PAGE
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 . . . . . . . . .September 30, 1997
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)
973-948-3000
-------------------------------
(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 October 31, 1997:
14,684,949 (see note 1)
-1-
PAGE
Item 1. Financial Statements.
- ------------------------------
SELECTIVE INSURANCE GROUP, INC.
-------------------------------
Consolidated Balance Sheets
-------------------------------
(unaudited)
(dollars in thousands)
ASSETS September 30 December 31
- ------ 1997 1996
Investments: ------------ ----------
Debt securities, held-to-maturity -
at amortized cost (fair value of
$424,444-1997; $445,273-1996)......... $ 409,653 432,792
Debt securities, available-for-sale -
at fair value (amortized cost of
$1,032,221-1997; $965,965-1996)....... 1,061,144 985,372
Equity securities, available-for-sale -
at fair value (cost of
$113,107-1997; $99,383-1996).......... 214,312 161,096
Short-term investments
(at cost which approximates fair value) 9,965 33,924
Other investments (at cost which approximates
fair value)........................... 19,300 10,530
--------- ---------
Total investments ...................... 1,714,374 1,623,714
Cash....................................... 7,413 6,098
Interest and dividends due or accrued ..... 22,881 24,167
Premiums and other receivables............. 209,823 152,008
Reinsurance recoverable on paid losses
and loss expenses..................... 12,176 7,863
Reinsurance recoverable on unpaid losses and
loss expenses......................... 135,054 150,208
Prepaid reinsurance premiums............... 30,697 30,813
Deferred Federal income tax................ 10,706 30,771
Real estate, furniture and equipment....... 47,347 48,993
Deferred policy acquisition costs.......... 102,504 83,150
Excess of cost over fair value of net
assets acquired....................... 9,544 9,894
Other assets............................... 25,817 22,058
--------- ---------
Total assets............................ $ 2,328,336 2,189,737
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Liabilities:
- -----------
Reserve for losses......................... $ 1,004,559 1,015,601
Reserve for loss expenses.................. 178,046 174,192
Unearned premiums.......................... 395,298 332,040
Convertible subordinated debentures........ 6,879 6,912
Short-term debt ........................... 15,500 -
Notes payable.............................. 96,857 96,857
Current Federal income tax................. 4,032 3,729
Other liabilities ......................... 77,240 86,107
--------- ---------
Total liabilities....................... 1,778,411 1,715,438
--------- ---------
Stockholders' Equity:
- --------------------
Common stock of $2 par value per share:
Authorized shares-90,000,000
Issued: 18,140,742-1997; 17,911,087-1996 . 36,281 35,822
Additional paid-in capital................. 64,548 53,882
Net unrealized gains on available-for-sale
securities, net of deferred income
tax effect............................ 84,583 52,728
Retained earnings.......................... 426,487 386,601
Treasury stock - at cost
(shares: 3,447,668-1997; 3,366,631-1996) (54,251) (50,680)
Deferred compensation expense and notes
receivable from stock sales................ (7,723) (4,054)
--------- ---------
Total stockholders' equity ............. 549,925 474,299
--------- ---------
Total liabilities and stockholders' equity $ 2,328,336 2,189,737
========= =========
See accompanying notes to unaudited consolidated financial statements.
-2-
PAGE
SELECTIVE INSURANCE GROUP, INC.
