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 . . . . . . .June 30, 1998. . . . . . .
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 July 31, 1998:
29,117,917
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Item 1. Financial Statements.
- ------------------------------
SELECTIVE INSURANCE GROUP, INC.
-------------------------------
Consolidated Balance Sheets
-------------------------------
(dollars in thousands)
(unaudited)
ASSETS June 30 December 31
- ------ 1998 1997
Investments: ------------ ----------
Debt securities, held-to-maturity -
at amortized cost (fair value of
$409,370-1998; $426,251-1997)......... $ 395,537 410,169
Debt securities, available-for-sale -
at fair value (amortized cost of
$996,008-1998; $1,009,060-1997)....... 1,032,763 1,044,390
Equity securities, available-for-sale -
at fair value (cost of
$151,167-1998; $120,602-1997)......... 274,239 222,273
Short-term investments -
at cost which approximates fair value 7,200 28,781
Other investments - at fair value.......... 21,053 20,077
--------- ---------
Total investments ...................... 1,730,792 1,725,690
Cash....................................... 6,432 5,017
Interest and dividends due or accrued ..... 22,751 23,474
Premiums and other receivables............. 237,339 196,786
Reinsurance recoverable on paid losses
and loss expenses..................... 9,911 11,088
Reinsurance recoverable on unpaid losses and
loss expenses......................... 135,695 124,197
Prepaid reinsurance premiums............... 24,650 31,189
Current Federal income tax................. 752 -
Deferred Federal income tax................ - 6,489
Real estate, furniture and equipment....... 48,563 45,465
Deferred policy acquisition costs.......... 110,500 98,110
Goodwill................................... 16,664 17,337
Other assets............................... 40,405 21,349
--------- ---------
Total assets............................ $ 2,384,454 2,306,191
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Liabilities:
- -----------
Reserve for losses......................... $ 995,810 984,393
Reserve for loss expenses.................. 176,513 176,776
Unearned premiums.......................... 402,219 373,766
Convertible subordinated debentures........ 6,815 6,845
Short-term debt ........................... 19,000 17,400
Notes payable.............................. 89,714 89,714
Current Federal income tax................. - 1,747
Deferred Federal income tax................ 3,356 -
Other liabilities ......................... 95,637 90,234
--------- ---------
Total liabilities....................... 1,789,064 1,740,875
--------- ---------
Stockholders' Equity:
- --------------------
Common stock of $2 par value per share:
Authorized shares-180,000,000
Issued: 36,756,742-1998; 36,363,856-1997 73,514 72,728
Additional paid-in capital................. 36,302 30,450
Accumulated other comprehensive income-
Net unrealized gains on available-for-sale
securities, net of deferred income
tax effect............................ 103,888 89,051
Retained earnings.......................... 461,116 439,811
Treasury stock - at cost
(shares: 7,545,675-1998; 7,097,462-1997) (71,255) (59,785)
Deferred compensation expense and notes
receivable from stock sales.......... (8,175) (6,939)
--------- ---------
Total stockholders' equity ............. 595,390 565,316
--------- ---------
Total liabilities and stockholders' equity $ 2,384,454 2,306,191
========= =========
See accompanying notes to unaudited consolidated financial statements.
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SELECTIVE INSURANCE GROUP, INC.
================================
Consolidated Statements of Income
(in thousands, except per share data)
(unaudited) (unaudited)
Quarter ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
------ ------ ------ ------
Revenues:
- --------
Net premiums written.................$ 196,636 197,262 385,100 372,446
Net increase in unearned premiums
and prepaid reinsurance
premiums ....................... (19,084) (28,007) (34,992) (32,610)
------- ------- ------- -------
Net premiums earned ................. 177,552 169,255 350,108 339,836
Net investment income earned......... 24,080 24,694 49,188 49,126
Net realized gains .................. 1,798 991 2,879 1,969
Other income......................... 2,144 1,097 4,335 2,272
------- ------- ------- -------
Total revenues.................... 205,574 196,037 406,510 393,203
------- ------- ------- -------
Expenses:
- --------
Losses incurred ..................... 109,187 96,114 213,393 195,655
Loss expenses incurred............... 17,640 20,486 34,973 39,549
Policy acquisition costs............. 56,172 51,055 110,786 102,708
Dividends to policyholders........... 1,686 1,088 2,700 2,293
Interest expense..................... 2,290 2,453 4,566 4,739
Other expenses....................... 1,963 2,492 3,516 4,380
------- ------- ------- -------
Total expenses.................... 188,938 173,688 369,934 349,324
------- ------- ------- -------
Income before Federal income tax .... 16,636 22,349 36,576 43,879
------- ------- ------- -------
Federal income tax expense:
Current.............................. 1,887 4,202 5,155 7,660
Deferred............................. 1,139 1,044 1,855 2,415
------- ------- ------- -------
Total Federal income tax
expense......................... 3,026 5,246 7,010 10,075
------- ------- ------- -------
Net income...........................$ 13,610 17,103 29,566 33,804
======= ======= ======= =======
Earnings per share:
- ------------------
Basic.............................$ 0.47 0.59 1.02 1.17
Diluted ..........................$ 0.44 0.56 0.93 1.10
Dividends to stockholders............$ 0.14 0.14 0.28 0.28
See accompanying notes to unaudited consolidated financial statements.
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SELECTIVE INSURANCE GROUP, INC.
Consolidated Statements of Cash Flows
Unaudited
Six months ended June 30
(dollars in thousands) 1998 1997
---- ----
Operating Activities
- --------------------
Net income $ 29,566 33,804
Adjustments to reconcile net income to
net cash provided by operating activities:
Decrease (increase) in interest and dividends
due or accrued 723 (76)
Increase in premiums and other receivables (40,553) (37,658)
Decrease (increase) in reinsurance recoverable
on paid losses and loss expenses 1,177 (1,947)
(Decrease) increase in reserves for losses and loss
expenses, net of reinsurance recoverable on
unpaid losses and loss expenses (344) 151
Increase in unearned premiums, net of
prepaid reinsurance premiums 34,992 32,610
(Increase) decrease in net Federal income tax (643) 1,886
Increase in deferred policy acquisition costs (12,390) (10,149)
Depreciation and amortization 4,270 4,102
Net realized gains (2,879) (1,969)
Other - net (9,330) (22,241)
------ ------
Net adjustments (24,977) (35,291)
------ ------
Net cash provided by (used in)
operating activities 4,589 (1,487)
------ ------
Investing Activities
- --------------------
Purchase of debt securities, held-to-maturity (12,682) (16,070)
Purchase of debt securities, available-for-sale (57,813) (71,077)
Purchase of equity securities, available-for-sale (33,979) (14,502)
Sale of debt securities, available-for-sale 33,695 29,058
Redemption and maturities of debt securities,
held-to-maturity 27,306 28,568
Redemption and maturities of debt securities,
available-for-sale 38,139 9,410
Sale of equity securities, available-for-sale 5,524 6,061
Proceeds from other investments 25 207
(Decrease) increase in net payable from security
transactions (5,170) 7,277
Net additions to real estate, furniture
and equipment (6,277) (1,391)
------ ------
Net cash used in investing activities $ (11,232) (22,459)
------ ------
See accompanying notes to unaudited consolidated financial statements.
