageNumber of
    
    
    Fair ValueShares
    
    
    per ShareUnvested restricted stock at December 31, 2007
    
    
    44,584
    
    
    $
    14.66Granted - 2008
    
    
    
    
    
    
    Vested - 2008
    
    
    
    
    
    
    Forfeited - 2008
    
    
    
    
    
    
    Unvested restricted stock at March 31, 2008
    
    
    44,584
    
    
    $
    14.66Compensation remaining to be recognized for unvested restricted stock at March 31, 2008 (millions)
    
    
    
    
    
    $
    0.5Weighted-average remaining amortization period
    
    
    
    
    
    1.5 years
 13




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##### 



Earnings per Share
  Three months endedMarch 312008
    
    
    2007(Dollars in thousands, except per share data)Numerator for basic and diluted earnings per share:Net income
    
    $
    2,592
    
    
    $
    2,553Denominator for basic earnings per share  weighted-average shares
outstanding
    
    
    6,219,748
    
    
    
    6,087,191Effect of stock incentive plans
    
    
    158,499
    
    
    
    204,511Denominator for diluted earnings per share
    
    
    6,378,247
    
    
    
    6,291,702Basic earnings per share
    
    $
    0.42
    
    
    $
    0.42Diluted earnings per share
    
    $
    0.41
    
    
    $
    0.41
  Income Taxes
  (8) Fair Value of Assets and Liabilities
   
    
    Level 1  Valuations for assets and liabilities traded in active exchange markets,
such as the New York Stock Exchange. Level 1 also includes U.S. Treasury, other U.S.
government and agency mortgage-backed securities that are traded by dealers or brokers in
active markets. Valuations are obtained from readily available third-party pricing
sources for market transactions involving identical assets or liabilities.
    
    Level 2  Valuations for assets and liabilities traded in less active dealer or broker
markets. Valuations are obtained from third party pricing services for identical or
comparable assets or liabilities.
    
    Level 3  Valuations for assets and liabilities that are derived from other valuation
methodologies, including option pricing models, discounted cash flow models and similar
techniques, and not based on market exchange, dealer, or broker traded transactions.
Level 3 valuations incorporate certain assumptions and projections in determining the
fair value assigned to such assets or liabilities.
 14




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##### 



March 31, 2008(in thousands)
    
    Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Fixed-income securities, available for sale
    
    $
    331,447
    
    
    $
    5,651
    
    
    $
    322,373
    
    
    $
    3,423Equity securities
    
    
    16,957
    
    
    
    15,129
    
    
    
    1,005
    
    
    
    823Total assets
    
    $
    348,404
    
    
    $
    20,780
    
    
    $
    323,378
    
    
    $
    4,246Other liabilities
    
    $
    1,075
    
    
    
    
    
    
    $
    1,075
    
    
    
    Total liabilities
    
    $
    1,075
    
    
    
    
    
    
    $
    1,075
    
    
    
    Net gains (losses) included in net income relating
to assets held and liabilities at March 31, 2008
    
    $
    (796
    )
    
    $
    (100
    )
    
    $
    (696
    )
    
    
    
   For
the quarter ended March 31, 2008Fixed-incomesecurities,available
    
    
    Equity(in thousands)
    
    for sale
    
    
    securitiesBalance, beginning of quarter
    
    $
    2,399
    
    
    $
    823Total net gains included in other comprehensive income
    
    
    53
    
    
    
    Purchases, sales, issuances and settlements, net
    
    
    971
    
    
    
    Balance, end of quarter
    
    $
    3,423
    
    
    $
    823
  15




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##### 



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.
       16




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##### 



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




---



##### 



Adjusted Loss and
    
    
    
    Adjusted Loss andChange in Loss
    
    Loss Adjustment
    
    Percentage
    
    Loss Adjustment
    
    Percentageand Loss
    
    Reserves Net of
    
    Change in
    
    Reserves Net of
    
    Change inAdjustment
    
    Reinsurance as of
    
    Equity as of
    
    Reinsurance as of
    
    Equity as ofReserves Net of
    
    March 31,
    
    March 31,
    
    December 31,
    
    December 31,Reinsurance
    
    2008
    
    2008 (1)
    
    2007
    
    2007 (1)(Dollars in thousands)(10.0)%
    
    $180,629
    
    9.7%
    
    $172,815
    
    9.5%(7.5)%
    
    185,647
    
    7.3%
    
    177,616
    
    7.1%(5.0)%
    
    190,664
    
    4.8%
    
    182,416
    
    4.7%(2.5)%
    
    195,682
    
    2.4%
    
    187,217
    
    2.4%Base
    
    200,699
    
    
    
