• Financial Highlights of Results for years ended December 31, 2008, 2007, and 2006;

• Results of Operations and Related Information by Segment;

• Federal Income Taxes;

• Financial Condition, Liquidity, and Capital Resources;

• Off-Balance Sheet Arrangements;

• Contractual Obligations and Contingent Liabilities and Commitments; and

• Adoption of Accounting Pronouncements.

Critical Accounting Policies and Estimates We have identified the policies and estimates described below as critical to our business operations and the understanding of the results of our operations. Our preparation of the Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our Consolidated Financial Statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates. Those estimates that were most critical to the preparation of the Consolidated Financial Statements involved the following: (i) reserve for losses and loss expenses; (ii) deferred policy acquisition costs; (iii) pension and post-retirement benefit plan actuarial assumptions; (iv) OTTI; (v) goodwill; and (vi) reinsurance.

Reserves for Losses and Loss Expenses
Significant periods of time can elapse between the occurrence of an insured loss, the reporting of the loss to the insurer, and the insurer's payment of that loss. To recognize liabilities for unpaid losses and loss expenses, insurers establish reserves as balance sheet liabilities representing estimates of amounts needed to pay reported and unreported net losses and loss expenses. As of December 31, 2008, we had accrued $2.6 billion of gross loss and loss expense reserves compared to $2.5 billion at December 31, 2007. How reserves are established
When a claim is reported to an insurance subsidiary, claims personnel establish a "case reserve" for the estimated amount of the ultimate payment. The amount of the reserve is primarily based upon a case by case evaluation of the type of claim involved, the circumstances surrounding each claim, and the policy provisions relating to the type of losses. The estimate reflects the informed judgment of such personnel based on their knowledge, experience, and general insurance reserving practices. Until the claim is resolved, these estimates are revised as deemed appropriate by the responsible claims personnel based on subsequent developments and periodic reviews of the case.
In addition to case reserves, we maintain estimates of reserves for losses and loss expenses IBNR. Using generally accepted actuarial reserving techniques, we project our estimate of ultimate losses and loss expenses at each reporting date. The difference between: (i) projected ultimate loss and loss expense reserves and (ii) case loss reserves and loss expense reserves thereon are carried as the IBNR reserve. The actuarial techniques used are part of a comprehensive reserving process that includes two primary components. The first component is a detailed quarterly reserve analysis performed by our internal actuarial staff, which is managed independently from the operating units.In completing this analysis, the actuaries are required to make numerous assumptions, including, for example, the selection of loss development factors and the weight to be applied to each individual actuarial indication. These indications include paid and incurred versions for the following actuarial methodologies: loss development, Bornhuetter-Ferguson, Berquist-Sherman, and frequency/severity. Additionally, the actuaries must gather substantially similar data in sufficient volume to ensure the statistical credibility of the data. The second component of the analysis is the projection of the expected ultimate loss ratio for each line of business for the current accident year. This projection is part of our planning process wherein we review and update expected loss ratios each quarter. This review includes actual versus expected pricing changes, loss trend assumptions, and updated prior period loss ratios from the most recent quarterly reserve analysis.
In addition to the most recent loss trends, a range of possible IBNR reserves is determined annually and continually considered, among other factors, in establishing IBNR for each reporting period. Loss trends include, but are not limited to, large loss activity, environmental claim activity, large case reserve additions or reductions for prior accident years, and reinsurance recoverable issues. We also consider factors such as: (i) per claim information;
(ii) company and industry historical loss experience; (iii) legislative enactments, judicial decisions, legal developments in the imposition of damages, and changes in political attitudes; and (iv) trends in general economic conditions, including the effects of inflation. Based on the consideration of the range of possible IBNR reserves, recent loss trends, uncertainty associated with actuarial assumptions and other factors, IBNR is established and the ultimate net liability for losses and loss expenses is determined. Such an assessment requires considerable judgment given that it is frequently not possible to determine whether a change in the data is an anomaly until some time after the event. Even if a change is determined to be permanent, it is not always possible to reliably determine the extent of the change until some time later. There is no precise method for subsequently evaluating the impact of any specific factor on the adequacy of reserves because the eventual deficiency or redundancy is affected by many factors. The changes in these estimates, resulting from the continuous review process and the differences between estimates and ultimate payments, are reflected in the consolidated statements of income for the period in which such estimates are changed. Any changes in the liability estimate may be material to the results of operations in future periods. Major trends by line of business creating additional loss and loss expense reserve uncertainty The Insurance Subsidiaries are multi-state, multi-line property and casualty insurance companies and, as such, are subject to reserve uncertainty stemming from a variety of sources. These uncertainties are considered at each step in the process of establishing loss and loss expense reserves. However, as market conditions change, certain trends are identified that management believes create an additional amount of uncertainty. A discussion of recent trends, by line of business, that have been recognized by management follows:

