Forward-Looking Statements
In this Quarterly Report on Form 10-Q, we discuss and make statements regarding our intentions, beliefs, current expectations, and projections regarding our company's future operations and performance. Such statements are "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are often identified by words such as "anticipates," "believes," "expects," "will," "should," and "intends" and their negatives. We caution prospective investors that such forward-looking statements are not guarantees of future performance. Risks and uncertainties are inherent in our future performance. Factors that could cause actual results to differ materially from those indicated by such forward-looking statements include, but are not limited to, those discussed under Item 1A. "Risk Factors" below. These risk factors may not be exhaustive. We operate in a continually changing business environment and new risk factors may emerge from time to time. We can neither predict such new risk factors nor can we assess the impact, if any, of such new risk factors on our businesses or the extent to which any factor or combination of factors may cause actual results to differ materially from those expressed or implied in any forward-looking statements in this report. In light of these risks, uncertainties, and assumptions, the forward-looking events discussed in this report might not occur. We make forward-looking statements based on currently available information and assume no obligation to update these statements due to changes in underlying factors, new information, future developments, or otherwise.
Introduction
We offer property and casualty insurance products and human resource administration outsourcing services through our various subsidiaries. We classify our businesses into three operating segments: (i) Insurance Operations, which consists of commercial lines ("Commercial Lines") and personal lines, including our flood line of business ("Personal Lines"); (ii) Investments; and
(iii) Human Resource Administration Outsourcing ("HR Outsourcing"). These segments reflect a change from our historical segments of: Insurance Operations, Investments, and Diversified Insurance Services (which included federal flood insurance administrative services ("Flood") and HR Outsourcing). In the process of periodically reviewing our operating segments, we have considered the provisions set forth in accordance with Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("FAS 131"), and have reclassified our Flood operations to be included within our Insurance Operations segment, which reflects the way we are now managing this business. We believe these reporting changes will better enable investors to view us the way our management views our operations and provide more consistency with how our peers report their business. Our revised segments are reflected throughout this report for all periods presented. The purpose of the Management's Discussion and Analysis ("MD&A") is to provide an understanding of the consolidated results of operations and financial condition and known trends and uncertainties that may have a material impact in future periods. Consequently, investors should read the MD&A in conjunction with the consolidated financial statements in our Annual report on Form 10-K for the year ended December 31, 2008 ("2008 Annual Report"). In the MD&A, we will discuss and analyze the following:
• Critical Accounting Policies and Estimates;

• Financial Highlights of Results for Second Quarter 2009 and Six Months 2009;

• Results of Operations and Related Information by Segment;

• Federal Income Taxes;

• Financial Condition, Liquidity, and Capital Resources;

• Off-Balance Sheet Arrangements; and

• Contractual Obligations and Contingent Liabilities and Commitments.

Critical Accounting Policies and Estimates These unaudited interim consolidated financial statements include amounts based on our informed estimates and judgments for those transactions that are not yet complete. Such estimates and judgments affect the reported amounts in the consolidated financial statements. Those estimates and judgments most critical to the preparation of the financial statements involved the following:
(i) reserves for losses and loss expenses; (ii) deferred policy acquisition costs; (iii) pension and postretirement benefit plan actuarial assumptions;
(iv) other-than-temporary investment impairments; (v) goodwill; and
(vi) reinsurance. These estimates and judgments require the use of assumptions about matters that are highly uncertain and, therefore, are subject to change as facts and circumstances develop. If different estimates and judgments had been applied, materially different amounts might have been reported in the financial statements. For additional information regarding our critical accounting policies, refer to our 2008 Annual Report, pages 43 through 51, except for the other-than-temporary-impairment ("OTTI") discussion, which is updated below. Other-Than-Temporary Investment Impairments An investment in a fixed maturity, equity security or an other investment (i.e., an alternative investment), is impaired if its fair value falls below its book value and the decline is considered to be other than temporary. We regularly review our entire investment portfolio for declines in fair value. If we believe that a decline in the value of an available-for-sale ("AFS") security is temporary, we record the decline as an unrealized loss in accumulated other comprehensive income ("OCI"). Temporary declines in the value of a held-to-maturity ("HTM") security are not recognized in the financial statements. Our assessment of a decline in fair value includes judgment as to the financial position and future prospects of the entity that issued the investment security, as well as a review of the security's underlying collateral. Broad changes in the overall market or interest rate environment generally will not lead to a write-down.
Our evaluation for OTTI of a fixed maturity security or a short-term investment includes, but is not limited to, the evaluation of the following factors:
• Whether the decline appears to be issuer or industry specific;

