EMC Insurance (EMCI) 10-Q 2011 Q1 Quarterly report

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 MARCH 31, 2011

OR

o 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 offices)	(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    o 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).

o Yes    o 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	o	Accelerated filer	x
Non-accelerated filer	o	Smaller reporting company	o

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

o 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 April 29, 2011
Common stock, $1.00 par value	12,957,760

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	30
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44
	Item 4.	Controls and Procedures	44
PART II		OTHER INFORMATION
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45
	Item 6.	Exhibits	46
Signatures			47
Index to Exhibits			48

PART I.                      FINANCIAL INFORMATION

ITEM 1.                      FINANCIAL STATEMENTS

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	March 31,		December 31,
	2011		2010
ASSETS
Investments:
Fixed maturities:
Securities held-to-maturity, at amortized cost (fair value $382,905 and $389,679)	$	335,320	$	340,803
Securities available-for-sale, at fair value (amortized cost $883,749,482 and $909,582,782)		912,992,330		941,537,026
Equity securities available-for-sale, at fair value (cost $84,461,376 and $75,721,039)		109,114,446		101,138,982
Other long-term investments, at cost		26,002		29,827
Short-term investments, at cost		54,445,536		36,616,111
Total investments		1,076,913,634		1,079,662,749
Cash		728,827		491,994
Reinsurance receivables due from affiliate		32,868,653		30,256,586
Prepaid reinsurance premiums due from affiliate		8,793,643		9,530,426
Deferred policy acquisition costs (affiliated $37,670,566 and $37,584,448)		37,683,733		37,584,448
Prepaid pension benefits due from affiliate		4,692,991		5,125,701
Accrued investment income		11,587,420		10,925,854
Accounts receivable		1,027,521		1,716,150
Income taxes recoverable		741,523		2,350,864
Deferred income taxes		8,297,229		6,690,218
Goodwill		941,586		941,586
Other assets (affiliated $2,398,198 and $2,433,445)		2,563,031		2,517,922
Total assets	$	1,186,839,791	$	1,187,794,498

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

3

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	March 31,			December 31,
	2011			2010
LIABILITIES
Losses and settlement expenses (affiliated $564,103,373 and $553,125,183)	$	567,422,231		$	556,140,956
Unearned premiums (affiliated $167,746,796 and $167,896,119)		167,817,489			167,896,119
Other policyholders’ funds due to affiliate		8,573,012			8,315,751
Surplus notes payable to affiliate		25,000,000			25,000,000
Amounts due affiliate to settle quarterly transaction balances		10,493,402			18,380,813
Pension and postretirement benefits payable to affiliate		20,987,377			20,418,716
Other liabilities (affiliated $16,464,544 and $22,861,092)		16,586,572			23,001,141
Total liabilities		816,880,083			819,153,496
STOCKHOLDERS’ EQUITY
Common stock, $1 par value, authorized 20,000,000 shares; issued and outstanding, 12,953,116 shares in 2011 and 12,927,678 shares in 2010		12,953,116			12,927,678
Additional paid-in capital		89,556,825			88,937,294
Accumulated other comprehensive income (loss):
Net unrealized losses on fixed maturity securities with “other-than-temporary” impairments		(5,210	)		(69,852	)
Other net unrealized gains		35,037,556			37,361,774
Pension and postretirement benefits payable to affiliate		(12,624,231	)		(12,796,435	)
Total accumulated other comprehensive income		22,408,115			24,495,487
Retained earnings		245,041,652			242,280,543
Total stockholders’ equity		369,959,708			368,641,002
Total liabilities and stockholders’ equity	$	1,186,839,791		$	1,187,794,498

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

4

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three months ended March 31,
	2011			2010
REVENUES
Premiums earned (affiliated $97,075,882 and $91,455,297)	$	96,286,814		$	92,345,066
Investment income, net		12,078,595			12,516,987
Net realized investment gains, excluding impairment losses on available-for-sale securities		8,504,042			877,308
Total “other-than-temporary” impairment losses on available-for-sale securities		(245,846	)		(231,856	)
Portion of impairment losses on fixed maturity available-for-sale securities recognized in other comprehensive income (before taxes)		—			(120,539	)
Net impairment losses on available-for-sale securities		(245,846	)		(352,395	)
Net realized investment gains		8,258,196			524,913
Other income (all affiliated)		203,830			206,686
		116,827,435			105,593,652
LOSSES AND EXPENSES
Losses and settlement expenses (affiliated $73,283,167 and $55,433,133)		73,369,601			56,042,624
Dividends to policyholders (all affiliated)		2,512,969			2,354,462
Amortization of deferred policy acquisition costs (affiliated $24,027,495 and $21,607,445)		23,810,782			21,865,115
Other underwriting expenses (all affiliated)		9,621,324			10,365,194
Interest expense (all affiliated)		225,000			225,000
Other expense (affiliated $686,863 and $278,020)		932,378			198,203
		110,472,054			91,050,598
Income before income tax expense (benefit)		6,355,381			14,543,054
INCOME TAX EXPENSE (BENEFIT)
Current		1,617,075			4,153,450
Deferred		(483,044	)		511,512
		1,134,031			4,664,962
Net income	$	5,221,350		$	9,878,092
Net income per common share
-basic and diluted	$	0.40		$	0.75
Dividend per common share	$	0.19		$	0.18
Average number of common shares outstanding
-basic and diluted		12,935,554			13,123,810

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

5

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three months ended March 31,
	2011			2010
Net income	$	5,221,350		$	9,878,092
OTHER COMPREHENSIVE INCOME (LOSS)
Change in unrealized holding gains on investment securities, net of deferred income tax expense of $1,638,868 and $4,653,751		3,043,609			8,642,680
Reclassification adjustment for realized investment gains included in net income, net of income tax expense of $2,890,369 and $225,907		(5,367,827	)		(419,545	)
Change in unrealized holding gains on fixed maturity securities with “other-than-temporary” impairment, net of deferred income tax expense of $34,808 and $5,387		64,642			10,004
Reclassification adjustment for realized investment losses from fixed maturity securities with “other-than-temporary” impairment included in net income, net of income tax benefit of $0 and $42,188		—			78,351
Adjustment associated with affiliate’s pension and postretirement benefit plans, net of deferred income tax expense of $92,726 and $99,227:
Net actuarial gain		250,371			262,318
Prior service credit		(78,167	)		(78,042	)
		172,204			184,276
Other comprehensive income (loss)		(2,087,372	)		8,495,766
Total comprehensive income	$	3,133,978		$	18,373,858

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

6

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three months ended March 31,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	5,221,350		$	9,878,092
Adjustments to reconcile net income to net cash used in operating activities:
Losses and settlement expenses (affiliated $10,978,190 and ($2,248,180))		11,281,275			(1,733,934	)
Unearned premiums (affiliated ($149,323) and ($468,138))		(78,630	)		(451,149	)
Other policyholders’ funds due to affiliate		257,261			625,049
Amounts due affiliate to settle quarterly transaction balances		(7,887,411	)		3,903,872
Pension and postretirement benefits payable to affiliate		1,266,301			1,423,218
Reinsurance receivables due from affiliate		(2,612,067	)		596,534
Prepaid reinsurance premiums due from affiliate		736,783			(1,703,815	)
Commission payable (affiliated ($5,344,556) and ($5,669,456))		(5,347,980	)		(5,669,456	)
Interest payable to affiliate		(675,000	)		(675,000	)
Deferred policy acquisition costs (affiliated ($86,118) and $532,078)		(99,285	)		532,078
Stock-based compensation payable to affiliate		70,243			67,361
Accrued investment income		(661,566	)		(1,652,290	)
Accrued income tax:
Current		1,616,925			(2,346,699	)
Deferred		(483,044	)		511,512
Realized investment gains		(8,258,196	)		(524,913	)
Accounts receivable		688,629			(514,810	)
Amortization of premium/discount on fixed maturity securities		(263,895	)		(203,776	)
Other, net (affiliated ($349,329) and ($4,175,205))		(444,282	)		(4,187,342	)
		(10,893,939	)		(12,003,560	)
Net cash used in operating activities	$	(5,672,589	)	$	(2,125,468	)

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

7

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

	Three months ended March 31,
	2011			2010
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities of fixed maturity securities held-to-maturity	$	5,513		$	5,471
Purchases of fixed maturity securities available-for-sale		(36,022,457	)		(32,246,159	)
Disposals of fixed maturity securities available-for-sale		62,148,580			24,022,995
Purchases of equity securities available-for-sale		(29,545,693	)		(6,700,487	)
Disposals of equity securities available-for-sale		29,034,594			6,526,009
Disposals of other long-term investments		3,825			4,055
Net (purchases) disposals of short-term investments		(17,829,425	)		12,798,929
Net cash provided by investing activities		7,794,937			4,410,813
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock through affiliate’s stock option plans		567,142			334,418
Excess tax benefit associated with affiliate’s stock option plans		7,584			—
Dividends paid to stockholders (affiliated ($1,491,092) and ($1,412,613))		(2,460,241	)		(2,364,005	)
Net cash used in financing activities		(1,885,515	)		(2,029,587	)
NET INCREASE IN CASH		236,833			255,758
Cash at the beginning of the year		491,994			278,534
Cash at the end of the quarter	$	728,827		$	534,292

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

8

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.       BASIS OF PRESENTATION

EMC Insurance Group Inc., a 61 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. 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, 2010 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 2010 Form 10-K or the 2010 Annual Report to Stockholders for more detailed footnote information.

