<PAGE> PAGE 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
=========
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended . . . . . . .March 31, 1996
OR
[ ] 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: 0-8641
SELECTIVE INSURANCE GROUP, INC.
-------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-2168890
---------- ----------
(State or other jurisdiction (I.R.S. Employer Identification No,)
of incorporation or organization)
40 Wantage Avenue, Branchville, New Jersey 07890
------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
201-948-3000
------------
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 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 report), and (2) has been subject to
such filing requirements for the past 90 days. 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:
Common stock, par value $2 per share, outstanding as of
April 30, 1996: 14,520,885
PAGE 2
PART I FINANCIAL INFORMATION
==============================
Item 1. Financial Statements.
- - ------------------------------
SELECTIVE INSURANCE GROUP, INC.
-------------------------------
Consolidated Balance Sheets
---------------------------
(unaudited)
(dollars in thousands)
ASSETS March 31 Dec. 31
- - ------ 1996 1995
Investments: -------- --------
Debt securities, held-to-maturity -
at amortized cost(fair value of
$444,844 - 1996; $460,444 - 1995) $ 430,620 439,585
Debt securities, available-for-sale - at fair value
(amortized cost of $935,833 - 1996; $902,375 - 1995) 956,501 949,004
Equity securities, available-for-sale - at fair value
(cost of $93,926 - 1996; $76,858 - 1995) 141,134 117,522
Short-term investments (at cost which approximates
fair value) 22,895 47,306
Other investments (at cost which approximates
fair value) 10,685 10,721
--------- ---------
Total investments 1,561,835 1,564,138
Interest and dividends due or accrued 23,317 23,619
Premiums and other receivables 160,357 165,194
Reinsurance recoverable on paid losses and loss expenses 5,676 5,169
Reinsurance recoverable on unpaid losses and
loss expenses 138,874 121,369
Prepaid reinsurance premiums 37,552 39,952
Deferred Federal income tax 39,416 32,202
Real estate, furniture and equipment 49,145 49,373
Deferred policy acquistion costs 81,685 82,200
Excess of cost over fair value of net assets acquired 10,245 10,362
Other assets 22,115 19,499
--------- ---------
Total assets $ 2,130,217 2,113,077
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- - ------------------------------------
Liabilities:
- - ------------
Reserve for losses $ 987,784 953,251
Reserve for loss expenses 170,867 166,801
Unearned premiums 338,247 343,887
Convertible subordinated debentures 7,282 7,292
Notes payable 104,000 104,000
Current Federal income tax 1,705 1,993
Other liabilities 90,032 99,104
--------- ---------
Total liabilities 1,699,917 1,676,328
--------- ---------
Stockholders' Equity:
- - ---------------------
Common stock of $2 par value per share:
Authorized shares: 90,000,000
Issued: 17,764,144 - 1996; 17,647,178 - 1995 35,528 35,294
Additional paid-in capital 49,773 46,071
Net unrealized gains on available-for-sale securities,
net of deferred income tax effect 44,119 56,740
Retained earnings 352,150 347,318
Treasury stock - at cost (shares: 3,248,334 - 1996;
3,247,189 - 1995) (46,471) (46,429)
Notes receivable from stock sales and deferred
compensation expense (4,799) (2,245)
--------- ---------
Total stockholders' equity 430,300 436,749
--------- ---------
Total liabilities and stockholders' equity $ 2,130,217 2,113,077
========= =========
See accompanying notes to unaudited consolidated financial statements.
PAGE 3
SELECTIVE INSURANCE GROUP, INC.
===============================
Consolidated Statements of Income
---------------------------------
(unaudited)
(in thousands, except per share data)
Quarter ended
March 31
Revenues: 1996 1995
- - --------- ------- -------
Net premiums written $ 173,447 191,567
Net decrease (increase) in unearned premiums
and prepaid reinsurance premiums 3,240 (13,001)
------- -------
Net premiums earned 176,687 178,566
Net investment income earned 24,011 21,724
Net realized gains (losses) on investments 429 (87)
Other income 758 826
------- -------
Total revenues 201,885 201,029
------- -------
Expenses:
- - ---------
Losses incurred 115,396 105,831
Loss expenses incurred 19,772 20,800
Policy acquisition costs 52,706 53,730
Dividends to policyholders 1,428 1,864
Interest expense 2,323 2,325
Other expenses 721 1,031
------- -------
Total expenses 192,346 185,581
------- -------
Income before Federal income tax 9,539 15,448
Federal income tax expense (benefit): ------- -------
Current 1,067 3,567
Deferred (418) (964)
------- -------
Total Federal income tax expense 649 2,603
------- -------
Net income $ 8,890 12,845
======= =======
Earnings per share:
- - -------------------
Net income-primary $ .61 .90
Net income-fully diluted $ .60 .88
Dividends to stockholders $ .28 .28
See accompanying notes to unaudited consolidated financial statements.
