Edgar Filing: EMC INSURANCE GROUP INC

form10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended JUNE 30, 2009

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________to __________________

Commission File Number: 0-10956

EMC INSURANCE GROUP INC.

(Exact name of registrant as specified in its charter)

Iowa		42-6234555
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

717 Mulberry Street, Des Moines, Iowa		50309
(Address of principal executive office)		(Zip Code)

(515) 345-2902

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 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.

x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

¨ Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	x
Non accelerated filer	¨	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

¨ Yes x No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at July 31, 2009
Common stock, $1.00 par value		13,241,205

Total pages 58

TABLE OF CONTENTS

		PAGE
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements	3
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48
Item 4.	Controls and Procedures	49

PART II	OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 4.	Submission of Matters to a Vote of Security Holders	50
Item 6.	Exhibits	52

Signatures		53

Index to Exhibits		54

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PART I.

FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	June 30,		December 31,
	2009		2008
ASSETS
Investments:
Fixed maturities:
Securities held-to-maturity, at amortized cost (fair value $506,763 and $572,852)	$	462,077	$	534,759
Securities available-for-sale, at fair value (amortized cost $763,299,308 and $821,306,951)		771,346,101		812,868,835
Fixed maturity securities on loan:
Securities available-for-sale, at fair value (amortized cost $22,844,456 and $8,923,745)		23,296,381		8,950,052
Equity securities available-for-sale, at fair value (cost $70,433,905 and $75,025,666)		91,138,757		88,372,207
Other long-term investments, at cost		57,546		66,974
Short-term investments, at cost		115,804,852		54,373,082
Total investments		1,002,105,714		965,165,909

Balances resulting from related party transactions with
Employers Mutual:
Reinsurance receivables		33,986,093		36,355,047
Prepaid reinsurance premiums		4,358,746		4,157,055
Deferred policy acquisition costs		35,180,992		34,629,429
Other assets		2,894,716		2,534,076

Cash		219,774		182,538
Accrued investment income		10,128,567		12,108,129
Deferred policy acquisition costs		4,331		-
Accounts receivable		258,581		23,041
Income taxes recoverable		3,485,219		11,859,539
Deferred income taxes		25,099,680		30,819,592
Goodwill		941,586		941,586
Securities lending collateral		24,082,180		9,322,863
Total assets	$	1,142,746,179	$	1,108,098,804

See accompanying Notes to Consolidated Financial Statements.

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EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	June 30,		December 31,
	2009		2008
LIABILITIES
Balances resulting from related party transactions with
Employers Mutual:
Losses and settlement expenses	$	560,571,821	$	573,031,853
Unearned premiums		154,036,757		154,446,205
Other policyholders' funds		8,697,986		6,418,870
Surplus notes payable		25,000,000		25,000,000
Indebtedness to related party		8,964,127		20,667,196
Employee retirement plans		21,332,191		19,331,007
Other liabilities		32,691,818		16,964,452

Unearned premiums		21,655		-
Securities lending obligation		24,082,180		9,322,863
Total liabilities		835,398,535		825,182,446

STOCKHOLDERS' EQUITY
Common stock, $1 par value, authorized 20,000,000 shares; issued and outstanding, 13,238,284 shares in 2009 and 13,267,668 shares in 2008		13,238,284		13,267,668
Additional paid-in capital		95,193,211		95,639,349
Accumulated other comprehensive income (loss)		6,327,009		(9,930,112	)
Retained earnings		192,589,140		183,939,453
Total stockholders' equity		307,347,644		282,916,358
Total liabilities and stockholders' equity	$	1,142,746,179	$	1,108,098,804

See accompanying Notes to Consolidated Financial Statements.

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EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

All balances presented below, with the exception of net investment income, realized investment losses, income tax expense (benefit) and other items specifically identified, are the result of related party transactions with Employers Mutual.

	Three months ended						Six months ended
	June 30,						June 30,
	2009			2008			2009			2008
REVENUES
Premiums earned:
Related party transactions	$	96,093,871		$	96,617,696		$	188,510,222		$	191,595,481
Other transactions		4,135			-			42,332			-
Total premiums earned		96,098,006			96,617,696			188,552,554			191,595,481
Investment income, net		11,172,618			11,999,354			23,449,853			23,939,587
Net realized investment gains, excluding impairment losses on available-for-sale securities		1,664,373			2,066,268			1,429,413			2,056,375
Total other-than-temporary impairment losses on available-for-sale securities		(759,206	)		(1,695,298	)		(9,116,556	)		(4,597,382	)
Portion of impairment losses on fixed maturity available-for-sale securities recognized in other comprehensive income (before taxes)		-			-			-			-
Net impairment losses on available-for-sale securities		(759,206	)		(1,695,298	)		(9,116,556	)		(4,597,382	)
Net realized investment gains (losses)		905,167			370,970			(7,687,143	)		(2,541,007	)
Other income		198,272			160,571			351,258			307,898
		108,374,063			109,148,591			204,666,522			213,301,959
LOSSES AND EXPENSES
Losses and settlement expenses		65,164,251			80,336,977			118,940,865			140,343,685
Dividends to policyholders		1,926,476			1,851,840			5,756,082			2,276,008
Amortization of deferred policy acquisition costs:
Related party transactions		21,524,535			21,894,170			43,531,396			44,405,267
Other transactions		(2,380	)		-			1,465			-
Total amortization of deferred policy acquisition costs		21,522,155			21,894,170			43,532,861			44,405,267
Other underwriting expenses		10,307,318			8,010,436			19,437,601			17,129,901
Interest expense		225,000			225,000			450,000			439,375
Other expense		337,922			410,019			731,154			1,228,016
		99,483,122			112,728,442			188,848,563			205,822,252
Income (loss) before income tax expense (benefit)		8,890,941			(3,579,851	)		15,817,959			7,479,707

INCOME TAX EXPENSE (BENEFIT)
Current		1,846,402			(1,627,267	)		6,427,384			1,080,498
Deferred		77,407			(1,012,254	)		(3,380,420	)		(879,447	)
		1,923,809			(2,639,521	)		3,046,964			201,051
Net income (loss)	$	6,967,132		$	(940,330	)	$	12,770,995		$	7,278,656

Net income (loss) per common share -basic and diluted	$	0.53		$	(0.07	)	$	0.96		$	0.53

Dividend per common share	$	0.18		$	0.18		$	0.36		$	0.36

Average number of common shares outstanding -basic and diluted		13,235,928			13,653,462			13,242,831			13,715,977

See accompanying Notes to Consolidated Financial Statements.

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EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three months ended June 30,						Six months ended June 30,
	2009			2008			2009			2008

Net income (loss)	$	6,967,132		$	(940,330	)	$	12,770,995		$	7,278,656

OTHER COMPREHENSIVE INCOME (LOSS)
Change in unrealized holding gains (losses) on investment securities, before deferred income tax expense (benefit)		25,869,759			(5,151,467	)		17,571,695			(18,026,484	)
Deferred income tax expense (benefit)		9,054,415			(1,803,012	)		6,150,092			(6,309,269	)
		16,815,344			(3,348,455	)		11,421,603			(11,717,215	)

Reclassification adjustment for realized investment (gains) losses included in net income, before income tax (expense) benefit		(905,167	)		(370,970	)		7,687,143			2,541,007
Income tax (expense) benefit		(316,808	)		(129,840	)		2,690,501			889,352
		(588,359	)		(241,130	)		4,996,642			1,651,655

Adjustment associated with Employers Mutual's retirement benefit plans, before deferred income tax expense (benefit):
Net actuarial loss		491,106			14,846			982,212			29,692
Prior service credit		(120,048	)		(120,456	)		(240,096	)		(240,912	)
		371,058			(105,610	)		742,116			(211,220	)
Deferred income tax expense (benefit)		129,870			(36,964	)		259,740			(73,927	)
		241,188			(68,646	)		482,376			(137,293	)

Other comprehensive income (loss)		16,468,173			(3,658,231	)		16,900,621			(10,202,853	)

Total comprehensive income (loss)	$	23,435,305		$	(4,598,561	)	$	29,671,616		$	(2,924,197	)

See accompanying Notes to Consolidated Financial Statements.

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EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six months ended June 30,
	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	12,770,995		$	7,278,656

Adjustments to reconcile net income to net cash provided by operating activities:
Balances resulting from related party transactions with Employers Mutual:
Losses and settlement expenses		(12,460,032	)		12,110,640
Unearned premiums		(409,448	)		(4,344,529	)
Other policyholders' funds		2,279,116			(1,535,063	)
Indebtedness to related party		(11,703,069	)		1,878,865
Employee retirement plans		2,743,300			920,323
Reinsurance receivables		2,368,954			(2,940,907	)
Prepaid reinsurance premiums		(201,691	)		565,697
Commission payable		(4,450,923	)		(6,000,936	)
Interest payable		(225,925	)		(333,125	)
Prepaid assets		(653,181	)		(1,545,365	)
Deferred policy acquisition costs		(551,563	)		489,291
Stock-based compensation plans		196,148			132,265
Other, net		1,617,535			(2,675,632	)

Accrued investment income		1,979,562			57,257
Accrued income tax:
Current		8,374,319			(820,492	)
Deferred		(3,380,420	)		(879,447	)
Realized investment losses		7,687,143			2,541,007
Deferred policy acquisition costs		(4,331	)		-
Unearned premiums		21,655			-
Accounts receivable		(235,540	)		(215,731	)
Amortization of premium/discount on fixed maturity securities		(333,601	)		394,028
		(7,341,992	)		(2,201,854	)
Net cash provided by operating activities	$	5,429,003		$	5,076,802

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EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

(Unaudited)

	Six months ended June 30,
	2009			2008
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities of fixed maturity securities held-to-maturity	$	72,905		$	17,801
Purchases of fixed maturity securities available-for-sale		(137,197,792	)		(217,113,824	)
Disposals of fixed maturity securities available-for-sale		199,569,328			265,721,315
Purchases of equity securities available-for-sale		(25,203,582	)		(19,273,464	)
Disposals of equity securities available-for-sale		24,146,973			17,662,297
Disposals of other long-term investments		9,428			17,507
Net purchases of short-term investments		(61,431,769	)		(41,271,600	)
Net cash (used in) provided by investing activities		(34,509	)		5,760,032

CASH FLOWS FROM FINANCING ACTIVITIES
Balances resulting from related party transactions with Employers Mutual:
Issuance of common stock through Employers
Mutual's incentive stock option plans		114,033			797,291
Dividends paid to Employers Mutual		(2,825,227	)		(2,825,227	)

Repurchase of common stock		(706,483	)		(7,016,961	)
Dividends paid to public stockholders		(1,939,581	)		(2,110,205	)
Net cash used in financing activities		(5,357,258	)		(11,155,102	)

NET INCREASE (DECREASE) IN CASH		37,236			(318,268	)
Cash at the beginning of the year		182,538			262,963

Cash at the end of year	$	219,774		$	(55,305	)

See accompanying Notes to Consolidated Financial Statements.

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EMC INSURANCE GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.	BASIS OF PRESENTATION

EMC Insurance Group Inc., a 59 percent owned subsidiary of Employers Mutual Casualty Company (Employers Mutual), is an insurance holding company with operations in property and casualty insurance and reinsurance. Both commercial and personal lines of insurance are written, with a focus on medium-sized commercial accounts. The term “Company” is used interchangeably to describe EMC Insurance Group Inc. (Parent Company only) and EMC Insurance Group Inc. and its subsidiaries.

