##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 Quarterly Report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
 for the Quarterly Period Ended September 30, 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)
 
  
  þ o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller Reporting Company o
 o þ
  Number of Shares Outstanding as of October 31, 2008COMMON STOCK (No Par Value)
    
    6,453,560(Title of Class)
    
    (Outstanding Shares)




---



##### 



TABLE OF CONTENTS
  
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    40Item 4. Controls and Procedures
    
    
    44PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    44Item 1A. Risk Factors
    
    
    44Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    44Item 3. Defaults Upon Senior Securities
    
    
    44Item 4. Submission of Matters to a Vote of Security Holders
    
    
    44Item 5. Other Information
    
    
    46Item 6. Exhibits
    
    
    46SIGNATURES
    
    
    46Exhibits:
    
    
    47EX-31.1EX-31.2EX-32.1EX-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




---



##### Table of Contents



Forward-looking Statements
                    3




---



##### Table of Contents



4




---



##### Table of Contents



Part I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEET
 September 30,
    
    
    December 31,2008
    
    
    2007(Dollars in thousands)(Unaudited)AssetsInvestments:Fixed-income securities, available for sale, at fair value
(cost $333,628 and $321,978, respectively)
    
    $
    328,548
    
    
    
    324,238Equity securities, at fair value (cost $12,351 and $12,500,
respectively)
    
    
    14,730
    
    
    
    17,930Short-term investments, at cost, which approximates fair value
    
    
    9,998
    
    
    
    Total investments
    
    
    353,276
    
    
    
    342,168Cash and cash equivalents
    
    
    14,690
    
    
    
    21,580Premiums receivable
    
    
    39,431
    
    
    
    36,339Reinsurance receivables
    
    
    89,104
    
    
    
    83,844Prepaid reinsurance premiums
    
    
    7,460
    
    
    
    9,486Deferred policy acquisition costs
    
    
    21,202
    
    
    
    20,528Accrued investment income
    
    
    3,639
    
    
    
    3,582Property and equipment, net
    
    
    15,357
    
    
    
    13,056Deferred income taxes
    
    
    11,581
    
    
    
    7,670Goodwill
    
    
    5,416
    
    
    
    5,416Other assets
    
    
    3,286
    
    
    
    2,766Total assets
    
    $
    564,442
    
    
    
    546,435Liabilities and EquityLiabilities:Losses and loss adjustment expenses
    
    $
    298,991
    
    
    
    274,399Unearned premiums
    
    
    86,271
    
    
    
    88,024Accounts payable and accrued expenses
    
    
    13,549
    
    
    
    14,622Other reinsurance balances
    
    
    11,824
    
    
    
    14,734Trust preferred securities
    
    
    15,571
    
    
    
    15,559Advances under line of credit
    
    
    3,000
    
    
    
    3,000Other liabilities
    
    
    2,283
    
    
    
    2,691Total liabilities
    
    
    431,489
    
    
    
    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, outstanding
6,782,691 and 6,717,693 shares, respectively
    
    
    
    
    
    
    Additional paid-in capital
    
    
    71,163
    
    
    
    70,394Accumulated other comprehensive (loss)/income
    
    
    (2,073
    )
    
    
    4,896Retained earnings
    
    
    73,969
    
    
    
    67,613Unearned ESOP shares
    
    
    (2,662
    )
    
    
    (3,131
    )Treasury stock, 567,158 and 505,814 shares
    
    
    (7,444
    )
    
    
    (6,366
    )Total stockholders equity
    
    
    132,953
    
    
    
    133,406Total liabilities and stockholders equity
    
    $
    564,442
    
    
    
    546,435
  5




---



##### Table of Contents



MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF EARNINGS
Nine Months Ended September 30, 2008 and 2007
 2008
    
    
    2007(Dollars in thousands, except per share data)(Unaudited)Revenues:Net premiums earned
    
    $
    115,590
    
    
    
    106,367Investment income, net of expenses
    
    
    10,173
    
    
    
    9,592Net realized investment (losses)/gains
    
    
    (2,944
    )
    
    
    267Other revenue
    
    
    1,555
    
    
    
    1,494Total revenues
    
    
    124,374
    
    
    
    117,720Expenses:Losses and loss adjustment expenses
    
    
    71,564
    
    
    
    65,398Amortization of deferred policy acquisition costs (related party
amounts of $805 and $865, respectively)
    
    
    31,163
    
    
    
    27,829Other expenses
    
    
    10,618
    
    
    
    7,530Interest expense
    
    
    961
    
    
    
    911Total expenses
    
    
    114,306
    
    
    
    101,668Income before income taxes
    
    
    10,068
    
    
    
    16,052Income taxes
    
    
    2,463
    
    
    
    4,697Net income
    
    $
    7,605
    
    
    
    11,355Earnings per common share:Basic
    
    $
    1.22
    
    
    
    1.85Diluted
    
    $
    1.19
    
    
    
    1.80Weighted average shares:Basic
    
    
    6,230,476
    
    
    
    6,125,654Diluted
    
    
    6,382,740
    
    
    
    6,318,029
  6




---



##### Table of Contents



MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended September 30, 2008 and 2007
 2008
    
    
    2007(Dollars in thousands, except per share data)(Unaudited)Revenues:Net premiums earned
    
    $
    37,869
    
    
    
    37,303Investment income, net of expenses
    
    
    3,469
    
    
    
    2,880Net realized investment losses
    
    
    (2,281
    )
    
    
    (366
    )Other revenue
    
    
    536
    
    
    
    587Total revenues
    
    
    39,593
    
    
    
    40,404Expenses:Losses and loss adjustment expenses
    
    
    22,819
    
    
    
    22,768Amortization
of deferred policy acquisition costs (related party amounts of $263 and $287, respectively)
    
    
    10,460
    
    
    
    9,870Other expenses
    
    
    3,776
    
    
    
    3,315Interest expense
    
    
    328
    
    
    
    300Total expenses
    
    
    37,383
    
    
    
    36,253Income before income taxes
    
    
    2,210
    
    
    
    4,151Income taxes
    
    
    430
    
    
    
    1,139Net income
    
    $
    1,780
    
    
    
    3,012Earnings per common share:Basic
    
    $
    0.29
    
    
    
    0.49Diluted
    
    $
    0.28
    
    
    
    0.47Weighted average shares:Basic
    
    
    6,237,804
    
    
    
    6,174,842Diluted
    
    
    6,382,413
    
    
    
    6,345,865
  7




---



##### Table of Contents



MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
Nine Months Ended September 30, 2008
(Unaudited, dollars in thousands)
 AccumulatedAdditional
    
    
    other
    
    
    
