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Executive Perspective
February 13, 2008

To Our Shareholders, Friends and Associates:

Exceptionally strong underwriting and investment income in the fourth quarter helped your company close 2007 with $610 million of operating income, setting a new record. Our independent agents and associates continue to focus on underwriting fundamentals, including the risk selection and pricing that are key to success in a competitive environment. In addition, nature gave your company a break, hitting us with no significant catastrophe losses in the fourth quarter and only $26 million for the entire year. What a change this was from last year, when we reported $44 million of catastrophe losses for the fourth quarter and $175 million for the full year.

How did we move from record high catastrophe losses one year to record low catastrophe losses the next? To some extent, we can accept credit for managing our catastrophe losses by controlling our coastal exposures, addressing our geographic concentrations, managing policy deductibles and taking other underwriting actions. To a greater extent, the contrast between 2007 and 2006 simply shows that weather is not very predictable. We were lucky in 2007, but cannot predict which way our luck will run in the future. Already in 2008, severe weather across our operating territories has led to catastrophe losses for our policyholders. Our field associates and agents are working hard to assess the damage and develop initial estimates.

That's okay. We are in the business of managing risk. We believe your company is in good shape and has proven strategies to offset the inherent low predictability of weather and the potential it brings for volatile results. We pay attention to the basics, including these three "Rs" of insurance.

First, reinsurance: We transfer some of the risk by buying reinsurance. We negotiate prices and contract terms with our high quality reinsurers during the fourth quarter each year. You'll find details of our program in the attached February 6 news release. This program has tremendous benefits in addition to increasing predictability by limiting our potential catastrophe losses. It supports our flexibility in serving our agents and their communities, allowing us to write policies covering higher limits on a case-by-case basis.

Second, reserves: We set aside adequate amounts to pay claims, including those already reported as well as those not yet reported. Our reserves for prior years have developed favorably in each of the past 16 years, adding modestly to underwriting profits. You'll read inside that this contribution was higher in 2007 than in the past, and we expect it to return to a more typical level in 2008. Sound reserving policies help assure the accuracy of the prices we charge for our products and the amounts we allocate to pay claims, minimizing the need for reserve charges that would add volatility to our financial results in future years.

The third "R" is readiness. We believe catastrophes bring opportunities as we respond effectively. Teams of our own field claims representatives are organized, trained and equipped to move quickly when a storm hits. They are authorized to evaluate and pay claims on the spot, and even our agencies can write checks for smaller claims. They work together to give service with a human touch. Afterwards, policyholders spread the word about their claims satisfaction, increasing sales.

These three "Rs" are part of a fourth you've heard from us before - relationships. Your company aims to conduct business in a way that creates long-term relationships, bringing a measure of stability to shareholders, policyholders, agents and associates. As we consider the challenging market conditions and the severe weather already occurring in early 2008, we think relationships and stability are the right way to weather all storms.

Respectfully,

/S/ John J. Schiff, Jr.

John J. Schiff, Jr., CPCU
Chairman and Chief Executive Officer
/S/ James E. Benoski

James E. Benoski
Vice Chairman, President, Chief Operating Officer, and Chief Insurance Officer


This report contains forward-looking statements that involve potential risks and uncertainties. For factors that could cause results to differ materially from those discussed, please see the most recent edition of our safe harbor statement under the Private Securities Litigation Reform Act of 1995. To view or print the edition in effect as of this report's initial publication date, please view this document as a printable PDF.