The accompanying unaudited consolidated financial statements have been prepared on the basis of U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The Company has evaluated all subsequent events through the date the financial statements were issued (August 7, 2009). 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. The consolidated balance sheet at December 31, 2008 has been derived from the audited financial statements at that date, but does not include all of the information and notes required by GAAP for complete financial statements.

Certain amounts previously reported in prior years’ consolidated financial statements have been reclassified to conform to current year presentation.

In reading these financial statements, reference should be made to the Company’s 2008 Form 10-K or the 2008 Annual Report to Stockholders for more detailed footnote information.

2.	NEW ACCOUNTING PRONOUNCEMENTS

In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles.” SFAS 168 establishes the FASB Accounting Standards Codification (the “Codification”) as the single source of authoritative GAAP recognized by the FASB that is to be applied to non-governmental entities. SFAS 168 is effective for interim and annual reporting periods ending after September 15, 2009. The Codification will supersede all the existing non-SEC accounting and reporting standards upon its effective date. The adoption of SFAS 168 will change the basis for reference to GAAP guidance in the Company’s financial statements, but will have no effect on the consolidated financial position or operating results of the Company.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events,” which sets forth the period after the balance sheet date during which management shall evaluate events or transactions for potential recognition or disclosure, the circumstances under which an entity shall recognize events or transactions occurring after the balance sheet date, and disclosures to make about events or transactions that occur after the balance sheet date. This pronouncement is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of SFAS 165 had no effect on the consolidated financial position or operating results of the Company. The Company evaluates subsequent events through the date its financial statements are issued (filed with the Securities and Exchange Commission).

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In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS 157 were effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company adopted the requirements of SFAS 157 effective January 1, 2008, which resulted in additional disclosures, but no impact on the consolidated financial position or operating results. In October 2008, the FASB issued Staff Position (FSP) FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market For That Asset Is Not Active,” which was followed in April 2009 by FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” Both of these FSPs are intended to clarify the application of SFAS 157 in markets that are not, at the measurement date, providing fair values representative of orderly transactions. FSP FAS 157-3 was effective upon issuance, adoption of which had no effect on the consolidated financial position or operating results of the Company. FSP FAS 157-4 was effective for interim and annual reporting periods ending after June 15, 2009. Adoption of this FSP had no effect on the consolidated financial position or operating results of the Company.

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” which provides guidance for evaluating “other-than-temporary” impairments for fixed maturity securities, and requires changes to the financial statement presentation and disclosure of fixed maturity and equity security “other-than-temporary” impairments. FSP FAS 115-2 and FAS 124-2 requires that the evaluation of an impaired fixed maturity security include an assessment of whether the entity has the intent to sell the security and if it is more likely than not to be required to sell the security before recovery of its amortized cost basis. In addition, if the present value of cash flows expected to be collected is less than the amortized cost of the security, a credit loss is deemed to exist and the security is considered “other-than-temporarily” impaired. The portion of the impairment related to a credit loss is recognized through earnings and the impairment related to other factors is recognized through other comprehensive income. This FSP was effective for interim and annual reporting periods ending after June 15, 2009. A cumulative effect adjustment from retained earnings to accumulated other comprehensive income is required for previously “other-than-temporarily” impaired fixed maturity securities still owned that have a non-credit component of the loss as of the date of adoption. The adoption of this FSP resulted in a cumulative effect adjustment to increase retained earnings and decrease accumulated other comprehensive income by $643,500, net of tax. Adoption of this FSP also resulted in additional disclosures for fixed maturity and equity securities.

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” which requires disclosure in interim financial statements of the fair value disclosures required annually by SFAS 107 “Disclosure about Fair Value of Financial Statements.” This FSP was effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this FSP resulted in the addition of fair value disclosures, but had no effect on the consolidated financial position or operating results of the Company.

In December 2008, the FASB issued FSP FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets,” which provides guidance on employers’ disclosures about plan assets of defined benefit pension or other postretirement plans. This FSP is intended to address a lack of transparency surrounding the types of assets and associated risks in an employer’s defined benefit pension or other postretirement plans. The plan asset disclosures required by this FSP are effective for fiscal years ending after December 15, 2009. The adoption of FSP FAS 132(R)-1 will result in additional disclosures, but will have no effect on the consolidated financial position or operating results of the Company.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations,” a replacement of SFAS No. 141, “Business Combinations”. SFAS 141(R) retains the fundamental requirements of SFAS No. 141 in that the acquisition method of accounting (referred to as “purchase method” in SFAS 141) be used for all business combinations. SFAS 141(R) is to be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Adoption of this statement had no effect on the consolidated financial position or operating results of the Company.

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3.	REINSURANCE

The effect of reinsurance on premiums written and earned, and losses and settlement expenses incurred, for the three months and six months ended June 30, 2009 and 2008 is presented below.

	Three months ended June 30, 2009
	Property and casualty insurance			Reinsurance			Total
Premiums written
Direct	$	58,396,662		$	-		$	58,396,662
Assumed from nonaffiliates		643,243			19,305,942			19,949,185
Assumed from affiliates		85,426,091			-			85,426,091
Ceded to nonaffiliates		(5,512,106	)		(714,568	)		(6,226,674	)
Ceded to affiliates		(58,396,662	)		-			(58,396,662	)
Net premiums written	$	80,557,228		$	18,591,374		$	99,148,602

Premiums earned
Direct	$	56,484,963		$	-		$	56,484,963
Assumed from nonaffiliates		643,396			20,222,739			20,866,135
Assumed from affiliates		81,632,124			-			81,632,124
Ceded to nonaffiliates		(5,728,790	)		(671,463	)		(6,400,253	)
Ceded to affiliates		(56,484,963	)		-			(56,484,963	)
Net premiums earned	$	76,546,730		$	19,551,276		$	96,098,006

Losses and settlement expenses incurred
Direct	$	43,767,201		$	-		$	43,767,201
Assumed from nonaffiliates		455,029			14,847,866			15,302,895
Assumed from affiliates		51,620,942			147,163			51,768,105
Ceded to nonaffiliates		(1,093,945	)		(812,804	)		(1,906,749	)
Ceded to affiliates		(43,767,201	)		-			(43,767,201	)
Net losses and settlement expenses incurred	$	50,982,026		$	14,182,225		$	65,164,251

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	Three months ended June 30, 2008
	Property and casualty insurance			Reinsurance			Total
Premiums written
Direct	$	52,557,837		$	-		$	52,557,837
Assumed from nonaffiliates		556,874			17,165,234			17,722,108
Assumed from affiliates		84,964,793			-			84,964,793
Ceded to nonaffiliates		(5,603,637	)		(330,143	)		(5,933,780	)
Ceded to affiliates		(52,557,837	)		-			(52,557,837	)
Net premiums written	$	79,918,030		$	16,835,091		$	96,753,121

Premiums earned
Direct	$	53,567,100		$	-		$	53,567,100
Assumed from nonaffiliates		604,284			18,321,294			18,925,578
Assumed from affiliates		83,873,693			-			83,873,693
Ceded to nonaffiliates		(6,014,033	)		(167,542	)		(6,181,575	)
Ceded to affiliates		(53,567,100	)		-			(53,567,100	)
Net premiums earned	$	78,463,944		$	18,153,752		$	96,617,696

Losses and settlement expenses incurred
Direct	$	46,913,731		$	-		$	46,913,731
Assumed from nonaffiliates		585,877			13,891,697			14,477,574
Assumed from affiliates		71,513,549			129,611			71,643,160
Ceded to nonaffiliates		(5,556,328	)		(227,429	)		(5,783,757	)
Ceded to affiliates		(46,913,731	)		-			(46,913,731	)
Net losses and settlement expenses incurred	$	66,543,098		$	13,793,879		$	80,336,977

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	Six months ended June 30, 2009
	Property and casualty insurance			Reinsurance			Total
Premiums written
Direct	$	112,961,069		$	-		$	112,961,069
Assumed from nonaffiliates		1,205,490			36,465,906			37,671,396
Assumed from affiliates		162,582,574			-			162,582,574
Ceded to nonaffiliates		(11,201,606	)		(945,032	)		(12,146,638	)
Ceded to affiliates		(112,961,069	)		-			(112,961,069	)
Net premiums written	$	152,586,458		$	35,520,874		$	188,107,332

Premiums earned
Direct	$	112,012,857		$	-		$	112,012,857
Assumed from nonaffiliates		1,306,851			36,894,202			38,201,053
Assumed from affiliates		162,782,768			-			162,782,768
Ceded to nonaffiliates		(11,461,287	)		(969,980	)		(12,431,267	)
Ceded to affiliates		(112,012,857	)		-			(112,012,857	)
Net premiums earned	$	152,628,332		$	35,924,222		$	188,552,554

Losses and settlement expenses incurred
Direct	$	73,661,643		$	-		$	73,661,643
Assumed from nonaffiliates		896,434			28,017,875			28,914,309
Assumed from affiliates		94,336,249			324,171			94,660,420
Ceded to nonaffiliates		(3,405,490	)		(1,228,374	)		(4,633,864	)
Ceded to affiliates		(73,661,643	)		-			(73,661,643	)
Net losses and settlement expenses incurred	$	91,827,193		$	27,113,672		$	118,940,865

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	Six months ended June 30, 2008
	Property and casualty insurance			Reinsurance			Total
Premiums written
Direct	$	104,617,389		$	-		$	104,617,389
Assumed from nonaffiliates		1,243,221			34,073,538			35,316,759
Assumed from affiliates		164,378,674			-			164,378,674
Ceded to nonaffiliates		(11,324,682	)		(525,810	)		(11,850,492	)
Ceded to affiliates		(104,617,389	)		-			(104,617,389	)
Net premiums written	$	154,297,213		$	33,547,728		$	187,844,941

Premiums earned
Direct	$	105,272,711		$	-		$	105,272,711
Assumed from nonaffiliates		1,395,285			34,460,735			35,856,020
Assumed from affiliates		168,049,448			-			168,049,448
Ceded to nonaffiliates		(11,890,379	)		(419,608	)		(12,309,987	)
Ceded to affiliates		(105,272,711	)		-			(105,272,711	)
Net premiums earned	$	157,554,354		$	34,041,127		$	191,595,481

Losses and settlement expenses incurred
Direct	$	79,505,158		$	-		$	79,505,158
Assumed from nonaffiliates		1,309,462			26,120,470			27,429,932
Assumed from affiliates		119,047,743			277,418			119,325,161
Ceded to nonaffiliates		(6,179,265	)		(232,143	)		(6,411,408	)
Ceded to affiliates		(79,505,158	)		-			(79,505,158	)
Net losses and settlement expenses incurred	$	114,177,940		$	26,165,745		$	140,343,685

Individual lines in the above tables are defined as follows:

“Direct” represents policies issued by the Company’s property and casualty insurance subsidiaries.

“Assumed from nonaffiliates” represents the Company’s property and casualty insurance subsidiaries’ pool participation percentage of involuntary business assumed by the pool participants pursuant to state law. This line also includes business assumed by the reinsurance subsidiary through the quota share agreement, and, starting January 1, 2009, German-based business assumed by the reinsurance subsidiary outside the quota share agreement.