    
    
    
    UnearnedPreferred
    
    
    Common
    
    
    paid-in
    
    
    comprehensive
    
    
    Retained
    
    
    ESOP
    
    
    Treasurystock
    
    
    stock
    
    
    capital
    
    
    income/(loss)
    
    
    earnings
    
    
    shares
    
    
    stock
    
    
    TotalBalance, December 31, 2007
    
    $
    
    
    
    
    
    
    
    
    70,394
    
    
    
    4,896
    
    
    
    67,613
    
    
    
    (3,131
    )
    
    
    (6,366
    )
    
    
    133,406Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,605
    
    
    
    
    
    
    
    
    
    
    
    7,605Unrealized losses on
securities:Unrealized holding losses arising
during period, net of related
income tax benefit of $4,465
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,667
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,667
    )Less reclassification adjustment for
losses included in net income, net
of related income tax benefit
of $932
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,809
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,809Defined benefit pension plan, net of
related income tax benefit of $57
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (111
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (111
    )Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,969
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    636Stock compensation plan
amortization
    
    
    
    
    
    
    
    
    
    
    390
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    390Tax benefit from stock
compensation plan
    
    
    
    
    
    
    
    
    
    
    40
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40ESOP shares committed
    
    
    
    
    
    
    
    
    
    
    339
    
    
    
    
    
    
    
    
    
    
    
    469
    
    
    
    
    
    
    
    808Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,078
    )
    
    
    (1,078
    )Dividends to stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,249
    )
    
    
    
    
    
    
    
    
    
    
    (1,249
    )Balance, September 30,
2008
    
    $
    
    
    
    
    
    
    
    
    71,163
    
    
    
    (2,073
    )
    
    
    73,969
    
    
    
    (2,662
    )
    
    
    (7,444
    )
    
    
    132,953
  8




---



##### Table of Contents



MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2008 and 2007
 2008
    
    
    2007(Dollars in thousands)(Unaudited)Cash flows from operating activities:Net income
    
    $
    7,605
    
    
    
    11,355Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization of fixed assets
    
    
    1,760
    
    
    
    1,605Net amortization of premium
    
    
    1,123
    
    
    
    938Amortization of stock compensation
    
    
    390
    
    
    
    876ESOP share commitment
    
    
    808
    
    
    
    892Net realized investment losses/(gains)
    
    
    2,944
    
    
    
    (267
    )Deferred income tax
    
    
    (321
    )
    
    
    (655
    )Change in assets and liabilities:Premiums receivable
    
    
    (3,092
    )
    
    
    (5,672
    )Reinsurance receivables
    
    
    (5,260
    )
    
    
    (5,230
    )Prepaid reinsurance premiums
    
    
    2,026
    
    
    
    6,448Deferred policy acquisition costs
    
    
    (674
    )
    
    
    (4,765
    )Other assets
    
    
    (784
    )
    
    
    (424
    )Losses and loss adjustment expenses
    
    
    24,592
    
    
    
    20,551Unearned premiums
    
    
    (1,753
    )
    
    
    10,302Other reinsurance balances
    
    
    (2,910
    )
    
    
    (6,084
    )Other
    
    
    (1,081
    )
    
    
    4,383Net cash provided by operating activities
    
    
    25,373
    
    
    
    34,253Cash flows from investing activities:Purchase of fixed income securities, available for sale
    
    
    (50,816
    )
    
    
    (54,057
    )Purchase of equity securities
    
    
    (2,904
    )
    
    
    (2,471
    )(Purchase)/sale of short-term investments, net
    
    
    (9,998
    )
    
    
    1,949Sale and maturity of fixed income securities, available for sale
    
    
    34,819
    
    
    
    17,505Sale of equity securities
    
    
    2,981
    
    
    
    2,777Purchase of property and equipment, net
    
    
    (4,058
    )
    
    
    (1,822
    )Net cash used in investing activities
    
    
    (29,976
    )
    
    
    (36,119
    )Cash flows from financing activities:Purchase of treasury stock
    
    
    (1,078
    )
    
    
    (40
    )Tax benefit from stock compensation plans
    
    
    40
    
    
    
    153Proceeds from issuance of common stock
    
    
    
    
    
    
    40Dividends to stockholders
    
    
    (1,249
    )
    
    
    (942
    )Net cash used in financing activities
    
    
    (2,287
    )
    
    
    (789
    )Net decrease in cash and cash equivalents
    
    
    (6,890
    )
    
    
    (2,655
    )Cash and cash equivalents at beginning of period
    
    
    21,580
    
    
    
    17,618Cash and cash equivalents at end of period
    
    $
    14,690
    
    
    
    14,963Cash paid during the period for:Interest
    
    $
    934
    
    
    
    902Income taxes
    
    $
    2,758
    
    
    
    4,750
  9




---



##### Table of Contents



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
 10




---



##### Table of Contents



Effective Date of FASB Statement No. 157
  Determining the Fair Value of a Financial
Asset When the Market For That Asset Is Not Active
 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
 The Hierarchy of Generally Accepted Accounting
Principles
 Determining Whether
Instruments Granted in Share-Based Payment Transactions are Participating Securities (FSP 03-6-1)
 11




---



##### Table of Contents



Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards
 Segment Information
       12




---



##### Table of Contents



Nine Months Ended September 30,2008
    
    
    2007(In thousands)Revenues:Net premiums earned:Commercial lines
    
    $
    100,496
    
    
    $
    90,287Personal lines
    
    
    15,094
    
    
    
    16,080Total net premiums earned
    
    
    115,590
    
    
    
    106,367Net investment income
    
    
    10,173
    
    
    
    9,592Net realized investment (losses)/gains
    
    
    (2,944
    )
    
    
    267Other revenue
    
    
    1,555
    
    
    
    1,494Total revenues
    
    $
    124,374
    
    
    $
    117,720Income before income taxes:Underwriting income (loss):Commercial lines
    
    $
    2,981
    
    
    $
    5,416Personal lines
    
    
    (736
    )
    
    
    194Total underwriting income
    
    
    2,245
    
    
    
    5,610Net investment income
    
    
    10,173
    
    
    
    9,592Net realized investment (losses)/gains
    
    
    (2,944
    )
    
    
    267Other
    
    
    594
    
    
    
    583Income before income taxes
    
    $
    10,068
    
    
    $
    16,052
 Three Months Ended September 30,2008
    
    
    2007(In thousands)Revenues:Net premiums earned:Commercial lines
    
    $
    32,807
    
    
    $
    31,975Personal lines
    
    
    5,062
    
    
    