PAGE 4
SELECTIVE INSURANCE GROUP, INC.
===============================
Consolidated Statements of Cash Flows
-------------------------------------
(unaudited)
Quarter ended March 31
(in thousands) 1996 1995
Operating Activities ---- ----
- - ---------------------
Net income $ 8,890 12,845
Adjustments to reconcile net income to net cash ------- -------
provided by operating activities:
Increase in reserves for losses and loss expenses 38,599 22,642
Increase (decrease) in unearned premiums (5,640) 10,833
Decrease in Federal income tax (706) (1,197)
Depreciation and amortization 1,249 1,371
Decrease (increase) in premiums and other receivables 4,837 (11,256)
Decrease (increase) in deferred policy acquisition costs 515 (2,500)
Decrease (increase) in interest and dividends due
and accrued 302 (432)
Increase in reinsurance recoverable on paid
losses and expenses (507) (831)
Decrease (increase) in reinsurance recoverable on
unpaid losses and expenses (17,505) 677
Decrease in prepaid reinsurance premiums 2,400 2,168
Net realized (gains) losses on investments (429) 87
Other - net (13,789) (16)
------- -------
Net adjustments 9,326 21,546
------- -------
Net cash provided by operating activities 18,216 34,391
------- -------
Investing Activities
- - --------------------
Purchase of debt securities, held-to-maturity (18,168) (20,996)
Purchase of debt securities, available-for-sale (49,841) (13,922)
Purchase of equity securities, available-for-sale (17,628) (1,575)
Sale of debt securities, available-for-sale 11,200 -
Redemption and maturities of debt securities,
held-to-maturity 27,019 9,337
Redemption and maturities of debt securities,
available-for-sale 5,644 170
Sale of equity securities, available-for-sale 739 431
Proceeds of other investments 47 16
Increase in net payable from security
transactions not settled 1,845 175
Net additions to real estate, furniture and equipment (979) (849)
------- -------
Net cash used in investing activities $ (40,122) (27,213)
------- -------
See accompanying notes to unaudited consolidated financial statements.
PAGE 5
SELECTIVE INSURANCE GROUP, INC.
===============================
Consolidated Statements of Cash Flows, continued
-------------------------------------------------
(unaudited)
Quarter ended March 31
(in thousands) 1996 1995
Financing Activities ---- ----
- - --------------------
Dividends to stockholders $ (4,058) (3,978)
Acquisition of treasury stock (42) (88)
Net proceeds from dividend reinvestment plan 286 295
Net proceeds from employee and agent
stock plans 3,640 1,635
Proceeds from notes receivable from stock sale
and additions to deferred compensation expense (2,331) (841)
------- -------
Net cash used in financing activities (2,505) (2,977)
------- -------
Net increase (decrease) in short-term investments (24,411) 4,201
Short-term investments at beginning of year 47,306 30,631
------- -------
Short-term investments at end of period $ 22,895 34,832
======= =======
Supplemental disclosures of cash flow information
- - -------------------------------------------------
Cash paid during the period for:
Interest $ 2,687 2,547
Federal income tax 1,355 3,800
Supplemental schedule of non-cash financing activity:
Conversion of convertible subordinated debentures 10 30
See accompanying notes to unaudited consolidated financial statements.
PAGE 6
Notes to Unaudited Consolidated Financial Statements
- - ----------------------------------------------------
1. Basis of Presentation
---------------------
The interim financial statements are unaudited but reflect all
adjustments which, in the opinion of management, are necessary to
provide a fair statement of the results of the Selective Insurance
Group, Inc. and its consolidated subsidiaries (collectively, the
"Company") for the interim periods presented. References herein to
"Selective" are to the Parent Company, Selective Insurance Group, Inc.
All such adjustments are of a normal recurring nature. The results of
operations for any interim period are not necessarily indicative of
results for the full year. These financial statements should be read in
conjunction with the financial statements and notes thereto contained in
the Company's Annual Report on Form 10-K for the year ended December 31,
1995.