2.       NEW ACCOUNTING PRONOUNCEMENTS

In October 2010, the Financial Accounting Standards Board (FASB) updated its guidance related to Insurance Topic 944 of the FASB Accounting Standards Codification TM(ASC) to clarify which costs associated with the acquisition of insurance contracts should be capitalized and deferred for recognition during the coverage period. This guidance specifies that only incremental costs or costs directly related to the successful acquisition of new or renewal insurance contracts are to be capitalized as a deferred acquisition cost. Currently, industry practice is such that deferred costs typically also include costs related to unsuccessful insurance contract acquisitions. This guidance is effective for annual reporting periods (and interim reporting periods of those annual reporting periods) beginning on or after December 15, 2011, and may be adopted prospectively or retrospectively. Adoption of this guidance will have an impact on the consolidated financial position and operating results of the Company since certain costs associated with contract acquisition that are currently deferred will not likely meet the criteria for deferral under the new guidance. The Company has not yet established an estimate of the impact this statement will have on its financial statements.

In July 2010, the FASB updated its guidance related to Receivables Topic 310 of the ASC to require additional disclosures regarding credit risk exposures and the allowance for credit losses, as well as a description of the accounting policies and methodology used to estimate the liability for off-balance-sheet credit risk exposures and related charges. The additional disclosures required at the end of a reporting period were effective for interim and annual reporting periods ending on or after December 15, 2010, and the additional disclosures required about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. Adoption of this guidance resulted in some additional disclosures at year-end 2010, but had no effect on the consolidated financial position or operating results of the Company.

9

In January 2010, the FASB updated its guidance related to the Fair Value Measurements and Disclosures Topic 820 of the ASC to require additional disclosures regarding transfers in and out of fair value measurement Levels 1 and 2, the display of Level 3 activity on a gross basis (rather than net), fair value measurement disclosures for each class of assets and liabilities (rather than by line item within the statement of financial position), and additional disclosures about inputs and valuation techniques. This guidance was effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which is effective for fiscal years (and interim periods of those fiscal years) beginning after December 15, 2010. Adoption of this guidance had no effect on the consolidated financial position or operating results of the Company.

3.       REINSURANCE

The effect of reinsurance on premiums written and earned, and losses and settlement expenses incurred, for the three months ended March 31, 2011 and 2010 is presented below.

	Three months ended March 31, 2011
	Property and
	casualty
	insurance			Reinsurance			Total
Premiums written
Direct	$	67,389,515		$	—		$	67,389,515
Assumed from nonaffiliates (1)		148,275			27,034,789			27,183,064
Assumed from affiliates		81,889,754			—			81,889,754
Ceded to nonaffiliates		(5,409,729	)		(4,638,271	)		(10,048,000	)
Ceded to affiliates (1)		(67,389,515	)		(2,239,652	)		(69,629,167	)
Net premiums written	$	76,628,300		$	20,156,866		$	96,785,166
Premiums earned
Direct	$	65,476,643		$	—		$	65,476,643
Assumed from nonaffiliates		213,684			26,466,493			26,680,177
Assumed from affiliates		82,631,073			—			82,631,073
Ceded to nonaffiliates		(5,533,465	)		(5,251,319	)		(10,784,784	)
Ceded to affiliates		(65,476,643	)		(2,239,652	)		(67,716,295	)
Net premiums earned	$	77,311,292		$	18,975,522		$	96,286,814
Losses and settlement expenses incurred
Direct	$	55,139,822		$	—		$	55,139,822
Assumed from nonaffiliates		300,990			30,668,591			30,969,581
Assumed from affiliates		53,230,852			225,060			53,455,912
Ceded to nonaffiliates		(2,364,154	)		(3,692,891	)		(6,057,045	)
Ceded to affiliates		(55,139,822	)		(4,998,847	)		(60,138,669	)
Net losses and settlement expenses incurred	$	51,167,688		$	22,201,913		$	73,369,601

(1) The “Reinsurance” and “Total” amounts include $1,022,885 associated with a portfolio adjustment related to the January 1, 2011 increase in participation in the MRB pool. Ten percent of this amount ($102,288) is included in the ceded to affiliates amounts for the cost of the $3,000,000 excess-of-loss reinsurance protection provided by Employers Mutual.

10

	Three months ended March 31, 2010
	Property and
	casualty
	insurance			Reinsurance			Total
Premiums written
Direct	$	58,737,264		$	—		$	58,737,264
Assumed from nonaffiliates		548,249			23,823,795			24,372,044
Assumed from affiliates		77,339,454			—			77,339,454
Ceded to nonaffiliates		(5,332,061	)		(5,827,666	)		(11,159,727	)
Ceded to affiliates		(58,737,264	)		—			(58,737,264	)
Net premiums written	$	72,555,642		$	17,996,129		$	90,551,771
Premiums earned
Direct	$	58,838,450		$	—		$	58,838,450
Assumed from nonaffiliates		625,428			21,493,676			22,119,104
Assumed from affiliates		79,681,894			—			79,681,894
Ceded to nonaffiliates		(5,519,959	)		(3,935,973	)		(9,455,932	)
Ceded to affiliates		(58,838,450	)		—			(58,838,450	)
Net premiums earned	$	74,787,363		$	17,557,703		$	92,345,066
Losses and settlement expenses incurred
Direct	$	41,773,466		$	—		$	41,773,466
Assumed from nonaffiliates		607,416			13,317,340			13,924,756
Assumed from affiliates		44,188,891			183,651			44,372,542
Ceded to nonaffiliates		(782,019	)		(1,472,655	)		(2,254,674	)
Ceded to affiliates		(41,773,466	)		—			(41,773,466	)
Net losses and settlement expenses incurred	$	44,014,288		$	12,028,336		$	56,042,624

Individual lines in the above tables are defined as follows:

● “Direct” represents business produced by the property and casualty insurance subsidiaries.

● “Assumed from nonaffiliates” for the property and casualty insurance subsidiaries represents their aggregate 30 percent pool participation percentage of involuntary business assumed by the pool participants pursuant to state law.  For the reinsurance subsidiary, this line represents the reinsurance business assumed through the quota share agreement (including “fronting” activities performed by Employers Mutual, which were expanded significantly during 2010, most notably with MRB) and the business assumed outside the quota share agreement.

● “Assumed from affiliates” for the property and casualty insurance subsidiaries represents their aggregate 30 percent 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 are allocated to the property and casualty insurance subsidiaries and the reinsurance subsidiary.

● “Ceded to nonaffiliates” for the property and casualty insurance subsidiaries represents their aggregate 30 percent pool participation percentage of the ceded reinsurance agreements that provide protection to the pool and each of its participants.  For the reinsurance subsidiary, this line includes reinsurance business that is ceded to other insurance companies in connection with above referenced “fronting” activities performed by Employers Mutual.

● “Ceded to affiliates” for the property and casualty insurance subsidiaries represents the cession of their direct business to Employers Mutual under the terms of the pooling agreement.  For the reinsurance subsidiary, starting in 2011 this line includes amounts ceded to Employers Mutual in connection with the $3,000,000 excess-of-loss reinsurance agreement.

11

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 environment in which they operate.

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

	Property and casualty insurance			Reinsurance			Parent company			Consolidated
Three months ended March 31, 2011
Premiums earned	$	77,311,292		$	18,975,522		$	—		$	96,286,814
Underwriting loss		(5,192,669	)		(7,835,193	)		—			(13,027,862	)
Net investment income		8,897,650			3,180,547			398			12,078,595
Realized investment gains		6,353,354			1,904,842			—			8,258,196
Other income		203,830			—			—			203,830
Interest expense		225,000			—			—			225,000
Other expenses		162,716			421,286			348,376			932,378
Income (loss) before income tax expense (benefit)	$	9,874,449		$	(3,171,090	)	$	(347,978	)	$	6,355,381
Assets	$	869,404,454		$	315,194,520		$	370,424,697		$	1,555,023,671
Eliminations		—			—			(363,287,007	)		(363,287,007	)
Reclassifications		—			(4,896,873	)		—			(4,896,873	)
Net assets	$	869,404,454		$	310,297,647		$	7,137,690		$	1,186,839,791
	Property and casualty insurance			Reinsurance			Parent company			Consolidated
Three months ended March 31, 2010
Premiums earned	$	74,787,363		$	17,557,703		$	—		$	92,345,066
Underwriting profit		1,116,596			601,075			—			1,717,671
Net investment income		9,416,496			3,104,100			(3,609	)		12,516,987
Realized investment gains		405,511			119,402			—			524,913
Other income		206,686			—			—			206,686
Interest expense		225,000			—			—			225,000
Other expenses		227,724			(310,195	)		280,674			198,203
Income (loss) before income tax expense (benefit)	$	10,692,565		$	4,134,772		$	(284,283	)	$	14,543,054
Assets	$	876,088,849		$	282,987,101		$	359,263,780		$	1,518,339,730
Eliminations		—			—			(354,828,537	)		(354,828,537	)
Reclassifications		—			—			(567,044	)		(567,044	)
Net assets	$	876,088,849		$	282,987,101		$	3,868,199		$	1,162,944,149

12

The following table displays the net premiums earned of the property and casualty insurance segment and the reinsurance segment for the three months ended March 31, 2011 and 2010, by line of insurance.