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SELECTIVE INSURANCE GROUP, INC.
Consolidated Statements of Cash Flows, continued
Unaudited
Six months ended June 30
(dollars in thousands) 1998 1997
---- ----
Financing Activities
- --------------------
Dividends to stockholders $ (8,261) (8,207)
Acquisition of treasury stock (11,470) (3,467)
Principal proceeds from short-term debt 1,600 16,775
Net proceeds from dividend reinvestment plan 569 564
Net proceeds from stock purchase and
compensation plans 6,040 8,608
Increase in deferred compensation expense and
amounts received on notes receivable from
stock sales (2,001) (5,534)
------ ------
Net cash (used in) provided by financing
activities (13,523) 8,739
------ ------
Net decrease in short-term
investments and cash (20,166) (15,207)
Short-term investments and cash at
beginning of year 33,798 40,022
------ ------
Short-term investments and cash at
end of period $ 13,632 24,815
====== ======
Supplemental disclosures of cash flow information
- -------------------------------------------------
Cash paid during the period for:
Interest $ 4,652 4,301
Federal income tax 7,653 8,189
Supplemental schedule of
non-cash financing activity:
Conversion of convertible subordinated
debentures 30 33
See accompanying notes to unaudited consolidated financial statements.
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Selective Insurance Group, Inc.
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 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, 1997.
2. Adoption of Accounting Policies
-------------------------------
During 1998, the Company adopted the following accounting policies:
(a) The American Institute of Certified Public Accountants issued
Statement of Position No. 97-3 "Accounting by Insurance and Other
Enterprises for Insurance related Assessments" ("SOP 97-3"). SOP 97-3
establishes standards for accounting for guaranty-fund and certain other
insurance related assessments. SOP 97-3 is effective for fiscal years
beginning after December 15, 1998 and requires the impact of adoption to be
reported as a change in accounting principle. SOP 97-3 was adopted in 1998
by the Company and had no material effect on the Company's results of
operations or financial condition.
(b) The American Institute of Certified Public Accountants issued
Statement of Position No. 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal-Use" ("SOP 98-1"). SOP 98-1
provides guidance on accounting for the costs of computer software
developed or obtained for internal-use and when such costs incurred should
and should not be capitalized. SOP 98-1 is effective for all fiscal years
beginning after December 15, 1998. The provisions of SOP 98-1 should be
applied to internal-use software costs incurred in those fiscal years for
all projects, including those projects in progress upon initial application
of the statement. Earlier application is encouraged in fiscal years for
which annual financial statements have not been issued. SOP 98-1 was
adopted by the Company during the first quarter of 1998. As a result of
SOP 98-1, the Company capitalized $1.5 million of computer software
development costs.
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SELECTIVE INSURANCE GROUP, INC.
Notes to Unaudited Consolidated Financial Statements, continued
(c) Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("FASB 130"), was adopted during the first quarter of
1998. FASB 130 requires the Company to report total comprehensive income
in condensed financial statements of interim periods.
The following is a presentation of the Company's total comprehensive income
for the years ended June 30, 1998 and 1997.
Quarter ended Six months ended
June 30 June 30
---------------- -----------------
(dollars in thousands) 1998 1997 1998 1997
- -------------------------------------------------------------------------
Net income $13,610 17,103 29,566 33,804
------- ------ ------ ------
Other comprehensive income:
- ---------------------------
Unrealized holding gains
arising during period 1,497 39,462 25,705 27,264
Less: reclassification
adjustment for net
realized gains included
in net income (1,798) (991) (2,879) (1,969)
------ ------ ------ ------
Other comprehensive income
(loss) before tax (301) 38,471 22,826 25,295
Income tax benefit (expense)
related to items of other
comprehensive income 106 (13,464) (7,989) (8,853)
------ ------ ------ ------
Other comprehensive (loss)
income, net of tax (195) 25,007 14,837 16,442
Total comprehensive income $13,415 42,110 44,403 50,246
====== ====== ====== ======
3. Pending Accounting Pronouncements
----------------------------------
In June of 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No, 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FASB 133"). FASB 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, (collectively
referred to as derivatives) and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999, earlier application is encouraged, but it is
permitted only as of the beginning of any fiscal quarter that begins after
issuance of this statement. This Statement should not be applied
retroactively to financial statements of prior periods. The adoption of
this statement is not expected to have a material effect on the Company's
results of operations or financial condition.
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SELECTIVE INSURANCE GROUP, INC.
Notes to Unaudited Consolidated Financial Statements, continued
4. Reinsurance
-----------
The following is a table of assumed and ceded amounts by income statement
caption:
Quarter ended Six months ended
June 30 June 30
------------- ----------------
(in thousands) 1998 1997 1998 1997
- -----------------------------------------------------------------------
Net premiums written:
Assumed $ 5,609 3,425 12,044 11,112
Ceded (20,306) (20,466) (34,969) (38,696)
Net premiums earned:
Assumed $ 7,159 5,125 12,633 10,920
Ceded (21,080) (20,274) (41,507) (40,800)
Losses incurred:
Assumed $ 5,431 2,523 10,257 5,644
Ceded (12,363) (6,295) (28,331) (9,728)
Loss expenses incurred:
Assumed $ 715 451 1,195 940
Ceded (644) (486) (1,602) (870)
(1) During the first six months of 1998, the increase in ceded losses
incurred resulted from reinsurance recoveries of $11 million pertaining to
several severe claims during the first half of 1998 and flood claims, in
1998, which generated reinsurance loss recoveries in the amounts of $7
million for the six month period ended June 30, 1998. The flood business
is ceded 100% to the National Flood Insurance Program and therefore, the
Company is a servicer 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 1998 presentation.
All earnings per share amounts for all periods have been presented and
restated to conform to FASB 128, "Earnings per Share" requirements. Such
reclassification and presentation changes had no effect on the Company's
net income or stockholders' equity.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This quarterly report on Form 10-Q contains certain statements that are not
historical facts and are considered "forward-looking statements"
(as defined in the Private Securities Litigation Reform Act of 1995), which
can be identified by terms such as "believes," "expects," "intends," "may,"
"will," "should," "anticipates," "benefits," the negatives thereof, or by
discussion of strategy, goals and/or future expectations. Such
forward-looking statements involve opinions and predictions based on
current information and assumptions, and no assurance can be given that the
future results will be achieved since events or results may materially
differ as a result of risks and uncertainties facing the Company. These
include, but are not limited to, economic, market or regulatory conditions,
competition, and investment risks, as well as risks associated with the
Company's entry into new markets, diversification and catastrophic events.