    192,017
    
    2.5%
    
    205,716
    
    (2.4)%
    
    196,817
    
    (2.4)%5.0%
    
    210,734
    
    (4.8)%
    
    201,618
    
    (4.7)%7.5%
    
    215,751
    
    (7.3)%
    
    206,418
    
    (7.1)%10.0%
    
    220,769
    
    (9.7)%
    
    211,219
    
    (9.5)%
 
 (1)
    
    Net of tax   March 31,
    
    
    December 31,2008
    
    
    2007(In thousands)Commercial lines:Commercial multi-peril
    
    $
    208,428
    
    
    $
    198,919Commercial automobile
    
    
    41,297
    
    
    
    37,569Other liability
    
    
    12,055
    
    
    
    11,854Workers compensation
    
    
    8,322
    
    
    
    8,279Surety
    
    
    7,375
    
    
    
    6,818Fire, allied, inland marine
    
    
    320
    
    
    
    131277,797
    
    
    
    263,570Personal lines:Homeowners
    
    
    6,696
    
    
    
    7,029Personal automobile
    
    
    1,862
    
    
    
    2,122Other liability
    
    
    995
    
    
    
    1,142Fire, allied, inland marine
    
    
    110
    
    
    
    490Workers compensation
    
    
    36
    
    
    
    469,699
    
    
    
    10,829Total
    
    $
    287,496
    
    
    $
    274,399
 18




---



##### 



Investments.
     Policy Acquisition Costs.
 Reinsurance.
  Income Taxes.
 19




---



##### 



Results of Operations
       20




---



##### 



Three months ended March 31, 2008 compared to three months ended March 31, 2007
  2008 vs. 2007 Income
    
    2008
    
    2007
    
    Change
    
    % Change(Dollars in thousands)Commercial lines underwriting income
    
    $
    772
    
    
    $
    1,501
    
    
    $
    (729
    )
    
    
    (48.6
    )%Personal lines underwriting loss
    
    
    (22
    )
    
    
    (945
    )
    
    
    923
    
    
    
    N/MTotal underwriting income
    
    
    750
    
    
    
    556
    
    
    
    194
    
    
    
    34.9
    %Net investment income
    
    
    3,361
    
    
    
    2,941
    
    
    
    420
    
    
    
    14.3
    %Net realized investment losses
    
    
    (820
    )
    
    
    (47
    )
    
    
    (773
    )
    
    
    N/MOther
    
    
    455
    
    
    
    418
    
    
    
    37
    
    
    
    8.9
    %Interest expense
    
    
    (296
    )
    
    
    (307
    )
    
    
    11
    
    
    
    (3.6
    )%Income before income taxes
    
    
    3,450
    
    
    
    3,561
    
    
    
    (111
    )
    
    
    (3.1
    )%Income taxes
    
    
    858
    
    
    
    1,008
    
    
    
    (150
    )
    
    
    (14.9
    )%Net Income
    
    $
    2,592
    
    
    $
    2,553
    
    
    $
    39
    
    
    
    1.5
    %Loss/ LAE ratio (GAAP)
    
    
    63.4
    %
    
    
    61.2
    %
    
    
    2.2
    %Underwriting expense ratio (GAAP)
    
    
    34.7
    %
    
    
    37.2
    %
    
    
    (2.5
    )%Combined ratio (GAAP)
    
    
    98.1
    %
    
    
    98.4
    %
    
    
    (0.3
    )%Loss/ LAE ratio (Statutory)
    
    
    63.4
    %
    
    
    61.2
    %
    
    
    2.2
    %Underwriting expense ratio (Statutory)
    
    
    35.6
    %
    
    
    37.3
    %
    
    
    (1.7
    )%Combined ratio (Statutory)
    
    
    99.0
    %
    
    
    98.5
    %
    
    
    0.5
    %
 
 (N/M means not meaningful)    21




---



##### 



2008 vs. 2007 Revenue
    
    2008
    
    2007
    
    Change
    
    % Change(In thousands)Direct premiums written
    
    $
    38,297
    
    
    $
    39,272
    
    
    $
    (975
    )
    
    
    (2.5
    )%Net premiums written
    
    
    34,539
    
    
    
    34,801
    
    
    
    (262
    )
    
    
    (0.8
    )%Net premiums earned
    
    
    39,077
    
    
    
    33,988
    
    
    
    5,089
    
    
    