2. Reinsurance
-----------
The following is a table of assumed and ceded amounts by income
statement caption:
Quarter ended March 31
(in thousands) 1996 1995
- - -----------------------------------------------------------------------------
Net premiums written:
Assumed $ 7,750 4,801
Ceded (22,969) (22,865)
Net premiums earned:
Assumed $ 8,449 8,772
Ceded (25,370) (24,692)
Losses incurred:
Assumed $ 3,395 8,870
Ceded(1) (30,035) (9,874)
Loss expenses incurred:
Assumed $ 518 392
Ceded (1,416) (621)
(1) The significant increase in ceded losses incurred for the first
quarter of 1996 reflected flood and winter storm claims which
generated reinsurance loss recoveries of $13.4 million and $4.4
million, respectively. The flood business is ceded 100% to the
National Flood Insurance Program and therefore, the Company is a
servicer and not an underwriter of this type of insurance and bears
no risk of policyholder loss.
PAGE 7
Item 2. Management's Discussion and Analysis of Financial Condition and
- - ------ ---------------------------------------------------------------
Results of Operations
---------------------
The following discussion relates to the Company's results of operations,
financial condition and liquidity for the interim periods indicated.
Results of Operations
- - ---------------------
Comparison of First Quarter of 1996 to First Quarter of 1995
- - ------------------------------------------------------------
Revenues
- - --------
Net premiums written for the first quarter of 1996 decreased by 9.5%, or
$18.1 million, over the same period in 1995. The reduction in net premiums
written occurred in the Strategic Business Units ("SBUs") writing commercial
lines, where net premiums written declined by 13.0%, or $18.1 million. The
decrease in premium volume for the first quarter of 1996 coupled with the
higher premium volume recorded during 1995 translated into an overall decline
in total net premiums earned of 1.1%, or $1.9 million, in the first quarter
of 1996 over the same period in 1995.
The decrease in net premiums written for the first quarter of 1996 compared
to the first quarter of 1995 was in all commercial lines SBUs, except for
bonds, and reflected: (i) enhanced service levels in 1995 which reduced
premium processing backlog, thereby increasing the 1995 premium volume by
approximately $25 million; (ii) a reduction in premium volume of
approximately $7 million due to agency terminations; and (iii) a highly
competitive commercial lines marketplace. These items were partially offset
by an increase in new business.
The personal lines SBU net premiums written remained relatively consistent
for the first quarter of 1996 compared to the same period one year ago.
Additional premiums generated from rate increases in the New Jersey personal
automobile line of insurance ($1.5 million) were partially offset by higher
New Jersey Unsatisfied Claim and Judgment Fund ("UCJF") ceded premiums of
$0.9 million and a reduction in exposure as measured by policy in-force
counts, which reduced premiums by $0.4 million.
Net investment income earned for the first quarter of 1996 increased 10.5%,
or $2.3 million, over the same period in 1995. The rise was primarily due to
income generated from investments acquired from cash provided by operating
activities during 1995 and 1996. The growth in investment income was
partially offset by redemptions and maturities during 1995 of higher yielding
debt securities reinvested at lower fixed income yields currently available
in the marketplace. These factors, coupled with the increase in fair value
of both the available-for-sale debt and equity securities recognized during
1995, reduced the Company's overall annualized investment yield for the
quarter to 6.2% for 1996, down from 6.5% for the same period one year ago.
Expenses
- - --------
The ratio of losses and loss expenses incurred to net premiums earned for the
first quarter of 1996 was 76.5%, up from 70.9% for the first quarter of 1995.
The 5.6 point increase in the loss and loss expense ratio, for the most part,
reflected numerous winter storm claims which primarily impacted the personal
lines, mercantile and service, public entities, as well as the habitational
and recreational SBUs. These weather-related claims, which amounted to $9.5
million (net of $4.4 million of reinsurance), increased the loss and loss
expense ratio for the first quarter of 1996 by 5.4 points.
Overall, the commercial lines SBUs loss and loss expense ratio has
experienced improvement in both the general liability and workers'
compensation lines of insurance due to rate increases. However, such
improvement was offset by less
PAGE 8
favorable results in property and commercial automobile lines of insurance
(excluding the effects of the winter storms). The increase in the loss and
loss expense ratio in property insurance was due to the higher level of claim
severity and the increase in commercial automobile insurance was due to claim
frequency within the current accident year.
The ratio of policy acquisition costs to net premiums earned for the first
quarter of 1996 declined to 29.8% from 30.1% for the same period in 1995.
The decline in the ratio principally reflected the reduction in the New
Jersey Fair Automobile Insurance Reform Act ("FAIRA") assessment. As of
December 31, 1995, the Company had fully reserved for future FAIRA
assessments. During 1995, the Company incurred FAIRA assessments of $7.4
million of which $1.9 million was charged to the first quarter of 1995.
Partially offsetting the reduced FAIRA assessment was an increase in labor
costs expressed as a percentage of net premiums earned.