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.
Results of Operations
- ---------------------
Comparison of Second Quarter ended June 30, 1998 ("Second Quarter 1998"),
and Six Months Ended June 30, 1998 ("Six Months 1998"), to Second Quarter
ended June 30, 1997 ("Second Quarter 1997"), and Six Months Ended June 30,
1997 ("Six Months 1997"):
Revenues
Net premiums written for the Six Months 1998 increased 3%, or $13 million
as compared with the same period in 1997. For the Second Quarter 1998 net
premiums written were essentially flat compared with the same period in
1997. Net premiums written for the Second Quarter 1997 and Six Months 1997
included a one-time benefit of $15 million, pertaining to renewal business
only, due to the conversion of New Jersey personal automobile policies from
a six month term to an annual term (the "Conversion"), effective April 1,
1997. As a result of the Conversion, net premiums written, unearned
premiums and premiums and other receivables for the Second Quarter 1997 and
Six Months 1997 increased by approximately $15 million, with no effect on
net premiums earned or cash flow. Excluding the effects of the Conversion,
and a one-time increase of $4 million in the Six Months 1998, which
reflected the Company's buyout of the New Jersey Homeowners Quota Share
Reinsurance Program, the Second Quarter 1998 and Six Months 1998 net
premiums written increased 8%, or $15 million, and 7%, or $23 million,
respectively, when compared with the same periods in 1997. The growth in
net premiums written was in the commercial SBUs for the Second Quarter 1998
and Six Months 1998.
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The commercial SBUs net premiums written increased $16 million and $28
million for the Second Quarter 1998 and Six Months 1998, respectively,
resulting from increases in all commercial SBUs except for public entities.
This increase reflected $43 million and $84 million of net premiums written
from new business written in the commercial SBUs for the Second Quarter 1998
and Six Months 1998, respectively, over the corresponding prior year
periods. This growth in new business was primarily due to the Company's
increase in the number of field underwriters (the key contact between the
independent agent and the Company), the Company's Midwestern expansion and
the Company's strengthening of agency relationships. The net premiums
written attributable to new business were partially offset by: (i) rate
reductions and credits of approximately $7 million and $13 million,
respectively, due to competition; (ii) a reduction in renewal premiums of
$2 million and $6 million, respectively, due to agency terminations; and
(iii) a reduction in existing business resulting primarily from competition
and re-evaluation of certain underwriting risks. The public entities SBU
net premiums written continued to decrease mainly due to the continued
trend, in this customer segment, towards self-insurance mechanisms and
other alternative markets.
The personal lines SBU net premiums written remained relatively flat,
excluding the effect of the Conversion, for both the Second Quarter 1998
and Six Months 1998. Net premiums written for the Six Months 1998 reflected
the reduction in the New Jersey Homeowners Quota Share Reinsurance Program
from 85% to 75% and the removal of all homeowners liability premium from
this program. These changes resulted in a $2 million increase for the
Second Quarter 1998 and $8 million increase for the Six Months 1998 ($4
million of which was due to a one-time adjustment in the first quarter of
1998 reflecting the buy out of the ceded reinsurance unearned premium
reserves from the previous year) in homeowners net premiums written over
the corresponding 1997 periods. These increases were offset by reductions
in personal automobile net premiums written of $4 million for the Second
Quarter 1998 and $8 million for the Six Months 1998 mainly in New Jersey due
to a reduction in existing business resulting primarily from competition.
The increase in 1998 net premiums written resulted in an increase to net
premiums earned. After an insurance policy is sold, net premiums written
are recorded for the sales transaction and then earned over the life of the
insurance policy (which is generally a one-year term). The growth in the
1998 net premiums written resulted in an increase of 5%, or $8 million, and
3%, or $10 million, in net premiums earned for the Second Quarter 1998 and
Six Months 1998, respectively when compared with the same periods one year
ago.
Net investment income earned for the Second Quarter 1998 and Six Months
1998 remained essentially flat over the same period in 1997. Although the
amount of assets generating investment income increased when compared to
June 1997, the additional income earned from the growth in invested assets
was offset by redemptions and maturities of higher yielding debt securities
reinvested at lower fixed income yields currently available in the
marketplace. These factors reduced the Company's overall annualized
investment yield as of June 30, 1998 to 5.7%, down from 6.1% for the same
period in 1997.
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Expenses
The ratio of losses and loss expenses incurred to net premiums earned for
the Second Quarter 1998 and Six Months 1998 was 71.4% and 70.9%,
respectively. These ratios represent a 2.5 point and a 1.7 point increase
over the ratios for the corresponding Second Quarter 1997 and Six Months
1997 periods. Weather-related claims of $3 million (before-tax) and
$4 million (before-tax) increased the loss and loss expense ratio by 1.5
points and 1.2 points for the Second Quarter 1998 and Six Months 1998,
respectively. Losses from these weather-related claims were primarily
reflected in the habitational and recreational, mercantile and service and
public entities SBU's. Excluding the effects of the weather-related
claims, the loss and loss expense ratio increased 1.0 point and .5 points
for the Second Quarter 1998 and Six Months 1998, respectively. These
increases were mainly due to higher loss and loss ratios in most of the
commercial SBUs, as described below.
Overall, the commercial SBUs loss and loss expense ratio increased by 3.3
points and 2.0 points for the Second Quarter 1998 and Six Months 1998,
respectively. These increases reflected weather-related claims which
resulted in increases of 1.9 points for the Second Quarter 1998 and 1.4
points for the Six Months 1998. Excluding the effects of the 1998
weather-related claims, the commercial SBUs loss and loss expense ratio
increased by 1.4 points for the Second Quarter 1998 and 0.6 points for the
Six Months 1998. Unfavorable results in both the workers' compensation and
commercial automobile lines of insurance contributed to the overall
increase in most of the commercial SBUs loss and loss expense ratio.
The increase to the loss and loss expense ratio for workers' compensation
primarily resulted from prior years' mandated rate decreases associated
with this line of insurance throughout all of the commercial SBUs. The
adverse results in the commercial automobile line of insurance were mainly
due to a few severe claims and a slight increase in the frequency of
claims. In response to the performance of the commercial automobile
business, the Company is reviewing this business, which includes, loss
control, re-evaluating risk selection and re-evaluating risk
classification. The Second Quarter 1998 and Six Months 1998 commercial
SBUs loss and loss expense ratio was also impacted due to a few severe 1998
property claims.
