SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q/A

Amendment No. 1

Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the Quarterly Period Ended September 30, 2005,

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.

(Exact name of Registrant as specified in its charter)

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)

(609) 737-0426

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).   Yes þ No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

	Number of Shares Outstanding as of October 31,2005
COMMON STOCK (No Par Value)	6,556,670
(Title of Class)	(Outstanding Shares)

EXPLANATORY NOTE

    The registrant is filing this Amendment No. 1 to its Form 10-Q for the quarter ended September 30, 2005, in response to a request by the SEC to remove narrative disclosure referring to overall or total underwriting profit or loss contained within Item 2, the Management’s Discussion and Analysis of Financial Condition and Results of Operations. Other than the change referred to above, all other information included in the Mercer Insurance Group, Inc. Form 10-Q, as filed on November 9, 2005, remains unchanged. Items 1, 3 and 4 of Part I and all items of Part II of that filing have been omitted from this Amendment because they are unchanged. All information contained herein is as of September 30, 2005, and does not reflect any events that have occurred subsequent to that date.

TABLE OF CONTENTS

	Page
PART I. FINANCIAL INFORMATION		4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	4
SIGNATURES	22
Exhibits:

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

(i)

Forward-looking Statements

     Mercer Insurance Group, Inc. (the “Company”) may from time to time make written or oral “forward-looking statements,” including statements contained in the Company’s filings with the Securities and Exchange Commission (including this Quarterly Report on Form 10-Q and the exhibits hereto and thereto), in its reports to shareholders and in other communications by the Company, which are made in good faith by the Company pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

     These forward-looking statements include statements with respect to the Company’s beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, that are subject to significant risks and uncertainties, and are subject to change based on various factors (some of which are beyond the Company’s control). The words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan” and similar expressions are intended to identify forward-looking statements. The following factors, among others, could cause the Company’s financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements:

• future economic conditions in the regional and national markets in which the Company competes which are less favorable than expected;

• the effects of weather-related and other catastrophic events;

• the geographic concentration of insured accounts;

• the effect of legislative, judicial, economic, demographic and regulatory events in the two states in which we do business as of September 30, 2005;

• the continuation of an A.M. Best rating in the Excellent category;

• the ability to enter new markets successfully and capitalize on growth opportunities either through acquisitions or the expansion of our producer network;

• the ability to obtain regulatory approval for an acquisition, to close the transaction, and to successfully integrate an acquisition and its operations.

• financial market conditions, including, but not limited to, changes in interest rates and the stock markets causing a reduction of investment income or investment gains, an acceleration of the amortization of deferred policy acquisition costs, reduction in the value of our investment portfolio or a reduction in the demand for our products;

• the impact of acts of terrorism and acts of war;

• the effects of terrorist related insurance legislation and laws;

• inflation;

• the cost, availability and collectibility of reinsurance;

• estimates and adequacy of loss reserves and trends in losses and loss adjustment expenses;

• heightened competition, including specifically the intensification of price competition, the entry of new competitors and the development of new products by new and existing competitors;

2

• changes in the coverage terms selected by insurance customers, including higher deductibles and lower limits;

• our inability to obtain regulatory approval of, or to implement, premium rate increases;

• the potential impact on our reported net income that could result from the adoption of future accounting standards issued by the Financial Accounting Standards Board or other standard-setting bodies;

• inability to carry out marketing and sales plans, including, among others, development of new products or changes to existing products and acceptance of the new or revised products in the market;

• unanticipated changes in industry trends and ratings assigned by nationally recognized rating organizations;

• adverse litigation or arbitration results;

• the ability to carry out our business plans; or

• adverse changes in applicable laws, regulations or rules governing insurance holding companies and insurance companies, and environmental, tax or accounting matters including limitations on premium levels, increases in minimum capital and reserves, and other financial viability requirements, and changes that affect the cost of, or demand for our products.

     The Company cautions that the foregoing list of important factors is not exclusive. Readers are also cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date of this report. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following presents management’s discussion and analysis of our financial condition and results of operations as of the dates and for the periods indicated. You should read this discussion in conjunction with the condensed consolidated financial statements and notes thereto included in this report. This discussion contains forward-looking information that involves risks and uncertainties. Actual results could differ significantly from these forward-looking statements. See “Forward-Looking Statements”.

Overview

THE CONVERSION TRANSACTION AND THE HOLDING COMPANY

     Mercer Insurance Group, Inc. (the “Company” or the “Holding Company”) is a holding company owning all of the outstanding shares of Mercer Insurance Company, the company resulting from the conversion of Mercer Mutual Insurance Company from the mutual to the stock form of organization on December 15, 2003 (the “Conversion”). Prior to the Conversion, and since 1844, Mercer Mutual Insurance Company was engaged in the business of selling property and casualty insurance.

Our Business

     The Company and its subsidiaries underwrite property and casualty insurance in New Jersey and Pennsylvania. Our consolidated operating insurance company subsidiaries are:

• Mercer Insurance Company, a Pennsylvania property and casualty stock insurance company offering insurance coverage to businesses and individuals in New Jersey and Pennsylvania,

• Mercer Insurance Company of New Jersey, Inc., a New Jersey property and casualty stock insurance company offering insurance coverage to businesses and individuals in New Jersey; and

• Franklin Insurance Company, a property and casualty stock insurance company offering private passenger automobile and homeowners insurance to individuals located in Pennsylvania.

     The Company is subject to regulation by the Pennsylvania Insurance Department and the New Jersey Department of Banking and Insurance as its primary regulators because it is the holding company for Mercer Insurance Company, and, indirectly, Mercer Insurance Company of New Jersey, Inc. and Franklin Insurance Company.

     Mercer Insurance Company has applied for a license to write property and casualty insurance in New York. When licensed in that state, Mercer Insurance Company will initially write business which supports existing accounts, and may introduce in that state specialty programs for select religious institutions and habitational risks. After October 1, 2005, through its new subsidiary Financial Pacific Insurance Company, the Company will be writing business in the California, Arizona, Nevada and Oregon, and will be licensed in 15 additional states.

     We manage our business and report our operating results in three operating segments: commercial lines insurance, personal lines insurance and the investment function. See Note 2 of the notes to our condensed consolidated financial statements included in this report. However, assets are not allocated to segments and are

4

reviewed in the aggregate for decision-making purposes. Our commercial lines insurance business consists primarily of multi-peril and general liability and related coverages. Our personal lines insurance business consists primarily of homeowners (in New Jersey and Pennsylvania) and private passenger automobile (in Pennsylvania only) insurance coverages. We market both the commercial and personal insurance lines through independent producers.