    5,328Total net premiums earned
    
    
    37,869
    
    
    
    37,303Net investment income
    
    
    3,469
    
    
    
    2,880Net realized investment losses
    
    
    (2,281
    )
    
    
    (366
    )Other revenue
    
    
    536
    
    
    
    587Total revenues
    
    $
    39,593
    
    
    $
    40,404Income before income taxes:Underwriting income:Commercial lines
    
    $
    741
    
    
    $
    1,207Personal lines
    
    
    73
    
    
    
    143Total underwriting income
    
    
    814
    
    
    
    1,350Net investment income
    
    
    3,469
    
    
    
    2,880Net realized investment losses
    
    
    (2,281
    )
    
    
    (366
    )Other
    
    
    208
    
    
    
    287Income before income taxes
    
    $
    2,210
    
    
    $
    4,151
 13




---



##### Table of Contents



Reinsurance
    Comprehensive Income / (Loss)
  Nine months endedSeptember 30,2008
    
    
    2007(In thousands)Net income
    
    $
    7,605
    
    
    $
    11,355Other comprehensive (loss)/income, net of tax:Unrealized gains/(losses) on securities:Unrealized holding (losses)/gains arising during period, net of related income tax
(benefit)/expense of $(4,465) and $462, respectively
    
    
    (8,667
    )
    
    
    897Less reclassification adjustment for losses/(gains) included in net income, net of related
income tax (benefit)/expense of $(932) and $161, respectively
    
    
    1,809
    
    
    
    (312
    )Defined benefit pension plan, net of related income tax benefit of $57
    
    
    (111
    )
    
    
    (6,969
    )
    
    
    585Comprehensive income
    
    $
    636
    
    
    $
    11,940
 14




---



##### Table of Contents



Three months endedSeptember 30,2008
    
    
    2007(In thousands)Net income
    
    $
    1,780
    
    
    $
    3,012Other comprehensive (loss)/income, net of tax:Unrealized gains/(losses) on securities:Unrealized holding (losses)/gains arising during period, net of related income tax
(benefit)/expense of $(2,741) and $1,461, respectively
    
    
    (5,321
    )
    
    
    2,836Less reclassification adjustment for losses/(gains) included in net income, net of related
income tax (benefit)/expense of $(722) and $44, respectively
    
    
    1,404
    
    
    
    (85
    )Defined benefit pension plan, net of related income tax benefit of $19
    
    
    (37
    )
    
    
    (3,954
    )
    
    
    2,751Comprehensive (loss)/income
    
    $
    (2,174
    )
    
    $
    5,763
 Share-based Compensation
    15




---



##### Table of Contents



Weighted AverageNumber of
    
    
    Exercise PriceShares
    
    
    per ShareOutstanding at December 31, 2007
    
    
    603,200
    
    
    $
    13.24Granted - 2008
    
    
    
    
    
    
    Exercised - 2008
    
    
    
    
    
    
    Forfeited - 2008
    
    
    
    
    
    
    Outstanding at September 30, 2008
    
    
    603,200
    
    
    $
    13.24Exercisable at:September 30, 2008
    
    
    522,533
    
    
    $
    12.56Weighted-average remaining contractual life
    
    
    
    
    
    5.9 yearsCompensation remaining to be recognized for unvested
stock options at September 30, 2008 (millions)
    
    
    
    
    
    $
    0.3Weighted-average remaining amortization period
    
    
    
    
    
    1.5 yearsAggregate Intrinsic Value of outstanding options,
September 30, 2008 (millions)
    
    
    
    
    
    $
    2.3Aggregate Intrinsic Value of exercisable options,
September 30, 2008 (millions)
    
    
    
    
    
    $
    2.1
   Weighted AverageNumber of
    
    
    Fair ValueShares
    
    
    per ShareUnvested restricted stock at December 31, 2007
    
    
    44,584
    
    
    $
    14.66Granted - 2008
    
    
    
    
    
    
    Vested - 2008
    
    
    (18,125
    )
    
    
    12.24Forfeited - 2008
    
    
    
    
    
    
    Unvested restricted stock at September 30, 2008
    
    
    26,459
    
    
    $
    16.32Compensation remaining to be recognized for unvested restricted stock at September 30, 2008 (millions)
    
    
    
    
    
    $
    0.3Weighted-average remaining amortization period
    
    
    
    
    
    1.2 years
 16




---



##### Table of Contents



(6)
    
    Earnings per Share
  Nine months endedSeptember 30,2008
    
    
    2007(Dollars in thousands, except per share data)Numerator for basic and diluted earnings per share:Net income
    
    $
    7,605
    
    
    $
    11,355Denominator for basic earnings per share  weighted-average shares outstanding
    
    
    6,230,476
    
    
    
    6,125,654Effect of stock incentive plans
    
    
    152,264
    
    
    
    192,375Denominator for diluted earnings per share
    
    
    6,382,740
    
    
    
    6,318,029Basic earnings per share
    
    $
    1.22
    
    
    $
    1.85Diluted earnings per share
    
    $
    1.19
    
    
    $
    1.80
 Three months endedSeptember 30,2008
    
    
    2007(Dollars in thousands, except per share data)Numerator for basic and diluted earnings per share:Net income
    
    $
    1,780
    
    
    $
    3,012Denominator for basic earnings per share  weighted-average shares outstanding
    
    
    6,237,804
    
    
    
    6,174,842Effect of stock incentive plans
    
    
    144,609
    
    
    
    171,023Denominator for diluted earnings per share
    
    
    6,382,413
    
    
    
    6,345,865Basic earnings per share
    
    $
    0.29
    
    
    $
    0.49Diluted earnings per share
    
    $
    0.28
    
    
    $
    0.47
  Income Taxes
  (8) Fair Value of Assets and Liabilities
 17




---



##### Table of Contents




    
    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.
    
