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 81 percent of consolidated premiums earned during the first half 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 19 percent of consolidated premiums earned during the first half 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 is no longer disclosing quarterly development amounts.

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, which 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 consistency of reserve adequacy. If reserves are maintained at a consistent level of adequacy (and all else remains equal), then development should be fairly consistent from year to year. Therefore, the source of earnings (current or prior accident years) is not relevant. The most recent actuarial analysis of the Company's loss and settlement expense reserves indicates a level of adequacy reasonably consistent with other recent evaluations.

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 and six months
ended June 30, 2009 and 2008 are as follows:

                                      Three months ended           Six months ended
                                           June 30,                    June 30,
($ in thousands)                      2009          2008          2009          2008
Property and Casualty Insurance
Premiums earned                     $  76,547     $  78,464     $ 152,629     $ 157,554
Losses and settlement expenses         50,982        66,543        91,827       114,178
Acquisition and other expenses         29,812        27,900        61,292        55,554
Underwriting loss                   $  (4,247 )   $ (15,979 )   $    (490 )   $ (12,178 )

Loss and settlement expense ratio        66.6 %        84.8 %        60.2 %        72.5 %
Acquisition expense ratio                38.9 %        35.6 %        40.1 %        35.2 %
Combined ratio                          105.5 %       120.4 %       100.3 %       107.7 %

Catastrophe and storm losses        $   7,974     $  21,968     $  10,218     $  27,616

                                      Three months ended          Six months ended
                                           June 30,                   June 30,
($ in thousands)                       2009          2008         2009         2008
Reinsurance
Premiums earned                     $   19,551     $ 18,153     $ 35,924     $ 34,041
Losses and settlement expenses          14,182       13,794       27,114       26,166
Acquisition and other expenses           3,944        3,856        7,435        8,257
Underwriting profit (loss)          $    1,425     $    503     $  1,375     $   (382 )

Loss and settlement expense ratio         72.5 %       76.0 %       75.5 %       76.9 %
Acquisition expense ratio                 20.2 %       21.2 %       20.7 %       24.2 %
Combined ratio                            92.7 %       97.2 %       96.2 %      101.1 %

Catastrophe and storm losses        $    1,091     $  1,550     $  2,559     $  1,632



                                             Three months ended           Six months ended
                                                  June 30,                    June 30,
($ in thousands)                             2009          2008          2009          2008
Consolidated
REVENUES
Premiums earned                            $  96,098     $  96,617     $ 188,553     $ 191,595
Net investment income                         11,173        12,000        23,450        23,940
Realized investment gains (losses)               905           371        (7,687 )      (2,541 )
Other income                                     198           160           351           308
                                             108,374       109,148       204,667       213,302
LOSSES AND EXPENSES
Losses and settlement expenses                65,164        80,337       118,941       140,344
Acquisition and other expenses                33,756        31,756        68,727        63,811
Interest expense                                 225           225           450           439
Other expense                                    338           410           731         1,228
                                              99,483       112,728       188,849       205,822

Income (loss) before income tax expense
(benefit)                                      8,891        (3,580 )      15,818         7,480
Income tax expense (benefit)                   1,924        (2,640 )       3,047           201
Net income (loss)                          $   6,967     $    (940 )   $  12,771     $   7,279

Net income (loss) per share                $    0.53     $   (0.07 )   $    0.96     $    0.53

Loss and settlement expense ratio               67.8 %        83.1 %        63.1 %        73.3 %
Acquisition expense ratio                       35.1 %        32.9 %        36.4 %        33.3 %
Combined ratio                                 102.9 %       116.0 %        99.5 %       106.6 %

Catastrophe and storm losses               $   9,065     $  23,518     $  12,777     $  29,248

The Company reported net income of $6,967,000 ($0.53 per share) for the three months ended June 30, 2009, compared to a net loss of $940,000 ($0.07 per share) for the same period in 2008. For the six months ended June 30, 2009, net income increased to $12,771,000 ($0.96 per share) from $7,279,000 ($0.53 per share) for the same period in 2008. These improvements reflect a significant decline in catastrophe and storm losses from the record amounts experienced in 2008; however, the decline in catastrophe and storm losses was partially offset by an increase in large losses (defined as losses greater than $250,000, excluding catastrophe and storm losses). Net income for the six months ended June 30, 2009 also reflects a significant amount of "other-than-temporary" investment impairment losses recognized during the first quarter of 2009.

Premiums Earned

Premiums earned decreased 0.5 percent and 1.6 percent to $96,098,000 and $188,553,000 for the three months and six months ended June 30, 2009 from $96,617,000 and $191,595,000 for the same periods in 2008. These decreases are primarily attributed to the moderate, but steady, decline in the property and casualty insurance segment's overall premium rate levels that has occurred during the past few years as a result of competitive market conditions associated with the current soft market. The Company has been able to implement moderate price increases in select lines of business and geographic locations during the first six months of 2009 and continues to see a trend toward smaller industry rate reductions, evidence that the soft market is beginning to ease. The Company expects some rate improvement in the second half of the year; however, due to the lagging effect of prior rate level reductions the Company's overall premium rate level on an earned basis is expected to decline approximately 4.1 percent in 2009. Reinsurance pricing has improved somewhat during the first half of 2009, though not to the extent anticipated at the beginning of the year.