Workers Compensation
At December 31, 2008, our workers compensation line of business recorded reserves, net of reinsurance, of $850 million, or 35% of our total recorded reserves. In addition to the uncertainties associated with actuarial assumptions and methodologies described above, the workers compensation line of business can be impacted by a variety of issues such as unexpected changes in medical cost inflation, changes in overall economic conditions and company specific initiatives. From 2005 through 2008, we experienced an unusual amount of volatility associated with our workers compensation medical costs. In 2008 overall economic conditions were extremely unstable. Finally, in the past few years the company implemented a multi-faceted workers compensation strategy which incorporated knowledge management and predictive modeling initiatives. From 2005 through 2008, we experienced an unusual amount of volatility in our prior year reserve development ranging from $42 million of adverse development in 2005 to $24 million of favorable development in 2008. Even though medical cost development returned to a more customary level in 2007 and 2008, the unusual amount of volatility over the previous few years does create additional uncertainty. In addition, potential impacts from changing economic conditions and unforeseen expected results from our company-specific strategies are potential sources of additional uncertainty in the future. If the higher than historical increases in medical costs in 2005 do not return and/or external economic conditions improve and/or our workers compensation strategies exceed our expectations, the result could be favorable development in the future. However, if higher medical trends return and/or economic conditions remain poor and/or our internal strategies are less effective than anticipated, the result could be adverse reserve development in the future. General Liability
At December 31, 2008, our general liability line of business had recorded reserves, net of reinsurance of $891 million, which represented 37% of our total net reserves. This line of business includes excess policies which provide additional limits above underlying automobile and general liability coverages. While prior year development in recent years has been relatively minor, two recent changes in our book of business relating to excess coverage could create additional volatility in our results: (i) we have grown the number of our commercial excess policies at a greater rate than the rest of our commercial lines of business; and (ii) we have raised the net retention of our reinsurance covering these policies over the past several accident years. Both of these changes raise the average limits of losses that we retain on a net basis. While management has not identified any specific trends relating to additional reserve uncertainty, our increase in average net retention does create the potential for additional volatility in our reserves.
Commercial Automobile
At December 31, 2008, our commercial automobile line of business had recorded reserves, net of reinsurance, of $346 million, which represented 14% of our total net reserves. This line of business experienced only $0.4 million of favorable development in 2008 which is significantly less than the $19 million and $15 million it experienced in 2007 and 2006, respectively. The significant favorable prior year loss development from 2005 to 2007 was driven by a downward trend in large claims. The number of large claims has a high degree of volatility from year to year and, therefore, requires a longer period before true trends are recognized and can be acted upon. We experienced lower than expected severity in accident years 2002 through 2005 which has not continued in the most recent three accident years. While management has not identified any specific trends related to this line, the volatility of large claims does create additional uncertainty in our analysis for our most recent accident years. General Liability and Commercial Automobile (Claims Initiatives Impact) In addition to the line of business specific issues mentioned above, both of these lines of business have been impacted by a number of initiatives undertaken by our claims department which have resulted in the quicker development of case reserves. This change in the average level of case reserves increases the uncertainty in both the positive and negative directions in the short run, but the longer term benefit is a more refined management of the claims process. Personal Automobile
At December 31, 2008, our personal automobile line of business had recorded reserves, net of reinsurance, of $159 million, which represented 7% of our total net reserves. The majority of this business is written in New Jersey, where the judicial and regulatory environment has been subject to significant changes over the past few decades. The most recent change occurred in June 2005, when the New Jersey Supreme Court ruled that the serious life impact standard does not apply to the AICRA limitation on lawsuit threshold. As a result of this decision, we increased reserves for this line of business by a net amount of $10 million, the majority of which was reflected in 2005 results. This recent judicial decision has increased the uncertainty surrounding our personal automobile reserves, particularly for accident years 2006 through 2008, since much of the historical information used to make assumptions has been rendered less effective as a basis for projecting future results.