    15.0
    %Net investment income
    
    
    3,361
    
    
    
    2,941
    
    
    
    420
    
    
    
    14.3
    %Net realized investment losses
    
    
    (820
    )
    
    
    (47
    )
    
    
    (773
    )
    
    
    N/MOther revenue
    
    
    455
    
    
    
    426
    
    
    
    29
    
    
    
    6.8
    %Total revenue
    
    $
    42,073
    
    
    $
    37,308
    
    
    $
    4,765
    
    
    
    12.8
    %
 
       22




---



##### 



2008 vs. 2007 Investment Income and Realized Gains
    
    2008
    
    2007
    
    Change
    
    % Change(In thousands)Fixed income securities
    
    $
    3,609
    
    
    $
    3,152
    
    
    $
    457
    
    
    
    14.5
    %Dividends
    
    
    85
    
    
    
    74
    
    
    
    11
    
    
    
    14.9
    %Cash, cash equivalents & other
    
    
    170
    
    
    
    203
    
    
    
    (33
    )
    
    
    (16.3
    )%Gross investment income
    
    
    3,864
    
    
    
    3,429
    
    
    
    435
    
    
    
    12.7
    %Investment expenses
    
    
    (503
    )
    
    
    (488
    )
    
    
    (15
    )
    
    
    (3.1
    )%Net investment income
    
    $
    3,361
    
    
    $
    2,941
    
    
    $
    420
    
    
    
    14.3
    %Realized losses  fixed income securities
    
    $
    
    
    
    $
    (28
    )
    
    $
    28
    
    
    
    N/MRealized (losses)/gains  equity securities
    
    
    (124
    )
    
    
    29
    
    
    
    (153
    )
    
    
    N/MMark-to-market valuation for interest rate swaps
    
    
    (696
    )
    
    
    (48
    )
    
    
    (648
    )
    
    
    N/MNet realized losses
    
    $
    (820
    )
    
    $
    (47
    )
    
    $
    (773
    )
    
    
    N/M
    %
 
 (N/M means not meaningful)     23




---



##### 



Less than 12 Months
    
    
    12 Months or Longer
    
    
    TotalEstimated
    
    
    Unrealized
    
    
    Estimated
    
    
    Unrealized
    
    
    Estimated
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses(In Thousands)U.S. Treasury securities and
obligations of U.S.
government corporations
and agencies
    
    $
    3,167
    
    
    $
    3
    
    
    $
    1,151
    
    
    $
    11
    
    
    $
    4,318
    
    
    $
    14Obligations of states and
political subdivisions
    
    
    32,652
    
    
    
    444
    
    
    
    1,064
    
    
    
    38
    
    
    
    33,716
    
    
    
    482Corporate securities
    
    
    3,783
    
    
    
    119
    
    
    
    7,903
    
    
    
    677
    
    
    
    11,686
    
    
    
    796Mortgage-backed securities
    
    
    11,230
    
    
    
    163
    
    
    
    1,585
    
    
    
    167
    
    
    
    12,815
    
    
    
    330Total fixed maturities
    
    
    50,832
    
    
    
    729
    
    
    
    11,703
    
    
    
    893
    
    
    
    62,535
    
    
    
    1,622Total equity securities
    
    
    3,578
    
    
    
    310
    
    
    
    83
    
    
    
    20
    
    
    
    3,661
    
    
    
    330Total securities in a
temporary unrealized
loss
position
    
    $
    54,410
    
    
    $
    1,039
    
    
    $
    11,786
    
    
    $
    913
    
    
    $
    66,196
    
    
    $
    1,952
    24




---



##### 



2008 vs. 2007 Commercial Lines (CL)
    
    2008
    
    2007
    
    Change
    
    % Change(Dollars in thousands)CL Direct premiums written
    
    $
    33,333
    
    
    $
    34,101
    
    
    $
    (768
    )
    
    
    (2.3
    )%CL Net premiums written
    
    $
    30,126
    
    
    $
    30,148
    
    
    $
    (22
    )
    
    
    (0.1
    )%CL Net premiums earned
    
    $
    34,031
    
    
    $
    28,540
    
    
    $
    5,491
    
    
    
    19.2
    %CL Loss/ LAE expense ratio (GAAP)
    
    
    63.4
    %
    
    
    56.9
    %
    
    
    6.5
    %CL Expense ratio (GAAP)
    
    
    34.3
    %
    
    
    37.9
    %
    
    
    (3.6
    )%CL Combined ratio (GAAP)
    
