- Quarterly Report (10-Q)

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, 2010,

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 R No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months. Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer £ Accelerated filer R Non-accelerated filer £ Smaller reporting company £

Indicate by check mark if the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes £ No R

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 30, 2010
COMMON STOCK (No Par Value)		6,481,842
(Title of Class)		(Outstanding Shares)

TABLE OF CONTENTS

	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements	5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3. Quantitative and Qualitative Disclosures About Market Risk	44
Item 4. Controls and Procedures	47
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	47
Item 1A. Risk Factors	47
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 3. Defaults Upon Senior Securities	47
Item 4. (Removed and Reserved)	48
Item 5. Other Information	48
Item 6. Exhibits	48
SIGNATURES	49
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

Forward-looking Statements

Mercer Insurance Group, Inc. (the “Group”) may from time to time make written or oral “forward-looking statements,” including statements contained in the Group’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 Group, which are made in good faith by the Group 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 Group’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 Group’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 Group’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 Group competes which are less favorable than current or expected conditions;

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

·	the concentration of insured accounts in California, New Jersey and Pennsylvania;

·	the effect of legislative, judicial, economic, demographic and regulatory events in the seven states in which we do the majority of our business as of September 30, 2010;

·	the failure to maintain an A.M. Best rating in the Excellent category;

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

·	the inability 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 in 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 collectability 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;

·	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;

·	the inability to carry out marketing and sales plans, including, among others, the 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;

·	our inability to retain our executive officers and key employees, and our inability to hire high quality officers and employees necessitated by our growth;

disruption in world financial markets, which could adversely affect demand for the Company’s products, and credit risk associated with agents, customers, and reinsurers, as well as adversely affecting the Company’s investment portfolio value and investment income. Disrupted markets could present difficulty if the Company needed to raise additional capital in the future; 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 Group 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 Group 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 Group.

Part I — FINANCIAL INFORMATION

Item 1. Financial Statements

MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

September 30, 2010 and December 31, 2009

(Dollars in thousands, except share amounts)

	2010			2009
Assets	(Unaudited)
Investments, at fair value:
Fixed-income securities, available for sale, at fair value (cost $378,822 and $348,635, respectively)	$	410,636			365,464
Equity securities, at fair value (cost $7,974 and $7,516, respectively)		9,600			9,484
Short-term investments, at cost, which approximates fair value		3,400			-
Total investments		423,636			374,948

Cash and cash equivalents		16,086			39,927
Premiums receivable		38,741			36,405
Reinsurance receivables		75,380			79,599
Prepaid reinsurance premiums		6,311			5,871
Deferred policy acquisition costs		18,841			18,876
Accrued investment income		3,842			4,287
Property and equipment, net		20,622			21,516
Deferred income taxes		109			4,941
Goodwill		5,416			5,416
Other assets		4,440			3,568
Total assets	$	613,424			595,354
Liabilities and Equity
Liabilities:
Losses and loss adjustment expenses	$	309,728			311,348
Unearned premiums		76,102			76,601
Accounts payable and accrued expenses		10,771			12,150
Other reinsurance balances		13,244			12,386
Trust preferred securities		15,605			15,592
Advances under line of credit		3,000			3,000
Other liabilities		4,356			4,069
Total liabilities		432,806			435,146

Stockholders’ 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 7,114,233 and 7,074,333 shares, outstanding 6,971,228 and 6,883,498 shares		-			-
Additional paid-in capital		73,037			72,139
Accumulated other comprehensive income		21,877			12,220
Retained Earnings		95,494			86,101
Unearned ESOP shares		(1,411	)		(1,878	)
Treasury stock, 632,391 and 632,076 shares		(8,379	)		(8,374	)
Total stockholders’ equity		180,618			160,208
Total liabilities and stockholders’ equity	$	613,424			595,354

See accompanying notes to consolidated financial statements.

MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

Nine Months Ended September 30, 2010 and 2009

	2010			2009
	(Dollars in thousands, except per share data)
	(Unaudited)
Revenues:
Net premiums earned	$	101,828			105,215
Investment income, net of expenses		10,433			10,833
Net realized investment gains (losses)
Other-than-temporary impairments (none allocated to Other		(89	)		(787	)
Comprehensive Income)
Other net realized investment gains		1,665			1,180
Total net realized investment gains		1,576			393
Other revenue		1,478			1,555

Total revenues		115,315			117,996

Expenses:
Losses and loss adjustment expenses		62,851			64,643
Amortization of deferred policy acquisition costs (related party amounts of $805 and $768, respectively)		27,784			29,002
Other expenses		8,179			9,438
Interest expense		1,061			1,066

Total expenses		99,875			104,149

Income before income taxes		15,440			13,847

Income taxes		4,322			3,652

Net income	$	11,118			10,195

Earnings per common share:
Basic	$	1.77			1.64
Diluted	$	1.73			1.61

See accompanying notes to consolidated financial statements.

MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

Three Months Ended September 30, 2010 and 2009

	2010		2009
	(Dollars in thousands, except per share data)
	(Unaudited)
Revenues:
Net premiums earned	$	33,714		34,681
Investment income, net of expenses		3,428		3,605
Net realized investment gains (losses)
Other-than-temporary impairments (none allocated to Other		-		(55	)
Comprehensive Income)
Other net realized investment gains		486		527
Total net realized investment gains		486		472
Other revenue		502		516

Total revenues		38,130		39,274

Expenses:
Losses and loss adjustment expenses		20,184		21,683
Amortization of deferred policy acquisition costs (related party amounts of $256 and $263, respectively)		9,351		9,499
Other expenses		2,831		2,869
Interest expense		357		358

Total expenses		32,723		34,409

Income before income taxes		5,407		4,865

Income taxes		1,541		1,311

Net income	$	3,866		3,554

Earnings per common share:
Basic	$	0.61		0.57
Diluted	$	0.60		0.56

See accompanying notes to consolidated financial statements.

MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

Nine months ended September 30, 2010

(Unaudited, dollars in thousands)

								Accumulated
					Additional			other						Unearned
	Preferred		Common		paid-in			comprehensive			Retained			ESOP			Treasury
	stock		stock		capital			income			earnings			shares			stock			Total
Balance, December 31, 2009	$	-		-		72,139			12,220			86,101			(1,878	)		(8,374	)		160,208
Net income												11,118									11,118
Unrealized gains on securities:
Unrealized holding gains arising during period, net of related income tax expense of $5,631									10,931												10,931
Less reclassification adjustment for gains included in net income, net of related income tax expense of $653									(1,267	)											(1,267	)
Defined benefit pension plan, net of related income tax benefit of $4									(7	)											(7	)
Other comprehensive income																					9,657
Comprehensive income																					20,775
Stock compensation plan amortization						86															86
Tax adjustment from stock compensation plan						(27	)														(27	)
ESOP shares committed						351									467						818
Purchase of treasury stock																		(5	)		(5	)
Issuance of common stock						488															488
Dividends to stockholders												(1,725	)								(1,725	)
Balance, September 30, 2010	$	-		-		73,037			21,877			95,494			(1,411	)		(8,379	)		180,618

See accompanying notes to consolidated financial statements.

MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30, 2010 and 2009

	2010			2009
	(Dollars in thousands)
	(Unaudited)
Cash flows from operating activities:
Net income	$	11,118			10,195
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of fixed assets		2,347			2,358
Amortization of premium, net		1,312			1,099
Amortization of stock compensation		86			313
ESOP share commitment		818			737
Net realized investment gains		(1,576	)		(393	)
Deferred income tax		(142	)		(487	)
Change in assets and liabilities:
Premiums receivable		(2,336	)		(3,966	)
Reinsurance receivables		4,219			6,039
Prepaid reinsurance premiums		(440	)		1,267
Deferred policy acquisition costs		35			777
Other assets		(971	)		(469	)
Losses and loss adjustment expenses		(1,620	)		4,846
Unearned premiums		(499	)		(945	)
Other reinsurance balances		858			1,986
Other		(1,092	)		(1,646	)

Net cash provided by operating activities		12,117			21,711

Cash flows from investing activities:
Purchase of fixed income securities, available for sale		(81,276	)		(61,825	)
Purchase of equity securities		(2,062	)		(1,252	)
Sale and maturity of fixed income securities, available for sale		51,576			39,575
Sale of equity securities		1,923			4,352
Purchase of short-term investments		(3,400	)		-
Purchase of property and equipment, net		(1,450	)		(6,394	)

Net cash used in investing activities		(34,689	)		(25,544	)

Cash flows from financing activities:
Purchase of treasury stock		(5	)		(143	)
Proceeds from issuance of common stock		488			-
Tax adjustment from stock compensation plan		(27	)		29
Dividends to stockholders		(1,725	)		(1,394	)

Net cash used in financing activities		(1,269	)		(1,508	)

Net decrease in cash and cash equivalents		(23,841	)		(5,341	)
Cash and cash equivalents at beginning of period		39,927			37,043

Cash and cash equivalents at end of period	$	16,086			31,702

Cash paid during the period for:
Interest	$	1,051			1,054
Income taxes	$	4,950			3,970

See accompanying notes to consolidated financial statements.

MERCER INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

(1)	Basis of Presentation

The financial information for the interim periods included herein is unaudited; however, such information reflects all adjustments which are, in the opinion of management, necessary to a fair presentation of the financial position, results of operations, and cash flows for the interim periods. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year.

These interim unaudited consolidated financial statements include the accounts of Mercer Insurance Group, Inc. (MIG) and its subsidiaries, and have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”). The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that are used in the preparation of the financial statements, and actual results could differ. All significant intercompany accounts and transactions between MIG and its subsidiaries are eliminated in consolidation.

MIG and its subsidiaries (collectively, the Group) includes Mercer Insurance Company (MIC), its subsidiaries Mercer Insurance Company of New Jersey, Inc. (MICNJ), Franklin Insurance Company (FIC), and BICUS Services Corporation (BICUS), and Financial Pacific Insurance Group, Inc. (FPIG) and its subsidiaries Financial Pacific Insurance Company (FPIC) and Financial Pacific Insurance Agency (FPIA), which is currently inactive. FPIG also holds an interest in three statutory business trusts that were formed for the purpose of issuing Floating Rate Capital Securities.

The Group, through its property and casualty insurance subsidiaries, sells a wide array of property and casualty insurance products designed to meet the insurance needs of individuals in New Jersey and Pennsylvania, and small and medium-sized businesses in Arizona, California, Nevada, New Jersey, New York, Oregon and Pennsylvania. The companies in the Group are operated under common management, and are licensed collectively in twenty two states, but are currently focused on doing business in the states previously noted. Business written in New York only supports accounts in adjacent states. FPIC writes direct mail surety coverage in some of the other states where it holds licenses.

The Group’s business activities are separated into three operating segments, which are commercial lines of insurance, personal lines of insurance and the investment function.

These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes for the year ended December 31, 2009 included in the Group’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the SEC).

Share-Based Compensation

The Group makes grants of qualified (ISOs) and non-qualified stock options (NQOs), and non-vested shares (restricted stock) under its stock incentive plan. Stock options are granted at prices that are not less than market price at the date of grant, and are exercisable over a period of ten years for ISOs and ten years and one month for NQOs. Restricted stock grants, ISOs and NQOs vest over periods of three or five years.

The Group applies the fair value recognition provisions of Accounting Standards Codification (ASC) section 718, Compensation – Stock Compensation , using the modified-prospective-transition method. The after-tax compensation expense recorded in the consolidated statements of earnings for stock options (net of forfeitures) for the nine months ended September 30, 2010 and 2009 was $61,000 and $144,000, respectively. The after-tax compensation expense recorded in the consolidated statements of earnings for restricted stock (net of forfeitures) for the nine months ended September 30, 2010 and 2009 was $17,000 and $103,000, respectively. The after-tax compensation expense recorded in the consolidated statements of earnings for stock options (net of forfeitures) for the three months ended September 30, 2010 and 2009 was $18,000 and $41,000, respectively. The after-tax compensation expense recorded in the consolidated statements of earnings for restricted stock (net of forfeitures) for the three months ended September 30, 2010 and 2009 was $4,000 and $13,000, respectively.

As of September 30, 2010, the Group has $0.1 million of unrecognized total compensation cost related to non-vested stock options and restricted stock. That cost will be recognized over the remaining weighted-average vesting period of one year.

For the nine months ended September 30, 2010, the Group made no grants of restricted stock and stock options. In addition, there were no forfeitures of restricted stock, ISOs or NQOs. There were 39,900 ISOs and NQOs exercised during the first nine months of 2010. During the first nine months of 2009, ISOs on 10,000 shares of stock expired unexercised and were consequently forfeited.

New Accounting Pronouncements

In April 2009, the FASB issued guidance under ASC section 820 , Fair value Measurements and Disclosures, relating to required disclosures concerning the fair value of financial instruments when a publicly traded company issues financial information for interim reporting periods. The requirements are effective for interim reporting periods ending after June 15, 2009. The adoption of the new standard did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued guidance under ASC section 320, Investments – Debt and Equity Securities, modifying the requirements for recognizing other-than-temporarily impaired debt securities and significantly changing the existing impairment model for such securities. This guidance also modifies the presentation of other-than-temporary impairment losses. Such modifications include changing the amount of the other-than-temporary impairment that is recognized in earnings when there are credit losses on a debt security that the entity does not intend to sell and it is not more-likely-than-not that the entity will be required to sell the security prior to recovery. In these situations, the portion of the total impairment that is related to the credit loss would be recognized as a charge against operations, and the remaining portion would be included in other comprehensive income. The guidance also increases the frequency of and expands already required disclosures about the other-than-temporary impairment of debt and equity securities. This guidance is effective for fiscal years ending after June 15, 2009.