Premiums earned for the property and casualty insurance segment decreased 2.4 percent and 3.1 percent to $76,547,000 and $152,629,000 for the three months and six months ended June 30, 2009 from $78,464,000 and $157,554,000 for the same periods in 2008. These decreases are primarily attributed to the continued decline in overall premium rate levels, but also reflect a lack of growth in insured exposures and strategic decisions to reduce the Company's personal lines presence in certain territories. New business policy counts for the first half of 2009 were up 4.9 percent in commercial lines and 24.2 percent in personal lines, with new business premium increasing 10.5 percent and 32.8 percent, respectively. The percentage increase in personal lines new business premium includes approximately 9 percentage points associated with a change from 6 month auto policies to annual auto policies. The growth in personal lines new business premium is occurring in select territories which management has identified as having greater profit potential. Retention rates remain above industry averages, with commercial lines and personal lines at approximately 85 percent and 88 percent, respectively. Commercial lines retention is slightly lower than the past several years, reflecting the ongoing competitiveness of the commercial lines marketplace and management's willingness to walk away from underpriced business. During the first half of 2009, new business premium was not sufficient to offset the premium lost from declining rate levels and business not retained, resulting in a 1.1 percent decline in written premiums.

Premiums earned for the reinsurance segment increased 7.7 percent and 5.5 percent to $19,551,000 and $35,924,000 for the three months and six months ended June 30, 2009 from $18,153,000 and $34,041,000 for the same periods in 2008. These increases are primarily associated with a moderate increase in reinsurance premium rate levels, an increase in reinstatement premium income and the addition of a few new accounts. These increases were partially offset by a decline in business assumed from the Mutual Reinsurance Bureau (MRB) pool and a decrease in the estimate of earned but not reported (EBNR) premiums. Due to a loss of capital in the insurance industry as a result of the economic recession, reinsurance premium rate levels have firmed (somewhat quicker than the firming in direct insurance premium rates) and the reinsurance segment obtained moderate increases on most of its renewals during the first six months of 2009.

Losses and settlement expenses

The loss and settlement expense ratio decreased to 67.8 percent and 63.1 percent for the three months and six months ended June 30, 2009 from 83.1 percent and 73.3 percent for the same periods in 2008. These decreases are primarily attributed to a significant decline in catastrophe and storm losses from the record amounts experienced in 2008; however, the improvement in catastrophe and storm losses was partially offset by an increase in large losses. In addition, the loss and settlement expense ratio continues to be negatively impacted by prior premium rate level reductions that are currently being earned.

The loss and settlement expense ratio for the property and casualty insurance segment decreased to 66.6 percent and 60.2 percent for the three months and six months ended June 30, 2009 from 84.8 percent and 72.5 percent for the same periods in 2008. The decrease in catastrophe and storm losses accounted for declines of approximately 18 and 11 percentage points in the loss and settlement expense ratios for the three and six months ended June 30, 2009, respectively. Catastrophe and storm losses accounted for 6.8 percentage points of the loss and settlement expense ratio during the first half of 2009, which is slightly higher than the 10-year average of 6.5 percentage points. However, if the record 2008 catastrophe and storm losses are excluded from the calculation, the 2009 catastrophe and storm losses are 1.4 percentage points higher than the 9-year average of 5.4 percentage points. Large losses increased to $7,356,000 and $15,370,000 for the three and six months ended June 30, 2009 from $6,330,000 and $12,336,000 for the same periods in 2008, which equates to increases of approximately 1.5 and 2.3 percentage points on the loss and settlement expense ratio for the three and six months ended June 30, 2009. Average claim frequency and severity were mixed during the first half of 2009, with average claim frequency down slightly and average claim severity up approximately 1 percentage point. Prior premium rate level reductions continue to have a negative impact on the loss and settlement expense ratio, but to a lesser extent due to the reduction in the magnitude of rate decreases implemented in 2009.

The loss and settlement expense ratio for the reinsurance segment decreased to 72.5 percent and 75.5 percent for the three months and six months ended June 30, 2009 from 76.0 percent and 76.9 percent for the same periods in 2008. These decreases reflect a relatively large increase in IBNR reserves that occurred during the second quarter of 2008, as well as a decline in reported losses during 2009. These improvements were partially offset by an increase in catastrophe and storm losses.

Acquisition and other expenses

The acquisition expense ratio increased to 35.1 percent and 36.4 percent for the three months and six months ended June 30, 2009 from 32.9 percent and 33.3 percent for the same periods in 2008. These increases are attributed to the property and casualty insurance segment and primarily reflect higher expenses for employee benefits, contingent salaries and executive bonuses. The increase for the first six months of 2009 also reflects an increase in policyholder dividend expense. A decline in commission expense in the reinsurance segment partially offset the increase in expenses in the property and casualty insurance segment.