	Three months ended March 31,
	2011		2010
Property and casualty insurance segment
Commercial lines:
Automobile	$	16,143,170	$	15,871,169
Property		16,689,879		15,809,175
Workers’ compensation		16,485,108		15,653,372
Liability		14,571,827		14,400,002
Other		1,919,693		2,190,187
Total commercial lines		65,809,677		63,923,905
Personal lines:
Automobile		6,430,181		6,080,351
Property		4,937,752		4,650,322
Liability		133,682		132,785
Total personal lines		11,501,615		10,863,458
Total property and casualty insurance	$	77,311,292	$	74,787,363
Reinsurance segment
Pro rata reinsurance:
Property and casualty	$	1,786,117	$	1,544,678
Property		2,887,840		2,381,062
Marine/Aviation		221,983		236,004
Casualty		277,065		544,763
Crop		217,787		66,267
Total pro rata reinsurance		5,390,792		4,772,774
Excess-of-loss reinsurance:
Property		11,235,697		9,874,663
Casualty		2,345,300		2,910,040
Surety		3,733		226
Total excess-of-loss reinsurance		13,584,730		12,784,929
Total reinsurance	$	18,975,522	$	17,557,703
Consolidated	$	96,286,814	$	92,345,066

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5.           INCOME TAXES

The actual income tax expense for the three months ended March 31, 2011, and 2010 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) as follows:

	Three months ended March 31,
	2011			2010
Computed “expected” income tax expense	$	2,224,383		$	5,090,069
Increases (decreases) in tax resulting from:
Tax-exempt interest income		(1,208,092	)		(1,254,309	)
Dividends received deduction		(140,479	)		(116,173	)
Proration of tax-exempt interest and dividends received deduction		202,286			205,572
Elimination of deduction for Medicare Part D retiree drug subsidy		—			794,383
Other, net		55,933			(54,580	)
Income tax expense	$	1,134,031		$	4,664,962

As a result of the Patient Protection and Affordable Care Act (H.R. 3590) and the follow-up Health Care and Education Reconciliation Act of 2010 (H.R. 4872) signed into law on March 23, 2010 and March 30, 2010, respectively (the “Acts”), beginning in 2013 the Company will no longer be able to claim a tax deduction for drug expenses that are reimbursed under the Medicare Part D retiree drug subsidy program.  Although this tax change does not take effect until 2013, the Company was required to recognize the financial impact of this tax change in the period in which the Acts were signed.  As a result of the Acts, the Company recognized a decrease in its deferred tax asset of $794,383 during the first quarter of 2010.

The Company had no provision for uncertain tax positions at March 31, 2011 or December 31, 2010.  The Company did not recognize any interest or other penalties related to U.S. federal or state income taxes during the three months ended March 31, 2011 or 2010.  It is the Company’s accounting policy to reflect income tax penalties as other expense, and interest as interest expense.

The Company files a U.S. federal tax return, 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.  The Company’s U.S. federal tax returns for tax years 2005 through 2008 are currently being audited.  No additional tax liability is expected from these audits.

6.           EMPLOYEE RETIREMENT PLANS

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

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	Three months ended March 31,
	2011			2010
Pension plans:
Service cost	$	3,112,182		$	2,860,970
Interest cost		2,406,393			2,498,263
Expected return on plan assets		(3,876,511	)		(3,169,248	)
Amortization of net actuarial loss		840,282			1,001,284
Amortization of prior service cost		112,370			113,020
Net periodic pension benefit cost	$	2,594,716		$	3,304,289
Postretirement benefit plans:
Service cost	$	1,150,622		$	982,900
Interest cost		1,499,645			1,383,440
Expected return on plan assets		(732,474	)		(738,122	)
Amortization of net actuarial loss		444,212			337,737
Amortization of prior service credit		(532,814	)		(532,814	)
Net periodic postretirement benefit cost	$	1,829,191		$	1,433,141

Net periodic pension benefit cost allocated to the Company amounted to $797,973 and $1,017,441 for the three months ended March 31, 2011 and 2010, respectively.  Net periodic postretirement benefit cost allocated to the Company amounted to $527,794 and $409,932 for the three months ended March 31, 2011 and 2010, respectively.

Employers Mutual plans to contribute approximately $22,000,000 to the pension plan and $4,000,000 to the VEBA trust in 2011.  The Company’s share of these contributions would be approximately $6,750,000 and $1,122,000, respectively.  As of March 31, 2011, Employers Mutual has not made a contribution to the pension plan or 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.

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 permit the issuance of incentive stock options only, while the 2007 Plan permits the issuance 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 awards.  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.

15

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 executive officers.

The Company recognized compensation expense from these plans of $70,243 ($50,104 net of tax) and $67,361 ($54,617 net of tax) for the three months ended March 31, 2011 and 2010, respectively.  No compensation expense was recognized during the three months ended March 31, 2011 and 2010 related to a separate stock appreciation rights agreement that is accounted for as a liability-classified award because the fair value of the award did not exceed the floor contained in the agreement.  During the first three months of 2011, 302,180 non-qualified stock options were granted under the 2007 Plan to eligible participants at a price of $24.405.  During the three months ended March 31, 2011, 26,431 options were exercised under the plans at prices ranging from $11.38 to $20.68.

The weighted average fair value of options granted during the three months ended March 31, 2011 and 2010 amounted to $4.44 and $1.77, respectively.  Employers Mutual estimated the fair value of each option grant on the date of grant using the Black-Scholes-Merton option-pricing model and the following weighted-average assumptions:

	2011			2010
Weighted-average dividend yield		3.11	%		3.48	%
Expected volatility		20.9% - 51.2	%		16.7% - 23.6	%
Weighted-average volatility		32.76	%		19.17	%
Risk-free interest rate		0.17% - 2.75	%		0.16% - 2.99	%
Expected term (years)		0.25 - 6.40			0.25 - 6.30

The expected term of the options granted in 2011 was estimated using historical data that excluded certain option exercises that occurred prior to the normal vesting period due to the retirement of the option holders.  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 2.99 years.

The expected volatility of options for the 2011 option grant was computed by using the historical daily prices of the Company’s common stock for a period covering 6.4 years, which approximates the average term of the options, which produced an expected volatility of 43.7 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 daily prices for the period approximating the expected term of those options.  This produced expected volatility ranging from 20.9 percent to 51.2 percent.  Prior to 2011, expected volatilities were calculated, in most instances, using historical high and low average monthly prices of the Company’s common stock.  This produced expected volatilities that were typically lower than those calculated in 2011 using daily prices.  Due to the higher expected volatilities used in the valuations of the options in the 2011 grant, the fair values of the granted options are higher, which in turn produces higher stock compensation expense.

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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		Estimated
	amount		fair value
March 31,2011
Assets:
Fixed maturity securities held-to-maturity:
Residential mortgage-backed	$	335,320	$	382,905
Total fixed maturity securities held-to-maturity		335,320		382,905
Fixed maturity securities available-for-sale:
U.S. treasury		4,715,486		4,715,486
U.S. government-sponsored agencies		154,803,660		154,803,660
Obligations of states and political subdivisions		391,592,813		391,592,813
Commercial mortgage-backed		89,327,865		89,327,865
Residential mortgage-backed		32,191,380		32,191,380
Other asset-backed		12,443,069		12,443,069
��Corporate		227,918,057		227,918,057
Total fixed maturity securities available-for-sale		912,992,330		912,992,330
Equity securities available-for-sale:
Common stocks:
Financial services		13,598,433		13,598,433
Information technology		17,994,221		17,994,221
Healthcare		14,089,751		14,089,751
Consumer staples		6,050,842		6,050,842
Consumer discretionary		12,420,774		12,420,774
Energy		15,615,109		15,615,109
Industrials		10,717,899		10,717,899
Other		9,959,417		9,959,417
Non-redeemable preferred stocks		8,668,000		8,668,000
Total equity securities available-for-sale		109,114,446		109,114,446
Short-term investments		54,445,536		54,445,536
Other long-term investments		26,002		26,002
Liabilities:
Surplus notes		25,000,000		23,659,503

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	Carrying		Estimated
	amount		fair value
December 31,2010
Assets:
Fixed maturity securities held-to-maturity:
Residential mortgage-backed	$	340,803	$	389,679
Total fixed maturity securities held-to-maturity		340,803		389,679
Fixed maturity securities available-for-sale:
U.S. treasury		4,801,766		4,801,766
U.S. government-sponsored agencies		168,072,840		168,072,840
Obligations of states and political subdivisions		390,932,504		390,932,504
Commercial mortgage-backed		93,222,219		93,222,219
Residential mortgage-backed		34,285,838		34,285,838
Other asset-backed		13,100,849		13,100,849
Corporate		237,121,010		237,121,010
Total fixed maturity securities available-for-sale		941,537,026		941,537,026
Equity securities available-for-sale:
Common stocks:
Financial services		11,246,421		11,246,421
Information technology		17,350,652		17,350,652
Healthcare		12,785,689		12,785,689
Consumer staples		7,784,286		7,784,286
Consumer discretionary		12,162,474		12,162,474
Energy		9,381,310		9,381,310
Industrials		7,466,153		7,466,153
Other		14,630,005		14,630,005
Non-redeemable preferred stocks		8,331,992		8,331,992
Total equity securities available-for-sale		101,138,982		101,138,982
Short-term investments		36,616,111		36,616,111
Other long-term investments		29,827		29,827
Liabilities:
Surplus notes		25,000,000		23,893,033

The estimated fair value of fixed maturity securities, equity securities and short-term investments 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 March 31, 2011 and December 31, 2010.

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

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.  The following fair value hierarchy  prioritizes inputs to valuation techniques used to measure fair value:

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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 judgments 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 and medium-term 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- 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.

On a quarterly basis, the Company receives from its independent pricing service a list of fixed maturity securities, if any, 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 March 31, 2011, the Company did not hold any fixed maturity securities that were priced solely from broker quotes.