“Assumed from affiliates” represents the property and casualty insurance subsidiaries’ pool participation percentage of all the pool members’ direct business. Losses and settlement expenses incurred also includes claim-related services provided by Employers Mutual that is allocated to the property and casualty insurance subsidiaries and the reinsurance subsidiary.

“Ceded to nonaffiliates” represents the Company’s property and casualty insurance subsidiaries’ pool participation percentage of ceded reinsurance agreements that provide protection to the pool and each of its participants. This line also includes a limited amount of ceded reinsurance that is subject to the quota share agreement.

“Ceded to affiliates” represents the cession of the property and casualty insurance subsidiaries’ direct business to Employers Mutual under the terms of the pooling agreement.

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4.	SEGMENT INFORMATION

The Company’s operations consist of a property and casualty insurance segment and a reinsurance segment. The property and casualty insurance segment writes both commercial and personal lines of insurance, with a focus on medium-sized commercial accounts. The reinsurance segment provides reinsurance for other insurers and reinsurers. The segments are managed separately due to differences in the insurance products sold and the business environments in which they operate.

Summarized financial information for the Company’s segments is as follows:

Three months ended	Property and casualty						Parent
June 30, 2009	insurance			Reinsurance			company			Consolidated
Premiums earned	$	76,546,730		$	19,551,276		$	-		$	96,098,006

Underwriting profit (loss)		(4,247,256	)		1,425,062			-			(2,822,194	)
Net investment income		8,332,816			2,838,412			1,390			11,172,618
Realized investment gains		699,368			205,799			-			905,167
Other income		198,272			-			-			198,272
Interest expense		225,000			-			-			225,000
Other expenses		175,195			(241,995	)		404,722			337,922
Income (loss) before income tax expense (benefit)	$	4,583,005		$	4,711,268		$	(403,332	)	$	8,890,941

Three months ended	Property and casualty						Parent
June 30, 2008	insurance			Reinsurance			company			Consolidated
Premiums earned	$	78,463,944		$	18,153,752		$	-		$	96,617,696

Underwriting profit (loss)		(15,978,968	)		503,241			-			(15,475,727	)
Net investment income		8,947,910			3,010,099			41,345			11,999,354
Realized investment gains		291,436			79,534			-			370,970
Other income		160,571			-			-			160,571
Interest expense		225,000			-			-			225,000
Other expenses		154,370			(77,770	)		333,419			410,019
Income (loss) before income tax expense (benefit)	$	(6,958,421	)	$	3,670,644		$	(292,074	)	$	(3,579,851	)

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Six months ended	Property and casualty						Parent
June 30, 2009	insurance			Reinsurance			company			Consolidated
Premiums earned	$	152,628,332		$	35,924,222		$	-		$	188,552,554

Underwriting profit (loss)		(490,684	)		1,375,829			-			885,145
Net investment income		17,552,335			5,883,461			14,057			23,449,853
Realized investment losses		(5,090,803	)		(2,596,340	)		-			(7,687,143	)
Other income		351,258			-			-			351,258
Interest expense		450,000			-			-			450,000
Other expenses		406,329			(393,124	)		717,949			731,154
Income (loss) before income tax expense (benefit)	$	11,465,777		$	5,056,074		$	(703,892	)	$	15,817,959

Assets	$	871,178,931		$	269,245,170		$	308,328,158		$	1,448,752,259
Eliminations		-			-			(305,034,237	)		(305,034,237	)
Reclassifications		(7,428	)		(964,415	)		-			(971,843	)
Net assets	$	871,171,503		$	268,280,755		$	3,293,921		$	1,142,746,179

Six months ended	Property and casualty						Parent
June 30, 2008	insurance			Reinsurance			company			Consolidated
Premiums earned	$	157,554,354		$	34,041,127		$	-		$	191,595,481

Underwriting loss		(12,177,518	)		(381,862	)		-			(12,559,380	)
Net investment income		17,937,726			5,922,765			79,096			23,939,587
Realized investment losses		(1,767,491	)		(773,516	)		-			(2,541,007	)
Other income		307,898			-			-			307,898
Interest expense		439,375			-			-			439,375
Other expenses		298,876			294,203			634,937			1,228,016
Income (loss) before income tax expense (benefit)	$	3,562,364		$	4,473,184		$	(555,841	)	$	7,479,707

Assets	$	887,165,394		$	270,439,643		$	346,845,999		$	1,504,451,036
Eliminations		-			-			(333,633,938	)		(333,633,938	)
Reclassifications		(27,872	)		(1,162,048	)		-			(1,189,920	)
Net assets	$	887,137,522		$	269,277,595		$	13,212,061		$	1,169,627,178

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The following table displays the net premiums earned of the property and casualty insurance segment and the reinsurance segment for the three months and six months ended June 30, 2009 and 2008, by line of business.

	Three months ended June 30,					Six months ended June 30,
	2009			2008		2009			2008
Property and casualty insurance segment
Commercial lines:
Automobile	$	16,429,213		$	17,131,598	$	32,740,287		$	34,652,631
Property		15,379,498			15,141,220		30,370,053			30,413,109
Workers' compensation		16,349,144			16,227,773		32,646,536			32,171,211
Liability		15,600,105			17,095,169		31,529,611			34,396,379
Other		2,176,665			2,204,430		4,393,531			4,378,590
Total commercial lines		65,934,625			67,800,190		131,680,018			136,011,920

Personal lines:
Automobile		5,821,012			5,627,382		11,440,236			11,352,533
Property		4,648,635			4,881,039		9,220,270			9,876,895
Liability		142,458			155,333		287,808			313,006
Total personal lines		10,612,105			10,663,754		20,948,314			21,542,434
Total property and casualty insurance	$	76,546,730		$	78,463,944	$	152,628,332		$	157,554,354

Reinsurance segment
Pro rata reinsurance:
Property and casualty	$	1,973,799		$	2,291,680	$	3,506,807		$	4,478,236
Property		6,070,557			5,426,036		9,458,991			8,304,828
Marine/Aviation		146,793			270,051		253,977			491,113
Casualty		256,344			502,394		629,580			757,706
Crop		123,809			92,686		187,491			156,513
Total pro rata reinsurance		8,571,302			8,582,847		14,036,846			14,188,396

Excess-of-loss reinsurance:
Property		8,318,855			6,714,961		16,962,129			13,829,803
Casualty		2,663,206			2,855,944		4,937,636			6,023,287
Surety		(2,087	)		-		(12,389	)		(359	)
Total excess-of-loss reinsurance		10,979,974			9,570,905		21,887,376			19,852,731
Total reinsurance	$	19,551,276		$	18,153,752	$	35,924,222		$	34,041,127

Consolidated	$	96,098,006		$	96,617,696	$	188,552,554		$	191,595,481

5.	INCOME TAXES

The actual income tax expense (benefit) for the three months and six months ended June 30, 2009 and 2008 differed from the “expected” income tax expense for those periods (computed by applying the United States federal corporate tax rate of 35 percent to income before income tax expense) primarily due to tax-exempt interest income.

The Company had no provision for uncertain tax positions at June 30, 2009 or 2008. The Company did not recognize any interest or other penalties related to U.S. federal or state income taxes during the three months and six months ended June 30, 2009 or 2008. It is the Company’s accounting policy to reflect income tax penalties as other expense, and interest as interest expense.

The Company files U.S. federal tax returns, along with various state income tax returns. The Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for years before 2005.

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6.	EMPLOYEE RETIREMENT PLANS

The components of net periodic benefit cost for Employers Mutual’s pension and postretirement benefit plans is as follows:

	Three months ended						Six months ended
	June 30,						June 30,
	2009			2008			2009			2008
Pension plans:
Service cost	$	2,297,656		$	2,180,977		$	4,595,312		$	4,361,954
Interest cost		2,569,411			2,350,250			5,138,822			4,700,500
Expected return on plan assets		(2,480,734	)		(3,545,228	)		(4,961,468	)		(7,090,456	)
Amortization of net actuarial loss		1,574,066			46,905			3,148,132			93,810
Amortization of prior service costs		113,074			113,640			226,148			227,280
Net periodic pension benefit cost	$	4,073,473		$	1,146,544		$	8,146,946		$	2,293,088

	Three months ended						Six months ended
	June 30,						June 30,
	2009			2008			2009			2008
Postretirement benefit plans:
Service cost	$	692,870		$	709,539		$	1,385,740		$	1,419,078
Interest cost		1,070,392			1,000,176			2,140,785			2,000,353
Expected return on plan assets		(603,006	)		(507,327	)		(1,206,011	)		(1,014,654	)
Amortization of net actuarial loss		24,514			-			49,028			-
Amortization of prior service credit		(532,814	)		(532,814	)		(1,065,628	)		(1,065,628	)
Net periodic postretirement benefit cost	$	651,956		$	669,574		$	1,303,914		$	1,339,149

Net periodic pension benefit cost allocated to the Company amounted to $1,250,092 and $353,340 for the three months and $2,500,181 and $706,677 for the six months ended June 30, 2009 and 2008, respectively. Net periodic postretirement benefit cost allocated to the Company amounted to $183,243 and $188,079 for the three months and $366,486 and $376,156 for the six months ended June 30, 2009 and 2008, respectively.

Employers Mutual plans to contribute approximately $25,000,000 to the pension plan and approximately $2,800,000 to the VEBA trust in 2009. As of June 30, 2009, Employers Mutual has contributed $1,000,000 to the pension plan and $1,000,000 to the postretirement benefit plan’s VEBA trust.

7.	STOCK-BASED COMPENSATION

The Company has no stock-based compensation plans of its own; however, Employers Mutual has several stock plans which utilize the common stock of the Company. Employers Mutual can provide the common stock required under its plans by: 1) using shares of common stock that it currently owns; 2) purchasing common stock on the open market; or 3) directly purchasing common stock from the Company at the current fair value. Employers Mutual has historically purchased common stock from the Company for use in its stock option plans and its non-employee director stock purchase plan. Employers Mutual generally purchases common stock on the open market to fulfill its obligations under its employee stock purchase plan.

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Employers Mutual maintains three separate stock option plans for the benefit of officers and key employees of Employers Mutual and its subsidiaries. A total of 1,000,000 shares of the Company’s common stock have been reserved for issuance under the 1993 Employers Mutual Casualty Company Incentive Stock Option Plan (1993 Plan), a total of 1,500,000 shares have been reserved for issuance under the 2003 Employers Mutual Casualty Company Incentive Stock Option Plan (2003 Plan) and a total of 2,000,000 shares have been reserved for issuance under the 2007 Employers Mutual Casualty Company Stock Incentive Plan (2007 Plan).

The 1993 Plan and the 2003 Plan provide for awards of incentive stock options only, while the 2007 Plan provides for the awarding of performance shares, performance units, and other stock-based awards, in addition to qualified (incentive) and non-qualified stock options, stock appreciation rights, restricted stock and restricted stock units. All three plans provide for a ten year time limit for granting options. Options can no longer be granted under the 1993 Plan and no additional options will be granted under the 2003 Plan now that Employers Mutual is utilizing the 2007 Plan. Options granted under the plans generally have a vesting period of five years, with options becoming exercisable in equal annual cumulative increments commencing on the first anniversary of the option grant. Option prices cannot be less than the fair value of the common stock on the date of grant.

The Senior Executive Compensation and Stock Option Committee (the “Committee”) of Employers Mutual’s Board of Directors (the “Board”) grants the awards and is the administrator of the plans. The Company’s Compensation Committee must consider and approve all awards granted to the Company’s senior executive officers.