     Our income is principally derived from written premiums received from insureds in the commercial lines (businesses insured) and personal lines (individuals insured) segments, less the costs of underwriting the insurance policies, the costs of settling and paying claims reported on the policies, and from investment income reduced by investment expenses and gains or losses on holdings in our investment portfolio. Written premiums are the total amount of premiums billed to the policyholder less the amount of premiums returned, generally as a result of cancellations, during a policy period. Written premiums become premiums earned as the policy ages. In the absence of premium rate changes, if an insurance company writes the same number and mix of policies each year, written premiums and premiums earned will be equal, and the unearned premium reserve will remain constant. During periods of growth, the unearned premium reserve will increase, causing premiums earned to be less than written premiums. Conversely, during periods of decline, the unearned premium reserve will decrease, causing premiums earned to be greater than written premiums.

     Variability in our income is caused by a variety of circumstances, some within the control of our companies and some not within our control. Premium volume is affected by, among other things, the availability and regular flow to our insurance companies of quality, properly-priced risks being produced by our agents, the ability to retain on renewal existing good-performing accounts, competition from other insurance companies, regulatory rate approvals, our reputation, and other limitations created by the marketplace or regulators. Our underwriting costs are affected by, among other things, the amount of commission and profit-sharing commission we pay our agents to produce the underwriting risks for which we receive premiums, the cost of issuing insurance policies and maintaining our customer and agent relationships, marketing costs, taxes we pay to the states in which we operate on the amount of premium we collect, and other assessments and charges imposed on our companies by the regulators in the states in which we do business. Our claim and claim settlement costs are affected by, among other things, the quality of our accounts, severe or extreme weather in our operating region, the nature of the claim, the regulatory and legal environment in our territories, inflation in underlying medical and property repair costs, and the availability and cost of reinsurance. Our investment income and realized gains and losses are determined by, among other things, market forces, the rates of interest and dividends paid on our investment portfolio holdings, the credit or investment quality of the issuers and the success of their underlying businesses, the market perception of the issuers, and other factors such as ratings by rating agencies and analysts.

Critical Accounting Policies

     General. The Company’s financial statements are prepared in conformity with U.S. generally accepted accounting principles (GAAP). We are required to make estimates and assumptions in certain circumstances that affect amounts reported in our consolidated financial statements and related footnotes. We evaluate these estimates and assumptions on an on-going basis based on historical developments, market conditions, industry trends and other information that we believe to be reasonable under the circumstances. There can be no assurance that actual results will conform to our estimates and assumptions, and that reported results of operations will not be materially adversely affected by the need to make accounting adjustments to reflect changes in these estimates and assumptions from time to time. We believe the following policies are the most sensitive to estimates and judgments.

     Liabilities for Loss and Loss Adjustment Expenses. The liability for losses and loss adjustment expenses represents estimates of the ultimate unpaid cost of all losses incurred, including losses for claims that have not yet been reported to our insurance companies. The amount of loss reserves for reported claims is based primarily upon

5

a case-by-case evaluation of the type of risk involved, knowledge of the circumstances surrounding each claim and the insurance policy provisions relating to the type of loss. The amounts of loss reserves for unreported claims and loss adjustment expenses are determined using historical information by line of insurance as adjusted to current conditions. Inflation is implicitly provided for in the reserving function through analysis of costs, trends and reviews of historical reserving results over multiple years.

     Reserves are closely monitored and are recomputed periodically using the most recent information on reported claims and a variety of statistical techniques. Specifically, on a quarterly basis, we review, by line of business, existing reserves, new claims, changes to existing case reserves, and paid losses with respect to the current and prior accident years. We use historical paid and incurred losses and accident year data to derive expected ultimate loss and loss adjustment expense ratios by line of business. We then apply these expected loss and loss adjustment expense ratios to in-force business to derive a reserve level for each line of business. This amount, together with reserves required by new reported claims and changes to existing case reserves, is compared to existing reserves to establish the adjustment to reserves that is required. In connection with the determination of the reserves, we also consider other specific factors such as recent weather-related losses, trends in historical paid losses, and legal and judicial trends with respect to theories of liability. Because of the nature of our business, which generally provides coverage for short-term risks, loss development is comparatively rapid and historical paid losses have been a reliable predictive measure of future losses.

     Nevertheless, reserves are estimates because there are uncertainties inherent in the determination of ultimate losses. Court decisions, regulatory changes and economic conditions can affect the ultimate cost of claims that occurred in the past as well as create uncertainties regarding future loss cost trends. Accordingly, the ultimate liability for unpaid losses and loss settlement expenses will likely differ from the amount recorded at September 30, 2005. Changes in estimates or differences between estimates and amounts ultimately paid are reflected in current operations. Loss reserving techniques and assumptions have been consistently applied during the periods presented.

     The table below summarizes the effect on net loss reserves and equity in the event of reasonably likely changes in the variables considered in establishing loss and loss adjustment expense reserves. The range of reasonably likely changes was established based on a review of changes in accident year development by line of business and applied to loss reserves as a whole. The selected range of changes does not indicate what could be the potential best or worst case or likely scenarios:

Adjustment	Adjusted Loss and
Change in Loss and	Loss Reserves Net of		Percentage Change in			Adjusted Loss and Loss		Percentage Change
Loss Adjustment	Reinsurance as of		Stockholders’ Equity as			Adjustment Reserves		in Stockholders’
Reserves Net of	September 30,		of September 30,			Net of Reinsurance as of		Equity as of
Reinsurance	2005		2005(1)			December 31, 2004		December 31, 2004(1)
(Dollars in thousands)
(10.0)%		29,005		2.1	%		29,669		2.2	%
(7.5)%		29,810		1.6	%		30,493		1.6	%
(5.0)%		30,616		1.1	%		31,317		1.1	%
(2.5)%		31,422		0.5	%		32,141		0.5	%
Base		32,227		—			32,965		—
2.5%		33,033		(0.5	)%		33,789		(0.5	)%
5.0%		33,839		(1.1	)%		34,613		(1.1	)%
7.5%		34,644		(1.6	)%		35,437		(1.6	)%
10.0%		35,450		(2.1	)%		36,262		(2.2	)%

(1) Net of tax

6

     The property and casualty industry has incurred substantial aggregate losses from claims related to asbestos-related illnesses, environmental remediation, product and construction defect liability, mold, and other uncertain exposures. We have not historically experienced significant losses from these types of claims, although Financial Pacific Insurance Group, which the Company acquired on October 1, 2005, has a book of Contractors business which has resulted in construction defect claims over the years.