• The degree to which the issuer is current or in arrears in making principal and interest payments on the fixed maturity security;

• The issuer's current financial condition and ability to make future scheduled principal and interest payments on a timely basis;

• Stress testing of projected cash flows under various economic and default scenarios;

• Buy/hold/sell recommendations published by outside investment advisors and analysts; and

• Relevant rating history, analysis and guidance provided by rating agencies and analysts.

If there is a decline in fair value on a fixed maturity security that we intend to sell or, more-likely-than-not, may be required to sell, the impairment is considered other-than-temporary and is charged to earnings as a component of realized losses. However, if we do not intend to sell the security and if we do not believe we will be required to sell the security, we then determine whether the amortized cost basis of the security is expected to be recovered. If we do not expect recovery to occur, the impairment is considered other than temporary and is charged to earnings as a component of realized losses. When assessing the recoverability of the amortized cost basis, we compare the present value of the cash flows that we expect to be collected from the security to the amortized cost basis of the security. Any shortfall in the present value of the cash flows expected to be collected in relation to the amortized cost basis is referred to as a credit impairment. Any shortfall between the present value of expected cash flows to be collected in relation to the fair value of the security is referred to as a non-credit impairment. Credit impairments are charged to earnings as a component of realized losses while non-credit impairments are recorded to OCI as a component of unrealized losses.

We perform impairment assessments for the structured securities in our fixed maturity portfolio (including, but not limited to, commercial mortgage-backed securities ("CMBS"), residential mortgage-backed securities ("RMBS"), asset-backed securities ("ABS"), and collateralized debt obligations ("CDOs")), and corporate debt, including an evaluation of the underlying collateral of these structured securities. This assessment takes into consideration the length of time for which the security has been in an unrealized loss position, but primarily focuses on the performance of the underlying collateral under various economic and default scenarios that may involve subjective judgments and estimates by management. Our modeling of these securities involves various factors, such as projected default rates, the nature and realizable value of the collateral, the ability of the security to make scheduled payments, historical performance and other relevant economic and performance factors. If an OTTI determination is made, we perform a discounted cash flow analysis to ascertain the amount of the credit impairment.
Our evaluation for OTTI of an equity security, includes, but is not limited to, the evaluation of the following factors:
• Whether the decline appears to be issuer or industry specific;

• The relationship of market prices per share to book value per share at the date of acquisition and date of evaluation;

• The price-earnings ratio at the time of acquisition and date of evaluation;

• The financial condition and near-term prospects of the issuer, including any specific events that may influence the issuer's operations, coupled with our intention to hold the securities in the near term;

• The recent income or loss of the issuer;

• The independent auditors' report on the issuer's recent financial statements;

• The dividend policy of the issuer at the date of acquisition and the date of evaluation;

• Any buy/hold/sell recommendations or price projections published by outside investment advisors;

• Any rating agency announcements; and

• The length of time and the extent to which the fair value has been less than the carrying value.

If there is a decline in fair value on an equity security that we do not intend to hold, or if we determine the decline is other than temporary, we write down the carrying value of the investment and record the charge through earnings as a component of realized losses.
Our evaluation for OTTI of an other investment (i.e., an alternative investment) includes, but is not limited to, conversations with the management of the alternative investment concerning the following:
• The current investment strategy;

• Changes made or future changes to be made to the investment strategy;

• Emerging issues that may affect the success of the strategy; and

• The appropriateness of the valuation methodology used regarding the underlying investments.

If there is a decline in fair value on an other investment that we do not intend to hold, or if we determine the decline is other than temporary, we write down the carrying value of the investment and record the charge through earnings as a component of realized losses.