Total Federal income tax expense decreased by $2.0 million to $0.6 million
for the first quarter of 1996, compared to $2.6 million for the first quarter
of 1995. The Company's effective tax rate was an expense of 6.8% and 16.9%
for the first quarter of 1996 and 1995, respectively. The Company's
effective tax rate differs from the Federal corporate tax rate of 35%
primarily as a result of tax-exempt investment income. The effective tax
rate in the first quarter of 1996 was lower than the first quarter of 1995
due to the higher level of underwriting losses attributable to the winter
storms in 1996.
Income
- - ------
Operating income, income excluding net realized gains on investments (net of
tax effect), for the first quarter of 1996 decreased 33.3% to $8.6 million,
or $.59 per primary share, compared to $12.9 million, or $.90 per share, for
the same period in 1995. The Company recognized a net gain on the sale of
investments (net of tax effect), for 1996 of $0.3 million, or $.02 per share,
compared to a $0.1 million loss, which had no impact on earnings per share,
for the same period in 1995. Net income for the first quarter of 1996
decreased 30.8% to $8.9 million, or $.61 per primary share, from $12.8
million, or $.90 per share, for the same period in 1995. First quarter 1996
net income was reduced by $6.2 million, or $.43 per share as a result of
underwriting losses attributable to the winter storms.
Financial Condition, Liquidity and Capital Resources
- - ----------------------------------------------------
Selective is an insurance holding company whose principal assets are its
investments in its insurance subsidiaries. As an insurance holding company,
Selective meets its cash requirements through proceeds from the sales of
Selective's common stock and dividends from its insurance subsidiaries, the
payments of which are subject to state regulatory requirements.
Total assets increased 0.8%, or $17.1 million, from December 31, 1995 to
March 31, 1996. The growth in total assets reflected: (i) a $17.5 million
increase in reinsurance recoverable on unpaid losses and expenses principally
due to flood claims ($9.9 million) as well as winter storms ($2.6 million)
during the first quarter of 1996; and (ii) a $7.2 million increase in
deferred Federal income taxes, mainly due to tax benefits related to the net
unrealized loss recognized for the first quarter of 1996 on available-for-
sale securities. These items were partially offset by a $2.3 million
decrease in total investments. The decrease in investments reflected the
combination of: (i) higher interest rates available during the first quarter
of 1996, which reduced the fair value of the debt securities, available-for-
sale by $26.0 million; (ii) a continued rise in the equity market during the
first quarter of 1996, which increased the fair value of equity securities by
$6.5 million; and (iii) additional investments ($16.6 million) purchased with
the net cash provided by operating activities.
The rise in total liabilities of 1.4%, or $23.6 million, from December 31,
1995 to March 31, 1996 was mainly attributable to increases in reserves for
losses and loss expenses of $38.6 million due to: (i) outstanding reserves
for
PAGE 9
1996 winter storm losses of $7.2 million; (ii) outstanding reserves for 1996
flood losses of $9.9 million; and (iii) normal reserve increases. This
increase was partially offset by a $5.6 million decrease in unearned premiums
and a $9.1 million decrease in other liabilities. The reduction in other
liabilities reflected the payment of certain assessments and 1995 profit
sharing incentives during the first quarter of 1996.
The overall obligations and cash outflow of the Company include: claim
settlements; commissions; labor costs; premium taxes; general and
administrative expenses; investment purchases; interest expenses; capital
expenditures with respect to the Company's automation program; principal
payments on the senior notes and dividends to policyholders and Selective's
stockholders. The insurance subsidiaries satisfy their obligations and cash
outflow through premium collections, interest and dividend income and
maturities. For the quarters ended March 31, 1996 and 1995, cash provided by
operating activities amounted to $18.2 million and $34.4 million,
respectively. The decrease in cash provided by operating activities in the
first quarter of 1996 was in part due to: (i) a $5.0 million increase in the
1996 UCJF assessment payment; (ii) increased loss and loss expenses paid due,
in part, to the winter storms; and (iii) increases in 1995 incentives and
profit sharing amounts paid during the first quarter of 1996. The Company
expects to continue to generate cash from operations over the balance of the
year.
PAGE 10
Part II OTHER INFORMATION
- - --------------------------
Item 4. Submission of Matters to a Vote of Security Holders
- - ------------------------------------------------------------
(a) The registrant's Annual Meeting of Stockholders (the "Annual Meeting")
was held on May 3, 1996.