     The table below summarizes loss and loss adjustment reserves by major line of business:

	September 30, 2005		December 31, 2004
	(Dollars in thousands)
Commercial lines:
Other Liability	$	9,908	$	9,374
Commercial multi-peril		7,240		5,441
Workers’ compensation		5,451		4,627
Commercial automobile		947		1,456
Fire, allied, inland marine		701		781
		24,247		21,679
Personal lines:
Homeowners		8,147		10,095
Personal automobile		1,975		2,283
Other liability		1,076		1,596
Fire, allied, inland marine		262		338
Workers’ compensation		75		37
		11,535		14,349
Total	$	35,782	$	36,028

     Investments. Unrealized investment gains or losses on investments carried at fair value, net of applicable income taxes, are reflected directly in stockholders’ equity as a component of comprehensive income and, accordingly, have no effect on net income. A decline in fair value of an investment below its cost that is deemed other than temporary is charged to earnings as a realized loss. We monitor our investment portfolio and review investments that have experienced a decline in fair value below cost to evaluate whether the decline is other than temporary. These evaluations involve judgment and consider the magnitude and reasons for a decline and the prospects for the fair value to recover in the near term. Adverse investment market conditions, or poor operating results of underlying investments, could result in impairment charges in the future.

     The Company’s policy on impairment of value of investments is as follows: if a security has a market value below cost it is considered impaired. For any such security a review of the financial condition and prospects of the company will be performed by the Investment Committee to determine if the decline in market value is other than temporary. If it is determined that the decline in market value is “other than temporary”, the carrying value of the security will be written down to “realizable value” and the amount of the write down accounted for as a realized loss. “Realizable value” is defined for this purpose as the market price of the security. Write-down to a value other than the market price requires objective evidence in support of that value.

     In evaluating the potential impairment of fixed income securities, the Investment Committee will evaluate relevant factors, including but not limited to the following: the issuer’s current financial condition and ability to make future scheduled principal and interest payments, relevant rating history, analysis and guidance provided by rating agencies and analysts, the degree to which an issuer is current or in arrears in making principal and interest payments, and changes in price relative to the market.

     In evaluating the potential impairment of equity securities, the Investment Committee will evaluate certain factors, including but not limited to the following: the relationship of market price per share versus carrying value per share at the date of acquisition and the date of evaluation, the price-to-earnings ratio at the date of acquisition and the date of evaluation, any rating agency announcements, the issuer’s financial condition and near-term

7

prospects, including any specific events that may influence the issuer’s operations, the independent auditor’s report on the issuer’s financial statements; and any buy/sell/hold recommendations or price projections by outside investment advisors.

     We have one significant non-traded equity security, a non-voting common stock in Excess Reinsurance Company, which is carried at $1.1 million. Its fair value is estimated at the statutory book value as reported to the National Association of Insurance Commissioners (NAIC). Other non-traded securities, which are not material in the aggregate, are carried at cost.

     Policy Acquisition Costs. We defer policy acquisition costs, such as commissions, premium taxes and certain other underwriting expenses that vary with and are primarily related to the production of business. These costs are amortized over the effective period of the related insurance policies. The method followed in computing deferred policy acquisition costs limits the amount of deferred costs to their estimated realizable value, which gives effect to the premium to be earned, related investment income, loss and loss adjustment expenses, and certain other costs expected to be incurred as the premium is earned. Future changes in estimates, the most significant of which is expected loss and loss adjustment expenses, may require acceleration of the amortization of deferred policy acquisition costs.

     Reinsurance. Amounts recoverable from property and casualty reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Amounts paid for reinsurance contracts are expensed over the contract period during which insured events are covered by the reinsurance contracts.

     Ceded unearned premiums and reinsurance balances recoverable on paid and unpaid loss and loss adjustment expenses are reported separately as assets, instead of being netted with the appropriate liabilities, because reinsurance does not relieve us of our legal liability to our policyholders. Reinsurance balances recoverable are subject to credit risk associated with the particular reinsurer. Additionally, the same uncertainties associated with estimating unpaid loss and loss adjustment expenses affect the estimates for the ceded portion of these liabilities.

     We continually monitor the financial condition of our reinsurers.

     Income Taxes. We use the asset and liability method of accounting for income taxes. Deferred income taxes are provided and arise from the recognition of temporary differences between financial statement carrying amounts and the tax bases of our assets and liabilities. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. The effect of a change in tax rates is recognized in the period of the enactment date.

Results of Operations

     Our results of operations are influenced by factors affecting the property and casualty insurance industry in general, which include potentially significant variations due to competition, weather, catastrophic events, regulation, the state of the reinsurance market, general economic conditions, judicial trends, fluctuations in interest rates and other changes in the investment environment.

     Our growth in premiums and underwriting results has been, and continue to be, influenced by market conditions. Pricing in the property and casualty insurance industry historically has been and remains cyclical. During a soft market cycle, price competition is prevalent, which makes it difficult to write and retain properly priced personal and commercial lines business. Our policy is to maintain disciplined underwriting and pricing standards during soft markets, declining business which is inadequately priced for its level of risk. The hard market

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and related pricing power of the early part of the current decade has given way to a much more competitive market recently, particularly in large commercial accounts, package policies and in the Pennsylvania personal auto market. This has resulted in slower premium growth than the Company has achieved in recent years.

     The availability of reinsurance at reasonable pricing is an important part of our business. The recent surge in hurricane activity has placed reinsurers under greater financial pressures than experienced in recent years, and so it is difficult to predict what impact these events will have on catastrophe reinsurance rates, and on reinsurance capacity in the market place as we approach the renewal of our annual reinsurance contracts at the beginning of 2006, or whether reinsurers may move to reduce occurrence limits included in reinsurance contracts to control catastrophe exposures. Although our operating territories experienced only a minor impact from the residual effects of the hurricanes that ravaged the Gulf coast, it is still yet to be determined how much of an impact those events may have on the pricing of our reinsurance contracts on renewal.

Nine months and three months ended September 30, 2005 compared with nine months and three months ended September 30, 2004.

     The components of income for 2005 and 2004, and the change and percentage change from year to year, are shown in the charts below. The accompanying narrative refers to the statistical information displayed in the chart(s) immediately above the narrative.

Nine months ended September 30,
2005 vs. 2004 Income										%
(Dollars in thousands)	2005			2004			Change			Change
Commercial lines underwriting income	$	3,242		$	5,384		$	(2,142	)		(39.8	)%
Personal lines underwriting loss		(1,121	)		(4,591	)		3,470			75.6	%
Total underwriting income		2,121			793			1,328			167.5	%
Net investment income		2,254			1,933			321			16.6	%
Realized investment gains		1,273			439			834			190.0	%
Other revenue		256			266			(10	)		(3.8	)%
Income before income taxes		5,904			3,431			2,473			72.1	%
Income taxes		1,785			1,010			775			76.7	%
Net income	$	4,119		$	2,421		$	1,698			70.1	%
Loss / LAE ratio (GAAP)		47.6	%		50.7	%		(3.1	)%
Underwriting expense ratio (GAAP)		47.7	%		47.4	%		0.3	%
Combined ratio (GAAP)		95.3	%		98.1	%		(2.8	)%
Loss / LAE ratio (Statutory)		47.6	%		50.7	%		(3.1	)%
Underwriting expense ratio (Statutory)		47.1	%		45.8	%		1.3	%
Combined ratio (Statutory)		94.7	%		96.5	%		(1.8	)%