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A small number of the Company’s securities are not priced by the independent pricing service.  One is an equity security that is reported as a Level 3 fair value measurement at March 31, 2011 and December 31, 2010, since no reliable observable inputs are used in its valuation.  This equity security continues to be reported at the fair value obtained from the Securities Valuation Office (SVO) of the National Association of Insurance Commissioners (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 $2,130 at March 31, 2011 and December 31, 2010.  The remaining securities not priced by the Company’s independent pricing service are fixed maturity securities.  These fixed maturity securities are classified as Level 2 fair value measurements and are carried at aggregate fair values of $2,958,676 at March 31, 2011 and $12,914,542 at December 31, 2010.  The fair values for these fixed maturity securities were obtained from the Company’s investment custodian using independent pricing services which utilize 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.  This includes comparing valuations from the independent pricing source, the Company’s investment custodian and the SVO.  From these comparisons, material variances are identified and resolved to determine the final valuations 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 March 31, 2011 and December 31, 2010.

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	Fair value measurements at March 31, 2011 using
			Quoted
			prices in		Significant
			active markets		other		Significant
			for identical		observable		unobservable
			assets		inputs		inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Description
Fixed maturity securities available-for-sale:
U.S. treasury	$	4,715,486	$	—	$	4,715,486	$	—
U.S. government-sponsored agencies		154,803,660		—		154,803,660		—
Obligations of states and political subdivisions		391,592,813		—		391,592,813		—
Commercial mortgage-backed		89,327,865		—		89,327,865		—
Residential mortgage-backed		32,191,380		—		32,191,380		—
Other asset-backed		12,443,069		—		12,443,069		—
Corporate		227,918,057		—		227,918,057		—
Total fixed maturity securities available-for-sale		912,992,330		—		912,992,330		—
Equity securities available-for-sale:
Common stocks:
Financial services		13,598,433		13,596,303		—		2,130
Information technology		17,994,221		17,994,221		—		—
Healthcare		14,089,751		14,089,751		—		—
Consumer staples		6,050,842		6,050,842		—		—
Consumer discretionary		12,420,774		12,420,774		—		—
Energy		15,615,109		15,615,109		—		—
Industrials		10,717,899		10,717,899		—		—
Other		9,959,417		9,959,417		—		—
Non-redeemable preferred stocks		8,668,000		8,668,000		—		—
Total equity securities available-for-sale		109,114,446		109,112,316		—		2,130
Short-term investments		54,445,536		54,445,536		—		—
	$	1,076,552,312	$	163,557,852	$	912,992,330	$	2,130

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	Fair value measurements at December 31, 2010 using
			Quoted
			prices in		Significant
			active markets		other		Significant
			for identical		observable		unobservable
			assets		inputs		inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Description
Fixed maturity securities available-for-sale:
U.S. treasury	$	4,801,766	$	—	$	4,801,766	$	—
U.S. government-sponsored agencies		168,072,840		—		168,072,840		—
Obligations of states and political subdivisions		390,932,504		—		390,932,504		—
Commercial mortgage-backed		93,222,219		—		93,222,219		—
Residential mortgage-backed		34,285,838		—		34,285,838		—
Other asset-backed		13,100,849		—		13,100,849		—
Corporate		237,121,010		—		237,121,010		—
Total fixed maturity securities available-for-sale		941,537,026		—		941,537,026		—
Equity securities available-for-sale:
Common stocks:
Financial services		11,246,421		11,244,291		—		2,130
Information technology		17,350,652		17,350,652		—		—
Healthcare		12,785,689		12,785,689		—		—
Consumer staples		7,784,286		7,784,286		—		—
Consumer discretionary		12,162,474		12,162,474		—		—
Energy		9,381,310		9,381,310		—		—
Industrials		7,466,153		7,466,153		—		—
Other		14,630,005		14,630,005		—		—
Non-redeemable preferred stocks		8,331,992		8,331,992		—		—
Total equity securities available-for-sale		101,138,982		101,136,852		—		2,130
Short-term investments		36,616,111		36,616,111		—		—
	$	1,079,292,119	$	137,752,963	$	941,537,026	$	2,130

 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 months ended March 31, 2011 and 2010. Any unrealized gains or losses on these securities are recognized in other comprehensive income. Any gains or losses from disposals or impairments of these securities are reported as realized investment gains or losses in net income.

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	Fair value measurements using significant unobservable inputs (Level 3)
	Equity securities
	available-for-sale,
	financial services		Total
Balance at December 31, 2009	$	2,014	$	2,014
Total unrealized gains included in other comprehensive income		—		—
Balance at March 31, 2010	$	2,014	$	2,014
Balance at December 31, 2010	$	2,130	$	2,130
Total unrealized gains included in other comprehensive income		—		—
Balance at March 31, 2011	$	2,130	$	2,130

 There were no transfers into or out of Levels 1 or 2 during the three months ended March 31, 2011 or 2010. It is the Company’s policy to recognize transfers between levels at the beginning of the reporting period.

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 March 31, 2011 and December 31, 2010 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.

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			Gross		Gross
	Amortized		unrealized		unrealized		Estimated
	cost		gains		losses		fair value
March 31, 2011
Securities held-to-maturity:
Fixed maturity securities:
Residential mortgage-backed	$	335,320	$	47,585	$	—	$	382,905
Total securities held-to-maturity	$	335,320	$	47,585	$	—	$	382,905
Securities available-for-sale:
Fixed maturity securities:
U.S. treasury	$	4,669,699	$	45,787	$	—	$	4,715,486
U.S. government-sponsored agencies		155,669,135		1,465,608		2,331,083		154,803,660
Obligations of states and political subdivisions		384,460,499		11,492,623		4,360,309		391,592,813
Commercial mortgage-backed		79,698,655		9,653,571		24,361		89,327,865
Residential mortgage-backed		31,060,473		1,387,072		256,165		32,191,380
Other asset-backed		11,609,317		991,874		158,122		12,443,069
Corporate		216,581,704		11,783,749		447,396		227,918,057
Total fixed maturity securities		883,749,482		36,820,284		7,577,436		912,992,330
Equity securities:
Common stocks:
Financial services		11,272,111		2,385,298		58,976		13,598,433
Information technology		12,674,092		5,580,913		260,784		17,994,221
Healthcare		11,465,198		2,770,427		145,874		14,089,751
Consumer staples		5,255,450		883,785		88,393		6,050,842
Consumer discretionary		8,236,629		4,194,214		10,069		12,420,774
Energy		10,528,692		5,086,417		—		15,615,109
Industrials		8,364,360		2,353,539		—		10,717,899
Other		7,664,844		2,294,573		—		9,959,417
Non-redeemable preferred stocks		9,000,000		201,200		533,200		8,668,000
Total equity securities		84,461,376		25,750,366		1,097,296		109,114,446
Total securities available-for-sale	$	968,210,858	$	62,570,650	$	8,674,732	$	1,022,106,776

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			Gross		Gross
	Amortized		unrealized		unrealized		Estimated
	cost		gains		losses		fair value
December 31, 2010
Securities held-to-maturity:
Fixed maturity securities:
Residential mortgage-backed	$	340,803	$	48,876	$	—	$	389,679
Total securities held-to-maturity	$	340,803	$	48,876	$	—	$	389,679
Securities available-for-sale:
Fixed maturity securities:
U.S. treasury	$	4,747,814	$	53,952	$	—	$	4,801,766
U.S. government-sponsored agencies		167,976,167		1,995,829		1,899,156		168,072,840
Obligations of states and political subdivisions		384,164,252		11,650,499		4,882,247		390,932,504
Commercial mortgage-backed		82,906,928		10,341,728		26,437		93,222,219
Residential mortgage-backed		32,801,281		1,664,155		179,598		34,285,838
Other asset-backed		12,100,433		1,056,995		56,579		13,100,849
Corporate		224,885,907		12,954,535		719,432		237,121,010
Total fixed maturity securities		909,582,782		39,717,693		7,763,449		941,537,026
Equity securities:
Common stocks:
Financial services		8,630,273		2,667,761		51,613		11,246,421
Information technology		11,215,431		6,163,395		28,174		17,350,652
Healthcare		10,200,062		2,705,556		119,929		12,785,689
Consumer staples		6,010,692		1,834,157		60,563		7,784,286
Consumer discretionary		7,636,589		4,535,110		9,225		12,162,474
Energy		6,350,228		3,031,082		—		9,381,310
Industrials		5,395,949		2,096,834		26,630		7,466,153
Other		11,281,815		3,350,963		2,773		14,630,005
Non-redeemable preferred stocks		9,000,000		100,000		768,008		8,331,992
Total equity securities		75,721,039		26,484,858		1,066,915		101,138,982
Total securities available-for-sale	$	985,303,821	$	66,202,551	$	8,830,364	$	1,042,676,008

 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 March 31, 2011 and December 31, 2010, listed by length of time the securities were in an unrealized loss position.