As of the beginning of the period of adoption of this guidance, entities are required to recognize a cumulative-effect adjustment to reclassify the non-credit component of a previously recognized other-than-temporary impairment loss from beginning retained earnings to beginning accumulated other comprehensive income if the entity does not intend to sell the security and it is not more-likely-than-not that the entity will be required to sell the security before recovery.

The Group adopted this guidance as of January 1, 2009. As the Group did not hold any debt securities at January 1, 2009 that were the subject of previous other-than-temporary impairment charges which were non-credit in nature, the adoption of this guidance did not result in the recognition of a cumulative-effect adjustment. Adoption of this guidance did not have a material impact to the Group’s results of operations, financial condition, or liquidity.

In April 2009, the FASB issued guidance under ASC section 820, Fair value Measurements and Disclosures, which addresses the factors that determine whether there has been a significant decrease in the volume and level of activity for an asset or liability when compared to the normal market activity. This guidance provides that if it has been determined that the volume and level of activity has significantly decreased and that transactions are not orderly, further analysis is required and significant adjustments to the quoted prices or transactions might be needed. The guidance is effective for interim and annual reporting periods ending after June 15, 2009. Adoption did not have a material impact on the Group’s results of operations, financial condition, or liquidity.

In May 2009, the FASB issued guidance under ASC section 855, Subsequent Events, which establishes the standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. Adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In June 2009, the FASB issued guidance under ASC section 105, Generally Accepted Accounting Principles, that established the FASB Accounting Standards Codification as the source of authoritative GAAP for nongovernmental entities. The Codification superseded all existing non-SEC accounting and reporting standards. The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009. As the Codification will not change existing GAAP, the guidance did not have an impact on our financial condition or results of operations, but will change the way the Company refers to GAAP accounting standards.

In August 2009, the FASB issued guidance under ASC section 320 , Investments – Debt and Equity Securities, related to fair value measurements and disclosures for liabilities, which amends earlier guidance related to fair value measurements and disclosures. The new guidance provides clarification in circumstances where a quoted price in an active market for an identical liability is not available, and a reporting entity is required to measure fair value using one or more valuation techniques. In addition, the new guidance also addresses practical difficulties where fair value measurements based on the price that would be paid to transfer a liability to a new obligor and contractual or legal requirements that prevent such transfers from taking place. The Company adopted the new standard which became effective for the annual reporting period ended December 31, 2009. The adoption of the new standard did not have a material impact on the Group’s consolidated financial statements.

In January 2010, the FASB issued guidance under ASC section 320, Investments – Debt and Equity Securities, that requires additional disclosures regarding fair value measurements. The guidance requires entities to disclose the amounts and reasons for significant transfers between Level 1 and Level 2 of the fair value hierarchy, reasons for any transfers in or out of Level 3 and to separately disclose information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances, and settlements. Portions of the guidance are effective for interim and annual reporting periods beginning after December 15, 2009, and the remaining guidance is effective for interim and annual reporting periods beginning after December 15, 2010.

In October 2010, the FASB issued Accounting Standards Update (ASU) 2010-26, Financial Services-Insurance (Topic 944) – Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. This guidance modifies the types of costs incurred by insurance entities that can be capitalized in the acquisition of new and renewal insurance contracts. The guidance provides that only costs that are incremental or directly related to the successful acquisition of new or renewal insurance contracts can be capitalized as a deferred acquisition cost. This would include, among other items, commissions paid to agents, premium taxes, and the portion of employee costs directly related to acquired contracts. This guidance is effective for interim and annual reporting periods beginning after December 15, 2010, and can be adopted with either prospective or retrospective application, with early adoption permitted. The Company is currently evaluating the impact of this guidance on its financial statements, but expects the guidance to result in a reduction in the deferred policy acquisition costs and stockholders’ equity reported on its consolidated balance sheet. The deferred policy acquisition costs carried on the Company’s consolidated balance sheet as of September 30, 2010 was $18,841.

(2)	INVESTMENTS

Net investment income, net realized investment gains or losses, and change in unrealized gains or losses on investment securities are as follows.

Net investment income and net realized investment gains (losses):


	Three months ended						Nine months ended
	September 30,						September 30,
	2010			2009			2010			2009
Investment income:
Fixed income securities	$	3,951			4,026		$	11,838			11,986
Equity securities		57			60			180			219
Cash and equivalents		39			40			107			119
Gross investment income		4,047			4,126			12,125			12,324
Less investment expenses		619			521			1,692			1,491
Net investment income		3,428			3,605			10,433			10,833
Net realized gains (losses):
Fixed income securities		548			34			1,600			(278	)
Equity securities		32			574			320			300
Mark-to-market valuation for interest rate swaps		(94	)		(136	)		(344	)		371
Net realized investment gains		486			472			1,576			393
Net investment income and net realized investment gains	$	3,914			4,077		$	12,009			11,226

Investment expenses include salaries, advisory fees and other miscellaneous expenses attributable to the maintenance of investment activities.

The change in net unrealized gains of securities for the three months and nine months ended September 30, 2010 is as follows:

	Three months		Nine months
	ended		ended
Change in Unrealized Gains and (Losses):	September 30,		September 30,
	2010		2010
Fixed-income securities	$	7,212	$	14,985
Equity securities		583		(342	)
	$	7,795	$	14,643

The cost and estimated market value of available-for-sale fixed-income and equity investment securities at September 30, 2010 and December 31, 2009 is shown below.


			Gross		Gross		Estimated
			Unrealized		Unrealized		Fair
	Cost (1)		Gains		Losses		Value
At September 30, 2010:
Fixed-income securities, available for sale:
U.S. government and government agencies (2)	$	68,856		4,558		-		73,414
Obligations of states and political subdivisions		120,981		9,173		27		130,127
Industrial and miscellaneous		173,110		16,745		-		189,855
Non-agency mortgage-backed securities		15,875		1,374		9		17,240
Total fixed maturities		378,822		31,850		36		410,636
Equity securities at estimated market value		7,974		1,762		136		9,600
Total	$	386,796	$	33,612	$	172	$	420,236

			Gross		Gross		Estimated
			Unrealized		Unrealized		Fair
	Cost (1)		Gains		Losses		Value
At December 31, 2009:
Fixed-income securities, available for sale:
U.S. government and government agencies (2)	$	68,864		3,209		52		72,021
Obligations of states and political subdivisions		136,706		6,743		156		143,293
Industrial and miscellaneous		124,135		6,380		292		130,223
Non-agency mortgage-backed securities		18,930		1,008		11		19,927
Total fixed maturities		348,635		17,340		511		365,464
Equity securities:
At estimated market value		7,516		2,001		33		9,484
Total	$	356,151		19,341		544		374,948

(1)	Original cost of equity and fixed-income securities adjusted for other than temporary impairment write-downs and amortization of premium and accretion of discount.

(2)	Includes approximately $51,628 and $55,092 (cost) and $55,180 and $57,874 (fair value), respectively, of mortgage-backed securities implicitly or explicitly backed by the U.S. government and government agencies as of September 30, 2010 and December 31, 2009.

The following table shows our industrial and miscellaneous fixed income securities and equity holdings by industry sector:


	September 30, 2010				December 31, 2009
	Cost (1)		Fair Value		Cost (1)		Fair Value

Industrial and miscellaneous:

Fixed income securities
Financial	$	49,212	$	52,230	$	29,612	$	31,537
Retail specialty		48,496		53,831		42,211		43,897
Energy		40,153		45,086		30,685		32,317
Information technology		18,028		19,667		12,260		12,728
Pharmaceutical		17,221		19,041		9,367		9,744
Total	$	173,110	$	189,855	$	124,135	$	130,223


Equity securities
Retail specialty	$	4,539	$	5,293	$	3,488	$	4,216
Information technology		1,348		1,607		995		1,363
Financial		1,156		1,416		1,293		1,505
Pharmaceutical		768		1,023		1,333		1,764
Energy		163		261		407		636
Total	$	7,974	$	9,600	$	7,516	$	9,484

The estimated market value and unrealized loss for securities in a temporary unrealized loss position as of September 30, 2010 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

U.S. Treasury securities and
obligations of U.S.
government corporations
and agencies	$	-	$	-	$	-	$	-	$	-	$	-
Obligations of states and
political subdivisions		1,271		27		-		-		1,271		27
Corporate securities		-		-		-		-		-		-
Non-agency mortgage-backed securities		2,031		9		-		-		2,031		9
Total fixed maturities		3,302		36		-		-		3,302		36
Total equity securities		1,138		136		-		-		1,138		136
Total securities in a
temporary unrealized loss
position	$	4,440	$	172	$	-	$	-	$	4,440	$	172

Fixed maturity investments with unrealized losses for less than twelve months are ordinarily in an unrealized loss position due to changes in the interest rate environment and anomalies in pricing in the current credit markets. At September 30, 2010 we had no fixed maturity securities with an unrealized loss for more than twelve months.

There are eight common stock securities that are in an unrealized loss position at September 30, 2010. All of these securities have been in an unrealized loss position for less than seven months. We do not believe these declines are other than temporary as a result of reviewing the circumstances of each such security, and we currently have the ability and intent to hold these securities until recovery.

The amortized cost and estimated fair value of fixed income securities at September 30, 2010, by contractual maturity, are shown below (note that mortgage-backed securities in the below table include securities backed by the U.S. government and agencies). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	Amortized		Estimated
	Cost		Fair Value

Due in one year or less	$	17,021		17,190
Due after one year through five years		130,099		137,334
Due after five years through ten years		150,748		169,231
Due after ten years		13,451		14,461
		311,319		338,216
Mortgage-backed securities:
Agency mortgage-backed securities		51,628		55,180
Non-agency mortgage-backed securities		15,875		17,240
Total mortgage-backed securities		67,503		72,420
	$	378,822		410,636

A roll-forward of the amount related to credit losses for fixed income securities recognized in earnings is presented in the following table:

	Three months			Nine months
	ended			ended
	September 30			September 30,
	2010			2010


Beginning balance of cumulative credit loss for securities held at beginning of period	$	2,679		$	3,732
Additional credit loss for securities previously other-than-temorarily impaired		-			7
Credit loss for securities not previously other-than-temorarily impaired		-			82
Reduction in credit loss for securities disposed or collected		(82	)		(1,224	)
Reduction in credit loss for securities other-than-temporarily impaired which were		-			-
intended to be or were required of necessity to be sold
Change in credit loss due to accretion of increase in cash flows for securities		-			-
previously other-than-temporarily impaired
Ending balance September 30, 2010	$	2,597		$	2,597

The gross realized gains and losses on investment securities for the three and nine month periods ended September 30, 2010 and 2009 are as follows:


	Three months ended September 30,				Nine months ended September 30,
	2010		2009		2010		2009
Gross realized gains:
Gains on sale of securities		599		807		2,086		1,122
Mark-to-market for interest rate swaps		-		-		-		371
Total		599		807		2,086		1,493
Gross realized losses:
Losses on sale of securities		19		144		77		313
Other-than-temporary impairment write-downs		-		55		89		787
Mark-to-market for interest rate swaps		94		136		344		-
Total		113		335		510		1,100

Net realized gain		486		472		1,576		393

In the nine months ended September 30, 2010 and September 30, 2009, we recorded pre-tax charges to earnings of $89 and $787, respectively, for credit-related write-downs of other-than-temporarily-impaired securities (OTTI).

The Group has no material amount of non-credit other-than-temporary impairment loss carried in Other Comprehensive Income at September 30, 2010.

Proceeds from sales and maturities of securities were $17.9 million and $16.0 million, respectively, for the three months ended September 30, 2010 and 2009. Proceeds from sales and maturities of securities were $53.5 million and $43.9 million, respectively, for the nine months ended September 30, 2010 and 2009.

(3) Segment Information

The Group markets its products through independent insurance agents, which sell commercial lines of insurance primarily to small to medium-sized businesses and personal lines of insurance to individuals.

The Group manages its business in three segments: commercial lines insurance (including surety), personal lines insurance, and investments. The commercial lines insurance and personal lines insurance segments are managed based on underwriting results determined in accordance with GAAP, and the investment segment is managed based on after-tax investment returns.

Underwriting results for commercial lines and personal lines take into account premiums earned, incurred losses and loss adjustment expenses, and underwriting expenses. The investments segment is evaluated by consideration of net investment income (investment income less investment expenses) and realized gains and losses.

In determining the results of each segment, assets are not allocated to segments and are reviewed in the aggregate for decision-making purposes.