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Three months ended September 30,
2005 vs. 2004 Income										%
(Dollars in thousands)	2005			2004			Change			Change
Commercial lines underwriting income	$	1,599		$	1,880		$	(281	)		(14.9	)%
Personal lines underwriting loss		(596	)		(1,261	)		665			52.7	%
Total underwriting income		1,003			619			384			62.0	%
Net investment income		770			639			131			20.5	%
Realized investment gains		1,175			340			835			245.6	%
Other revenue		84			86			(2	)		(2.3	)%
Income before income taxes		3,032			1,684			1,348			80.0	%
Income taxes		971			563			408			72.5	%
Net income	$	2,061		$	1,121		$	940			83.9	%
Loss / LAE ratio (GAAP)		42.6	%		44.0	%		(1.4	)%
Underwriting expense ratio (GAAP)		50.9	%		51.6	%		(0.7	)%
Combined ratio (GAAP)		93.5	%		95.6	%		(2.1	)%
Loss / LAE ratio (Statutory)		42.6	%		44.0	%		(1.4	)%
Underwriting expense ratio (Statutory)		51.4	%		50.5	%		0.9	%
Combined ratio (Statutory)		94.0	%		94.5	%		(0.5	)%

     Charts and discussion relating to each of our reporting segments (commercial lines underwriting, personal lines underwriting, and the investments segment) follow below.

     Our personal lines underwriting performance in the first nine months of 2005 is significantly better than the prior year. This improved performance has been driven by the absence in 2005 of the severe weather which occurred in our operating territories in the first quarter of 2004, during which the Company had a significantly higher number of claims in personal lines. This improvement in personal lines in 2005 was offset by higher losses in the commercial lines segment, including a number of larger losses in the second and third quarters, although through the nine months of 2005 the number of new claims continues to be on the low side of the normal range of expectations, and more favorable than the prior year, and large losses in the aggregate are within the normal range of expectations. The Company’s statutory combined ratio improved to 94.7% in 2005 from 96.5% in 2004. Net investment income increased 16.6% to $2.3 million, primarily as a result of increased yields on short-term investments held in the fixed-income investment portfolio. Realized investment gains amounted to $1.3 million in 2005, compared to a gain of $439,000 in 2004. The unusual level of realized gains in 2005 is attributable to the disposition of securities in anticipation of funding the acquisition of Financial Pacific Insurance Group, Inc. on October 1, 2005, for $40.4 million in cash. Our other income, primarily service charges recorded on insurance premiums paid over the term of the policy instead of when the policy is issued, has declined modestly in 2005.

     In the three months ended September 30, 2005, claims frequency improved on that of the 2004 quarter. Net investment income in the quarter improved by 20% over the prior year to $770,000, due principally to the higher general level of interest rates on short-term holdings.

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Nine months ended September 30,
2005 vs. 2004 Revenue
(Dollars in thousands)	2005		2004		Change			% Change
Direct premiums written	$	48,004	$	46,883	$	1,121			2.4	%
Net premiums written		44,112		42,193		1,919			4.5	%
Net premiums earned		45,378		41,617		3,761			9.0	%
Net investment income		2,254		1,933		321			16.6	%
Realized investment gains		1,273		439		834			190.0	%
Other Revenue		256		266		(10	)		(3.8	)%
Total Revenue	$	49,161	$	44,255	$	4,906			11.1	%

Three months ended September 30,
2005 vs. 2004 Revenue
(Dollars in thousands)	2005		2004		Change			% Change
Direct premiums written	$	15,270	$	14,644	$	626			4.3	%
Net premiums written		14,171		13,420		751			5.6	%
Net premiums earned		15,404		14,032		1,372			9.8	%
Net investment income		770		639		131			20.5	%
Realized investment gains		1,175		340		835			245.6	%
Other Revenue		84		86		(2	)		(2.3	)%
Total Revenue	$	17,433	$	15,097	$	2,336			15.5	%

     Total revenues for the nine months of 2005 were up 11.1% over 2004 to $49.2 million. This increase was due primarily to a $3.8 million, or 9.0%, increase in net premiums earned in 2005, a 190% increase in realized investment gains to $1.3 million resulting from securities sales to fund the Financial Pacific acquisition, and a 16.6% increase in net investment income to $2.3 million resulting from higher short term interest rates in 2005 over 2004. In the third quarter of 2005, as compared to the same period of 2004, total revenues were up 15.5% over 2004 to $17.4 million. This increase was due primarily to a $1.4 million, or 9.8%, increase in net premiums earned in 2005, an 245.6% increase in realized investment gains to $1.2 million resulting from securities sales to fund the Financial Pacific acquisition, and a 20.5% increase in net investment income to $770,000 resulting from higher short term interest rates in 2005 over 2004..

     In the first nine months of 2005 direct premiums written increased only 2.4% to $48.0 million, reflecting more competitive pricing in the marketplace and the Company’s discipline to not accept underwriting risks which are priced inappropriately. In the third quarter of 2005, as compared to the same quarter in the prior year, direct premiums written increased 4.3% to $15.3 million. Net premiums written for the nine months and third quarter increased 4.5 % and 5.6%, respectively, to $44.1 million and $14.2 million, respectively. Net premiums earned for the nine months and third quarter increased 9.0% and 9.8%, respectively, to $45.4 million and $15.4 million, respectively.

     Growth in Net Investment Income is discussed below.

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Nine months ended September 30,
2005 vs. 2004 Investment income and
realized gains
(Dollars in thousands)	2005			2004			Change			% Change
Fixed income securities	$	2,651		$	2,471		$	180			7.3	%
Dividends		303			303			0			0.0	%
Cash, cash equivalents & other		582			279			303			108.6	%
Gross investment income		3,536			3,053			483			15.8	%
Investment expenses		(1,282	)		(1,120	)		162			14.5	%
Net investment income	$	2,254		$	1,933		$	321			16.6	%
Realized losses on fixed income	$	(498	)	$	(146	)	$	(352	)	NM		%
Realized gains on equities		1,771			590			1,181		NM		%
Realized losses — other		—			(5	)		5		NM		%
Net realized gains	$	1,273		$	439		$	834		NM		%

(N/M means “not meaningful”)

     In the nine months ended September 30, net investment income increased $321,000, or 16.6%, due principally to increased yields on the short-term portfolio holdings, driven by higher interest rates on the shorter end of the yield curve.

     Effective January 1, 2004, the Company engaged a new investment management firm for its fixed income securities portfolio, whose responsibilites included investing the proceeds of the Conversion. Given a difficult interest rate environment and fixed income securities market, this was not largely completed until the second quarter of 2004, and, consequently, a portion of the Conversion proceeds earned a short-term yield during much of the first six months of 2004 that was considerably lower than similar yields in 2005.