================================
Consolidated Statements of Income
(unaudited)
(in thousands, except per share data)
Quarter ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
------ ------ ------ ------
Revenues:
- --------
Net premiums written.................$ 200,680 196,765 573,126 544,979
Increase in unearned premiums,
net of prepaid
reinsurance premiums ........... (30,764) (24,659) (63,374) (20,112)
------- ------- ------- -------
Net premiums earned ................. 169,916 172,106 509,752 524,867
Net investment income earned......... 24,479 23,908 73,605 71,702
Net realized gains (losses)
on investments.................. 3,386 (35) 5,355 1,328
Other income......................... 1,120 1,255 3,392 3,286
------- ------- ------- -------
Total revenues.................... 198,901 197,234 592,104 601,183
------- ------- ------- -------
Expenses:
- --------
Losses incurred ..................... 98,279 104,445 293,934 325,240
Loss expenses incurred............... 20,094 18,418 59,643 57,262
Policy acquisition costs............. 50,978 54,161 153,686 159,569
Dividends to policyholders........... 1,007 1,164 3,300 3,909
Interest expense..................... 2,454 2,299 7,193 6,945
Other expenses....................... 1,857 1,875 6,237 3,998
------- ------- ------- -------
Total expenses.................... 174,669 182,362 523,993 556,923
------- ------- ------- -------
Income before Federal income tax 24,232 14,872 68,111 44,260
------- ------- ------- -------
Federal income tax expense:
Current.............................. 5,340 2,547 13,000 7,183
Deferred............................. 497 73 2,912 365
------- ------- ------- -------
Total Federal income tax
expense......................... 5,837 2,620 15,912 7,548
------- ------- ------- -------
Net income...........................$ 18,395 12,252 52,199 36,712
======= ======= ======= =======
Earnings per share:
- ------------------
Net income-primary................$ 1.25 0.84 3.56 2.53
Net income-fully diluted .........$ 1.22 0.82 3.47 2.46
Dividends to stockholders............$ 0.28 0.28 0.84 0.84
See accompanying notes to unaudited consolidated financial statements.
-3-
PAGE
SELECTIVE INSURANCE GROUP, INC.
Consolidated Statements of Cash Flows
(unaudited)
Nine months ended Sept. 30
(in thousands) 1997 1996
---- ----
Operating Activities
- --------------------
Net income $ 52,199 36,712
Adjustments to reconcile net income to
net cash provided by operating activities:
Increase in interest and dividends due or accrued 1,286 669
Increase in premiums and other receivables (57,815) (11,435)
Increase in reinsurance recoverable on paid
losses and loss expenses (4,313) (4,022)
Decrease in net Federal income tax asset 3,215 576
Increase in deferred policy acquisition costs (19,354) (6,300)
Increase in reserves for losses and loss
expenses,net of reinsurance recoverable on
unpaid losses and loss expenses 7,966 40,310
Increase in unearned premiums, net of
prepaid reinsurance premiums 63,374 20,112
Depreciation and amortization 6,245 3,680
Net realized gains on investments (5,355) (1,328)
Other - net (15,571) (25,624)
------ ------
Net adjustments (20,322) 16,638
------ ------
Net cash provided by operating activities 31,877 53,350
------ ------
Investing Activities
Purchase of debt securities, held-to-maturity (31,730) (56,968)
Purchase of debt securities, available-for-sale (120,948) (65,722)
Purchase of equity securities, available-for-sale (21,815) (24,295)
Purchase of other investments (9,000) -
Sale of debt securities, available-for-sale 29,057 13,217
Redemption and maturities of debt securities,
held-to-maturity 54,788 59,057
Redemption and maturities of debt securities,
available-for-sale 25,883 29,264
Sale of equity securities, available-for-sale 13,697 5,017
Proceeds from other investments 223 79
Increase in net payable from security
transactions 2,891 49
Net additions to real estate, furniture
and equipment (2,311) (2,915)
------ ------
Net cash used in investing activities $ (59,265) (43,217)
------ ------
See accompanying notes to unaudited consolidated financial statements.
-4-
PAGE
SELECTIVE INSURANCE GROUP, INC.