    
    97.7
    %
    
    
    94.8
    %
    
    
    2.9
    %
     2008 vs. 2007 Personal Lines (PL)
    
    2008
    
    2007
    
    Change
    
    % Change(Dollars in thousands)PL Direct premiums written
    
    $
    4,964
    
    
    $
    5,171
    
    
    $
    (207
    )
    
    
    (4.0)
    %PL Net premiums written
    
    $
    4,413
    
    
    $
    4,653
    
    
    $
    (240
    )
    
    
    (5.2)
    %PL Net premiums earned
    
    $
    5,046
    
    
    $
    5,448
    
    
    $
    (402
    )
    
    
    (7.4)
    %PL Loss/ LAE expense ratio (GAAP)
    
    
    63.2
    %
    
    
    84.1
    %
    
    
    (20.9
    )%PL Expense ratio (GAAP)
    
    
    37.3
    %
    
    
    33.3
    %
    
    
    4.0
    %PL Combined ratio (GAAP)
    
    
    100.5
    %
    
    
    117.4
    %
    
    
    (16.9
    )%
  25




---



##### 



2008 vs. 2007 Expenses and Expense Ratio
    
    2008
    
    2007
    
    Change
    

% Change(Dollars in thousands)Amortization of Deferred Acquisition Costs
    
    $
    10,362
    
    
    $
    8,777
    
    
    $
    1,585
    
    
    
    18.1
    %As a % of net premiums earned
    
    
    26.5
    %
    
    
    25.8
    %
    
    
    0.7
    %Other underwriting expenses
    
    
    3,195
    
    
    
    3,854
    
    
    
    (659
    )
    
    
    (17.1
    )%Underwriting expenses
    
    $
    13,557
    
    
    $
    12,631
    
    
    $
    926
    
    
    
    7.3
    %Underwriting expense ratio
    
    
    34.7
    %
    
    
    37.2
    %
    
    
    (2.5
    )%
   2008 vs. 2007 Income Taxes
    
    2008
    
    2007
    
    Change
    

% Change(Dollars in thousands)Income before income taxes
    
    $
    3,450
    
    
    $
    3,561
    
    
    $
    (111
    )
    
    
    (3.1
    )%Income taxes
    
    
    858
    
    
    
    1,008
    
    
    
    (150
    )
    
    
    (14.9
    )%Net income
    
    $
    2,592
    
    
    $
    2,553
    
    
    $
    39
    
    
    
    1.5
    %Effective tax rate
    
    
    24.9
    %
    
    
    28.3
    %
    
    
    (3.4
    )%
  LIQUIDITY AND CAPITAL RESOURCES
   26




---



##### 



27




---



##### 



IMPACT OF INFLATION
   OFF BALANCE SHEET COMMITMENTS AND CONTRACTUAL OBLIGATIONS
   
 28




---



##### 



Item 3. Quantitative and Qualitative Disclosures About Market Risk
 General.
  Interest Rate Risk.
  Credit Risk.
  Municipal Bond Holding Exposure.
  o
    
    AA+ including insurance enhancemento
    
    AA excluding insurance enhancement
 
    
    99% of the underlying ratings are A- or better
    
    82% of the underlying ratings are AA- or better
  o
    
    The average credit quality with insurance enhancement is AA+o

    
    The average credit quality of the underlying securities, excluding insurance enhancement, is AAo

    
    Each municipal fixed income investment is evaluated based on its underlying
credit fundamentals, irrespective of credit enhancement provided by bond insurers
  o

    
    The average credit quality of those securities without enhancement is AA
  29




---



##### 



% of TotalAverage Credit
    
    Market
    
    Muni
    
    UnrealizedRating
    
    Value
    
    Portfolio
    
    Gain(dollars in thousands)Uninsured Securities
    
    AA+
    
    $
    45,417
    
    
    
    30
    %
    
    $
    415Securities with
Insurance
Enhancement
    
    AA+
    
    
    105,482
    
    
    
    70
    %
    
    
    1,017Total
    
    
    
    
    
    $
    150,899
    
    
    
    100
    %
    
    $
    1,432
 MarketCredit Enhancement
    
    Value
    
    % of Total(dollars in thousands)AMBAC
    
    $
    11,264
    
    
    
    7
    %FGIC
    
    
    32,058
    
    
    
    21
    %FSA
    
    
    31,912
    
    
    
    21
    %MBIA
    
    
    30,248
    
    
    
    20
    %No Enhancement
    
    
    38,474
    
    
    
