PAGE 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one) FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Fee required)
For the fiscal year ended.....December 31, 1997.................
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No fee required)
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
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(State or Other Jurisdiction of Incorporation or Organization)
22-2168890
-------------------------------
(IRS Employer Identification No.)
40 Wantage Avenue, Branchville, New Jersey 07890
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code 973-948-3000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
-------------------
8 3/4% Convertible Subordinated Debentures due January 1, 2008
(Title of class)
Common Stock, par value $2 per share
(Title of class)
Preferred Share Purchase Rights
(Title of Class)
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 and (2) has been subject to
such filing requirements for the past 90 days.
[X] Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant based on last sale price on the Nasdaq National Market on
February 16, 1998.
Common Stock, par value $2 per share: $758,818,852
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of February 16, 1998.
Common Stock, par value $2 per share: 29,505,318
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the Selective Insurance Group, Inc. 1997 Annual Report to
Stockholders ("1997 Annual Report") are incorporated by reference to Parts
I, II, and IV of this report.
Portions of the definitive Proxy Statement for the 1998 Annual Meeting of
Stockholders ("Proxy Statement") are incorporated by reference to Part III
of this report.
PAGE 2
Forward-looking statements
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This 1997 annual report on Form 10-K contains certain statements that
are not historical facts and are considered "forward-looking statements"
(as defined in the Private Securities Litigation Act of 1995), which can be
identified by terms such as "believes," "expects," "intends," "may," "will,"
"should," "anticipates," 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.
PART I
Item 1. Business.
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General
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Founded in 1925 and organized in 1977, Selective Insurance Group, Inc.
(the "Parent") is a regional insurance holding company which, through its
subsidiaries, (collectively, "Selective" or the "Company") offers a broad
range of commercial insurance products, alternative risk management
products, and managed care and related services to small- to medium-sized
service-oriented businesses, governmental entities and selected classes of
light industry. The Company's commercial insurance products represent
approximately 70% of net premiums earned. Selective also offers personal
insurance products to individuals and families, which represent
approximately 30% of net premiums earned. The Company's commercial and
personal products are distributed principally in suburban and rural areas
of New Jersey, Pennsylvania, New York, Maryland, Virginia, South Carolina,
Delaware and other Mid-Atlantic and Southeastern states. In 1996, the
Company began writing insurance in Illinois, the first state of a six-state
expansion into the Midwest, which in 1997 also included Iowa, Indiana,
Wisconsin, Michigan and Ohio.
The Company offers its insurance products through Selective Insurance
Company of America ("SICA"), Selective Way Insurance Company ("SWIC"),
Selective Insurance Company of the Southeast ("SISE"), Selective Insurance
Company of South Carolina ("SISC") and Selective Insurance Company of New
York ("SINY"), formerly Exchange Insurance Company, (collectively, the
"Insurance Subsidiaries"). In November 1997, the Company acquired the assets
of Alta Services LLC ("Alta"), formerly MCSI/MRSI, a managed care company
that provides medical claims handling services to the insurance industry.
See Item 1. "Business" -- Strategy.
The following table shows the distribution of net premiums earned by
state for the periods indicated:
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Year Ended December 31,
1995 1996 1997
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Earned Premium Distribution by State
New Jersey 61.4% 60.0 58.1
Pennsylvania 10.0 10.6 11.3
New York 6.5 7.2 7.7
Maryland 4.8 4.5 4.9
Virginia 4.5 4.5 4.7
South Carolina 4.6 5.0 4.6
Delaware 3.1 3.2 2.9
North Carolina 2.4 2.7 2.5
Georgia 2.1 2.1 2.1
Other states 0.6 0.2 1.2
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Total 100.0% 100.0 100.0
===== ===== =====
For the ten years ended December 31, 1997, the Company's average
statutory loss and loss expense ratio and average statutory combined ratio
were 70.2% and 104.5%, respectively. The Company's average statutory loss
and loss expense ratio during this period outperformed the property and
casualty industry's average ratio, as reported by A.M. Best Company, Inc.
("A.M. Best"), by 10.1 points. The Company attributes its performance to
its strong relationships with its independent insurance agencies, its
expertise in underwriting property and casualty insurance risks, its
penetration of suburban and rural market areas in the Mid-Atlantic and
Southeastern states and its conservative loss and loss expense reserving
practices. For the ten years ended December 31, 1997, the Company's average
statutory underwriting expense ratio was 33.2% compared to 26.2% for the
property and casualty insurance industry. The Company's historical statutory
underwriting expense ratio is higher than the industry average, primarily
due to the impact of taxes and assessments in New Jersey from 1990 through
1996 (which accounted for approximately 1.6 points of the average ratio)
and labor costs (which accounted for approximately 8.1 points of the average
ratio). The industry average expense ratio reflects the inclusion of direct
writers of insurance which generally have lower distribution costs than the
Company. The Company's average statutory combined ratio outperformed the
property and casualty industry average statutory combined ratio by 3.3
points for this ten-year period. The Company's statutory combined ratio is
not as favorable as the Company's loss and loss expense ratio in comparison
to the industry primarily due to the impact of the Company's underwriting
expense ratio as previously described. The table on page 3 sets forth
certain Company and industry ratios:
PAGE 3
Simple
Average of
All Periods Years Ended December 31,
Presented 1997 1996 1995 1994
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Certain Company Ratios(1):
Loss 58.9% 56.8 60.6 60.4 60.6
Loss expense 11.3 11.4 10.8 10.8 11.1
Underwriting expense 33.2 31.2 30.8 29.4 31.6
Policyholders' dividends 1.2 0.7 0.7 1.0 1.0
Combined ratio(3) 104.5 100.1 102.9 101.6 104.3
Growth (decline)in net
premiums written 6.2 3.7 (8.6) 8.5 14.8
Certain Industry Ratios(1)(4):
Loss 67.5 61.2 65.4 65.7 68.1
Loss expense 12.8 12.5 12.9 13.2 13.0
Underwriting expense 26.2 26.7 26.4 26.1 26.0
Policyholders' dividends 1.3 1.4 1.1 1.4 1.3
Combined ratio(3) 107.8 101.8 105.8 106.4 108.5
Growth in net premiums written 3.7 3.2 3.4 3.6 3.8
Company Favorable
(Unfavorable) to Industry:
Combined ratio 3.3 1.7 2.9 4.8 4.2
Growth in net premiums written 2.5 0.5 (12.0) 4.9 11.0
(1) The ratios and percentages are based upon Statutory Accounting
Practices ("SAP").
(2) In 1993, this ratio includes the one-time restructuring charge of $9.0
million, which increased the ratio by 1.5 points.
(3) A combined ratio under 100% generally indicates an underwriting
profit and a combined ratio over 100% generally indicates an
underwriting loss. Because of investment income, a company may still
be profitable although its combined ratio exceeds 100%.
(4) Source: A.M. Best. The industry ratios for 1997 have been estimated
by A.M. Best.
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Simple
Average of
All Periods Years Ended December 31,
Presented 1993 1992 1991 1990
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Certain Company Ratios(1):
Loss 58.9% 60.3 58.2 56.6 57.9
Loss expense 11.3 11.5 11.3 11.3 12.5
Underwriting expense 33.2 35.5(2) 37.0 38.3 36.1
Policyholders' dividends 1.2 1.2 1.3 1.5 1.6
Combined ratio(3) 104.5 108.5(2) 107.9 107.6 108.0
Growth (decline)in net
premiums written 6.2 8.9 13.0 3.8 2.9
Certain Industry Ratios(1)(4):
Loss 67.5 66.7 74.7 68.5 69.4
Loss expense 12.8 12.8 13.4 12.6 12.9
Underwriting expense 26.2 26.3 26.6 26.4 26.0
Policyholders' dividends 1.3 1.1 1.2 1.3 1.2
Combined ratio(3) 107.8 106.9 115.7 108.8 109.6
Growth in net premiums written 3.7 6.2 2.0 2.4 4.5
Company Favorable
(Unfavorable) to Industry:
Combined ratio 3.3 (1.6)(2) 7.8 1.2 1.6
Growth in net premiums written 2.5 2.7 11.0 1.4 (1.6)
(1) The ratios and percentages are based upon Statutory Accounting
Practices ("SAP").
(2) In 1993, this ratio includes the one-time restructuring charge of $9.0
million, which increased the ratio by 1.5 points.
(3) A combined ratio under 100% generally indicates an underwriting profit
and a combined ratio over 100% generally indicates an underwriting loss.
Because of investment income, a company may still be profitable
although its combined ratio exceeds 100%.
(4) Source: A.M. Best. The industry ratios for 1997 have been estimated
by A.M. Best.
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Simple
Average of
All Periods Years Ended December 31,
Presented 1989 1988
- ---------------------------------------------------------------------------
Certain Company Ratios(1):
Loss 58.9% 58.8 59.1
Loss expense 11.3 10.9 11.2
Underwriting expense 33.2 32.2 29.6
Policyholders' dividends 1.2 1.5 1.2
Combined ratio(3) 104.5 103.4 101.1
Growth (decline) in net
premiums written 6.2 5.1 10.0
Certain Industry Ratios(1)(4):
Loss 67.5 69.2 66.4
Loss expense 12.8 12.7 11.9
Underwriting expense 26.2 26.0 25.7
Policyholders' dividends 1.3 1.3 1.4
Combined ratio(3) 107.8 109.2 105.4
Growth in net premiums written 3.7 3.2 4.5
Company Favorable
(Unfavorable) to Industry:
Combined ratio 3.3 5.8 4.3
Growth in net premiums written 2.5 1.9 5.5
(1) The ratios and percentages are based upon Statutory Accounting
Practices ("SAP").
(2) In 1993, this ratio includes the one-time restructuring charge of $9.0
million, which increased the ratio by 1.5 points.
(3) A combined ratio under 100% generally indicates an underwriting profit
and a combined ratio over 100% generally indicates an underwriting loss.
Because of investment income, a company may still be profitable
although its combined ratio exceeds 100%.
(4) Source: A.M. Best. The industry ratios for 1997 have been estimated by
A.M. Best.
PAGE 4
Strategy
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The Company's primary focus has been on improving underwriting
results, generating profitable growth and enhancing relationships with
independent agents who are aligned with the Company's strategic objectives.
The principal elements of the Company's strategies are to:
(i) generate an underwriting profit and increase premium volume;
(ii) reduce expenses and improve productivity through increased
automation and controlled expenses;
(iii)diversify geographically and develop new products and services;
and
(iv) continue to build and reward employees that are
committed to the Company and its objectives.
Generate an Underwriting Profit and Increase Premium Volume
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In 1997, the Company's net premiums written increased by 4% over 1996.
The conversion of New Jersey personal automobile policies from six-month to
annual terms (the "Conversion") increased 1997 net premiums written by
approximately $36 million, while 1996 net premiums written included a
one-time adjustment of $8 million reflecting the Company's buy out of
certain reinsurance arrangements (the "Reinsurance Buy Out"). Excluding the
effects of the Conversion and the Reinsurance Buy Out, net premiums written
for 1997 decreased by about $3 million. Premium growth during the year was
impacted by a highly competitive commercial lines marketplace and a move
toward self-insurance programs, which particularly impacts the Company's
public entities business. See Item 7. "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Strategic Business Units. The Company's customer-focused Strategic
Business Units ("SBUs") define customer groups that the Company believes
offer profitable growth potential. The SBUs evaluate the marketplace and
provide products and services specifically developed to meet the needs of
agents and insureds in a particular market or territory.
The SBUs also provide a variety of services to the Company's branch
offices, agency management specialists ("AMSs") and agents, such as leads
for new accounts, technical training, analysis of underwriting results and
other specialized resources. Focusing on profitability is a principal
strategy for each SBU. The SBUs analyze the results by business class,
territory and agency to determine profitability, thereby allowing the
Company to be more attuned to areas of opportunity.
Alignment of Agents' Interests. Selective is working to align the
interests of the agents with the Company's strategic objectives. The Company
has reviewed the quality of business and profitability of every agent,
reinforcing strong relationships with agents who maintain the Company's
underwriting standards and commitment to profitable growth and terminating
those who do not. Selective has maintained a strong relationship with its
agency network by providing superior service and a stable marketplace as
well as applying consistent underwriting standards. One economic incentive
for the agents is profit sharing commissions, through which profitable
agents have an opportunity to earn additional commissions of up to
approximately 13% of their direct premiums written. In addition, agents can
purchase Selective common stock at a 5% discount with no brokerage fees
through the agents' stock purchase plan. During 1997, nearly 30% of
Selective's agents participated in the stock purchase plan.
Field Operations - Underwriting. Since its inception in 1995,
Selective's field underwriting program has become an integral, dynamic part
of the agent-company relationship. AMSs are experienced underwriters with
strong marketing and communication skills. Working in the field with a
specific group of agents, the AMSs can respond quickly to new commercial
business submissions and make timely decisions that can result in writing
desirable accounts. Each AMS is backed by a team of underwriters and
technical specialists in the branches.
Field Operations - Claims. The Company's strategic plan for it's
claims organization is parallel to the Company's field underwriting strategy
by creating a partnership between branch office and field operations. Claims
management specialists ("CMSs") work directly with agents, insureds, AMSs
and claimants. On-site inspections, personal interviews and face-to-face
negotiations are expected to result in more accurate loss settlements and
increased fraud detection. Working in the field, the CMSs gain knowledge
about potential exposures, and expand the role of the Company's claims staff
in the areas of loss control and risk management. Each branch office has
restructured its claim operation and 100 CMSs have been placed in the field.
Reduce Expenses and Improve Productivity
----------------------------------------
The Company's objective continues to be the reduction of expenses
through increased efficiency and automation. This objective is designed to
reduce the Company's underwriting and loss expense ratios by improving the
productivity and efficiency of internal operations. At December 31, 1997,
the Company's insurance operations work force numbered 1,580. Productivity,
as measured by net premiums written per employee, in 1997 was $454,000 up
from $433,000 in 1996. However, excluding the effects of the Conversion in
1997, the net premiums written per employee was $431,000, down slightly from
1996. The decrease was due to the lower levels of net premiums written. See
Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Controlled Expenses. The Company's loss expense ratio has
averaged 11.0% for the three-year period ended December 31, 1997. The
Company plans to reduce this ratio by reducing the legal fees incurred in
the course of the claim settlement process.
PAGE 5
In 1997, these legal expenses totaled approximately $22 million,
or 3% of net premiums earned. The litigation plan is a four-pronged approach
to achieve savings without sacrificing the quality of legal advice to, and
representation of, the Company's insureds. The program involves expansion of
the Company's staff counsel operations (attorneys employed by the Company to
represent the interests of insureds) in which the Company has an average
suit cost nearly 46% lower than outside counsel. The program also includes:
(i) fixed fee schedules for cases handled by outside counsel; (ii)
arbitration services to avoid higher costs associated with going to trial;
and (iii) legal fee audit review services to help identify billing errors.
The Company continues to focus on loss cost containment initiatives.
These initiatives include: (i) a comprehensive managed care program which
reduced 1997 workers' compensation and automobile costs by more than $16
million; (ii) a special investigative unit and claims professionals which
saved the Company approximately $10 million in 1997 by uncovering fraudulent
claims; and (iii) a voluntary automobile repair shop program which saved the
company $5 million of reduced repair costs in 1997 while maintaining a 94%
customer service satisfaction rating.
Automation. Insurance is a detailed, paper-intensive business.
Available computer technology offers significant potential for utilizing
automation to support the Company's objectives to reduce expenses.
The Commercial Lines Automated System ("CLAS"), originally introduced
in 1995 and completed in 1996, eliminates a number of manual steps, reducing
the time it takes to process commercial insurance products. With instant
access to the information, underwriters and claim adjusters are readily
able to answer questions, process changes quickly, verify coverages and
work more efficiently with agents to quote new business.
In 1998, the Company intends to add workers' compensation to CLAS and
move this system towards a "windows" environment. This project will also
involve significant enhancements which is expected to make it easier for
agents to conduct business with the Company.
Rating and product information is now available for Selective agents on
CD-Rom. Using Selective-specific software in their offices, the agents can
obtain initial pricing on accounts. That information can be transferred
electronically between the agent, the AMS and branch office, thus enabling
Selective to provide faster turnaround on policy issuance and coverage
revisions.
Agents currently using Applied's agency management software have the
ability to electronically send and receive personal lines policy
information. All agents can electronically make inquiries on the Company's
claims and billing systems. In 1998, the Company intends to expand its
"Agency Interface" capability to accept and send personal lines policy
transactions from additional agency management systems and to begin to
electronically interface with agents on commercial lines products.
Claims management specialists, equipped with laptop computers, have
electronic access to current claim information, have the ability to
authorize claim payments, and can input log notes from the field. A project
team is developing a new mobile claims system planned for implementation
during 1998, that is intended to enhance the claims adjusting process via
laptop computer by enabling complete claims entry and access to database
information from the field.
Diversification
---------------
Geographic Diversification. One of the Company's strategies is to
improve the geographic balance of its business through a long-term
diversification strategy. Geographic diversification reduces exposure to the
regulatory environment and weather-related catastrophes of any one
jurisdiction. Currently 58.1% of the Company's business is earned in New
Jersey, a decrease of approximately 2 percentage points from 1996, with most
of the remaining business earned in Pennsylvania, New York, South Carolina,
Virginia, Maryland, Delaware, North Carolina and Georgia. In 1992, the Parent
acquired Niagara Exchange Corporation ("Niagara"). Niagara's principal
insurance subsidiary, SINY, writes most of its business in New York, which
in 1997 accounted for 7.7% of the Company's overall net premiums earned.
In 1996, the Company began writing insurance in Illinois, the first state
of a six-state expansion into the Midwest, which in 1997 also included
Iowa, Indiana, Wisconsin, Michigan and Ohio. The Company believes that
these areas offer growth opportunities in the middle-market segments
targeted by the Company. This region experiences fewer natural catastrophes
than Mid-Atlantic and Southern states and offers a stable regulatory and
legal environment. In addition, population is spread outside of major
metropolitan areas, a factor that is compatible with the Company's
underwriting philosophy and operation. In 1997, the Company opened a
Midwest field and systems office in Mansfield, Ohio to support its
expansion into the Midwest. In addition to the expansion strategy, the
Company continues to focus on increasing its penetration in the other
Eastern states where it currently does business.
Fee-for-Service Operations. The business of insurance involves risk
assumption and is often subject to the uncertainties of market cycles and
weather-related catastrophes. To enhance the Company's operating income and
provide more stability, the Company's strategy is to expand its fee-based
operations through the sale of services by Selective Technical Administrative
Resources, Inc. ("SelecTech") and Alta. Fee-based businesses leverage the
Company's core skills and help to provide revenue and operating income that
is not dependent on the risk-bearing nature of traditional insurance
activities.
PAGE 6
Selective writes flood insurance (provided through the Personal Lines
SBU) under the auspices of the National Flood Insurance Program, the
premiums from which are ceded 100% to the Federal government. As a servicing
carrier, not an underwriter, Selective bears no risk of policyholder loss.
The Company receives a servicing fee from which it pays agency commissions
and other related expenses. In 1997, the Company's flood direct premiums
written increased by 22% to $19 million, and generated a net profit of $1
million. In 1998, the Company expects the flood program to be expanded into
all 50 states and to reduce processing costs through a new policy writing
system.
SelecTech generates fees by providing third party administrative
services to self-insured accounts. Insurance products have been traditionally
sold as an entire package of services which includes underwriting, policy
issuance, loss control, and claim handling. As businessowners move to
self-insurance, they also want the ability to purchase only those insurance
services that meet their specific needs. SelecTech, in conjunction with
Selected Risk Managers ("SRM"), is continuously exploring new business
opportunities that will allow the Company to offer a complete array of
services to businesses looking for risk management solutions in the
alternative markets.
In November 1997, in anticipation of the continued growth of managed
care medical cost containment and other medical claims services, the Company
acquired the assets of Alta Services LLC. Alta, the Company's newest SBU, is
a managed care company that provides a wide range of medical claims handling
services to the insurance industry. For the past several years, Alta has
provided services to Selective for the Company's managed care program.
Alta's approach to managed care is a critical part of the Company's
claim strategy. It is the Company's goal to export the products of Alta to
all of its operating territories and elsewhere since Alta also handles claims
for self-insured businesses and other insurers. Alta manages workers'
compensation and automobile medical claims on a nonrisk-bearing basis.
Priority is placed on quickly assigning an injured person to one of Alta's
network physicians and making sure they get the best medical care and, where
necessary, rehabilitation services. The goal is to return patients to their
normal routine, at work and at home, as soon as possible. In addition to
these services, Alta utilizes aggressive management and audit procedures for
hospital and medical bills to make sure Selective and Alta's other customers
are paying only what they should for a patient's treatment and care. Alta
continually monitors the performance of network physicians to ensure both
optimum patient results and ease of doing business.