25

	Less than twelve months				Twelve months or longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	value		losses		value		losses		value		losses
March 31, 2011
Fixed maturity securities:
U.S. government-sponsored agencies	$	93,691,202	$	2,331,083	$	—	$	—	$	93,691,202	$	2,331,083
Obligations of states and political subdivisions		78,711,253		4,360,309		—		—		78,711,253		4,360,309
Commercial mortgage-backed		3,735,743		24,361		—		—		3,735,743		24,361
Residential mortgage-backed		13,157,552		252,399		1,198,769		3,766		14,356,321		256,165
Other asset-backed		2,958,676		158,122		—		—		2,958,676		158,122
Corporate		39,558,174		447,396		—		—		39,558,174		447,396
Total, fixed maturity securities		231,812,600		7,573,670		1,198,769		3,766		233,011,369		7,577,436
Equity securities:
Common stocks:
Financial services		1,864,818		58,976		—		—		1,864,818		58,976
Information technology		3,556,066		260,784		—		—		3,556,066		260,784
Healthcare		431,205		26,873		1,464,530		119,001		1,895,735		145,874
Consumer staples		1,896,985		88,393		—		—		1,896,985		88,393
Consumer discretionary		752,637		10,069		—		—		752,637		10,069
Non-redeemable preferred stocks		—		—		4,466,800		533,200		4,466,800		533,200
Total, equity securities		8,501,711		445,095		5,931,330		652,201		14,433,041		1,097,296
Total temporarily impaired securities	$	240,314,311	$	8,018,765	$	7,130,099	$	655,967	$	247,444,410	$	8,674,732

	Less than twelve months				Twelve months or longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	value		losses		value		losses		value		losses
December 31, 2010
Fixed maturity securities:
U.S. government-sponsored agencies	$	64,030,427	$	1,899,156	$	—	$	—	$	64,030,427	$	1,899,156
Obligations of states and political subdivisions		97,769,789		4,882,247		—		—		97,769,789		4,882,247
Commercial mortgage-backed		3,998,831		26,437		—		—		3,998,831		26,437
Residential mortgage-backed		11,346,913		157,798		1,222,717		21,800		12,569,630		179,598
Other asset-backed		3,331,324		56,579		—		—		3,331,324		56,579
Corporate		38,270,674		719,432		—		—		38,270,674		719,432
Total, fixed maturity securities		218,747,958		7,741,649		1,222,717		21,800		219,970,675		7,763,449
Equity securities:
Common stocks:
Financial services		1,608,012		51,613		—		—		1,608,012		51,613
Information technology		879,805		28,174		—		—		879,805		28,174
Healthcare		3,551,623		119,929		—		—		3,551,623		119,929
Consumer staples		1,218,294		60,563		—		—		1,218,294		60,563
Consumer discretionary		253,023		9,225		—		—		253,023		9,225
Industrials		761,616		26,630		—		—		761,616		26,630
Other		42,752		2,773		—		—		42,752		2,773
Non-redeemable preferred stocks		—		—		4,231,992		768,008		4,231,992		768,008
Total, equity securities		8,315,125		298,907		4,231,992		768,008		12,547,117		1,066,915
Total temporarily impaired securities	$	227,063,083	$	8,040,556	$	5,454,709	$	789,808	$	232,517,792	$	8,830,364

26

Unrealized losses on fixed maturity securities totaled $7,577,436 (includes $8,015 related to the non-credit component of an “other-than-temporary” impairment of a residential mortgage-backed security) at March 31, 2011 and were primarily associated with municipal securities and U.S. government-sponsored agency securities. The primary factors contributing to these unrealized losses were an increase in interest rates since purchase, and, for certain municipal securities, a widening of risk premium spread over U.S. Treasuries since their purchase. Of all the securities that are in an unrealized loss position, all but 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 the amounts due on these securities, it was determined that these securities were not “other-than-temporarily” impaired at March 31, 2011.

 The unrealized losses on common stocks at March 31, 2011 are not concentrated in a particular sector or an individual security. The Company believes the unrealized losses on common stocks are primarily due to general fluctuations in the equity markets. Because the Company has the ability and intent to hold these securities for a reasonable amount of time to allow for recovery, it was determined that these securities were not “other-than-temporarily” impaired at March 31, 2011.

 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 by rating agencies 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 the Company 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 these securities were not “other-than-temporarily” impaired at March 31, 2011.

 The amortized cost and estimated fair value of fixed maturity securities at March 31, 2011, 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		Estimated
	cost		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		335,320		382,905
Totals	$	335,320	$	382,905
Securities available-for-sale:
Due in one year or less	$	13,114,189	$	13,208,269
Due after one year through five years		80,647,666		84,167,764
Due after five years through ten years		129,783,609		137,023,574
Due after ten years		549,444,890		557,073,478
Mortgage-backed securities		110,759,128		121,519,245
Totals	$	883,749,482	$	912,992,330

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

	Three months ended March 31,
	2011			2010
Fixed maturity securities available-for-sale:
Gross realized investment gains	$	28,959		$	11,134
Gross realized investment losses		—			—
“Other-than-temporary” impairments		—			(204,045	)
Equity securities available-for-sale:
Gross realized investment gains		8,554,280			901,588
Gross realized investment losses		(79,197	)		(35,414	)
“Other-than-temporary” impairments		(245,846	)		(148,350	)
Totals	$	8,258,196		$	524,913

 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 reflect the impairment of three equity securities during the first quarter of 2011, compared to three equity securities and two fixed maturity securities during the first quarter of 2010.

 During the first quarter of 2010, the Company determined that the credit loss associated with a previously impaired residential mortgage-backed security increased, resulting in an additional $120,539 impairment loss recognized in earnings in the first quarter of 2010. The Company also recognized $83,506 of “other-than-temporary” impairment loss on a second residential mortgage-backed security during the first quarter of 2010 due to management’s intent to sell the security, which was completed during the second quarter.

 The following table is a roll forward of the amount of credit losses that have been recognized in earnings from “other-than-temporary” impairments. Note that this table only includes the credit loss component of “other-than-temporary” impairments, and does not include the non-credit loss component of impairments (which is recognized through “other comprehensive income”) or impairments that are recognized through earnings in their entirety (not subject to bifurcation between credit and non-credit components).

	Three months ended March 31,
	2011		2010
Balance at beginning of year	$	207,854	$	87,315
Credit loss for which an “other-than-temporary” impairment loss was previously recognized		—		120,539
Balance at March 31	$	207,854	$	207,854

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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 $1,614,711 at December 31, 2010. The Company has a contingent liability of $1,614,711 at December 31, 2010 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. 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 program became effective immediately and does not have an expiration date. The timing and terms of the purchases are determined by management based on market conditions and are 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. The Company did not repurchase any shares of its common stock during the first quarter of 2011. Since the inception of the repurchase program the Company has repurchased 980,533 shares of common stock at a cost of $23,148,435, leaving $1,851,565 available for the repurchase of additional shares.

12.       SUBSEQUENT EVENTS

 The Company currently expects losses associated with storms that occurred during the month of April 2011, including a tornado in Mapleton, Iowa and a record number of tornadoes in Alabama and several other southern states, to total approximately $15,000,000. These losses will be reflected in the Company’s second quarter results.

29

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 2010 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 all information currently available into account.  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 61 percent owned subsidiary of Employers Mutual Casualty Company (Employers Mutual), is an insurance holding company with operations in property and casualty insurance and reinsurance.  

Property and casualty insurance operations are conducted through three subsidiaries and represent the most significant segment of the Company’s business, totaling approximately 80 percent of consolidated premiums earned during the first three months of 2011.  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.

30

Reinsurance operations are conducted through EMC Reinsurance Company, and represented approximately 20 percent of consolidated premiums earned during the first three months of 2011.  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, 2011, the terms of the quota share agreement were revised.  Under the terms of the revised agreement, the reinsurance subsidiary assumes 100 percent of Employers Mutual’s assumed reinsurance business, with certain exceptions, on a gross basis (rather than the previous net basis), and cedes to Employers Mutual all losses in excess of $3,000,000 per event under a separate excess-of-loss reinsurance agreement.  The cost of the $3,000,000 excess-of-loss reinsurance protection is 10.0 percent of total assumed reinsurance premiums.  This new arrangement allows the reinsurance subsidiary to have the $3,000,000 cap on losses assumed per event apply to all assumed reinsurance business, including the direct reinsurance business written outside the quota share agreement.    

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 2010

Form 10-K.

RESULTS OF OPERATIONS

Segment information and consolidated net income for the three months ended March 31, 2011 and 2010 are as follows:

	Three months ended
	March 31,
($ in thousands)	2011			2010
Property and casualty insurance
Premiums earned	$	77,311		$	74,787
Losses and settlement expenses		51,168			44,014
Acquisition and other expenses		31,336			29,657
Underwriting profit (loss)	$	(5,193	)	$	1,116
Loss and settlement expense ratio		66.2	%		58.9	%
Acquisition expense ratio		40.5	%		39.6	%
Combined ratio		106.7	%		98.5	%
Losses and settlement expenses:
Insured events of current year	$	55,850		$	57,626
Decrease in provision for insured events of prior years		(4,682	)		(13,612	)
Total losses and settlement expenses	$	51,168		$	44,014
Catastrophe and storm losses	$	3,423		$	2,364

31

	Three months ended
	March 31,
($ in thousands)	2011			2010
Reinsurance
Premiums earned	$	18,976		$	17,558
Losses and settlement expenses		22,202			12,029
Acquisition and other expenses		4,609			4,928
Underwriting profit (loss)	$	(7,835	)	$	601
Loss and settlement expense ratio		117.0	%		68.5	%
Acquisition expense ratio		24.3	%		28.1	%
Combined ratio		141.3	%		96.6	%
Losses and settlement expenses:
Insured events of current year	$	21,427		$	19,837
Increase (decrease) in provision for insured events of prior years		775			(7,808	)
Total losses and settlement expenses	$	22,202		$	12,029
Catastrophe and storm losses	$	5,982		$	1,057