Consolidated Statements of Cash Flows, continued
(unaudited)
Nine months ended Sept 30
(in thousands) 1997 1996
---- ----
Financing Activities
- --------------------
Dividends to stockholders $ (12,313) (12,214)
Acquisition of treasury stock (3,571) (161)
Proceeds from short-term debt 15,500 -
Net proceeds from dividend reinvestment plan 849 901
Net proceeds from stock purchase and
compensation plans 10,243 5,598
Increase in deferred compensation expense and
proceeds received on notes receivable from
stock sales (5,964) (2,889)
------ ------
Net cash provided by (used in) financing
activities 4,744 (8,765)
------ ------
Net decrease in short-term investments
and cash (22,644) 1,368
Short-term investments at beginning of year 40,022 54,033
------ ------
Short-term investments and cash at
end of period $ 17,378 55,401
====== ======
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 7,256 7,333
Federal income tax 12,697 6,971
Supplemental schedule of
non-cash financing activity:
Conversion of convertible subordinated
debentures 33 380
See accompanying notes to unaudited consolidated financial statements.
-5-
PAGE
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 presentation 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
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, 1996.
On October 28, 1997 the Company's board of directors declared a 2 for 1
stock split payable on December 1, 1997 to shareholders of record on
November 17, 1997. Giving retroactive effect for the 2 for 1 stock split
for the shares outstanding at October 31, 1997, of 14,689,949, there would
be 29,369,898 shares outstanding.
2. Recent Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("FASB 128").
FASB 128 supersedes Accounting Principles Board Opinion No. 15 "Earnings
per Share" ("APB 15") and specifies the computation, presentation, and
disclosure requirements for earnings per share ("EPS") for entities with
publicly held common stock or potential common stock (that is, securities
such as options, warrants, convertible securities, or contingent stock
agreements). The objective of FASB 128 is to simplify the computation of
EPS and to make the United States standard for computing EPS more compatible
with the EPS standards of other countries and with that of the International
Accounting Standards Committee. FASB 128 will be effective for financial
statements for both interim and annual periods ending after December 15,
1997. The adoption of FASB 128 is not expected to have a material effect on
the Company's EPS disclosures.
The FASB has issued Statement of Financial Accounting Standards No. 129,
"Disclosure of Information about Capital Structure" ("FASB 129"). FASB 129
specifies required disclosures about capital structure that had already been
included in a number of previously existing separate statements and opinions
and applies to all entities, public and non-public. FASB 129 will be
effective for financial statements for periods ending after December 15,
1997.
The FASB has issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("FASB 130"). FASB 130 establishes
standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements.
Comprehensive income includes all changes in equity during a period except
those resulting from investments by owners and distribution to owners.
Under FASB 130, an enterprise will continue to display an amount for net
income, but will also be required to report other items that are included in
comprehensive income. FASB 130 will be effective
-6-
PAGE
for financial statements for periods beginning after December 15, 1997.
Early application is permitted.
The FASB issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
("FASB 131"). FASB 131 establishes standards for the way that public
business enterprises report information about operating segments in their
annual financial statements and requires that those enterprises report
selected financial information about operating segments in interim financial
reports issued to shareholders. Currently there is an "industry approach"
to segment disclosures whereas in FASB 131 segment disclosures are operating
segments. Operating segments are components of an enterprise that;
(i) engage in business activities from which it may earn revenues and incur
expenses; (ii) generate operating results which are regularly reviewed by
the enterprise's chief operating decision maker and (iii) have financial
information available. FASB 131 will be effective for financial statements
for periods beginning after December 15, 1997, although earlier application
is encouraged.
The Company's primary operating subsidiaries write property and
casualty insurance, and the Company presently classifies its business into
two industry segments, personal insurance and commercial insurance. The
business of the commercial insurance segment is conducted by seven customer-
focused Strategic Business Units ("SBUs"), which are contractors,
habitational and recreational, mercantile and service, manufacturing and
processing, public entities, bonding and selective risk managers. The
Company currently reports certain disclosures by the SBU operating segments
and when FASB 131 is effective, all required segment disclosures will be
reported by SBU operating segments.
3. Lines of Credit
During the second quarter of 1997, the Company increased its existing
revolving line of credit with a bank from $10 million to $25 million.
Selective itself may only borrow up to $20 million of the line. A
commitment fee of .12%, or $30,000, on the $25 million is payable annually.