Over the past several years, Alta has provided services for the
Company's managed care program. In 1997, this managed care program reduced
workers' compensation and automobile medical bill costs for the Company by
$11 million and $5 million, respectively. With the addition of Alta, the
Company is in the position of giving customers access to quality medical and
rehabilitation services, while enhancing claims management through in-house
managed care expertise.
Alternative Markets. The insurance industry broadly defines the
alternative market as any program in which clients self-insure part or all of
their insurable exposures. Historically, the practice of self-insuring was
limited to the largest corporations, who, as buyers, were more sophisticated
in insurance risk and exposure management. The Company believes that middle
market companies now have begun to utilize the alternative market with
increasing frequency. Industry statistics show that the number of companies
participating in the alternative market has expanded rapidly during the last
decade, now approaching 35% of commercial insurance premiums in the United
States. Industry experts predict that 70% of all commercial lines premium
dollars could be tied into an alternative market mechanism within ten years.
The Company's strategy is to offer the alternative market products to
meet the coverage and risk financing needs of the Company's independent
agents and their customers for large accounts, self-insured groups,
associations and fee-for-service business. As part of this strategy, the
Company formed SRM.
Employee Rewards
----------------
The Company's annual cash incentive programs are based on the
achievement of specific business objectives and on individual and team
performance measured by the achievement of business performance goals related
to increased profitability and premium growth and improving service. These
goals were developed from the Company's overall strategy for growth and
profitability. Employees set individual and team targets that go beyond their
normal responsibilities. Total incentive compensation (including payroll
taxes) amounted to $9 million, $5 million and $6 million for 1997, 1996 and
1995, respectively.
In addition to annual cash incentive programs, under the Company's stock
option plan II, the Company's Compensation Committee may grant stock options
or make restricted or unrestricted grants of common stock. The primary
purpose of stock options and restricted stock is to retain and reward
employees whose contributions and expertise are key to the success of the
business. All full-time employees whose contributions have a direct impact on
our business objectives and strategies are eligible.
PAGE 7
Industry Segments
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The Insurance Subsidiaries are engaged in writing property and casualty
insurance products. The SBUs market and sell the insurance products to
specific customer groups. The products marketed encompass several lines of
insurance. Accordingly, the Company has classified its business into two
principal segments: commercial and personal insurance. In addition, the
Company has recognized alternative markets and new business opportunities
that exist within the insurance business. These opportunities are unlike the
traditional risk-bearing insurance markets and offer the Company a market to
generate fee income for insurance related services such as managed care,
claims handling, loss control and risk management. For Financial Information
pertaining to the Company's industry segments, see Note 20 to the Company's
Consolidated Financial Statements on page 52 of the 1997 Annual Report,
incorporated herein by reference.
Commercial Insurance
--------------------
The Company's commercial insurance coverages consist of the following:
Workers' Compensation coverage insures employers against employee
claims resulting from work-related injuries. Compensation is payable
regardless of who was at fault. There are four types of benefits payable
under workers' compensation policies: medical benefits, vocational
rehabilitation benefits, disability benefits and death benefits. Because
the Insurance Subsidiaries write voluntary workers' compensation, they are
also required to write involuntary coverage. Involuntary workers'
compensation business is written through the National Council on
Compensation Insurance, Inc. ("NCCI"). Effective January 1, 1995, Selective
withdrew from the New Jersey NCCI and chose to accept direct assignments of
involuntary workers' compensation coverage in an effort to reduce processing
costs and improve the loss experience of this business through better loss
control, managed care and risk management.
Commercial Automobile coverage insures policyholders against losses
incurred from bodily injury, bodily injury to third parties, property damage
to an insured's vehicle (including fire and theft) and property damage to
other vehicles and property as a result of automobile accidents involving
commercial vehicles. These policies may include uninsured motorist coverage.
Because the Insurance Subsidiaries write voluntary commercial automobile
insurance, they are also required by law to write involuntary coverage
through the Commercial Automobile Insurance Plan ("CAIP").
Liability coverage insures policyholders against third party liability
for bodily injury and property damage, including liability for products sold,
and the defense of claims alleging such damages. The liability lines
continue to reflect the potential exposure to environmental claims. The
emergence of these claims is slow and highly unpredictable. Environmental
liabilities are contingent on very complex legal and coverage issues making
reliable estimation of the exposure difficult. For additional information
about the Company's exposure to environmental liabilities, see the section
entitled "Environmental reserves" on pages 31 through 32 inclusive in the
1997 Annual Report and note 15(a) to the Consolidated Financial Statements on
pages 49 and 50 of the 1997 Annual Report, all of which are incorporated
herein by reference.
Property coverage insures policyholders against commercial property
damage caused by fire, wind, hail, water, theft and vandalism, and other
perils.
Umbrella coverage affords policyholders liability protection
supplemental to that provided under primary liability policies and insures
against catastrophic losses. Umbrella coverage normally is written in
conjunction with other commercial insurance to provide a complete insurance
package for commercial accounts.
Bonds is responsible for writing fidelity and surety, including but not
limited to: bid, performance, maintenance, supply, site plan and subdivision
bonds.
PAGE 8
In 1997, Selective's commercial insurance products were developed and
marketed through six SBUs. The following table sets forth, for all commercial
SBUs; and by each commercial SBU, the Company's net premiums written, net
premiums earned, underwriting income or loss on a GAAP basis and the
statutory combined ratio for the periods indicated:
1997 Commercial SBU Highlights
(dollars in thousands)
- ----------------------------------
Net Net GAAP Statutory
Premiums Premiums Underwriting Combined
Written Earned Income (Loss) Ratio(1)
- ------------------------------------------------------------------------
All Commercial SBUs 1997 $472,460 465,846 (12,701) 103.6%
1996 475,104 477,506 (24,832) 105.3
1995 535,050 521,196 (18,475) 103.1
Contractors 1997 168,056 163,262 (8,071) 105.5
1996 157,722 158,317 (6,813) 104.5
1995 178,126 170,486 (9,531) 104.9
Mercantile and Service 1997 144,423 144,137 (3,360) 102.9
1996 148,280 148,122 (11,948) 108.3
1995 167,832 163,741 (5,576) 102.7
Public Entity 1997 64,137 69,933 (2,596) 105.3
1996 86,673 91,513 (4,508) 104.8
1995 106,802 106,702 (4,556) 103.7
Habitational and 1997 52,441 49,659 (107) 100.2
Recreational 1996 46,870 44,395 (3,188) 107.5
1995 45,547 44,832 (1,660) 103.9
Manufacturing and 1997 31,711 29,485 (116) 100.4
Processing 1996 28,006 27,638 375 98.9
1995 29,236 28,138 2,230 92.5
Bonds 1997 11,398 8,946 3,794 57.6
1996 6,965 6,815 1,142 78.7
1995 6,756 6,493 1,974 69.0
Other (2) 1997 294 424 (2,245) N/M
1996 588 706 108 N/M
1995 751 804 (1,356) N/M
(1) Industry standard not generally accepted accounting principles.
(2) The calendar year results reflect loss and loss expense savings
(development) for accident years prior to 1993 (the year in which the
SBUs were formed).
N/M Not meaningful
The commercial SBUs' net premiums earned represented approximately 70%
of the total net premiums earned in 1997. The 1996 net premiums written
included a one-time adjustment of $8 million reflecting the Reinsurance Buy
Out. Excluding the Reinsurance Buy Out, the commercial SBUs net premiums
written increased 1%, or $5 million, compared to 1996. This increase included
$132 million of net premiums written attributable to new business, after
deducting reinsurance costs of approximately $6 million, which was primarily
offset by: (i) lower premium volume of approximately $21 million due to
agency terminations; (ii) a reduction in existing business (renewal
retention) attributable to a highly competitive commercial lines marketplace
as well as nonrenewals resulting from the Company's reunderwriting
(reevaluating) of certain business classes and/or accounts; (iii) workers'
compensation rate decreases, which lowered net premiums written by
approximately $18 million; and (iv) lower net premiums written in the Public
Entity SBU, primarily due to a shift in business to the alternative markets.
The significant growth in new business resulted in the Company
generating an increase in most of the commercial SBUs' net premiums written.
However, the Public Entity SBU net premiums written were down $23 million in
1997, primarily due to the trend towards self-insurance and other alternative
risk sharing mechanisms.
For the three-year period ended December 31, 1997, the Commercial SBUs,
in total, average statutory combined ratio was 104.0%. The 1997 combined
ratio improved by 1.7 points, compared to 1996. The 1996 results reflected
numerous weather-related storm losses which increased the ratio by 3.0
points. Excluding these storm losses from the 1996 results, the 1997 combined
ratio increased 1.3 points primarily due to a rise in labor costs and other
operating expenses while net premiums written remained relatively flat. See
Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
PAGE 9
The Company's commercial SBUs consist of the following:
The Contractors SBU focuses on providing commercial insurance coverage
for key business segments in the construction industry including carpentry,
electrical, excavating, plumbing and landscaping, as well as many other
special artisan classes. In 1997, the Contractors SBU's net premiums earned
represented 35% of the Company's total net premiums earned for commercial
insurance. For the three-year period ended December 31, 1997, the Company's
average statutory combined ratio for this SBU was 105.0%. Contractors
generated a statutory combined ratio of 105.5% in 1997, up from 104.5% in
1996. This increase was primarily driven by poor results in the commercial
automobile line of insurance, particularly within the construction specialty
trade business class. The Company is taking steps to improve the results in
the commercial line of insurance, including pricing analysis, reunderwriting
and increased loss control.
The Mercantile and Service SBU focuses on providing commercial insurance
coverage to retail stores, offices, religious institutions, wholesalers and
service businesses. In 1997, the Mercantile and Service SBU's net premiums
earned represented 31% of the Company's total net premiums earned for
commercial insurance. For the three-year period ended December 31, 1997, the
Company's average statutory combined ratio for this SBU was 104.6%.
Mercantile and Service generated a statutory combined ratio of 102.9% in 1997
down from 108.3% in 1996. The decrease in the 1997 combined ratio was
primarily attributable to the absence of weather-related catastrophe claims.
In 1996, weather-related catastrophe claims increased the 1996 combined ratio
by 4.4 points. In addition to the favorable weather conditions, the decrease
in the 1997 combined ratio reflected improvements to the businessowner
program as a result of the Company's effort to improve this program.
The Public Entity SBU focuses on providing commercial insurance coverage
for public entities including: municipalities; school boards; and volunteer
fire departments and rescue squads. In 1997, the Public Entity SBU's net
premiums earned represented 15% of the Company's total net premiums earned
for commercial insurance. For the three-year period ended December 31, 1997,
the Company's average statutory combined ratio for this SBU was 104.6%.
Public Entity generated a statutory combined ratio of 105.3% in 1997, up from
104.8% in 1996 mainly due to the declining net premiums written in 1997. The
Public Entity SBU net premiums written were down $23 million in 1997,
primarily due to the trend towards self-insurance and other alternative risk
sharing mechanisms.
The Habitational and Recreational SBU focuses on providing commercial
insurance coverage to hotels and motels, condominiums, property owner
associations, golf courses, country clubs, restaurants, membership
organizations and other miscellaneous types of recreational industries. In
1997, this SBU's net premiums earned represented 11% of the Company's total
net premiums earned for commercial insurance. For the three-year period ended
December 31, 1997, the Company's average statutory combined ratio for this
SBU was 103.9%. Habitational and Recreational generated a statutory combined
ratio of 100.2% in 1997 down from 107.5% in 1996. The decrease in the 1997
combined ratio was primarily attributable to the absence of weather-related
catastrophe claims. In 1996, weather-related catastrophe claims increased the
1996 combined ratio by 6.5 points.
The Manufacturing and Processing SBU focuses on providing commercial
insurance coverage for light industrial and processing businesses with low
product liability exposures. In 1997, the Manufacturing and Processing SBU's
net premiums earned represented 6% of the Company's total net premiums earned
for commercial insurance. For the three-year period ended December 31, 1997,
the Company's average statutory combined ratio for this SBU was 97.3%.
Manufacturing and Processing generated a statutory combined ratio of 100.4%
in 1997 up from 98.9% in 1996. In 1996, weather-related catastrophe claims
increased the 1996 combined ratio by 5.7 points. Absent these weather-related
claims, the 1997 combined ratio increased 7.2 points, which was driven by a
small number of severe commercial automobile and property losses.
The Bonds SBU focuses on providing commercial insurance coverage for
fidelity and surety, including but not limited to: bid, performance,
maintenance, supply, site plan and subdivision bonds. In 1997, the Bonds
SBU's net premiums earned represented 2% of the Company's total net premiums
earned for commercial insurance. For the three-year period ended December
31, 1997, the Company's average statutory combined ratio for this SBU was
68.4%. An underwriting profit has been achieved in twenty-one out of the last
twenty-two years in the Company's Bond business.
PAGE 10
Personal Insurance
------------------
The following table sets forth, by personal lines coverages, the
Company's net premiums written, net premiums earned, underwriting income or
loss on a GAAP basis and the statutory combined ratio for the periods
indicated:
1997 Personal Lines SBU Highlights
(dollars in thousands)
- ----------------------------------
Net Net GAAP Statutory
Premiums Premiums Underwriting Combined
Written Earned Income (Loss) Ratio (1)
Total 1997 $245,178 210,442 11,522 93.7%
Personal 1996 217,167 217,473 4,819 97.5
Lines SBU 1995 221,935 221,587 1,762 98.2
Automobile 1997 223,047 187,656 4,044 96.9
1996 194,118 193,721 4,261 97.5
1995 197,902 197,398 5,494 96.8
Homeowners 1997 15,647 16,079 3,987 72.8
1996 15,611 16,245 (3,005) 118.9
1995 15,325 15,412 (5,993) 131.1
Flood 1997 - - 1,239 -
1996 - - 1,955 -
1995 - - 756 -
Other 1997 6,484 6,707 2,252 69.3
1996 7,438 7,507 1,608 79.2
1995 8,708 8,777 1,505 82.6
(1) Industry standard not generally accepted accounting principles.
The Personal Lines SBU represented approximately 30% of the total net
premiums earned in 1997. Personal lines SBU net premiums written increased
13% in 1997 over 1996. This includes $36 million from the Conversion which
had no impact on net premiums earned. Net premiums earned in New Jersey
represented 84% of total personal lines business. The Company intends to
diversify by expanding its personal lines program in existing and new states.
The Personal Lines SBU underwriting results have improved significantly over
the past three years, resulting in underwriting gains of $12 million, $5
million and $2 million in 1997, 1996 and 1995, respectively. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." For the three-year period ended December 31, 1997, the personal
lines SBU average statutory combined ratio was 96.5%. The combined ratio for
1997 improved by 3.8 points to 93.7%, which was primarily due to improved
homeowners results, reflecting favorable weather conditions as well as
reduced catastrophic reinsurance costs and improved rate adequacy. In 1996,
weather-related catastrophe claims increased the 1996 combined ratio by 1.9
points. Personal automobile and personal catastrophic liability continued to
remain profitable throughout 1995, 1996 and 1997.
The Company's personal insurance coverages consist of the following:
Personal Automobile coverage insures individuals against losses incurred
from bodily injury, bodily injury to third parties, property damage to an
insured's vehicle (including fire and theft), property damage to other
vehicles and other property as a result of automobile accidents involving
personal vehicles. These policies may include uninsured motorist coverage. In
1997, personal automobile net premiums earned represented 89% of the
Company's total net premiums earned for personal insurance. For the
three-year period ended December 31, 1997, the Company's average statutory
combined ratio for this coverage was 97.1%. The Company has been successful
in obtaining personal automobile rate increases and surcharges in New Jersey
that increased net premiums earned by approximately $2 million, $5 million
and $8 million for 1997, 1996 and 1995, respectively. In addition to improved
automobile rate adequacy, the Company is seeing important fundamental changes
within this marketplace, including safer cars, greater fraud detection and
increased public awareness of the costs associated with reckless and drunk
driving. See Item 1. "Business" -- Regulation.
Homeowners coverage insures individuals for losses to their residences
and personal property such as those caused by fire, wind, hail, water damage,
theft and vandalism and against third party liability claims. Additional
coverage for specific personal property items can be purchased on a scheduled
personal property basis. In 1997, homeowners net premiums earned represented
8% of the Company's total net premiums earned for personal insurance. For the
three-year period ended December 31, 1997, the Company's average statutory
combined ratio for this coverage was 107.6%. On a statutory basis,
PAGE 11
homeowners coverage generated a combined ratio of 72.8% in 1997, down from
118.9% in 1996. In 1996, weather-related catastrophe claims increased the
1996 combined ratio by 18.6 points. In addition to the favorable weather
conditions in 1997, improvements in this line were attributable to an
aggressive homeowners inspection program that was completed to ensure that
all property values reflect the amount necessary to replace the home in the
event of a loss, reduced catastrophe reinsurance costs, and improved rate
adequacy.
Personal Catastrophe Liability coverage, included in the "Other"
category in the personal lines table, affords policyholders liability
protection supplemental to that provided under automobile and homeowners
policies and insures against catastrophic losses. This coverage normally is
written in conjunction with other personal insurance. In 1997, net premiums
earned for personal catastrophe liability coverage represented 2% of the
Company's total net premiums earned for personal insurance. For the
three-year period ended December 31, 1997, the Company's average statutory
combined ratio for this coverage was 58.9%.
Flood coverage, which is provided through the Personal Lines SBU, is
ceded 100% to the National Flood Insurance Program. The Company is a servicer
and not an underwriter of this type of insurance and therefore bears no risk
of policyholder loss. The Company receives a servicing fee from which it pays
agency commissions and other related expenses. The flood business generated a
profit of $1 million, $2 million and $1 million in 1997, 1996 and 1995,
respectively.
Fee-For-Service Operations
--------------------------
In addition to its risk-bearing insurance activities, the Company also
engages in providing insurance-related servicing activities designed to
generate fee income. The Company believes that leveraging its insurance
knowledge to generate fee income will allow it to further diversify its
business, utilize market opportunities created by the movement of insureds to
alternative market products, to decrease its underwriting expense ratios, and
to reduce the impact on its business resulting from insurance cycles and
weather-related catastrophic losses.
In anticipation of growth in alternative market insurance solutions, the
Company formed SelecTech to generate fee income by providing third party
administration services for public entities that self-insure and use other
means of alternative insurance. The services provided include, but are not
limited to: claims administration, loss control and risk management.
The Alta Services SBU was formed when the Company purchased the assets
of Alta in November 1997, to more fully integrate its claim operation within
its medical case management program. It's array of services include
rehabilitation and occupational services, medical bill review, workers'
compensation managed care programs, and hospital bill audits. Alta also
offers the same services for a fee to self-insured businesses and other
insurance companies.
Alternative Markets
-------------------
The Selective Risk Managers SBU was formed to focus on business
opportunities in alternative insurance markets and to lead underwriting and
sales efforts for large accounts, self-insured, group and association
business. While primarily focused on developing customized primary insurance
or reinsurance products for the commercial SBUs, Selected Risk Managers also
generates fee income for the Insurance Subsidiaries by collecting ceding
commissions and placement fees. During 1997, Selective Risk Managers wrote 30
alternative market programs and accounted for a premium commitment of
approximately $20 million of commercial insurance through the various
commercial SBUs. In addition to developing and marketing alternative
insurance products, SRM promotes the services of SelecTech and Alta.
Marketing and Distribution
- --------------------------
The Company's products are developed and marketed through the Company's
nine SBUs. These customer-focused SBUs evaluate the marketplace and provide a
broad range of products and services specifically developed to meet the needs
of the Company's agents and insureds in a particular market or territory
including business opportunities in the insurance alternative markets.
The Insurance Subsidiaries sell their insurance products exclusively
through a network of approximately 850 independent insurance agencies
supported by nine full-service branch offices. The Company has maintained a
strong relationship with its agency network by providing superior service,
a stable marketplace and applying consistent underwriting standards. During
the three-year period 1994 through 1996, the Company's agency force, in
total, decreased by approximately 300 agencies. Approximately 90% of this
reduction was due to terminations, with the remaining 10% being attributed
to consolidations within the agency population. During 1997, the Company's
agency force increased by approximately 90 agencies. The majority of this
increase was due to new agency appointments in the Midwest where the Company
began writing insurance in Illinois in 1996, and in Indiana, Iowa,
Wisconsin, Michigan and Ohio in 1997.
PAGE 12
The Company's continuing focus on profitable premium growth is closely
linked to the quality of the Company's relationships with the independent
agents who sell its products and services. The Company believes that its
unique business model of SBUs, field offices, AMSs and CMSs enhances its
level of service to its independent insurance agents.