    26
    %Other Enhancement
    
    
    6,943
    
    
    
    5
    %Grand Total
    
    $
    150,899
    
    
    
    100
    %
  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)(dollars in thousands)S&P orequivalent
    
    Market
    
    % of
    
    Market
    
    % of
    
    Market
    
    % of
    
    Market
    
    % of
    
    Market
    
    % ofratings
    
    Value
    
    Total
    
    Value
    
    Total
    
    Value
    
    Total
    
    Value
    
    Total
    
    Value
    
    TotalAAA
    
    $
    25,459
    
    
    
    56
    %
    
    $
    78,343
    
    
    
    74
    %
    
    $
    11,415
    
    
    
    11
    %
    
    $
    103,802
    
    
    
    69
    %
    
    $
    36,874
    
    
    
    24
    %AA+
    
    
    5,471
    
    
    
    12
    %
    
    
    8,612
    
    
    
    8
    %
    
    
    22,622
    
    
    
    21
    %
    
    
    14,083
    
    
    
    9
    %
    
    
    28,093
    
    
    
    18
    %AA
    
    
    11,933
    
    
    
    26
    %
    
    
    8,292
    
    
    
    8
    %
    
    
    31,369
    
    
    
    30
    %
    
    
    20,225
    
    
    
    13
    %
    
    
    43,302
    
    
    
    29
    %AA-
    
    
    2,554
    
    
    
    6
    %
    
    
    6,202
    
    
    
    6
    %
    
    
    21,488
    
    
    
    20
    %
    
    
    8,756
    
    
    
    6
    %
    
    
    24,042
    
    
    
    16
    %A+
    
    
    
    
    
    
    
    
    
    
    2,969
    
    
    
    3
    %
    
    
    8,755
    
    
    
    8
    %
    
    
    2,969
    
    
    
    2
    %
    
    
    8,755
    
    
    
    6
    %A
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,776
    
    
    
    6
    %
    
    
    
    
    
    
    
    
    
    
    5,776
    
    
    
    4
    %A-
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,993
    
    
    
    3
    %
    
    
    
    
    
    
    
    
    
    
    2,993
    
    
    
    2
    %BBB-
    
    
    
    
    
    
    
    
    
    
    1,064
    
    
    
    1
    %
    
    
    1,064
    
    
    
    1
    %
    
    
    1,064
    
    
    
    1
    %
    
    
    1,064
    
    
    
    1
    %Total
    
    $
    45,417
    
    
    
    100
    %
    
    $
    105,482
    
    
    
    100
    %
    
    $
    105,482
    
    
    
    100
    %
    
    $
    150,899
    
    
    
    100
    %
    
    $
    150,899
    
    
    
    100
    %Average Rating
    
    AA+
    
    AA+
    
    AA
    
    AA+
    
    AA
 Structured Product Exposure.
 30




---



##### 



Equity Risk.
   
 Item 4. Controls and Procedures
  
 Part II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 1A. Risk Factors.
  31




---



##### 



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3. Defaults Upon Senior Securities
  32




---



##### 



Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 Exhibits
 Exhibit No.
    
    Title3.1
    
    Articles of Incorporation of Mercer Insurance Group, Inc.
(incorporated by reference herein to the Groups Pre-effective
Amendment No. 3 on Form S-1, SEC File No. 333-104897.)3.2
    
    Bylaws of Mercer Insurance Group, Inc. (incorporated by
reference herein to the Groups Annual Report on Form 10-K,
SEC File No. 000-25425, for the fiscal year ended December 31,
2003.)31.1
    
    Certification of Chief Executive Officer in accordance with
Section 302 of the Sarbanes-Oxley Act of 2002, (filed
herewith)31.2
    
    Certification of Chief Financial Officer in accordance with
Section 302 of the Sarbanes-Oxley Act of 2002, (filed
herewith)32.1
    
    Certification of Chief Executive Officer in accordance with
Section 906 of the Sarbanes-Oxley Act of 2002, (filed
herewith)32.2
    
    Certification of Chief Financial Officer in accordance with
Section 906 of the Sarbanes-Oxley Act of 2002, (filed
herewith)
 33




---



##### 



SIGNATURES
  MERCER INSURANCE GROUP, INC. (Registrant)Dated: May 8, 2008
    By:
    /s/ Andrew R. SpeakerAndrew R. Speaker,President and Chief Executive OfficerDated: May 8, 2008
    By:
    /s/ David B. MercleanDavid B. Merclean,Senior Vice President and Chief Financial Officer 
 34