Mercer Insurance Group Reports Positive Numbers for Q3

November 2, 2005

Mercer Insurance Group Inc. reported its operating results for the quarter and nine months ended Sept. 30, 2005. Mercer Insurance Group Inc. (the Company) offers commercial and personal lines of insurance to businesses and individuals in Pennsylvania and New Jersey through its insurance subsidiaries, Mercer Insurance Company, Mercer Insurance Company of New Jersey Inc., and Franklin Insurance Company.

In the three months ended Sept. 30, 2005, the company reported net income, determined under accounting principles generally accepted in the United States of America (GAAP), of $2.1 million, or $0.34 per diluted share, which was an increase of $940,000, or 84%, over the prior year quarter’s net income of $1.1 million, or $0.17 per diluted share.

After-tax realized investment gains included in net income for the quarter were $776,000, or $0.13 per diluted share, compared to $224,000, or $0.03 per diluted share in the same period in 2004. The unusual level of realized gains in the current quarter was attributable to the disposition of securities in anticipation of funding the acquisition for cash of Financial Pacific Insurance Group Inc.

Operating income (a non-GAAP measure defined as net income less after-tax realized gains) improved 43% in the third quarter of 2005 to $1.3 million, or $0.21 per diluted share, from $897,000, or $0.14 per diluted share, in the same quarter of 2004. The company’s GAAP combined ratio for the third quarter was 93.5%, as compared to 95.6% for the same quarter of 2004.

Revenues in the third quarter increased 15% to $17.4 million, as compared to the 2004 third quarter revenue of $15.1 million. Net premiums earned for the third quarter increased 10% to $15.4 million, as compared to net premiums earned of $14.0 million in the same period of 2004. Net investment income increased 21% to $770,000 as compared to $639,000 in the comparable period in 2004.

For the nine months ended Sept. 30, 2005, the company reported net income of $4.1 million, or $0.67 per diluted share, an increase of 70% over the net income of $2.4 million, or $0.38 per diluted share, in the comparable period in 2004. After-tax realized investment gains included in net income for the nine months increased to $840,000, or $0.14 per diluted share, from $290,000, or $0.05 per diluted share, in the similar period in 2004.

Operating income for the nine months of 2005 improved 54% to $3.3 million, or $0.53 per diluted share, from $2.1 million, or $0.33 per diluted share, during the same period in 2004. The company’s GAAP combined ratio for the nine months of 2005 was 95.3%, as compared to 98.1% for the same period of 2004.

Revenues for the nine months ended Sept. 30, 2005 were $49.2 million, an increase of 11% over the 2004 similar period revenue of $44.3 million. Net premiums earned for the nine months were $45.4 million, a 9% increase over net premiums earned of $41.6 million in the same period in 2004. Net investment income for the nine months ended Sept. 30, 2005 increased $320,000, or 17%, to $2.3 million from $1.9 million in the prior year period. The increase in investment income is due to the increase in the general level of short-term interest rates in 2005.

The third quarter and nine month results for 2005 include after-tax charges of $125,000 and $360,000, respectively, for external costs of compliance with the Sarbanes Oxley Act of 2002, and $116,000 and $334,000, respectively, in connection with grants of restricted stock under the company’s 2004 Stock Incentive Plan. In the comparable periods in 2004, net income included after-tax charges of $99,000 and $99,000, respectively, for external costs of compliance with the Sarbanes Oxley Act of 2002, and $114,000 and $136,000, respectively, in connection with grants of restricted stock. The company’s book value per share was $16.92 as of Sept. 30, 2005.

On Oct. 1, 2005 the company completed its acquisition of all the outstanding stock of Financial Pacific Insurance Group Inc. for approximately $40.4 million in cash. Because this transaction closed after the end of the third quarter, none of Financial Pacific’s results of operations are included in the reported financial results. Financial Pacific is a specialty writer of commercial lines with a focus on business in four western states, and is licensed in 15 additional states. Financial Pacific provides products to a variety of commercial businesses in the contractor, manufacturing, retail, services and wholesaling businesses, among other businesses.

Andrew Speaker, Mercer’s president and CEO, commented that “this was a very good quarter with results driven by our attention to careful underwriting, and our increasing focus on commercial lines. These factors and the favorable weather in our operating territory during the quarter all contributed to a lower than usual number of new claims. In addition, now that the acquisition of Financial Pacific Insurance Group Inc. has been completed, we look forward to integrating our companies and growing together. We view this acquisition as an important step in our strategy of selectively acquiring attractive companies while maintaining organic growth in our existing markets and expanding into selected states, and one which will help us leverage appropriately our capital position.”

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