32

	Three months ended
	March 31,
($ in thousands)	2011			2010
Consolidated
REVENUES
Premiums earned	$	96,287		$	92,345
Net investment income		12,078			12,517
Realized investment gains		8,258			525
Other income		204			207
		116,827			105,594
LOSSES AND EXPENSES
Losses and settlement expenses		73,370			56,043
Acquisition and other expenses		35,945			34,585
Interest expense		225			225
Other expense		932			198
		110,472			91,051
Income before income tax expense		6,355			14,543
Income tax expense		1,134			4,665
Net income	$	5,221		$	9,878
Net income per share	$	0.40		$	0.75
Loss and settlement expense ratio		76.2	%		60.7	%
Acquisition expense ratio		37.3	%		37.4	%
Combined ratio		113.5	%		98.1	%
Losses and settlement expenses:
Insured events of current year	$	77,277		$	77,463
Decrease in provision for insured events of prior years		(3,907	)		(21,420	)
Total losses and settlement expenses	$	73,370		$	56,043
Catastrophe and storm losses	$	9,405		$	3,421

The Company reported net income of $5,221,000 and $9,878,000 ($0.40 and $0.75 per share) during the first three months of 2011 and 2010, respectively.  The decrease in net income is primarily attributed to a decline in the underwriting results of both the property and casualty insurance segment and the reinsurance segment; however, the decline in underwriting results was partially offset by a significant increase in realized investment gains.  The reinsurance segment experienced the most significant decline in underwriting results from a combination of higher catastrophe losses (including $3,000,000 of net losses from the Japan earthquake and a high level of snow related losses) and adverse development on prior years’ reserves.  The decline in underwriting results of the property and casualty insurance segment is attributed to several factors, including an increase in claim severity, a decline in the amount of favorable development experienced on prior years’ reserves, and an increase in catastrophe and storm losses.  

33

Premium income

Premiums earned increased 4.3 percent to $96,287,000 for the three months ended March 31, 2011 compared to $92,345,000 for the same period in 2010.  Premium rate levels for the property and casualty insurance segment were relatively flat during the first quarter of 2011.  Competition remains very strong in the commercial lines of business; however, moderate rate increases have been implemented in personal lines during the past several years.  Management continues to implement commercial lines rate increases where warranted.  Recent expectations were that overall rate levels would not improve until the economy recovers.  However, the recent rash of severe weather during the month of April in the southern and eastern United States could lead to improved pricing sooner than previously expected.  The reinsurance segment reported an increase in premium income, largely from the new reinsurance contracts written during 2010.  Pricing for the January 1, 2011 reinsurance renewal season was down slightly for business with good experience in 2010; however, the market appears to have subsequently hardened and trended higher due to the catastrophic losses stemming from the March 11, 2011 Japan earthquake and tsunami.  This improved pricing impacted most April 1, 2011 renewals and is expected to continue for business renewing during the remainder of 2011.  

Premiums earned for the property and casualty insurance segment increased 3.4 percent to $77,311,000 for the three months ended March 31, 2011 from $74,787,000 for the same period in 2010, primarily as a result of an increase in policy count during the last nine months of 2010.  Premium rates have continued to improve somewhat in the personal lines of business, but the commercial lines of business, which account for more than 80 percent of the property and casualty insurance segment’s premiums, remain very competitive.  Overall, the industry has continued to report average rate declines of three to five percent in commercial lines of business, depending on policy size and line of business; however, the Company’s rates for commercial lines of business have been relatively steady, with an overall decline of less than one percent.  Rate competition in the commercial lines of business is being driven, at least in part, by the weak economy.  Up to this point, most companies have been content to retain their good business at current pricing levels and wait for the economy to improve.  However, the high level of severe tornado activity during the month of April in the southern and eastern United States is fueling speculation that rate levels could begin to improve in the near future.  Renewal business premium increased approximately six percent during the first quarter of 2011 (compared to the same period in 2010); however, new business premium was down.  Premium income in the first quarter of 2011 benefited from additional premiums generated from audits of policyholders’ insured exposures, compared to return premiums for audits completed during the same period in 2010.  The overall policy retention rate remained stable at approximately 87 percent.  Policy counts increased slightly during the first quarter of 2011 in both the commercial and personal lines of business.  

Premiums earned for the reinsurance segment increased 8.1 percent to $18,976,000 for the three months ended March 31, 2011 from $17,558,000 for the same period in 2010.  This increase is primarily associated with the new facility business written during 2010 (includes reinsurance business from small to mid-size insurance companies, as well as new property business in central and eastern Europe).  The reinsurance segment benefited from a small decline in the cost of the $3,000,000 excess-of-loss reinsurance protection provided by Employers Mutual (from 10.5 percent in 2010 to 10.0 in 2011); however, this benefit was more than offset by the additional reinsurance premium paid to Employers Mutual to provide reinsurance protection on the direct reinsurance business written outside the quota share agreement.  Due to the mild 2010 hurricane season and a recovery in the reinsurance industry’s capital level, premium rate levels declined slightly during the January 1, 2011 renewal season.  However, the market appears to have subsequently hardened and trended higher due to the catastrophic losses resulting from the Japan earthquake and tsunami.  This improved pricing impacted most April 1, 2011 renewals and is expected to continue for the remainder of the year, which will benefit future operating results.

Effective January 1, 2011, Country Mutual Insurance Company (Country Mutual) discontinued its participation in the Mutual Reinsurance Bureau (MRB) pool, but continues to be responsible for its share of losses occurring through 2010.  As a result, Employers Mutual became a one-fourth participant in the MRB pool, up from its previous one-fifth participation.  In connection with Employers Mutual’s increased participation in the MRB pool, the reinsurance subsidiary recorded a $1,023,000 portfolio adjustment increase in its written premiums in the first quarter of 2011 that offset a corresponding increase in its unearned premium.  The reinsurance subsidiary ceded ten percent of this amount ($102,000) to Employers Mutual for the cost of the excess-of-loss reinsurance protection and recognized $399,000 of commission allowance to compensate Country Mutual for the acquisition costs incurred to generate this business.

34

Losses and settlement expenses

Losses and settlement expenses increased 30.9 percent to $73,370,000 for the three months ended March 31, 2011 from $56,043,000 for the same period in 2010.  The loss and settlement expense ratio increased to 76.2 percent for the three months ended March 31, 2011 from 60.7 percent for the same period in 2010.  The reinsurance segment experienced a significant deterioration in its loss and settlement expense ratio from a combination of higher catastrophe losses and adverse development on prior years’ reserves.  The property and casualty insurance segment’s loss and settlement expense ratio also increased in the first quarter of 2011 over the same period of 2010, due to an increase in claim severity (including large losses), a decline in the amount of favorable development experienced on prior years’ reserves, and an increase in catastrophe and storm losses.  The Company’s catastrophe and storm losses totaled $9,405,000 ($0.47 per share after tax) in the first quarter of 2011 compared to $3,421,000 ($0.17 per share after tax) in the first quarter of 2010.  Catastrophe and storm losses accounted for 9.8 percentage points of the loss and settlement expense ratio for the first quarter, which is significantly higher than the 10-year (2001 through 2010) first quarter average of 3.0 percentage points.  The actuarial analysis of the Company’s carried reserves as of December 31, 2010 indicates that the level of reserve adequacy is consistent with other recent evaluations.  From management’s perspective, this measure is more relevant to an understanding of the Company’s results of operations than the composition of the underwriting results between the current and prior accident years.

The loss and settlement expense ratio for the property and casualty insurance segment increased to 66.2 percent for the three months ended March 31, 2011 from 58.9 percent for the same period in 2010.  This increase reflects increased claim severity (including large losses) in nearly all lines of business, increased claim frequency in several casualty lines of business, higher catastrophe and storm losses, and previously implemented premium rate level reductions.  Catastrophe and storm losses were above average during the first quarter of 2011, adding 4.4 percentage points to the loss and settlement expense ratio, compared to 3.2 percentage points during the same period of 2010.  The property and casualty insurance segment continued to experience favorable development on prior years’ reserves, but the amount was substantially less than the amount reported in the first quarter of 2010.  Approximately $4,000,000, or 44 percent, of the decline in favorable development can be attributed to a change in the methodology used to allocate bulk reserves to the various accident years that was implemented December 31, 2010.  Under the revised methodology, a larger portion of the current quarter’s bulk reserves is being allocated to the prior accident years.  This had the effect of reducing the amount of favorable development reported in the first quarter of 2011 compared to the same period in 2010.  Most of the remaining decline in favorable development is attributed to a higher level of adverse development on open claims during the first quarter of 2011.  The amount of favorable development experienced on closed claims was very similar to the amount experienced in the first quarter of 2010.  

The loss and settlement expense ratio for the reinsurance segment increased to 117.0 percent for the three months ended March 31, 2011 from 68.5 percent for the same period in 2010.  This increase is primarily due to the combination of higher catastrophe and storm losses and adverse development on prior years’ reserves.  Total losses from the Japan earthquake are currently estimated at $8,000,000; however, all losses in excess of $3,000,000 are ceded to Employers Mutual under the terms of the excess-of-loss reinsurance agreement.  The reinsurance subsidiary had approximately $362,000 of adverse development on the Home Office Reinsurance Assumed Department (HORAD) book of business (compared to approximately $6,808,000 of favorable development during the same period of 2010).  The adverse development in the HORAD book of business is due to higher than anticipated reported losses on the 2010 accident year, primarily in the catastrophe excess and property per risk excess lines of business.   The reinsurance subsidiary also had approximately $413,000 of adverse development on the MRB book of business (compared to approximately $1,000,000 of favorable development during the same period of 2010).

Acquisition and other expenses

Acquisition and other expenses increased 3.9 percent to $35,945,000 for the three months ended March 31, 2011 from $34,585,000 for the same period in 2010.  The acquisition expense ratio decreased slightly to 37.3 percent for the three months ended March 31, 2011 from 37.4 percent for the same period in 2010.  This decrease reflects a decline in contingent commission expense in the reinsurance segment, which was largely offset by an increase in employee medical costs in the property and casualty insurance segment.  