The Company recognized compensation expense from these plans of $51,872 ($46,922 net of tax) and $50,027 ($48,957 net of tax) for the three months and $196,148 ($155,049 net of tax) and $132,265 ($128,712 net of tax) for the six months ended June 30, 2009 and 2008, respectively. The Company recognized negative compensation expense of $9,360 ($6,084 net of tax) during the three months ended June 30, 2008, related to a separate stock appreciation rights agreement that is accounted for as a liability-classified award. No compensation expense was recognized for this agreement in the first six months of 2008, or for the three or six months ended June 30, 2009 due to the terms of the agreement. During the first six months of 2009, 304,400 non-qualified stock options with tandem stock appreciation rights were granted under the 2007 Plan to eligible participants at a price of $18.865. Up to one-half of the non-qualified stock options granted may be exercised as stock appreciation rights, but only if done in conjunction with the exercise of a non-qualified stock option. During the first six months of 2009, 4,953 options were exercised under the plans at prices ranging from $9.25 to $12.6875.

The weighted average fair value of options granted during the first six months of 2009 and 2008 amounted to $2.30 and $2.77, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes-Merton option-pricing model and the following weighted-average assumptions:

	2009			2008
Dividend yield		3.82	%		3.07	%
Expected volatility		22.7% - 43.8	%		21.0% - 30.1	%
Weighted-average volatility		35.24	%		26.09	%
Risk-free interest rate		0.38% - 2.81	%		1.45% - 3.17	%
Expected term (years)		0.25 - 6.30			0.25 - 6.25

The expected term of the options granted in 2009 was estimated using historical data that was adjusted to remove the effect of option exercises prior to the normal vesting period due to the retirement of the option holder. The expected term of options granted to individuals who are, or will be, eligible to retire prior to the completion of the normal vesting period has been adjusted to reflect the potential accelerated vesting period. This produced a weighted-average expected term of 2.6 years.

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The expected volatility in the price of the underlying shares for the 2009 option grant was computed by using the historical average high and low monthly prices of the Company’s common stock for a period covering 6.3 years, which approximates the average term of the options and produced an expected volatility of 22.7 percent. The expected volatility of options granted to individuals who are, or will be, eligible to retire prior to the completion of the normal vesting period was computed by using the historical average high and low daily, weekly, or monthly prices for the period approximating the expected term of those options. This produced expected volatility ranging from 23.4 percent to 43.8 percent.

8.	DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount and the estimated fair value of the Company’s financial instruments is summarized below.

	Carrying amount		Estimated fair value
June 30, 2009
Assets:
Fixed maturity securities:
Held-to-maturity	$	462,077	$	506,763
Available-for-sale		794,642,482		794,642,482
Equity securities available-for-sale		91,138,757		91,138,757
Short-term investments		115,804,852		115,804,852
Other long-term investments		57,546		57,546
Securities lending collateral		24,082,180		24,082,180
Liabilities:
Surplus notes		25,000,000		22,734,366
Securities lending obligation		24,082,180		24,082,180

December 31, 2008
Assets:
Fixed maturity securities:
Held-to-maturity	$	534,759	$	572,852
Available-for-sale		821,818,887		821,818,887
Equity securities available-for-sale		88,372,207		88,372,207
Short-term investments		54,373,082		54,373,082
Other long-term investments		66,974		66,974
Securities lending collateral		9,322,863		9,322,863
Liabilities:
Surplus notes		25,000,000		23,290,761
Securities lending obligation		9,322,863		9,322,863

The estimated fair value of fixed maturity securities, equity securities, short-term investments, securities lending collateral and securities lending obligation is based on quoted market prices, where available. In cases where quoted market prices are not available, fair values are based on a variety of valuation techniques depending on the type of security.

Other long-term investments, consisting primarily of holdings in limited partnerships and limited liability companies, are valued by the various fund managers. In management’s opinion, these values reflect fair value at June 30, 2009 and December 31, 2008.

The fair value of the surplus notes is estimated using discounted cash flow analysis based on the Company’s current incremental borrowing rate for similar debt obligations.

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As previously discussed, the Company adopted SFAS 157 on January 1, 2008. SFAS 157 applies to all assets and liabilities that are measured and reported on a fair value basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS 157 establishes the following fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value:

Level 1 -

Unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.

Level 2 -

Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities 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 -

Prices or valuation techniques that require significant unobservable inputs. The unobservable inputs may reflect the Company’s own assumptions about the assumptions that market participants would use.

The Company uses an independent pricing source to obtain the estimated fair value of a majority of its securities. The fair value is based on quoted market prices, where available. This is typically the case for equity securities and short-term investments, which are accordingly classified as Level 1 fair value measurements. In cases where quoted market prices are not available, fair value is based on a variety of valuation techniques depending on the type of security. Many of the fixed maturity securities in the Company’s portfolio do not trade on a daily basis; however, observable inputs are utilized in their valuations, and these securities are therefore classified as Level 2 fair value measurements. Following is a brief description of the various pricing techniques used for different asset classes.

●

U.S. Treasury securities (including bonds, notes, and bills) are priced according to a number of live data sources, including active market makers and inter-dealer brokers. Prices from these sources are reviewed based on the sources’ historical accuracy for individual issues and maturity ranges.

●

U.S. government-sponsored agencies and corporate securities (including fixed-rate corporate bonds, medium-term notes, and retail notes) are priced by determining a bullet (non-call) spread scale for each issuer for maturities going out to forty years. These spreads represent credit risk and are obtained from the new issue market, secondary trading, and dealer quotes. An option adjusted spread model is incorporated to adjust spreads of issues that have early redemption features. The final spread is then added to the U.S. Treasury curve. For notes with odd coupon payment dates, a cash discounting yield/price routine calculates prices from final yields.

●

Obligations of states and political subdivisions are priced by tracking and analyzing actively quoted issues and trades reported by the Municipal Securities Rulemaking Board (MSRB). Municipal bonds with similar characteristics are grouped together into market sectors, and internal yield curves are constructed daily for these sectors. Individual bond evaluations are extrapolated from these sectors, with the ability to make individual spread adjustments for attributes such as discounts, premiums, alternative minimum tax, and/or whether or not the bond is callable.

●

Mortgage-backed securities are priced with models using spreads and other information solicited from Wall Street buy-side and sell-side sources, including primary and secondary dealers, portfolio managers, and research analysts, to produce pricing for each tranche. To determine a tranche’s price, first the cash flow for each tranche is generated (using consensus prepayment speed assumptions including, as appropriate, a proprietary prepayment projection based on historical statistics of the underlying collateral), then a benchmark yield is determined (in relation to the U.S. Treasury curve for the maturity corresponding to the tranche’s average life estimate), and finally collateral performance and tranche level attributes are incorporated to adjust the benchmark yield to determine the tranche-specific spread. This is then used to discount the cash flows to generate the price. When cash flows or other security structure or market information is not available to appropriately price a security, broker quotes may be used with a zero spread bid-side valuation, resulting in the same values for the mean and ask prices.

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On a quarterly basis, the Company receives from its independent pricing service a list of fixed maturity securities that were priced solely from broker quotes. Since this is not an observable input, any fixed maturity security in the Company’s portfolio that is on this list is classified as a Level 3 fair value measurement. At June 30, 2009, the Company did not hold any fixed maturity securities that were priced solely from broker quotes.

A small number of the Company’s securities are not priced by the independent pricing service. Two equity securities are reported as Level 3 fair value measurements since unobservable inputs are used in their valuations. The largest of these investments is the Class B shares of Insurance Services Office Inc. (ISO). The Company reports this investment at the fair value obtained from applying a 20 percent marketability discount to the quarterly valuations of the Class A shares produced by a nationally recognized independent firm. This resulted in a fair value of $14,965,502 for the Class B shares held by the Company at June 30, 2009 and December 31, 2008. A Form S-1 filing was made by ISO with the Securities and Exchange Commission during 2008 in preparation for a planned initial public offering. At the completion of the initial public offering, ISO will continue to have two classes of stock; however, there will be a defined conversion plan that will result in all Class B shares being converted into Class A shares within 30 months. As a result, after the initial public offering the marketability discount associated with the Class B shares will be well below the 20 percent discount utilized by the Company. In addition, the Company has a commitment from ISO that the offering price for the initial public offering will not be less than the fair value of the shares as determined by the nationally recognized independent firm. The other equity security included in the Level 3 fair value measurement category continues to be reported at the fair value obtained from the Securities Valuation Office (SVO) of the NAIC. The SVO establishes a per share price for this security based on an annual review of that company’s financial statements. This review is typically performed during the second quarter, and resulted in a fair value for the shares held by the Company of $8,908 and $3,641 at June 30, 2009 and December 31, 2008, respectively.

The remaining two securities not priced by the Company’s independent pricing service at June 30, 2009 are fixed maturity securities. The two fixed maturity securities are classified as Level 2 fair value measurements and are carried at aggregate fair values of $7,469,144 at June 30, 2009 and $7,162,662 at December 31, 2008. The fair values for these two fixed maturity securities were obtained from the Company’s investment custodian using an independent pricing service which utilizes similar pricing techniques as the Company’s independent pricing service.

The estimated fair values obtained from the independent pricing sources are reviewed by the Company for reasonableness and any discrepancies are investigated for final valuation. For fixed maturity securities, this includes comparing valuations from the independent pricing source, the Company’s investment custodian, the SVO, and an analytical service for fixed maturity securities. For equity securities, a similar comparison is done between the valuations from the independent pricing service, the Company’s investment custodian, and the SVO. From these comparisons, material variances are identified and resolved to determine the final valuation used in the financial statements.

The Company’s fixed maturity and equity securities available-for-sale, as well as short-term investments, are measured at fair value on a recurring basis. No assets or liabilities are currently measured at fair value on a non-recurring basis. Presented in the table below are the Company’s assets that are measured at fair value on a recurring basis as of June 30, 2009.

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	Fair value measurements at June 30, 2009 using
			Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs
Description	Total		(Level 1)		(Level 2)		(Level 3)

Fixed maturity securities available-for-sale	$	794,642,482	$	-	$	794,642,482	$	-
Equity securities available-for-sale		91,138,757		76,164,347		-		14,974,410
Short-term investments		115,804,852		115,804,852		-		-
	$	1,001,586,091	$	191,969,199	$	794,642,482	$	14,974,410

Presented in the table below is a reconciliation of the assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2009. Any unrealized gains or losses on these securities would be recognized in other comprehensive income. Any gains or losses from disposals or impairments of these securities would be reported as realized investment gains or losses in net income.

	Fair value measurements using significant unobservable inputs (Level 3)
Three months ended June 30, 2009	Fixed maturity securities available-for-sale		Equity securities available-for-sale		Total

Balance at March 31, 2009 .	$	-	$	14,969,143	$	14,969,143

Total unrealized gains included in other comprehensive income (loss)		-		5,267		5,267
Balance at June 30, 2009	$	-	$	14,974,410	$	14,974,410

	Fair value measurements using significant unobservable inputs (Level 3)
Six months ended June 30, 2009	Fixed maturity securities available-for-sale		Equity securities available-for-sale		Total

Balance at December 31, 2008	$	-	$	14,969,143	$	14,969,143

Total unrealized gains included in other comprehensive income (loss)		-		5,267		5,267
Balance at June 30, 2009	$	-	$	14,974,410	$	14,974,410

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9.	INVESTMENTS

Investments of the Company’s insurance subsidiaries are subject to the insurance laws of the state of their incorporation. These laws prescribe the kind, quality and concentration of investments that may be made by insurance companies. In general, these laws permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, preferred and common stocks and real estate mortgages. The Company believes that it is in compliance with these laws.