Financial Highlights of Results for Second Quarter 2009 and Six Months 2009

                                                     Unaudited                                  Unaudited
                                                   Quarter ended          Change            Six Months ended          Change
Financial Highlights                                 June 30,              % or                 June 30,               % or
($ in thousands, except per share amounts)      2009          2008        Points           2009          2008         Points
Revenues                                      $ 388,249       433,353         (10 )%     $ 757,814       872,400          (13 )%
Net income                                       15,688        28,651         (45 )          2,811        49,154          (94 )
Diluted net income per share                       0.29          0.54         (46 )           0.05          0.92          (95 )
Diluted weighted-average outstanding shares      53,234        53,064           -           53,181        53,461           (1 )
GAAP combined ratio                                98.3 %        99.8        (1.5 )pts        99.6 %        99.6            - pts
Statutory combined ratio                           98.8 %        98.7         0.1             99.5 %        98.5          1.0
Annualized return on average equity                 6.8 %        11.1        (4.3 )pts         0.6 %         9.4         (8.8 )pts

Net income decreased in Second Quarter and Six Months 2009 compared to the same periods last year due to:

• Pre-tax net investment income that decreased $12.1 million, to $26.4 million, in Second Quarter 2009 and by $34.3 million, to $42.1 million, in Six Months 2009. These decreases were primarily driven by losses on our other investments portfolio, which includes alternative investments. Alternative investment pre-tax losses of $8.9 million in Second Quarter 2009 compared to modest gains in Second Quarter 2008, and pre-tax losses of $29.4 million for Six Months 2009 compared to pre-tax gains of $2.2 million for Six Months 2008. These losses were a result of the continued volatility in the capital markets, dislocation of the credit markets, and reduced values of financial assets globally that has been ongoing since the third quarter of 2008. Our alternative investments, which are accounted for under the equity method, primarily consist of investments in limited partnerships that for the most part, report results to us, on a one quarter lag. As a result, the above mentioned pre-tax losses reflect the performance for the majority of these investments through March 31, 2009.

• Pre-tax realized losses on investment securities that increased $13.2 million, to $11.3 million, in Second Quarter 2009 and $38.8 million, to $35.3 million, in Six Months 2009 compared to gains in both periods last year. Current year losses are driven by non-cash OTTI charges of $12.5 million in Second Quarter 2009 and $39.6 million in Six Months 2009 due to continuing market volatility and credit deterioration. OTTI charges were $9.8 million in Second Quarter and Six Months 2008. For additional information regarding our realized gains and losses, including the OTTI charges, refer to the section below entitled "Investments."

Partially offsetting the items above were:

• A $5.1 million increase in pre-tax underwriting gains in our Insurance Operations segment, to $6.0 million, in Second Quarter 2009, reflecting improved property losses and favorable prior year reserve development, primarily in our workers compensation line of business, partially offset by higher loss costs in the current accident year on our casualty lines. This quarter, for the first time in nearly four years, we experienced increased Commercial Lines renewal pure price. Each month of the quarter contributed to this increase with April, May, and June coming in at 0.4%, 0.4%, and 1.1%, respectively.

• The aforementioned pre-tax items, as well as a lower expected tax rate in 2009, resulted in a reduction in federal tax expense of $10.5 million, to a federal tax benefit of $3.1 million, in Second Quarter 2009 and a reduction of $24.6 million, to a federal tax benefit of $11.1 million, for Six Months 2009. For additional information, see Note 9. "Federal Income Taxes" in Item 1. "Financial Statements" of this Form 10-Q.

Results of Operations and Related Information by Segment Insurance Operations
Our Insurance Operations segment writes property and casualty insurance business through seven insurance subsidiaries (the "Insurance Subsidiaries"). Our Insurance Operations segment sells property and casualty insurance products and services primarily in 22 states in the Eastern and Midwestern U.S. through approximately 960 independent insurance agencies. Our Insurance Operations segment consists of two components: (i) Commercial Lines, which markets primarily to businesses and represents approximately 85% of net premium written ("NPW"), and (ii) Personal Lines, which markets primarily to individuals and represents approximately 15% of NPW. The underwriting performance of these lines is generally measured by four different statutory ratios: (i) loss and loss expense ratio; (ii) underwriting expense ratio; (iii) dividend ratio; and
(iv) combined ratio. For further details regarding these ratios, see the discussion in the "Insurance Operations Results" section of Item 1. "Business." of our 2008 Annual Report. As mentioned above in the section entitled, "Introduction," effective as of the first quarter of 2009, the results of our Flood operations are now included within our Insurance Operations segment, consistent with our management of these operations. This change to our segment reporting is reflected throughout this report for all periods presented. Summary of Insurance Operations