     In implementing the investment policy guidelines and directions of the Investment Committee of the Board of Directors, the fixed income securities managers during 2004 changed the composition of the fixed income securities portfolio to be more heavily weighted in tax-exempt securities, industrial and miscellaneous fixed income securities, and mortgage-backed securities, and less heavily weighted towards U.S government and government agencies fixed income securities, with a goal of increasing yields while continuing to maintain high credit qualities.

     Net realized gains for the first nine months of 2005 were $1.3 million, as compared to $439,000 in the similar period in 2004. As noted above, these gains were taken as part of the process of funding the acquisition of Financial Pacific Insurance Group. In 2005, net realized investment gains of $1.3 million included gains on securities sales of $2.3 million, offset by losses on securities sales of $1.0 million. The losses from securities sales were comprised of $358,000 from the sale of fixed income securities, $203,000 from the sale of equities, and $402,000 from the writedown in the second quarter of securities determined to be other-than-temporarily impaired. These securities were written down to our estimate of fair market value at the time of the write-down.

     The following table summarizes the period of time that equity securities sold at a loss during 2005 had been in a continuous unrealized loss position:

	Fair
PERIOD OF TIME IN AN	Value on		Realized
UNREALIZED LOSS POSITION	Sale Date		Loss
	(In thousands)
0-6 months	$	1,746	$	165
7-12 months		360		38
More than 12 months		—		—
Total	$	2,106	$	203

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     The equity securities sold at a loss had been expected to appreciate in value but after re-evaluation were sold so that sale proceeds could be reinvested. Securities were sold due to a desire to reduce exposure to certain issuers and industries or in light of changing economic conditions.

     The following table summarizes the length of time equity securities with unrealized losses at September 30, 2005 have been in an unrealized loss position:

						Length of Unrealized Loss
		Fair		Unrealized		Less than		6 to 12		Over 12
September 30, 2005		Value		Losses		6 months		Months		Months
	(In thousands)
Equity securities:
Preferred stocks		$	1,154	$	51	$	51	$	0	$	0

     The estimated fair value and unrealized loss for all fixed income and equity securities in a temporary unrealized loss position as of September 30, 2005 are as follows:

	Less than 12 Months				12 Months or Longer				Total
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	(In thousands)
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	5,661	$	92	$	6,761	$	188	$	12,422	$	280
Obligations of states and political subdivisions		12,518		144		9,669		194		22,187		338
Corporate securities		4,063		120		6,734		163		10,797		283
Mortgage-backed securities		8,874		115		6,203		136		15,077		251
Total fixed maturities		31,116		471		29,367		681		60,482		1,152
Total equity securities		1,154		51		—		—		1,154		51
Total securities in a temporary unrealized loss position	$	32,270	$	522	$	29,367	$	681	$	61,637	$	1,203

     The unrealized losses on fixed maturity investments were primarily due to changes in the interest rate environment. The Company has 40 fixed maturity securities which have been in an unrealized loss position for more than twelve months. Of the 40 fixed maturity securities with unrealized losses for more than twelve months, all have fair values greater than 94% of cost, and 36 of the 40 have fair values greater than 97% of cost. The Company has reviewed these securities and believes these declines are temporary.

     There are 5 equity securities (all preferred stock) that are in an unrealized loss position on September 30, 2005. All of these securities have been in an unrealized loss position for less than six months. The Company has reviewed these securities and believes these declines are temporary.

     Results of our Commercial Lines segment were as follows:

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Nine months ended September 30,
2005 vs. 2004 Commercial lines (CL)
(Dollars in thousands)	2005			2004			Change			% Change
CL Direct premiums written	$	30,832		$	28,125		$	2,707			9.6	%
CL Net premiums written	$	28,005		$	24,965		$	3,040			12.2	%
CL Net premiums earned	$	28,517		$	24,150		$	4,367			18.1	%
CL Loss / LAE expense ratio (GAAP)		39.1	%		28.3	%		10.8	%
CL Expense ratio (GAAP)		49.5	%		49.4	%		0.1	%
CL Combined ratio (GAAP)		88.6	%		77.7	%		10.9	%

Three months ended September 30,
2005 vs. 2004 Commercial lines (CL)
(Dollars in thousands)	2005			2004			Change			% Change
CL Direct premiums written	$	9,104		$	8,048		$	1,056			13.1	%
CL Net premiums written	$	8,393		$	7,343		$	1,050			14.3	%
CL Net premiums earned	$	9,860		$	8,294		$	1,566			18.9	%
CL Loss / LAE expense ratio (GAAP)		33.0	%		25.7	%		7.3	%
CL Expense ratio (GAAP)		50.8	%		51.6	%		(0.9	)%
CL Combined ratio (GAAP)		83.8	%		77.3	%		6.5	%

     In the first nine months of 2005, our commercial lines direct premiums written increased by $2.7 million, or 9.6%, to $30.8 million, as compared to the same period in 2004. Commercial lines net written premium increased $3.0 million, or 12.2%, to $28.0 million in the same period, and net premiums earned increased $4.4 million, or 18.1%, to $28.5 million.

     In the third quarter of 2005, our commercial lines direct premiums written increased by $1.1 million, or 13.1%, to $9.1 million as compared to 2004. Commercial lines net written premium increased $1.1 million, or 14.3%, to $8.4 million in the same period, and net premiums earned increased $1.6 million, or 18.9%, to $9.9 million

     Our premiums written growth reflects the Company’s focus on growing the commercial lines book, while working within our underwriting standards. Growth rates in our commercial lines direct premiums written have declined recently as compared to previous years, due to a more competitive marketplace. Some of our classes of business, consisting generally of larger accounts, are more sensitive to competition than others. Competitive pressures tend to be more moderate for our smaller accounts, with a higher retention rate and less pressure on the renewal premium. We continually work with our agents to target classes of business and accounts compatible with our underwriting appetite, which includes certain types of religious institution risks, small business risks and property risks.

     In the commercial lines segment for the first nine months of 2005, we had underwriting income of $3.2 million, a GAAP combined ratio of 88.6%, a GAAP loss and loss adjustment expense ratio of 39.1% and a GAAP underwriting expense ratio of 49.5%, compared to an underwriting gain of $5.4 million, a GAAP combined ratio of 77.7%, a GAAP loss and loss adjustment expense ratio of 28.3% and an underwriting expense ratio of 49.4% for

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the same period in 2004. Our commercial lines loss ratio for 2005 has been adversely affected by a modestly higher amount of large property and casualty losses as compared to the same period in 2004, however the volume of new claims in 2005 is generally favorable.