The agreement provides that the principal outstanding on the revolving line
shall bear interest as elected by the Company under either a daily prime
rate quoted by the bank, the London Interbank Offer Rate ("Libor") plus
.28%, (Libor loans may be made for interest periods of one, two, three, or
six months), or a daily money market rate quoted by the bank.
During the first quarter of 1997, the Company entered into an additional
revolving line of credit agreement with a bank under which it may borrow up
to $25 million, of which Selective itself may only borrow up to $20 million.
A commitment fee of .12% on the $25 million is payable annually. The
agreement provides that the principal outstanding on the revolving line
shall bear interest as elected by the Company under either a daily prime
rate quoted by the bank, Libor plus .28% (Libor loans may be made for
interest periods of one, two, three, or six months), or a daily money market
rate quoted by the bank.
At September 30, 1997, there was $15,500,000 of short-term debt
outstanding under the two lines of credit and the weighted average interest
rate on these borrowings was 6.04%.
-7-
PAGE
4. Reinsurance
The following is a table of assumed and ceded amounts by income statement
caption:
Quarter ended Nine months ended
September 30 September 30
(in thousands) 1997 1996 1997 1996
- --------------------------------------------------------------------------
Net premiums written:
Assumed $ 7,397 7,559 18,509 22,206
Ceded (23,280) (17,356) (61,976) (64,809)
Net premiums earned:
Assumed $ 6,882 7,292 17,802 23,927
Ceded (21,292) (23,248) (62,092) (73,683)
Losses incurred:
Assumed $ 5,094 8,361 10,738 15,837
Ceded(1) (12,121) (17,016) (21,849) (58,181)
Loss expenses incurred:
Assumed $ 659 589 1,599 1,628
Ceded (564) (742) (1,434) (2,864)
(1) The significant decrease in ceded losses incurred for the nine months
ended September 30, 1997 reflected the higher level of flood claims,
winter storm claims and one severe liability claim, in the nine months
ended September 30, 1996, which generated reinsurance loss recoveries
of $18 million, $5 million and $6 million, respectively, for the nine
months ended September 30, 1996. 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.
5. Reclassifications
Certain amounts in the Company's prior year consolidated financial
statements have been reclassified to conform with the 1997 presentation.
Such reclassifications had no effect on the Company's net income or
stockholders' equity.
-8-
PAGE
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.
References herein to the "Company" are references to Selective Insurance
Group, Inc. and its consolidated subsidiaries, collectively. References
herein to "Selective" are to Selective Insurance Group, Inc.
The statements, other than historical information, contained in this Form
10-Q including, without limitation, the statements under "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
are, or may be deemed to be, forward-looking statements. Such statements
are subject to risks, uncertainties and other factors that could cause
actual results to differ materially. Such factors include, without
limitation: (i) the competitive nature of the insurance industry, (ii) the
effects of changes in insurance laws and regulations, particularly New
Jersey personal automobile insurance, (iii) the frequency and scope of
storms and other casualties, and (iv) changes in self-insurance and other
alternatives to traditional insurance.
Results of Operations
- ---------------------
Comparison of Third Quarter and Nine Months Ended September 30, 1997, to
Third Quarter and Nine Months Ended September 30, 1996:
Revenues
Net premiums written for the third quarter and nine months ended September
30, 1997 increased by 2%, or $4 million, and 5%, or $28 million,
respectively, over the same periods in 1996. Most of the increase in net
premiums written was in the personal lines Strategic Business Unit ("SBU"),
and reflected an increase in premiums written of 29%, or $16 million, for
the quarter ended September 30, 1997 and 23%, or $36 million, for the first
nine months of 1997. This increase in net premiums written occurred in the
New Jersey personal automobile line of insurance. New Jersey personal
automobile net premiums written included the results of a conversion of
six-month term policies to one-year policies (the "Conversion"), effective
April 1, 1997. The Conversion increased net premiums written by
approximately $15 million and $35 million for the quarter and nine months
ended September 30, 1997, respectively, but had no effect on net premiums
earned or cash flow.