    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.
       18




---



##### Table of Contents



September 30, 2008(in thousands)
    
    Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Investments:Fixed-income securities, available for sale
    
    $
    328,548
    
    
    $
    6,329
    
    
    $
    319,636
    
    
    $
    2,583Equity securities
    
    
    14,730
    
    
    
    13,684
    
    
    
    1,000
    
    
    
    46Total assets
    
    $
    343,278
    
    
    $
    20,013
    
    
    $
    320,636
    
    
    $
    2,629Other liabilities
    
    $
    582
    
    
    $
    
    
    
    $
    582
    
    
    $
    Total liabilities
    
    $
    582
    
    
    $
    
    
    
    $
    582
    
    
    $
    Net losses included in net income relating
to assets held and liabilities at
September 30, 2008
    
    $
    (3,685
    )
    
    $
    (255
    )
    
    $
    (2,865
    )
    
    $
    (565
    )
  For the Nine Months EndedSeptember 30, 2008Fixed-incomesecurities,available
    
    
    Equity(in thousands)
    
    for sale
    
    
    securitiesBalance, beginning of period
    
    $
    2,399
    
    
    $
    823Total net (losses)/gains included in net income
    
    
    (562
    )
    
    
    657Total net losses included in other comprehensive income
    
    
    (186
    )
    
    
    (682
    )Purchases, sales, issuances and settlements, net
    
    
    932
    
    
    
    (752
    )Balance, end of period
    
    $
    2,583
    
    
    $
    46
 19




---



##### Table of Contents



For the Three Months EndedSeptember 30, 2008Fixed-incomesecurities,available
    
    
    Equity(in thousands)
    
    for sale
    
    
    securitiesBalance, beginning of period
    
    $
    3,357
    
    
    $
    823Total net (losses)/gains included in net income
    
    
    (562
    )
    
    
    657Total net losses included in other comprehensive income
    
    
    (177
    )
    
    
    (682
    )Purchases, sales, issuances and settlements, net
    
    
    (35
    )
    
    
    (752
    )Balance, end of period
    
    $
    2,583
    
    
    $
    46
  (9) Retaliatory Tax Refund
   20




---



##### 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.
       21




---



##### Table of Contents



Critical Accounting Policies
 General.
 Liabilities for Loss and Loss Adjustment Expenses.
   22




---



##### Table of Contents



Adjusted Loss and
    
    
    
    
    
    Adjusted Loss andChange in Loss
    
    Loss Adjustment
    
    Percentage
    
    Loss Adjustment
    
    Percentageand Loss
    
    Reserves Net of
    
    Change in
    
    Reserves Net of
    
    Change inAdjustment
    
    Reinsurance as of
    
    Equity as of
    
    Reinsurance as of
    
    Equity as ofReserves Net of
    
    September 30,
    
    September 30,
    
    December 31,
    
    December 31,Reinsurance
    
    2008
    
    2008 (1)
    
    2007
    
    2007 (1)(Dollars in thousands)(10.0)%
    
    $
    189,354
    
    
    
    10.4
    %
    
    $
    172,815
    
    
    
    9.5
    %(7.5)%
    
    
    194,614
    
    
    
    7.8
    %
    
    
    177,616
    
    
    
    7.1
    %(5.0)%
    
    
    199,873
    
    
    
    5.2
    %
    
    
    182,416
    
    
    
    4.7
    %(2.5)%
    
    
    205,133
    
    
    
    2.6
    %
    
    
    187,217
    
    
    
    2.4
    %Base
    
    
    210,393
    
    
    
    
    
    
    
    192,017
    
    
    
    2.5%
    
    
    215,653
    
    
    
    (2.6
    )%
    
    
    196,817
    
    
    
    (2.4)
    %5.0%
    
    
    220,913
    
    
    
    (5.2)
    %
    
    
    201,618
    
    
    
    (4.7)
    %7.5%
    
    
    226,172
    
    
    
    (7.8)
    %
    
    
    206,418
    
    
    
    (7.1)
    %10.0%
    
    
    231,432
    
    
    
    (10.4)
    %
    
    
    211,219
    
    
    
    (9.5
    )%
 
 (1)
    
    Net of tax   23




---



##### Table of Contents



September 30,
    
    
    December 31,2008
    
    
    2007(In thousands)Commercial lines:Commercial multi-peril
    
    $
    217,196
    
    
    $
    198,919Commercial automobile
    
    
    43,723
    
    
    
    37,569Other liability
    
    
    11,103
    
    
    
    11,854Workers compensation
    
    
    8,187
    
    
    
    8,279Surety
    
    
    8,160
    
    
    
    6,818Fire, allied, inland marine
    
    
    367
    
    
    
    131288,736
    
    
    
    263,570Personal lines:Homeowners
    
    
    7,032
    
    
    
    7,029Personal automobile
    
    
    1,791
    
    
    
    2,122Other liability
    
    
    1,273
    
    
    
    1,142Fire, allied, inland marine
    
    
    111
    
    
    
    490Workers compensation
    
    
    48
    
    
    
    4610,255
    
    
    
    10,829Total
    
    $
    298,991
    
    
    $
    274,399
 Investments.
     24




---



##### Table of Contents



Policy Acquisition Costs.
 Reinsurance.
  Income Taxes.
 Results of Operations
    25




---



##### Table of Contents



Nine and three months ended September 30, 2008 compared to nine and three months ended September
30, 2007
  Nine months ended September 30,2008 vs. 2007 Income
    
    2008
    
    2007
    
    Change
    
    % Change(Dollars in thousands)Commercial lines underwriting income
    
    $
    2,981
    
    
    $
    5,416
    
    
    $
    (2,435
    )
    
    
    (45.0)
    %Personal lines underwriting (loss)/income
    
    
    (736
    )
    
    
    194
    
    
    
    (930
    )
    
    
    N/MTotal underwriting income
    
    
    2,245
    
    
    
    5,610
    
    
    
    (3,365
    )
    
    
    (60.0)
    %Net investment income
    
    
    10,173
    
    
    
    9,592
    
    
    
    581
    
    
    
    6.1
    %Net realized investment (losses)/gains
    
    
    (2,944
    )
    
    
    267
    
    
    
    (3,211
    )
    
    
    N/MOther
    
    
    1,555
    
    
    
    1,494
    
    
    
    61
    
    
    
    4.1
    %Interest expense
    
    
    (961
    )
    
    
    (911
    )
    
    
    (50
    )
    
    
    5.5
    %Income before income taxes
    
    
    10,068
    
    
    
    16,052
    
    
    
    (5,984
    )
    
    
    (37.3)
    %Income taxes
    
    
    2,463
    
    
    
    4,697
    
    
    
    (2,234
    )
    
    
    (47.6)
    %Net Income
    
    
    7,605
    
    
    
    11,355
    
    
    
    (3,750
    )
    
    
    (33.0)
    %Loss/ LAE ratio (GAAP)
    
    
    61.9
    %
    
    
    61.5
    %
    
    
    0.4
    %Underwriting expense ratio (GAAP)
    
    
    36.1
    %
    
    
    33.2
    %
    
    
    2.9
    %Combined ratio (GAAP)
    
    
    98.0
    %
    
    
    94.7
    %
    
    
    3.3
    %Loss/ LAE ratio (Statutory)
    