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For the property and casualty insurance segment, the acquisition expense ratio increased to 40.5 percent for the three months ended March 31, 2011 from 39.6 percent for the same period in 2010.  This increase is generally attributed to higher employee medical benefit costs.

For the reinsurance segment, the acquisition expense ratio decreased to 24.3 percent for the three months ended March 31, 2011 from 28.1 percent for the same period in 2010.  This decrease is primarily attributed to a decrease in contingent commission expense in the MRB book of business.  Partially offsetting this decrease was the commission expense recorded by the reinsurance subsidiary in conjunction with Country Mutual’s withdrawal from the MRB pool.  As discussed above, the reinsurance subsidiary recognized $399,000 of commission allowance associated with the $1,023,000 increase in its unearned premium reserve.  However, a portion of these commissions were capitalized as part of the deferred acquisition cost asset (to be expensed as the related premiums are earned), resulting in approximately $194,000 being expensed in the first quarter of 2011.

Investment results

Net investment income decreased 3.5 percent to $12,078,000 for the three months ended March 31, 2011 from $12,517,000 for the same period in 2010, despite an increase in the average invested balance of fixed maturity securities.  During the past several years, cash from operations, as well as cash from maturing investments, have been invested in fixed maturity securities with progressively lower yields, resulting in a sustained decline in the fixed maturity portfolio’s annualized yield.  The current annualized yield on the fixed maturity portfolio is 4.87 percent, compared to 4.98 percent at December 31, 2010 and 5.13 percent at March 31, 2010.  The effective duration of the Company’s fixed maturity portfolio was 5.73 years at March 31, 2011, compared to 5.75 years at December 31, 2010.  The Company’s equity portfolio had a return of 7.95 percent during the first quarter of 2011, compared to 5.92 percent for the S&P 500.  

The Company reported net realized investment gains of $8,258,000 and $525,000 for the first three months of 2011 and 2010, respectively. During the first quarter of 2011, the Company’s outside equity manager rebalanced the equity portfolio to improve future performance, which triggered a significant amount of realized gains.  “Other-than-temporary” investment impairment losses of $246,000 and $352,000 were recognized in the first quarter of 2011 and 2010, respectively.  The impairment losses in 2011 were from three equity securities, while the impairment losses in 2010 were from three equity securities and two residential mortgage-backed securities ($121,000 from the determination of credit loss on one residential mortgage-backed security, and $83,000 associated with management’s intent to sell another residential mortgage-backed security in an unrealized loss position).  

Other expense

The increase in other expense is due to foreign currency exchange losses recognized on the reinsurance segment’s foreign currency denominated reinsurance business.  A foreign currency exchange loss of $421,000 was recognized during the first quarter of 2011, compared to a $310,000 gain recognized during the same period of 2010.

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Income tax

Income tax expense decreased 75.7 percent to $1,134,000 for the three months ended March 31, 2011 from $4,665,000 for the same period in 2010.  The effective tax rate for the three months ended March 31, 2011 was 17.8 percent, compared to 32.1 percent for the same period in 2010.  The decrease in the effective tax rate for 2011 primarily reflects the decline in the amount of pre-tax income earned during the quarter relative to the amount of tax-exempt interest income earned.  The effective tax rate for the three months ended March 31, 2010 was elevated by 5.5 percentage points due to the impact of tax law changes signed into law during the first quarter of 2010 in connection with the passage of the Patient Protection and Affordable Care Act (H.R. 3590) and the follow-up Health Care and Education Reconciliation Act of 2010 (H.R. 4872) (the “Acts”).  In accordance with these Acts, beginning in 2013 the Company will no longer be able to claim a tax deduction for drug expenses that are reimbursed under the Medicare Part D retiree drug subsidy program.  Although this tax change does not take effect until 2013, the Company was required to recognize the financial impact of the change beginning in the period in which the Acts were signed.  As a result of the Acts, the Company recognized a decrease in its deferred tax asset of $794,000 during the first quarter of 2010.

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 negative cash flows from operations of $5,673,000 and $2,125,000 during the first three months of 2011 and 2010, respectively.  It is not unusual for the Company to generate negative cash flows from operations during the first quarter; however, on an annual basis, 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 insufficient to fund current operating needs.  As of March 31, 2011, the Company did not have any significant variations between the maturity dates of its investments and the expected payment 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 its 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 2011 without prior regulatory approval is approximately $39,271,000.  The Company received $4,000,000 and $4,000,000 of dividends from its insurance company subsidiaries and paid cash dividends to its stockholders totaling $2,460,000 and $2,364,000 in the first three months of 2011 and 2010, respectively.  

The Company’s insurance and reinsurance company subsidiaries must maintain 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.

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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 vary because of uncertainties regarding settlement dates for unpaid losses and the potential for large losses, either individually or in the aggregate.  Accordingly, the insurance company subsidiaries maintain investment and reinsurance programs intended to provide adequate funds to pay claims without forced sales of investments.  In addition, the insurance company subsidiaries have access to a line of credit maintained by Employers Mutual with the Federal Home Loan Bank to provide additional liquidity if needed.

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.  A variety of maturities are maintained in the Company’s investment portfolio to assure adequate liquidity.  The maturity structure of the fixed maturity portfolio 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 subsequent to their purchase.

The Company invests for the long term 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 March 31, 2011 and December 31, 2010, the Company had net unrealized holding gains, net of deferred taxes, on its fixed maturity securities available-for-sale of $19,008,000 and $20,770,000, respectively.  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 interest 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.  Due to the declining interest rate environment, the Company experienced a high level of call activity on fixed maturity securities during 2010 and 2009.  The proceeds from these called securities have been reinvested at lower yields, which are currently having a negative impact on investment income.

The Company previously participated in a securities lending program administered by Mellon Bank, N.A. whereby certain fixed maturity securities from the investment portfolio were loaned to other institutions for short periods of time.  The Company received a fee for each security loaned out under this program and required initial collateral equal to 102 percent of the fair value of the loaned securities.  During the fourth quarter of 2009, management decided to discontinue its participation in the securities lending program and as a result, began to unwind the program.  The Company terminated its participation in the securities lending program as of December 31, 2010.

The Company held $26,000 and $30,000 in minority ownership interests in limited partnerships and limited liability companies at March 31, 2011 and December 31, 2010, respectively.  The Company does not hold any other unregistered securities.

The Company’s cash balance was $729,000 and $492,000 at March 31, 2011 and December 31, 2010, respectively.  

During the first three months of 2011, Employers Mutual made no contributions to either the qualified pension plan or the postretirement benefit plans.  Employers Mutual expects to make contributions totaling $22,000,000 to the qualified pension plan and $4,000,000 to the postretirement benefit plans during 2011. The Company's share of these contributions would be approximately $6,750,000 and $1,122,000, respectively.

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Employers Mutual contributed $26,000,000 to its qualified pension plan and $2,480,000 to its postretirement benefit plans in 2010.  During the first three months of 2010, Employers Mutual made no contributions to either the qualified pension plan or the postretirement benefit plans.The Company reimbursed Employers Mutual $7,973,000 for its share of the 2010 qualified pension plan contribution and $697,000 for its share of the 2010 postretirement benefit plans contribution (no reimbursements were paid in the first three months of 2010).  

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 and reinsurance company 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 March 31, 2011.

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, 2010, the Company’s insurance subsidiaries had total adjusted statutory capital of $347,133,000, which was well in excess of the minimum RBC requirement of $58,048,000.

The Company’s total cash and invested assets at March 31, 2011 and December 31, 2010 are summarized as follows:

	March 31, 2011
					Percent of
	Amortized		Fair		total			Carrying
($ in thousands)	cost		value		fair value			value
Fixed maturity securities held-to-maturity	$	335	$	383		—	%	$	335
Fixed maturity securities available-for-sale		883,749		912,992		84.7			912,992
Equity securities available-for-sale		84,461		109,114		10.1			109,114
Cash		729		729		0.1			729
Short-term investments		54,446		54,446		5.1			54,446
Other long-term investments		26		26		—			26
	$	1,023,746	$	1,077,690		100.0	%	$	1,077,642
	December 31, 2010
					Percent of
	Amortized		Fair		total			Carrying
($ in thousands)	cost		value		fair value			value
Fixed maturity securities held-to-maturity	$	341	$	390		—	%	$	341
Fixed maturity securities available-for-sale		909,583		941,537		87.2			941,537
Equity securities available-for-sale		75,721		101,139		9.4			101,139
Cash		492		492		—			492
Short-term investments		36,616		36,616		3.4			36,616
Other long-term investments		30		30		—			30
	$	1,022,783	$	1,080,204		100.0	%	$	1,080,155

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The amortized cost and estimated fair value of fixed maturity and equity securities at March 31, 2011 were as follows:

			Gross		Gross
	Amortized		unrealized		unrealized		Estimated
($ in thousands)	cost		gains		losses		fair value
Securities held-to-maturity:
Fixed maturity securities:
Residential mortgage-backed	$	335	$	48	$	—	$	383
Total securities held-to-maturity	$	335	$	48	$	—	$	383
Securities available-for-sale:
Fixed maturity securities:
U.S. treasury	$	4,669	$	46	$	—	$	4,715
US government-sponsored agencies		155,669		1,466		2,331		154,804
Obligations of states and political subdivisions		384,461		11,493		4,361		391,593
Commercial mortgage-backed		79,699		9,653		24		89,328
Residential mortgage-backed		31,060		1,387		256		32,191
Other asset-backed		11,609		992		158		12,443
Corporate		216,582		11,783		447		227,918
Total fixed maturity securities		883,749		36,820		7,577		912,992
Equity securities:
Common stocks:
Financial services		11,272		2,385		59		13,598
Information technology		12,674		5,581		261		17,994
Healthcare		11,465		2,770		146		14,089
Consumer staples		5,255		884		88		6,051
Consumer discretionary		8,237		4,194		10		12,421
Energy		10,529		5,086		—		15,615
Industrials		8,364		2,354		—		10,718
Other		7,665		2,295		—		9,960
Non-redeemable preferred stocks		9,000		201		533		8,668
Total equity securities		84,461		25,750		1,097		109,114
Total securities available-for-sale	$	968,210	$	62,570	$	8,674	$	1,022,106

The Company’s property and casualty insurance subsidiaries have $25,000,000 of surplus notes issued to Employers Mutual at an interest rate of 3.60 percent.  Reviews of the interest rate are conducted by the Inter-Company Committees of the Boards of Directors of the Company and Employers Mutual every five years, with the next review due in 2013.  Payments of interest and repayments 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 states 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 $225,000 during the first three months of both 2011 and 2010.  During the first quarter of 2011, the Company’s property and casualty insurance subsidiaries paid Employers Mutual for the interest that had been accrued on the surplus notes during 2010.