The personal lines SBU loss and loss expense ratio increased by 1.4 points
for both the Second Quarter 1998 and Six Months 1998 to 75.7% and 74.9%,
respectively, as compared to the same periods last year. These increases
include .5 points and .6 points of weather-related claims for the Second
Quarter 1998 and Six Months 1998, respectively. Excluding the impact of
the 1998 weather-related claims, the personal lines SBU loss and loss
expense ratio increased only slightly, mainly due to a few severe personal
automobile claims and homeowners losses in the Second Quarter 1998.
There is an excess profits law in New Jersey, which sets a maximum profit
level on personal automobile insurance. Under New Jersey regulations, an
insurer's excess profits earned on direct insurance written in New Jersey on
private passenger automobiles, as determined pursuant to an actuarial
formula set forth in applicable regulations ("NJ Excess Profits"), are
subject to
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refund or credit to policyholders. A NJ Excess Profits calculation must be
made by an insurer for this purpose and submitted to the New Jersey
Department of Banking and Insurance each year for the three-year period
including the year for which the calculation is done and the two calendar
years immediately preceding such year.
For the three-year period ended December 31, 1997, the Company's most recent
submission indicated that it had no obligation to make an excess profit
premium refund. However, if the Company's current profitability continues
in its New Jersey personal automobile business, it is possible that it will
incur an excess profit premium refund obligation in the future. The Company
considers the potential effect of such excess profits in establishing its
reserves.
On May 19, 1998, the Governor of New Jersey signed into law personal
automobile insurance reform legislation. The law contains multiple
implementation dates that will be determined through the adoption of
regulations. One provision of the law reduces average statewide automobile
insurance premiums by 15%, with the greatest reductions being applicable to
liability-only policies. The Company anticipates that this provision will
become effective on or about January 1, 1999, and that its New Jersey
personal automobile direct premiums written will be reduced between 11% and
12%, or approximately $17 million. This is less than the average of 15%
because a higher proportion of Selective's policies provide physical damage
coverage, on which the rate reduction will be lower.
The law also contains provisions that are intended to generate savings to
the insurance industry. The Company believes that the effect on its
overall financial results due to the loss of premiums as a result of rate
reductions will be partially offset by other provisions included in the
law, including: (i)revisions to the state's no-fault law; (ii) increased
fraud prosecution initiatives; and (iii) the elimination of unnecessary
medical tests and the use of medical fee schedules that should reduce loss
and loss expenses.
The Company is currently unable to estimate the extent of such savings and
believes the new law will not significantly impact its overall after-tax
financial results for a number of reasons. These reasons include a
concurrent reduction in policy acquisition costs (commissions, premium
taxes, etc.) with lower premium volume, and potentially lower costs as a
result of the savings provisions included in the law. In addition, the
reduction in premiums written as a result of the law should reduce the
possibility of a NJ Excess Profits premium refund obligation after the new
law is implemented in 1999.
The ratio of policy acquisition costs to net premiums earned for the Second
Quarter and Six Months 1998 increased to 31.6% compared to 30.2% for the
same periods in 1997. The increase in the ratio primarily reflected an
increase in the relationship of commission expenses, state premium tax
expenses and labor costs expressed as a percentage of net premiums earned,
which added approximately 0.9 points, 0.2 points and 0.3 points,
respectively, to the ratio. Commission expenses increased as a percentage
of net premiums earned
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primarily due to commission incentives to agents to increase profitable
business with the Company which resulted in an increase of 0.7 points and
an increase in the proportion of commercial premiums as a percentage of
total net premiums written which pay a higher commission rate than personal
lines and resulted in a 0.2 point increase. State premium tax expenses
have increased mainly due to the Company's efforts to diversify and write
more business outside of New Jersey. Many states outside of New Jersey
have higher state premium tax rates. Labor costs have increased in 1998
primarily due to the Company's staffing increases in its Midwest operation
and the hiring of additional field underwriters.
Total Federal income tax expense decreased by approximately $2 million, to
$3 million for the Second Quarter 1998, compared to $5 million for the same
period of 1997. For the Six Months 1998, the Federal income tax expense
decreased approximately $3 million, to $7 million, compared to $10 million
for the Six Months in 1997. The Company's effective tax rate was 19.2% for
the Six Months 1998, compared with 23.0% for the Six Months of 1997. The
Company's effective tax rate differs from the Federal corporate rate of 35%
primarily as a result of the tax-exempt investment income. The effective
tax rate for the Six Months 1998 was lower than the Six Months 1997, mainly
due to the higher level of underwriting losses in 1998.
Income
- ------
The table below shows operating income, net realized gains, and net income,
including per share amounts for the quarter and six months ended June 30,
1998 and 1997.
- --------------------------------------------------------------------------
(dollars in thousands, Quarter ended June Six months ended June
except for per share data) 1998 1997 1998 1997
- ---------------------------------------------------------------------------
Operating income, excluding
net realized gains
(net of tax) (1) $12,442 16,459 27,695 32,524
Net realized gain,
net of tax 1,168 644 1,871 1,280
Net income (1) 13,610 17,103 29,566 33,804
Per diluted share:
Operating income (1) .40 .54 .87 1.06
Net realized gain .04 .02 .06 .04
Net income (1) .44 .56 .93 1.10
(1)Operating and net income for the quarter and Six Months 1998,
include weather-related storm losses of $2 million, or $.06 per
diluted share, and $3 million, or $.09 per diluted share, respectively.
-13-
Page
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.
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
stockholders.
The insurance subsidiaries satisfy their obligations and cash outflow
through premium collections, interest and dividend income and maturities.
The Company's cash requirements also include the cost of any shares of
common stock repurchased under its common stock repurchase program.
On July 2, 1996, the Company's Board of Directors (the "Board") authorized
management to repurchase up to two million shares of Selective's common
stock. The stock may be repurchased from time to time in the open market
or in privately negotiated transactions. The determination to make such
purchases is made based on market conditions, available cash and alternative
investment opportunities. As of June 30, 1998, the Company had repurchased
a total of 1.0 million shares at a total cost of $24 million under the
program, of which 446,000 shares were repurchased during the Six Months 1998
at a total cost of $11 million. In addition to the original two million
shares previously authorized, the Board, on July 28, 1998, authorized
Selective to repurchase an additional two million shares of its common
stock under the Company's common stock repurchase program.
For the Six Months 1998, cash provided by operating activities amounted to
$4.6 million compared to cash used in operating activities of $1.5 million
for the same period in 1997. The modest increase was mainly due to higher
levels of net premiums written during 1998. This increase was partially
offset by an increase in claims paid. The rate at which outstanding claims
are being paid and closed has increased due to the implementation of claims
management specialists ("CMSs") in the field and improved litigation
management. The Company believes that the deployment of the CMSs and the
enhanced litigation programs will result, over the long-term, in more
favorable claim settlements. However, the short-term impact of these
programs has been an increase in claim payments of approximately $15
million to $20 million, which has reduced cash provided by operating
activities for the Six Months 1998. The Company anticipates this trend to
continue through the remainder of 1998 and into 1999. The Company expects
to generate cash from operations over the balance of the year.