    
    61.9
    %
    
    
    61.5
    %
    
    
    0.4
    %Underwriting expense ratio (Statutory)
    
    
    35.9
    %
    
    
    31.5
    %
    
    
    4.4
    %Combined ratio (Statutory)
    
    
    97.8
    %
    
    
    93.0
    %
    
    
    4.8
    %
 26




---



##### Table of Contents



Three months ended September 30,2008 vs. 2007 Income
    
    2008
    
    2007
    
    Change
    
    % Change(Dollars in thousands)Commercial lines underwriting income
    
    $
    741
    
    
    $
    1,207
    
    
    $
    (466
    )
    
    
    (38.6)
    %Personal lines underwriting income
    
    
    73
    
    
    
    143
    
    
    
    (70
    )
    
    
    (49.0)
    %Total underwriting income
    
    
    814
    
    
    
    1,350
    
    
    
    (536
    )
    
    
    (39.7)
    %Net investment income
    
    
    3,469
    
    
    
    2,880
    
    
    
    589
    
    
    
    20.5
    %Net realized investment losses
    
    
    (2,281
    )
    
    
    (366
    )
    
    
    (1,915
    )
    
    
    N/MOther
    
    
    536
    
    
    
    587
    
    
    
    (51
    )
    
    
    (8.7)
    %Interest expense
    
    
    (328
    )
    
    
    (300
    )
    
    
    (28
    )
    
    
    9.3
    %Income before income taxes
    
    
    2,210
    
    
    
    4,151
    
    
    
    (1,941
    )
    
    
    (46.8)
    %Income taxes
    
    
    430
    
    
    
    1,139
    
    
    
    (709
    )
    
    
    (62.2)
    %Net Income
    
    
    1,780
    
    
    
    3,012
    
    
    
    (1,232
    )
    
    
    (40.9)
    %Loss/ LAE ratio (GAAP)
    
    
    60.3
    %
    
    
    61.0
    %
    
    
    (0.7)
    %Underwriting expense ratio (GAAP)
    
    
    37.6
    %
    
    
    35.4
    %
    
    
    2.2
    %Combined ratio (GAAP)
    
    
    97.9
    %
    
    
    96.4
    %
    
    
    1.5
    %Loss/ LAE ratio (Statutory)
    
    
    60.3
    %
    
    
    61.0
    %
    
    
    (0.7)
    %Underwriting expense ratio (Statutory)
    
    
    37.6
    %
    
    
    33.9
    %
    
    
    3.7
    %Combined ratio (Statutory)
    
    
    97.9
    %
    
    
    94.9
    %
    
    
    3.0
    %
       27




---



##### Table of Contents



Nine Months Ended September 30,2008 vs. 2007 Revenue
    
    2008
    
    2007
    
    Change
    
    % Change(In thousands)Direct premiums written
    
    $
    129,538
    
    
    $
    140,506
    
    
    $
    (10,968
    )
    
    
    (7.8)
    %Net premiums written
    
    
    115,863
    
    
    
    123,116
    
    
    
    (7,253
    )
    
    
    (5.9)
    %Net premiums earned
    
    
    115,590
    
    
    
    106,367
    
    
    
    9,223
    
    
    
    8.7
    %Net investment income
    
    
    10,173
    
    
    
    9,592
    
    
    
    581
    
    
    
    6.1
    %Net realized investment (losses)/gains
    
    
    (2,944
    )
    
    
    267
    
    
    
    (3,211
    )
    
    
    N/MOther revenue
    
    
    1,555
    
    
    
    1,494
    
    
    
    61
    
    
    
    4.1
    %Total revenue
    
    $
    124,374
    
    
    $
    117,720
    
    
    $
    6,654
    
    
    
    5.7
    %
 Three Months Ended September 30,2008 vs. 2007 Revenue
    
    2008
    
    2007
    
    Change
    
    % Change(In thousands)Direct premiums written
    
    $
    42,161
    
    
    $
    47,027
    
    
    $
    (4,866
    )
    
    
    (10.3)
    %Net premiums written
    
    
    37,575
    
    
    
    41,110
    
    
    
    (3,535
    )
    
    
    (8.6)
    %Net premiums earned
    
    
    37,869
    
    
    
    37,303
    
    
    
    566
    
    
    
    1.5
    %Net investment income
    
    
    3,469
    
    
    
    2,880
    
    
    
    589
    
    
    
    20.5
    %Net realized investment losses
    
    
    (2,281
    )
    
    
    (366
    )
    
    
    (1,915
    )
    
    
    N/MOther revenue
    
    
    536
    
    
    
    587
    
    
    
    (51
    )
    
    
    (8.7)
    %Total revenue
    
    $
    39,593
    
    
    $
    40,404
    
    
    $
    (811
    )
    
    
    (2.0)
    %
   28




---



##### Table of Contents



29




---



##### Table of Contents



Nine Months Ended September 30,2008 vs. 2007 Investment Income and Realized Gains
    
    2008
    
    2007
    
    Change
    
    % Change(In thousands)Fixed income securities
    
    $
    11,058
    
    
    $
    9,627
    
    
    $
    1,431
    
    
    
    14.9
    %Dividends
    
    
    254
    
    
    
    219
    
    
    
    35
    
    
    
    16.0
    %Cash, cash equivalents & other
    
    
    356
    
    
    
    1,458
    
    
    
    (1,102
    )
    
    
    (75.6)
    %Gross investment income
    
    
    11,668
    
    
    
    11,304
    
    
    
    364
    
    
    
    3.2
    %Investment expenses
    
    
    (1,495
    )
    
    
    (1,712
    )
    
    
    217
    
    
    
    12.7
    %Net investment income
    
    
    10,173
    
    
    
    9,592
    
    
    $
    581
    
    
    
    6.1
    %Realized losses  fixed income securities
    
    
    (3,226
    )
    
    
    (8
    )
    
    $
    (3,218
    )
    
    
    N/MRealized gains  equity securities
    
    
    486
    
    
    
    481
    
    
    
    5
    
    
    
    N/MMark-to-market valuation for interest rate swaps
    
    
    (204
    )
    
    
    (206
    )
    
    
    2
    
    
    
    N/MNet realized (losses)/gains
    
    
    (2,944
    )
    
    
    267
    
    
    $
    (3,211
    )
    
    
    N/M
 30




---



##### Table of Contents



Three Months Ended September 30,2008 vs. 2007 Investment Income and Realized Gains
    
    2008
    
    2007
    
    Change
    
    % Change(In thousands)Fixed income securities
    
    $
    3,769
    
    
    $
    3,209
    
    
    $
    560
    
    
    