The commercial SBUs net premiums written for the third quarter and nine
months ended September 30, 1997, decreased by 8%, or $12 million, and 2%,
or $8 million, respectively, over the same periods in 1996. During the
third quarter ended September 30, 1996, net premiums written increased due
to a revision of certain reinsurance agreements, pursuant to which the
Company realized a one-time increase in net premiums written of
approximately $8 million reflecting the Company's buyout of certain ceded
reinsurance unearned premium reserves at June 30, 1996. Excluding the
effects of the prior year reinsurance buyout, the slight decrease for the
quarter and nine months ended September 30, 1997, was due to:(i) agency
terminations of approximately $7 million and $17
-9-
PAGE
million, respectively; (ii) rate reductions of approximately $4 million and
$14 million, respectively, mainly in the workers' compensation line of
insurance, principally due to the impact of improving loss trends; and
(iii) a reduction in existing business (renewal retention) attributable to
a highly competitive commercial insurance market place. In addition, the
public entities SBU net premiums written was impacted by a continuing trend
towards self-insurance mechanisms and other alternative markets, which
reduced net premiums written for the quarter and nine months ended September
30, 1997, by approximately $11 million and $17 million, respectively. The
reduction in net premiums written in the commercial SBUs, was offset by an
increase of $13 million and $40 million of new insurance business issued in
the quarter and nine months ended September 30, 1997, respectively.
Excluding the effects of the Conversion and the prior year reinsurance
buyout, the moderate decrease in net premiums written for the quarter and
nine months ended September 30, 1997, translated into an overall decrease in
total net premiums earned of 1%, or $2 million, for the quarter, and 3%, or
$15 million, for the nine months ended September 30, 1997, compared to the
same periods in 1996.
Net investment income earned for the third quarter and nine months ended
September 30, 1997, increased 2%, or $0.6 million, and 3%, or $2 million,
respectively, over the same period in 1996. The increases were primarily
due to income generated from investments acquired from cash provided by
operating activities during 1996 and the investment of proceeds from short-
term borrowings during 1997. The Company was able to invest the proceeds
from the short-term borrowings at a higher rate than the borrowing rate.
The Company's overall annualized investment yield was 6.0% and 6.1% for the
nine months ended 1997 and 1996, respectively.
Expenses
The ratio of losses and loss expenses incurred to net premiums earned for
the third quarter ended September 30, 1997 was 69.7%, a 1.7 point decrease
from the ratio for the same period in 1996. During the quarter ended
September 30, 1996, the Company incurred $6 million of losses (net of $0.9
million of reinsurance) as a result of weather-related claims, which
increased the loss and loss expense ratio for third quarter 1996 by 3.7
points. Absent these weather-related claims, the net loss and loss expense
ratio increased 2.0 points, which reflected less favorable results in the
public entities SBU, primarily in the general liability and commercial
automobile lines of insurance, and the personal lines SBU, primarily in
personal automobile. These declines were partially offset by improved
results in all other commercial SBUs.
The ratio of losses and loss expenses incurred to net premiums earned for
the nine months ended September 30, 1997, was 69.4%, a 3.5 point decrease
from the ratio for the nine months ended September 30, 1996. The decrease
in 1997 in the loss and loss expense ratio was primarily attributable to the
numerous 1996 weather-related claims which primarily impacted the personal
lines, mercantile and service, public entities, and habitational and
recreational SBUs in the prior year. These weather-related claims, which
amounted to $17
-10-
PAGE
million (net of $6 million of reinsurance), increased the nine months
ended September 30, 1996 loss and loss expense ratio by 3.2 points. In
addition to the lack of weather-related claims in the nine months ended
September 30, 1997, most of the commercial SBUs ratios improved in the
workers compensation line of insurance.