Financial data by segment is as follows:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2010		2009			2010			2009
	(In thousands)					(In thousands)
Revenues:
Net premiums earned:
Commercial lines	$	28,887	$	29,737		$	87,517		$	90,611
Personal lines		4,827		4,944			14,311			14,604
Total net premiums earned		33,714		34,681			101,828			105,215
Net investment income		3,428		3,605			10,433			10,833
Net realized investment gains		486		472			1,576			393
Other revenue		502		516			1,478			1,555
Total revenues	$	38,130	$	39,274		$	115,315		$	117,996
Income before income taxes:
Underwriting income (loss):
Commercial lines	$	1,310	$	698		$	4,837		$	3,059
Personal lines		38		(68	)		(1,823	)		(927	)
Total underwriting income		1,348		630			3,014			2,132
Net investment income		3,428		3,605			10,433			10,833
Net realized investment gains		486		472			1,576			393
Other		145		158			417			489
Income before income taxes	$	5,407	$	4,865		$	15,440		$	13,847

(4) Reinsurance

Premiums earned are net of amounts ceded for reinsurance of $11.7 million and $13.4 million for the nine months ended September 30, 2010 and 2009, respectively, and $4.0 million and $4.6 million for the three months ended September 30, 2010 and 2009, respectively. Losses and loss adjustment expenses are net of amounts ceded for reinsurance of $4.9 million and $8.2 million for the nine months ended September 30, 2010 and 2009, respectively, and $1.5 million and $4.7 million for the three months ended September 30, 2010 and 2009, respectively.

Effective January 1, 2010, the Group renewed its reinsurance coverages with no change in its retention of $1.0 million on any individual property or casualty risk for both 2010 and 2009. There was no change in umbrella liability retention which is reinsured on a 75% quota share basis up to $1.0 million and on a 100% quota share basis in excess of $1.0 million for both 2010 and 2009. The property limit was increased to $10.0 million in 2010 from $7.5 million in 2009. The Group purchases facultative coverage in excess of these limits. Effective January 1, 2010, a $500,000 annual deductible was added to the $1.5 million excess of $500,000 layer of the surety excess of loss treaty.

In conjunction with the renewal of the reinsurance program for both 2010 and 2009, the prior year reinsurance treaties were terminated on a run-off basis, which requires that for policies in force as of December 31, 2009 and 2008, respectively, these reinsurance agreements continue to cover losses occurring on these policies in the future. Therefore, the Group will continue to remit premiums to and collect reinsurance recoverable from the reinsurers on these prior year treaties as the underlying business runs off.

(5) Comprehensive Income

The Group’s comprehensive income for the nine and three months periods ended September 30, 2010 and 2009 is as follows:

	Nine months ended
	September 30,
	2010			2009
	(In thousands)
Net income	$	11,118		$	10,195
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains arising during period, net of related income tax expense of $5,631 and $6,126		10,931			11,892
Less reclassification adjustment for (gains) included in net income, net of related income tax expense of $653 and $8		(1,267	)		(15	)
Defined benefit pension plan, net of related income tax (benefit) expense of ($4) and $1		(7	)		3
		9,657			11,880
Comprehensive income	$	20,775		$	22,075

	Three months ended
	September 30,
	2010			2009
	(In thousands)
Net income	$	3,866		$	3,554
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains arising during period, net of related income tax expense of $2,847 and $3,816		5,527			7,408
Less reclassification adjustment for gains included in net income, net of related income tax expense of $197 and $207		(383	)		(402	)
Defined benefit pension plan, net of related income tax (benefit) expense of ($2) and $1		(2	)		1
		5,142			7,007
Comprehensive income	$	9,008		$	10,561

(6) Share-based Compensation

The Group adopted the Mercer Insurance Group, Inc. 2004 Stock Incentive Plan (the Plan) on June 16, 2004. Awards under the Plan may be made in the form of incentive stock options (to employees only), nonqualified stock options, restricted stock or any combination to employees and non-employee directors. At adoption, the Plan initially limited to 250,000 the number of shares that may be awarded as restricted stock, and to 500,000 the number of shares for which incentive stock options may be granted. The total number of shares initially authorized in the Plan was 876,555 shares, with an annual increase equal to 1% of the shares outstanding at the end of each year. As of September 30, 2010, the Plan’s authorization has been increased under this feature to 1,270,514 shares. The Plan provides that stock options and restricted stock awards may include vesting restrictions and performance criteria at the discretion of the Compensation Committee of the Board of Directors. The term of options may not exceed ten years for incentive stock options, and ten years and one month for nonqualified stock options, and the option price may not be less than fair market value on the date of grant. The grants made under the plan employ graded vesting over vesting periods of 3 or 5 years for restricted stock, incentive stock options, and nonqualified stock option grants, and include only service conditions. Upon exercise, it is anticipated that newly issued shares will be issued to the option holder.

For the nine and three month periods ended September 30, 2010, the Group made no grants of restricted stock and stock options. In addition, there were no forfeitures of restricted stock or stock options, and there were 39,900 incentive stock options and nonqualified stock options exercised in 2010.

Information regarding stock option activity in the Group’s Plan is presented below:

	Number of Shares			Weighted Average Exercise Price per Share
Outstanding at December 31, 2009		590,700		$	13.26
Granted - 2010		-			-
Exercised - 2010		(39,900	)		12.21
Forfeited - 2010		-			-
Outstanding at September 30, 2010		550,800		$	13.33
Exercisable at:
September 30, 2010		535,800		$	13.33
Weighted-average remaining contractual life				3.5 years
Compensation remaining to be recognized for unvested stock options at September 30, 2010 (millions)				$	0.1
Weighted-average remaining amortization period				0.4 years
Aggregate Intrinsic Value of outstanding options, September 30, 2010 (millions)				$	2.8
Aggregate Intrinsic Value of exercisable options, September 30, 2010 (millions)				$	2.7

In determining the expense to be recorded for stock options in the consolidated statements of earnings, the fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model. The significant assumptions utilized in applying the Black-Scholes-Merton option pricing model are the risk-free interest rate, expected term, dividend yield, and expected volatility. The risk-free interest rate is the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term used as the assumption in the model. The expected term of an option award is based on expected experience of the awards. The dividend yield is determined by dividing the per share dividend by the grant date stock price. The expected volatility is based on the volatility of MIG’s stock price over a historical period.

Information regarding unvested restricted stock activity in the Group’s Plan is below:

	Number of Shares			Weighted Average Fair Value per Share
Unvested restricted stock at December 31, 2009		3,000		$	22.18
Granted - 2010		-			-
Vested - 2010		(1,000	)		12.80
Forfeited - 2010		-			-
Unvested restricted stock at September 30, 2010		2,000		$	26.87
Compensation remaining to be recognized for unvested restricted stock at September 30, 2010 (millions)					0.03
Weighted-average remaining amortization period					1

(7) Earnings per Share

The computation of basic and diluted earnings per share is as follows:


	Nine months ended September 30,
	2010		2009
	(Dollars in thousands, except per share data)
Numerator for basic and diluted earnings per share:
Net income	$	11,118	$	10,195
Denominator for basic earnings per share - weighted-average shares outstanding		6,289,558		6,200,840
Effect of stock incentive plans		147,158		120,225
Denominator for diluted earnings per share		6,436,716		6,321,065
Basic earnings per share	$	1.77	$	1.64
Diluted earnings per share	$	1.73	$	1.61


	Three months ended September 30,
	2010		2009
	(Dollars in thousands, except per share data)
Numerator for basic and diluted earnings per share:
Net income	$	3,866	$	3,554
Denominator for basic earnings per share - weighted-average shares outstanding		6,323,843		6,225,483
Effect of stock incentive plans		136,565		164,246
Denominator for diluted earnings per share		6,460,408		6,389,729
Basic earnings per share	$	0.61	$	0.57
Diluted earnings per share	$	0.60	$	0.56

The denominator for diluted earnings per share does not include the effect of outstanding stock options that have an anti-dilutive effect. Options on 40,000 shares were considered to be anti-dilutive for the nine and three month periods ended September 30, 2010 and 2009 and were excluded from the earnings per share calculation.

(8) Fair Value of Assets and Liabilities

In accordance with ASC section 820, Fair Value Measurements and Disclosures, the Group’s assets and financial liabilities measured at fair value are categorized into three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

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.

The Group uses quoted values and other data provided by a nationally recognized independent pricing service (pricing service) as inputs into its process for determining fair values of its investments. The pricing service covers over 99% of all asset classes, fixed-income and equity securities, domestic and foreign.

The pricing service obtains market quotations and actual transaction prices for securities that have quoted prices in active markets. Fixed maturities other than U.S. Treasury securities generally do not trade on a daily basis. For these securities, the pricing service prepares estimates of fair value measurements for these securities using its proprietary pricing applications which include available relevant market information, benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. Additionally, the pricing service uses an Option Adjusted Spread model to develop prepayment and interest rate scenarios.

Relevant market information, relevant credit information, perceived market movements and sector news are used to evaluate each asset class. The market inputs utilized in the pricing evaluation include, but are not limited to, benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data and industry and economic events. The extent of the use of each market input depends on the asset class and the market conditions. Depending on the security, the priority of the use of inputs may change or some market inputs may not be relevant. For some securities additional inputs may be necessary.

The pricing service utilized by the Group has indicated that they will only produce an estimate of fair value if there is objectively verifiable information to produce a valuation. If the pricing service discontinues pricing an investment, the Group would be required to produce an estimate of fair value using some of the same methodologies as the pricing service, but would have to make assumptions for market based inputs that are unavailable due to market conditions.

The Group reviews its securities measured at fair value and the classification of such investments based on industry practice. A review process is performed on prices received from the pricing service. In addition, a review is performed of the pricing service’s processes, practices and inputs, which include any number of financial models, quotes, trades and other market indicators. Pricing of the portfolio is reviewed on a monthly basis and securities with changes in prices exceeding defined tolerances are verified to other sources (e.g. broker, Bloomberg, etc.). Any price challenges resulting from this review are based upon significant supporting documentation which is provided to the pricing service for its review. The Group does not adjust quotes or prices obtained from the pricing service without first going through this process of challenging the price with the pricing service. At September 30, 2010, there were no unresolved challenges outstanding, and therefore the Group has not adjusted any of the pricing service’s valuations.

The fair value estimates of most fixed maturity investments are based on observable market information rather than market quotes. Accordingly, the estimates of fair value for such fixed maturities, other than U.S. Treasury securities, provided by the pricing service are included in the amount disclosed in Level 2 of the hierarchy. The estimated fair values of U.S. Treasury securities are included in the amount disclosed in Level 1 as the estimates are based on unadjusted market prices. The Group determined that Level 2 securities would include corporate bonds, mortgage backed securities, municipal bonds, asset backed securities, certain U.S. government agencies, non-U.S. government securities, certain short-term securities and investments in mutual funds.

Securities are generally assigned to Level 3 in cases where non-binding broker/dealer quotes are significant inputs to the valuation and there is a lack of transparency as to whether these quotes are based on information that is observable in the marketplace. The Group’s Level 3 securities were valued primarily through the use of non-binding broker quotes.

Equities that trade on a major exchange are assigned to Level 1. Equities not traded on a major exchange are assigned to Levels 2 or 3 based on the criteria and hierarchy described above.

Included in Level 2, Other Liabilities are interest rate swap agreements which the Group is a party to in order to hedge the floating interest rate on its trust preferred securities, thereby changing the variable rate exposure to a fixed rate exposure for interest on these obligations. The estimated fair value of the interest rate swaps is obtained from the third-party financial institution counterparties.

The table below presents the balances of financial assets and liabilities measured at fair value on a recurring basis.

	September 30, 2010
(In thousands)	Total		Level 1		Level 2		Level 3

Fixed income securities, available for sale:
U.S. government and government agencies		73,414		5,873		67,541		-
Obligations of states and political subdivisions		130,127		-		130,127		-
Industrial and miscellaneous		189,855		-		189,855		-
Non-agency mortgage-/asset-backed securities		17,240		-		15,696		1,544
Total fixed-income securities, available for sale		410,636		5,873		403,219		1,544
Equity securities		9,600		9,533		-		67
Total assets		420,236		15,406		403,219		1,611

Other liabilities		1,704		-		1,704		-
Total liabilities		1,704		-		1,704		-

	December 31, 2009
(In thousands)	Total		Level 1		Level 2		Level 3

Fixed income securities, available for sale:
U.S. government and government agencies		72,021		5,596		66,425		-
Obligations of states and political subdivisions		143,293		-		143,293		-
Industrial and miscellaneous		130,223		-		130,223		-
Non-agency mortgage-/asset-backed securities		19,927		-		18,579		1,348
Total fixed-income securities, available for sale		365,464		5,596		358,520		1,348
Equity securities		9,484		9,417		-		67
Total assets		374,948		15,013		358,520		1,415

Other liabilities		1,360		-		1,360		-
Total liabilities		1,360		-		1,360		-

The changes in Level 3 financial assets and liabilities measured at fair value on a recurring basis are summarized as follows:

	For the Nine Months Ended					For the Nine Months Ended
	September 30, 2010					September 30, 2009
(in thousands)	Fixed income securities, available for sale			Equity securities		Fixed income securities, available for sale			Equity securities

Balance, beginning of period	$	1,348		$	67	$	1,767		$	46
Total gains or losses (realized/unrealized)
Included in net income		-			-		(301	)		-
Included in other comprehensive income		196			-		46			-
Purchases, sales, issuances and settlements, net		299			-		(9	)		-
Transfers out of Level 3		(299	)		-		-			-
Balance, end of period	$	1,544		$	67	$	1,503		$	46

	For the Three Months Ended					For the Three Months Ended
	September 30, 2010					September 30, 2009
(in thousands)	Fixed income securities, available for sale			Equity securities		Fixed income securities, available for sale			Equity securities

Balance, beginning of period	$	1,790		$	67	$	1,414		$	46
Total gains or losses (realized/unrealized)
Included in net income		-			-		(18	)		-
Included in other comprehensive income		53			-		112			-
Purchases, sales, issuances and settlements, net		-			-		(5	)		-
Transfers out of Level 3		(299	)		-		-			-
Balance, end of period	$	1,544		$	67	$	1,503		$	46

The Company did not have significant transfers between Levels 1 and 2 during the during the three and nine month periods ended September 30, 2010 and 2009.

