The purpose of insurance is to be there when policyholders need it most – to provide compensation in the event of a covered loss. During times of economic difficulty, that commitment becomes even more important. New Jersey Manufacturers Insurance Company and its subsidiaries practice prudent operating principles to ensure resources are in place to handle policyholders' needs.

The year 2008 was an extraordinarily difficult time across the entire world economy. Job losses were rampant, many financial institutions failed or required government bailouts, and home foreclosures proliferated. Irresponsible "subprime" mortgage-backed securities and over-leveraged use of credit-default swaps figured prominently.

The recession had a ravaging impact on investment returns, which reached across the entire property/casualty industry. As markets slumped, many carriers were forced to delve substantially into surplus.

The inherent stability and strength of NJM Insurance Group demonstrates its greatest value when times are difficult. The surplus for policyholders’ protection stood at $2.14 billion as of December 31, 2008. While this was a decrease of $100.7 million or 4.5% – the first reduction since 1992 – this compared quite favorably with industry trends. Studies from A.M. Best Research indicate a 10.0% reduction in policyholders’ surplus across the U.S. property/casualty industry. The strength of NJM Insurance Group’s surplus is the key to its outstanding ratings from A.M. Best Company, the nation’s preeminent insurance rating agency. New Jersey Manufacturers Insurance Company (NJM) and New Jersey Re-Insurance Company (NJRe) earned A++ (Superior).

Strong surplus, conservative underwriting and careful stewardship of policyholders' premium dollars are among the factors that have supported the payment of dividends to policyholders every year since 1918. More than $4.7 billion has been returned to policyholders in this time. In 2008 alone, $179.5 million in dividends were incurred, including $61.2 million in Special Dividends to 405,000 Personal Auto policyholders in late 2008. The average payment was $149, representing the 15th year in a row for declaration of Special Dividends.

Special Dividend payments were particularly well received in 2008, given the souring economic news across the country. Policyholders sent many positive responses, praising the prudent business practices that made these payments possible.

In the midst of extreme competition, the Group enjoyed overall growth in policy count – increasing by 11,756 or 1.6% to reach 752,890. This is an encouraging indicator that solid value and outstanding service continue to resonate even during trying times.

Rate reductions in major lines for the benefit of policyholders, combined with welcome declines in assigned risk business, led to direct written premiums of $1,468.8 million, down by $43.4 million or 2.9%. The decreases had a $31.5 million impact in Personal Auto and $2.4 million in Commercial Auto. Written premiums in the voluntary market stood at $1,388.0 million, a reduction of $24.7 million or 1.7%; while assigned risk business in Personal Auto and Workers’ Compensation fell to $80.8 million, down by $18.8 million or 18.8%.

Rounding

Net earned premiums for the Group stood at $1,447.7 million, down by $27.9 million or 1.9%. Underwriting deductions, including losses, loss adjustment expenses and underwriting expenses, stood at $1,355.4 million, compared to $1,315.2 million at year-end 2007. This led to an underwriting gain of $92.3 million before dividends or 6.4%. While this is lower than last year's total of $160.4 million or 10.9%, it stands out in comparison to an estimated post-dividend underwriting loss nationally of $21.5 billion, as cited by A.M. Best.

Direct written premiums within New Jersey Manufacturers Insurance Company – the Group's parent and premium carrier – were largely flat in 2008, finishing at $1,310.7 million, a decrease of $6.5 million or 0.5%. Net premiums earned stood at $1,265.2 million, up by $3.7 million or 0.3%.

Personal Auto is the parent Company's largest line and one that has been particularly subject to competition. Although written premiums in Personal Auto declined by $8.2 million or 1.1% to stand at $714.1 million, this result actually represented hidden growth. The lower premium figure was greatly overshadowed by NJM's voluntary 5.0% rate reduction effective February 15, 2008.

NJM continues to do particularly well in policyholder retention. In 2008, 97% of Personal Auto policyholders opted to renew their policies. This compares quite favorably to a 2008 survey of personal auto policyholders by J.D. Power & Associates, which indicated that 85% of auto insurance customers say they are loyal to their carrier. NJM has been especially consistent in this regard, with overall retention averaging 96.7% over the past five years. Only life events, such as giving up driving or moving away from New Jersey or Pennsylvania, have kept this rate from being even higher.