     In the commercial lines segment for the third quarter of 2005, we had underwriting income of $1.6 million, a GAAP combined ratio of 83.8%, a GAAP loss and loss adjustment expense ratio of 33.0% and a GAAP underwriting expense ratio of 50.8%, compared to an underwriting gain of $1.9 million, a GAAP combined ratio of 77.3%, a GAAP loss and loss adjustment expense ratio of 25.7% and an underwriting expense ratio of 51.6% for the same period in 2004

     Results of our Personal Lines segment were as follows:

Nine months ended September 30,
2005 vs. 2004 Personal lines (PL)
(Dollars in thousands)	2005			2004			Change			% Change
PL Direct premiums written	$	17,172		$	18,758		$	(1,586	)		(8.5)	%
PL Net premiums written	$	16,107		$	17,229		$	(1,122	)		(6.5)	%
PL Net premiums earned	$	16,861		$	17,467		$	(606	)		(3.5)	%
PL Loss / LAE expense ratio (GAAP)		61.9	%		81.7	%		(19.8)	%
PL Expense ratio (GAAP)		44.7	%		44.6	%		0.1	%
PL Combined ratio (GAAP)		106.6	%		126.3	%		(19.7)	%

Three months ended September 30,
2005 vs. 2004 Personal lines (PL)
(Dollars in thousands)	2005			2004			Change			% Change
PL Direct premiums written	$	6,166		$	6,596		$	(430	)		(6.5	)%
PL Net premiums written	$	5,778		$	6,077		$	(299	)		(4.9	)%
PL Net premiums earned	$	5,543		$	5,737		$	(194	)		(3.4	)%
PL Loss / LAE expense ratio (GAAP)		59.7	%		70.5	%		(10.8	)%
PL Expense ratio (GAAP)		51.0	%		51.5	%		(0.5	)%
PL Combined ratio (GAAP)		110.7	%		122.0	%		(11.3	)%

     In the personal lines segment for the first nine months of 2005, we had an underwriting loss of $1.1 million, a GAAP combined ratio of 106.6%, a GAAP loss and loss adjustment expense ratio of 61.9% and a GAAP underwriting expense ratio of 44.7%, compared to an underwriting loss of $4.6 million, a GAAP combined ratio of 126.3%, a GAAP loss and loss adjustment expense ratio of 81.7% and an underwriting expense ratio of 44.6% for the same period in 2004.

     In the personal lines segment for the third quarter of 2005, we had an underwriting loss of $596,000, a GAAP combined ratio of 110.7%, a GAAP loss and loss adjustment expense ratio of 59.7% and a GAAP underwriting expense ratio of 51.0%, compared to an underwriting loss of $1.3 million, a GAAP combined ratio of 122.0%, a GAAP loss and loss adjustment expense ratio of 70.5% and an underwriting expense ratio of 51.5% for the same period in 2004.

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     The personal lines performance in the first nine months of 2005 was affected by a significantly lower frequency of losses and by a lower severity of losses as compared to the first nine months of 2004. The 2004 losses were significantly higher than usual, and were attributable to harsh weather conditions which resulted in a high number of losses from frozen pipes, structural collapses, more frequent automobile losses and accidents, and other losses of the type caused by an extended period of harsh weather.

     Besides the improved loss frequency resulting from the more moderate weather in the first nine months of 2005, the personal lines book benefited from the underwriting initiatives undertaken in both the homeowners and Pennsylvania personal automobile lines in the last two years. These initiatives included the reclassification of certain homeowners risks from our preferred program to our standard program, resulting in a higher premium, as well as modified underwriting standards relating to the types of Pennsylvania personal automobile risks the Company will write. The Company implemented a rate increase for the homeowners line in New Jersey on July 1, 2005, and anticipates an overall average rate increase of approximately 5.7%. The impact of the Company’s underwriting initiatives in its Pennsylvania personal automobile line has resulted in lower direct premium written, as contraction in the number of policies in certain tiers has occurred more quickly than premium expansion in the targeted tiers. The direct loss ratio for our Pennsylvania personal automobile book has improved, however, as our targeted tiers have become a proportionately larger part of our book.

     Although the Company expects to continue growing its personal lines book, it will continue to devote greater focus to growth in the commercial lines book.

     The Company’s operating expenses were as follows:

Nine months ended September 30,
2005 vs. 2004 Expenses and expense ratio
(Dollars in thousands)	2005			2004			Change			% Change
Amortization of DAC	$	11,936		$	11,509		$	427			3.7	%
As a % of net premiums earned		26.3	%		27.7	%		(1.4)	%
Other underwriting expenses		9,725			8,212			1,513			18.4	%
Total expenses excluding losses/LAE	$	21,661		$	19,721		$	1,940			9.8	%
Underwriting expense ratio		47.7	%		47.4	%		0.3	%		N/M
(N/M means “not meaningful”)

     Underwriting expenses increased by $1.9 million, or 9.8%, to $21.6 million for the nine months of 2005, as compared to the same period in 2004. This increase was principally attributable to an increase in other underwriting expenses, growth in commissions resulting from higher earned premium volume, and increased charges relating to corporate expenses and compensation expenses, including bonuses and agents profit-sharing, which were at higher levels than the first nine months of 2004. In 2005, the Company had pre-tax external expense associated with Sarbanes – Oxley compliance of $546,000, and pre-tax expense of $506,000 associated with grants of restricted stock, for which expenses were $150,000 and $206,000, respectively, in the first nine months of 2004.

     The Company maintains an Agency Profit Sharing plan, which, in addition to base commissions, annually rewards agents for the growth and profitability of the business they produce while representing the Company. The additional commission is computed only on the aggregate growth and profitability of the book of business the agent

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produces each year. The Company does not have any marketing services agreements, placement services agreements, or similar arrangements.

     We are currently in the process of converting our information system, which is targeted for completion in the latter half of 2006. When completed, we expect some costs to moderate as implementation costs and costs associated with operating dual systems end. These reduced costs will be offset by some higher staffing costs, but we also should be positioned to expand premium volume in the near term without material incremental expense because of increased processing capacity.

     In the first nine months of 2004, a disputed retaliatory tax assessment was paid, leaving an unneeded accrual of $300,000 which was then reversed and served to reduce premium tax expense accordingly.

     In the third quarter of 2004, we began renewing most of our New Jersey policies in our Mercer Insurance Company of New Jersey, Inc. subsidiary, thus eliminating the Company’s liability for retaliatory premium taxes. Accordingly, the results for the first nine months of 2005 do not reflect any expense for retaliatory taxes, while the first nine months of 2004 included a pre-tax expense for this item of approximately $200,000. See the Liquidity and Capital Resources section for additional information regarding retaliatory tax and the Company’s claim to recover previously paid retaliatory tax.

     The Company’s tax provision is as follows:

Nine months ended September 30,
2005 vs. 2004 Income taxes
(Dollars in thousands)	2005			2004			Change			% Change
Income before income taxes	$	5,904		$	3,431		$	2,473			72.1	%
Income taxes		1,785			1,010			775			76.7	%
Net income	$	4,119		$	2,421		$	1,698			70.1	%
Effective tax rate		30.2	%		29.4	%		0.8	%

(N/M means “not meaningful”)

Federal income tax expense was $1.8 million for the first nine months of 2005, an effective rate of 30.2%, compared to $1.0 million, or an effective rate of 29.4%, for the same period in 2004. The increase in the effective tax rate in 2005 is primarily attributable to the fact that tax-exempt investment income and dividend income (which reduce the effective tax rate) represented a smaller percentage of net income in 2005 than in 2004.