Underwriting
- ------------
Commercial insurance is underwritten by branch AMSs who apply the
Company's underwriting guidelines for particular policies and types of
customers. Each AMS is supported by an underwriting team, which is
responsible for policy renewal and processing. In addition, home office staff
specialists and the SBUs provide additional technical support and services to
the branch offices when needed. Substantially all of the personal insurance
underwriting activities are conducted at the home office under supervision of
the centralized Personal Lines SBU.
The branch offices and the SBUs work together to develop pricing, growth
and profitability objectives. The branch AMSs deal directly with the
Company's independent insurance agencies, and their regular interaction
provides the Company with information as to the agencies' needs for products
and pricing. This information is used by the branch offices and SBUs to
develop the necessary products, pricing and applicable underwriting
guidelines.
For certain classes of business and policy limits (with the exception of
umbrella policies), certain agencies have the authority to bind the Insurance
Subsidiaries. The Insurance Subsidiaries have a period, generally 60 days
after the effective date of coverage, during which they can cancel
undesirable risks. During the 60 day period, the Insurance Subsidiaries are
required to pay any claim which would be covered under such policies. The
Company's agents' handbook sets forth underwriting criteria for particular
policies and insureds. When a risk falls outside of the established
guidelines, the agencies must contact their respective branch AMS to obtain
authorization to bind coverage. Insurance accounts that exceed the branch
AMS's authority requires home office approval. Policies that are accepted
become subject to regulatory limitations on policy cancellations and, except
for nonpayment of premiums, generally may not be canceled after the first 60
days other than at renewal upon prescribed prior notice of cancellation.
Claims
- ------
Claims on policies are investigated and settled primarily by more than
100 CMSs who are in the field, and assigned to key agents. Losses are
reported directly by the agent to its CMS who investigates and resolves the
claim in person with the Company's policyholder. This enables the Company to
physically inspect and settle losses in person promptly and accurately. In
locales where there is insufficient claims volume to justify the cost of an
internal claims staff, or when a particular claims expertise is required, the
Insurance Subsidiaries use independent adjusters to investigate and resolve
claims.
The Company's claims policy emphasizes the timely investigation and
settlement of meritorious claims for appropriate amounts, maintenance of
timely and adequate reserves for claims, and the cost-effective delivery of
claims services by controlling loss and loss expenses.
Claims settlement authority levels are established for each CMS and
supervisor based on their expertise and experience. The setting of reserves
and disposition of property and liability claims in excess of $100,000 field
authority, per claim, requires home office review and approval. The Company
refers all environmental claims to a centralized environmental claims unit
which specializes in the claim management of these exposures.
While claims adjusting has been moved into the field, the Company has
centralized its recovery, subrogation, fraud and workers' compensation claims
handling, which are directed at the Corporate office. The Company has
instituted internal procedures to screen claims for potential fraud. When
fraud is suspected, the claim is reviewed by the Company or outside fraud
investigator to determine the appropriate action before payment is
authorized. The Company's automated claims system enables tracking of claims
suspected to be fraudulent to determine the savings of nonpayment of such
claims. In addition, the Company has introduced anti-fraud training and
educational programs for its employees.
Reinsurance
- -----------
The Insurance Subsidiaries follow the customary industry practice of
ceding a portion of their risks and paying to reinsurers a portion of the
premiums received under the policies. This reinsurance program permits
greater diversification of business and the ability to offer increased
coverage while limiting maximum net losses. The Insurance Subsidiaries are
parties to reinsurance contracts under which certain types of policies are
automatically reinsured without the need for approval by the reinsurer of
individual risks covered ("treaty reinsurance"), reinsurance contracts
handled on an individual policy or per-risk basis requiring the agreement of
the reinsurer as to each risk insured ("facultative reinsurance") and certain
automatic facultative arrangements that permit the Company to automatically
reinsure risks within certain specified limits ("automatic facultative
reinsurance"). Reinsurance does not legally discharge an insurer from its
liability for the full face amount of its policies, but does make the
reinsurer liable to the insurer to the extent of the reinsurance ceded.
PAGE 13
The Company has a Reinsurance Security Committee ("Reinsurance
Committee") that reviews and approves all reinsurers who do business with the
Company. The Reinsurance Committee reviews the financial condition of the
reinsurer as well as applicable company ratings from: (i) A.M. Best; (ii)
Insurance Solvency International; and (iii) Standard & Poor's Insurance
Rating Services ("Standard & Poor's"). Further information is obtained from
the Company's reinsurance brokers, direct reinsurers and market information
sources. Company guidelines require a reinsurer to have an "A-" or better
rating by A.M. Best. However, the Reinsurance Committee may approve
reinsurers who have ratings below "A-" or who have not yet been assigned a
rating.
The Company continuously monitors the reinsurance program to determine
that its protection is not excessive, but adequate to ensure the availability
of funds to provide for losses while maintaining adequate funds for business
growth. The Company's primary reinsurers are American Re-Insurance Company,
Zurich Reinsurance Company of America, St. Paul Reinsurance Management
Corporation and Axa Re (Paris). In addition, the Company cedes no-fault
claims for medical benefits in excess of $75,000 to the New Jersey
Unsatisfied Claim and Judgment Fund ("UCJF").
The Company maintains treaty excess of loss programs which cover each
property occurrence in excess of $400,000 up to $10 million and each casualty
occurrence in excess of $1 million up to $50 million, except for commercial
umbrella which is reinsured up to $10 million. In certain instances where
greater capacity is needed for a larger property or casualty risk,
facultative reinsurance is purchased.
Effective January 1, 1998, the Company revised its property catastrophe
program and its New Jersey Homeowners Quota Share Program ("Homeowners Quota
Share Program"). The revised program provides protection against higher
levels of catastrophe losses at a lower cost when compared with the 1997
program. The new catastrophe program is in four layers and covers: (i) 95%
of losses in excess of $10 million up to $55 million; (ii) 50% of losses in
excess of $55 million up to $85 million; and (iii) 95% of losses in excess
of $85 million up to $150 million in two layers. In addition, the Homeowners
Quota Share Program was reduced from 85% to 75%, and all homeowners
liability premium has been removed from this program. The provisional
commission received from the reinsurers has been increased from 38.5% to
45%, and the occurrence limit has been removed completely. The Company
believes that the 1998 property catastrophe program, coupled with the
Homeowners Quota Share Program, provides adequate protection for the Company
if catastrophic losses were to occur. The Company expects its costs for both
the catastrophe and Homeowners Quota Share programs to be reduced by
approximately $2 million in 1998 compared to 1997.
Pooling Arrangements
- --------------------
The Insurance Subsidiaries participate in intercompany pooling and
expense sharing arrangements ("pool" or "pooling agreement"). The pool
permits each Insurance Subsidiary to rely on the capacity of the entire pool,
rather than only its own capital and surplus and it prevents any one
Insurance Subsidiary from suffering any undue losses, as all Insurance
Subsidiaries share underwriting profits and losses in proportion to their
pool participation percentages. The pool permits all Insurance Subsidiaries
to obtain a uniform rating from A.M. Best and Standard & Poor's.
The pool participation percentage of each Insurance Subsidiary reflects
the ratio of that subsidiary's policyholders' surplus to the Company's
aggregate policyholders' surplus. The percentages are as follows:
SICA...............55.5%
SWIC...............21.5%
SISC................9.0%
SISE................7.0%
SINY................7.0%
Through the pooling agreement, SICA assumes from the other Insurance
Subsidiaries, net of applicable reinsurance, all of their combined premiums,
losses, loss expenses and underwriting expenses and SICA cedes to the other
Insurance Subsidiaries 44.5% of the Insurance Subsidiaries' combined
premiums, losses, loss expenses and underwriting expenses. Through the pool,
the Insurance Subsidiaries also share underwriting and administration
expenses. Accounts are rendered within forty five days after the end of the
calendar quarter and are settled within sixty days after the end of the
calendar quarter. The pool may be terminated at the end of any calendar
month by any Insurance Subsidiary giving ninety days prior notice of
termination.
Reserves for Net Losses and Loss Expenses
- -----------------------------------------
For information about reserves for net losses and loss expenses, see (i)
the section entitled "Analysis of reserves for losses and loss expenses" on
pages 28 through 30, inclusive, of the 1997 Annual Report, (ii) the section
entitled "Environmental reserves" on pages 31 through 32, inclusive, of the
1997 Annual Report and (iii) notes 15(a) and 17 to the Consolidated Financial
Statements on pages 49 through 52 of the 1997 Annual Report, all of which are
incorporated herein by reference.
PAGE 14
Investments and Investment Policy
- ---------------------------------
For information about investments and investment policy, see the section
entitled "Investments" on pages 18 and 19, of the 1997 Annual Report,
incorporated herein by reference.
Year 2000 Issues
- ----------------
The Company presently expects to be Year 2000 compliant by the end of
1998. During 1996, the Company began its efforts to prepare its information
systems for Year 2000 by evaluating its computer programs and systems and
commencing revisions where necessary. Extensive testing of these revisions
will commence in 1998. The impact of Year 2000 issues is uncertain, but the
Company presently expects that Year 2000 issues will not have a material
adverse effect on the Company's financial condition or results of operations.
See Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Regulation
- ----------
General
-------
Insurance companies are subject to supervision and regulation in the
states in which they are domiciled and in which they transact business. Such
supervision and regulation relate to numerous aspects of an insurance
company's business and financial condition. The primary purpose of such
supervision and regulation is the protection of policyholders. The extent of
regulation varies but generally is derived from state statutes which delegate
regulatory, supervisory and administrative authority to state insurance
departments. The Company believes that it is in compliance with applicable
regulatory requirements in all material respects as of the date of this
report. Although the U.S. Federal government does not directly regulate the
insurance industry, Federal initiatives from time to time can have an impact
on the industry.
State Regulation
----------------
The authority of the state insurance departments extends to such matters
as the establishment of standards of solvency, which must be met and
maintained by insurers, the licensing of insurers and agents, the imposition
of restrictions on investments, premium rates for property and casualty
insurance, the payment of dividends and distributions, the provisions which
insurers must make for current losses and future liabilities, the deposit of
securities for the benefit of policyholders and the approval of policy forms.
State insurance departments also conduct periodic examinations of the
financial and business affairs of insurance companies and require the filing
of annual and other reports relating to the financial condition of insurance
companies. Regulatory agencies require that premium rates not be excessive,
inadequate or unfairly discriminatory. In general, the Insurance
Subsidiaries must file all rates for personal and commercial insurance with
the insurance department of each state in which they operate.
All states have enacted legislation that regulates insurance holding
company systems. Each insurance company in a holding company system is
required to register with the insurance supervisory agency of its state of
domicile and furnish information concerning the operations of companies
within the holding company system that may materially affect the operations,
management or financial condition of the insurers. Pursuant to these laws,
the respective departments may examine the Parent and the Insurance
Subsidiaries at any time, require disclosure or prior approval of material
transactions of the Insurance Subsidiaries with any affiliate and require
prior approval or notice of certain transactions, such as dividends or
distributions to the Parent from the Insurance Subsidiary domiciled in that
state.
NAIC Guidelines
---------------
The Insurance Subsidiaries are subject to the general statutory
accounting practices and reporting formats established by the National
Association of Insurance Commissioners ("NAIC"). The NAIC also promulgates
model insurance laws and regulations relating to the financial and
operational regulation of insurance companies, which includes the Insurance
Regulating Information System ("IRIS"). IRIS identifies eleven industry
ratios and specifies "usual values" for each ratio. Departure from the usual
values on four or more of the ratios can lead to inquiries from individual
state insurance commissioners as to certain aspects of an insurer's business.
The Insurance Subsidiaries have, in recent years, met all of the IRIS test
ratios.
NAIC rules and regulations generally are not directly applicable to an
insurance company until they are adopted by applicable state legislatures and
departments of insurance. NAIC model laws and regulations have become
increasingly important in recent years, due primarily to the NAIC's Financial
Regulations Standards and Accreditation Program. Under this program, states
which have adopted certain required model laws and regulations and meet
various staffing and other requirements are "accredited" by the NAIC. Such
accreditation reflects an eventual nationwide regulatory network of
accredited states. All of the states in which the Insurance Subsidiaries are
domiciled, with the exception of New York, are accredited.
PAGE 15
The NAIC Model Act was adopted by the NAIC to, among other things,
enhance the regulation of insurer insolvency. This act includes certain
risk-based capital ("RBC") requirements for property and casualty insurance
companies. These requirements are designed to assess capital adequacy and to
raise the level of protection that statutory surplus provides for
policyholders. The NAIC Model Act measures the major areas of risk to which
property and casualty insurers are exposed: (i) asset risk, which is the risk
of default and decline in market value of assets; (ii) credit risk, which is
the risk that ceded reinsurance and other receivables might not be collected;
(iii) underwriting risk, which is the risk that prices or reserves are
inadequate; and (iv) off balance sheet risk, which includes excessive
premium growth and contingent liabilities. Insurers having less total
adjusted capital than required by the act are subject to varying degrees of
regulatory action depending on the level of capital inadequacy.
The model law establishes four levels of regulatory action. The extent
of regulatory intervention and action increases as the ratio of an insurer's
total adjusted capital, as defined in the model law, to its Authorized
Control Level ("ACL"), as calculated under the model law, decreases. The
first action level, the Company Action Level, requires an insurer to submit a
comprehensive financial plan of corrective actions to the insurance
regulators if total adjusted capital falls below 200% of the ACL amount. The
second action level, the Regulatory Action Level, requires an insurer to
submit a plan containing corrective actions and permits the insurance
regulators to perform an examination or other analysis and issue a corrective
order if total adjusted capital falls below 150% of the ACL amount. The
Authorized Control Level, the third action level, allows the regulators to
take any action they deem necessary, including placing the insurer under
regulatory control or rehabilitate or liquidate an insurer, in addition to
the aforementioned actions if total adjusted capital falls below the ACL
amount. The fourth action level is the Mandatory Control Level which
requires the regulators to place the insurer under regulatory control if
total adjusted capital falls below 70% of the ACL amount. Based upon the 1997
statutory financial statements for the Insurance Subsidiaries, each Insurance
Subsidiary's total adjusted capital exceeded the Company Action Level, and
the risk-based capital ratios are as follows:
SICA..............528%
SWIC..............604%
SISE..............578%
SISC..............589%
SINY..............502%
Automobile Insurance Regulation
-------------------------------
During 1997, the Governor of New Jersey signed into law an insurance
reform bill, this enacted law: (i) eliminates automatic approval of annual
cost-of-living premium increases in favor of "expedited rate filings" of 3%
or less, which do not require prior approval from the insurance commissioner;
(ii) prohibits insurers from non-renewing good drivers (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. The Company does not presently believe these
provisions will have a material effect on the Company's financial condition
or results of operations.
New Jersey insurance regulations presently require insurers to write all
personal automobile coverage presented to them from drivers with eight points
or less on their driving record. While SICA is required to write such
coverage, the rates charged by SICA reflect the insured's motor vehicle
record and incidence of at-fault accidents. Drivers whose poor driving record
makes them ineligible to otherwise obtain insurance must purchase insurance
from the Personal Automobile Insurance Plan ("PAIP"). SICA receives its
proportionate share of PAIP business based on its voluntary personal
automobile writings. Premiums and losses under PAIP are borne by the Company.
Pennsylvania, Delaware, District of Columbia, Virginia, Georgia and New York
also maintain assigned risk plans. Each plan requires a company to accept
its proportionate share of this business based upon its share of the
voluntary market.
Because the Company writes voluntary commercial automobile insurance in
New Jersey, the Company is also required by New Jersey law to write
involuntary coverage through a CAIP for those insureds who are otherwise
unable to obtain insurance in the marketplace. Participation in the CAIP is
based on the Company's share of the voluntary commercial automobile market.
Pennsylvania, Delaware, Virginia, South Carolina, Georgia and New York also
maintain assigned risk plans. Each plan requires a company to accept its
proportionate share of this business based upon its share of the voluntary
market.
South Carolina insurance regulations currently require insurers to write
all personal and certain commercial automobile coverage presented to them by
drivers. Although the Company is required to write all new applications, the
Company is able to cede up to 35% to the South Carolina Reinsurance Facility
("SCRF"). This ceding mechanism allows the Company to cede less desirable
risks to the SCRF. The SCRF operates on a no-profit, no-loss basis through a
surcharge on all automobile policies written in South Carolina. However, as
a result of legislation enacted in July 1997, the SCRF will be abolished and
replaced by a joint underwriting association ("JUA"). Effective March 1,
1999, the JUA will issue policies through association member companies to
drivers unable to obtain coverage in the voluntary market. These member
companies will share in the association's profits and losses. Beginning
March 1, 1999, the Company may non-renew policies currently ceded to the
SCRF.
PAGE 16
The UCJF provides for an insurance fund to reimburse auto insurers
paying no fault claims for medical benefits in excess of $75,000 without
limit for claims against policies issued or renewed prior to January 1, 1991
and up to a maximum of $250,000 per claim against policies issued or renewed
thereafter. Supplementally, the UCJF compensates persons not required by law
to carry automobile insurance who are injured in accidents with uninsured or
unidentified motorists. The UCJF is funded through assessments on auto
insurers in proportion to net direct written personal and commercial auto
premiums. UCJF assessments are treated as ceded reinsurance premiums, and
recoveries are treated as reinsurance recoverables.
Excess Profits
--------------
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
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 (the "New Jersey Department") 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. If the
Company's current profitability continues in its New Jersey personal
automobile business, it may be possible that the Company will incur an excess
profit premium refund obligation. The Company has considered the potential
effect of such excess profits in establishing its reserves. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Homeowners Insurance Regulation
-------------------------------
The New Jersey Department regulations prohibit the cancellation or
non-renewal of homeowners insurance policies for any underwriting reason or
guideline which is arbitrary, capricious or unfairly discriminatory or
without adequate notice to insured. Among the regulatory provisions to which
the Company is subject are those designed to address problems in the
homeowners property insurance marketplace. These mechanisms are designed to
address perceived problems in the availability and affordability of such
insurance. These mechanisms take two forms, voluntary and involuntary.
Voluntary mechanisms such as the New Jersey Windstorm Market Assistance
Program ("Program") generally do not result in assessments to the Company.
The Program is designed to assist property owners in New Jersey coastal areas
in obtaining homeowners insurance. The Company has the option to accept or
decline to write insurance offered to it through the Program. If accepted by
the Company, such business would be treated as would any other property
business written by the Company.
Involuntary mechanisms such as the New Jersey Fair Access to Insurance
Requirements ("NJFAIR") generally result in assessments to the Company.
NJFAIR writes fire and extended coverage on homeowners for those individuals
otherwise unable to secure insurance. Policies are issued by NJFAIR and the
deficit, if any, is assessed to those companies writing homeowners insurance
in the state based on the Company's share of the voluntary property market.
Similar involuntary plans exist in the District of Columbia and most other
states in which the Company operates including: Delaware, Georgia, Maryland,
New York, North Carolina, Pennsylvania and Virginia.
Workers' Compensation Insurance Regulation
------------------------------------------
Because the Insurance Subsidiaries write voluntary workers' compensation
insurance, they also are required by state law to write involuntary coverage,
which is coverage for those insureds which are otherwise unable to obtain
insurance in the marketplace. Insurance companies that underwrite voluntary
workers' compensation insurance can either write involuntary coverage
assigned by state regulatory authorities or participate in the NCCI, which is
a sharing arrangement among carriers for involuntary risks. The Company
participates in the NCCI; however, effective January 1, 1995, the Company
withdrew from the New Jersey NCCI and commenced accepting direct assignments.
Environmental Regulation
------------------------
Although the U.S. Federal government does not directly regulate the
insurance industry, Federal environmental initiatives can have an impact on
the industry. Authorization for funding for the hazardous substances
superfund under the Comprehensive Environmental Response, Compensation and
Liability Act ("Superfund") expired on December 31, 1995. Despite the
expiration of funding, currently there are still funds remaining in Superfund
from prior years. At this time, the Company is unable to predict whether, or
in what form Superfund will be reauthorized; and what the possible impact on
the Company will be.
PAGE 17
Other Assessments
-----------------
All states require insurers licensed to do business in their state to
bear a portion of the loss suffered by insureds as a result of the insolvency
of other licensed insurers. Insurers can be assessed, on the basis of a
percentage of premiums written for the relevant lines of insurance in that
state each year, to pay the claims of insureds of insolvent insurers.
Generally, most of these assessments are recoverable either in the form of
policy surcharges, premium tax reductions or, since such assessments are a
component of the rate structure, in the form of rate increases. In New
Jersey, contingent upon approval by the Commissioner of Insurance, these
assessments are recoverable through policy surcharges. Consequently, the
impact of these assessments to the Company is not significant.