Total assets increased 3%, or $78 million from December 31, 1997 to June 30,
1998. The growth was due to: (i) an increase in premiums and other
receivables of $40 million and deferred policy acquisition costs (policy
acquisition costs which are deferred and amortized over the life of the
policy period) of $12 million primarily due to the increased premium volume;
(ii) a $19 million increase in other assets primarily due to a $15 million
investment receivable generated by the Company's investment in a short-sale
transaction; (iii) an increase in reinsurance recoverable on unpaid losses
and loss expense
-14-
Page
of $11 million mainly due to a $5 million reinsurance recoverable on a few
severe commercial claims and flood loss reserve increases of $2 million;
(iv) an increase in total investments of $5 million. The above increases
were partially offset by an $10 million decrease in deferred Federal
income taxes which mainly reflected the associated deferred taxes on
increases in unrealized gains on available-for-sale securities and deferred
policy acquisition costs.
The rise in total liabilities of 3%, or $48 million, from December 31, 1997
to June 30, 1998 was mainly attributable to an increase in unearned premiums
of $28 million due to the increase in net premiums written; as well as an
increase in reserves for losses and loss expenses of $11 million due to
normal reserve increases associated with the growth in net premiums written.
Also contributing to the overall increase in total liabilities was an
increase in other liabilities of $.5 million. The increase in other
liabilities primarily reflected the recording of a $15 million payable
generated by the Company's investment in a short-sale transaction offset by
decreases in reserves for securities payable ($5 million), agency profit
sharing ($4 million) and premium, payroll and other taxes ($1 million).
The Company, like all users of automated information systems, is addressing
the potential "Year 2000" issues that could affect a wide variety of its
automated information systems, such as mainframe applications, personal
computers and communications systems. In 1996, Selective began
of preparing its information systems for this event by evaluating all its
computer programs, revising code, replacing applications where necessary,
and testing. Extensive testing has been performed through the first half of
1998 and will continue through the remainder of 1998 on a fully integrated
systems basis. While recognizing that some uncertainty exists, the Company
anticipates that its automated information systems will be "Year 2000"
compliant by the end of 1998.
In addition to the potential impact on the Company's own automated
information systems, the Company has conducted an external awareness
campaign with vendors, agents and others with whom the Company does
business. The Company has been communicating with its independent agency
force about the importance of the Year 2000, and is currently working with
its agents to determine their needs, as well as their level of
preparedness. At the same time, software vendors are being monitored to
ensure "Year 2000" tracking and compliance, while contingency plans are
being developed for noncompliance in conjunction with the Company's
deadlines.
Currently, the Company believes most significant "Year 2000" insurance
claims are likely to occur in the information technology sector,
and under the error and omissions ("E&O") insurance coverages and directors
and officers liability ("D&O") insurance coverages. The Company does not
significantly participate in these markets, nor does it significantly write
E&O and D&O coverage types. However, the Company anticipates that there may
be "Year 2000" claims by its insureds resulting from malfunctioning
technology, which cannot be quantified at this time.
The Company does not presently anticipate that costs incurred for the "Year
2000" will be significant or that "Year 2000" issues will have a material
impact on its results of operations or financial condition.
-15-
Page
Part II
- -------
Item 5. Other Information
- --------------------------
(a) A duly executed proxy given in connection with Selective's 1999
Annual Meeting of Stockholders will confer discretionary authority on
the proxies named therein, or any of them, to vote at such meeting on
any matter of which Selective does not have written notice on or
before February 15, 1999, which is forty-five days prior to the
Date on which Selective first mailed its proxy materials for its 1998
Annual Meeting of Stockholders, without advice in Selective's
proxy statement as to the nature of such matter.
(b) On July 28, 1998, Selective's Board of Directors authorized Selective
to repurchase an additional two million shares of its common stock,
under its repurchase program, depending on market conditions,
available cash and alternative investment opportunities. This program
expires on the date of the first meeting of Selective's Board of
Directors held after January 1, 2000.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits:
The exhibits required by Item 601 of Regulation S-K 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.
-16-
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: August 14, 1998
By: /s/Gregory E. Murphy
--------------------
Gregory E. Murphy,
President and
Chief Operating Officer
Date: August 14, 1998
By: /s/ David B. Merclean
----------------------
David B. Merclean
Senior Vice President and
Chief Financial Officer
-17-
Page
SELECTIVE INSURANCE GROUP, INC.
INDEX TO EXHIBITS
Exhibit No.
10.1 Cover Page
Amendment, dated May 31, 1998, to the Commercial Loan Note of
$25,000,000 Line of Credit with Summit Bank as amended through
May 31, 1999, filed herewith.
10.2 Cover Page
Amendment, dated June 30, 1998, to the Promissory Note of
$25,000,000 Revolving Line of Credit with State Street Bank and
Trust Company as amended through June 30, 1999, filed herewith.
10.3 Employment Agreement, dated May 1, 1999, between Selective
Insurance Company of America and James W. Entringer, filed
herewith.
10.4 Employment Agreement, dated May 1, 1998, between Selective
Insurance Company of America and Gregory E. Murphy, filed
herewith.
11 Statement Re Computation of Per Share Earnings, filed herewith.
27 Financial Data Schedule, filed herewith.
-18-
PAGE
EXHIBIT 10.1 - COVER LETTER
- ---------------------------
August 14, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Selective Insurance Group, Inc. Form 10Q for the period ending
June 30, 1998
Ladies and Gentlemen:
Accompanying this letter for filing pursuant to the Securities Act of 1933,
is an amendment to the Promissory Note of $25,000,000 Revolving Line of
Credit with Summit Bank. The note was initially filed as an exhibit with
the Form 10Q for the quarter ended June 30, 1997.
Very truly yours,
/s/ Marie A. Yorke
Marie A. Yorke
Administrative Assistant
Financial Accounting and Reporting
/MAY
Enclosures
PAGE
EXHIBIT 10.1
- ------------
as of May 31, 1998
Selective Insurance Company of America
Selective Insurance Group, Inc.
40 Wantage Avenue
Branchville, New Jersey 07890-1000
Re: Letter Loan Agreement dated June 30, 1997 as heretofore
modified and extended (the "Loan Agreement")
Gentlemen:
This is to confirm our approval of your request for an extension
through May 31, 1999 of the expiration date of the $25,000,000.00 Revolving
Line of Credit provided for in the Loan Agreement. Accordingly, we have
agreed to modify the definition of Revolving Maturity Date to provide that
May 31, 1999 is the Revolving Maturity Date.
Our approval shall not constitute a waiver of any Events of Default,
if any so exist, or any future violation of any provisions of the Loan
Agreement or any other Loan Documents.
