The term "Company" is used below interchangeably to describe EMC Insurance Group Inc. (Parent Company only) and EMC Insurance Group Inc. and its subsidiaries. The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included under Item 1 of this Form 10-Q, and the Management's Discussion and Analysis of Financial Condition and Results of Operations section of the Company's 2008 Form 10-K.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides issuers the opportunity to make cautionary statements regarding forward-looking statements. Accordingly, any forward-looking statement contained in this report is based on management's current beliefs, assumptions and expectations of the Company's future performance, taking into account all information currently available to management. These beliefs, assumptions and expectations can change as the result of many possible events or factors, not all of which are known to management. If a change occurs, the Company's business, financial condition, liquidity, results of operations, plans and objectives may vary materially from those expressed in the forward-looking statements. The risks and uncertainties that may affect the actual results of the Company include, but are not limited to, the following:
· catastrophic events and the occurrence of significant severe weather conditions;

· the adequacy of loss and settlement expense reserves;

· state and federal legislation and regulations;

· changes in the property and casualty insurance industry, interest rates or the performance of financial markets and the general economy;

· rating agency actions;

· "other-than-temporary" investment impairment losses; and

· other risks and uncertainties inherent to the Company's business, including those discussed under the heading "Risk Factors" in the Company's Annual Report on Form 10-K.

Management intends to identify forward-looking statements when using the words "believe", "expect", "anticipate", "estimate", "project" or similar expressions. Undue reliance should not be placed on these forward-looking statements.

COMPANY OVERVIEW

The Company, a 59.3 percent owned subsidiary of Employers Mutual Casualty Company (Employers Mutual), is an insurance holding company with operations in property and casualty insurance and reinsurance.

Property and casualty operations are conducted through three subsidiaries and represent the most significant segment of the Company's business, totaling approximately 82 percent of consolidated premiums earned during the first three months of 2009. The property and casualty insurance operations are integrated with the property and casualty insurance operations of Employers Mutual through participation in a reinsurance pooling agreement. Because the Company conducts its property and casualty insurance operations together with Employers Mutual through the reinsurance pooling agreement, the Company shares the same business philosophy, management, employees and facilities as Employers Mutual and offers the same types of insurance products.

Reinsurance operations are conducted through EMC Reinsurance Company, and represented approximately 18 percent of consolidated premiums earned during the first three months of 2009. The principal business activity of EMC Reinsurance Company is to assume, through a quota share reinsurance agreement, the voluntary reinsurance business written directly by Employers Mutual with unaffiliated insurance companies (subject to certain limited exceptions). Effective January 1, 2009, EMC Reinsurance Company began writing Germany-based assumed reinsurance business on a direct basis as a result of regulatory changes in Germany.

In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the interim financial statements have been included. The results of operations for the interim periods reported are not necessarily indicative of results to be expected for the year.

MANAGEMENT ISSUES AND PERSPECTIVES

The Company has historically reported on a quarterly basis the amount of development (both favorable and adverse) experienced on prior years' reserves. Because of the potential for confusion among investors regarding the perceived impact development has on the Company's results of operations, management has determined that beginning in the second quarter, quarterly development amounts will not be disclosed.

To understand the rationale supporting this decision, it is necessary to have a proper understanding of the Company's reserving process. Management does not use accident year loss picks to establish the Company's carried reserves. Case loss and incurred but not reported (IBNR) reserves, as well as settlement expense reserves, are established independently of each other and added together to get the Company's total loss and settlement expense reserve. The Company's reserving methodology was expanded during 2007 to include bulk case loss reserves. These bulk reserves supplement the aggregate reserves of the individual claim files and are used to help maintain a consistent level of overall case loss reserve adequacy.