Regulation of Dividends and Distributions
-----------------------------------------
The Parent is an insurance holding company whose principal assets
consist of the stock of the Insurance Subsidiaries. The Insurance
Subsidiaries are subject to supervision and regulation in the states in which
they are domiciled and in which they transact business. The Parent's ability
to declare and pay dividends on Common Stock is affected by the ability of
the Insurance Subsidiaries to declare and distribute dividends under the
regulatory limitations of such states. See Item 5. "Market For Registrant's
Common Equity and Related Stockholder Matters."
Legislative and Regulatory Proposals
------------------------------------
The Governor of New Jersey and the State legislature are working to
develop cost containment reforms to the private passenger automobile
insurance system. In January 1998, a legislative Joint Committee of the New
Jersey Senate and Assembly on Automotive Insurance Reform was empaneled to
review several issues including: (i) reduction of policy limits to reduce
premium cost; (ii) review of risk classification and rating; and (iii)
reduction in fraud. The Company cannot presently predict the form or timing
of any initiatives which will result from the committee deliberations, nor
can the Company estimate the financial impact, if any, that such initiatives
may have on the Company and its operations.
Competition
- -----------
The Company competes with other regional and national insurance
companies, self-insurers and direct writers of insurance coverages. Many of
these competitors are larger than the Company with greater economic
resources. The property and casualty insurance industry is highly
competitive on the basis of both price and service. There are numerous
companies competing for this business in the geographic areas in which the
Insurance Subsidiaries operate, particularly outside of New Jersey. The
Company's competitors could undertake actions which could adversely affect
the Company's underwriting results, such as pricing premiums more
aggressively. The insurance industry continues to experience pricing
competition, which has impacted the Company's commercial business. Selective
will not abandon its underwriting business fundamentals to compete solely on
the basis of price. In addition, because the Company's insurance products
are marketed through independent insurance agencies, most of which represent
more than one insurance company, the Company faces competition within each
agency. However, the Company believes that the loss of any particular
independent insurance agency would not have a material adverse effect on the
Company's financial position and operating results.
The Company believes that as a regional company it has certain
competitive advantages over national companies in the states in which its
insurance businesses are concentrated, including a closer relationship with
its agents and a better knowledge of its operating territories. The Company
believes that the branch offices, SBUs, AMSs and CMSs further enhance its
relationship with agents and policyholders by enabling the Company to provide
competitive service and underwriting.
The Company also faces competition from the implementation of
self-insurance, as many insureds are examining the risks of self-insuring as
an alternative to traditional insurance. Another competitive factor in the
industry involves banks stepping up efforts to break the barriers between
various segments of the financial services industry, including insurance.
These efforts pose new challenges to insurance companies and agents from
industries traditionally outside the insurance business.
Developed several years ago in anticipation of growth in alternative
market insurance solutions, the Company formed SelecTech to generate fee
income by providing third party administration services for public entities
that self-insure and use other means of alternative insurance. The services
provided include, but are not limited to: claims administration, loss
control, risk management and reinsurance.
In 1997, the Company formed Selective Risk Managers to focus on business
opportunities in alternative insurance markets and to lead underwriting and
sales efforts for large accounts, self-insured, group and association
business. While primarily focused on providing primary insurance or
reinsurance on alternative market programs, Selective Risk Managers also
generates fee income by collecting ceding commissions and placement fees.
PAGE 18
Ratings
- -------
The Company is rated "A+" (Superior) by A.M. Best. Ratings by A.M. Best
for the insurance industry range from "A++ (Superior)" to "F (in
Liquidation)." According to A.M. Best, an insurer with an "A++" or "A+"
rating has demonstrated superior overall performance. During 1997, A.M. Best
reaffirmed the Company's A+ rating, which A.M. Best advised "reflects the
Company's high-quality balance sheet, strong local market focus, continued
improvement in operating results and strengthened capital position."
According to A.M. Best, the objective of the rating system is to
evaluate factors affecting the overall performance of an insurance company
in order to provide an opinion of the company's financial strength, operating
performance and ability to meet its obligations to policyholders. The
procedures include quantitative and qualitative evaluations of the company's
financial condition and operating performance. The quantitative evaluation
is based on an analysis of each company's reported financial performance for
at least the previous five fiscal years. These tests measure a company's
performance in the areas of profitability, capitalization (leverage) and
liquidity. A.M. Best also reviews the following qualitative data: (i) spread
of risk; (ii) quality and appropriateness of reinsurance programs; (iii)
quality and diversification of assets; (iv) adequacy of policy or loss
reserves; (v) adequacy of surplus; (vi) capital structure; and (vii)
management's experience and objectives.
The Company also has an A+ claims-paying rating from Standard & Poor's.
According to Standard & Poor's, insurers with this rating offer good
financial security, but their capacity to meet policyholder obligations is
somewhat susceptible to adverse economic and underwriting conditions.
Claims-paying ability ratings by Standard & Poor's for the industry range
from "AAA (Superior)" to "R (Regulatory Action)," and insurers with a rating
of "BBB-" or better are considered to have a secure claims-paying ability.
According to Standard & Poor's, a claims-paying ability rating
represents its opinion of an insurance company's financial capacity to meet
the obligations of its insurance policies in accordance with their terms.
This opinion is not specific to any particular insurance policy or contract,
nor does it address the suitability of a particular insurance policy or
contract for a specific purpose or purchaser. Furthermore, the opinion does
not take into account deductibles, surrender or cancellation penalties, the
timeliness of payment, or the likelihood of the use of a defense such as
fraud to deny claims. Claims-paying ability ratings are assigned by
Standard & Poor's at the request of the insurer. Ratings are based on
current information furnished by the insurer or obtained by Standard &
Poor's from other sources it considers reliable and on extensive
uantitative and qualitative analysis. The rating process also includes
meetings with the insurer's management. Standard & Poor's does not perform
an audit in connection with any rating and may rely on unaudited financial
information.
Insurance companies are rated by rating agencies to provide both
industry participants and insurance consumers meaningful information on
specific insurance companies. Higher ratings generally indicate financial
stability and a strong ability to pay claims. Ratings are assigned by rating
agencies to insurers based upon factors relevant to policyholders and are not
directed toward protection of investors. Such ratings are neither ratings of
securities nor recommendations to buy, hold or sell any security.
Item 2 Properties.
Information required under this item is incorporated herein by reference
to the sections entitled "Subsidiaries," "Region Offices," "Field
Underwriting Office," "Information Systems Offices" and "Properties" on page
57 of the 1997 Annual Report. The Company's facilities are substantially
fully utilized and are adequate for the conduct of the Company's business.
Item 3. Legal Proceedings.
Information required under this item is incorporated herein by reference
to note 15(a) to the consolidated financial statements on pages 49 and 50 of
the 1997 Annual Report.
Item 4. Submission of Matters to a Vote of Security Holders.
None
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
Information required under this item regarding the principal market on
which the Company's common stock is traded and the number of holders thereof
is incorporated herein by reference to the section entitled "Common Stock
Information" on page 57 of the 1997 Annual Report.
Information required under this item regarding the price range of the
Company's common stock and frequency and amount of dividends is incorporated
herein by reference to the section entitled "Quarterly Financial Information"
on page 53; and the section entitled "Financial condition; liquidity and
capital resources" on page 26 up to the second full paragraph on page 27 of
the 1997 Annual Report.
PAGE 19
Item 6. Selected Financial Data.
Information required under this item is incorporated herein by reference
to page 20 and the first column and related notes on page 21 of the 1997
Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Information required under this item is incorporated herein by reference
to the section entitled "Results of operations" on pages 22 through to the
fifth full paragraph on page 26; the section entitled "Federal Income Taxes"
on page 26; the section entitled "Impact of inflation" on page 32; and the
section entitled "Financial condition; liquidity and capital resources" on
pages 26 through to the fifth full paragraph on page 28, of the 1997 Annual
Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements and supplementary data of the
Company are incorporated herein by reference to pages 33 through 52,
inclusive, of the 1997 Annual Report. An index to the consolidated financial
statements is contained in Item 14 (a)(1) of this report, and the Quarterly
Financial Information is incorporated herein by reference to page 53 of the
1997 Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
PART III
The Company will file with the Securities and Exchange Commission,
within 120 days after the end of the fiscal year covered by this report, a
definitive Proxy Statement pursuant to Regulation 14A under the Securities
Exchange Act of 1934 in connection with its 1997 Annual Meeting of
Stockholders, which meeting includes the election of directors. In accordance
with General Instruction G(3) of Form 10-K, the information required by Items
10, 11, 12 and 13 below is incorporated herein by reference to the Proxy
Statement.
Item 10. Directors and Executive Officers of the Registrant.
Incorporated herein by reference to the sections entitled: (i) "Election
of Directors," "Candidates," "Continuing Directors" and "Notes to Table of
Candidates and Continuing Directors" in the Proxy Statement, (ii) "Executive
Compensation and Other Information Executive Officers of the Company" and
(iii) "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy
Statement.
Item 11. Executive Compensation.
Incorporated herein by reference to the sections entitled: (i)
"Compensation of Directors," "Compensation Committee Interlocks and Insider
Participation," and "Report of the Selective Insurance Group, Inc. Salary and
Employee Benefits Committee" in the Proxy Statement and (ii) "Summary
Compensation Table," "Footnotes to Summary Compensation Table," "Stock
Options and Stock Appreciation Rights," "Options and SAR Exercises and
Holdings," "Pension Plans" in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Incorporated herein by reference to the sections entitled: (i) "General
Matters" in the Proxy Statement; and (ii) "Candidates," "Continuing
Directors" and "Notes to Table of Candidates and Continuing Directors" in the
Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
Incorporated herein by reference to the section entitled "Interest of
Management and Others in Certain Transactions" in the Proxy Statement.
PAGE 20
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as a part of (or incorporated by
reference) in this report:
(1) Consolidated financial statements:
The consolidated financial statements of the Company, with Independent
Auditors' Report thereon, listed below are incorporated herein by
reference to pages 33 through 53, inclusive, of the 1997 Annual Report.
1997
Annual
Report
Page
Independent Auditors' Report.................................... 33
Consolidated Balance Sheets at December 31, 1997 and 1996....... 34
Consolidated Statements of Income for the years
ended December 31, 1997, 1996 and 1995.......................... 35
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1997, 1996 and 1995............ 36
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995.......................... 37
Notes to Consolidated Financial Statements......................38-52
(2) Financial statement schedules:
The financial statement schedules, with Independent Auditors' Report
thereon, required to be filed are listed below by page number as filed
in this report. All other schedules are omitted as the information
required is inapplicable, immaterial, or the information is presented
in the consolidated financial statements or related notes.
Form
10-K
Page
Independent Auditors' Report................................. 22
Schedule I Summary of Investments - Other than
Investments in Related Parties at
December 31, 1997............................... 23
Schedule II Condensed Financial Information of
Registrant at December 31, 1997
and 1996, and for the years ended
December 31, 1997, 1996 and 1995............. 24-26
Schedule III Supplementary Insurance Information
for the years ended December 31,
1997, 1996 and 1995.......................... 27-29
Schedule IV Reinsurance for the years ended
December 31, 1997, 1996 and 1995................ 30
PAGE 21
Schedule V Allowance for Uncollectible Premiums
and Other Receivables for the years
ended December 31, 1997, 1996 and 1995.......... 31
Schedule VI Supplemental Information for the
years ended December 31, 1997, 1996
and 1995........................................ 32
(3) 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-K or incorporated in this report by reference, and is
incorporated herein by this reference.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the last quarter of the
period covered by this report.
PAGE 22
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholders
Selective Insurance Group, Inc.
Under date of January 22, 1998, we reported on the consolidated balance
sheets of Selective Insurance Group, Inc. and subsidiaries as of December
31, 1997 and 1996, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1997, as contained in the annual report
on Form 10-K for the year 1997. These consolidated financial statements and
our report thereon are incorporated by reference in the annual report on
Form 10-K for the year 1997. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the
related consolidated financial statement schedules as listed in the
accompanying index. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statement schedules based on our
audits.
In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
/s/KPMG Peat Marwick LLP
New York, New York
January 22, 1998
PAGE 23
SCHEDULE I
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1997
Type of investment Cost or Fair Carrying
(in thousands) amortized cost value amount
Debt securities:
Held-to-maturity:
U.S. government and government
agencies $ 15,569 16,135 15,569
Obligations of states and
political subdivisions 357,380 372,182 357,380
Mortgage-backed securities 37,220 37,934 37,220
Total debt securities, --------- --------- ---------
held-to-maturity 410,169 426,251 410,169
Available-for-sale:
U.S. government and government
agencies 149,038 153,736 153,736
Obligations of states and
political subdivisions 291,210 306,020 306,020
Corporate securities 489,329 503,524 503,524
Asset-backed securities 41,060 41,472 41,472
Mortgage-backed securities 38,423 39,638 39,638
Total debt securities, --------- --------- ---------
available-for-sale 1,009,060 1,044,390 1,044,390
Equity securities, available-for-sale:
Common stocks:
Public utilities 2,573 6,515 6,515
Banks, trust and insurance
companies 26,100 31,625 31,625
Industrial, miscellaneous
and all other 91,929 184,133 184,133
Total equity securities, --------- --------- ---------
available-for-sale 120,602 222,273 222,273
Short-term investments 28,781 XX,XXX 28,781
Other investments 20,077 XX,XXX 20,077
--------- --------- ---------
Total investments $1,588,689 XX,XXX 1,725,690
========= ========= =========
PAGE 24
SCHEDULE II
SELECTIVE INSURANCE GROUP, INC.
(Parent Corporation)
Balance Sheets
(dollars in thousands) December 31,
1997 1996
- ----------------------------------------------------------------------------
Assets
- ------
Equity securities, available-for-sale
- at fair value (cost: $2,471) $ 2,585 2,468
Debt securities, available-for-sale
at fair value (amortized cost: $25,215) 24,587 -
Short-term investments 347 5,287
Cash 45 27
Investment in subsidiaries 650,298 571,539
Current Federal income tax 774 -
Deferred Federal income tax 4,203 2,928
Other assets 1,676 852
------- -------
Total assets $ 684,515 583,101
======= =======
Liabilities and Stockholders' Equity
- ------------------------------------
Convertible subordinated debentures $ 6,845 6,912
Notes payable 89,714 96,857
Short-term debt 17,400 -
Current Federal income tax - 488
Other liabilities 5,240 4,545
------- -------
Total liabilities 119,199 108,802
------- -------
Stockholders' equity:
Common stock of $2 par value per share:
Authorized shares: 180,000,000
Issued: 36,363,856 1997;
35,822,174 1996 72,728 71,644
Additional paid-in capital 30,450 18,060
Net unrealized gains on securities,
available-for-sale, net of deferred
income tax effect 89,051 52,728
Retained earnings 439,811 386,601
Treasury stock at cost
(shares: 7,097,462 1997;
6,733,262 1996) (59,785) (50,680)
Deferred compensation expense and notes receivable
from stock sales (6,939) (4,054)
------- -------
Total stockholders' equity 565,316 474,299
------- -------
Total liabilities and stockholders' equity $ 684,515 583,101
======= =======
Information should be read in conjunction with the notes to consolidated
financial statements of Selective Insurance Group, Inc. and Consolidated
Subsidiaries in the 1997 Annual Report.
PAGE 25
SCHEDULE II (Cont'd)
SELECTIVE INSURANCE GROUP, INC.
(Parent Corporation)
Statements of Income
(in thousands) Year ended December 31,
1997 1996 1995
- --------------------------------------------------------------------------
Revenues:
Dividends from subsidiaries $ 35,891 28,006 13,483
Net investment income earned 1,657 548 429
Miscellaneous income 34 22 44
------ ------ ------
37,582 28,576 13,956
------ ------ ------
Expenses:
Interest 9,592 9,185 9,297
Deferred compensation expense 2,865 1,106 1,595
Other operating 1,379 301 433
------ ------ ------
13,836 10,592 11,325
------ ------ ------
Income before Federal income tax
and equity in undistributed income of
subsidiaries 23,746 17,984 2,631
------ ------ ------
Federal income tax benefit:
Current (2,660) (3,012) (3,289)
Deferred (1,096) (326) (220)
------ ------ ------
(3,756) (3,338) (3,509)
------ ------ ------
Income before equity in undistributed
income of subsidiaries, net of tax 27,502 21,322 6,140
Equity in undistributed income of
subsidiaries, net of tax 42,106 34,229 46,902
------ ------ ------
Net income $ 69,608 55,551 53,042
====== ====== ======
Information should be read in conjunction with the notes to consolidated
financial statements of Selective Insurance Group, Inc. and Consolidated
Subsidiaries in the 1997 Annual Report.
PAGE 26
SCHEDULE II (Cont'd)
SELECTIVE INSURANCE GROUP, INC.
(Parent Corporation)
Statements of Cash Flows
(in thousands) Year ended December 31,
1997 1996 1995
- --------------------------------------------------------------------------
Operating Activities:
Net income $ 69,608 55,551 53,042
------ ------ ------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in undistributed income of
subsidiaries, net of tax (42,106) (34,229) (46,902)
Increase (decrease) in net Federal
income tax (2,357) (618) 792
Other, net 2,704 389 900
------ ------ ------
Net adjustments (41,759) (34,458) (45,210)
------ ------ ------
Net cash provided by operating
activities 27,849 21,093 7,832
------ ------ ------
Investing Activities:
Purchase of equity securities,
available-for-sale - - (2,471)
Purchase of debt securities,
available-for-sale (25,182) - -
------ ------ ------
(25,182) - (2,471)
------ ------ ------
Financing Activities:
Proceeds from short-term debt 17,400 - -
Principal payment on note payable (7,143) (7,143) -
Capital contributions to subsidiaries - - (3)
Dividends to stockholders (16,398) (16,268) (15,996)
Acquisition of treasury stock (9,105) (4,251) (285)
Net proceeds from issuance of
common stock 13,407 7,959 7,104
Increase in deferred compensation
expense and notes receivable from
stock sale (5,750) (2,915) (1,686)
Net cash used in financing activities ------ ------ ------
(7,589) (22,618) (10,866)
------ ------ ------
Net decrease in cash and
short-term investments (4,922) (1,525) (5,505)
Cash and short-term investments at
beginning of year 5,314 6,839 12,344
Cash and short-term investments at ------ ------ ------
end of year $ 392 5,314 6,839
====== ====== ======
Information should be read in conjunction with the notes to consolidated
financial statements of Selective Insurance Group, Inc. and Consolidated
Subsidiaries in the 1997 Annual Report.
PAGE 27
SCHEDULE III
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
Year ended December 31, 1997
Deferred Reserve for
Segment policy losses and Net
acquisition loss Unearned premiums
(in thousands) costs expenses premiums earned
- ---------------------------------------------------------------------------
Commercial $ 73,800 784,108 233,688 465,846
Personal 24,310 247,775 108,889 210,442
Other - 5,089 - (20)
Reinsurance recoverable
on unpaid loss
and loss expenses - 124,197 - -
Prepaid reinsurance
premiums - - 31,189 -
Interest and general
corporate expenses - - - -
------ --------- ------- -------
Total $98,110 1,161,169 373,766 676,268
====== ========= ======= =======
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
Year ended December 31, 1997
Losses and Amortization
Segment loss of deferred Other Net
expenses policy Acqui- Operating premiums
(in thousands) incurred sition costs expenses written
- ---------------------------------------------------------------------------
Commercial $ 311,442 132,922 32,753 472,460
Personal 149,963 40,394 9,491 245,178
Other (23) - 607 (20)
Reinsurance recoverable
on unpaid loss
and loss expenses
- - - -
Prepaid reinsurance
premiums - - - -
Interest and general
corporate expenses - - 13,769 -
------- ------- ------ -------
Total $ 461,382 173,316 53,620 717,618
======= ======= ====== =======
NOTE: A meaningful allocation of net investment income of $100,530 and net
realized gains on investments of $6,021 is considered impracticable because
the Company does not maintain distinct investment portfolios for each
segment.
PAGE 28
SCHEDULE III (Cont'd)
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
Year ended December 31, 1996
Deferred Reserve for
Segment policy losses and Net
acquisition loss Unearned premiums
(in thousands) costs expenses premiums earned
- ---------------------------------------------------------------------------
Commercial $ 65,515 789,213 227,074 477,506
Personal 17,635 245,227 74,153 217,473
Other - 5,145 - (32)
Reinsurance recoverable
on unpaid loss
and loss expenses
- 150,208 - -
Prepaid reinsurance
premiums - - 30,813 -
Interest and general
corporate expenses - - - -
------ --------- ------- -------
Total $83,150 1,189,793 332,040 694,947
====== ========= ======= =======
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
Year ended December 31, 1996
Losses and Amortization
Segment loss of deferred Other Net
expenses policy Acqui- Operating premiums
(in thousands) incurred sition costs expenses written
- ---------------------------------------------------------------------------
Commercial $ 338,043 134,430 28,195 475,104
Personal 157,654 45,246 10,651 217,167
Other (32) - 15 (32)
Reinsurance recoverable
on unpaid loss
and loss expenses
- - - -
Prepaid reinsurance
premiums - - - -
Interest and general
corporate expenses - - 10,646 -
------- ------- ------ -------
Total $ 495,665 179,676 49,507 692,239
======= ======= ====== =======
NOTE: A meaningful allocation of net investment income of $96,952 and net
realized gains on investments of $2,786 is considered impracticable because
the Company does not maintain distinct investment portfolios for each
segment.