As of March 31, 2011, the Company had no material commitments for capital expenditures.

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Off-Balance Sheet Arrangements

Employers Mutual collects from agents, policyholders and reinsureds all premiums associated with the insurance business produced by the pool participants and the assumed reinsurance business ceded to the reinsurance subsidiary.  Quarterly, Employers Mutual settles with the pool participants and the reinsurance subsidiary the premiums written from these insurance policies and reinsurance contracts, providing full credit for the premiums written during the quarter (not just the collected portion).  Due to this arrangement, and since a significant portion of these premium balances are collected over the course of the coverage period, Employers Mutual carries a substantial receivable balance for insurance and reinsurance premiums in process of collection.  Any of these 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 (Employers Mutual’s insurance and reinsurance premium receivable balances) that is not reflected in the Company’s financial statements.  The ten-year average annual charge-off expense allocated to the Company was $313,000 at December 31, 2010.  Based on historical data, this credit-risk exposure is not considered to be material to the Company’s results of operations or financial position, and accordingly, no loss contingency liability has been recorded.

Investment Impairments and Considerations

The Company recorded “other-than-temporary” investment impairment losses totaling $246,000 on three equity securities during the first quarter of 2011, compared to $352,000 on three equity securities and two residential mortgage-backed securities in the same period of 2010.  

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.  

At March 31, 2011, 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 March 31, 2011.  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 $5,639,000, net of tax; however, the Company’s financial position would not be affected because 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.

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Following is a schedule of the length of time securities have continuously been in an unrealized loss position as of March 31, 2011.

	Less than twelve months				Twelve months or longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
($ in thousands)	value		losses		value		losses		value		losses
Fixed maturity securities:
U.S. government-sponsored agencies	$	93,691	$	2,331	$	—	$	—	$	93,691	$	2,331
Obligations of states and political subdivisions		78,711		4,361		—		—		78,711		4,361
Commercial mortgage-backed		3,736		24		—		—		3,736		24
Residential mortgage-backed		13,157		252		1,199		4		14,356		256
Other asset-backed		2,959		158		—		—		2,959		158
Corporate		39,558		447		—		—		39,558		447
Subtotal, fixed maturity securities		231,812		7,573		1,199		4		233,011		7,577
Equity securities:
Common stocks:
Financial services		1,865		59		—		—		1,865		59
Information technology		3,556		261		—		—		3,556		261
Healthcare		431		27		1,465		119		1,896		146
Consumer staples		1,897		88		—		—		1,897		88
Consumer discretionary		753		10		—		—		753		10
Non-redeemable preferred stocks		—		—		4,467		533		4,467		533
Subtotal, equity securities		8,502		445		5,932		652		14,434		1,097
Total temporarily impaired securities	$	240,314	$	8,018	$	7,131	$	656	$	247,445	$	8,674

The Company does not purchase non-investment grade securities.  Any non-investment grade securities held are the result of rating downgrades that occurred subsequent to their purchase.  At March 31, 2011, non-investment grade fixed maturity securities held by the Company included American Airlines, Weyerhaeuser Company and 13 residential mortgage-backed securities.  Of these securities, only five of the residential mortgage-backed securities were in an unrealized loss position with an aggregate unrealized loss of $110,000.

Following is a schedule of gross realized losses recognized in the first quarter of 2011 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.  There were no realized losses recognized on fixed maturity securities during the first quarter of 2011.

	Realized losses from sales						“Other-than-		Total
					Gross		temporary”		gross
	Book		Sales		realized		impairment		realized
($ in thousands)	value		price		losses		losses		losses
Equity securities:
Three months or less	$	2,140	$	2,061	$	79	$	177	$	256
Over three months to six months		—		—		—		15		15
Over six months to nine months		—		—		—		54		54
Over nine months to twelve months		—		—		—		—		—
Over twelve months		—		—		—		—		—
	$	2,140	$	2,061	$	79	$	246	$	325

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LEASES, COMMITMENTS AND CONTINGENT LIABILITIES

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 of these lease costs are included as expenses under the pooling agreement.  The Company’s contractual obligations as of March 31, 2011 did not change materially from those presented in the Company’s 2010 Form 10-K.  

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 assessments to be recovered through premium tax offsets.  Estimated guaranty fund assessments of $1,294,000 and $1,269,000 have been accrued as of March 31, 2011 and December 31, 2010, respectively.  Premium tax offsets of $782,000 and $758,000, which are related to prior guarantee fund payments and current assessments, have been accrued as of March 31, 2011 and December 31, 2010, 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 workers with pre-existing disabilities.  Estimated second-injury fund assessments of $1,608,000 and $1,613,000 have been accrued as of March 31, 2011 and December 31, 2010, 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.

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 $1,615,000 at December 31, 2010.  The Company has a contingent liability of $1,615,000 at March 31, 2011 and December 31, 2010 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.

NEW ACCOUNTING GUIDANCE

In October 2010, the Financial Accounting Standards Board (FASB) updated its guidance related to Insurance Topic 944 of the FASB Accounting Standards Codification TM(ASC) to clarify which costs associated with the acquisition of insurance contracts should be capitalized and deferred for recognition during the coverage period.  This guidance specifies that only incremental costs or costs directly related to the successful acquisition of new or renewal insurance contracts are to be capitalized as a deferred acquisition cost.  Currently, industry practice is such that deferred costs typically also include costs related to unsuccessful insurance contract acquisitions.  This guidance is effective for annual reporting periods (and interim reporting periods of those annual reporting periods) beginning on or after December 15, 2011, and may be adopted prospectively or retrospectively.  Adoption of this guidance will have an impact on the consolidated financial position and operating results of the Company since certain costs associated with contract acquisition that are currently deferred will not likely meet the criteria for deferral under the new guidance.  The Company has not yet established an estimate of the impact this statement will have on its financial statements.

In July 2010, the FASB updated its guidance related to Receivables Topic 310 of the ASC to require additional disclosures regarding credit risk exposures and the allowance for credit losses, as well as a description of the accounting policies and methodology used to estimate the liability for off-balance-sheet credit risk exposures and related charges.  The additional disclosures required at the end of a reporting period were effective for interim and annual reporting periods ending on or after December 15, 2010, and the additional disclosures required about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010.  Adoption of this guidance resulted in some additional disclosures at year-end 2010, but had no effect on the consolidated financial position or operating results of the Company.

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In January 2010, the FASB updated its guidance related to the Fair Value Measurements and Disclosures Topic 820 of the ASC to require additional disclosures regarding transfers in and out of fair value measurement Levels 1 and 2, the display of Level 3 activity on a gross basis (rather than net), fair value measurement disclosures for each class of assets and liabilities (rather than by line item within the statement of financial position), and additional disclosures about inputs and valuation techniques.  This guidance was effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which is effective for fiscal years (and interim periods of those fiscal years) beginning after December 15, 2010.  Adoption of this guidance had no effect on the consolidated financial position or operating results of the Company.

ITEM 3.                      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The main objectives in managing the Company’s investment portfolios are to maximize after-tax investment return while minimizing credit risk, 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.

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 2010 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 first quarter of 2011 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 March 31, 2011:

					(c) Total number		(d) Maximum number
	(a) Total		(b) Average		of shares (or		(or approximate dollar
	number of		price		units) purchased		value) of shares
	shares		paid		as part of publicly		(or units) that may yet
	(or units)		per share		announced plans		be purchased under the
Period	purchased (1)		(or unit)		or programs (2)		plans or programs (2 & 3)
1/1/11 - 1/31/11		7,238	$	22.61		—	$	6,342,126
2/1/11 - 2/28/11		53		24.25		—		6,342,126
3/1/11 - 3/31/11		1,423		24.25		—		6,342,126
Total		8,714	$	22.88		—

(1)	Included in these amounts are 34, 53 and 1,423 shares that were purchased in the open market in January, February and March, respectively, to fulfill the Company’s obligations under its dividend reinvestment and common stock purchase plan.  7,204 shares were purchased in the open market during January 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 $1,851,565 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.

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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 May 10, 2011.

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 Accounting Officer)

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EMC INSURANCE GROUP INC. AND SUBSIDIARIES

INDEX TO EXHIBITS

Exhibit number		Item
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.

* Filed herewith

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