The personal lines SBU loss and loss expense ratio of 73.8% and 73.6% for
the quarter and nine months ended September 30, 1997, increased by 4.7
points and 2.5 points, respectively, when compared with the same periods
for 1996 (absent the effects of weather-related claims of 1.7 points and
2.7 points, respectively). The increase was due to the results of the
personal automobile line of insurance, which included a provision for the
New Jersey excess profits calculation. This was partially offset by an
improvement in the homeowners line of insurance mainly due to rate
increases and lower reinsurance costs.
The commercial SBU's loss and loss expense ratio increased by 0.6 points to
67.8%, for the quarter ended September 30, 1997, absent the effects of the
weather-related claims of 4.8 points from the ratio of 72.0% for the quarter
ended September 30, 1996. The slight decline reflected less favorable
results in the public entities SBU. These results were offset by the
mercantile and service and habitational and recreational SBUs, which had
significant improvements in their loss and loss expense ratio for the
quarter ended September 30, 1997, throughout most of their business classes
and lines of insurance. Favorable loss experience in the workers
compensation line of insurance impacted most of the commercial SBUs, with
significant improvement in the manufacturing and processing SBU. The
improved workers compensation results reflect positive loss trends primarily
attributable to: (i) lower average medical costs due to managed care;
(ii) programs which permit employees to return to work earlier; and (iii)
various favorable legislative reforms.
For the nine months ended September 30, 1997, the loss and loss expense
ratio for the commercial SBUs decreased 5.3 points to 67.4% compared to
72.7% for the same period in 1996. Absent the effects of the 1996 weather-
related claims of 3.6 points, the loss and loss expense ratio decreased 1.7
points with the most notable improvements in the mercantile and service and
habatitional and recreational SBUs. These improvements were in most
business classes and commercial lines of insurance in these SBUs. This
improvement was partially offset by less than favorable results in the
public entities SBU.
The ratio of policy acquisition costs to net premiums earned for the quarter
ended September 30, 1997 was 30.0%, as compared to 31.5%, for the same
period in 1996, and for the nine months ended September 30, 1997 was 30.1%,
as compared to 30.4%, for the same period in 1996. The decrease in the
ratio for the third quarter reflected the prior year impact of the buyout of
the reinsurance program.
Total Federal income tax expense increased by approximately $3 million to
$6 million for the quarter ended September 30, 1997, compared to $3 million
for the same period of 1996. For the nine months ended September 30, 1997,
the Federal income tax expense increased approximately $8 million to $16
million, compared to $8 million for the nine months in 1996. The Company's
effective tax rate was 23.4% for the nine months ended September 30, 1997,
compared with
-11-
PAGE
17.1% for the nine months of 1996. The effective tax rate for the nine
months ended September 30, 1997, was higher than the nine months ended
September 30, 1996, due primarily to the tax benefit from the higher level
of underwriting losses due to the winter storms in 1996. The Company's
effective tax rate differs from the Federal corporate rate of 35% primarily
as a result of the tax-exempt investment income.
Income
The table below shows operating income, net realized gains, and net income,
including per share amounts for the quarter and nine months ended September
30, 1997 and 1996.
- ----------------------------------------------------------------------------
Quarter ended Nine months ended
($ in thousands, September September
except for per share data) 1997 1996 1997 1996
- ----------------------------------------------------------------------------
Operating income, excluding
net realized gains
(net of tax) (1) $16,194 12,275 48,718 35,849
Net realized gains (losses),
net of tax 2,201 (23) 3,481 863
Net income (1) 18,395 12,252 52,199 36,712
Per Primary Share:
Operating income (1) 1.10 .84 3.32 2.47
Net realized gains (losses) .15 - .24 .06
Net income (1) 1.25 .84 3.56 2.53
(1) Operating and net income for the quarter and nine months ended September
30, 1996, include weather-related winter storm losses of $4 million, or
$.28 per primary share, and $11 million, or $.76 per primary share,
respectively.
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 the
Company's common stock and dividends from its insurance subsidiaries, the
payments of which are subject to state regulatory requirements.