Capitalized terms not defined herein but defined in the Loan Agreement
shall have the same meaning ascribed to such terms in the Loan Agreement.
Your execution shall also act as your representation that the execution of
this letter agreement has been authorized by all required corporate action,
that this letter agreement constitutes the valid and binding obligation of
the Borrower, is enforceable in accordance with its terms, that no Event of
Default exists and that no material adverse change of the Borrower has
occurred.
Except as herein set forth, the Loan Agreement and all other Loan
Documents shall remain in full force and effect. Our agreement as aforesaid
is subject to your written agreement with the terms hereof by signing and
returning a copy hereof where so indicated below, along with the enclosed
Allonges, where so indicated below, along with the enclosed Allonges, where
so indicated below.
Summit Bank
By: /s/ Richard P. Neale
------------------------
Name:
Title:
Agreed To:
Selective Insurance Company Selective Insurance Company
of America of America
By: /s/ David B. Merclean By: /s/ Robert P. Rank
------------------------ -------------------------
Name: David B. Merclean Name: Robert P. Rank
Title: Chief Financial Title: Chief Investment
Officer Officer
Selective Insurance Group, Inc. Selective Insurance Group, Inc.
By: /s/ David B. Merclean By: /s/ Robert P. Rank
------------------------ -------------------------
Name: David B. Merclean Name: Robert P. Rank
Title: Chief Financial Title: Chief Investment
Officer Officer
May 19, 1998
Serv/Corp/Forms/ADW/Master
1684.Ext/Ltr
Page
ALLONGE TO: REVOLVING CREDIT MASTER PROMISSORY NOTE
BORROWER: SELECTIVE INSURANCE COMPANY OF AMERICA
PAYEE: SUMMIT BANK
DATE OF NOTE: JUNE 30, 1997
ORIGINAL PRINCIPAL AMOUNT: $25,000,000.00
BACKGROUND
A. The Borrower and the Payee have entered into that certain letter
agreement, dated as of the date hereof (the "Amendment"), pursuant to which
the Borrower and the Payee have agreed, inter alia, to modify certain terms
of the documents which evidence the Borrower's obligations to the Payee
(collectively, the "Loan Documents").
B. In connection with the Amendment, the Borrower and the Payee wish to
amend the terms of that certain Revolving Credit Master Promissory Note,
dated as of June 30, 1997 by the Borrower in favor of the Payee in the
original principal amount of $25,000,000.00 (together with all amendments
and modifications thereto, the "Note").
NOW, THEREFORE, incorporating the foregoing by reference and for
other good and valuable consideration, the receipt and legal sufficiency of
which is hereby acknowledged and intending to be legally bound, the parties
hereto agree as follows:
1. Amendments. The Maturity Date of the Note is hereby amended to
be, and the outstanding principal amount owing under the Note, all accrued
but unpaid interest, and all other amounts due under the Loan Documents and
evidenced by the Note, shall be due and payable in full on May 31, 1999 or
as otherwise set forth in the Loan Documents. Interest shall continue to be
payable monthly on the first day of each month and on the Maturity Date.
2. Continuing Effect. Except as expressly set forth herein, all of
the terms, covenants and conditions of the Note shall remain in full force
and effect. This Allonge is given as a modification of the Borrower's
obligation under the Note and is not given in substitution therefor or
extinguishment thereof and is not intended to be a novation.
3. Attachment to Note. This Allonge shall be and remain attached to
the Note and shall be an integral part thereof.
IN WITNESS WHEREOF, the parties hereto have caused this Allonge to be
duly exectued as of this 31st day of May, 1998.
SELECTIVE INSURANCE COMPANY SELECTIVE INSURANCE COMPANY
OF AMERICA OF AMERICA
BY: /s/ David B. Merclean BY: /s/ Robert P. Rank
----------------------- ------------------------
NAME: David B. Merclean NAME: Robert P. Rank
TITLE: Chief Financial Officer TITLE: Chief Investment Officer
SUMMIT BANK
BY: /s/ Richard P. Neale
----------------------
-1-
May 19, 1998
Serv/Per/ADW/Stf/Active/Selective
3507/AllongeCo.
Page
ALLONGE TO: REVOLVING CREDIT MASTER PROMISSORY NOTE
BORROWER: SELECTIVE INSURANCE GROUP, INC.
PAYEE: SUMMIT BANK
DATE OF NOTE: JUNE 30, 1997
ORIGINAL PRINCIPAL AMOUNT: $20,000,000.00
BACKGROUND
A. The Borrower and the Payee have entered into that certain letter
agreement, dated as of the date hereof (the "Amendment"), pursuant to which
the Borrower and the Payee have agreed, inter alia, to modify certain terms
of the documents which evidence the Borrower's obligations to the Payee
(collectively, the "Loan Documents").
B. In connection with the Amendment, the Borrower and the Payee wish to
amend the terms of that certain Revolving Credit Master Promissory Note,
dated as of June 30, 1997 by the Borrower in favor of the Payee in the
original principal amount of $20,000,000.00 (together with all amendments
and modifications thereto, the "Note").
NOW, THEREFORE, incorporating the foregoing by reference and for
other good and valuable consideration, the receipt and legal sufficiency of
which is hereby acknowledged and intending to be legally bound, the parties
hereto agree as follows:
1. Amendments. The Maturity Date of the Note is hereby amended to
be, and the outstanding principal amount owing under the Note, all accrued
but unpaid interest, and all other amounts due under the Loan Documents and
evidenced by the Note, shall be due and payable in full on May 31, 1999 or
as otherwise set forth in the Loan Documents. Interest shall continue to be
payable monthly on the first day of each month and on the Maturity Date.
2. Continuing Effect. Except as expressly set forth herein, all of
the terms, covenants and conditions of the Note shall remain in full force
and effect. This Allonge is given as a modification of the Borrowers
obligation under the Note and is not given in substitution therefor or
extinguishment thereof and is not intended to be a novation.
3. Attachment to Note. This Allonge shall be and remain attached to
the Note and shall be an integral part thereof.
IN WITNESS WHEREOF, the parties hereto have caused this Allonge to be
duly exectued as of this 31st day of May, 1998.
SELECTIVE INSURANCE GROUP, INC. SELECTIVE INSURANCE GROUP, INC.
BY: /s/ David B. Merclean BY: /s/ Robert P. Rank
----------------------- ------------------------
NAME: David B. Merclean NAME: Robert P. Rank
TITLE: Chief Financial Officer TITLE: Chief Investment Officer
SUMMIT BANK
BY: /s/ Richard P. Neale
----------------------
-1-
May 19, 1998
Serv/Per/ADW/Stf/Active/Selective
3507/AllongeParent
PAGE
EXHIBIT 10.2 - COVER LETTER
- ---------------------------
August 14, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Selective Insurance Group, Inc. Form 10Q for the period ending
June 30, 1998
Ladies and Gentlemen:
Accompanying this letter for filing pursuant to the Securities Act of 1933,
is an amendment to the Promissory Note of $25,000,000 Revolving Line of
Credit with State Street Bank and Trust Company. The note was initially
filed as an exhibit with the Form 10Q for the quarter ended March 31, 1997.