LIQUIDITY AND CAPITAL RESOURCES

     Our insurance companies generate sufficient funds from their operations to meet their obligations and to maintain a high degree of liquidity in their investment portfolios. The primary source of funds to meet the demands of claim settlements and operating expenses are premium collections, investment earnings and maturing investments. Mercer Insurance Company in 2004 completed an expansion of its facilities in Pennington, New Jersey, at a cost of at $2.9 million. These improvements are fully paid for and will not require any further use of operating cash flow.

     We are also in the process of building an information system platform that will allow our producers to conduct their business through the Internet. As of September 30, 2005, we have spent $3.6 million on the development of this platform, which includes license fees for software used in the platform. It is anticipated to be completed in the

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latter part of 2006, at an additional cost of approximately $1.0 million. Mercer Insurance Company possesses sufficient resources for these future expenditures without incurring any debt.

     Our insurance companies maintain investment and reinsurance programs that are intended to provide sufficient funds to meet their obligations without forced sales of investments. This requires them to ladder the maturity of their portfolios and thereby maintain a portion of their investment portfolio in relatively short-term and highly liquid assets to ensure the availability of funds.

     The principal source of liquidity for Mercer Insurance Group, Inc. (which has very few expenses and does not currently need a significant regular source of cash flow to cover these expenses for the forseeable future) has up to now been the net proceeds it retained from the Conversion stock offering, as well as dividend payments and other fees received from Mercer Insurance Company or other subsidiaries, and payments it receives on the 10-year note it received from the ESOP (see below) when the ESOP purchased shares at the time of the Conversion. For a period of three years after the Conversion (which took place on December 15, 2003), Mercer Insurance Company may not declare or pay any dividend to Mercer Insurance Group without the approval of the Pennsylvania Insurance Department. After this three-year period, Mercer Insurance Company will be limited by the insurance laws of Pennsylvania as to the amount of dividends or other distributions it may pay to its holding company. Under Pennsylvania law, there is a maximum amount that may be paid by Mercer Insurance Company during any twelve-month period after notice to, but without prior approval of, the Pennsylvania Insurance Department. This limit is the greater of 10% of Mercer Insurance Company’s statutory surplus as reported on its most recent annual statement filed with the Pennsylvania Insurance Department, or the net income of Mercer Insurance Company for the period covered by such annual statement.

     If the dividend restrictions imposed on Mercer Insurance Company related to the Conversion were not in effect, then as of December 31, 2004, the amounts available for payment of dividends from Mercer Insurance Company in 2005, without the prior approval of the Pennsylvania Insurance Department would have been approximately $6.2 million. Similar restrictions apply to the insurance subsidiaries of Mercer Insurance Company and their ability to pay dividends upstream to it.

     In connection with the acquisition of Financial Pacific Insurance Group for approximately $40.4 million in cash on October 1, 2005, all of the securities of Mercer Insurance Group, Inc. (which were purchased with proceeds of the Conversion) were converted into cash, with all but approximately $300,000 of this balance used to fund the acquisition. The remaining liquid assets in Mercer Insurance Group, as well as its other sources of revenue, are adequate to fund its current expenses for the foreseeable future.

     As part of the funding of the acquisition, Mercer Insurance Company, with the approval of the Pennsylvania Department of Insurance, paid an extraordinary dividend of $10 million on September 30, 2005, to Mercer Insurance Group, Inc. Mercer Insurance Company also entered into a loan agreement with Mercer Insurance Group, Inc., by which it advanced on September 30, 2005, a loan of $10 million with a 20-year note and a fixed interest rate of 4.75%, repayable in 20 equal annual installments. After the acquisition, Mercer Insurance Group has no special limitations on its ability to take periodic dividends from Financial Pacific Insurance Group, but Financial Pacific Insurance Group will be subject to normal dividend restrictions administered by the California Department of Insurance similar to those described above for Mercer Insurance Company. The Company believes that the resources available to Mercer Insurance Group, Inc., will be adequate for it to meets its obligation under the note to Mercer Insurance Company and its other expenses.

     Total assets decreased by 1.8%, or $3.2 million, to $178.3 million, at September 30, 2005 from December 31, 2004. Cash balances were increased by $31.6 million from December 31, 2004 amounts, to $47.8 million in preparation for the funding of the cash acquisition of Financial Pacific Insurance Group on October 1, 2005 for

18

$40.4 million. Premium receivables decreased by $1.5 million, or 13.7%, reflecting the timing of a large account written by the Company in December 2004, as well as the seasonality of renewals. Reinsurance receivables increased $1.2 million, or 46.9%, due principally to increased recoverables on large losses. Other assets increased by $1.1 million, or 80.4%, from December 31, 2004, primarily due to funds paid in advance to a state guaranty association that will be recouped by the Company through policyholder surcharge over the next year.

     Total liabilities decreased by $3.4 million, or 4.2%, in the nine months ended September 30, 2005, to $77.7 million. Loss and loss adjustment expense reserves were relatively unchanged while unearned premium reserves decreased by $1.4 million, or 4.2%, reflecting renewal seasonality and the more competitive marketplace.

     Total stockholders’ equity increased marginally by $200,000, or less than 1%, to $100.6 million from December 31, 2004. Changes to stockholders’ equity for the nine months ended September 30, 2005 principally included net income of $4.1 million, the purchase of treasury stock for $3.2 million and unrealized investment losses (after tax) of $1.8 million.

     The Company maintains an ESOP, which purchased 626,111 shares from the Company at the time of the Conversion in return for a note bearing interest at 4% on the principal amount of $6,261,110. Mercer Insurance Company makes annual contributions to the ESOP sufficient for it to make its required annual payment under the terms of the loan to the Company. It is anticipated that approximately 10% of the original ESOP shares will be allocated annually to employee participants of the ESOP. An expense charge is booked ratably during each year for the shares committed to be allocated to participants that year, determined with reference to the fair market value of the Company’s stock at the time the commitment to allocate the shares is accrued and recognized. The issuance of the shares to the ESOP was fully recognized in the Additional Paid-in Capital account at Conversion, with a contra account entitled Unearned ESOP Shares established in the Stockholders’ Equity section of the balance sheet for the unallocated shares at an amount equal to their original per-share purchase price.