Total assets increased 6%, or $139 million from December 31, 1996 to
September 30, 1997. The growth was due to: (i) an increase in total
investments, including cash, of $92 million which included cash provided
by operating activities of $32 million, the draw of $16 million on the
Company's lines of credit, and a $49 million increase in net unrealized
gains on available-for-
-12-
PAGE
sale securities; and (ii) an increase in premiums and other receivables of
$58 million and deferred acquisition costs of $19 million mainly due to the
Conversion. This was offset by a $20 million decrease in deferred Federal
income taxes which mainly reflected the associated deferred taxes on the
increase in unrealized gains on available-for-sale securities.
The rise in total liabilities of 4%, or $63 million, from December 31, 1996
to September 30, 1997 was primarily attributable to additional borrowings of
$16 million on the two lines of credit which the Company had outstanding at
September 30, 1997. The lines of credit complement the cash provided by
operating activities and provide the Company with increased flexibility in
its cash management. Unearned premiums increased by $63 million primarily
due to the Conversion. These increases were partially offset by a $7 million
decrease in outstanding loss and loss expense reserves mainly due to a
decrease in the flood line of insurance, an increased volume of outstanding
claim files being closed with final settlements, and reduced exposure
reflecting a lower level of net premiums earned in 1996 and 1997. The rate
at which outstanding claims are being closed has increased due, in part, to
the implementation of claims management specialists (CMSs) in the field and
improved litigation management. In preparation for placing CMSs in the
field, the Company actively settled certain of its liability claims in order
that each CMS would have a more manageable number of claims to handle in the
field. In addition, the Company is utilizing its litigation managers to
more actively settle claims. For the most part, this increased claim
settlement was experienced in the general liability, personal automobile and
commercial automobile lines of insurance.
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; ongoing
capital expenditures with respect to the Company's automation programs;
principal payments on the senior notes and dividends to policyholders and
stockholders. The insurance subsidiaries satisfy their obligations and cash
outflow through premium collections, interest and dividend income and
maturities. Selective has authorized a share repurchase program under which
it may repurchase up to one million shares of its common stock, depending on
market conditions, through available cash and lines of credit. Through this
program, Selective has repurchased approximately 195,000 shares at a total
cost of $7 million; of which 67,000 shares, at a cost of $3 million, were
acquired during the nine months ended September 30, 1997. For the nine
months ended September 30, 1997 and 1996, cash provided by operating
activities amounted to $32 million and $53 million, respectively. The
decrease in cash provided by operating activities was mainly a result of the
higher level of claim and claim expense payments (approximately $4 million)
associated with the aforementioned CMS deployment and increased litigation
settlement activity. In addition, the lower levels of premiums written in
1996 and 1997 (excluding the effects of the Conversion and reinsurance
buyout transaction) has also impacted the cash flow from operations during
the nine months of 1997. The Conversion does not have any impact on cash
flow. The Company expects to continue to generate cash from operations over
the balance of the year.
On June 30, 1997, the Governor of New Jersey signed into law an automobile
insurance reform bill. This legislation (i) eliminates automatic approval
of cost-of-living increases in favor of "expedited rate filings" of 3% or
less,
-13-
PAGE
which do not require prior approval from the insurance commissioner;
(ii) prohibits insurers from non-renewing good drivers (good drivers being
defined as "no more than one at fault accident or four insurance point
moving violations within a five year period"); and (iii) eliminates the bad
driver surcharge system in favor of a tier rating system. In addition to
the legislation enacted in June, Governor Whitman, upon being reelected on
November 4, 1997, announced that she will pursue a cost reform agenda during
the remainder of 1997 and into 1998. The Company believes that there may be
further legislative initiatives in New Jersey with respect to personal
automobile insurance reform. The Company cannot presently predict the form
or timing of any such initiatives, nor can the Company estimate the
financial effects, if any, that such initiatives may have on the Company and
its operations.
-14-
PAGE
Part II OTHER INFORMATION
- --------------------------
Item 5. Other Information.