For the three and nine month periods ended September 30, 2010 and 2009, there were no non-financial assets measured at fair value on a recurring or non-recurring basis. In addition, there were no non-financial liabilities measured at fair value on a nonrecurring basis.

The carrying amount reported in the consolidated balance sheet for cash and cash-equivalents, short-term investments, premium and reinsurance receivables, accrued investment income, accounts payable and accrued expenses, other reinsurance balances, trust-preferred securities and line of credit obligations approximates their fair values.

(9) Derivative Instruments and Hedging Activities

The Group entered into three interest rate swap agreements to hedge against interest rate risk on its floating rate trust preferred securities. Our interest rate swaps are contracts to convert, for a period of time, the floating rate of the trust preferred securities into a fixed rate without exchanging the instruments themselves. As of September 30, 2010 and December 31, 2009, the Group was party to interest-rate swap agreements with an aggregate notional principal amount of $15,500.

The Group accounts for its interest rate swaps in accordance with accounting guidance under ASC section 815 , Derivatives and Hedging .

The Group has designated the interest rate swaps as non-hedge instruments. Accordingly, the Group recognizes the fair value of the interest rate swaps as assets or liabilities on the consolidated balance sheets with the changes in fair value recognized in net realized investment losses or gains in the consolidated statement of earnings. The estimated fair value of the interest rate swaps is based on the valuation received from the financial institution counterparty.

By using financial instruments to manage exposure to changes in interest rates, the Group exposes itself to market and credit risk. Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates. Credit risk would be the failure of the counterparty to perform under the terms of the contract. When the fair value of a contract is positive, the counterparty owes the Group, which creates credit risk for the Group. When the fair value of a contract is negative, the Group owes the counterparty and, therefore, it does not possess credit risk. The Group minimizes the credit risk in hedging instruments by entering into transactions with high-quality counterparties whose credit rating is higher than Aa.

A summary of the fair values of interest rate swaps outstanding as of September 30, 2010 and December 31, 2009 follows:



	September 30, 2010				December 31, 2009
	Balance Sheet Location	Fair Value Liability			Balance Sheet Location	Fair Value Liability
Interest rate swaps:

Union Bank of California (Trust I)	Other liabilities	$	(466	)	Other liabilities	$	(417	)
Union Bank of California (Trust II)	Other liabilities		(337	)	Other liabilities		(274	)
Union Bank of California (Trust III)	Other liabilities		(901	)	Other liabilities		(669	)

Total derivatives		$	(1,704	)		$	(1,360	)

A summary of the effect of derivative instruments on the consolidated statements of earnings for the three and nine month periods ended September 30, 2010 and 2009 follows:


	Nine months ended
	September 30, 2010				September 30, 2009
	Location of (Loss) Recognized in Income	Amount of (Loss) Recognized in Income			Location of Gain Recognized in Income	Amount of Gain Recognized in Income
Interest rate swaps:

Union Bank of California (Trust I)	Net realized investment gains	$	(48	)	Net realized investment gains	$	89
Union Bank of California (Trust II)	Net realized investment gains		(64	)	Net realized investment gains		66
Union Bank of California (Trust III)	Net realized investment gains		(232	)	Net realized investment gains		216

Total derivatives		$	(344	)		$	371


	Three months ended
	September 30, 2010				September 30, 2009
	Location of (Loss) Recognized in Income	Amount of (Loss) Recognized in Income			Location of (Loss) Recognized in Income	Amount of (Loss) Recognized in Income
Interest rate swaps:

Union Bank of California (Trust I)	Net realized investment gains	$	(8	)	Net realized investment losses	$	(35	)
Union Bank of California (Trust II)	Net realized investment gains		(17	)	Net realized investment losses		(27	)
Union Bank of California (Trust III)	Net realized investment gains		(69	)	Net realized investment losses		(74	)

Total derivatives		$	(94	)		$	(136	)

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 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

Mercer Insurance Group, Inc. (MIG or the Holding Company) is a holding company owning, directly and indirectly, all of the outstanding shares of our four insurance companies and our non-insurance subsidiaries (collectively, the Group). Mercer Insurance Company, our oldest insurance company, has been engaged in the sale of property and casualty insurance since 1844. Our insurance companies underwrite property and casualty insurance principally in Arizona, California, New Jersey, Nevada, Oregon, and Pennsylvania, with a limited amount of business is written in New York to support accounts in adjacent states, and are as follows:

•

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. In the second quarter of 2010, we made application for a non-admitted license for MIC in California, with the application still in progress.

•

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.

The Group’s operating subsidiaries are licensed collectively in twenty-two states, but are currently focused on doing business in six states: Arizona, California, Nevada, New Jersey, Pennsylvania and Oregon. MIC and MICNJ also write property and casualty insurance in New York in support of existing accounts written in other states. FPIC holds an additional fifteen state licenses outside of the Group’s current focus area. Currently, only direct mail surety coverage is being written in some of these states.

The Group is subject to regulation by the insurance regulators of each state in which it is licensed to transact business. The primary regulators are the Pennsylvania Insurance Department, the California Department of Insurance, and the New Jersey Department of Banking and Insurance, because these are the regulators for the states of domicile of the Group’s insurance subsidiaries, as follows: MIC (Pennsylvania-domiciled), FPIC (California-domiciled), MICNJ (New Jersey-domiciled), and FIC (Pennsylvania-domiciled).

The insurance affiliates within the Group participate in a reinsurance pooling arrangement (the “Pool”) whereby each insurance affiliate’s underwriting results are combined and then distributed proportionately to each participant. Each insurer’s share in the Pool is based on their respective statutory surplus from the most recently filed statutory annual statement as of the beginning of each year.

All insurance companies in the Group have been assigned a group rating of “A” (Excellent) by A.M. Best. The Group has been assigned this rating for the past 9 years. An “A” rating is the third highest rating of A.M. Best’s 16 possible rating categories. On its annual review in 2010 of Mercer’s rating, A.M. Best affirmed the Group’s “A” rating with a Stable outlook.

We manage our business and report our operating results in three operating segments: commercial lines insurance, personal lines insurance and the investment function. Assets are not allocated to segments and are reviewed in the aggregate for decision-making purposes. Our commercial lines insurance business consists primarily of multi-peril, general liability, commercial auto, and related insurance coverages. Our personal lines insurance business consists primarily of homeowners (in New Jersey and Pennsylvania) and private passenger automobile (in Pennsylvania only) insurance coverages.

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 Group’s financial statements are prepared in conformity with 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. Unpaid losses and loss adjustment expenses, also referred to as loss reserves, are the largest liability of our property and casualty subsidiaries. Our loss reserves include case reserve estimates for claims that have been reported and bulk reserve estimates for (a) the expected aggregate differences between the case reserve estimates and the ultimate cost of reported claims and (b) claims that have been incurred but not reported as of the balance sheet date, less estimates of the anticipated salvage and subrogation recoveries. Each of these categories also includes estimates of the loss adjustment expenses associated with processing and settling all reported and unreported claims. Estimates are based upon past loss experience modified for current and expected trends as well as prevailing economic, legal and social conditions.

The amount of loss and loss adjustment expense reserves for reported claims is based primarily upon a case-by-case evaluation of the type of risk involved, specific 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 losses and loss adjustment expenses are determined using historical information by line of business, adjusted to current conditions. Inflation is ordinarily provided for implicitly in the reserving function through analysis of costs, trends, and reviews of historical reserving results over multiple years. Our loss reserves are not discounted to present value.

Reserves are closely monitored and recomputed periodically using the most recent information on reported claims and a variety of projection techniques. Specifically, on at least 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 (to earned premiums) by line of business. We then apply these expected loss and loss adjustment expense ratios to earned premiums to derive a reserve level for each line of business. 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, economic conditions, and legal and judicial trends with respect to theories of liability. Any changes in estimates are reflected in operating results in the period in which the estimates are changed. During the third quarter of 2010, such estimate changes resulted in net favorable development on prior accident years of approximately $3.0 million, primarily in our Commercial automobile line of business, where we have in recent accident years seen favorable frequency and lower than expected emergence of losses, as well as better than expected case reserve development.

We perform a comprehensive annual review of loss reserves for each of the lines of business we write in connection with the determination of the year-end carried reserves. The review process takes into consideration the variety of trends and other factors that impact the ultimate settlement of claims in each particular class of business. A similar review is performed prior to the determination of the June 30 carried reserves. Prior to the determination of the March 31 and September 30 carried reserves, we review the emergence of paid and reported losses relative to expectations and make necessary adjustments to our carried reserves to reflect changes in estimates. There are also a number of analyses of claims experience and reserves undertaken by management on a monthly basis.

When a claim is reported to us, our claims personnel establish a “case reserve” for the estimated amount of the ultimate payment. This estimate reflects an informed judgment based upon general insurance reserving practices and the experience and knowledge of the estimator. The individual estimating the reserve considers the nature and value of the specific claim, the severity of injury or damage, and the policy provisions relating to the type of loss. Case reserves are adjusted by our claims staff as more information becomes available. It is our policy to periodically review and revise case reserves and to settle each claim as expeditiously as possible.

We maintain bulk and incurred but not reported reserves (usually referred to as “IBNR reserves”) to provide for claims already incurred that have not yet been reported (and which often may not yet be known to the insured) and for future developments on reported claims. The IBNR reserve is determined by estimating our insurance companies’ ultimate net liability for both reported and incurred but not reported claims and then subtracting both the case reserves and payments made to date for reported claims; as such, the IBNR reserves represent the difference between the estimated ultimate cost of all claims that have occurred or will occur and the reported losses and loss adjustment expenses. Reported losses include cumulative paid losses and loss adjustment expenses plus aggregate case reserves. A relatively large proportion of our gross and net loss reserves, particularly for long tail liability classes, are reserves for IBNR losses.

Some of our business relates to coverage for short-tail risks and, for these risks, the development of losses is comparatively rapid and historical paid losses and case reserves, adjusted for known variables, have been a reliable guide for purposes of reserving. “Tail” refers to the time period between the occurrence of a loss and the settlement of the claim. The longer the time span between the incidence of a loss and the settlement of the claim, the more the ultimate settlement amount can vary. Some of our business relates to long-tail risks, where claims are slower to emerge (often involving many years before the claim is reported) and the ultimate cost is more difficult to predict. For these lines of business, more sophisticated actuarial methods, such as the Bornhuetter-Ferguson loss development method, are employed to project an ultimate loss expectation, and then the related loss history must be regularly evaluated and loss expectations updated, with a likelihood of variability from the initial estimate of ultimate losses. A substantial portion of the business written by FPIC is this type of longer-tailed casualty business.

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, 2010.

The property and casualty industry has incurred substantial aggregate losses from claims related to asbestos-related illnesses, environmental remediation, product liability, mold, and other uncertain exposures. We have not experienced significant losses from these types of claims. Our subsidiary, FPIC, insures contractors for liability for construction defect risks, among other risks.

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


	September 30, 2010		December 31, 2009
	(In thousands)
Commercial lines:
Commercial multi-peril	$	242,573	$	245,361
Commercial automobile		34,877		34,164
Workers' compensation		8,718		8,728
Surety		8,681		8,799
Other liability		4,050		4,766
Fire, allied, inland marine		111		27
		299,010		301,845
Personal lines:
Homeowners		7,353		6,457
Personal automobile		2,314		2,113
Fire, allied, inland marine		548		345
Other liability		419		506
Workers' compensation		84		82
		10,718		9,503
Total	$	309,728	$	311,348

Investments. We have designated our fixed income portfolio as available for sale, and therefore it is carried at fair value in our consolidated balance sheet, as are equity securities. Unrealized investment gains or losses on our securities, net of applicable income taxes, are reflected directly in stockholders’ equity as a component of accumulated other comprehensive income and, accordingly, have no effect on net income. Realized investment gains or losses on dispositions of investments are recognized in net income, net of appropriate taxes.

In the case of unrealized losses in our portfolio, the Investment Committee reviews the impaired investments, evaluating 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 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 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. 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”. The amount of the write-down is accounted for as a realized loss in the case of equities and in the case of fixed income securities where the decline is attributable to credit issues or when the Company has the intent or will be required to sell the impaired security. Where a fixed income other than-temporary-impairment is not attributable to credit issues, it will be recognized in other comprehensive income. “Realizable value” is defined for this purpose as the market price of the security for an equity security and the present value of the expected cash flows for a fixed income security. A write-down to a value other than the market price requires objective evidence in support of that value.