    17.5
    %Dividends
    
    
    87
    
    
    
    72
    
    
    
    15
    
    
    
    20.8
    %Cash, cash equivalents & other
    
    
    103
    
    
    
    396
    
    
    
    (293
    )
    
    
    (74.0)
    %Gross investment income
    
    
    3,959
    
    
    
    3,677
    
    
    
    282
    
    
    
    7.7
    %Investment expenses
    
    
    (490
    )
    
    
    (797
    )
    
    
    307
    
    
    
    38.5
    %Net investment income
    
    
    3,469
    
    
    
    2,880
    
    
    $
    589
    
    
    
    20.5
    %Realized losses  fixed income securities
    
    
    (2,767
    )
    
    
    (8
    )
    
    $
    (2,759
    )
    
    
    N/MRealized gains  equity securities
    
    
    640
    
    
    
    138
    
    
    
    502
    
    
    
    N/MMark-to-market valuation for interest rate swaps
    
    
    (154
    )
    
    
    (496
    )
    
    
    342
    
    
    
    N/MNet realized losses
    
    
    (2,281
    )
    
    
    (366
    )
    
    $
    (1,915
    )
    
    
    N/M
        31




---



##### Table of Contents



At September 30, 2008
    
    
    At December 31, 2007
    
    
    At December 31, 2006Cost (2)
    
    
    Fair Value
    
    
    Cost (2)
    
    
    Fair Value
    
    
    Cost (2)
    
    
    Fair Value(In thousands)Fixed income securities (1):United States government and
government agencies (3)
    
    $
    87,372
    
    
    $
    87,957
    
    
    $
    84,736
    
    
    $
    85,454
    
    
    $
    75,683
    
    
    $
    74,981Obligations of states and
political subdivisions
    
    
    143,675
    
    
    
    141,383
    
    
    
    142,873
    
    
    
    144,026
    
    
    
    116,361
    
    
    
    116,298Industrial and miscellaneous
    
    
    75,319
    
    
    
    72,815
    
    
    
    65,109
    
    
    
    65,208
    
    
    
    53,298
    
    
    
    52,717Mortgage-backed securities
    
    
    27,262
    
    
    
    26,393
    
    
    
    29,260
    
    
    
    29,550
    
    
    
    29,427
    
    
    
    29,458Total fixed income securities
    
    
    333,628
    
    
    
    328,548
    
    
    
    321,978
    
    
    
    324,238
    
    
    
    274,769
    
    
    
    273,454Equity securities
    
    
    12,351
    
    
    
    14,730
    
    
    
    12,500
    
    
    
    17,930
    
    
    
    10,940
    
    
    
    16,522Short-term investments
    
    
    9,998
    
    
    
    9,998
    
    
    
    
    
    
    
    
    
    
    
    7,692
    
    
    
    7,692Total
    
    $
    355,977
    
    
    $
    353,276
    
    
    $
    334,478
    
    
    $
    342,168
    
    
    $
    293,401
    
    
    $
    297,668
 
 (1)
    
    In our consolidated financial statements, investments are carried at fair value.(2)
    
    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.(3)
    
    Includes approximately $65,704, $57,862 and $48,840 (cost) and $66,177, $58,376 and $48,548
(estimated fair value) of mortgage-backed securities issued by U.S. government agencies as of September 30, 2008 and December 31, 2007 and 2006, respectively.  32




---



##### Table of Contents



At September 30, 2008
    
    
    At December 31, 2007Cost (1)
    
    
    Fair Value
    
    
    Cost (1)
    
    
    Fair Value(In thousands)Industrial and miscellaneous
fixed income securitiesFinancial
    
    $
    33,968
    
    
    $
    32,291
    
    
    $
    35,784
    
    
    $
    35,603Retail specialty
    
    
    27,574
    
    
    
    27,242
    
    
    
    19,434
    
    
    
    19,601Energy
    
    
    9,679
    
    
    
    9,273
    
    
    
    4,298
    
    
    
    4,355Pharmaceutical
    
    
    2,249
    
    
    
    2,237
    
    
    
    2,747
    
    
    
    2,792Information technology
    
    
    1,849
    
    
    
    1,772
    
    
    
    2,846
    
    
    
    2,857Total
    
    $
    75,319
    
    
    $
    72,815
    
    
    $
    65,109
    
    
    $
    65,208Equity securitiesFinancial
    
    $
    3,287
    
    
    $
    3,394
    
    
    $
    4,364
    
    
    $
    6,007Retail specialty
    
    
    4,760
    
    
    
    5,958
    
    
    
    4,083
    
    
    
    6,037Energy
    
    
    1,320
    
    
    
    1,656
    
    
    
    953
    
    
    
    1,620Pharmaceutical
    
    
    1,001
    
    
    
    1,542
    
    
    
    840
    
    
    
    1,379Information technology
    
    
    1,410
    
    
    
    1,486
    
    
    
    1,637
    
    
    
    2,115Transportation
    
    
    573
    
    
    
    694
    
    
    
    623
    
    
    
    772Total
    
    $
    12,351
    
    
    $
    14,730
    
    
    $
    12,500
    
    
    $
    17,930
 
 (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.    33




---



##### Table of Contents



September 30,
    
    December 31,Type/Ratings of Investment (1)(2)
    
    2008 (3)
    
    2007 (3)U.S. government and agencies
    
    
    26.8
    %
    
    
    25.8
    %AAA
    
    
    26.5
    %
    
    
    48.3
    %AA
    
    
    28.9
    %
    
    
    11.1
    %A
    
    
    16.1
    %
    
    
    14.4
    %BBB
    
    
    1.5
    %
    
    
    0.3
    %BB
    
    
    0.1
    %
    
    
    0.1
    %B
    
    
    0.1
    %
    
    
    0.0
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
 
 (1)
    
    The ratings set forth in this table are based on the ratings assigned by Standard & Poors
Corporation (S&P). If S&Ps ratings were unavailable, the equivalent ratings supplied by
Moodys Investors Services, Inc., Fitch Investors Service, Inc. or the NAIC were used where
available.(2)
    
    The ratings shown above include, where applicable, credit enhancement by monoline bond
insurers (see Item 3 for discussion of credit enhancement on municipal bond holdings)(3)
    
    Represents the fair value of the classification as a percentage of the total fair value of
the portfolio.  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
    
    $
    23,060
    
    
    $
    183
    
    
    $
    960
    
    
    $
    30
    
    
    $
    24,020
    
    
    $
    213Obligations of states and
political subdivisions
    
    
    85,736
    
    
    
    2,781
    
    
    