(b) The names of the directors elected and the votes cast for the election of
directors were as follows:
Elected
For Term Votes Broker
Name Expiring For Withheld Non-votes
- - ---- -------- --- -------- ---------
William A. Dolan, II 1999 12,119,863 191,309 0
William C. Gray, D.V.M. 1999 12,117,745 193,427 0
Frederick H. Jarvis 1999 12,077,992 233,180 0
Joan M. Lamm-Tennant, Ph.D. 1999 12,117,948 193,224 0
A. David Brown 1997 12,061,906 249,266 0
J. Brian Thebault 1997 12,003,502 307,670 0
The other directors whose terms continued after the Annual Meeting
are Messrs. James W. Entringer, C. Edward Herder, William M.
Kearns, Jr., S. Griffin McClellan, III, Russell R. Moffett,
William M. Rue, and Thomas D. Sayles, Jr.
(c) The proposal to approve the Selective Insurance Group, Inc. Stock
Compensation Plan for Non-employee Directors was adopted and the
votes cast were as follows:
Broker
For Against Abstain Non-votes
--- ------- ------- ---------
10,963,103 1,091,829 256,240 0
Item 6. Exhibits and Reports on Form 8-K
- - ----------------------------------------
(a) Exhibits
Exhibit
Number
- - -------
11 Statement Re Computation of Per Share Earnings
(b) Reports on Form 8-K
None
PAGE 11
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.
SELECTIVE INSURANCE GROUP, INC.
-------------------------------
Registrant
Date: May 14, 1996
By: /s/James W. Entringer
---------------------
James W. Entringer,
Chairman of the Board,
President, and
Chief Executive Officer
Date: May 14, 1996
By: /s/Gregory E. Murphy
--------------------
Gregory E. Murphy,
Senior Vice President
and Chief Financial Officer
PAGE 12
SELECTIVE INSURANCE GROUP, INC.
------------------------------
INDEX TO EXHIBITS
-----------------
Form
10-Q
Exhibit No. Page
- - ---------- ----
11 Statement Re Computation of per Share Earnings 13
PAGE 13
EXHIBIT 11
SELECTIVE INSURANCE GROUP, INC.
-------------------------------
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
----------------------------------------------
Quarter ended March 31
1996 1995
(in thousands, except per share data)
- - -----------------------------------------------------------------------------
Primary earnings per share:
Net income $ 8,890 12,845
Weighted average number of shares of
common stock outstanding 14,460,498 14,205,607
Net income per share of common stock $ .61 .90
========== ==========
Fully diluted earnings per share:
Income applicable to common stock
on a fully diluted basis:
Net income $ 8,890 12,845
Interest on convertible debentures 158 161
Amortization of other debt expenses 2 2
Tax effect on interest and debt expenses (56) (57)
---------- ----------
$ 8,994 12,951
========== ==========
Weighted average number of shares
outstanding on a fully diluted basis:
Weighted average number of shares of
common stock outstanding 14,460,498 14,205,607
Additional shares assuming conversion
of debentures 514,093 519,392
---------- ----------
14,974,591 14,724,999
========== ==========
Fully diluted income per share of common stock $ .60 .88
========== ==========
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the March
31, 1996 10Q and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0000230557
<NAME> SELECTIVE INS. GROUP, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 956,501
<DEBT-CARRYING-VALUE> 430,620
<DEBT-MARKET-VALUE> 444,844
<EQUITIES> 141,134
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,561,835
<CASH> 22,895
<RECOVER-REINSURE> 5,676
<DEFERRED-ACQUISITION> 81,685
<TOTAL-ASSETS> 2,130,217
<POLICY-LOSSES> 1,158,651<F1>
<UNEARNED-PREMIUMS> 338,247
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 111,282<F2>
0
0
<COMMON> 35,528
<OTHER-SE> 394,772
<TOTAL-LIABILITY-AND-EQUITY> 2,130,217
176,687
<INVESTMENT-INCOME> 24,011
<INVESTMENT-GAINS> 429
<OTHER-INCOME> 758
<BENEFITS> 135,168<F3>
<UNDERWRITING-AMORTIZATION> 52,706
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 9,539
<INCOME-TAX> 649
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,890
<EPS-PRIMARY> .61
<EPS-DILUTED> .60
<RESERVE-OPEN> 1,120,052<F4>
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 1,158,651<F5>
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Equals the sum of Reserve for losses and the Reserve for loss expenses.
<F2>Equals the sum of Notes payable and Convertible subordinated debentures.
<F3>Equals the sum of Losses incurred and Loss expenses incurred.
<F4>Equals the sum of Reserve for losses and Reserve for loss expenses at the
beginning of the year.
<F5>Equals the sum of Reserve for losses and Reserve for loss expenses at the
end of the period.
</FN>
</TABLE>