     Mercer Insurance Group, Inc. adopted a stock-based incentive plan at its 2004 annual meeting of shareholders. Pursuant to that plan, Mercer Insurance Group may issue a total of 876,555 shares, which amount will increase automatically each year by 1% of the number of shares outstanding at the end of the preceding year. At June 30, 2005, the shares authorized under the plan has been increased under this provision to 944,597 shares. The fair market value of any common stock used for restricted stock awards will initially represent unearned compensation, and will be amortized ratably against earnings. As Mercer Insurance Group accrues compensation expense to reflect the vesting of such shares, unearned compensation will be reduced accordingly. This compensation expense will be deductible for federal income tax purposes upon vesting under current law. During 2004, the Company made grants of 215,000 shares of restricted stock, grants of 173,000 Incentive Stock Options, and grants of 364,700 non-qualified stock options. As of September 30, 2005, 7,500 shares of restricted stock and 18,500 stock options were forfeited, and 5,000 shares of restricted stock and 15,000 Incentive Stock options were granted. Additional grants of 10,000 shares of restricted stock, 97,575 Incentive Stock options, and 27,425 non-qualified options were made after September 30, 2005 to individuals employed by Financial Pacific Insurance Group in connection with its acquisition on October 1, 2005 by Mercer Insurance Group.

     On October 20, 2004, the Company’s Board of Directors authorized the repurchase of up to 250,000 additional shares of its common stock (in addition to the 250,000 share repurchase authorized June 16, 2004 and previously completed). The repurchase of the additional 250,000 shares was completed on March 2, 2005. The repurchased shares will be held as treasury shares available for issuance in connection with Mercer Insurance Group’s 2004 Stock Incentive Plan. In the aggregate, 500,000 shares have been repurchased since the Conversion, at an aggregate cost of $6.3 million, or $12.53 per share, with 2005 purchases totaling $3.2 million, or $13.18 per share. In addition, 1,563 shares of stock were repurchased from employees in order to pay the required tax withholdings on the first vesting of restricted stock under the stock incentive plan.

19

In connection with a continuing retaliatory tax controversy, in 2003 and 2004 the Company paid an aggregate of $3.2 million, plus interest, to the New Jersey Division of Taxation (the “Division”) in retaliatory tax. The retaliatory tax generally is imposed on foreign insurers when the foreign company’s home state (i.e., its state of incorporation or domicile) has a higher rate of premium tax than the state imposing the tax, in this case New Jersey. The payments were made in response to notices of deficiency issued by the Division to the Company.

In conjunction with making such payments, the Company filed notices of protest with the Division with respect to the retaliatory tax imposed. The basis for the protests was that the Division’s imposition of the retaliatory tax was unconstitutional and based on an incorrect interpretation of the law which denied the Company the ability to take advantage of New Jersey’s premium tax cap, which limits the premiums tax to the lesser of the Company’s New Jersey premiums or 12.5 percent of the Company’s total premiums received from both New Jersey and out-of-state policyholders. The protests currently are pending with the Division’s Conferences and Appeals branch.

Concurrent with the processing of the Company’s protests of the retaliatory tax, other foreign insurers have been litigating virtually identical issues in New Jersey courts. On March 9, 2005, the Appellate Division of the New Jersey Superior Court reversed a decision of the New Jersey Tax Court that had sustained the Division’s imposition of the retaliatory tax against a foreign insurer. The Division has since appealed the decision of the Appellate Division to the New Jersey Supreme Court, which has agreed to hear the case. The Company expects that the Division’s ruling on the Company’s protest will be based on the ultimate resolution of the case now being appealed to the New Jersey Supreme Court. It is not known how the New Jersey Supreme Court will address this case, and therefore the Company is unable to determine whether all, or any portion, of the retaliatory tax will be refunded. Any such refund would be reduced by related Federal Income Tax. Due to the contingencies involved, the Company has not accrued any refund of the retaliatory tax.

SUBSEQUENT EVENT — ACQUISITIONS

On October 1, 2005, the Company acquired all the outstanding stock of Financial Pacific Insurance Group, Inc. for approximately $40.4 million in cash (the press release was filed on a Form 8-K on October 4, 2005). The transaction was effected through a merger of a wholly owned subsidiary of Mercer into Financial Pacific.

The acquisition was made using the excess funds held by the holding company (Mercer Insurance Group, Inc.), as well as funds advanced to the holding company from Mercer Insurance Company in the form of both an extraordinary dividend as well as an intercompany loan. The majority of the cash balance carried on the Company’s balance sheet at September 30, 2005, was used to consummate the transaction shortly after the end of the quarter. The Pennsylvania Insurance Department previously approved the extraordinary dividend and the intercompany loan arrangement.

The acquisition will allow the Company to continue growing its commercial lines segment, to achieve product and geographic diversification, and to achieve greater scale over time in connection with infrastructure costs such as information technology. It is expected that the acquisition of Financial Pacific will be immediately accretive to the earnings of the Company. Financial Pacific currently focuses on four western states and is licensed in another fifteen states outside the Company’s present focus areas.

As of and for the year ended December 31, 2004, Financial Pacific reported GAAP stockholders’ equity of $35.4 million, operating income of $4.6 million and net income of $5.9 million. In 2004, Financial Pacific generated approximately $107 million of direct premiums primarily in California, Nevada, Oregon and Arizona through approximately 300 independent agents.

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IMPACT OF INFLATION

     Inflation increases an insured’s need for property and casualty insurance coverage. Inflation also increases the cost of claims incurred by property and casualty insurers as property repairs, replacements and medical expenses increase. These cost increases reduce profit margins to the extent that rate increases are not implemented on an adequate and timely basis. We establish property and casualty insurance premiums levels before the amount of losses and loss expenses, or the extent to which inflation may affect these expenses, are known. Therefore, our insurance companies attempt to anticipate the potential impact of inflation when establishing rates, and if inflation is not adequately factored into rates, the rate increases will lag behind increases in loss costs resulting from inflation. Because inflation has remained relatively low in recent years, financial results have not been significantly affected by inflation.

     Inflation also often results in increases in the general level of interest rates, and, consequently, generally results in increased levels of investment income derived from our investments portfolio, although increases in investment income will generally lag behind increases in loss costs caused by inflation.

OFF BALANCE SHEET COMMITMENTS AND CONTRACTUAL OBLIGATIONS

     The Company was not a party to any unconsolidated arrangement or financial instrument with special purpose entities or other vehicles at September 30, 2005 which would give rise to previously undisclosed market, credit or financing risk.

     The Company and its subsidiaries have no significant contractual obligations at September 30, 2005, other than its insurance obligations under its policies of insurance. Projected cash disbursements pertaining to these insurance obligations have not materially changed since December 31, 2004, and the Company expects to have the cash to pay these obligations as they come due.

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Item 6. Exhibits

Exhibits

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

SIGNATURES

          In accordance with the requirements of the Exchange Act, the Registrant caused this amendment to be signed on its behalf by the undersigned, thereunto duly authorized.

	MERCER INSURANCE GROUP, INC. (Registrant)
Dated: January 11, 2006	By:	/s/ Andrew R. Speaker
		Andrew R. Speaker,
		President and Chief Executive Officer
Dated: January 11, 2006	By:	/s/ David B. Merclean
		David B. Merclean,
		Chief Financial Officer

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