    1,034
    
    
    
    60
    
    
    
    86,770
    
    
    
    2,841Corporate securities
    
    
    53,417
    
    
    
    2,461
    
    
    
    2,582
    
    
    
    188
    
    
    
    55,999
    
    
    
    2,649Mortgage-backed securities
    
    
    18,593
    
    
    
    843
    
    
    
    1,187
    
    
    
    102
    
    
    
    19,780
    
    
    
    945Total fixed maturities
    
    
    180,806
    
    
    
    6,268
    
    
    
    5,763
    
    
    
    380
    
    
    
    186,569
    
    
    
    6,648Total equity securities
    
    
    4,403
    
    
    
    723
    
    
    
    1,225
    
    
    
    139
    
    
    
    5,628
    
    
    
    862Total securities in a
temporary unrealized loss
position
    
    $
    185,209
    
    
    $
    6,991
    
    
    $
    6,988
    
    
    $
    519
    
    
    $
    192,197
    
    
    $
    7,510
  34




---



##### Table of Contents



Nine Months Ended September 30,2008 vs. 2007 Commercial Lines (CL)
    
    2008
    
    2007
    
    Change
    
    % Change(Dollars in thousands)CL Direct premiums written
    
    $
    112,871
    
    
    $
    123,245
    
    
    $
    (10,374
    )
    
    
    (8.4)
    %CL Net premiums written
    
    $
    100,852
    
    
    $
    107,812
    
    
    $
    (6,960
    )
    
    
    (6.5)
    %CL Net premiums earned
    
    $
    100,496
    
    
    $
    90,287
    
    
    $
    10,209
    
    
    
    11.3
    %CL Loss/ LAE expense ratio (GAAP)
    
    
    61.1
    %
    
    
    59.9
    %
    
    
    1.2
    %CL Expense ratio (GAAP)
    
    
    35.9
    %
    
    
    34.1
    %
    
    
    1.8
    %CL Combined ratio (GAAP)
    
    
    97.0
    %
    
    
    94.0
    %
    
    
    3.0
    %
 Three Months Ended September 30,2008 vs. 2007 Commercial Lines (CL)
    
    2008
    
    2007
    
    Change
    
    % Change(Dollars in thousands)CL Direct premiums written
    
    $
    36,237
    
    
    $
    40,871
    
    
    $
    (4,634
    )
    
    
    (11.3)
    %CL Net premiums written
    
    $
    32,187
    
    
    $
    35,598
    
    
    $
    (3,411
    )
    
    
    (9.6)
    %CL Net premiums earned
    
    $
    32,808
    
    
    $
    31,975
    
    
    $
    833
    
    
    
    2.6
    %CL Loss/ LAE expense ratio (GAAP)
    
    
    59.9
    %
    
    
    61.9
    %
    
    
    (2.0)
    %CL Expense ratio (GAAP)
    
    
    37.7
    %
    
    
    34.3
    %
    
    
    3.4
    %CL Combined ratio (GAAP)
    
    
    97.6
    %
    
    
    96.2
    %
    
    
    1.4
    %
  35




---



##### Table of Contents



Nine Months Ended September 30,2008 vs. 2007 Personal Lines (PL)
    
    2008
    
    2007
    
    Change
    
    % Change(Dollars in thousands)PL Direct premiums written
    
    $
    16,667
    
    
    $
    17,261
    
    
    $
    (594
    )
    
    
    (3.4
    )%PL Net premiums written
    
    $
    15,011
    
    
    $
    15,304
    
    
    $
    (293
    )
    
    
    (1.9
    )%PL Net premiums earned
    
    $
    15,094
    
    
    $
    16,080
    
    
    $
    (986
    )
    
    
    (6.1
    )%PL Loss/ LAE expense ratio (GAAP)
    
    
    67.3
    %
    
    
    70.6
    %
    
    
    (3.3
    )%PL Expense ratio (GAAP)
    
    
    37.6
    %
    
    
    28.2
    %
    
    
    9.4
    %PL Combined ratio (GAAP)
    
    
    104.9
    %
    
    
    98.8
    %
    
    
    6.1
    %
 36




---



##### Table of Contents



Three Months Ended September 30,2008 vs. 2007 Personal Lines (PL)
    
    2008
    
    2007
    
    Change
    
    % Change(Dollars in thousands)PL Direct premiums written
    
    $
    5,924
    
    
    $
    6,156
    
    
    $
    (232
    )
    
    
    (3.8
    )%PL Net premiums written
    
    $
    5,388
    
    
    $
    5,512
    
    
    $
    (124
    )
    
    
    (2.2
    )%PL Net premiums earned
    
    $
    5,061
    
    
    $
    5,328
    
    
    $
    (267
    )
    
    
    (5.0
    )%PL Loss/ LAE expense ratio (GAAP)
    
    
    62.8
    %
    
    
    55.9
    %
    
    
    6.9
    %PL Expense ratio (GAAP)
    
    
    36.9
    %
    
    
    41.4
    %
    
    
    (4.5
    )%PL Combined ratio (GAAP)
    
    
    99.7
    %
    
    
    97.3
    %
    
    
    2.4
    %
     Nine Months Ended September 30,2008 vs. 2007 Expenses and Expense Ratio
    
    2008
    
    2007
    
    Change
    
    % Change(Dollars in thousands)Amortization of Deferred Acquisition Costs
    
    $
    31,163
    
    
    $
    27,829
    
    
    $
    3,334
    
    
    
    12.0
    %As a % of net premiums earned
    
    
    27.0
    %
    
    
    26.2
    %
    
    
    0.8
    %Other underwriting expenses
    
    
    10,618
    
    
    
    7,530
    
    
    
    3,088
    
    
    
    41.0
    %Underwriting expenses
    
    
    41,781
    
    
    
    35,359
    
    
    $
    6,422
    
    
    
    18.2
    %Underwriting expense ratio
    
    
    36.1
    %
    
    
    33.2
    %
    
    
    2.9
    %
   37




---



##### Table of Contents



Nine Months Ended September 30,2008 vs. 2007 Income Taxes
    
    2008
    
    2007
    
    Change
    
    % Change(Dollars in thousands)Income before income taxes
    
    $
    10,068
    
    
    $
    16,052
    
    
    $
    (5,984
    )
    
    
    (37.3
    )%Income taxes
    
    
    2,463
    
    
    
    4,697
    
    
    
    (2,234
    )
    
    
    (47.6
    )%Net income
    
    
    7,605
    
    
    
    11,355
    
    
    $
    (3,750
    )
    