Adverse investment market conditions, poor operating performance, or other adversity encountered by entities whose stock or fixed maturity securities we own could result in impairment charges in the future.

In the nine and three month periods ended September 30, 2010 and 2009, we recorded pre-tax charges to earnings of $89,000 and $787,000, and $0 and $55,000, respectively, for credit-related write-downs of other-than-temporarily-impaired securities (OTTI). All were treated as other-than-temporarily-impaired as a result of deteriorating underlying collateral issues, including increased delinquency and default rates and slower payments, as well as declining business conditions and rating agency downgrades. Included in these amounts for 2010 are charges of $82,000 for other-than-temporary impairment of fixed income securities for which a decision had been made to sell.

The Company has no material amount of non-credit OTTI loss carried in other comprehensive income at September 30, 2010 or December 31, 2009.

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. See note 1 to the Company’s financial statements in Item 1.

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.

Prior to 2007, some of the Group's reinsurance treaties (primarily FPIC’s treaties) have provisions for contingent ceding commissions based on the loss experience of the underlying reinsurance contracts. Estimating the emergence of claims to the applicable reinsurance layers is judgemental and subject to uncertainty, and the net amounts that will ultimately be realized may vary from the estimated amounts presented in the Group's results of operations.

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

The key goal of the Group’s business model is the sale of properly priced and underwritten personal and commercial property and casualty insurance through independent agents and the investment of the premiums in a manner designed to assure that claims and expenses can be paid while providing a return on the capital employed. Loss trends and investment performance are critical factors in the success of the business model.

Our results of operations are also influenced by factors affecting the property and casualty insurance industry in general. The operating results of the United States property and casualty insurance industry are subject to significant variations due to competition, weather, catastrophic events, regulation, the availability and cost of satisfactory reinsurance, general economic conditions, judicial trends, fluctuations in interest rates and other changes in the investment environment.

The availability of reinsurance at reasonable pricing is an important part of our business. Effective, January 1, 2009 (and continuing into 2010), the Group increased its retention to $1 million (from a maximum retention of $850,000 in 2008) on the casualty, property and workers’ compensation lines of business. As the Group increases the net retention of the business it writes, net premiums written and earned will increase and ceded losses will decrease.

The Group writes homeowners insurance only in New Jersey and Pennsylvania, and personal automobile insurance only in Pennsylvania. Personal lines insurance is not written in any other states in which the Group does business.

Nine and Three months ended September 30, 2010 compared to Nine and Three months ended September 30, 2009

The components of income for the nine and three months ended September 30, 2010 and 2009, 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 immediately above the narrative.

Nine months ended September 30,
2010 vs. 2009 Income	2010			2009			Change			% Change
	(Dollars in thousands)
Commercial lines underwriting income	$	4,837		$	3,059		$	1,778			58.1	%
Personal lines underwriting loss		(1,823	)		(927	)		(896	)		(96.7	) %
Total underwriting income		3,014			2,132			882			41.4	%
Net investment income		10,433			10,833			(400	)		(3.7	) %
Net realized investment gains		1,576			393			1,183			N/M
Other		1,478			1,555			(77	)		(5.0	) %
Interest expense		(1,061	)		(1,066	)		5			(0.5	) %
Income before income taxes		15,440			13,847			1,593			11.5	%
Income taxes		4,322			3,652			670			18.3	%
Net Income		11,118			10,195			923			9.1	%

Loss/ LAE ratio (GAAP)		61.7	%		61.4	%		0.3	%
Underwriting expense ratio (GAAP)		35.3	%		36.6	%		(1.3	) %
Combined ratio (GAAP)		97.0	%		98.0	%		(1.0	) %

Loss/ LAE ratio (Statutory)		62.2	%		61.5	%		0.7	%
Underwriting expense ratio (Statutory)		35.2	%		35.9	%		(0.7	) %
Combined ratio (Statutory)		97.4	%		97.4	%		-	%

Three months ended September 30,
2010 vs. 2009 Income	2010			2009			Change			% Change
	(Dollars in thousands)
Commercial lines underwriting income	$	1,310		$	698		$	612			87.7	%
Personal lines underwriting income (loss)		38			(68	)		106			155.9	%
Total underwriting income		1,348			630			718			114.0	%
Net investment income		3,428			3,605			(177	)		(4.9	) %
Net realized investment gains		486			472			14			N/M
Other		502			516			(14	)		(2.7	) %
Interest expense		(357	)		(358	)		1			0.3	%
Income before income taxes		5,407			4,865			542			11.1	%
Income taxes		1,541			1,311			230			17.5	%
Net Income		3,866			3,554			312			8.8	%

Loss/ LAE ratio (GAAP)		59.9	%		62.5	%		(2.6	) %
Underwriting expense ratio (GAAP)		36.1	%		35.7	%		0.4	%
Combined ratio (GAAP)		96.0	%		98.2	%		(2.2	) %

Loss/ LAE ratio (Statutory)		60.3	%		62.5	%		(2.2	) %
Underwriting expense ratio (Statutory)		37.7	%		36.7	%		1.0	%
Combined ratio (Statutory)		98.0	%		99.2	%		(1.2	) %

(N/M means “not meaningful”)

Our GAAP and statutory combined ratios for the first nine months of 2010 were 97.0% and 97.4%, respectively, as compared to GAAP and statutory combined ratios of 98.0% and 97.4%, respectively, in the prior year. Underwriting income in the first nine months of 2010 was $3.0 million as compared to $2.1 million in 2009. See the discussion below relating to commercial and personal lines performance.

Our GAAP and statutory combined ratios for the three months ended September 30, 2010 were 96.0% and 98.0%, respectively, as compared to GAAP and statutory combined ratios of 98.2% and 99.2%, respectively, in the prior year. Underwriting income in the three months ended September 30, 2010 was $1.3 million, as compared to $630,000 in 2009. See the discussion below in the sections relating to commercial and personal lines performance.

In the nine months ended September 30, 2010, net investment income decreased $400,000 to $10.4 million, as compared to $10.8 million in 2009. Gross investment income, before allocated expenses, decreased $199,000 in the same period to $12.1 million from $12.3 million in the prior year. See the discussion below relating to the investment segment.

In the three months ended September 30, 2010, net investment income decreased $177,000 to $3.4 million, as compared to $3.6 million in 2009. Gross investment income, before allocated expenses, decreased $79,000 in the same period to $4.0 million from $4.1 million in the prior year. See the discussion below relating to the investment segment.

Net realized investment gains in the first nine months of 2010 amounted to $1.6 million, as compared to a net realized gains of $393,000 in 2009. Included in net realized investment gains and losses for the nine months ended September 30, 2010 and 2009, the Group had write-downs of other than temporary impairments related to credit quality of $89,000 and $787,000, respectively, and a (loss) gain on the mark to market valuation of interest rate swaps of ($344,000) and $371,000, respectively. See also the discussion of other than temporary impairments on investment securities in the “Critical Accounting Policies” section.

Net realized investment gains in the three months ended September 30, 2010 amounted to $486,000, as compared to $472,000 in the same period in 2009. Included in net realized investment gains and losses for the three months ended September 30, 2010 and 2009, the Group had write-downs of other than temporary impairments related to credit quality of $0 and $55,000, respectively, and losses on the mark to market valuation of interest rate swaps of $94,000 and $136,000, respectively. See also the discussion of other-than-temporary impairments on investment securities in the “Critical Accounting Policies” section.

Other revenue of $1.5 million and $1.6 million in the first nine months of 2010 and 2009, respectively, and $502,000 and $516,000 for the three months ended September 30, 2010 and 2009, respectively, primarily represents service charges recorded on insurance premium payment plans.

Interest expense of $1.1 million was incurred in each of the first nine months of 2010 and 2009, and $357,000 and $358,000, respectively, was incurred during the third quarters of 2010 and 2009, and represents interest expense on the trust preferred securities obligations of FPIG.

Charts and discussion relating to each of our segments (Investment, Commercial Lines, and Personal Lines) follow with further discussion below.

Revenues

Nine Months Ended September 30,
2010 vs. 2009 Revenue	2010		2009		Change			% Change
	(In thousands)
Direct premiums written	$	112,750	$	116,986	$	(4,236	)		(3.6	) %
Net premiums written		100,889		105,537		(4,648	)		(4.4	) %
Net premiums earned		101,828		105,215		(3,387	)		(3.2	) %
Net investment income		10,433		10,833		(400	)		(3.7	) %
Net realized investment gains		1,576		393		1,183			N/M
Other revenue		1,478		1,555		(77	)		(5.0	) %
Total revenue	$	115,315	$	117,996	$	(2,681	)		(2.3	) %

Three Months Ended September 30,
2010 vs. 2009 Revenue	2010		2009		Change			% Change
	(In thousands)
Direct premiums written	$	35,008	$	37,374	$	(2,366	)		(6.3	) %
Net premiums written		31,365		33,355		(1,990	)		(6.0	) %
Net premiums earned		33,714		34,681		(967	)		(2.8	) %
Net investment income		3,428		3,605		(177	)		(4.9	) %
Net realized investment gains		486		472		14			N/M
Other revenue		502		516		(14	)		(2.7	) %
Total revenue	$	38,130	$	39,274	$	(1,144	)		(2.9	) %

(N/M means “not meaningful”)

Total revenues for the first nine months of 2010 were $115.3 million, as compared to $118.0 million in the first nine months of 2009. Total revenues for the third quarter of 2010 were $38.1 million, as compared to $39.3 million in 2009.

Direct premiums written in the nine month period decreased 3.6%, or $4.2 million, to $112.8 million from the same period in the prior year. In the three months ended September 30, 2010, direct premiums written declined 6.3%, or $2.4 million, from the prior year. The declines in direct written premium are a result of weakened economic conditions and reduced economic activity in our operating territories, particularly California, which reduces insurance exposures and the need to insure them. In addition, the current market continues to be very competitive, with pricing and coverage competition present in all classes of commercial accounts, package policies, and commercial automobile policies, as well as in personal lines, all of which presents a challenge in retaining our accounts on renewal, or renewing a policy at the expiring premium, and impedes our ability to add new business. Significant competition continues on large accounts, as competitors compete for these higher premium accounts. The Company is also seeing more intense competition, especially in the western territory, for middle market accounts, defined as between $25,000 and $100,000 in annual premium. Pricing in the property and casualty insurance industry historically has been and remains cyclical, and in the current soft market condition, price competition is prevalent, making it challenging to write and retain properly priced personal and commercial lines business. To compensate for these market pressures, we work with our agents to identify business and accounts compatible with our underwriting risk appetite, which includes certain types of religious institution risks, contracting risks, small business risks and property risks. In so doing, the Group maintains a strong focus on its disciplined underwriting and on maintaining its pricing standards, declining business which it determines is inadequately priced for its level of risk. To address these competitive and economic pressures, we are continuously refining existing product offerings in a deliberate manner and with a long-term perspective.

Despite the competitive market conditions and weakened economy, the Group’s policy retention on renewal has been favorable across most product lines and the Group has been able to grow its policy count, aided through the introduction of new products. In the fourth quarter of 2008, a new Business Owners Policy for California risks was introduced. This product targets small to medium sized businesses, which have been shown to be somewhat less price sensitive and demonstrate higher retention on renewal than larger accounts. In 2009, a new contracting product which specializes in covering artisan contractors was introduced in Arizona and California. In the third quarter of 2010, this program was introduced in Nevada and Oregon. Artisan contractors primarily provide repair and maintenance services, and the sector tends to experience less severe market fluctuations compared to the new construction industry, and will help diversify our west coast book away somewhat from its historic new construction orientation.

Net premiums written decreased in the nine and three month periods ended September 30, 2010, as a result of the decrease in direct premiums written. The decline in net premiums earned is attributable to decline in direct and net written premium. The Company’s 2010 reinsurance program was renewed with very little change. Effective January 1, 2010, the Group renewed its reinsurance coverages with no change in its retention of $1.0 million on any individual property or casualty risk. There was no change in umbrella liability retention, which is reinsured on a 75% quota share basis up to $1.0 million and on a 100% quota share basis in excess of $1.0 million for both 2010 and 2009. The property limit was increased to $10.0 million in 2010 from $7.5 million in 2009. The Group purchases facultative coverage in excess of these limits. Effective January 1, 2010, a $500,000 annual deductible was added to the $1.5 million excess of $500,000 layer of the surety excess of loss treaty.

For more information see the discussions below relating to the Investment segment, Commercial Lines segment, and Personal Lines segment.