                                            Unaudited                                  Unaudited
                                          Quarter ended          Change            Six Months ended         Change
All Lines                                   June 30,              % or                 June 30,              % or
($ in thousands)                       2009          2008        Points           2009          2008        Points
GAAP Insurance Operations Results:
NPW                                  $ 365,263       389,394          (6 )%       741,046       781,348          (5 )%

Net premium earned ("NPE")             358,311       377,254          (5 )        722,184       760,641          (5 )
Less:
Losses and loss expenses incurred      239,049       252,804          (5 )        491,243       505,880          (3 )
Net underwriting expenses incurred     112,418       121,937          (8 )        226,595       249,914          (9 )
Dividends to policyholders                 812         1,579         (49 )          1,277         2,114         (40 )

Underwriting income                  $   6,032           934         546 %          3,069         2,733          12 %

GAAP Ratios:
Loss and loss expense ratio               66.7 %        67.0        (0.3 )pts        68.0 %        66.5         1.5 pts
Underwriting expense ratio                31.4 %        32.4        (1.0 )           31.4 %        32.8        (1.4 )
Dividends to policyholders ratio           0.2 %         0.4        (0.2 )            0.2 %         0.3        (0.1 )

Combined ratio                            98.3 %        99.8        (1.5 )           99.6 %        99.6           -

Statutory Ratios:
Loss and loss expense ratio               66.7 %        66.9        (0.2 )           68.0 %        66.4         1.6
Underwriting expense ratio                31.9 %        31.4         0.5             31.3 %        31.8        (0.5 )
Dividends to policyholders ratio           0.2 %         0.4        (0.2 )            0.2 %         0.3        (0.1 )

Combined ratio                            98.8 %        98.7         0.1 pts         99.5 %        98.5         1.0 pts

• NPW decreased in both Second Quarter and Six Months 2009 compared to Second Quarter and Six Months 2008 due to the continued competitive insurance marketplace and the economic recession, which has led to reduced levels of exposure given the reduction in payroll consistent with the current unemployment level. These factors are evidenced by the following:

• Reductions in endorsement and audit activity of $14.7 million, to a net return premium of $19.7 million, in Second Quarter 2009 and $29.1 million, to a net return premium of $37.2 million, in Six Months 2009; and

• Reductions in net renewals of $14.1 million, to $317.0 million, in Second Quarter 2009 and $18.7 million, to $642.1 million, in Six Months 2009 driven by the impact of unemployment on our workers compensation and general liability lines of business, the trend of which we expect to continue until the unemployment rate stabilizes. Commercial Lines retention decreased two points in Second Quarter 2009, to 76%, and one point, to 77%, in Six Months 2009.

Partially offsetting these items was an improvement in new business premium, which increased by $9.0 million, to $83.3 million, in Second Quarter 2009, and $16.2 million, to $165.2 million, for Six Months 2009, compared to the same periods last year.

Although renewal premiums are down, renewal pure price increased by 0.6% for Second Quarter 2009, resulting in our first quarter of Commercial Lines pure price increases since the first quarter of 2005. Each month of the quarter contributed to this increase with April, May, and June coming in at 0.4%, 0.4%, and 1.1%, respectively. This increase is compared to a decrease in renewal pure price of 3.1% for Second Quarter 2008. For Six Months 2009, renewal pure price was down only 0.1% compared to 3.1% for Six Months 2008.

• NPE decreases in Second Quarter 2009 and Six Month 2009 compared to the same periods last year, are consistent with the fluctuation in NPW for the twelve-month period ended June 30, 2009 as compared to the 12-month period ended June 30, 2008. This decrease was primarily driven by a decrease in exposure coupled with premiums written in 2008, which experienced a decrease in pure price of 3.1% in 2008, earning in over the course of 2009.

• For Second Quarter 2009 compared to Second Quarter 2008, the GAAP loss and loss expense ratio decreased 0.3 points, reflecting: (i) property losses that were $5.3 million, or 0.7 points lower in Second Quarter 2009 at $46.9 million; and (ii) approximately $5 million, or 1.4 points in favorable casualty prior year development, primarily in our workers compensation line of business, compared to immaterial prior year development in Second Quarter 2008. This improvement was partially offset by casualty loss costs that have outpaced premiums in the current accident year.