Other Lines of Business
At December 31, 2008, no other individual line of business had recorded reserves
of more than $67 million, net of reinsurance. We have not identified any recent
trends that would create additional significant reserve uncertainty for these
other lines of business.
The following tables provide case and IBNR reserves for losses, reserves for
loss expenses, and reinsurance recoverable on unpaid losses and loss expenses as
of December 31, 2008 and 2007:

                                                                                               Reinsurance
                                                                                               Recoverable
                                                                                                on Unpaid
                                             Loss Reserves                       Loss          Losses and
As of December 31, 2008         Case            IBNR                            Expense           Loss
($ in thousands)              Reserves        Reserves           Total         Reserves         Expenses          Net Reserves
Commercial automobile         $ 131,038          187,804          318,842         36,868              9,351             346,359
Workers compensation            396,345          431,549          827,894        103,952             81,556             850,290
General liability               203,487          538,591          742,078        185,434             36,978             890,534
Commercial property              39,570            1,978           41,548          3,669              2,214              43,003
Business owners' policies        25,988           35,309           61,297         10,073              5,256              66,114
Bonds                             2,135            4,314            6,449          2,215                387               8,277
Other                               719            1,323            2,042              -                686               1,356

Total commercial lines          799,282        1,200,868        2,000,150        342,211            136,428           2,205,933

Personal automobile             123,964           62,141          186,105         35,239             62,699             158,645
Homeowners                       18,589           22,729           41,318          4,628                883              45,063
Other                            13,730           15,026           28,756          2,566             24,182               7,140

Total personal lines            156,283           99,896          256,179         42,433             87,764             210,848

Total                         $ 955,565        1,300,764        2,256,329        384,644            224,192           2,416,781




                                                                                               Reinsurance
                                                                                               Recoverable
                                                                                                on Unpaid
                                             Loss Reserves                       Loss          Losses and
As of December 31, 2007         Case            IBNR                            Expense           Loss
($ in thousands)              Reserves        Reserves           Total         Reserves         Expenses          Net Reserves
Commercial automobile         $ 117,299          188,294          305,593         36,236             12,255             329,574
Workers compensation            382,364          424,528          806,892        102,315             76,747             832,460
General liability               198,636          500,806          699,442        162,098             46,434             815,106
Commercial property              44,520            2,030           46,550          3,572              5,895              44,227
Business owners' policies        23,469           30,967           54,436          8,604              5,281              57,759
Bonds                             4,008            3,509            7,517          2,217                296               9,438
Other                               907            1,601            2,508              -                863               1,645

Total commercial lines          771,203        1,151,735        1,922,938        315,042            147,771           2,090,209

Personal automobile             127,646           70,989          198,635         38,221             65,541             171,315
Homeowners                       17,889           21,227           39,116          4,511                944              42,683
Other                             7,479           14,404           21,883          2,201             13,545              10,539

Total personal lines            153,014          106,620          259,634         44,933             80,030             224,537

Total                         $ 924,217        1,258,355        2,182,572        359,975            227,801           2,314,746

Range of reasonable reserves
We established a range of reasonably possible reserves for net claims of approximately $2,267 million to $2,545 million at December 31, 2008 and of $2,180 million to $2,414 million at December 31, 2007. A low and high reasonable reserve selection was derived primarily by considering the range of indications calculated using generally accepted actuarial techniques. Such techniques assume that past experience, adjusted for the effects of current developments and anticipated trends, are an appropriate basis for predicting future events. Although this range reflects likely scenarios, it is possible that the final outcomes may fall above or below these amounts. Based on internal stochastic modeling, we feel that a reasonable estimate of the likelihood that the final outcome falls within the current range is approximately 75%. This range does not include a provision for potential increases or decreases associated with environmental reserves. Our best estimate is consistent with the actuarial best estimate. We do not discount to present value that portion of our loss reserves expected to be paid in future periods; however, the loss reserves take into account anticipated recoveries for salvage and subrogation claims.