The amortized cost and estimated fair value of securities held-to-maturity and available-for-sale as of June 30, 2009 and December 31, 2008 are as follows. Securities classified as held-to-maturity are carried at amortized cost. All other securities have been classified as available-for-sale and are carried at fair value.

June 30, 2009	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Securities held-to-maturity:
Fixed maturity securities:
Residential mortgage-backed	$	462,077	$	44,686	$	-	$	506,763
Total securities held-to-maturity	$	462,077	$	44,686	$	-	$	506,763

Securities available-for-sale:
Fixed maturity securities:
US treasury	$	4,735,006	$	328,200	$	-	$	5,063,206
US government-sponsored agencies		205,501,122		2,283,238		529,695		207,254,665
Obligations of states and political subdivisions		298,640,462		9,894,089		5,284,907		303,249,644
Commercial mortgage-backed		39,892,080		2,754,322		2,911,091		39,735,311
Residential mortgage-backed		42,615,083		909,414		2,460,656		41,063,841
Collateralized debt obligations		9,384,343		462,754		272,935		9,574,162
Corporate		178,855,427		6,628,660		3,257,604		182,226,483
Debt securities issued by foreign governments		6,520,241		-		45,071		6,475,170
Total fixed maturity securities		786,143,764		23,260,677		14,761,959		794,642,482

Equity securities:
Common stocks:
Financial services		7,546,645		17,004,871		95,102		24,456,414
Information technology		10,482,514		2,982,637		112,697		13,352,454
Healthcare		12,179,351		1,317,669		523,237		12,973,783
Consumer staples		8,470,648		400,260		249,684		8,621,224
Consumer discretionary		7,790,683		1,087,997		401,116		8,477,564
Energy		5,783,182		1,531,122		155,452		7,158,852
Other		8,680,882		699,312		254,428		9,125,766
Non-redeemable preferred stocks		9,500,000		-		2,527,300		6,972,700
Total equity securities		70,433,905		25,023,868		4,319,016		91,138,757
Total securities available-for-sale	$	856,577,669	$	48,284,545	$	19,080,975	$	885,781,239

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December 31, 2008	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Securities held-to-maturity:
Fixed maturity securities:
Residential mortgage-backed	$	534,759	$	38,093	$	-	$	572,852
Total securities held-to-maturity	$	534,759	$	38,093	$	-	$	572,852

Securities available-for-sale:
Fixed maturity securities:
US treasury	$	4,730,985	$	442,062	$	-	$	5,173,047
US government-sponsored agencies		282,152,396		3,410,866		682,890		284,880,372
Obligations of states and political subdivisions		301,326,007		7,291,171		8,525,393		300,091,785
Commercial mortgage-backed		31,001,558		2,366,742		3,275,086		30,093,214
Residential mortgage-backed		41,242,066		573,352		2,794,186		39,021,232
Collateralized debt obligations		9,677,383		41,184		609,339		9,109,228
Corporate		153,499,337		3,020,196		9,621,407		146,898,126
Debt securities issued by foreign governments		6,600,964		8,261		57,342		6,551,883
Total fixed maturity securities		830,230,696		17,153,834		25,565,643		821,818,887

Equity securities:
Common stocks:
Financial services		8,190,462		15,560,209		293,354		23,457,317
Information technology		11,913,152		1,606,225		1,174,331		12,345,046
Healthcare		11,276,843		262,405		1,920,754		9,618,494
Consumer staples		8,107,473		316,847		336,315		8,088,005
Consumer discretionary		5,401,525		672,211		558,218		5,515,518
Energy		7,313,125		2,456,741		203,424		9,566,442
Other		13,323,086		689,324		660,125		13,352,285
Non-redeemable preferred stocks		9,500,000		-		3,070,900		6,429,100
Total equity securities		75,025,666		21,563,962		8,217,421		88,372,207
Total securities available-for-sale	$	905,256,362	$	38,717,796	$	33,783,064	$	910,191,094

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The following table sets forth the estimated fair value and gross unrealized losses associated with investment securities that were in an unrealized loss position as of June 30, 2009 and December 31, 2008, listed by length of time the securities have been in an unrealized loss position.

June 30, 2009	Less than twelve months				Twelve months or longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	value		losses		value		losses		value		losses
Fixed maturity securities:
US government-sponsored agencies	$	58,643,924	$	529,695	$	-	$	-	$	58,643,924	$	529,695
Obligations of states and political subdivisions		40,300,069		1,538,993		23,276,142		3,745,914		63,576,211		5,284,907
Commercial mortgage-backed		2,300,601		77,035		13,415,115		2,834,056		15,715,716		2,911,091
Residential mortgage-backed		21,717,204		1,385,919		4,004,485		1,074,737		25,721,689		2,460,656
Collateralized debt obligations		2,772,844		113,055		1,381,121		159,880		4,153,965		272,935
Corporate		12,957,553		210,275		28,458,814		3,047,329		41,416,367		3,257,604
Debt securities issued by foreign governments		6,475,170		45,071		-		-		6,475,170		45,071
Total, fixed maturity securities		145,167,365		3,900,043		70,535,677		10,861,916		215,703,042		14,761,959

Equity securities:
Common stocks:
Financial services		2,164,393		95,102		-		-		2,164,393		95,102
Information technology		2,789,559		112,697		-		-		2,789,559		112,697
Healthcare		3,719,156		523,237		-		-		3,719,156		523,237
Consumer staples		3,027,311		249,684		-		-		3,027,311		249,684
Consumer discretionary		3,614,432		401,116		-		-		3,614,432		401,116
Energy		2,101,380		155,452		-		-		2,101,380		155,452
Other		3,121,340		254,428		-		-		3,121,340		254,428
Non-redeemable preferred stocks		-		-		6,972,700		2,527,300		6,972,700		2,527,300

Total, equity securities		20,537,571		1,791,716		6,972,700		2,527,300		27,510,271		4,319,016
Total temporarily impaired securities	$	165,704,936	$	5,691,759	$	77,508,377	$	13,389,216	$	243,213,313	$	19,080,975

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December 31, 2008	Less than twelve months				Twelve months or longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	value		losses		value		losses		value		losses
Fixed maturity securities:
US government-sponsored agencies	$	87,086,543	$	682,890	$	-	$	-	$	87,086,543	$	682,890
Obligations of states and political subdivisions		158,396,837		8,405,003		997,842		120,390		159,394,679		8,525,393
Commercial mortgage-backed		20,814,315		3,275,086		-		-		20,814,315		3,275,086
Residential mortgage-backed		23,496,497		2,794,186		-		-		23,496,497		2,794,186
Collateralized debt obligations		6,313,510		609,339		-		-		6,313,510		609,339
Corporate		88,779,231		9,621,407		-		-		88,779,231		9,621,407
Debt securities issued by foreign governments		5,543,901		57,342		-		-		5,543,901		57,342
Total, fixed maturity securities		390,430,834		25,445,253		997,842		120,390		391,428,676		25,565,643

Equity securities:
Common stocks:
Financial services		3,016,517		293,354		-		-		3,016,517		293,354
Information technology		3,447,833		1,174,331		-		-		3,447,833		1,174,331
Healthcare		7,417,668		1,920,754		-		-		7,417,668		1,920,754
Consumer staples		4,646,967		336,315		-		-		4,646,967		336,315
Consumer discretionary		2,887,949		558,218		-		-		2,887,949		558,218
Energy		717,509		203,424		-		-		717,509		203,424
Other		5,632,827		660,125		-		-		5,632,827		660,125
Non-redeemable preferred stocks		1,215,000		285,000		5,214,100		2,785,900		6,429,100		3,070,900
Total, equity securities		28,982,270		5,431,521		5,214,100		2,785,900		34,196,370		8,217,421
Total temporarily impaired securities	$	419,413,104	$	30,876,774	$	6,211,942	$	2,906,290	$	425,625,046	$	33,783,064

Unrealized losses on fixed maturity securities totaled $14,761,959 at June 30, 2009 and were primarily associated with three different sectors: financial, municipal and mortgage-backed securities. These sectors experienced a widening of risk premium spreads over U.S. Treasuries relative to other credit sectors. All but eight of these securities (Weyerhaeuser Company, American Airlines, US Freightways Corporation and five residential mortgage-backed securities) are considered investment grade by credit rating agencies. Because management does not intend to sell these securities, does not believe it will be required to sell these securities before recovery, and believes it will collect all amounts due on these securities, it was determined that the securities were not “other-than-temporarily” impaired at June 30, 2009.

All of the Company’s preferred stock holdings are perpetual preferred stocks. The Company evaluates perpetual preferred stocks for “other-than-temporary” impairment similar to fixed maturity securities since they have debt-like characteristics such as periodic cash flows in the form of dividends and call features, are rated similar to debt securities and are priced like other long-term callable fixed maturity securities. There was no evidence of any credit deterioration in the issuers of the preferred stocks and management does not intend to sell these securities before recovery, nor does it believe it will be required to sell these securities before recovery; therefore, it was determined that the securities were not “other-than-temporarily” impaired at June 30, 2009.

The unrealized losses on common stocks at June 30, 2009 are not concentrated in a particular sector or an individual security. Management believes the unrealized losses on common stocks are primarily due to general fluctuations in the equity markets. Because management has the ability and intent to hold these securities for a reasonable amount of time to allow for recovery, it was determined that the securities were not “other-than-temporarily” impaired at June 30, 2009.

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The amortized cost and estimated fair value of fixed maturity securities at June 30, 2009, by contractual maturity, are shown below. 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 cost		Estimated fair value
Securities held-to-maturity:
Due in one year or less	$	-	$	-
Due after one year through five years		-		-
Due after five years through ten years		-		-
Due after ten years		-		-
Mortgage-backed securities		462,077		506,763
Totals	$	462,077	$	506,763

Securities available-for-sale:
Due in one year or less	$	17,253,701	$	16,713,104
Due after one year through five years		82,835,312		86,790,607
Due after five years through ten years		76,919,029		79,519,065
Due after ten years		517,244,216		521,246,392
Mortgage-backed securities		91,891,506		90,373,314
Totals	$	786,143,764	$	794,642,482

A summary of realized investment gains and losses is as follows:

	Three months ended						Six months ended
	June 30,						June 30,
	2009			2008			2009			2008
Fixed maturity securities available-for-sale:
Gross realized investment gains	$	104,691		$	12,822		$	181,007		$	126,215
Gross realized investment losses		-			-			-			-
"Other-than-temporary" impairments		-			-			(2,219,779	)		-

Equity securities available-for-sale:
Gross realized investment gains		1,571,259			2,434,890			2,869,870			2,778,313
Gross realized investment losses		(11,577	)		(381,444	)		(1,621,464	)		(848,153	)
"Other-than-temporary" impairments		(759,206	)		(1,695,298	)		(6,896,777	)		(4,597,382	)
Totals	$	905,167		$	370,970		$	(7,687,143	)	$	(2,541,007	)

Gains and losses realized on the disposition of investments are included in net income. The cost of investments sold is determined on the specific identification method using the highest cost basis first. The amounts reported as “other-than-temporary” impairments on equity securities available-for-sale reflect the impairment of 4 equity securities during the second quarter of 2009 and 28 equity securities during the six months ended June 30, 2009, compared to 7 and 18 equity securities during the same periods of 2008, respectively. The impairment losses reported for the six months ended June 30, 2009, reflects a large amount of impairment losses recognized during the first quarter of 2009 as a result of the severe and prolonged turmoil in the financial markets.