PAGE 29
SCHEDULE III (Cont'd)
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
Year ended December 31, 1995
Losses Amortization
Segment Net and loss of deferred Other Net
premiums expenses policy acqui- operating premiums
(in thousands) earned incurred sition costs expenses written
- -------------------------------------------------------------------------
Commercial $ 521,196 366,936 137,981 29,172 535,050
Personal 221,587 161,935 48,533 10,157 221,935
Other 34 30 -0- 17 36
Interest and
general corporate
expenses - - - 11,909 -
------- ------- ------- ------ -------
Total $ 742,817 528,901 186,514 51,255 757,021
======= ======= ======= ====== =======
NOTE: A meaningful allocation of net investment income of $91,640 and net
realized gains on investments of $900 is considered impracticable
because the Company does not maintain distinct investment portfolios for
each segment.
PAGE 30
SCHEDULE IV
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
REINSURANCE
Years ended December 31, 1997, 1996 and 1995
% of
Ceded to Assumed amount
Gross other from other Net assumed
(in thousands) amount companies companies amount to net
- -----------------------------------------------------------------------------
1997
Premiums earned:
Accident and health ins. $ 297 - - 297 -
Property and liability ins. 739,647 84,384 20,708 675,971 3.1
------- ------ ------ -------
Total premiums earned $ 739,944 84,384 20,708 676,268 3.1
======= ====== ====== =======
1996
Premiums earned:
Accident and health ins. $ 799 - - 799 -
Property and liability ins. 760,557 95,765 29,356 694,148 4.2
------- ------ ------ -------
Total premiums earned $ 761,356 95,765 29,356 694,947 4.2
======= ====== ====== =======
1995
Premiums earned:
Accident and health ins. $ 1,925 - - 1,925 -
Property and liability ins. 785,773 94,429 49,548 740,892 6.7
------- ------- ------ -------
Total premiums earned $ 787,698 94,429 49,548 742,817 6.7
======= ======= ====== =======
PAGE 31
SCHEDULE V
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
ALLOWANCE FOR UNCOLLECTIBLE PREMIUMS AND OTHER RECEIVABLES
Years ended December 31, 1997, 1996 and 1995
(in thousands)
- ----------------------------------------------------------------------------
1997 1996 1995
Balance, January 1 $ 3,302 3,450 2,501
Additions 2,331 3,502 2,847
Deletions (2,577) (3,650) (1,898)
----- ----- -----
Balance, December 31 $ 3,056 3,302 3,450
===== ===== =====
PAGE 32
SCHEDULE VI
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTAL INFORMATION
Years ended December 31, 1997, 1996 and 1995
Losses and loss expenses
incurred related to Paid
Affiliation with Registrant (1) (2) losses
current prior and loss
(in thousands) year years expenses
- ---------------------------------------------------------------------------
Consolidated Property/
Casualty Subsidiaries:
Year ended Dec. 31, 1997 $471,506 (10,124) 463,995
Year ended Dec. 31, 1996 $504,843 (9,178) 454,763
Year ended Dec. 31, 1995 $516,219 12,682 418,072
Note: The other information required in this schedule (e.g., deferred
policy acquisition costs, reserves for losses and loss expenses, unearned
premiums, net premiums earned, net investment income, amortization of
deferred policy acquisition costs, and net premiums written) is contained
in Schedule III in this report. In addition, the Company does not discount
loss reserves.
PAGE
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ James W. Entringer March 27, 1998
-------------------------------
James W. Entringer, Chairman of
the Board and Chief Executive Officer
By: /s/ Gregory E. Murphy March 27, 1998
-------------------------------
Gregory E. Murphy, President and
Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
By: /s/ James W. Entringer March 27, 1998
-------------------------------
James W. Entringer, Chairman of
the Board and Chief Executive Officer
By: /s/ Gregory E. Murphy March 27, 1998
-------------------------------
Gregory E. Murphy, President and
Chief Operating Officer
By: /s/ David B. Merclean March 27, 1998
-------------------------------
David B. Merclean, Senior Vice
President and Chief Financial Officer
By: /s/ A. David Brown March 27, 1998
-------------------------------
A. David Brown, Director
By: /s/ William A. Dolan, II March 27 1998
-------------------------------
William A. Dolan, II, Director
By: /s/ William C. Gray, D.V.M. March 27, 1998
-------------------------------
William C. Gray, D.V.M., Director
By: /s/ C. Edward Herder March 27, 1998
-------------------------------
C. Edward Herder, Director
By: /s/ Frederick H. Jarvis March 27, 1998
-------------------------------
Frederick H. Jarvis, Director
By: /s/ William M. Kearns,Jr. March 27, 1998
-------------------------------
William M. Kearns, Jr., Director
By: /s/ Joan Lamm-Tennant, Ph.D. March 27, 1998
-------------------------------
Joan Lamm-Tennant, Ph.D.
Director
By: /s/ S. Griffin McClellan, III March 27, 1998
-------------------------------
S. Griffin McClellan, III
Director
By: /s/ William M. Rue March 27, 1998
-------------------------------
William M. Rue, Director
By: /s/ Thomas D. Sayles, Jr. March 27, 1998
-------------------------------
Thomas D. Sayles, Jr.
Director
By: /s/ J. Brian Thebault March 27, 1998
-------------------------------
J. Brian Thebault, Director
PAGE
EXHIBIT INDEX
* Exhibits included within this 10-K Filing
P Paper filing under cover of Form SE
Exhibit
Number
- -------
2 Agreement and Plan of Merger, dated as of March 27, 1992, among
Selective Insurance Group, Inc., Niagara Acquisition Co., Niagara
Exchange Corporation, Riedman Corporation, PSCO Partners Limited
Partnership, PSCO Bermuda Partners, PSCO Fund Limited and Charles
J. Clauss (incorporated herein by reference to Exhibit 1 to the
Company's Current Report on Form 8-K dated March 30, 1992, filed
with the Securities Exchange Commission on April 7, 1992, File
No. 0-8641.)
*3.1 Restated Certificate of Incorporation of Selective Insurance Group,
Inc., dated August 4, 1977, as amended through November 6, 1997,
filed herewith.
3.2 The Company's By-Laws, adopted on August 26, 1977, amended through
May 1, 1992 (incorporated herein by reference to Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1994, File No. 0-8641).
4.1 The form of Indenture dated December 29, 1982, between the
Selective Insurance Group, Inc. and Midlantic National Bank, as
Trustee relating to the Company's 8 3/4% Subordinated Convertible
Debentures due 2008 (incorporated herein by reference to Exhibit
4.3 to the Company's Registration Statement on Form S-3
No. 2-80881).
4.2 Rights Agreement dated November 3, 1989 between Selective Insurance
Group, Inc. and Midlantic National Bank (incorporated herein by
reference to Exhibit 4.2 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994, File No. 0-8641).
10.1 The Selective Insurance Retirement Savings Plan as amended through
August 15, 1996 (incorporated herein by reference by Exhibit 4 to
the Company's Registration Statement on Form S-8 No. 333-10477).
10.2 Amendment, dated May 2, 1997, to the Selective Insurance Retirement
Savings Plan in Exhibit 10.1 above (incorporated herein by
reference to Exhibit 10.6 to the Company's Quarterly Report on
Form 10Q for the quarter ended June 30, 1997, File No. 0-8641).
10.3 The Retirement Income Plan for Employees of Selective Insurance
Company of America, as amended through May 6, 1994 (incorporated
herein by reference to Exhibit 10.2 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1994, File
No. 0-8641).
10.4 The Company's Stock Option Plan as amended through May 6, 1988
(incorporated herein by reference to Exhibit 4 to the Company's
Registration Statement on Form S-8 No. 33-22450).
10.5 Directors' Plan. A retirement and total and permanent disability
plan for directors as amended through May 5, 1989 (incorporated
herein by reference to Exhibit 10.4 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1994, File
No. 0-8641).
*10.6 Resolutions adopted by the Selective Insurance Group, Inc. Board
of Directors on December 31, 1997 with respect to the Directors'
Plan in Exhibit 10.5 above, filed herewith.
10.7 Deferred Compensation Plan for Directors (incorporated herein by
reference to Exhibit 10.5 to the Company's Annual Report on Form
10-K for the year ended December 31, 1993, File No. 0-8641).
PAGE
10.8 The Company's 1987 Employee Stock Purchase Savings Plan
(incorporated herein by reference to Exhibit 10.6 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1993,
File No. 0-8641).
10.9 Amendment, dated May 2, 1997, to the 1987 Employee Stock Purchase
Savings Plan in Exhibit 10.8 above (incorporated herein by
reference to Exhibit 10.5 to the Company's Quarterly Report on
Form 10Q for the quarter ended June 30, 1997, File No. 0-8641).
10.10 The Selective Insurance Rewards Program adopted January 1, 1994,
which replaced the Annual Incentive Compensation Plan
(incorporated herein by reference to Exhibit 10.7 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1994,
File No. 0-8641).
10.11 The Selective Insurance Group, Inc. Stock Purchase Plan for
Independent Insurance Agents as amended through December 1, 1995
(incorporated herein by reference to Exhibit 10.8 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995,
File No. 0-8641).
10.12 The Selective Insurance Group, Inc. Stock Option Plan for Directors
as amended through November 1, 1991 (incorporated herein by
reference to Exhibit 4.1 to the Company's Registration Statement
on Form S-8 No. 33-36368).
10.13 Selective Insurance Group, Inc. Stock Option Plan II, as amended
through October 9, 1997, and related forms of option agreements
(incorporated herein by reference to Exhibits 4.1 to the
Company's Registration Statement on Form S-8 No. 33-37501).
10.14 The Selective Insurance Group, Inc. Stock Compensation Plan for
Nonemployee Directors (incorporated herein by reference to
Exhibit 4 to the Company's Registration Statement on Form S-8
No. 333-10465).
*10.15 SIGI Acquisition Company LLC Limited Liability Company Agreement,
filed herewith
10.16 Employment, Termination and Severance Agreements.
10.16a Employment Agreement with James W. Entringer, dated September 1,
1993, as amended (incorporated herein by reference to Exhibit
10.12 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1993, File No. 0-8641).
10.16b Amendment, dated September 1, 1996, to the Employment Agreement
in Exhibit 10.16a above (incorporated herein by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996, File No. 0-8641).
10.16c Employment Agreement with Dominic J. Addesso , dated September 1,
1993, as amended (incorporated herein by reference to Exhibit
10.14 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1993, File No. 0-8641).
10.16d Amendment, dated September 1, 1996, to the Employment Agreement
in Exhibit 10.16(c) above (incorporated herein by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997, File No. 0-8641).
10.16e Employment Agreement with Thornton R. Land , dated September 1,
1993, as amended (incorporated herein by reference to Exhibit
10.15 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1993, File No. 0-8641).
10.16f Amendment, dated September 1, 1996, to the Employment Agreement
in Exhibit 10.16e above (incorporated herein by reference to
Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996, File No. 0-8641).
PAGE
10.16g Employment Agreement with Gregory E. Murphy, dated August 1, 1995
(incorporated herein by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1995, File No. 0-8641).
10.16h Employment Agreement with Donald E. Williams, dated August 1,
1995 (incorporated herein by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995, File No. 0-8641).
10.16i Employment Agreement with Jamie Ochiltree, III, dated October 31,
1995 (incorporated herein by reference to Exhibit 10.11f to the
Company's Annual Report on Form 10-K for the year ended December
31, 1995, File No. 0-8641).
10.16j Employment Agreement, dated May 2, 1997, between Selective
Insurance Company of America and James W. Coleman, Jr.
(incorporated herein by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10Q for the quarter ended
June 30, 1997, File No. 0-8641).
10.16k Form of Termination Agreement, between the Company and each of
Messrs. Entringer, Addesso and Land, as amended (incorporated
herein by reference to Exhibit 10.16 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1993, File
No. 0-8641).
10.16l Termination Agreement, dated August 1, 1995, between Selective
Insurance Company of America and Gregory E. Murphy (incorporated
herein by reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1995, File
No. 0-8641).
10.16m Termination Agreement, dated August 1, 1995, between Selective
Insurance Company of America and Donald E. Williams (incorporated
herein by reference to Exhibit 10.4 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1995, File
No. 0-8641).
10.16n Termination Agreement, dated August 1, 1995, between Selective
Insurance Company of America and Jamie Ochiltree (incorporated
herein by reference to Exhibit 10.11j to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995, File
No. 0-8641).
10.16o Termination Agreement, dated May 2, 1997, between Selective
Insurance Company of America and James W. Coleman, Jr.
(incorporated herein by reference to Exhibit 10.4 to the
Company's Quarterly Report on Form 10Q for the quarter ended
June 30, 1997, File No. 0-8641).
10.16p Severance agreement with Walter H. Hallowell, dated July 12, 1994
(incorporated herein by reference to Exhibit 10.15 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1994,
File No. 0-8641).
10.17 Property Reinsurance Contracts.
*10.17a New Jersey Homeowners Quota Share Treaty between Selective
Insurance Company of America, Selective Way Insurance Company,
Selective Insurance Company of the Southeast, Selective Insurance
Company of South Carolina, and Selective Insurance Company
of New York and various insurance and/or reinsurance companies
(Contract No. 3645-24), filed herewith.
*10.17b Property Catastrophe Excess of Loss Reinsurance Contract between
various insurance and/or reinsurance companies and/or underwriting
members of Lloyd's and Selective Insurance Company of America,
Selective Way Insurance Company, Selective Insurance Company of
the Southeast, Selective Insurance Company of South Carolina and
Selective Insurance Company of New York, filed herewith.
PAGE
10.17c Property Per Risk Reinsurance Agreement between Selective Insurance
Company of America, Selective Way Insurance Company, Selective
Insurance Company of the Southeast, Selective Insurance Company of
South Carolina, Selective Insurance Company of New York, and
American Re-Insurance Company and/or St. Paul Reinsurance
Management Corporation (Contract No. 3525-0087), (incorporated
herein by reference to Exhibit 10.14g to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996, File
No. 0-8641).
10.18 Casualty Reinsurance Contracts.
10.18a Casualty Excess of Loss Reinsurance Agreement between Selective
Insurance Company of America, Selective Way Insurance Company,
Selective Insurance Company of the Southeast, Selective Insurance
Company of South Carolina, Selective Insurance Company of New York
and various insurance and/or reinsurance companies (Contract No.
3525-0090), (incorporated herein by reference to Exhibit 10.15g
to the Company's Annual Report on Form 10K for the year ended
December 31, 1996, File No. 0-8641).
10.19 Form of Note Purchase Agreement dated as of November 15, 1992 with
respect to Selective Insurance Group, Inc. 7.84% Senior Notes due
November 15, 2002 (incorporated herein by reference to Exhibit 99.1
to the Company's Post-Effective Amendment No. 1 to the Registration
Statement on Form S-3, No. 33-30833).
10.20 Form of Note Purchase Agreement dated as of August 1, 1994 with
respect to Selective Insurance Group, Inc. 8.77% Senior Notes due
August 1, 2005 (incorporated herein by reference to Exhibit 99.2
to the Company's Post-Effective Amendment No. 1 to the
Registration Statement on Form S-3, No. 33-30833).
10.21 Promissory Note of $25,000,000 Revolving Line of Credit with State
Street Bank and Trust Company (incorporated herein by reference to
Exhibit 10.1 to the Company's quarterly report on Form 10-Q fourth
quarter ended March 31,1997, File No. 0-8641).
10.22 Amendment, dated June 30, 1997, to the Promissory Note of
$25,000,000 Revolving Line of Credit with State Street Bank and
Trust Company in Exhibit 10.21 above, (incorporated herein by
reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997, File No. 0-8641).
10.23 Commercial Loan Note of $25,000,000 Line of Credit with Summit
Bank as amended through June 30, 1997, (incorporated herein by
reference to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997, File No. 0-8641).
*11 Computation of earnings per share, filed herewith.
*13 Portions of the 1997 Annual Report to Stockholders incorporated by
reference into this Form 10-K, filed herewith.
*21 Subsidiaries of Selective Insurance Group, Inc., filed herewith.
*23 Consent of Independent Auditors, filed herewith.
*27 Financial Data Schedule, filed herewith.
P28 Combined 1997 statutory Schedule P for the Selective Insurance
Group (information from reports furnished to state insurance
regulatory authorities, filed concurrently herewith under cover
of Form SE).
PAGE
EXHIBIT 3.1
CERTIFICATE OF AMENDMENT TO THE
RESTATED CERTIFICATE OF INCORPORATION
OF SELECTIVE INSURANCE GROUP, INC.
Pursuant to N.J.S.A. 14A:7-15.1, Selective Insurance Group, Inc., a New
Jersey corporation, under its seal and the hands of its Chairman of the
Board and Secretary does hereby certify as follows:
FIRST: The name of the corporation is SELECTIVE INSURANCE GROUP, INC.
(the "Corporation").
SECOND: On October 28, 1997, the Board of Directors of the Corporation duly
adopted, pursuant to N.J.S.A. 14A:7-15.1, resolutions approving (i) a
division of the outstanding shares of common stock of the Corporation, par
value #2.00 per share ("Common Stock"), and (ii) an amendment to the
Restated Certificate of Incorporation of the Corporation (the "Amendment")
in connection with said share division to increase the number of authorized
shares of Common Stock.
THIRD: The Amendment will not adversely affect the rights or preferences of
the holders of outstanding shares of any class or series and will not result
in the percentage of authorized shares that remains unissued after the share
division exceeding the percentage of authorized shares that were unissued
before the share division.
FOURTH: The class or series and number of shares thereof subject tot he
share division shall be the number of shares of Common Stock outstanding as
of the close of business on November 17, 1997, and the distribution shall
take place on December 1, 1997, the effective date of the share division
and the Amendment (the "Effective Date"). Said shares shall be divided so
that each holder of record of Common Stock as of the close of business on
November 17, 1997, shall be entitled to receive one additional share of
newly-issued Common Stock for every share of outstanding Common Stock held
by such holder.
FIFTH: In connection with the share division, the first sentence or Article
FOURTH of the Restated Certificate of Incorporation is amended as of the
Effective Date to read as follows:
"FOURTH: The total authorized capital shares of
the corporation shall be divided into two classes
and shall consist of one hundred eighty million
(180,000,000) shares of common stock having a par
value of $2.00 per share (herein called common
stock') and five million (5,000,000) shares of
preferred stock without par value (herein called
preferred stock')."
All other provisions of said Article FOURTH shall remain unchanged.
PAGE
SIXTH: The Effective Date of the share division and of the Amendment shall
be December 1, 1997.
IN WITNESS WHEREOF, SELECTIVE INSURANCE GROUP, INC. has made this
Certificate under its seal and the hands of its Chairman of the Board and
Secretary, this 31st day of October, 1997.
SELECTIVE INSURANCE GROUP, INC.
By:/s/ James S. Entringer
---------------------------
James W. Entringer
Chairman of the Board
- -------------------------------------
Attest:
/s/ Susan R. Perretta
- -------------------------------------
Susan R. Perretta
Secretary
PAGE
CERTIFICATE OF AMENDMENT F I L E D
--------------------------- NOV 6,1989
of JANE BURGIO
---- Secretary of State
RESTATED CERTIFICATE OF INCORPORATION
----------------------------------------
of
----
SELECTIVE INSURANCE GROUP, INC.
-----------------------------------
(Pursuant to Title 14A:7-2(2) of the
New Jersey Business Corporation Act)
_____________________________________________________________________
It is hereby certified that:
1. The name of the corporation is Selective Insurance Group, Inc.
(the "Corporation"); and
2. The Restated Certificate of Incorporation of the Corporation, as
amended (the "Certificate of Incorporation") is hereby amended so that the
designation and number of shares of the class and series acted upon in the
following resolution, and the relative rights, preferences and limitations of
such class and series. are as stated in such resolution.