    
    (33.0
    )%Effective tax rate
    
    
    24.5
    %
    
    
    29.3
    %
    
    
    (4.8
    )%
  LIQUIDITY AND CAPITAL RESOURCES
        38




---



##### Table of Contents



39




---



##### Table of Contents



IMPACT OF INFLATION
   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.
  40




---



##### Table of Contents



o
    
    AA+ including insurance enhancemento
    
    AA excluding insurance enhancement
 
    
    99% of the underlying ratings are A- or better
    
    84% 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, 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+
  Average Credit
    
    Market
    
    % of Total Muni
    
    UnrealizedRating
    
    Value
    
    Portfolio
    
    Loss(dollars in thousands)Uninsured Securities
    
    AA+
    
    $
    40,081,117
    
    
    
    28
    %
    
    $
    (672,361
    )Securities with
Insurance
Enhancement
    
    AA+
    
    
    101,301,550
    
    
    
    72
    %
    
    
    (1,619,610
    )Total
    
    
    
    
    
    $
    141,382,667
    
    
    
    100
    %
    
    $
    (2,291,971
    )
 MarketCredit Enhancement
    
    Value
    
    
    % of Total(dollars in thousands)AMBAC
    
    $
    10,833,856
    
    
    
    8
    %FGIC
    
    
    28,100,839
    
    
    
    20
    %FSA
    
    
    28,728,327
    
    
    
    20
    %MBIA
    
    
    27,227,677
    
    
    
    19
    %No Enhancement
    
    
    31,773,013
    
    
    
    23
    %Other Enhancement
    
    
    5,811,268
    
    
    
    4
    %Escrowed to Maturity
    
    
    8,907,687
    
    
    
    6
    %Grand Total
    
    $
    141,382,667
    
    
    
    100
    %
  41




---



##### Table of Contents



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
    
    $
    20,845,743
    
    
    
    52
    %
    
    $
    37,096,474
    
    
    
    37
    %
    
    $
    11,550,400
    
    
    
    11
    %
    
    $
    57,942,217
    
    
    
    41
    %
    
    $
    32,396,143
    
    
    
    23
    %AA+
    
    
    4,010,409
    
    
    
    10
    %
    
    
    20,040,095
    
    
    
    20
    %
    
    
    26,150,711
    
    
    
    26
    %
    
    
    24,050,504
    
    
    
    17
    %
    
    
    30,161,120
    
    
    
    20
    %AA
    
    
    12,896,639
    
    
    
    32
    %
    
    
    35,310,837
    
    
    
    35
    %
    
    
    30,745,394
    
    
    
    30
    %
    
    
    48,207,476
    
    
    
    34
    %
    
    
    43,642,033
    
    
    
    31
    %AA-
    
    
    2,328,326
    
    
    
    6
    %
    
    
    7,618,534
    
    
    
    8
    %
    
    
    17,041,563
    
    
    
    17
    %
    
    
    9,946,860
    
    
    
    7
    %
    
    
    19,369,889
    
    
    
    14
    %A+
    
    
    
    
    
    
    
    
    
    
    202,020
    
    
    
    0
    %
    
    
    6,376,417
    
    
    
    6
    %
    
    
    202,020
    
    
    
    0
    %
    
    
    6,376,417
    
    
    
    5
    %A
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,503,865
    
    
    
    6
    %
    
    
    
    
    
    
    
    
    
    
    5,503,865
    
    
    
    4
    %A-
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,899,610
    
    
    
    3
    %
    
    
    
    
    
    
    
    
    
    
    2,899,610
    
    
    
    2
    %BBB-
    
    
    
    
    
    
    
    
    
    
    1,033,590
    
    
    
    1
    %
    
    
    1,033,590
    
    
    
    1
    %
    
    
    1,033,590
    
    
    
    1
    %
    
    
    1,033,590
    
    
    
    1
    %Total
    
    $
    40,081,117
    
    
    
    100
    %
    
    $
    101,301,550
    
    
    
    100
    %
    
    $
    101,301,550
    
    
    
    100
    %
    
    $
    141,382,667
    
    
    
    100
    %
    
    $
    141,382,667
    
    
    
    100
    %Average Rating
    
    AA+
    
    
    
    
    
    
    AA+
    
    
    
    
    
    
    AA
    
    
    
    
    
    
    AA+
    
    
    
    
    
    
    AA
    Structured Product Exposure.
    42




---



##### Table of Contents



Equity Risk.
   Investments Outlook
    43




---



##### Table of Contents



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 Under ThePeriod
    
    Shares Purchased
    
    Paid per Share
    
    Programs (Note 1)
    
    Plans or Programs (Note 1)July 1-31, 2008
    
    
    0
    
    
    
    N/A
    
    
    
    0
    
    
    
    303,476August 1-31, 2008
    
    
    0
    
    
    
    N/A
    
    
    
    0
    
    
    
    303,476September 1-30, 2008
    
    
    35,000
    
    
    $
    17.43
    
    
    
    35,000
    
    
    
    268,476Total
    
    
    35,000
    
    
    $
    17.43
    
    
    
    35,000
    
    
    
    268,476
  
 Item 3. Defaults Upon Senior Securities
  44




---



##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 Exhibits
 Exhibit No.
    
    Title3.1
    
    Articles of Incorporation of Mercer Insurance Group, Inc.
(incorporated by reference herein to the Groups Pre-effective
Amendment No. 3 on Form S-1, SEC File No. 333-104897.)3.2
    
    Bylaws of Mercer Insurance Group, Inc. (incorporated by
reference herein to the Groups Annual Report on Form 10-K,
SEC File No. 000-25425, for the fiscal year ended December 31,
2003.)31.1
    
    Certification of Chief Executive Officer in accordance with
Section 302 of the Sarbanes-Oxley Act of 2002, (filed
herewith)31.2
    
    Certification of Chief Financial Officer in accordance with
Section 302 of the Sarbanes-Oxley Act of 2002, (filed
herewith)32.1
    
    Certification of Chief Executive Officer in accordance with
Section 906 of the Sarbanes-Oxley Act of 2002, (filed
herewith)32.2
    
    Certification of Chief Financial Officer in accordance with
Section 906 of the Sarbanes-Oxley Act of 2002, (filed
herewith)
 45




---



##### Table of Contents



SIGNATURES
  MERCER INSURANCE GROUP, INC. (Registrant)Dated: November 10, 2008
    By:
    /s/ Andrew R. SpeakerAndrew R. Speaker,President and Chief Executive OfficerDated: November 10, 2008
    By:
    /s/ David B. MercleanDavid B. Merclean,Senior Vice President and Chief Financial Officer 46