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During the first quarter of 2009, the Company recognized a fixed maturity security “other-than-temporary” impairment loss attributed to a bankruptcy filing made by Great Lakes Chemical Corporation, now known as Chemtura Corporation. At March 31, 2009, this security was trading at 26 percent of its par value, which was the amount established as the new cost basis ($780,000) after recognition of a $2,219,779 “other-than-temporary” impairment loss.

On April 1, 2009, the Company adopted FSP FAS 115-2 and FAS 124-2. This FSP requires a cumulative effect adjustment from retained earnings to accumulated other comprehensive income for previously “other-than-temporarily” impaired fixed maturity securities that have a non-credit component of the loss as of the date of adoption. The only “other-than-temporarily” impaired fixed maturity security held by the Company as of the adoption date was the Chemtura Corporation securities. On the date of adoption, the credit component of the loss amounted to $1,229,779 which was measured as the difference between the present value of the estimated cash flows ($1,770,000) and the original amortized cost basis ($2,999,779). The non-credit component of the loss ($990,000) was measured as the difference between the fair value ($780,000) and the present value of the estimated cash flows ($1,770,000). This non-credit component of the loss was treated as a change in accounting principle, and was reclassified from retained earnings to accumulated other comprehensive income as of April 1, 2009.

At June 30, 2009, the fair value of the Chemtura Corporation bonds increased to $1,770,000. Due to the bonds’ approaching maturity date of July 15, 2009, and more importantly, the expected receipt of their bankruptcy reorganization plan yet this year, this fair value amount is also considered to represent the present value of expected future cash flows. This amount is also equal to the April 1, 2009 adoption date estimate of the present value of expected cash flows. As a result, during the second quarter of 2009 the Company recognized no additional “other-than-temporary” impairment loss, nor interest income, in earnings from this fixed maturity security (for the credit loss component), but did recognize a $990,000 (before tax) gain in comprehensive income for the recovery in fair value (the non-credit loss component). Following is a tabular rollforward of the amount of credit losses recognized in earnings from “other-than-temporary” impairments.

Three months ended June 30, 2009	Credit losses recognized in earnings

Balance at April 1, 2009	$	1,229,779

Credit losses for which an other-than-temporary impairment loss was not previously recognized		-
Balance at June 30, 2009	$	1,229,779

Six months ended June 30, 2009	Credit losses recognized in earnings

Balance at December 31, 2008	$	-

Credit losses for which an other-than-temporary impairment loss was not previously recognized		1,229,779
Balance at June 30, 2009	$	1,229,779

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10.	CONTINGENT LIABILITIES

The Company and Employers Mutual and its other subsidiaries are parties to numerous lawsuits arising in the normal course of the insurance business. The Company believes that the resolution of these lawsuits will not have a material adverse effect on its financial condition or its results of operations. The companies involved have established reserves which are believed adequate to cover any potential liabilities arising out of all such pending or threatened proceedings.

The participants in the pooling agreement have purchased annuities from life insurance companies, under which the claimant is payee, to fund future payments that are fixed pursuant to specific claim settlement provisions. The Company’s share of case loss reserves eliminated by the purchase of these annuities was $1,881,645 at December 31, 2008. The Company has a contingent liability of $1,881,645 at December 31, 2008 should the issuers of these annuities fail to perform. The probability of a material loss due to failure of performance by the issuers of these annuities is considered remote. The Company’s share of the amount due from any one life insurance company does not equal or exceed one percent of its subsidiaries’ aggregate policyholders’ surplus.

11.	STOCK REPURCHASE PROGRAM

On March 10, 2008, the Company’s Board of Directors authorized a $15,000,000 stock repurchase program. This program became effective immediately and does not have an expiration date. The timing and terms of the purchases will be determined by management based on market conditions and will be conducted in accordance with the applicable rules of the Securities and Exchange Commission. Common stock purchased under this program is being retired by the Company. On October 31, 2008, the Company’s Board of Directors announced an extension of the stock repurchase program, authorizing an additional $10,000,000. As of June 30, 2009, 601,119 shares of common stock had been repurchased at a cost of $14,968,727.

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EMC INSURANCE GROUP INC. AND SUBSIDIARIES

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Unaudited)

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.

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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.

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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

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	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

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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.

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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.

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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.

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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 Company did not have any significant variations between the maturity dates of its investments and the expected payments of its loss and settlement expense reserves.

The Company is a holding company whose principal asset is its investment in its insurance subsidiaries. As a holding company, the Company is dependent upon cash dividends from its insurance company subsidiaries to meet all obligations, including cash dividends to stockholders and the funding of the Company’s stock repurchase program. State insurance regulations restrict the maximum amount of dividends insurance companies can pay without prior regulatory approval. The maximum amount of dividends that the insurance company subsidiaries can pay to the Company in 2009 without prior regulatory approval is approximately $28,449,000. The Company received $5,000,000 and $22,505,000 of dividends from its insurance company subsidiaries and paid cash dividends to its stockholders totaling $4,765,000 and $4,935,000 in the first six months of 2009 and 2008, respectively. The large amount of dividends received from the insurance company subsidiaries in 2008 was used to fund the Company’s $15,000,000 stock repurchase program. On October 31, 2008, the Company’s Board of Directors announced an extension of the stock repurchase program, authorizing an additional $10,000,000. This extension of the stock repurchase program will necessitate the dividend of additional funds from the insurance company subsidiaries to the holding company.

The Company’s insurance company subsidiaries must have adequate liquidity to ensure that their cash obligations are met; however, because of their participation in the pooling agreement and the quota share agreement, they do not have the daily liquidity concerns normally associated with an insurance or reinsurance company. This is because under the terms of the pooling and quota share agreements, Employers Mutual receives all premiums and pays all losses and expenses associated with the insurance business produced by the pool participants and the assumed reinsurance business ceded to the Company’s reinsurance subsidiary, and then settles the inter-company balances generated by these transactions with the participating companies within 45 days after the end of each quarter.

At the insurance company subsidiary level, the primary sources of cash are premium income, investment income and maturing investments. The principal outflows of cash are payments of claims, commissions, premium taxes, operating expenses, income taxes, dividends, interest and principal payments on debt, and investment purchases. Cash outflows can be variable because of uncertainties regarding settlement dates for unpaid losses and because of the potential for large losses, either individually or in the aggregate. Accordingly, the insurance company subsidiaries maintain investment and reinsurance programs generally intended to provide adequate funds to pay claims without forced sales of investments. In addition, Employers Mutual has a line of credit available to provide additional liquidity if needed. The insurance company subsidiaries have access to this line of credit through Employers Mutual.

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The Company maintains a portion of its investment portfolio in relatively short-term and highly liquid investments to ensure the availability of funds to pay claims and expenses. At June 30, 2009, approximately 27 percent of the Company’s fixed maturity securities were in U.S. government or U.S. government-sponsored agency securities. This is down from approximately 35 percent at December 31, 2008 due to a significant amount of call activity on the Company’s U.S. government agency securities that occurred during the first half of 2009 due to the low interest rate environment. The proceeds from these called securities are being invested in short-term securities until attractive long-term opportunities can be identified. A variety of maturities are maintained in the Company’s portfolio to assure adequate liquidity. The maturity structure of the fixed maturity securities is also established by the relative attractiveness of yields on short, intermediate and long-term securities. The Company does not invest in high-yield, non-investment grade debt securities. Any non-investment grade securities held by the Company are the result of rating downgrades that occurred subsequent to their purchase.

The Company considers itself to be a long-term investor and generally purchases fixed maturity securities with the intent to hold them to maturity. Despite this intent, the Company currently classifies purchases of fixed maturity securities as available-for-sale to provide flexibility in the management of its investment portfolio. At June 30, 2009 the Company had a net unrealized holding gain, net of deferred taxes, on fixed maturity securities available-for-sale of $5,524,000, compared to a net unrealized holding loss of $5,468,000 at December 31, 2008. The fluctuation in the fair value of these investments is primarily due to changes in the interest rate environment during this time period, but also reflects fluctuations in risk premium spreads over U.S. Treasuries for corporate and U.S. government-sponsored agency securities. Since the Company does not actively trade in the bond market, such fluctuations in the fair value of these investments are not expected to have a material impact on the operations of the Company, as forced liquidations of investments are not anticipated. The Company closely monitors the bond market and makes appropriate adjustments in its portfolio as conditions warrant.

The majority of the Company’s assets are invested in fixed maturity securities. These investments provide a substantial amount of investment income that supplements underwriting results and contributes to net earnings. As these investments mature, or are called, the proceeds are reinvested at current rates, which may be higher or lower than those now being earned; therefore, more or less investment income may be available to contribute to net earnings depending on the interest rate level.

The Company participates in a securities lending program administered by Mellon Bank, N.A. whereby certain fixed maturity securities from the investment portfolio are loaned to other institutions for short periods of time. The Company receives a fee for each security loaned out under this program and requires initial collateral equal to 102 percent of the fair value of the loaned securities. The collateral is primarily cash, but other forms of collateral are occasionally accepted, including letters of credit or U.S. Treasury securities. The cash collateral is invested in a Delaware business trust that is managed by Mellon Bank. In this trust, cash collateral funds of the Company are pooled with cash collateral funds of other security lenders administered by Mellon Bank, and these funds are invested in securities with high credit quality standards, maturity restrictions, and liquidity levels consistent with the short-term nature of securities lending transactions. The acceptable investments include time deposits, commercial paper, floating rate notes, asset-backed floating rate notes, and repurchase agreements. The earnings from this trust are used, in part, to pay the fee the Company receives for each security loaned under the program. The Company has a slight risk of a minor loss associated with the collateral pool if the aggregate fair value of the collateral pool were to decline below the aggregate liability represented by the collateral, assuming all securities loaned and backed by the collateral pool are returned. The Company had securities on loan with a fair value of $23,716,000 and $8,950,000 at June 30, 2009 and December 31, 2008, respectively. Collateral held in connection with these loaned securities totaled $24,082,000 and $9,323,000 at June 30, 2009 and December 31, 2008, respectively. Fluctuations in securities on loan are due to changes in demand for the type of securities the Company makes available to the program (primarily U.S. government agencies, U.S. treasuries and corporate bonds).

The Company held $58,000 and $67,000 in minority ownership interests in limited partnerships and limited liability companies at June 30, 2009 and December 31, 2008, respectively. The Company does not hold any other unregistered securities.

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The Company’s cash balance was $220,000 and $183,000 at June 30, 2009 and December 31, 2008, respectively.

During the first six months of 2009, Employers Mutual contributed $1,000,000 each to the pension plan and postretirement benefit plans. Upon settlement of the second quarter inter-company balances, the Company will reimburse Employers Mutual $300,000 and $286,525 for its share of the contributions to the pension and postretirement benefit plans, respectively. In 2009, Employers Mutual expects to make contributions totaling $25,000,000 to the pension plan and $2,800,000 to the postretirement benefit plans.

