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 60 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 insurance 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 nine 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 19 percent of consolidated premiums earned during the first nine 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

Catastrophe and storm losses

The Company has historically reported catastrophe and storm losses net of development experienced on prior years' catastrophe and storm losses. This has not had a material impact on the reported amounts of catastrophe and storm losses because development associated with prior years' catastrophe and storm losses has historically been relatively small. During 2009, however, the Company has experienced a larger amount of favorable development related to the record amount of catastrophe and storm losses incurred in 2008. As a result, the Company is changing its reporting of catastrophe and storm losses to include only the current accident year events. Any material amount of development experienced on prior accident years' catastrophe and storm losses will be reported separately. This change in reporting does not have any impact on the Company's results of operations; it only affects the reported amounts of catastrophe and storm losses.

Loss and settlement expense reserves

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. There is one exception, however, because, as noted above, any material amounts of development experienced on prior accident years' catastrophe and storm reserves will be reported. This is due to the fact that reserves associated with catastrophe and storm losses are event-specific, and are initially established on the basis of known exposures and estimates of loss frequency and severity. As actual loss information is reported, management is better able to project the ultimate cost of a loss event. Changes in the projected ultimate cost of prior accident years' loss events are reported as development, and this development has an impact on the Company's results of operations because the total amount of the Company's carried reserves has changed.

To understand management's rationale for discontinuing the disclosure of quarterly development amounts, 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. Non-catastrophe and storm IBNR and certain settlement expense reserves are established through an actuarial process for each line of business. These IBNR and 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. Development also occurs if the reserve on an open claim is changed. This development, when aggregated, would appear to have a direct impact on the Company's results of operations. However, because management strives to maintain a reasonably consistent level of overall reserve adequacy at each quarterly reporting date, the financial impact resulting from the development of prior accident year reserves is, in effect, being offset by the establishment of equally adequate reserves on current accident year claims and/or a change in the bulk case loss reserve.

Development associated with bulk reserves (i.e., non-catastrophe and storm 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 reported incurred 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 results of operations. There may be other factors impacting the development amounts associated with bulk reserves; however, management does not attempt to quantify such factors and is therefore unable to determine what, if any, impact such factors may have on the Company's results of operations.

Management intends to continue utilizing 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 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 total loss and settlement expense reserves are maintained at a reasonably consistent level of adequacy, the financial impact resulting from the development of prior accident years' reserves will, for all practical purposes, be offset by the establishment of equally adequate reserves on current accident year claims. Therefore, the primary driver of the Company's results of operations is not accident year performance, but rather current period claims experience. 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 nine months
ended September 30, 2009 and 2008 are as follows:


                                      Three months ended           Nine months ended
                                         September 30,               September 30,
($ in thousands)                      2009          2008          2009          2008
Property and Casualty Insurance
Premiums earned                     $  77,929     $  78,960     $ 230,558     $ 236,514
Losses and settlement expenses         58,006        65,503       149,833       179,681
Acquisition and other expenses         27,156        24,915        88,448        80,469
Underwriting loss                   $  (7,233 )   $ (11,458 )   $  (7,723 )   $ (23,636 )

Loss and settlement expense ratio        74.4 %        83.0 %        65.0 %        76.0 %
Acquisition expense ratio                34.9 %        31.5 %        38.3 %        34.0 %
Combined ratio                          109.3 %       114.5 %       103.3 %       110.0 %

Catastrophe and storm losses        $  16,354     $  15,263     $  28,708     $  43,969




                                      Three months ended          Nine months ended
                                         September 30,              September 30,
($ in thousands)                       2009          2008         2009          2008
Reinsurance
Premiums earned                     $   18,803     $ 17,450     $  54,727     $ 51,491
Losses and settlement expenses          14,270       16,141        41,384       42,307
Acquisition and other expenses           4,305        4,131        11,740       12,388
Underwriting profit (loss)          $      228     $ (2,822 )   $   1,603     $ (3,204 )

Loss and settlement expense ratio         75.9 %       92.5 %        75.6 %       82.2 %
Acquisition expense ratio                 22.9 %       23.7 %        21.5 %       24.0 %
Combined ratio                            98.8 %      116.2 %        97.1 %      106.2 %

Catastrophe and storm losses        $     (322 )   $  4,825     $   2,237     $  6,457