The 1.5-point increase in the GAAP loss and loss expense ratio for Six Months 2009 compared to Six Months 2008 was primarily attributable to:
(i) property losses that were $2.8 million, or 1.2 points higher in Six Months 2009 at $113.3 million; and (ii) casualty loss costs that have outpaced premiums in the current accident year. Partially offsetting this increase for Six Months 2009 was favorable casualty prior year development of approximately $15 million, or 2.1 points, in Six Months 2009 compared to approximately $3 million, or 0.4 points, in Six Months 2008 due to favorable results in our 2007 and prior accident years for our workers compensation line, partially offset by unfavorable prior year development in our 2008 accident year on this line.

• Decreases in the GAAP underwriting expense ratio in Second Quarter and Six Months 2009, were primarily attributable to several expense initiatives implemented in 2008 and during the first quarter of 2009. These initiatives included, but were not limited to: (i) workforce reductions in 2008 that resulted in a $3.4 million charge in the first quarter of 2008;
(ii) the re-domestication of two of the Insurance Subsidiaries to Indiana in June 2008; (iii) targeted changes to agency commissions that were implemented in most states in July 2008; (iv) the consolidation of our purchasing power with fewer vendors and their desire to lock up longer-term contracts; and (v) the elimination of retiree life insurance benefits for current employees amounting to a benefit of $4.2 million, pre-tax, in the first quarter of 2009.

Insurance Operations Outlook
In 2009, we continue to see a trend toward higher Commercial Lines pricing and fairly aggressive Personal Lines pricing in our Insurance Operations segment. As previously discussed, our Commercial Lines renewal pure pricing increased 0.6% for Second Quarter 2009, the first time in nearly four years during which our renewal pure pricing improved. Each month contributed to the positive quarter with renewal pure price increases of 0.4% in April, 0.4% in May and 1.1% in June. We believe these price increases, which were achieved while maintaining a delicate balance with retention, demonstrate the overall strength of the relationships that we have with our independent agents, even in difficult economic times. In the first quarter of 2009, our pure price decrease of 0.8% was relatively consistent with the 0.6% decrease indicated in the Commercial Lines Insurance Pricing Survey ("CLIPS") first quarter report. As for our Personal Lines operations, we plan on implementing rate increases that are expected to generate approximately $9 million in additional premium in 2009, a portion of which have already been implemented.
Regardless of the encouraging trend in pricing, premium growth continues to be a challenge due to the current difficulties brought on by the current recession and its impact on payrolls, gross receipts, and property values. We continue to believe that the cycle management tools we have in place are performing as we intended in these market conditions. These tools protect us from writing business that we believe will ultimately be unprofitable and, over the long run as pricing and exposures improve, will better position us to return to targeted return on equity levels.

The overall outlook on the industry for 2009 from key rating agencies is as follows:
• A.M. Best - A.M. Best is forecasting that the 2009 commercial lines industry combined ratio will be 105.1% and an overall industry combined ratio of 101.1%. In addition, in their report entitled "3-Month Financial Review," A.M. Best stated that they believe that pricing will begin to firm sometime in the later part of 2009.

• Fitch Ratings ("Fitch") - Fitch is projecting an industry-wide statutory combined ratio of 104.0% for 2009, reflecting their belief that underwriting results will not improve significantly as premiums are projected to grow by less than 1%. In addition, Fitch anticipates that underwriting results will be adversely impacted by higher expense ratios and less favorable reserve development, partially offset by a return to historical average catastrophe loss experience.

• Standard & Poor's ("S&P") - S&P recently released a mid-year update in which they stated that they are maintaining a negative outlook for the U.S. property and casualty insurance industry because of competitive pricing and investment losses that have significantly decreased surplus. S&P believes that rating downgrades will exceed upgrades for the industry during 2009.

Our Commercial Lines business reported a statutory combined ratio of 98.3% and 98.7% for the Second Quarter 2009 and Six Months 2009, respectively, while our Personal Lines business reported a statutory combined ratio of 102.1% and 104.5% . . .