3. The following resolution was duly adopted by the Board of
Directors of the Corporation as required by Subsection 14A:7-2(2) of the New
Jersey Business Corporation Act at a meeting duly called and held on November
3, 1989:
RESOLVED, that pursuant to the authority granted to and vested
in the Board of Directors of this Corporation (the "Board of
Directors") in accordance with the provisions of the Certificate of
Incorporation, the Board of Directors hereby creates a series of
Preferred Stock, without par value, of the Corporation ("Preferred
Stock") and hereby states the designation and number of shares, and
fixes the relative rights, preferences, and limitations thereof (in
addition to the provisions set forth in the Certificate of
Incorporation, which are applicable to the Preferred Stock of all
classes and series) as follows:
Series A Junior Preferred Stock:
Section 1. Designation and Amount. The shares of such series
shall be designated as "Series A Junior Preferred Stock" (the
"Series A Preferred Stock") and the number of shares constituting
the Series A Preferred Stock shall be 300,000. Such number of
shares may be increased or decreased by resolution of the Board of
Directors; provided, that no decrease shall reduce the number of
shares of Series A Preferred Stock to a number less than the number
of shares then outstanding plus the number of shares reserved for
issuance upon the exercise of outstanding options, rights or
warrants or upon the conversion of any outstanding securities
issued by the Corporation convertible into Series A Preferred
Stock.
Section 2. Dividends and Distributions.
(A) Subject to the rights of the holders of any shares of any
series of Preferred Stock (or any similar stock) ranking prior and
superior to the Series A Preferred Stock with respect to dividends,
the holders of shares of Series A Preferred Stock, in preference to
the holders of Common Stock, par value $2 per share, of the
Corporation (the "Common Stock"), and of any other junior stock,
shall be entitled to receive, when, as and if declared by the Board
of Directors out of funds legally available for the purpose,
quarterly dividends payable in cash on the first day of March,
June, September and December in each year (each such date being
referred to herein as a "Quarterly Dividend Payment Date"),
commencing on the first Quarterly Dividend Payment Date after the
first issuance of a share or fraction of a share of Series A
Preferred Stock, in an amount per share (rounded to the nearest
cent) equal to the greater of (a) $1 or (b) subject to the
provision for adjustment hereinafter set forth, 100 times the
aggregate per share amount of all cash dividends, and 100 times the
aggregate per share amount (payable in kind) of all non-cash
dividends or other distributions, other than a dividend payable in
shares of Common Stock or a subdivision of the outstanding shares
of Common Stock (by reclassification or otherwise), declared on the
Common Stock since the immediately preceding Quarterly Dividend
Payment Date or, with respect to the first Quarterly Dividend
Payment Date, since the first issuance of any share or fraction of
a share of Series A Preferred Stock. In the event the Corporation
shall at any time declare or pay any dividend on the Common Stock
payable in shares of Common Stock, or effect a sub-division or
combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a
dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then in each such case the amount to
which holders of shares of Series A Preferred Stock were entitled
immediately prior to such event under clause (b) of the preceding
sentence shall be adjusted by multiplying such amount by a
fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator
of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution
on the Series A Preferred Stock as provided in paragraph (A) of
this Section immediately after it declares a dividend or
distribution on the Common Stock (other than a dividend payable in
shares of Common Stock); provided that, in the event no dividend or
distribution shall have been declared on the Common Stock during
the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a dividend of $1 per
share on the Series A Preferred Stock shall nevertheless be payable
on such subsequent Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Preferred Stock from the Quarterly
Dividend Payment Date next preceding the date of issue of such
shares, unless the date of issue of such shares is prior to the
record date for the first Quarterly Dividend Payment Date, in which
case dividends on such shares shall begin to accrue from the date
of issue of such shares, or unless the date of issue is a Quarterly
Dividend Payment Date or is a date after the record date for the
determination of holders of shares of Series A Preferred Stock
entitled to receive a quarterly dividend and before such Quarterly
Dividend Payment Date, in either of which events such dividends
shall begin to accrue and be cumulative from such Quarterly
Dividend Payment Date. Accrued but unpaid dividends shall not bear
interest. Dividends paid on the shares of Series A Preferred Stock
in an amount less than the total amount of such dividends at the
time accrued and payable on such shares shall be allocated pro rata
on a share-by-share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date for the
determination of holders of shares of Series A Preferred Stock
entitled to receive Payment of a dividend or distribution declared
thereon, which record date shall be not more than 60 days prior to
the date fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of Series A
Preferred Stock shall have the following voting rights:
(A) Each share of Series A Preferred Stock shall entitle the
holder thereof to one vote on all matters submitted to a vote of
the stockholders of the Corporation, and each fractional share of
Series A Preferred Stock shall have an equivalent fractional vote
on all matters submitted to a vote of the stockholders of the
Corporation.
(B) Except as otherwise provided herein, in any other
Certificate of Amendment creating a series of Preferred Stock or
any similar stock, or by law, the holders of shares of Series A
Preferred Stock and the holders of shares of Common Stock and any
other capital stock of the Corporation having general voting rights
shall vote together as one class on all matters submitted to a vote
of stockholders of the Corporation.
(C) Except as set forth herein, or as otherwise provided by
law or the Certificate of Incorporation, holders of Series A
Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are
entitled to vote with holders of Common Stock as set forth herein)
for taking any corporate action.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Preferred Stock as provided
in Section 2 are in arrears, thereafter and until all accrued and
unpaid dividends and distributions, whether or not declared, on
shares of Series A Preferred Stock outstanding shall have been paid
in full, the Corporation shall not:
(i) declare or pay dividends, or make any other distributions,
on any shares of stock ranking junior (either as to dividends
or upon liquidation, dissolution or winding up) to the Series
A Preferred Stock;
(ii) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or
winding up) with the Series A Preferred Stock, except
dividends paid ratably on the Series A Preferred Stock and all
such parity stock on which dividends are payable or in arrears
in proportion to the total amounts to which the holders of all
such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to
the Series A Preferred Stock, provided that the Corporation
may at any time redeem, purchase or otherwise acquire shares
of any such junior stock in exchange for shares of any stock
of the Corporation ranking junior (either as to dividends or
upon dissolution, liquidation or winding up) to the Series A
Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for consideration
any shares of Series A Preferred Stock, or any shares of stock
ranking on a parity with the Series A Preferred Stock, except
in accordance with a purchase offer made in writing or by
publication (as determined by the Board of Directors) to all
holders of such shares upon such terms as the Board of
Directors, after consideration of the respective annual
dividend rates and other relative rights and preferences of
the respective series and classes, shall determine in good
faith will result in fair and equitable treatment among the
respective series or classes.
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any
shares of stock of the Corporation unless the Corporation could,
under paragraph (A) of this Section 4, purchase or otherwise
acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series A Preferred
Stock purchased or otherwise acquired by the Corporation in any
manner whatsoever shall be retired and cancelled promptly after the
acquisition thereof. All such shares shall upon their cancellation
become authorized but unissued shares of Preferred Stock and may be
reissued as part of a new series of Preferred Stock subject to the
conditions and restrictions on issuance set forth herein, in the
Certificate of Incorporation, or in any other Certificate of
Amendment creating a series of Preferred Stock or any similar stock
or as otherwise required by law.
Section 6. Liquidation, Dissolution or Winding Up. Upon any
liquidation, dissolution or winding up of the Corporation, no
distribution shall be made (1) to the holders of shares of stock
ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred Stock unless,
prior thereto, the holders of shares of Series A Preferred Stock
shall have received $100 per share, plus an amount equal to accrued
and unpaid dividends and distributions thereon, whether or not
declared, to the date of such payment, provided that the holders of
shares of Series A Preferred Stock shall be entitled to receive an
aggregate amount per share, subject to the provision for adjustment
hereinafter set forth, equal to lOO times the aggregate amount to
be distributed per share to holders of shares of Common Stock, or
(2) to the holders of shares of stock ranking on a parity (either
as to dividends or upon liquidation, dissolution or winding up)
with the Series A Preferred Stock, except distributions made
ratably on the Series A Preferred Stock and all such parity stock
in proportion to the total amounts to which the holders of all such
shares are entitled upon such liquidation, dissolution or winding
up. In the event the Corporation shall at any time declare or pay
any dividend on the Common Stock payable in shares of Common Stock,
or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in shares of Common Stock)
into a greater or lesser number of shares of Common Stock, then in
each such case the aggregate amount to which holders of shares of
Series A Preferred Stock were entitled immediately prior to such
event under the proviso in clause (1) of the preceding sentence
shall be adjusted by multiplying such amount by a fraction the
numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding
immediately prior to such event.
Section 7. Consolidation, Merger, etc. In case the Corporation
shall enter into any consolidation, merger, combination or other
transaction in which the shares of Common Stock are exchanged for
or changed into other stock or securities, cash and/or any other
property, then in any such case each share of Series A Preferred
Stock shall at the same time be similarly exchanged or changed into
an amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 100 times the aggregate amount of
stock, securities, cash and/or any other property (payable in
kind), as the case may be, into which or for which each share of
Common Stock is changed or exchanged. In the event the Corporation
shall at any time declare or pay any dividend on the Common Stock
payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a
dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then in each such case the amount set
forth in the preceding sentence with respect to the exchange or
change of shares of Series A Preferred Stock shall be adjusted by
multiplying such amount by a fraction, the numerator of which is
the number of shares of Common Stock outstanding immediately after
such event and the denominator of which is the number of shares of
Common Stock that were outstanding immediately prior to such event.
Section 8. No Redemption. The shares of Series A Preferred
Stock shall not be redeemable.
Section 9. Rank. The Series A Preferred Stock shall rank, with
respect to the payment of dividends and the distribution of assets,
junior to all series of any other class of the Corporation's
Preferred Stock.
Section 10. Amendment. The Certificate of Incorporation of the
Corporation shall not be amended in any manner which would
materially alter or change the powers, preferences or special
rights of the Series A Preferred Stock so as to affect them
adversely without the affirmative vote of the holders of at least
twothirds of the outstanding shares of Series A Preferred Stock,
votinq toqether as a single class.
IN WITNESS WHEREOF, this Certificate of Amendment is executed on
behalf of the Corporation by its Chairman of the Board and attested by its
Secretary this 3rd day of November, 1989.
SELECTIVE INSURANCE GROUP, INC.
Frederick H. Jarvis
By: ______________________
Name: Frederick H. Jarvis
Attest: -----------------------
Chairman of the Board,
Title: President and Chief
Thornton R. Land Executive officer
By: ___________________ -----------------------
Name: Thornton R. Land
Title: Secretary
PAGE
(X) TITLE 14A:1-6(5) New Jersey Business Corporation Act
( ) TITLE 15A:1-7(e) New Jersey Nonprofit Corporation Act
CERTIFICATE OF CORRECTION FILED
---------------------------- SEP 13 1989
OF JANE BURGIO
---- Secretary of State
SELECTIVE INSURANCE GROUP, INC.
---------------------------------
The Undersigned, hereby submits for filing, a Certificate of Correction,
executed in behalf of the above named Corporation, pursuant to the provisions
of the appropriate Statute, checked above, of the New Jersey Statutes.
1. The Certificate to be corrected is:
Certificate of Amendment to
the Restated Certificate of
Incorporation of Selective
Insurance Group, Inc. August 23, 1989
-------------------
Date Filed
2. The inaccuracy in the Certificate is:
Paragraph FOURTH was drawn and based upon an inaccurate excerpt of the
resolution of the Company and should have specified that the division of
the Company shares, effective September 1, 1989, would be distributed to
stockholders of record at the close of business on August 15, 1989.
3. The Certificate of Correction hereby reads as follows:
Paragraph FOURTH of the Certificate of Amendment to the Restated
Certificate of Incorporation of Selective Insurance Group, Inc. is
amended to read as follows:
FOURTH: The class or series and number of shares thereof subject to the
share division shall be the number of shares of Common Stock outstanding
as of the close of business on August 15, 1989, and the distribution
shall take place on September 1, 1989, the effective date of the share
division and the Amendment (the "Effective Date"). Said shares shall be
divided so that each holder of record of Common Stock as of the close of
business on August 15, 1989 shall be entitled to receive one additional
share of newly-issued Common Stock for every two shares of outstanding
Common Stock held by such holder.
(All other paragraphs and provisions of the Certificate of Amendment to the
Restated Certificate of Incorporation of Selective Insurance Group, Inc.
remain unchanged).
Thorton R. Land
Signature:________________________
Name: Thorton R. Land
-------------------------
Senior Vice President
Title: General Counsel & Secretary
-------------------------
DATE: September 11, 1989
-------------------------
PAGE
CERTIFICATE OF AMENDMENT F I L E D
--------------------------- Aug 23,1989
of JANE BURGIO
---- Secretary of State
RESTATED CERTIFICATE OF INCORPORATION
----------------------------------------
of
----
SELECTIVE INSURANCE GROUP, INC.
-----------------------------------
Pursuant to N.J.S.A. 14A:7-15.1, Selective Insurance Group, Inc., a New
Jersey corporation, under its seal and the hands of its Chairman of the Board
and Secretary does hereby certify as follows:
FIRST: The name of the corporation is SELECTIVE INSURANCE GROUP, INC. (the
"Corporation").
SECOND: On July 28, 1989, the Board of Directors of the Corporation duly
adopted, pursuant to N.J.S.A. 14A:7-15.1, resolutions approving (i) a
division of the outstanding shares of common stock of the Corporation, par
value $2.00 per share ("Common Stock"), and (ii) an amendment to the Restated
Certificate of Incorporation of the Corporation (the "Amendment") in
connection with said share division to increase the number of authorized
shares of Common Stock.
THIRD: The Amendment will not adversely affect the rights or preferences of
the holders of outstanding shares of any class or series and will not result
in the percentage of authorized shares that remains unissued after the share
division exceeding the percentage of authorized shares that were unissued
before the share division.
FOURTH: The class or series and number of shares thereof subject to the
share division shall be the number of shares of Common Stock outstanding as
of the close of business on September 1, 1989, the effective date of the
share division and the Amendment (the "Effective Date"). Said shares shall be
divided so that each holder of record of Common Stock as of the close of
business on the Effective Date shall be entitled to receive one additional
share of newly-issued Common Stock for every two shares of outstanding Common
Stock held by such holder as of the close of business on the Effective Date.
FIFTH: In connection with the share division, the first sentence of Article
FOURTH of the Restated Certificate of Incorporation of the Corporation is
amended as of the Effective Date to read as follows:
"FOURTH: The total authorized capital shares of the corporation shall
be divided into two classes and shall consist of ninety million
(90,000,OOO) shares of common stock having a par value of $2.00 per
share (herein called common stock') and five million (5,00O,OOO)
shares of preferred stock without par value (herein called preferred
stock')."
All other provisions of said Article FOURTH shall remain unchanged.
SIXTH: The Effective Date of the share division and of the Amendment shall
be September 1, 1989.
IN WITNESS WHEREOF, SELECTIVE INSURANCE GROUP, INC. has made this Certificate
under its seal and the hands of its Chairman of the Board and Secretary, this
22nd day of August, 1989.
SELECTIVE INSURANCE GROUP, INC.
Frederick H. Jarvis
By:___________________________
Frederick H. Jarvis
Chairman of the Board
Attest:
Thornton R. Land
_____________________________
Thornton R. Land, Secretary
PAGE
CERTIFICATE OF AMENDMENT F I L E D
--------------------------- JUNE 30,1987
of JANE BURGIO
---- Secretary of State
RESTATED CERTIFICATE OF INCORPORATION
----------------------------------------
of
----
SELECTIVE INSURANCE GROUP, INC.
-----------------------------------
Pursuant to N.J.S. 14A:9-4, Selective Insurance Group, Inc., a New
Jersey corporation, under its seal and the hands of its Chairman of the Board
and Secretary does hereby certify as follows:
FIRST: The name of the corporation is SELECTIVE INSURANCE GROUP, INC.
SECOND: On February 6, 1987, the Board of Directors of Selective Insurance
Group, Inc. duly adopted a resolution declaring it advisable that the
Restated Certificate of Incorporation of Selective Insurance Group, Inc. be
amended by amending the first sentence of Article FOURTH of the Restated
Certificate of Incorporation and by adding Articles SEVENTH, EIGHTH AND NINTH
as follows:
FOURTH: The total authorized capital shares of the corporation shall be
divided into two classes and shall consist of sixty million (60,000,000)
shares of common stock having a par value of $2.OO per share (herein called
"Common Stock") and five million (5,0OO,OOO) shares of preferred stock
without par value (herein called "Preferred Stock").
SEVENTH: (a) Vote Required for Business Combinations.
(1) Higher Vote for Business Combinations. In addition to any
affirmative vote required by law or this Restated Certificate of
Incorporation, and except as otherwise expressly provided in Section (b) of
this Article SEVENTH, any Business Combination (as hereinafter defined) shall
require the affirmative vote of the holders of at least 66 2/3% of the voting
power of all of the then outstanding shares of capital stock of the
corporation entitled to vote generally for the election of directors (the
"Voting Stock"), voting together as a single class (it being understood that
for purposes of this Article SEVENTH, each share of the Voting Stock shall
have the number of votes granted to it pursuant to Article FOURTH of this
Restated Certificate of Incorporation). Such affirmative vote shall be
required notwithstanding the fact that no vote may be required, or that a
lesser percentage may be specified, by law or in any agreement with any
national securities exchange or otherwise.
(2) Definition of "Business Combination". The term "Business
Combination" as used in this Article SEVENTH shall mean any transaction which
is referred to in any one or more of the following clauses (I) through (v):
(I) any merger or consolidation of the corporation or any
Subsidiary (as hereinafter defined) with (a) any Interested
Stockholder (as hereinafter defined) or (b) any other corporation
or person (whether or not itself an Interested Stockholder) which
is, or after such merger or consolidation would be, an Affiliate
(as hereinafter defined) of any Interested Stockholder; or
(ii) any sale, lease, exchange, mortgage, pledge, transfer or
other disposition (in one transaction or a series of transactions)
to or with, or proposed by or on behalf of, any Interested
Stockholder or any Affiliate of any Interested Stockholder of any
assets of the corporation or any Subsidiary having an aggregate
Fair Market Value (as hereinafter defined) constituting not less
than 10% of the total assets of the corporation as reported in the
consolidated balance sheet of the corporation as of the end of the
most recent quarter with respect to which such balance sheet has
been prepared; or
(iii) the issuance or transfer by the corporation or any
Subsidiary (in one transaction or a series of transactions) of any
securities of the corporation or any Subsidiary in exchange for
cash, securities or other property (or a combination thereof)
having an aggregate Fair Market Value constituting not less than
10% of the total assets of the corporation as reported in the
consolidated balance sheet of the corporation as of the end of the
most recent quarter with respect to which such balance sheet has
been prepared, to, or proposed by or on behalf of, any Interested
Stockholder or any Affiliate of any Interested Stockholder; or
(iv) the adoption of any plan or proposal for the liquidation or
dissolution of the corporation proposed by or on behalf of an
Interested Stockholder or any affiliate of any Interested
Stockholder; or
(v) any reclassification of securities (including any reverse
stock split), or recapitalization of the corporation, or any merger
or consolidation of the corporation with any of its Subsidiaries or
any other transaction (whether or not with or into or otherwise
involving an Interested Stockholder) which has the effect, directly
or indirectly, of increasing the proportionate share of the
outstanding shares of any class of equity or convertible securities
of the corporation or any Subsidiary which is directly or
indirectly owned by any Interested Stockholder or any Affiliate of
any Interested Stockholder.
(b) When Higher Vote is Not Required. The provisions of Section (a) of
this Article SEVENTH shall not be applicable to any particular Business
Combination, and such Business Combination shall require only such
affirmative vote, if any, as is required by law and any other provision of
this Restated Certificate of Incorporation, if all of the conditions
specified in either of the following paragraphs (l) or (2) are met:
(l) Approval by Continuing Directors. The Business Combination shall have
been approved by a majority of the total number of the Continuing Directors
(as hereinafter defined), it being understood that this condition shall not
be capable of satisfaction unless there is at least one continuing Director.
(2) Price, Form of Consideration and Procedural Requirements. All of the
following conditions shall have been met:
(I) The aggregate amount of the cash and the Fair Market Value as of
the date of the consummation of the Business Combination (the "Consummation
Date") of consideration other than cash to be received per share by holders
of shares of Common Stock of the corporation in such Business Combination
shall be at least equal to the sum of:
a. The greater of (l) (if applicable) the highest per share price
(including any brokerage commissions, transfer taxes and soliciting
dealers' fees) paid by the Interested Stockholder for any shares of
Common stock acquired or beneficially owned by it that were
acquired within the two-year period immediately prior to the first
public announcement of the proposal of the Business Combination
(the "Announcement Date") or in the transaction in which it became
an Interested Stockholder, whichever is higher, or (2) the Fair
Market Value per share of the Common Stock on the day after the
Announcement Date or on the date on which the Interested
Stockholder became an Interested Stockholder (such latter date is
referred to in this Article SEVENTH as the "Determination Date"),
whichever is higher; and
b. Interest on the per share price calculated at the rate for
90-day United States Treasury obligations in effect on the
Determination Date, compounded annually from that date until the
Consummation Date, less the per share amount of cash dividends
payable to holders of record on record dates occurring in the
interim, up to the amount of such interest.