Commercial Auto declined by $4.5 million or 6.7%, to stand at $62.3 million in direct premiums. The 3.5% voluntary rate reduction accounted for more than half of this decline. NJM enjoys fine retention here as well, with 11% of all policyholders having been with the Company for 25 years or more; 17% for 20 or more years, and 37% for 10 or more years.

Workers' Compensation faced increased competition as well as a tough economy in which employers reduced payrolls, a major component of premium. As a result, direct premiums written Group-wide stood at $474.3 million, a decline of $26.0 million or 5.2%. This is despite the impact of a 3.6% rate increase effective January 1, 2008, as recommended by the New Jersey Compensation Rating and Inspection Bureau and approved by the New Jersey Department of Banking and Insurance.

Residential coverages were the only major line of business that experienced increased direct premiums written in 2008. Writings rose by $16.3 million or 11.8% to reach $155.0 million. A 6.7% rate increase effective April 1, 2008 was a factor, accounting for $7.0 million or 43.0% of the change. The biggest reason behind this growth was NJM Personal Auto policyholders, having enjoyed their service experience and dividends, making the move to insure their homes with NJM as well. This increase in business took place without appreciable relative changes in coastal exposures on a new or renewal basis.

The Group's portfolio of fixed-income bonds reached $4,943.2 million at year-end 2008, an increase of $29.2 million or 0.6%. Equity holdings stood at $370.4 million, down by $37.3 million or 9.1%. Only 7.0% of the entire portfolio was comprised of equities, insulating the Group from much of the stock market slump. By comparison, the exposure of other A++ (Superior) rated property/casualty insurers had an average equity position of 25.2% according to A.M. Best figures for year-end 2007, the most recently available full-year statistics.

NJM Bank provided an extremely safe port in the storm that was the banking industry during 2008. Total assets reached $531.3 million, up by $129.5 million or 32.2%. Net income was $2.0 million, compared to $952,000 in 2007. NJM Bank's prudent lending practices continued to bear fruit, as it avoided the sort of mortgage difficulties that have plagued many financial institutions.

NJM's Board of Directors effectively represents the interests of policyholders. As policyholders themselves, they understand how the principles of Stewardship, Integrity and Service apply to all NJM business activities. Three members retired from Board service during 2008 – John E. Hart, Retired Executive Vice President and Counsel, and Peter T. Sapnar, Retired Senior Vice President, along with Frank J. Semcer, Chairman and Chief Executive Officer of Micro Stamping Corporation. Joining NJM's Board were NJM staff members Robert H. Zetterstrom, Vice President and General Counsel, and Christopher J. Colavita, Vice President, with Celestina S. Quintana, Owner/Operator, McDonald's Restaurants, and Robert J. Staudinger, President and Chief Executive Officer of National Manufacturing Co., Inc.

A significant transition in leadership took place in April 2008 with the retirement of Anthony G. Dickson, NJM’s President and CEO for 17 years. Tony's guiding hand steered NJM through a variety of challenges, with the best interests of policyholders always foremost in his mind. Although he concluded his day-to-day NJM career, Tony remains a member of the Board of Directors. Please see Page 5 for a historical perspective on Tony’s service.

In 2009, we are beginning construction of our new, 146,000-square-foot insurance and banking office in Hammonton, revamping our core Information Technology system for handling Workers' Compensation claims, and providing website enhancements to make it easier for Personal Lines policyholders to update policy information while facilitating the application process for new customers.

NJM's exemplary staff is directly responsible for its sterling reputation. Without the contributions of these 2,385 talented, dedicated individuals (plus 47 more at NJM Bank) supporting customer needs, NJM would run the risk of becoming "just another insurance company." Thank you for allowing us to serve you.

April 24, 2009

Anthony M. Stonis
Chairman of the Board

Bernard M. Flynn
President and Chief Executive Officer