Investment segment


Nine Months Ended September 30,
2010 vs. 2009 Investment Income and Realized Gains (losses)	2010			2009			Change			% Change
	(In thousands)
Fixed income securities	$	11,838		$	11,986		$	(148	)		(1.2	) %
Dividends		180			219			(39	)		(17.8	) %
Cash, cash equivalents & other		107			119			(12	)		(10.1	) %
Gross investment income		12,125			12,324			(199	)		(1.6	) %
Investment expenses		(1,692	)		(1,491	)		(201	)		13.5	%
Net investment income		10,433			10,833		$	(400	)		(3.7	) %

Realized gains (losses) - fixed income securities		1,600			(278	)	$	1,878			N/M
Realized gains - equity securities		320			300			20			N/M
Mark-to-market valuation (loss) gain for interest rate swaps		(344	)		371			(715	)		N/M
Net realized gains		1,576			393		$	1,183			N/M


Three Months Ended September 30,
2010 vs. 2009 Investment Income and Realized Gains (losses)	2010			2009			Change			% Change
	(In thousands)
Fixed income securities	$	3,951		$	4,026		$	(75	)		(1.9	) %
Dividends		57			60			(3	)		(5.0	) %
Cash, cash equivalents & other		39			40			(1	)		(2.5	) %
Gross investment income		4,047			4,126			(79	)		(1.9	) %
Investment expenses		(619	)		(521	)		(98	)		18.8	%
Net investment income		3,428			3,605		$	(177	)		(4.9	) %

Realized gains - fixed income securities		548			34		$	514			N/M
Realized gains (losses) - equity securities		32			574			(542	)		N/M
Mark-to-market valuation (loss) gain for interest rate swaps		(94	)		(136	)		42			N/M
Net realized gains		486			472		$	14			N/M
(N/M means “not meaningful”)

In the nine and three month periods ended September 30, 2010 and 2009, investment income on fixed income securities was $11.8 million and $3.9 million, as compared to $12.0 million and $4.0 million, respectively. This decrease from the prior year, despite growth in the portfolio, is driven by lower yields available in the market for securities that meet our investment risk appetite. Consequently, new money added to the portfolio is being invested in lower yields than previously reflected in the portfolio. In addition, the Company has been screening its fixed income portfolio in 2009 and 2010 for lower credit risk. This has resulted in the sale of a number of securities that while not currently a risk could potentially represent elevated credit risk in the future. The proceeds from these sales have generally been reinvested at lower yields than the securities sold, based on rates prevailing in the market at the time of reinvestment. Our tax equivalent yield (yield adjusted for tax-benefit received on tax-exempt securities) on fixed income securities (excluding short-term investments) has decreased to 4.70% for securities in the portfolio as of September 30, 2010.

Dividend income declined to $180,000 and $57,000, respectively, from $219,000 and $60,000, respectively, for the nine and three month periods ended September 30, 2010, due to a reduction in the size of our equities portfolio during 2009. Interest income on cash and cash equivalents in the nine and three month periods ended September 30, 2010 approximated that of the prior year. Investment expenses are higher by $201,000 and $98,000 in the nine and three month periods ended September 30, 2010, primarily due to allocations of internal costs to the investment function.

Net realized investment gains amounted to $1.6 million and $486,000, respectively, in the first nine and three month periods of 2010, as compared to net realized gains of $393,000 and $472,000, respectively, for the prior year. The Group recorded $89,000 and $787,000, respectively, of realized losses on credit-related other-than-temporary impairments in the nine months ended September 30, 2010 and 2009. In the three months ended September 30, 2010, the Group recorded charges of $0 and $55,000, respectively, for credit-related other-than-temporary impairment of fixed income securities. In the nine and three month periods ended September 30, 2010, the Group also recorded losses of $344,000 and $94,000, respectively, on the mark-to-market of interest rate swaps, as compared to a gain of $371,000 and loss of $136,000, respectively, in the same periods of the prior year. We currently have three ongoing interest rate swap agreements to hedge against interest rate risk on our floating rate trust preferred securities obligations. The estimated fair value of the interest rates swaps is obtained from the third-party financial institution counterparties. We mark the investments to market using these valuations and record the change in the economic value of the interest rate swaps as a realized gain or loss in the consolidated statement of earnings. See also the discussion of other than temporary impairments on investment securities in the “Critical Accounting Policies” section.

Fixed income securities represent 96.9% of invested assets. As of September 30, 2010, the fixed income portfolio consists of 99.7% investment grade securities, with 0.3% non-investment grade securities, which includes one corporate security held with a market value of $0.5 million, three asset-backed securities held with a combined market value of $0.6 million, one mortgage-backed security with a market value of $0.1 million and one small tax-exempt municipal bond. The fixed income portfolio has an average rating of Aa3/AA. During 2009 and into 2010, we have continually reviewed our fixed income portfolio with a view to identifying and disposing of securities which could eventually suffer a decline in value as a result of their individual circumstances. As part of that effort, we have disposed of securities in a number of sectors, including CMBSs, MBSs, ABSs and non-taxable municipal bonds, and reinvested the proceeds in a number of sectors, but principally in the corporate bond sector. In doing so, market conditions have adversely impacted our yield on the proceeds reinvested, and the Company has reduced its tax-advantaged income.

Among our portfolio holdings, the only direct subprime exposure consists of asset-backed securities (ABS) within the home equity subsector. The ABS home equity subsector totaled $0.46 million (book value) on September 30, 2010, representing 2.94% of the ABS holdings, 0.689% of the total structured product holdings, and 0.12% of total fixed income portfolio holdings. The subprime related exposure consists of three individual securities, of which two are insured by monolines against default of principal and interest. However, since FGIC is no longer rated and AMBAC has been downgraded to Caa2/R, the two insured securities are now rated according to the higher of the underlying collateral or the monoline rating. One bond is rated Caa1/D while the other is rated Ca/D. With regard to the remaining security without monoline insurance, it is rated C/B by Moody’s and S&P, respectively.

The following table sets forth consolidated cost and fair value information for our investments.



	September 30, 2010				December 31, 2009
	Cost (2)		Fair Value		Cost (2)		Fair Value
	(In thousands)


Fixed income securities (1)
United States government and government agencies (3)	$	68,856		73,414		68,864		72,021
Obligations of states and political subdivisions		120,981		130,127		136,706		143,293
Industrial and miscellaneous		173,110		189,855		124,135		130,223
Non-agency mortgage-backed certificates		15,875		17,240		18,930		19,927
Total fixed income securities		378,822		410,636		348,635		365,464
Equity securities		7,974		9,600		7,516		9,484
Short-term investments		3,400		3,400		-		-
Total	$	390,196		423,636		356,151		374,948

(1)	In our consolidated financial statements, investments are carried at fair value.

(2)	Original cost of equity and fixed income securities adjusted for other-than-temporary impairment write-downs and amortization of premium and accretion of discount.

(3)	Includes approximately $51,628 and $55,092 (cost) and $55,180 and $57,874 (fair value), respectively, of mortgage-backed securities implicitly or explicitly backed by the U.S. government and government agencies as of September 30, 2010, and December 31, 2009, respectively.

The estimated fair value and unrealized loss for securities in a temporary unrealized loss position as of September 30, 2010 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

U.S. Treasury securities and
obligations of U.S.
government corporations
and agencies	$	-	$	-	$	-	$	-	$	-	$	-
Obligations of states and
political subdivisions		1,271		27		-		-		1,271		27
Corporate securities		-		-		-		-		-		-
Non-agency mortgage-backed securities		2,031		9		-		-		2,031		9
Total fixed maturities		3,302		36		-		-		3,302		36
Total equity securities		1,138		136		-		-		1,138		136
Total securities in a
temporary unrealized loss
position	$	4,440	$	172	$	-	$	-	$	4,440	$	172

Fixed maturity investments with unrealized losses for less than twelve months are ordinarily due to changes in the interest rate environment and anomalies in pricing in the current credit markets. At September 30, 2010 we had no fixed maturity securities with an unrealized loss for more than twelve months.

There are eight common stock securities that are in an unrealized loss position at September 30, 2010. All of these securities have been in an unrealized loss position for less than seven months. We do not believe these declines are other-than-temporary as a result of reviewing the circumstances of each such security, and we currently have the ability and intent to hold this security until recovery.

At September 30, 2010, the adjusted effective duration of our fixed income portfolio was 3.98 years.

See Item 3 of this Form 10-Q “Quantitative and Qualitative Information about Market Risk” for further information on our investments.

Commercial Lines segment

Results of our Commercial Lines segment were as follows

Nine Months Ended September 30,
2010 vs. 2009 Commercial Lines (CL)	2010			2009			Change			% Change
	(Dollars in thousands)
CL Direct premiums written	$	96,867		$	100,825		$	(3,958	)		(3.9	) %
CL Net premiums written	$	86,669		$	91,006		$	(4,337	)		(4.8	) %
CL Net premiums earned	$	87,517		$	90,611		$	(3,094	)		(3.4	) %

CL Loss/ LAE expense ratio (GAAP)		59.1	%		60.0	%		(0.9	) %
CL Expense ratio (GAAP)		35.4	%		36.6	%		(1.2	) %
CL Combined ratio (GAAP)		94.5	%		96.6	%		(2.1	) %

Three Months Ended September 30,
2010 vs. 2009 Commercial Lines (CL)	2010			2009			Change			% Change
	(Dollars in thousands)
CL Direct premiums written	$	29,387		$	31,581		$	(2,194	)		(6.9	) %
CL Net premiums written	$	26,293		$	28,070		$	(1,777	)		(6.3	) %
CL Net premiums earned	$	28,887		$	29,737		$	(850	)		(2.9	) %

CL Loss/ LAE expense ratio (GAAP)		58.8	%		61.7	%		(2.9	) %
CL Expense ratio (GAAP)		36.7	%		36.0	%		0.7	%
CL Combined ratio (GAAP)		95.5	%		97.7	%		(2.2	) %

In the nine and three month periods ended September 30, 2010, our commercial lines direct premiums written were $96.9 million and $29.4 million, respectively, as compared to $100.8 million and $31.6 million, respectively, for the same periods in the prior year. This represented a 3.9% and 6.9% decline, respectively, from the nine and three month periods of the prior year.

The decrease in direct premiums is caused by several factors, including a decline in construction related activity due to a weak economy, negative audit premium on our contractors book, increased competition on large accounts, and increased competition in the California contractor market. Our California contractors book reflects the decreased economic activity in the California new construction market. Since the insurance premiums for these contractors generally reflect their level of economic activity, the average premium per policy has fallen as the insured’s business has contracted in the weak economy, resulting both in lower insurance exposures and lower premiums from these contractors. The retention levels in this book remain attractive, and policy count is up year-over-year, despite the difficult market conditions. This means that we have more customers in this market than in the previous year, but that on average we collect less premium from each in the current year because of the weakness in the insured’s businesses resulting from the weak economy. It also means that insurance exposures per contractor on average are down, since their businesses are less busy than before, which should result in fewer losses. See additional discussion above in the “2010 vs. 2009 Revenue” discussion.

In the nine and three month periods ended September 30, 2010, our commercial lines net premiums written were $86.7 million and $26.3 million, respectively, as compared to $91.0 million and $28.1 million, respectively, in the same periods in 2009. In the nine and three month periods ended September 30, 2010 our commercial lines net premiums earned were $87.5 million and $28.9 million, respectively, as compared to $90.6 million and $29.7 million, respectively, in the same periods in 2009. The decrease in net premiums written and net premiums earned resulted from the decline in recent quarters in direct premiums written. Our California contractor’s book had negative audit premium of $3.1 million in the first nine months of 2010 as compared to $2.9 million in the first nine months of 2009, which is earned immediately upon booking, and continues to adversely impact net premiums earned.

In the commercial lines segment for the first nine months of 2010, we had underwriting income of $4.8 million, an increase from the underwriting income of $3.1 million in the same period of 2009, a GAAP combined ratio of 94.5%, a GAAP loss and loss adjustment expense ratio of 59.1% and a GAAP underwriting expense ratio of 35.4%, compared to a GAAP combined ratio of 96.6%, a GAAP loss and loss adjustment expense ratio of 60.0% and a GAAP underwriting expense ratio of 36.6% in 2009.

In the commercial lines segment for the third quarter of 2010, we had underwriting income of $1.3 million, an increase from the underwriting income of $0.7 million in the same period of 2009, a GAAP combined ratio of 95.5%, a GAAP loss and loss adjustment expense ratio of 58.8% and a GAAP underwriting expense ratio of 36.7%, compared to a GAAP combined ratio of 97.7%, a GAAP loss and loss adjustment expense ratio of 61.7% and a GAAP underwriting expense ratio of 36.0% in 2009.

Included in commercial lines in the first nine months of 2010 were losses of approximately $1.1 million from catastrophe numbers 94 and 96 (as numbered and described by the Insurance Services Office). Development of these winter storms continued after March 31, 2010 and resulted in losses of $0.1 million in the quarter ended September 30, 2010. While the losses we suffered in 2010 from these catastrophes are not insignificant, the Group has in recent years managed its book of business to minimize the impact of catastrophic weather events by limiting exposures, and that effort is reflected in the fact that we believe the losses from these storms were less significant for us than for some of our competitors. During the third quarter of 2010, as part of the evaluation of expected ultimate loss and loss adjustment expense ratios, net favorable development on prior accident years of approximately $3.0 million was recognized, primarily in our Commercial automobile line of business, where we have in recent accident years seen favorable frequency and lower than expected emergence of losses, as well as better than expected case reserve development.