(ii) The aggregate amount of the cash and the Fair Market Value as of
the Consummation Date of consideration other than cash to be received
per share by holders of shares of any class of outstanding Voting Stock,
other than Common Stock, in such Business Combination shall be at least
equal to the sum of the following, unless such Business Combination is
one in which the corporation is to become the surviving entity and such
class of outstanding Voting Stock is to remain outstanding without any
change in its rights, preferences and limitations, in which case such
aggregate amount shall be at least equal to the sum of (x) the higher of
the amounts set forth in subparagraphs (a)(l) and (a)(3) below and (y)
the amount set forth in subparagraph (b) below (it being intended that
the requirements of this paragraph (2)(ii) shall be required to be met
with respect to every such class of outstanding Voting Stock whether or
not the Interested Stockholder has previously acquired any shares of a
particular class of Voting stock):
a. The greatest of (1) (if applicable) the highest per share
price (including any brokerage commissions, transfer taxes and
soliciting dealers' fees) paid by the Interested Stockholder for
any shares of such class of Voting Stock acquired or beneficially
owned by it that were acquired within the two-year period
immediately prior to the Announcement Date or in the transaction in
which it became an Interested Stockholder, whichever is higher, (2)
(if applicable) the highest preferential amount per share to which
the holders of shares of such class of Voting Stock are entitled in
the event of any voluntary or involuntary liquidation, dissolution
or winding up of the corporation, or (3) the Fair Market Value per
share of such class of Voting Stock on the day after the
Announcement Date or on the Determination Date, whichever is
higher; and
b. Interest on the per share price calculated at the rate of
9O-day United States Treasury obligations in effect on the
Determination Date, compounded annually from that date until the
Consummation Date, less the per share amount of cash dividends
payable on such class to holders of record on record dates
occurring in the interim, up to the amount of such interest.
(iii) The consideration to be received by holders of a particular
class of outstanding Voting Stock (including Common Stock) shall be in
cash or in the same form as the Interested Stockholder has previously
paid for shares of such class of Voting Stock. If the Interested
Stockholder has paid for shares of any class of Voting Stock with
varying forms of consideration, the form of consideration for such class
of Voting Stock shall be either cash or the form used to acquire the
largest number of shares of such class of Voting Stock previously
acquired by it.
(iv) The holders of all outstanding shares of Voting Stock not
beneficially owned by the Interested Stockholder immediately prior to
the consummation of any Business Combination shall be entitled to
receive in such Business Combination cash or other consideration for
their shares meeting all of the terms and conditions of this paragraph
(2) (provided, however, that the failure of any stockholders
who are exercising their statutory rights to dissent from such Business
Combination and receive payment of the fair value of their shares to
exchange their shares in such Business Combination shall not be deemed
to have prevented the condition set forth in this subparagraph (2)(iv)
from being satisfied).
(v) After such Interested Stockholder has become an Interested
Stockholder and prior to the consummation of such Business Combination:
(a) except as approved by a majority of the total number of Continuing
Directors, there shall have been no failure to declare and pay at the
regular date therefor any full quarterly dividends (whether or not
cumulative) on the outstanding Preferred Stock of the corporation, if
any; (b) there shall have been (l) no reduction in the annual rate of
dividends paid on the shares of Common Stock (except as necessary to
reflect any subdivision of the shares of Common Stock) except as
approved by a majority of the total number of Continuing Directors, and
(2) an increase in such annual rate of dividends as necessary to
reflect any reclassification (including any reverse stock split),
recapitalization, reorganization or any similar transaction which has
the effect of reducing the number of outstanding shares of Common Stock,
unless the failure so to increase such annual rate is approved by a
majority of the total number of continuing Directors; and (c) such
Interested Stockholder shall not have become the beneficial owner of any
additional shares of Voting Stock except as part of the transaction
which results in such Interested Stockholder becoming an Interested
Stockholder.
(vi) After such Interested Stockholder has become an Interested
Stockholder, such Interested Stockholder shall not have received the
benefit, directly or indirectly (except proportionately as a
stockholder), of any loans, advances, guarantees, pledges or other
financial assistance or any tax credits or other tax advantages provided
by the corporation, whether in anticipation of or in connection with
such Business Combination or otherwise.
(vii) A proxy or information statement describing the proposed
Business Combination and complying with the requirements of the
Securities Exchange Act of 1934, as amended, and the rules and
regulations thereunder (or any subsequent provisions replacing such Act,
rules or regulations) shall be mailed to public stockholders of the
corporation at least 30 days prior to the consummation of such Business
Combination (whether or not such proxy or information statement is
required to be mailed pursuant to such Act or subsequent provisions).
Such proxy or information statement shall contain, if a majority of the
total number of Continuing Directors so requests, an opinion of a
reputable investment banking firm (which firm shall be selected by a
majority of the total number of Continuing Directors, furnished with all
information it reasonably requests, and paid a reasonable fee for its
services by the corporation upon the corporation's receipt of such
opinion) as to the fairness (or lack of fairness) of the terms of the
proposed Business Combination from the point of view of the holders of
shares of Voting Stock (other than the Interested Stockholder).
(c) Certain Definitions. For the purposes of this Article SEVENTH:
(1) A "person" shall mean any individual, firm, corporation,
partnership or other entity, including, without limitation, any
syndicate or group deemed to be a person pursuant to Section 14(d)(2) of
the Securities Exchange Act of 1934, as in effect on May 1, 1987.
(2) "Interested Stockholder" shall mean any person (other than the
corporation or any Subsidiary, any employee benefit plan maintained by
the corporation or any Subsidiary or any trustee or fiduciary with
respect to any such plan when acting in such capacity) who or which:
(i) is the beneficial owner, directly or indirectly, of lO% or
more of the voting power of the then outstanding Voting Stock; or
(ii) is an Affiliate of the corporation and at any time within
the two-year period immediately prior to the date in question was
the beneficial owner, directly or indirectly of 10% or more of the
voting power of the then outstanding Voting Stock; or
(iii) is an assignee of or has otherwise succeeded to any shares
of Voting Stock which were at any time within the two-year period
immediately prior to the date in question beneficially owned by an
Interested Stockholder, if such assignment or succession shall have
occurred in the course of a transaction or series of transactions
not involving a public offering within the meaning of the
Securities Act of 1933; as amended.
In determining whether a person is an Interested Stockholder
pursuant to paragraph (2) of this Section (c), the number of shares
of Voting Stock deemed to be outstanding shall include shares
deemed owned through application of paragraph (3) of this Section
(c) but shall not include any other shares of Voting Stock which
may be issuable pursuant to any agreement, arrangement or
understanding, or upon exercise of conversion rights, warrants or
options, or otherwise.
(3) A person shall be a "beneficial owner" of any shares of Voting
Stock:
(i) which such person or any of its Affiliates or Associates (as
hereinafter defined) beneficially owns, directly or indirectly; or
(ii which such person or any of its Affiliates or Associates has
(a) the right to acquire (whether such right is exercisable
immediately or only after the passage of time), pursuant to any
agreement, arrangement or understanding or upon the exercise of
conversion rights, exchange rights, warrants or options, or
otherwise, or (b) the right to vote pursuant to any agreement,
arrangement or understanding; or
(iii) which are beneficially owned, directly or indirectly, by
any other person with which such person or any of its Affiliates or
Associates has any agreement, arrangement or understanding for the
purpose of acquiring, holding, voting or disposing of any shares of
Voting Stock.
(4) "Affiliate" or "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as in effect
on May l, 1987.
(5) "Subsidiary" shall mean any corporation of which a majority of any
class of equity security is owned, directly or indirectly, by the
corporation; provided, however, that for the purposes of the definition
of Interested Stockholder set forth in paragarah (2) of this Section
(c), the term "Subsidiary" shall mean only a corporation of which a
majority of each class of equity security is owned, directly or
indirectly, by the corporation.
(6) "Continuing Director" shall mean any member of the Board of
Directors of the corporation who is not the Interested Stockholder or an
Affiliate, Associate, representative, nominee or relative of the
Interested Stockholder and who was a member of the Board of Directors
prior to the time that the Interested Stockholder became an Interested
Stockholder, and any successor of a Continuing Director who is not the
Interested Stockholder or an Affiliate, Associate, representative,
nominee or relative of the Interested Stockholder and who is recommended
to succeed a Continuing Director by a majority of the total number of
Continuing Directors then on the Board of Directors.
(7) "Fair Market Value" shall mean: (i) in the case of stock, the
highest closing sale price during the 3O-day period immediately
preceding the date in question of a share of such stock on the Composite
Tape for New York Stock Exchange-Listed Stocks, or, if such stock is not
quoted on the Composite Tape, on the;New York Stock Exchange, or, if
such stock is not listed on such Exchange, on the principal United
States securities exchange registered under the Securities Exchange Act
of 1934, as amended, on which such stock is listed, or, if such stock is
not listed on any such exchange, the highest closing sale price or bid
quotation with respect to a share of such stock during the 30-day period
preceding the date in question on the National Association of Securities
Dealers, Inc. Automated Quotations System or any system then in use, or,
if no such quotations are available, the fair market value on the date
in question of a share of such stock as determined by a majority of the
total number of Continuing Directors in good faith, in each case with
respect to any class of such stock, appropriately adjusted for any
dividend or distribution in shares of such stock or any stock split or
reclassification of outstanding shares of such stock into a greater
number of share of such stock or any combination or reclassification of
outstanding shares of such stock into a smaller number of shares of such
stock; and (ii) in the case of property other than cash or stock, the
fair market value of such property on the date in question as determined
by a majority of the total number of Continuing Directors in good faith.
(8) In the event of any Business Combination in which the corporation
survives, the phrase "consideration other than cash to be received" as
used in paragraphs (2)(i) and (2)(ii) of Section (b) of this Article
SEVENTH shall include the shares of Common Stock and/or the shares of
any other class of outstanding Voting Stock retained by the holders of
such shares.
(9) References to "highest per share price" shall in each case with
respect to any class of stock reflect an appropriate adjustment for any
dividend or distribution in shares of such stock or any stock split or
reclassification of outstanding shares of such stock into a greater
number of shares of such stock or any combination or reclassification of
outstanding shares of such stock into a smaller number of shares of such
stock.
(d) Powers of the Board and the Continuing Directors. A majority of the
entire Board of Directors of the corporation shall have the power and duty to
determine for the purposes of this Article SEVENTH, on the basis of
information known to them after reasonable inquiry, whether a person is an
Interested Stockholder. Once the Board of Directors has made a determination,
pursuant to the preceding sentence, that a person is an Interested
Stockholder, a majority of the total number of directors of the corporation
who would qualify as Continuing Directors shall have the power and duty to
interpret all of the terms and provisions of this Article SEVENTH, and to
determine on the basis of information known to them after reasonable inquiry
all facts necessary to ascertain compliance with this Article SEVENTH,
including, without limitation, (A) the number of shares of Voting Stock
beneficially owned by any person, (B) whether a person is an Affiliate or
Associate of another, (C) whether the assets which are the subject of any
Business Combination have, or the consideration to be received for the
issuance or transfer of securities by the corporation or any Subsidiary in
any Business Combination has, an aggregate Fair Market Value constituting not
less than lO% of the total assets of the corporation as reported in the
consolidated balance sheet of the corporation as of the end of the most
recent quarter with respect to which such balance sheet has been prepared and
(D) whether all of the applicable conditions set forth in paragraph (2) of
Section (b) of this Article SEVENTH have been met with respect to any
Business Combination. Any determination pursuant to this Section (d) made in
good faith shall be binding and conclusive on all parties.
(e) No Effect on Fiduciary Obligations of Interested Stockholders.
Nothing contained in this Article SEVENTH shall be construed to relieve any
Interested Stockholder from any fiduciary obligation imposed by law.
(f) Amendment, Repeal, etc. Notwithstanding any other provisions of this
Restated Certificate of Incorporation or the By-laws of the corporation (and
notwithstanding the fact that a lesser percentage may be specified by law,
this Restated Certificate of Incorporation or the By-laws of the
corporation), and in addition to any affirmative vote of the holders of
Preferred Stock or any other class of capital stock of the corporation or any
series of any of the foregoing then outstanding which is required by law or
pursuant to this Restated Certificate of Incorporation, the affirmative vote
of the holders of 66-2/3% or more of the voting power of all the shares of
then outstanding Voting Stock, voting together as a single class, shall be
required to amend or repeal, or adopt any provision inconsistent with, this
Article SEVENTH of this Restated Certificate of Incorporation.
EIGHTH: (a) Number, Election and Terms. The business and affairs of the
corporation shall be managed by a Board of Directors which, subject to any
rights of the holders of any series of Preferred Stock then outstanding,
shall consist of not less than seven (7) nor more than twenty (2O) persons.
The exact number of directors within the minimum and maximum limitations
specified in the preceding sentence shall be fixed from time to time by the
Board of Directors pursuant to a resolution adopted by a majority of the
whole Board of Directors, and if such number is not so fixed, the number
shall be twelve (12). No decrease in the number of directors constituting the
Board of Directors shall shorten the term of any incumbent director. At the
1987 Annual Meeting of Stockholders, the directors shall be divided into
three classes, equal or as nearly equal in number as possible (but with not
less than three directors in each class), with the term of office of the
first class to expire at the 1988 Annual Meeting of Stockholders, the term of
office of the second class to expire at the 1989 Annual Meeting of
Stockholders and the term of office of the third class to expire at the 1990
annual Meeting of Stockholders, and with the members of each class to hold
office until their successors shall have been elected and qualified. At each
Annual Meeting of Stockholders following such initial classification and
election, directors elected to succeed those directors whose terms expire
shall be elected for a term of office to expire at the third succeeding
Annual Meeting of Stockholders after their election.
(b) Amendment, Repeal, etc. Notwithstanding anything contained in this
Restated Certificate of Incorporation to the contrary, the affirmative vote
of the holders of at least 66-2/3% of the voting power of all of the shares
of the corporation entitled to vote generally in the election of directors,
voting together as a single class, shall be required to alter, amend, adopt
any provision inconsistent with, or repeal this Article EIGHTH or to alter,
amend, adopt any provision inconsistent with, or repeal Sections 7A, 7B or 20
of the By-laws of the corporation.
NINTH: (a) Elimination of Certain Liability.
(1) A director of the corporation shall not be personally liable to the
corporation or its stockholders for damages for breach of any duty owed to
the corporation or its stockholders, except to the extent such personal
liability may not be eliminated or limited under the New Jersey Business
Corporation Act as the same exists or may hereafter be amended.
(2) An officer of the corporation shall not be personally liable to the
corporation or its stockholders for damages for breach of any duty owed to
the corporation or its stockholders, except to the extent and for the
duration of any period of time such personal liability may not be eliminated
or limited under the New Jersey Business Corporation Act as the same exists
or may hereafter be amended.
(b) Indemnification and Insurance.
(1) Right to Indemnification. Each person who has or is made a party or
is threatened to be made a party to or is involved in any pending, threatened
or completed civil, criminal, administrative or arbitrative action, suit or
proceeding, or any appeal therein or any inquiry or investigation which could
lead to such action, suit or proceeding (a "proceeding"), by reason of his or
her being or having been a director or officer of the corporation or of any
constituent corporation absorbed by the corporation in a consolidation or
merger, or by reason of his or her being or having been a director, officer,
trustee, employee or agent of any other corporation (domestic or foreign) or
of any partnership, joint venture, sole proprietorship, trust, employee
benefit plan or other enterprise (whether or not for profit), serving as such
at the request of the corporation, or the legal representative of any such
director, officer, trustee, employee or agent, shall be indemnified and held
harmless by the corporation to the fullest extent permitted by the New Jersey
Business Corporation Act, as the same exists or may hereafter be amended
(but, in the case of any such amendment, only to the extent that such
amendment permits the corporation to provide broader indemnification rights
than said Act permitted prior to such amendment), from and against any and
all reasonable costs, disbursements and attorneys' fees, and any and all
amounts paid or incurred in satisfaction of settlements, judgments, fines and
penalties, incurred or suffered in connection with any such proceeding, and
such indemnification shall continue as to a person who has ceased to be a
director, officer, trustee, employee or agent and shall inure to the benefit
of his or her heirs, executors, administrators and assigns; provided,
however, that, except as provided in paragraph (2) hereof, the corporation
shall indemnify any such person seeking indemnification in connection with a
proceeding (or part thereof) initiated by such person only if such proceeding
(or part thereof) was specifically authorized by the Board of Directors of
the corporation. The right to indemnification conferred in this Section shall
be a contract right and shall include the right to be paid by the corporation
the expenses incurred in connection with any proceeding in advance of the
final disposition of such proceeding as authorized by the Board of Directors;
provided, however, that if the New Jersey Business Corporation Act so
requires, the payment of such expenses incurred by a director or officer in
his or her capacity as a director or officer in advance of the final
disposition of a proceeding shall be made only upon receipt by the
corporation of an undertaking, by or on behalf of such director or officer,
to repay all amounts so advanced unless it shall ultimately be determined
that such director or officer is entitled to be indemnified under this
Section or otherwise. The corporation may, by action of its Board of
Directors, provide for indemnification and advancement of expenses to
employees and agents of the corporation with the same scope and effect as the
foregoing indemnification of directors and officers.
(2) Right of Claimant to Bring Suit. If a claim under paragraph (l) of
this Section is not paid in full by the corporation within thirty days after
a written request has been received by the corporation, the claimant may at
any time thereafter apply to a court for an award of indemnification by the
corporation for the unpaid amount of the claim and, if successful on the
merits or otherwise in connection with any proceeding, or in the defense of
any claim, issue or matter therein, the claimant shall be entitled also to be
paid by the corporation any and all expenses incurred or suffered in
connection with such proceeding. It shall be a defense to any such action
(other than an action brought to enforce a claim for the advancement of
expenses incurred in connection with any proceeding where the required
undertaking, if any, has been tendered to the corporation), that the claimant
has not met the standard of conduct which makes it permissible under the New
Jersey Business Corporation Act for the corporation to indemnify the claimant
for the amount claimed, but the burden of proving such defense shall be on
the corporation. Neither the failure of the corporation (including its Board
of Directors, independent legal counsel or its stockholders) to have made a
determination prior to the commencement of such proceeding that
indemnification of the claimant is proper in the circumstances because he or
she has met the applicable standard of conduct set forth in the New Jersey
Business Corporation Act, nor an actual determination by the corporation
(including its Board of Directors, independent legal counsel or its
stockholders) that the claimant has not met such applicable standard of
conduct, nor the termination of any proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent,
shall be a defense to the action or create a presumption that the claimant
has not met the applicable standard of conduct.
(3) Non-Exclusivity of Rights. The right to indemnification and
advancement of expenses provided by or granted pursuant to this Section (b)
shall not exclude or be exclusive of any other rights to which any person may
be entitled under a certificate of incorporation, By-law, agreement, vote of
stockholders or otherwise, provided that no indemnification shall be made to
or on behalf of such person if a judgment or other final adjudication adverse
to such person establishes that such person has not met the applicable
standard of conduct required to be met under the New Jersey Business
Corporation Act.
(4) Insurance. The corporation may purchase and maintain insurance on
behalf of any director, officer, employee or agent of the corporation or
another corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise against any expenses incurred in any proceeding and any
liabilities asserted against him or her by reason of such person being or
having been such a director, officer, employee or agent, whether or not the
corporation would have the power to indemnify such person against such
expenses and liabilities under the provisions of this Section (b) or
otherwise.
THIRD: On May l, 1987 at the Annual Meeting of the Shareholders of
SELECTIVE INSURANCE GROUP, INC. the foregoing resolution was duly adopted.
FOURTH: The number of shares outstanding at the time of the adoption of the
Amendments was 9,O56,882. The total number of shares entitled to vote thereon
was 9,056,882.
FIFTH: The number of shares voting for and against such Amendments is as
follows:
Number of Shares Number of Shares Number of Shares
voting for Amendment voting against abstaining as to
of Article Fourth Article Fourth Article Fourth
- -----------------------------------------------------------------------------
7,023,051 405,135 127,004
Number of Shares Number of Shares Number of Shares
voting for Article voting against abstaining as to
Seventh Article Seventh Article Seventh
- -----------------------------------------------------------------------------
6,607,064 447,510 500,696
Number of Shares Number of Shares Number of Shares
voting for Article voting against abstaining as to
Eighth Article Eighth Article Eighth
- -----------------------------------------------------------------------------
6,194,771 876,016 484,483
Number of Shares Number of Shares Number of Shares
voting for Article voting against abstaining as to
Ninth Article Ninth Article Ninth
- -----------------------------------------------------------------------------
7,060,935 353,934 140,401
There are no shares of the corporation entitled to vote as a class.