Employers Mutual contributed $15,000,000 to its pension plan and $12,200,000 to its postretirement benefit plans in 2008. During the first six months of 2008, Employers Mutual made no contribution to the pension plan, and a $1,200,000 contribution to the postretirement benefit plans. The Company reimbursed Employers Mutual $4,555,000 for its share of the 2008 pension contribution (no reimbursement was paid in the first six months of 2008) and $3,495,000 for its share of the 2008 postretirement benefit plans contribution ($343,000 in the settlement of the second quarter inter-company balances).

Capital Resources

Capital resources consist of stockholders’ equity and debt, representing funds deployed or available to be deployed to support business operations. For the Company’s insurance subsidiaries, capital resources are required to support premium writings. Regulatory guidelines suggest that the ratio of a property and casualty insurer’s annual net premiums written to its statutory surplus should not exceed three to one. On an annualized basis, all of the Company’s property and casualty insurance subsidiaries were well under this guideline at June 30, 2009.

The Company’s insurance subsidiaries are required to maintain a certain minimum level of surplus on a statutory basis, and are subject to regulations under which the payment of dividends from statutory surplus is restricted and may require prior approval of their domiciliary insurance regulatory authorities. The Company’s insurance subsidiaries are also subject to Risk Based Capital (RBC) requirements that may further impact their ability to pay dividends. RBC requirements attempt to measure minimum statutory capital needs based upon the risks in a company’s mix of products and investment portfolio. At December 31, 2008, the Company’s insurance subsidiaries had total adjusted statutory capital of $284,492,000, which was well in excess of the minimum RBC requirement of $53,674,000.

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The Company’s total cash and invested assets at June 30, 2009 and December 31, 2008 are summarized as follows:

	June 30, 2009
($ in thousands)	Amortized cost		Fair value		Percent of total fair value			Carrying value
Fixed maturity securities held-to-maturity	$	462	$	507		0.1	%	$	462
Fixed maturity securities available-for-sale		786,144		794,642		79.3	%		794,642
Equity securities available-for-sale		70,434		91,139		9.1	%		91,139
Cash		220		220		-			220
Short-term investments		115,805		115,805		11.5	%		115,805
Other long-term investments		57		57		-			57
	$	973,122	$	1,002,370		100.0	%	$	1,002,325

	December 31, 2008
($ in thousands)	Amortized cost		Fair value		Percent of total fair value			Carrying value
Fixed maturity securities held-to-maturity	$	535	$	573		0.1	%	$	535
Fixed maturity securities available-for-sale		830,231		821,819		85.1	%		821,819
Equity securities available-for-sale		75,026		88,372		9.2	%		88,372
Cash		182		182		-			182
Short-term investments		54,373		54,373		5.6	%		54,373
Other long-term investments		67		67		-			67
	$	960,414	$	965,386		100.0	%	$	965,348

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The amortized cost and estimated fair value of fixed maturity and equity securities at June 30, 2009 were as follows:

June 30, 2009	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Securities held-to-maturity:
Fixed maturity securities:
Residential mortgage-backed	$	462	$	45	$	-	$	507
Total securities held-to-maturity	$	462	$	45	$	-	$	507

Securities available-for-sale:
Fixed maturity securities:
U.S. treasury	$	4,735	$	328	$	-	$	5,063
U.S. government-sponsored agencies		205,501		2,283		530		207,254
Obligations of states and political subdivisions		298,641		9,894		5,285		303,250
Commercial mortgage-backed		39,892		2,754		2,911		39,735
Residential mortgage-backed		42,615		909		2,461		41,063
Collateralized debt obligations		9,384		463		273		9,574
Corporate		178,856		6,629		3,257		182,228
Debt securities issued by foreign governments		6,520		-		45		6,475
Total fixed maturity securities		786,144		23,260		14,762		794,642

Equity securities:
Common stocks:
Financial services		7,547		17,005		95		24,457
Information technology		10,482		2,983		113		13,352
Healthcare		12,179		1,318		523		12,974
Consumer staples		8,471		400		250		8,621
Consumer discretionary		7,791		1,088		401		8,478
Energy		5,783		1,531		156		7,158
Other		8,681		699		254		9,126
Non-redeemable preferred stocks		9,500		-		2,527		6,973
Total equity securities		70,434		25,024		4,319		91,139
Total securities available-for-sale	$	856,578	$	48,284	$	19,081	$	885,781

The Company’s property and casualty insurance subsidiaries have $25,000,000 of surplus notes issued to Employers Mutual. Effective February 1, 2008, the interest rate on these surplus notes was increased from 3.09 percent to 3.60 percent. Future reviews of the interest rate will be conducted by the Inter-Company Committees of the Boards of Directors of the Company and Employers Mutual every five years. Payment of interest and repayment of principal can only be made out of the applicable subsidiary’s statutory surplus and is subject to prior approval by the insurance commissioner of the respective state of domicile. The surplus notes are subordinate and junior in right of payment to all obligations or liabilities of the applicable insurance subsidiaries. Total interest expense incurred on these surplus notes was $450,000 and $439,000 during the first six months of 2009 and 2008, respectively. At December 31, 2008, EMCASCO Insurance Company and Illinois EMCASCO Insurance Company received approval for the payment of interest accrued on the surplus notes during 2008, while Dakota Fire Insurance Company did not receive the necessary approval.

As of June 30, 2009, the Company had no material commitments for capital expenditures.

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Off-Balance Sheet Arrangements

Employers Mutual receives all premiums and pays all losses and expenses associated with the assumed reinsurance business ceded to the reinsurance subsidiary and the insurance business produced by the pool participants, and then settles the inter-company balances generated by these transactions with the participating companies on a quarterly basis. When settling the inter-company balances, Employers Mutual provides the reinsurance subsidiary and the pool participants with full credit for the premiums written during the quarter and retains all receivable amounts. Any receivable amounts that are ultimately deemed to be uncollectible are charged-off by Employers Mutual and the expense is charged to the reinsurance subsidiary or allocated to the pool members on the basis of pool participation. As a result, the Company has an off-balance sheet arrangement with an unconsolidated entity that results in a credit-risk exposure that is not reflected in the Company’s financial statements. Based on historical data, this credit-risk exposure is not considered to be material to the Company’s results of operations or financial position.

Investment Impairments and Considerations

The Company recorded “other-than-temporary” investment impairment losses totaling $759,000 on 4 equity securities during the second quarter of 2009, and $1,695,000 on seven equity securities during the second quarter of 2008. For the six months ended June 30, 2009, the Company recognized “other-than-temporary” investment impairment losses totaling $9,117,000 on 28 equity securities and one fixed maturity security, compared to $4,597,000 on 18 equity securities during the first half of 2008. The impairment loss on the fixed maturity security ($2,220,000) is attributed to a bankruptcy filing made by Great Lakes Chemical Corporation, now known as Chemtura Corporation. The impairment losses on the equity securities are primarily attributed to the severe and prolonged turmoil in the financial markets.

The Company has no direct exposure to sub-prime residential lending, and holds no sub-prime residential collateralized debt obligations or sub-prime collateralized mortgage obligations. The Company does have indirect exposure to sub-prime residential lending markets as it has significant holdings of government agency securities, prime and Alt-A collateralized mortgage obligations, as well as fixed maturity and equity securities in both the banking and financial services sectors. While these holdings do not include companies engaged in originating residential lending as their primary business, they do include companies that may be indirectly engaged in this type of lending.

During the second quarter of 2008, management evaluated and implemented a new investment strategy targeting high-quality residential mortgage-backed securities. This investment strategy, which is being administered by Harris Investment Management, Inc., was designed to take advantage of the liquidity-induced market dislocation that existed in the securitized residential mortgage marketplace and targeted AAA rated residential mortgage-backed securities (no securities backed by subprime mortgages were purchased). The investments have been diversified with respect to key risk factors (such as vintage, originator and geography).

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At June 30, 2009, the Company had unrealized losses on available-for-sale securities as presented in the table below. The estimated fair value is based on quoted market prices, where available. In cases where quoted market prices are not available, fair values are based on a variety of valuation techniques depending on the type of security. None of these securities are considered to be in concentrations by either security type or industry. The Company uses several factors to determine whether the carrying value of an individual security has been “other-than-temporarily” impaired. Such factors include, but are not limited to, the security’s value and performance in the context of the overall markets, length of time and extent the security’s fair value has been below carrying value, key corporate events and collateralization of fixed maturity securities. Based on these factors, the absence of management's intent to sell these securities prior to recovery or maturity, and the fact that management does not anticipate that it will be forced to sell these securities prior to recovery or maturity, it was determined that the carrying value of these securities were not “other-than-temporarily” impaired at June 30, 2009. Risks and uncertainties inherent in the methodology utilized in this evaluation process include interest rate risk, equity price risk, and the overall performance of the economy, all of which have the potential to adversely affect the value of the Company’s investments. Should a determination be made at some point in the future that these unrealized losses are “other-than-temporary”, the Company’s earnings would be reduced by approximately $12,403,000, net of tax; however, the Company’s financial position would not be affected due to the fact that unrealized losses on available-for-sale securities are reflected in the Company’s financial statements as a component of stockholders’ equity, net of deferred taxes.

Following is a schedule of the length of time securities have continuously been in an unrealized loss position as of June 30, 2009.

June 30, 2009	Less than twelve months				Twelve months or longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	value		losses		value		losses		value		losses
Fixed maturity securities:
U.S. government-sponsored agencies	$	58,644	$	530	$	-	$	-	$	58,644	$	530
Obligations of states and political subdivisions		40,300		1,539		23,276		3,746		63,576		5,285
Commercial mortgage-backed		2,301		77		13,415		2,834		15,716		2,911
Residential mortgage-backed		21,717		1,386		4,004		1,075		25,721		2,461
Collateralized debt obligations		2,773		113		1,381		160		4,154		273
Corporate		12,958		210		28,459		3,047		41,417		3,257
Debt securities issued by foreign governments		6,475		45		-		-		6,475		45
Total, fixed maturity securities		145,168		3,900		70,535		10,862		215,703		14,762

Equity securities:
Common stocks:
Financial services		2,164		95		-		-		2,164		95
Information technology		2,790		113		-		-		2,790		113
Healthcare		3,719		523		-		-		3,719		523
Consumer staples		3,027		250		-		-		3,027		250
Consumer discretionary		3,614		401		-		-		3,614		401
Energy		2,101		156		-		-		2,101		156
Other		3,121		254		-		-		3,121		254
Non-redeemable preferred stocks		-		-		6,973		2,527		6,973		2,527
Total, equity securities		20,536		1,792		6,973		2,527		27,509		4,319
Total temporarily impaired securities	$	165,704	$	5,692	$	77,508	$	13,389	$	243,212	$	19,081

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All non-investment grade fixed maturity securities held at June 30, 2009 (US Freightways Corporation, American Airlines, Chemtura Corporation, Weyerhaeuser Company, and five residential mortgage-backed securities) had an aggregate unrealized loss of $2,242,000. The Company does not purchase non-investment grade securities. Any non-investment grade securities held by the Company are the result of rating downgrades that occurred subsequent to their purchase. The five residential mortgage-backed securities that are new to this list in 2009 (aggregate unrealized loss of $1,528,000) were part of the 2008 investment strategy that targeted high-quality residential mortgage-backed securities. The Chemtura Corporation securities were written down to fair value through an “other-than-temporary” impairment loss during the first quarter of 2009. At June 30, 2009, the fair value of these securities increased and was equal to the present value of estimated cash flows. As a result, the Chemtura Corporation securities were not in an unrealized loss position.