One of our strategies in this market is to introduce new products leveraging our core skills. In the fourth quarter of 2008, a new Business Owners Policy for California risks was introduced. This product targets small to medium sized businesses, which have been shown to be somewhat less price sensitive and demonstrating higher renewal retention than larger accounts. This product also helps to balance FPIC’s business between property and casualty exposures. In 2009, a new contracting product which specializes in covering artisan contractors was introduced in Arizona and California, and in 2010 was implemented in Nevada and Oregon. Artisan contractors primarily provide repair and maintenance services, and this segment tends to experience less severe market fluctuations compared to the construction industry. During 2009, a new Garage Program was introduced in New Jersey and Pennsylvania, which targets repair shops, auto body shops, and gas stations. During 2009, an Employment Practices Liability endorsement was introduced for package policies written in New Jersey and Pennsylvania. Also during 2009, an on-line rating system was introduced for agency rating and binding of policies for the artisan contractors program, BOP, and workers compensation in New Jersey and Pennsylvania. In the second quarter of 2010 we launched an on-line quoting and binding system for commercial auto along with a value added coverage endorsement for New Jersey and Pennsylvania.

Personal Lines segment

Results of our Personal Lines segment were as follows:

Nine Months Ended September 30,
2010 vs. 2009 Personal Lines (PL)	2010			2009			Change			% Change
	(Dollars in thousands)
PL Direct premiums written	$	15,883		$	16,160		$	(277	)		(1.7	) %
PL Net premiums written	$	14,220		$	14,531		$	(311	)		(2.1	) %
PL Net premiums earned	$	14,311		$	14,604		$	(293	)		(2.0	) %

PL Loss/ LAE expense ratio (GAAP)		77.6	%		70.2	%		7.4	%
PL Expense ratio (GAAP)		35.1	%		36.2	%		(1.1	) %
PL Combined ratio (GAAP)		112.7	%		106.4	%		6.3	%

Three Months Ended September 30,
2010 vs. 2009 Personal Lines (PL)	2010			2009			Change			% Change
	(Dollars in thousands)
PL Direct premiums written	$	5,621		$	5,794		$	(173	)		(3.0	) %
PL Net premiums written	$	5,072		$	5,285		$	(213	)		(4.0	) %
PL Net premiums earned	$	4,827		$	4,944		$	(117	)		(2.4	) %

PL Loss/ LAE expense ratio (GAAP)		66.2	%		67.8	%		(1.6	) %
PL Expense ratio (GAAP)		33.1	%		33.6	%		(0.5	) %
PL Combined ratio (GAAP)		99.3	%		101.4	%		(2.1	) %

Personal lines direct premiums written was comparable at $15.9 million in the first nine months of 2010, to the $16.2 million reported in the same period in 2009. Personal lines net premiums written was comparable at $14.2 million in the first nine months of 2010, to the $14.5 million reported in the same period in 2009. Personal lines net premiums earned declined to $14.3 million in 2010 from $14.6 million in the prior year, a 2.0% reduction. Our personal lines continue to be impacted by significant competition in the New Jersey homeowners insurance market and the Pennsylvania homeowners and private passenger automobile markets.

Personal lines direct premiums written was comparable at $5.6 million in the third quarter of 2010, to the $5.8 million reported in the same period in 2009. Personal lines net premiums written was comparable at $5.1 million in the third quarter of 2010, to the $5.3 million reported in the same period in 2009. Personal lines net premium earned in the third quarter of 2010 was comparable at $4.8 million to the $4.9 million reported in the prior year.

In the personal lines segment for the first nine months of 2010 we had an underwriting loss of $1.8 million, a GAAP combined ratio of 112.7%, a GAAP loss and loss adjustment expense ratio of 77.6% and a GAAP underwriting expense ratio of 35.1%, compared to an underwriting loss of $0.9 million, a GAAP combined ratio of 106.4%, a GAAP loss and loss adjustment expense ratio of 70.2% and a GAAP underwriting expense ratio of 36.2% in the first nine months of 2009.

In the personal lines segment for the third quarter 2010 we had an underwriting gain of $38,000, a GAAP combined ratio of 99.3%, a GAAP loss and loss adjustment expense ratio of 66.2% and a GAAP underwriting expense ratio of 33.1%, compared to an underwriting loss of $68,000, a GAAP combined ratio of 101.4%, a GAAP loss and loss adjustment expense ratio of 67.8% and a GAAP underwriting expense ratio of 33.6% in the third quarter of 2009.

Personal lines losses incurred in both the nine months ended September 30, 2010 and 2009 were elevated as a result of unusual events. In 2010, there were significant weather-related losses. Included in these weather related losses in the first nine months of 2010 were personal lines losses of approximately $1.3 million from catastrophes number 94 and number 96 (as numbered and described by the Insurance Services Office), with development of these winter storms continuing after March 31, 2010 and resulting in losses of $0.1 million in the quarter ended September 30, 2010. In the first quarter of 2009, there was a lesser, but elevated, level of losses from severe winter weather, as well as an unusual number of large fire losses.

While the losses we suffered in 2010 from catastrophes 94 and 96 are not insignificant, the Group has in recent years managed its book of business to minimize the impact of catastrophic weather events by limiting exposures, and that effort is reflected in the fact that we believe the losses from this storm were less significant for us than for some of our competitors.

In order to support our growth in personal lines, during 2009 we introduced a new on-line system for agents to use in selling homeowners policies. It enables agents to quote, bind and service homeowners policies in New Jersey and Pennsylvania, and it has been well-received by our agents, who produce all of our personal lines direct premium written.

Underwriting Expenses and the Expense Ratio

Nine Months Ended September 30,
2010 vs. 2009 Expenses and Expense Ratio	2010			2009			Change			% Change
	(Dollars in thousands)
Amortization of Deferred Acquisition Costs	$	27,784		$	29,002		$	(1,218	)		(4.2	)	%
As a % of net premiums earned		27.3	%		27.6	%		(0.3	) %
Other underwriting expenses		8,179			9,438			(1,259	)		(13.3	)	%
Underwriting expenses	$	35,963		$	38,440		$	(2,477	)		(6.4	)	%
Underwriting expense ratio		35.3	%		36.6	%		(1.3	) %

Three Months Ended September 30,
2010 vs. 2009 Expenses and Expense Ratio	2010			2009			Change			% Change
	(Dollars in thousands)
Amortization of Deferred Acquisition Costs	$	9,351		$	9,499		$	(148	)		(1.6	) %
As a % of net premiums earned		27.7	%		27.4	%		0.3	%
Other underwriting expenses		2,831			2,869			(38	)		(1.3	) %
Underwriting expenses	$	12,182		$	12,368		$	(186	)		(1.5	) %
Underwriting expense ratio		36.1	%		35.7	%		0.4	%

Underwriting expenses decreased by $2.5 million, or 6.4%, to $36.0 million in the first nine months of 2010, as compared to $38.4 million in the same period in 2009. The decrease in underwriting expenses reflects a 4.2% decrease in the amortization of deferred acquisition costs in 2010 and a 13.3% decrease in other underwriting expenses.

The amortization of deferred acquisition costs decreased in 2010 as compared to 2009 due in part to the decrease in net earned premiums. In addition, in the fourth quarter of 2008 the Group undertook an expense reduction program, resulting in significant cost reductions which are reflected in lower other underwriting expenses and lower amortization of deferred acquisition costs. Because some of the expenses eliminated were capitalized in deferred acquisition costs as of December 31, 2008, they were included in the 2009 deferred acquisition costs amortization, thus generating a favorable comparison for 2010 amortization of deferred acquisition costs when compared to that of 2009. Underwriting expenses also reflect lower share-based compensation expense and lower net contingent commission expense, and in 2010 some ceded contingent commission.

The expense reduction effort is ongoing, and continues to reduce the Group’s underwriting and other expenses.

The underwriting expense ratio for the first nine months of 2010 is 35.3%, down from 36.6% in the first nine months of 2009, and reflects the impact of the 2008 and 2009 expense reduction efforts noted above.

Federal income tax

Nine Months Ended September 30
2010 vs. 2009 Income Taxes	2010			2009			Change		% Change
	(Dollars in thousands)
Income before income taxes	$	15,440		$	13,847		$	1,593		11.5	%
Income taxes		4,322			3,652			670		18.3	%
Net income	$	11,118		$	10,195		$	923		9.1	%
Effective tax rate		28.0	%		26.4	%

Three Months Ended September 30
2010 vs. 2009 Income Taxes	2010			2009		Change		% Change
	(Dollars in thousands)
Income before income taxes	$	5,407		$	4,865	$	542		11.1	%
Income taxes		1,541			1,311		230		17.5	%
Net income	$	3,866		$	3,554	$	312		8.8	%
Effective tax rate		28.5	%		26.9	%

Federal income tax expense was $4.3 million and $3.7 million for the first nine months of 2010 and 2009, respectively. The effective tax rate was 28.0% and 26.4% for 2010 and 2009, respectively. The 2010 effective tax rate was higher than that of 2009 because the 2010 pre-tax income was relatively higher since it did not include the significant level of other-than-temporary impairments on our investments reflected in the 2009 pre-tax income, and because tax-advantaged income (interest on tax-free municipal bonds in this case) was lower in 2010 as part of an effort by the Group to avoid municipal bonds that present potential credit risk.

LIQUIDITY AND CAPITAL RESOURCES

Our insurance companies generate sufficient funds from their operations and maintain adequate liquidity in their investment portfolios to fund operations, including the payment of claims. The primary source of funds to meet the demands of claim settlements and operating expenses are premium collections, investment earnings and maturing investments.

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 the MIG (which has modest expenses and does not currently, or for the foreseeable future, need a significant regular source of cash flow to cover these expenses other than its debt service on its indebtedness to MIC, its quarterly dividend to shareholders, and the funding necessary for any stock repurchases pursuant to the currently authorized stock repurchase program) is dividend payments and other fees received from the insurance 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 MIC’s conversion from a mutual to a stock form of organization (the “Conversion”). MIG also has access to an existing credit line under which it can draw up to $7.5 million dollars.

On April 16, 2008, the Holding Company was authorized by the Board of Directors to repurchase, at management’s discretion, up to 5% of its outstanding stock. Any such purchases will be funded by the Holding Company’s existing resources, dividends from subsidiaries, or the credit line, or any combination of these resources. As of September 30, 2010, the MIG had purchased, pursuant to the authority granted by the Board on April 16, 2008, a total of 123,300 shares of outstanding stock at an average cost of $15.89 per share, and is holding the stock as treasury stock. MIG has not purchased any of its shares since early in 2009, except for modest amounts in connection with tax withholdings on the vesting of restricted stock, in order to conservatively position itself in a marketplace in which capital is not easily replaced.

The Group’s insurance companies are required by law to maintain a certain minimum surplus on a statutory basis, and are subject to risk-based capital requirements and to regulations under which payment of a dividend from statutory surplus may be restricted and may require prior approval of regulatory authorities.

Additionally, there is a covenant in the Group’s line of credit agreement that requires the Group to maintain at least 50% of its insurance company subsidiaries’ capacity to pay dividends without state regulation pre-approval.

As part of the funding of the acquisition of FPIG, MIG entered into a loan agreement with MIC, by which it advanced to MIG on September 30, 2005, a loan of $10 million with a self-liquidating 20-year note and a fixed interest rate of 4.75%, repayable in 20 equal annual installments.

MIG has no special limitations on its ability to take periodic dividends from its insurance subsidiaries except for the normal dividend restrictions administered by the respective domiciliary state regulators as described above. The Group believes that the resources available to MIG will be adequate for it to meet its obligation under the note to MIC, the line of credit and its other expenses.

MIG began paying quarterly dividends of $0.05 per common share in the second quarter of 2006. On April 16, 2008, MIG’s Board of Directors increased the quarterly dividend from $0.05 per share of common stock to $0.075 per share of common stock, effective with the payment of the June 27, 2008 dividend. On April 14, 2010, MIG’s Board of Directors increased the quarterly dividend from $0.075 per share of common stock to $0.10 per share of common stock, effective with the payment of the June 28, 2010 dividend. The amount of dividends paid for the first nine months of 2010 and 2009 totaled $1.7 million and $1.4 million, respectively. The shareholder dividend was funded from the Group’s insurance companies, for which approval was sought and received (where necessary) from each of the insurance companies’ primary regulators.

The Group maintains an Employee Stock Ownership Plan (ESOP), which purchased 626,111 shares from the Group at the time of the Conversion in return for a note bearing interest at 4% on the principal amount of $6,261,110. MIC makes annual contributions to the ESOP sufficient for it to make its required annual payment under the terms of the loan to MIG. 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 Group’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. Shareholder dividends received on unallocated ESOP shares are used to pay down principal and interest owed on the loan to the Holding Company.

All dividends from MIC to MIG require prior notice to the Pennsylvania Insurance Department. All “extraordinary” dividends require advance approval from that regulator. A dividend is deemed “extraordinary” if, when aggregated with all other dividends paid within the preceding 12 months, the dividend exceeds the greater of (a) statutory net income, excluding unrealized capital gains, for the preceding calendar year or (b) 10% of statutory surplus as of the preceding December 31. As of September 30, 2010, the amount available for payment of dividends from MIC in 2010 (including dividends already paid in 2010), without the prior approval, is approximately $7.6 million.

All dividends from FPIC to FPIG require prior notice to the California Department of Insurance. All “extraordinary” dividends require advance approval from that regulator. A dividend is deemed “extraordinary” if, when aggregated with all other dividends paid within the preceding 12 months, the dividend exceeds the greater of (a) statutory net income for the preceding calendar year, or (b) 10% of statutory surplus as of the preceding December 31. As of September 30, 2010, the amount available for payment of dividends from FPIC in 2010, including dividends already paid in 2010, without the prior approval, is approximately $7.2 million.