Case loss reserves are the individual reserves established for each reported claim based on the specific facts of each claim. Individual case loss reserves are based on the probable, or most likely, outcome for each claim, with probable outcome defined as what is most likely to be awarded if the case were to be decided by a civil court in the applicable venue or, in the case of a workers' compensation case, by that state's Workers' Compensation Commission. Bulk case loss reserves are actuarially derived and are allocated to the various accident years on the basis of the underlying aggregated case loss reserves of the applicable lines of business. IBNR and certain settlement expense reserves are established through an actuarial process for each line of business. The IBNR and certain settlement expense reserves are allocated to the various accident years using historical claim emergence and settlement payment patterns; other settlement expense reserves are allocated to the various accident years on the basis of case and bulk loss reserves. These components collectively comprise management's best estimate of the loss and settlement expense reserve.

When an individual claim is settled, development occurs if the claim is settled for more or less than the carried reserve. The impact that development associated with prior accident year individual case loss reserves has on the Company's results of operations may be misinterpreted, however, because management monitors the overall adequacy of the case loss reserves on a quarterly basis and makes adjustments to the bulk case loss reserve, if necessary, to maintain a consistent level of overall case loss reserve adequacy.

Development associated with bulk reserves (i.e., IBNR reserves, bulk case loss reserves and settlement expense reserves) further complicates the issue because these reserves are established in total and are then allocated to the various accident years for financial reporting purposes. At each quarterly reporting date, a certain portion of these bulk reserves are re-allocated from prior accident years to the current accident year. This re-allocation of the bulk reserves will generate development in each prior accident year's results because the decrease in any prior accident year's reserve amount will likely differ from the change in that prior accident year's paid amount. As a result, development resulting from the re-allocation of bulk reserves between accident years is merely a by-product of that process and does not have any impact on the Company's combined ratio or results of operations, because the total amount of the bulk reserves has not changed.

It is management's intention to continue to apply the current reserving methodology on a consistent basis. For that reason and the reasons noted above, management believes that the composition of the Company's underwriting results between the current and prior accident years creates potential for misinterpretation and, in any event, is not material or relevant to an understanding of the Company's results of operations. From management's perspective, the more important issue is where the Company's reserves fall within the range of actuarial indications. In other words, if reserves are maintained at a consistent level of adequacy (and all else remains equal), then development should continue at roughly the same level in future years. Therefore, the source of earnings (current or prior accident years) is not relevant.

CRITICAL ACCOUNTING POLICIES

The accounting policies considered by management to be critically important in the preparation and understanding of the Company's financial statements and related disclosures are presented in the Management's Discussion and Analysis of Financial Condition and Results of Operations section of the Company's 2008 Form 10-K.

RESULTS OF OPERATIONS

Segment information and consolidated net income for the three months ended March
31, 2009 and 2008 are as follows:


                                                            Three months ended
                                                                 March 31,
($ in thousands)                                            2009          2008
Property and Casualty Insurance
Premiums earned                                           $  76,082     $  79,090
Losses and settlement expenses                               40,845        47,635
Acquisition and other expenses                               31,480        27,654
Underwriting profit                                       $   3,757     $   3,801

Loss and settlement expense ratio                              53.7 %        60.2 %
Acquisition expense ratio                                      41.4 %        35.0 %
Combined ratio                                                 95.1 %        95.2 %

Losses and settlement expenses:
Insured events of current year                            $  57,684     $  61,361
Decrease in provision for insured events of prior years     (16,839 )     (13,726 )

Total losses and settlement expenses                      $  40,845     $  47,635

Catastrophe and storm losses                              $   2,244     $   5,648

                                                            Three months ended
                                                                 March 31,
($ in thousands)                                             2009          2008
Reinsurance
Premiums earned                                           $   16,373     $ 15,888
Losses and settlement expenses                                12,932       12,372
Acquisition and other expenses                                 3,491        4,401
Underwriting loss                                         $      (50 )   $   (885 )

Loss and settlement expense ratio                               79.0 %       77.9 %
Acquisition expense ratio                                       21.3 %       27.7 %
Combined ratio                                                 100.3 %      105.6 %

Losses and settlement expenses:
Insured events of current year                            $   17,151     $ 14,535
Decrease in provision for insured events of prior years       (4,219 )     (2,163 )

Total losses and settlement expenses                      $   12,932     $ 12,372

Catastrophe and storm losses                              $    1,468     $     82