Sensitivity Analysis: Potential impact on reserve volatility due to changes in key assumptions
Our process to establish reserves includes a variety of key assumptions, including, but not limited to, the following:
• The selection of loss development factors;

• The weight to be applied to each individual actuarial indication;

• Projected future loss trend; and

• Expected ultimate loss ratios for the current accident year.

The importance of any single assumption depends on several considerations, such as the line of business and the accident year. If the actual experience emerges differently than the assumptions used in the process to establish reserves, changes in our reserve estimate are possible and may be material to the results of operations in future periods. Set forth below is a discussion of the potential impact of using certain key assumptions that differ from those used in our latest reserve analysis. It is important to note that the following discussion considers each assumption individually, without any consideration of correlation between lines of business and accident years, and therefore, does not constitute an actuarial range. While the following discussion represents possible volatility from variations in key assumptions as identified by management, there is no assurance that the future emergence of our loss experience will be consistent with either our current or alternative set of assumptions. By the very nature of the insurance business, loss development patterns have a certain amount of normal volatility. Workers Compensation
In addition to the normal amount of volatility, medical loss development factors for workers compensation are particularly sensitive to assumptions relating to medical inflation. Actual medical loss development factors could be significantly different than those which are selected from historical loss experience if actual medical inflation is materially different than what was observed in the past. In addition, workers compensation has been the focus of a multi-faceted underwriting strategy designed to significantly reduce the loss ratio over time. The combination of the sensitivity of workers compensation results to medical inflation and changes in underwriting could lead to actual experience emerging differently than the assumptions used in the process to establish reserves. In our judgment, it is possible that actual medical loss development factors could range from 6% below to 8% above those selected in our latest reserve analysis and expected loss ratios could range from 5% below to 7% above those selected in our latest reserve analysis. The combination of reducing the assumptions for medical loss development by 6% and the expected loss ratio by 5% could decrease our indicated workers compensation reserves by approximately $58 million for accident years 2007 and prior. Alternatively, the combination of increasing the medical loss development factors by 8% and the expected loss ratio by 7% could increase our indicated workers compensation reserves by approximately $81 million for accident years 2007 and prior. General Liability
In addition to the normal amount of volatility, general liability loss development factors have greater uncertainty due to the complexity of the coverages and the possibly significant periods of time that can elapse between the occurrence of an insured loss, the reporting of the loss to the insurer, and the insurer's payment of that loss. In our judgment, it is possible that general liability loss development factors could be +/- 6% from those actually selected in our latest reserve analysis. If the loss development assumptions were changed by +/- 6%, that would increase/decrease our indicated general liability reserves by approximately $92 million for accident years 2007 and prior. Commercial Automobile
In addition to the normal amount of volatility, our commercial automobile line of business has realized significant favorable development in 2005 to 2007, which leveled off to a minimal amount in 2008. This favorable development was driven in large part by a reduction in our bodily injury large loss experience. The actual number of large claims has a high degree of volatility from year to year in terms of timing and ultimate final emergence. Even if ultimate large losses are ultimately consistent from year to year, if they are identified at different times than previous years, traditional loss development factors may overstate or understate actuarial indications. If the timing of large losses is significantly variable, it is our judgment that actual loss development factors could be +/- 6% different from those selected in our reserve review, which would increase/decrease our indicated commercial auto reserves by approximately $59 million for accident years 2007 and prior.
Claims Initiatives Impact on General Liability and Commercial Automobile In addition to the line of business specific assumptions discussed above, a number of claims initiatives have increased average case reserves for both the general liability and commercial auto lines of business. This increase in case reserves causes larger differences between some indications than would normally be experienced. In our judgment, it is possible that the selections for these lines of business in our latest reserve review could increase by $57 million or decrease by $46 million depending on how various methodologies converge for these lines of business in accident years 2007 and 2008.

Personal Automobile
In addition to the normal amount of volatility, the uncertainty of personal automobile loss development factors is greater than usual due to the number of judicial and regulatory changes in the New Jersey personal automobile market over the years. In our judgment, it is possible that personal auto bodily injury loss development factors could range from 4% below those actually selected in our latest reserve analysis to 3% above those selected in our latest reserve analysis. If the loss development assumptions were reduced by 4%, that would decrease our indicated personal automobile reserves by approximately $28 million for accident years 2007 and prior. Alternatively, if the loss development factors were increased by 3%, that would increase our indicated personal . . .