The Group 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 increases automatically each year by 1% of the number of shares outstanding at the end of the preceding year. At September 30, 2010, the number of shares authorized under the plan has been increased under this provision to 1,270,514 shares. For the nine months ended September 30, 2010, the Group made no grants of restricted stock and stock options. In addition, there were no forfeitures of restricted stock and 39,900 options were exercised during the first nine months of 2010.

Total assets increased 3.0%, or $18.0 million, to $613.4 million, at September 30, 2010, as compared to $595.4 million at December 31, 2009. The Group’s cash and invested assets increased $24.8 million, or 6.0%, primarily due to net cash provided by operating activities and unrealized holding gains on securities. Premiums receivable increased $2.3 million, or 6.4%, primarily due to timing differences in the recording and collecting of premium. Reinsurance receivables decreased $4.2 million, or 5.3%, reflecting the decrease in ceded loss and loss adjustment expense reserves. Prepaid reinsurance premiums increased $0.4 million, or 7.5% reflecting seasonality of premium writings. Deferred policy acquisition costs decreased $35,000, or $0.2%, and deferred policy acquisition costs as a percentage of net unearned premiums were 27.0% at September 30, 2010 compared to 26.7% at the end of 2009. Accrued investment income decreased $0.4 million, or 10.4%, and the accrued investment income to invested assets ratio decreased slightly to 0.9% at September 30, 2010 from 1.1% at December 31, 2009. The accrued investment income to invested assets ratio is subject to some variability due to timing of interest payments from period to period, as well as to change in the unrealized appreciation of the portfolio. Property and equipment decreased $0.9 million, or 4.2%. Construction of a new building in Rocklin, California was completed at the end of 2009 and there were no significant additions of other property and equipment during the first nine months of 2010. Deferred income taxes decreased by $4.8 million, or 97.8% from December 31, 2009 primarily reflecting the change in deferred taxes on the unrealized gains on securities. Other assets increased $0.9 million or 24.4%, from December 31, 2009, primarily due to an increase in prepaid assets and an increase in the federal income tax recoverable balance.

Total liabilities deceased by 0.5% or $2.3 million, to $432.8 million at September 30, 2010 as compared to $435.1 million at December 31, 2009. Loss and loss adjustment expense reserves decreased 0.5% to $309.7 million from $311.3 million at year end 2009, reflecting the decrease in exposures in recent years from the decline in direct and net premiums written and earned. The unearned premium liability decrease of $0.5 million or 0.7% to $76.1 million at September 30, 2010 reflects the change in written premiums as a result of the timing of premium writings throughout the year. Accounts payable and accrued expenses declined by $1.4 million or 11.3% primarily due to payments for agents profit sharing, state premium taxes, Group employee bonuses and other payments normally made in the first quarter of each year. Other reinsurance balances increased approximately $0.9 million or 6.9% from December 31, 2009. The increase in the reinsurance balances payable is primarily due to payments received in the first quarter on reinsurance receivables that offset against reinsurance payables on contracts that have a right of offset provision, reducing the offset and thereby increasing the payable. Other liabilities increased by $0.3 million to $4.4 million at September 30, 2010 primarily due to the change in the fair value of the interest-rate swap.

Total stockholders’ equity increased $20.4 million, or 12.7%, to $180.6 million, at September 30, 2010, from $160.2 million at December 31, 2009, primarily due to net income of $11.1 million, changes in unrealized holding gains and losses on securities of $9.7 million, issuance of common stock of $0.5 million and ESOP shares committed to be allocated to participants of $0.8 million, offset by stockholder dividends of $1.7 million.

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 Group was not a party to any unconsolidated arrangement or financial instrument with special purpose entities or other vehicles at September 30, 2010, which would give rise to previously undisclosed market, credit or financing risk.

The Group has no significant contractual obligations at September 30, 2010, other than its insurance obligations under its policies of insurance, trust preferred securities interest and principal, a line of credit obligation, and operating lease obligations. Projected cash disbursements pertaining to these obligations have not materially changed since December 31, 2009, and the Group expects to have the resources to pay these obligations as they come due.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

General

Market risk is the risk that we will incur losses due to adverse changes in market rates and prices. We have exposure to three principal types of market risk through our investment activities: interest rate risk, credit risk and equity risk. Our primary market risk exposure is to changes in interest rates. We have not entered, and do not plan to enter, into any derivative financial instruments for hedging, trading or speculative purposes, other than the remaining interest rate swap agreements that hedge the floating rate trust preferred securities which were assumed as part of the FPIG acquisition.

Interest Rate Risk

Interest rate risk is the risk that we will incur economic losses due to adverse changes in interest rates. Our exposure to interest rate changes primarily results from our significant holdings of fixed rate investments. Fluctuations in interest rates have a direct impact on the market valuation of these securities. Our available-for-sale portfolio of fixed-income securities is carried on the balance sheet at fair value. Therefore, an adverse change in market prices of these securities caused by movement in interest rates would generally result in unrealized losses reflected in Accumulated other comprehensive income in the balance sheet.

Credit Risk

The quality of our interest-bearing investments is generally good. Our fixed maturity securities portfolio at September 30, 2010 had an average rating of Aa3/AA.

Municipal Bond Holding Exposure

The overall credit quality, based on weighted average ratings of Standard & Poor’s (S&P) or Moody’s where S&P rating is unavailable, of the total market value of $130 million municipal fixed income portfolio is:

o “AA+” including insurance enhancement

o “AA” excluding insurance enhancement (using underlying ratings)

· 100% of the underlying ratings are “A-” or better

· 90.5% of the underlying ratings are “AA-” or better

The municipal fixed income portfolio with insurance enhancement represents $85.5 million, or 66% of the total municipal fixed income portfolio.

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

The municipal fixed income portfolio without insurance enhancement represents $44.6 million, or 34% of the total municipal fixed income portfolio.

o The average credit quality of those securities without enhancement is “AA+”

The following represents the Group’s municipal fixed income portfolio as of September 30, 2010:

	Average Credit Rating	Market Value		% of Total Muni Portfolio			Unrealized Gain

Uninsured Securities	AA+	$	44,657,166		34	%	$	3,041,645

Securities with Insurance Enhancement	AA+		85,470,114		66	%		6,104,909

Total		$	130,127,280		100	%	$	9,146,554

The following represents the Group’s ratings on the bonds in the municipal fixed income portfolio as of September 30, 2010:

						Insured Bonds					Insured Bonds					Total Municipal Bonds					Total Municipal Bonds
	Non-Insured					(with insured					(with underlying					(with insured					(with underlying
	Bonds					rating)					credit rating)					ratings)					credit ratings)

Rating	Market Value		%			Market Value		%			Market Value		%			Market Value		%			Market Value		%

AAA	$	24,744,573		55.4	%	$	38,342,845		44.8	%	$	16,248,123		19.0	%	$	63,087,418		48.5	%	$	40,992,696		31.5	%
AA+		3,536,900		7.9	%		24,023,067		28.1	%		29,085,288		34.0	%		27,559,967		21.2	%		32,622,188		25.0	%
AA		8,191,010		18.4	%		15,374,299		18.0	%		20,678,736		24.2	%		23,565,309		18.1	%		28,869,746		22.2	%
AA-		7,597,698		17.0	%		5,950,857		7.0	%		7,851,935		9.2	%		13,548,555		10.4	%		15,449,633		11.9	%
A+		-		0.0	%		1,779,046		2.1	%		3,505,486		4.1	%		1,779,046		1.4	%		3,505,486		2.7	%
A		586,985		1.3	%		-		0.0	%		6,044,873		7.1	%		586,985		0.4	%		6,631,858		5.1	%
A-		-		0.0	%		-		0.0	%		2,055,673		2.4	%		-		0.0	%		2,055,673		1.6	%

	$	44,657,166				$	85,470,114				$	85,470,114				$	130,127,280				$	130,127,280
	AA+					AA+					AA					AA+					AA

Insured municipals generally carry two ratings: a standalone rating based on individual fundamentals and an insured rating based on the claims paying ability of the issuer’s monoline insurer (if the issue is insured). When a monoline insurer is downgraded, the underlying rating on insured municipal bonds will reflect either the municipality’s or revenue bonds’ underlying credit rating itself or the insured rating, whichever is higher. Since the monoline insurers have experienced sharp downgrades, the monoline enhancement provides limited credit quality improvement to the aggregate portfolio versus the average weighted sum of the underlying credit ratings.

As of September 30, 2010, all of the Group’s municipal bonds carry an underlying rating of at least an A- or better by S&P or Moody’s.

Structured Product Exposure

The Group’s structured product exposure includes residential mortgage backed securities (MBS), asset backed securities (ABS) and commercial mortgage backed securities (CMBS). The total book value, as of September 30, 2010, was $67.6 million and represented 17.8% of the total invested fixed income assets.

MBS positions totaled $48 million (book value), representing 70.9% of the total structured product holdings. The MBS securities consist of both pass-through and collateralized mortgage obligation (CMO) structures. The pass-throughs are all agency sponsored securities and have a Aaa/AAA rating. Among the CMO’s, a majority are agency sponsored and as a result, also have a Aaa/AAA rating. The non-agency backed securities represent 2.4% of the CMO holdings and 0.5% of total MBS holdings; of the two non-agency CMO’s , one was rated AA by S&P and another CC by S&P.

ABS holdings totaled $15.6 million (book value), representing 23.1% of the total structured product holdings. The ABS securities consist of a diversified blend of subsectors including automobile loan and credit card receivables, home equity, rate reduction bonds etc.. Outside of three holdings of home equity (sub-prime), all other ABS securities are rated Aaa/AAA by Moody’s and S&P.

The ABS home equity subsector totaled $0.46 million (book value) on September 30, 2010, representing 2.94% of the ABS holdings, 0.689% of the total structured product holdings, and 0.12% of total fixed income portfolio holdings. The subprime related exposure consists of three individual securities, of which two are insured by monolines against default of principal and interest. However, since FGIC is no longer rated and AMBAC has been downgraded to Caa2/R, the two insured securities are now rated according to the higher of the underlying collateral or the monoline rating. One bond is rated Caa1/D while the other is rated Ca/D. With regard to the remaining security without monoline insurance, it is rated C/B by Moody’s and S&P, respectively.

The CMBS holding totaled $4 million (book value) on September 30, 2010, representing 6% of the total structured product holdings. All CMBS holdings are AAA rated and backed by government agencies.

There are two sectors where the Group has indirect exposure to subprime securities. These are the U.S. agency and investment grade corporate sectors. As of September 30, 2010, the Group held $11.3 million (book value) of agency debentures, consisting predominately of Fannie Mae, Federal Home Loan Bank, Freddie Mac, and Federal Farm Credit Bank securities.

The second sector of the market in which the Group has indirect exposure to subprime securities is the investment grade corporate market. As of September 30, 2010, the Group’s portfolio held $173.2 million (book value) of corporate bonds inclusive of FDIC-insured debt issued under the TLGP program. Among the corporate credit exposure, $37.6 million (market value) or 23.1% of the holdings, were non-insured financial issues. While the outlook of the banking, brokerage, finance, insurance and REIT sectors of the investment grade corporate market has improved, challenges and uncertainty remain. It is encouraging that banks in general have seen lower levels of charge-offs, early-stage delinquencies, and non-performing assets recently, and the expectation of further reductions going forward were driving the lower loss provisions in the most recent quarter. It is expected that these issuers will continue to pay principal and interest in accordance with original terms.

Equity Risk

Equity price risk is the risk that we will incur economic losses due to adverse changes in equity prices. Our exposure to changes in equity prices primarily results from our holdings of common stocks, mutual funds and other equities. Our portfolio of equity securities is carried on the balance sheet at fair value. Therefore, an adverse change in market prices of these securities would result in losses reflected in the balance sheet.

Item 4 . Controls and Procedures

Under the supervision and with the participation of our management, including the President and Chief Executive Officer and the Senior Vice President of Finance and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of September 30, 2010. Based on that evaluation, the President and Chief Executive Officer and the Senior Vice President of Finance and Chief Financial Officer have concluded that these disclosure controls and procedures were effective as of September 30, 2010. There were no changes in our internal control over financial reporting during the three months ended September 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II — OTHER INFORMATION

Item 1. Legal Proceedings.

None

Item 1A. Risk Factors.

There are no material changes from the risk factors previously disclosed in the registrant’s Form 10-K for the year ended December 31, 2009.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None

Item 3. Defaults Upon Senior Securities

None

Item 4. (Removed and Reserved)

Item 5. Other Information

None

Item 6. Exhibits

Exhibits

Exhibit No.	Title
3.1	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)

SIGNATURES

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

	MERCER INSURANCE GROUP, INC. (Registrant)

Dated: November 9, 2010	By:	/s/ Andrew R. Speaker
		Andrew R. Speaker,
		President and Chief Executive Officer

Dated: November 9, 2010	By:	/s/ David B. Merclean
		David B. Merclean,
		Senior Vice President of Finance and Chief Financial Officer
		Principal Accounting Officer

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