Following is a schedule of gross realized losses recognized in the first half of 2009 from the sale of securities and from “other-than-temporary” investment impairments. The schedule is aged according to the length of time the underlying securities were in an unrealized loss position. This schedule does not include realized losses stemming from corporate actions such as calls, pay-downs, redemptions, etc. Fixed maturity securities are generally held until maturity.

	Six months ended June 30, 2009
	Realized losses from sales						"Other-than-		Total
					Gross		temporary"		gross
	Book		Sales		realized		impairment		realized
($ in thousands)	value		price		losses		losses		losses
Fixed maturity securities:
Three months or less	$	-	$	-	$	-	$	-	$	-
Over three months to six months		-		-		-		-		-
Over six months to nine months		-		-		-		2,220		2,220
Over nine months to twelve months		-		-		-		-		-
Over twelve months		-		-		-		-		-
		-		-		-		2,220		2,220
Equity securities:
Three months or less		4,087		3,529		558		2,219		2,777
Over three months to six months		3,830		3,072		758		1,583		2,341
Over six months to nine months		1,014		758		256		2,444		2,700
Over nine months to twelve months		-		-		-		180		180
Over twelve months		330		281		49		471		520
		9,261		7,640		1,621		6,897		8,518
	$	9,261	$	7,640	$	1,621	$	9,117	$	10,738

The “other-than-temporary” impairment losses on fixed maturity securities are entirely from the impairment of Chemtura Corporation fixed maturity securities. The realized losses associated with securities that had been in an unrealized loss position for over twelve months are primarily from “other-than-temporary” impairment losses recognized on two equity securities.

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LEASES, COMMITMENTS AND CONTINGENT LIABILITIES

The following table reflects the Company’s contractual obligations as of June 30, 2009. Included in the table are the estimated payments that the Company expects to make in the settlement of its loss reserves and with respect to its long-term debt. One of the Company’s property and casualty insurance subsidiaries leases office facilities in Bismarck, North Dakota with lease terms expiring in 2014. Employers Mutual has entered into various leases for branch and service office facilities with lease terms expiring through 2021. All lease costs are included as expenses under the pooling agreement, after allocation of the portion of these expenses to the subsidiaries that do not participate in the pool. The table reflects the Company’s current 30.0 percent aggregate participation in the pooling agreement. The Company’s contractual obligation for long-term debt did not change from that presented in the Company’s 2008 Form 10-K.

	Payments due by period
	Total		Less than 1 year		1 - 3 years		4 - 5 years		More than 5 years
Contractual obligations	($ in thousands)
Loss and settlement expense reserves (1).	$	560,572	$	217,558	$	203,712	$	79,097	$	60,205
Long-term debt (2)		25,000		-		-		-		25,000
Interest expense on long-term debt (3)		9,213		1,113		1,800		1,800		4,500
Real estate operating leases		8,186		639		3,351		1,675		2,521
Total	$	602,971	$	219,310	$	208,863	$	82,572	$	92,226

(1)

The amounts presented are estimates of the dollar amounts and time period in which the Company expects to pay out its gross loss and settlement expense reserves. These amounts are based on historical payment patterns and do not represent actual contractual obligations. The actual payment amounts and the related timing of those payments could differ significantly from these estimates.

(2)	Long-term debt reflects the surplus notes issued by the Company’s property and casualty insurance subsidiaries to Employers Mutual, which have no maturity date. Excluded from long-term debt are pension and other postretirement benefit obligations.

(3)

Interest expense on long-term debt reflects the interest expense on the surplus notes issued by the Company’s property and casualty insurance subsidiaries to Employers Mutual. Interest on the surplus notes is subject to approval by the issuing company’s state of domicile. The balance shown under the heading “More than 5 years” represents interest expense for years six through ten. Since the surplus notes have no maturity date, total interest expense could be greater than the amount shown. Dakota Fire was not granted approval to pay its 2008 surplus note interest at the end of 2008. The table above assumes such approval will be granted at the end of 2009 (for both its 2008 and 2009 interest) and annually thereafter.

The participants in the pooling agreement are subject to guaranty fund assessments by states in which they write business. Guaranty fund assessments are used by states to pay policyholder liabilities of insolvent insurers domiciled in those states. Many states allow these assessments to be recovered through premium tax offsets. Estimated guaranty fund assessments of $1,344,000 and $1,506,000 and related premium tax offsets of $1,380,000 and $936,000 have been accrued as of June 30, 2009 and December 31, 2008, respectively. The guaranty fund assessments are expected to be paid over the next two years and the premium tax offsets are expected to be realized within ten years of the payments. The participants in the pooling agreement are also subject to second-injury fund assessments, which are designed to encourage employers to employ a worker with a pre-existing disability. Estimated second-injury fund assessments of $1,577,000 and $1,576,000 have been accrued as of June 30, 2009 and December 31, 2008, respectively. The second injury fund assessment accruals are based on projected loss payments. The periods over which the assessments will be paid is not known.

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The participants in the pooling agreement have purchased annuities from life insurance companies, under which the claimant is payee, to fund future payments that are fixed pursuant to specific claim settlement provisions. The Company’s share of case loss reserves eliminated by the purchase of these annuities was $1,882,000 at December 31, 2008. The Company has a contingent liability of $1,882,000 at December 31, 2008 should the issuers of the annuities fail to perform under the terms of the annuities. The probability of a material loss due to failure of performance by the issuers of these annuities is considered remote. The Company’s share of the amount due from any one life insurance company does not equal or exceed one percent of its subsidiaries’ aggregate policyholders’ surplus.

NEW ACCOUNTING PRONOUNCEMENTS

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ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The main objectives in managing the investment portfolios of the Company are to maximize after-tax investment return while minimizing credit risks, in order to provide maximum support for the underwriting operations. Investment strategies are developed based upon many factors including underwriting results, regulatory requirements, fluctuations in interest rates and consideration of other market risks. Investment decisions are centrally managed by investment professionals and are supervised by the investment committees of the respective boards of directors for each of the Company’s subsidiaries.

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Market risk represents the potential for loss due to adverse changes in the fair value of financial instruments, and is directly influenced by the volatility and liquidity in the markets in which the related underlying assets are traded. The market risks of the financial instruments of the Company relate to the investment portfolio, which exposes the Company to interest rate (inclusive of credit spreads) and equity price risk and, to a lesser extent, credit quality and prepayment risk. Monitoring systems and analytical tools are in place to assess each of these elements of market risk; however, there can be no assurance that future changes in interest rates, creditworthiness of issuers, prepayment activity, liquidity available in the market and other general market conditions will not have a material adverse impact on the Company’s results of operations, liquidity or financial position.

Two categories of influences on market risk exist as it relates to financial instruments. First are systematic aspects, which relate to the investing environment and are out of the control of the investment manager. Second are non-systematic aspects, which relate to the construction of the investment portfolio through investment policies and decisions, and are under the direct control of the investment manager. The Company is committed to controlling non-systematic risk through sound investment policies and diversification.

Further analysis of the components of the Company’s market risk (including interest rate risk, equity price risk, credit quality risk, and prepayment risk) can be found in the Company’s 2008 Form 10-K.

ITEM 4.

CONTROLS AND PROCEDURES

The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely making known to them material information relating to the Company and the Company’s consolidated subsidiaries required to be disclosed in the Company’s reports filed or submitted under the Exchange Act.

There were no changes in the Company’s internal control over financial reporting that occurred during the second quarter of 2009 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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EMC INSURANCE GROUP INC. AND SUBSIDIARIES

PART II.

OTHER INFORMATION

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table sets forth information regarding purchases of equity securities by the Company and affiliated purchasers for the three months ended June 30, 2009:

Period	(a) Total number of shares (or units) purchased			(b) Average price paid per share (or unit)		(c) Total number of shares (or units) purchased as part of publicly announced plans or programs			(d) Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs (2 & 3)

4/1/09 - 4/30/09		4,790	(1)	$	21.88		-	(2)	$	14,521,834

5/1/09 - 5/31/09		69	(1)		21.09		-	(2)		14,521,834

6/1/09 - 6/30/09		1,488	(1)		21.70		-	(2)		14,521,834

Total		6,347		$	21.83		-

(1) 55, 69 and 1,488 shares were purchased in the open market in April, May and June, respectively, to fulfill the Company’s obligations under its dividend reinvestment and common stock purchase plan. 4,735 shares were purchased in the open market during April under Employers Mutual Casualty Company’s employee stock purchase plan.

(2) On March 10, 2008, the Company’s Board of Directors authorized a $15,000,000 stock repurchase program and on October 31, 2008, announced an extension of the program, authorizing an additional $10,000,000. This purchase program was effective immediately and does not have an expiration date. A total of $10,031,273 remains available in this plan for the purchase of additional shares.

(3) On May 12, 2005, the Company announced that its parent company, Employers Mutual Casualty Company, had initiated a $15,000,000 stock purchase program under which Employers Mutual would purchase shares of the Company’s common stock in the open market. This purchase program was effective immediately and does not have an expiration date; however, this program is currently dormant and will remain so while the Company’s repurchase program is active. A total of $4,490,561 remains in this plan.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a)

Annual Meeting of Stockholders

EMC Insurance Group Inc.

May 19, 2009

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(b)

The following seven persons were elected to serve as directors of the Company for the ensuing year:

Margaret A. Ball		Bruce G. Kelley
George C. Carpenter III		Raymond A. Michel
Stephen A. Crane		Gretchen H. Tegeler
Robert L. Howe

(c)

Proposals or matters voted upon and number of votes cast:

Election of directors:

Nominee	Votes Cast for		Votes Withheld
Margaret A. Ball		12,764,772		76,933
George C. Carpenter III		12,810,367		31,338
Stephen A. Crane		12,812,396		29,309
Robert L. Howe		12,816,284		25,421
Bruce G. Kelley		12,812,603		29,102
Raymond A. Michel		12,810,825		30,880
Gretchen H. Tegeler		12,812,765		28,940

Proposal to ratify the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm for the current fiscal year.

For

12,807,424

Against

23,583

Abstain

10,698

(d)

None.

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ITEM 6.		EXHIBITS

31.1		Certification of President and Chief Executive Officer as required by Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Senior Vice President and Chief Financial Officer as required by Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of the President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of the Senior Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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EMC INSURANCE GROUP INC. AND SUBSIDIARIES

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 7, 2009.

	EMC INSURANCE GROUP INC.
	Registrant


	/s/ Bruce G. Kelley
	Bruce G. Kelley
	President and Chief Executive Officer
	(Principal Executive Officer)


	/s/ Mark E. Reese
	Mark E. Reese
	Senior Vice President and
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

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EMC INSURANCE GROUP INC. AND SUBSIDIARIES

INDEX TO EXHIBITS

Exhibit number	Item	Page number

31.1	Certification of President and Chief Executive Officer as required by Section 302 of the Sarbanes-Oxley Act of 2002.	55

31.2	Certification of Senior Vice President and Chief Financial Officer as required by Section 302 of the Sarbanes-Oxley Act of 2002.	56

32.1	Certification of the President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	57

32.2	Certification of the Senior Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	58