Very truly yours,
/s/ Marie A. Yorke
Marie A. Yorke
Administrative Assistant
Financial Accounting and Reporting
/MAY
Enclosures
Page
EXHIBIT 10.2
- ------------
STATE STREET
P.O. Box 9111
Boston, MA 02209-9111
As of June 30, 1998
Selective Insurance Company of America
Selective Insurance Group, Inc.
40 Wantage Avenue
Branchville, NJ 07890-1000
Re: Loan Facility
Ladies and Gentlemen:
State Street Bank and Trust Company (the "Bank") has made available to
Selective Insurance Company of America, a corporation organized under the
laws of New Jersey (the "Company") and Selective Insurance Group, Inc., a
corporation organized under the laws of New Jersey (the "Parent")
(collectively, the Company and the Parent are hereinafter referred to as the
"Borrower") an aggregate $25,000,000 revolving line of credit as described in
a letter agreement dated March 3, 1997 (as amended, the "Letter Agreement").
The Borrower has requested, and the Bank has agreed to extend the Revolving
Maturity Date as defined in the Letter Agreement. Therefore, for good and
valuable consideration, the receipt of which is hereby acknowledged, the
Borrower and the Bank hereby agree as follows:
1. The Letter Agreement is hereby amended by deleting the following
from paragraph 1 thereof: "June 30, 1998" and substituting the following
therefor: "June 30, 1999". All references to "Revolving Maturity Date" in
the Letter Agreement or any related document shall be deemed to refer to June
30, 1999.
2. The Letter Agreement is hereby amended by deleting the following
from the end of paragraph 2 thereof: "and provided further that no more than
$20,000,000 of Revolving Loans shall be outstanding to the Parent at any
time".
3. As amended hereby, all terms and conditions of the Letter Agreement
and Promissory Note executed in connection therewith remain in full force and
effect and are ratified and affirmed as of the date hereof and extended to
give effect to the terms hereof.
4. The Borrower represents to the Bank that no default or Event of
Default has occurred under the Letter Agreement or aforesaid Note, and
further that if the proceeds of any Revolving Loan are utilized to finance
the purchase of the stock of the Parent, such use will be in compliance with
Regulations U and X of the Board of Governors of the Federal Reserve System.
Page
Selective Insurance Company
of America
Selective Insurance Group,
Inc.
As of June 30, 1997
Page 2
5. This letter agreement shall constitute an agreement executed under
seal to be governed by the laws of The Commonwealth of Massachusetts
effective as of June 30, 1998.
Sincerely,
STATE STREET BANK AND
TRUST COMPANY
By: /s/ Edward M. Anderson
-----------------------
Title: Vice President
Acknowledged and accepted:
SELECTIVE INSURANCE COMPANY OF AMERICA
By: /s/ David B. Merclean
-------------------------
Title:Chief Financial Officer
By: /s/ Robert P. Rank
-------------------------
Title: Chief Investment Officer
SELECTIVE INSURANCE GROUP, INC.
By: /s/ David B. Merclean
-------------------------
Title:Chief Financial Officer
By: /s/ Robert P. Rank
-------------------------
Title: Chief Investment Officer
Page
EXHIBIT 10.3
- ------------
AMENDMENT NO. 3 TO EMPLOYMENT AGREEMENT
---------------------------------------
AMENDMENT NO. 3, dated as of May 1, 1998 among SELECTIVE INSURANCE
GROUP, INC., a New Jersey corporation ("Selective"), having an office at
Wantage Avenue, Branchville, New Jersey 07826, SELECTIVE INSURANCE COMPANY
OF AMERICA, a New Jersey corporation ("SICA"), having an office at
Wantage Avenue, Branchville, New Jersey 07826, and JAMES W. ENTRINGER having
an address at P.O. Box 2812, Branchville, New Jersey 07826 (the
"Executive"), to Employment Agreement dated as of September 1, 1993
among Selective, SICA and the Executive as heretofore amended by Amendment
No. 1 thereto dated as of January 31, 1994 and Amendment No. 2 thereto
dated as of June 6, 1996 (as so amended, the "Employment Agreement").
WHEREAS, Selective, SICA and the Executive have executed and delivered
the Employment Agreement, and Selective has guaranteed all of the
obligations of SICA as the Employer under the Employment Agreement; and
WHEREAS, the parties hereto desire to further amend the
Employment Agreement to modify the description of the duties of the
Executive as set forth in Section 4(a) of the Employment Agreement.
THEREFORE, in consideration of the premises and the mutual
covenants hereinafter set forth, the parties hereto agree as follows:
1. The Executive is presently serving as Chairman and Chief
Executive Officer of SICA and Selective, and all references in the
Employment Agreement to the Executive serving as Chairman, President and
Chief Executive Officer of the Company (as defined in the Employment
Agreement) are hereby amended to refer to the Executive as Chairman and
Chief Executive Officer of the Company (as defined in the Employment
Agreement) and Selective.
2. Selective reaffirms that it guarantees to the Executive the
full performance by SICA of all of its obligations under the
Employment Agreement as amended herein.
3. Except as amended herein, the Employment Agreement shall continue
in full force and effect on and after the date hereof.
IN WITNESS WHEREOF, this Amendment has been duly executed by the
Executive and on behalf of Selective and SICA by their duly authorized
officers, as of the date and year first above written.
SELECTIVE INSURANCE GROUP, INC.
By: /s/ Gregory E. Murphy
---------------------
Name: Gregory E. Murphy
Title: President and Chief
Operating Officer
SELECTIVE INSURANCE COMPANY
OF AMERICA
By:/s/ Gregory E. Murphy
---------------------
Name: Gregory E. Murphy
Title: President and Chief
Operating Officer
/s/ James W. Entringer
----------------------
Executive
Page
EXHIBIT 10.4
- ------------
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
---------------------------------------
AMENDMENT NO. 1, dated as of May 1, 1998 among SELECTIVE INSURANCE
GROUP, INC., a New Jersey corporation ("Selective"), having an office at
Wantage Avenue, Branchville, New Jersey 07826, SELECTIVE INSURANCE COMPANY
OF AMERICA, a New Jersey corporation ("SICA"), having an office at
Wantage Avenue, Branchville, New Jersey 07826, and GREGORY E. MURPHY having
an address at 10 Condit Road, Mountain Lakes, New Jersey 07046
(the "Executive"), to Employment Agreement dated as of August 1, 1995
among Selective, SICA and the Executive (the "Employment Agreement").