For the property and casualty insurance segment, the acquisition expense ratio increased to 38.9 percent and 40.1 percent for the three months and six months ended June 30, 2009 from 35.6 percent and 35.2 percent for the same periods in 2008. The increase for the three months ended June 30, 2009 reflects higher expenses for postretirement benefits, contingent salaries and executive bonuses, and employee health care benefits. These increases were partially offset by an increase in the estimate of deferrable acquisition expenses, which resulted in an increase in the deferred policy acquisition costs asset and a corresponding decline in acquisition and other expenses. The increase for the six months ended June 30, 2009 also reflects an increase in policyholder dividend expense, which is largely due to an increase in the estimated dividend payable on several safety dividend groups, as well as an increase in the estimated aggregate amount of dividends payable on individual workers' compensation policies. The increase in postretirement benefits expense is due to a significant increase in the amount of actuarial losses being amortized and a decrease in the expected return on plan assets, both resulting from the severe decline in the financial markets during 2008.

For the reinsurance segment, the acquisition expense ratio decreased to 20.2 percent and 20.7 percent for the three months and six months ended June 30, 2009 from 21.2 percent and 24.2 percent for the same periods in 2008. These decreases are largely attributed to the relatively high ratios reported in 2008 due to an increase in the estimate of commission expense on earned but not reported premiums. The decline in the ratio for the three months ended June 30, 2009 was limited to some extent by an increase in contingent commissions.

Investment results

Net investment income decreased 6.9 percent and 2.0 percent to $11,173,000 and $23,450,000 for the three months and six months ended June 30, 2009 from $12,000,000 and $23,940,000 for the same periods in 2008. These decreases are attributed to a high level of call activity that occurred on the Company's U.S. Government Agency securities during the first quarter of 2009 as a result of the low interest rate environment, a decline in yield on short-term investments and the elimination of dividends on the Federal Home Loan Mortgage Corporation
(Freddie Mac) and the Federal National Mortgage Association (Fannie Mae)
preferred stocks in 2008. The proceeds from the called securities are being invested in short-term securities until attractive long-term opportunities can be identified.

The Company reported net realized investment gains of $905,000 and $371,000 for the three months ended June 30, 2009 and 2008, respectively, but had net realized investment losses of $7,687,000 and $2,541,000 for the six months ended June 30, 2009 and 2008, respectively. "Other-than-temporary" investment impairment losses declined to $759,000 in the second quarter of 2009 from $1,695,000 for the same period in 2008. For the first six months of 2009, "other-than-temporary" investment impairment losses totaled $9,117,000, compared to $4,597,000 for the same period in 2008. The impairment losses recognized during 2009 and 2008 were primarily on equity securities, with the exception of a $2,220,000 impairment loss recognized on a fixed maturity security during the first quarter of 2009 due to a bankruptcy filing made by Great Lakes Chemical Corporation, now known as Chemtura Corporation.

The total rate of return on the Company's equity portfolio for the first six months of 2009 was 2.79 percent, which is less than the 3.16 percent total return generated by the S&P 500. During the second quarter, the equity portfolio returned 12.84 percent, compared to 15.93 percent for the S&P 500. The current annualized yield on the bond portfolio is 5.0 percent and the effective duration is 5.36 years.

Income tax

Income tax expense was $1,924,000 for the three months ended June 30, 2009 compared to an income tax benefit of $2,640,000 for the same period in 2008. For the six months ended June 30, 2009, income tax expense increased to $3,047,000 from $201,000 for the same period in 2008. The effective tax rate for the three months ended June 30, 2009 was 21.6 percent, compared to 73.7 percent (calculated on a net loss) for the same period in 2008. The effective tax rate for the six months ended June 30, 2009 was 19.3 percent, compared to 2.7 percent for the same period in 2008. The fluctuations in the effective tax rates reflect changes in pre-tax income earned during these periods relative to the amount of tax-exempt interest income earned.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Liquidity is a measure of a company's ability to generate sufficient cash flows to meet cash obligations. The Company had positive cash flows from operations of $5,429,000 and $5,077,000 during the first six months of 2009 and 2008, respectively. The Company typically generates substantial positive cash flows from operations because cash from premium payments is generally received in advance of cash payments made to settle claims. These positive cash flows provide the foundation of the Company's asset/liability management program and are the primary drivers of the Company's liquidity. When investing funds made available from operations, the Company invests in securities with maturities that approximate the anticipated payments of losses and settlement expenses of the underlying insurance policies. In addition, the Company maintains a portion of its investment portfolio in relatively short-term and highly liquid assets as a secondary source of liquidity should net cash flows from operating activities prove inadequate to fund current operating needs. As of June 30, 2009, the . . .