On October 28, 1997, the Board of Directors of Selective approved
a two-for-one common stock division affecting all authorized shares
of Selective common stock. The stock will be payable December 1,
1997 to stockholders of record on November 17, 1997. As a result
of the common stock division, Selective will issue on December 1,
1997 one additional share of common stock to stockholders for each
share held on the record date. In connection with the common stock
division, Selective's Restated Certificate of Incorporation as
amended effective November 6, 1997, was amended to increase the
authorized shares of common stock from 90,000,000 to 180,000,000
and the number of outstanding shares will increase from
approximately 14.7 million to approximately 29.4 million.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
The exhibits required by Item 601 of Regulation SK are listed in
the Exhibit Index, which immediately precedes the exhibits filed
with this form 10-Q.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the period covered
by this report.
-15-
PAGE
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: November 14, 1997
By: /s/James W. Entringer
--------------------------------------
James W. Entringer,
Chairman of the Board, and
Chief Executive Officer
Date: November 14, 1997
By: /s/David B. Merclean
-------------------------------------
David B. Merclean,
Senior Vice President
and Chief Financial Officer
-16-
PAGE
SELECTIVE INSURANCE GROUP, INC.
INDEX TO EXHIBITS
Exhibit No.
11 Statement Re Computation of Per Share Earnings, filed herewith.
27 Financial Data Schedule, filed herewith.
-17-
PAGE
EXHIBIT 11
SELECTIVE INSURANCE GROUP, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
Quarter ended Six months ended
($ in thousands, September 30 September 30
except per share data) 1997 1996 1997 1996
- ---------------------------------------------------------------------------
Primary earnings per share:
Net income $ 18,395 12,252 52,199 36,712
Weighted average number of
shares of common stock
outstanding 14,675,695 14,610,404 14,658,183 14,543,563
Net income per share of
common stock $ 1.25 .84 3.56 2.53
========== ========== ========== ==========
Fully diluted earnings per share:
Income applicable to common stock
on a fully diluted basis:
Net income $ 18,395 12,252 52,199 36,712
Interest on convertible
debentures 150 135 452 453
Amortization of other
debt expenses 2 2 6 6
Tax effect on interest
and debt expenses (53) (48) (160) (161)
---------- --------- --------- ----------
$ 18,494 12,341 52,497 37,010
========== ========= ========= =========
Weighted average number of shares
outstanding on a fully diluted basis:
Weighted average number of
common shares outstanding 14,675,695 14,610,404 14,658,183 14,543,563
Additional shares assuming
conversion of debentures 485,465 489,207 485,762 505,676
---------- ---------- ---------- ----------
15,161,160 15,099,611 15,143,945 15,040,239
========== ========== ========== ==========
Fully diluted income per
share of common stock $ 1.22 .82 3.47 2.46
========== ========== ========== ==========
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
September 30, 1997 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 1,061,144
<DEBT-CARRYING-VALUE> 409,653
<DEBT-MARKET-VALUE> 424,444
<EQUITIES> 214,312
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,714,374
<CASH> 7,413
<RECOVER-REINSURE> 12,176
<DEFERRED-ACQUISITION> 102,504
<TOTAL-ASSETS> 2,328,336
<POLICY-LOSSES> 1,182,605<F1>
<UNEARNED-PREMIUMS> 395,298
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 119,236<F2>
0
0
<COMMON> 36,281
<OTHER-SE> 513,644
<TOTAL-LIABILITY-AND-EQUITY> 2,328,336
509,752
<INVESTMENT-INCOME> 73,605
<INVESTMENT-GAINS> 5,355
<OTHER-INCOME> 3,392
<BENEFITS> 353,577<F3>
<UNDERWRITING-AMORTIZATION> 153,686
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 68,111
<INCOME-TAX> 15,912
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 52,199
<EPS-PRIMARY> 3.56
<EPS-DILUTED> 3.47
<RESERVE-OPEN> 1,189,793<F4>
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 1,182,605<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, Short-term debt, 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>