WHEREAS, Selective, SICA and the Executive have executed and delivered
the Employment Agreement and Selective has guaranteed all of the obligations
of SICA as the Employer under the Employment Agreement; and
WHEREAS, the parties hereto desire to amend the Employment Agreement
to modify the description of the duties of the Executive as set forth in
Section 4(a) of the Employment Agreement, to extend the term thereof and
to modify the Salary (as defined in Section 3 of the Employment Agreement)
provided for therein.
THEREFORE, in consideration of the premises and the mutual covenants
hereinafter set forth, the parties hereto agree as follows:
1. The term of employment under the Employment Agreement is
hereby extended for a period of three (3) years commencing August 1, 1998
(the "Renewal Term"), and all references in the Agreement to the term
thereof or the Executive's term of employment thereunder shall include
the Renewal Term.
2. The Salary, as defined and provided for in Section 3 of the
Employment Agreement, shall be paid to the Executive at a rate of not less
than Three Hundred Twenty-Five Thousand Dollars ($325,000.00) per year.
3. The Executive is presently serving as President and Chief
Operating Officer of SICA and Selective, and all references in the
Employment Agreement to Executive serving as Senior Vice President and
Chief Financial Officer of the Company (as defined in the Employment
Agreement) are hereby amended to refer to the Executive as President and
Chief Operating Officer of the Company (as defined in the Employment
Agreement) and Selective.
4. Selective reaffirms that it guarantees to the Executive the
full performance by SICA of all of its obligations under the
Employment Agreement as amended herein.
5. Except as amended herein, the Employment Agreement shall continue
in full force and effect on and after the date hereof.
IN WITNESS WHEREOF, this Amendment has been duly executed by the
Executive and on behalf of Selective and SICA by their duly authorized
officers, as of the date and year first above written.
SELECTIVE INSURANCE GROUP, INC.
By /s/ James W. Entringer
-----------------------
Name: James W. Entringer
Title: Chairman and Chief
Executive Officer
SELECTIVE INSURANCE COMPANY
OF AMERICA
By: /s/ James W. Entringer
------------------------
Name: James W. Entringer
Title: Chairman and Chief
Executive Officer
/s/ Gregory E. Murphy
------------------------
Executive
PAGE
EXHIBIT 11
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
For the six-months ended June 30, 1998 and 1997
(in thousands, except per Income Shares Per Share
share amounts) (Numerator) (Denominator) Amount
- ---------------------------------------------------------------------
1998
- ----
Basic EPS
Net Income available
to common stockholders $ 29,566 28,923 $ 1.02
====
Effect of Dilutive Securities
Restricted stock - 522
8.75% convertible
subordinated debentures 196 963
Stock Options (741) 662
------ ------
Diluted EPS
Income available to common
stockholders + assumed
conversions $ 29,021 31,070 $ 0.93
====== ====== ====
- ------------------------------------------------------------------------
1997
- ----
Basic EPS
Net Income available
to common stockholders $ 33,804 28,893 $ 1.17
====
Effect of Dilutive Securities
Restricted stock - 405
8.75% convertible
subordinated debentures 198 973
Stock Options 44 544
------ ------
Diluted EPS
Income available to common
stockholders + assumed
conversions $ 34,046 30,815 $ 1.10
====== ====== ====
-1-
Page
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
For the quarter ended June 30,1998 and 1997
(in thousands, except per Income Shares Per Share
share amounts) (Numerator) (Denominator) Amount
- ---------------------------------------------------------------------
1998
- ----
Basic EPS
Net Income available
to common stockholders $ 13,610 28,890 $ 0.47
====
Effect of Dilutive Securities
Restricted stock - 550
8.75% convertible
subordinated debentures 98 962
Stock Options (169) 618
------ ------
Diluted EPS
Income available to common
stockholders + assumed
conversions $ 13,539 31,020 $ 0.44
====== ====== ====
- ------------------------------------------------------------------------
1997
- ----
Basic EPS
Net Income available
to common stockholders $ 17,103 28,919 $ 0.59
====
Effect of Dilutive Securities
Restricted stock - 419
8.75% convertible
subordinated debentures 98 971
Stock Options 120 574
------ ------
Diluted EPS
Income available to common
stockholders + assumed
conversions $ 17,321 30,883 $ 0.56
====== ====== ====
-2-
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
June 30, 1998 10Q and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0000230557
<NAME> SELECTIVE INSURANCE GROUP, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 1,032,763
<DEBT-CARRYING-VALUE> 395,537
<DEBT-MARKET-VALUE> 409,370
<EQUITIES> 274,239
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,730,792
<CASH> 6,432
<RECOVER-REINSURE> 9,911
<DEFERRED-ACQUISITION> 110,500
<TOTAL-ASSETS> 2,384,454
<POLICY-LOSSES> 1,172,323<F1>
<UNEARNED-PREMIUMS> 402,219
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 115,529<F2>
0
0
<COMMON> 73,514
<OTHER-SE> 521,876
<TOTAL-LIABILITY-AND-EQUITY> 2,384,454
350,108
<INVESTMENT-INCOME> 49,188
<INVESTMENT-GAINS> 2,879
<OTHER-INCOME> 4,335
<BENEFITS> 248,366<F3>
<UNDERWRITING-AMORTIZATION> 110,786
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 36,576
<INCOME-TAX> 7,010
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,566
<EPS-PRIMARY> 1.02
<EPS-DILUTED> .93
<RESERVE-OPEN> 1,161,169<F4>
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 1,172,323<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>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains restated summary financial information extracted
from the June 30, 1997 10Q and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<RESTATED>
<CIK> 0000230557
<NAME> SELECTIVE INSURANCE GROUP, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 1,015,122
<DEBT-CARRYING-VALUE> 420,167
<DEBT-MARKET-VALUE> 431,850
<EQUITIES> 200,072
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,647,923
<CASH> 22,584
<RECOVER-REINSURE> 9,810
<DEFERRED-ACQUISITION> 93,299
<TOTAL-ASSETS> 2,253,547
<POLICY-LOSSES> 1,171,315<F1>
<UNEARNED-PREMIUMS> 362,545
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 120,511<F2>
0
0
<COMMON> 72,424
<OTHER-SE> 445,613
<TOTAL-LIABILITY-AND-EQUITY> 2,253,547
339,836
<INVESTMENT-INCOME> 49,126
<INVESTMENT-GAINS> 1,969
<OTHER-INCOME> 2,272
<BENEFITS> 235,204<F3>
<UNDERWRITING-AMORTIZATION> 102,708
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 43,879
<INCOME-TAX> 10,075
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,804
<EPS-PRIMARY> 1.17
<EPS-DILUTED> 1.10
<RESERVE-OPEN> 1,189,793<F4>
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 1,171,315<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>