IN WITNESS WHEREOF, SELECTIVE INSURANCE GROUP, INC. has made this Certificate
under its seal and the hands of its Chairman of the Board and Secretary, this
20th day of May, 1987
SELECTIVE INSURANCE GROUP, INC.
Frederick H. Jarvis
By:___________________________
Frederick H. Jarvis
Chairman of the Board
Attest:
Thornton R. Land
_____________________________
Thornton R. Land, Secretary
ACKNOWLEDGMENT
STATE OF NEW JERSEY, COUNTY OF SUSSEX: SS
I CERTIFY that on May 26, 1987, THORNTON R. LAND, personally came before me
and this person acknowledged under oath, to my satisfaction that:
(a) this person is the Secretary of SELECTIVE INSURANCE GROUP, INC., the
corporation named in the attached document;
(b) this person is the attesting witness to the signing of this document by
the proper corporate officer who is Frederick H. Jarvis who is the Chairman
of the Board of the corporation;
(c) this document was signed and delivered by the corporation as its
voluntary act duly authorized by a proper resolution of its Board of
Directors;
(d) this person knows the proper seal of the corporation which was affixed
to this document: and
(e) this person signed this proof to attest to the truth of these facts.
Thornton R. Land
___________________________
Signed and sworn to before
me on May 26, 1987.
Lewis P. Dolan, Jr.
__________________________
Atty at Law of N.J.
PAGE
CHECK APPROPRIATE STATUTE: Nonprofit Corporations
Must file this form in
(X) TITLE 14A:1-6(5) New Jersey DUPLICATE
Business Corporation Act
( ) TITLE 15A:1-7(e) New Jersey
Nonprofit Corporation Act
FOR OFFICIAL USE ONLY
CERTIFICATE OF CORRECTION FILED
---------------------------- JUN 20 1986
OF JANE BURGIO
---- Secretary of State
SELECTIVE INSURANCE GROUP, INC.
---------------------------------
________________________________________________________________________
(For Use by Domestic and Foreign, Profit and Nonprofit Corporations)
The Undersigned, hereby submits for filing, a Certificate of Correction,
executed in behalf of the above named Corporation, pursuant to the provisions
of the appropriate Statute, checked above, of the New Jersey Statutes.
1. The Certificate to be corrected is:
Certificate of Amendment to the Certificate
of Incorporation of SRI Corporation * December 17, 1979
------------------------------------- --------------------
(Type of Certificate) (Date Filed)
*Which Certificate predates the Restated
Certificate of Incorporation filed 6/17/86
2. The inaccuracy in the Certificate is (indicate inaccuracy or defect):
Paragraph FIFTH of the Certificate of Amendment should have referenced
only the first subparagraph of Paragraph FOURTH of the Certificate of
Incorporation as being amended.
3. The Certificate of Correction hereby reads as follows:
FIFTH: The first subparagraph of Paragraph FOURTH of the Certificate of
Incorporation is amended to read as follows:
"FOURTH: The total authorized capital shares of the corporation
shall be divided into two classes and shall consist of 5,000,000
shares of common stock having a Par Value of $2 per share (herein
called Common Stock'), and 5,000,000 shares of preferred stock
without par value (herein called Preferred Stock')."
(All other paragraphs and provisions of Paragraph FOURTH remain
unchanged)
Russell R. Moffett
Signature:______________________
Name : Russell R. Moffett
----------------------
Title : President
----------------------
(Must be Ch. of Bd. or
Pres or Vice Pres.)
----------------------
Date : June 19, 1986
----------------------
C-152 Rev. 10/83
PAGE
CHECK APPROPRIATE STATUTE: Nonprofit Corporations
Must file this form in
(X) TITLE 14A:1-6(5) New Jersey DUPLICATE
Business Corporation Act
( ) TITLE 15A:1-7(e) New Jersey
Nonprofit Corporation Act
FOR OFFICIAL USE ONLY
CERTIFICATE OF CORRECTION FILED
---------------------------- JUN 20 1986
OF JANE BURGIO
---- Secretary of State
SELECTIVE INSURANCE GROUP, INC.
---------------------------------
________________________________________________________________________
(For Use by Domestic and Foreign, Profit and Nonprofit Corporations)
The Undersigned, hereby submits for filing, a Certificate of Correction,
executed in behalf of the above named Corporation, pursuant to the provisions
of the appropriate Statute, checked above, of the New Jersey Statutes.
1. The Certificate to be corrected is:
Certificate of Amendment to the Certificate
of Incorporation of SRI Corporation * May 13, 1981
------------------------------------- --------------------
(Type of Certificate) (Date Filed)
*Which Certificate predates the Restated
Certificate of Incorporation filed 6/17/86
2. The inaccuracy in the Certificate is (indicate inaccuracy or defect):
Paragraph SECOND of the Certificate of Amendment should have referenced
only the first subparagraph of Paragraph 4 of the Certificate of
Incorporation as being amended.
3. The Certificate of Correction hereby reads as follows:
SECOND: On February 6, 1981, the Board of Directors of SRI Corporation
duly adopted a resolution declaring it advisable that the first sub
paragraph of Paragraph 4 of the Certificate of Incorporation of SRI
Corporation be amended to read as follows:
"4. The total authorized capital shares of the corporation shall
be divided into two classes and shall consist of 10,000,000 shares
of common stock having a Par Value of $2 per share (herein called
Common Stock') and 5,000,000 shares of preferred stock without par
value (herein called Preferred Stock')."
(All other paragraphs and provisions of Paragraph 4 remain
unchanged)
Russell R. Moffett
Signature: ______________________
Name : Russell R. Moffett
----------------------
Title : President
----------------------
(Must be Ch. of Bd. or
Pres or Vice Pres.)
----------------------
Date : June 19, 1986
----------------------
C-152 Rev. 10/83
PAGE
CHECK APPROPRIATE STATUTE: Nonprofit Corporations
Must file this form in
(X) TITLE 14A:1-6(5) New Jersey DUPLICATE
Business Corporation Act
( ) TITLE 15A:1-7(e) New Jersey
Nonprofit Corporation Act
FOR OFFICIAL USE ONLY
CERTIFICATE OF CORRECTION FILED
---------------------------- JUN 20 1986
OF JANE BURGIO
---- Secretary of State
SELECTIVE INSURANCE GROUP, INC.
---------------------------------
________________________________________________________________________
(For Use by Domestic and Foreign, Profit and Nonprofit Corporations)
The Undersigned, hereby submits for filing, a Certificate of Correction,
executed in behalf of the above named Corporation, pursuant to the provisions
of the appropriate Statute, checked above, of the New Jersey Statutes.
1. The Certificate to be corrected is:
Certificate of Amendment to the Certificate
of Incorporation of SRI Corporation * June 3, 1983
------------------------------------- --------------------
(Type of Certificate) (Date Filed)
*Which Certificate predates the Restated
Certificate of Incorporation filed 6/17/86
2. The inaccuracy in the Certificate is (indicate inaccuracy or defect):
Paragraph SECOND of the Certificate of Amendment should have referenced
only the first subparagraph of Paragraph 4 of the Certificate of
Incorporation as being amended.
3. The Certificate of Correction hereby reads as follows:
SECOND: On February 4, 1983, the Board of Directors of SRI Corporation
duly adopted a resolution declaring it advisable that the first sub
paragraph of Paragraph 4 of the Certificate of Incorporation of SRI
Corporation be amended to read as follows:
"4. The total authorized capital shares of the corporation shall
be divided into two classes and shall consist of 20,000,000 shares
of common stock having a Par Value of $2.00 per share (herein
called Common Stock') and 5,000,000 shares of preferred stock
without par value (herein called Preferred Stock')."
(All other paragraphs and provisions of Paragraph 4 remain
unchanged)
Russell R. Moffett
Signature: ______________________
Name : Russell R. Moffett
----------------------
Title : President
----------------------
(Must be Ch. of Bd. or
Pres or Vice Pres.)
----------------------
Date : June 19, 1986
----------------------
C-152 Rev. 10/83
PAGE
RESTATED CERTIFICATE FILED
---------------------------- JUN 17 1986
OF JANE BURGIO
---- Secretary of State
INCORPORATION
---------------------------------
Pursuant to N.J.S.A. 14A:9-5, SELECTIVE INSURANCE GROUP, INC., a New
Jersey corporation, hereby adopts a Restated Certificate of Incorporation.
FIRST: The name of the corporation is SELECTIVE INSURANCE GROUP, INC.
SECOND: The address of this corporation's registered office is Wantage
Avenue, Branchville, New Jersey 07890; and the name of this corporation's
registered agent is Russell R. Moffett.
THIRD: The purposes for which this corporation is organized are:
to engage in any activity within the purposes for which
corporations may be organized under the "New Jersey Business Corporation Act"
N.J.S. 14A:1-1 et seq.
FOURTH: The total authorized capital shares of the corporation shall
be divided into two classes and shall consist of twenty million shares of
common stock having a par value of $2.00 per share (herein called common
stock') and five million shares of preferred stock without par value (herein
called preferred stock').
The preferred shares are senior to the common shares and the common
shares are subject to the rights and preferences of preferred shares as
established by the Board of Directors.
All of any part of the shares of Preferred Stock may be issued by the
corporation from time to time for such consideration as may be
determined upon and fixed by the Board of Directors as provided by law.
The designations and the powers, preferences and rights and the
qualifications, limitations and restrictions thereof, of the Preferred
Stock shall be as follows:
1. The Board of Directors is expressly authorized at any time, and
from time to time, to provide for the issuance of shares of Preferred
Stock in one or more series, with such voting rights, full or limited,
but not to exceed one vote per share, or without voting powers and with
such designations, preferences and relative, participating, optional and
other special rights and qualifications, limitations or restrictions
thereof as shall be expressed in the resolution or resolutions providing
for the issue thereof adopted by the Board of Directors and as are not
expressed in this Certificate of Incorporation or any amendment thereto
including (but without limiting the generality of the foregoing) the
following:
A. The number of shares constituting such series and designation
thereof to distinguish such shares of such series from the shares of all
other series .
B. The voting powers of such series, whether full, limited or
none, the dividend rate of such series the conditions and dates upon
which such dividends shall be payable, the preference or relation which
such dividends shall bear to the dividends payable on any other class or
classes or on any other series of capital stock, and whether such
dividends shall be cumulative or non-cumulative.
C. The terms and provisions, governing the redemption of shares
of such series, if redeemable.
D. The terms and provisions governing the operation of retirement
or sinking funds, if any, for the retirement or purchase of shares of
such series.
E. The rights of holders of shares of such series upon the
dissolution of, or upon distribution, of the assets of the corporation.
F. Whether or not the shares of such series shall be convertible
into or exchangeable for shares of any other class or classes or of any
other series of any other class or classes of capital stock of the
corporation, and if provision be made for conversion or exchange the
times, prices, rates, adjustments and other terms and conditions of such
conversion or exchange.
G. Any other preferences, any relative, participating, optional
and other special rights and qualifications, limitations or restrictions
of such series."
FIFTH: The number of directors constituting the current Board of
Directors is twelve, and the names and addresses of such directors are:
J. William Barba Long Hill Road
New Vernon, New Jersey 07976
Lewis P. Dolan, Jr. 9 Franklin Street
Newton, New Jersey 07860
David M. Gessner 1133 Queens Road
Charlotte, North Carolina 28207
C. Edward Herder Main Street
Three Bridges, New Jersey 08887
Frederick H. Jarvis 354 Grist Mill Drive
Basking Ridge, New Jersey 07920
William M. Kearns, Jr. Village Road
New Vernon, New Jersey 07976
S. Griffin McClellan, III Cedar Road
Whitehouse Station, New jersey 08889
Russell R. Moffett R.D. 4, Box 270
Newton, New Jersey 07860
Roy B. Paul 4 Eaglet Glen
Panther Valley
Hackettstown, New Jersey 07840
William M. Rue 33 Cranbury Neck Road
Cranbury, New Jersey 08512
Louis P. Thebault Village Road
New Vernon, New Jersey 07976
W. Richard Wilson 9 Great Oak Road
Newton, New Jersey 07860
SIXTH: This Restated Certificate merely restates and integrates, but
does not substantively amend the Certificate of Incorporation as heretofore
amended.
IN WITNESS WHEREOF, SELECTIVE INSURANCE GROUP, INC. has made this
Certificate under its seal and the hands of its President and Secretary this
2nd day of June, 1986.
SELECTIVE INSURANCE GROUP, INC.
Russell R. Moffett
By: __________________________
Russell R. Moffett, President
Attest:
Thornton R. Land
___________________________
Thornton R. Land, Secretary
ACKNOWLEDGMENT
STATE OF NEW JERSEY, COUNTY OF SUSSEX: SS
I CERTIFY that on June 2, 1986
THORNTON R. LAND
personally came before me and this person acknowledged under oath, to my
satisfaction that:
(a) this person is the Secretary of SELECTIVE INSURANCE GROUP, INC.,
the corporation named in the attached document;
(b) this person is the attesting witness to the signing of this
document by the proper corporate officer who is Russell R. Moffett who is the
President of the corporation;
(c) this document was signed and delivered by the corporation as its
voluntary act duly authorized by a proper resolution of its Board of
Directors;
(d) this person knows the proper seal of the corporation which was
affixed to this document: and
(e) this person signed this proof to attest to the truth of these
facts.
Thornton R. Land
___________________________
Signed and sworn to before
me on June 2, 1986.
Lewis P. Dolan, Jr.
__________________________
Lewis P. Dolan, Jr. Esq.
Attorney at Law of New Jersey
CERTIFICATE
1. The name of the corporation is SELECTIVE INSURANCE GROUP, INC.
2. The Restated Certificate of Incorporation was adopted by the Board of
Directors on June 2,1986.
IN WITNESS WHEREOF, I have hereunto set my hand this 2nd day of June,
1986.
SELECTIVE INSURANCE GROUP, INC.
Russell R. Moffett
By: _____________________________
Russell R. Moffett, President
PAGE
AMENDED CERTIFICATE OF AMENDMENT F I L E D
---------------------------------- Jun 17,1986
to the JANE BURGIO
-------- Secretary of State
CERTIFICATE OF INCORPORATION
-------------------------------
of
----
SRI CORPORATION
-----------------
Pursuant to N.J.S 14A:7-15.1(3), SRI CORPORATION, a New Jersey
corporation, under its seal and the hands of its President and
Secretary, does hereby certify as follows:
PARAGRAPH FIRST: The name of the corporation is SRI
CORPORATION.
PARAGRAPH SECOND: On February 7, 1986 the Board of Directors of
SRI CORPORATION duly adopted a Resolution declaring it advisable that
Paragraph First of the Certificate of Incorporation of SRI CORPORATION
be amended to read as follows:
"1. The name of the corporation is SELECTIVE INSURANCE GROUP,
INC."
PARAGRAPH THIRD: On May 2nd, 1986 at a regular meeting of the
shareholders of SRI CORPORATION, the foregoing Resolution was duly
adopted.
PARAGRAPH FOURTH: The number of shares outstanding at the time of
the adoption of the amendment was 9,O22,601. The total number of shares
entitled to vote thereon was 9,022,601.
PARAGRAPH FIFTH: The number of shares voting for and against such
amendment is as follows:
Number of Shares Number of Shares Number of Shares
voting for Amendment voting against abstaining
Amendment
- -----------------------------------------------------------------------------
7,006,440 160,057 230,678
IN WITNESS WHEREOF, SRI CORPORATION has made this certificate unders its
seal and the hands of its President and Secretary this Second day of June ,
1986.
SRI CORPORATION
Russell R. Moffett
By: __________________________
Russell R. Moffett, President
Attest:
Thornton R. Land
___________________________
Thornton R. Land, Secretary
ACKNOWLEDGMENT
STATE OF NEW JERSEY, COUNTY OF SUSSEX: SS
I CERTIFY that on June 2, 1986
THORNTON R. LAND
personally came before me and this person acknowledged under oath, to my
satisfaction that:
(a) this person is the Secretary of SRI CORPORATION, the corporation
named in the attached document;
(b) this person is the attesting witness to the signing of this
document by the proper corporate officer who is Russell R. Moffett who is the
President of the corporation;
(c) this document was signed and delivered by the corporation as its
voluntary act duly authorized by a proper resolution of its Board of
Directors;
(d) this person knows the proper seal of the corporation which was
affixed to this document: and
(e) this person signed this proof to attest to the truth of these
facts.
Thornton R. Land
___________________________
Signed and sworn to before
me on June 2, 1986.
Barbara L. Johnson
__________________________
Barbara L. Johnson
Notary Public of New Jersey
My Commission Expires June 14,1990
PAGE
CERTIFICATE OF AMENDMENT F I L E D
--------------------------- May 21,1986
to the JANE BURGIO
-------- Secretary of State
CERTIFICATE OF INCORPORATION
------------------------------
of
----
SRI CORPORATION
-----------------
Pursuant to N.J.S. 14A:7-15.1(3), SRI CORPORATION, a New Jersey
corporation, under its seal and the hands of its President and Secretary,
does hereby certify as follows:
PARAGRAPH FIRST: The name of the corporation is SRI CORPORATION.
PARAGRAPH SECOND: On February 7, 1986 the Board of Directors of SRI
CORPORATION duly adopted a Resolution declaring it advisable that Paragraph
First of the Certificate of Incorporation of SRI CORPORATION be amended to
read as follows:
"1. The name of the corporation is SELECTIVE INSURANCE GROUP, INC."
2. On May 2nd, 1986 at a regular meeting of the shareholders of SRI
CORPORATION, the foregoing Resolution was duly adopted.
4. The number of shares outstanding at the time of the adoption of the
amendment was 9,022,6O1. The total number of shares entitled to vote
thereon was 9,022,601 .
5. The number of shares voting for and against such amendment is as
follows:
Number of Shares Number of Shares Number of Shares
voting for Amendment voting against abstaining
Amendment
----------------------------------------------------------------------------
6,975,904 160,057 230,678
IN WITNESS WHEREOF, SRI CORPORATION has made this Certificate under its
seal and the hands of its President and Secretary this Second day of May,
1986.
SRI CORPORATION
Russell R. Moffett
By: ___________________________
Russell R. Moffett, President
Attest:
Thornton R. Land
___________________________
Thornton R. Land, Secretary
ACKNOWLEDGMENT
STATE OF NEW JERSEY, COUNTY OF SUSSEX: SS
I CERTIFY that on May 2, 1986
THORNTON R. LAND
personally came before me and this person acknowledged under oath, to my
satisfaction that:
(a) this person is the Secretary of SRI CORPORATION, the corporation
named in the attached document;
(b) this person is the attesting witness to the signing of this
document by the proper corporate officer who is Russell R. Moffett who is the
President of the corporation;
(c) this document was signed and delivered by the corporation as its
voluntary act duly authorized by a proper resolution of its Board of
Directors;
(d) this person knows the proper seal of the corporation which was
affixed to this document: and
(e) this person signed this proof to attest to the truth of these
facts.
Thornton R. Land
___________________________
Signed and sworn to before
me on May 2, 1986.
Lewis P. Dolan Jr.
__________________________
Lewis P. Dolan Jr.
Attorney at Law of N.J.
PAGE
CERTIFICATE OF AMENDMENT F I L E D
-------------------------- Jun 3,1983
to the JANE BURGIO
-------- Secretary of State
CERTIFICATE OF INCORPORATION
-------------------------------
of
----
SRI CORPORATION
-----------------
PURSUANT to N.J.S.14A:7-15.1(3), SRI Corporation, a New Jersey
Corporation, under its seal and the hands of its President and Secretary,
does hereby certify as follows:
FIRST: The name of the corporation is SRI Corporation.
SECOND: On February 4, 1983, the Board of Directors of SRI Corporation
duly adopted a resolution declaring it advisable that Paragraph 4 of the
Certificate of Incorporation of SRI Corporation be amended to read as
follows:
"4. The total authorized capital shares of the corporation shall he
divided into two classes and shall consist of 20,000,000 shares of
common stock having a Par Value of $2.00 per share (herein called
Common Stock') and 5,000,000 of preferred stock without par value
(herein called Preferred Stock')"
THIRD: On May 6, 1983, at a regular meeting of the shareholders of SRI
Corporation, the foregoing Resolution was duly adopted.
FOURTH: The number of shares of capital stock outstanding at the time
of the adoption of the Amendment was 4,717,309. The total number of shares
entitled to vote thereon was 4,717,309.
FIFTH: The number of shares voting for and against such Amendment is
as follows:
Number of Shares Number of Shares Number of Shares
voting for Amendment voting against abstaining
Amendment
----------------------------------------------------------------------------
2,860,742 17,952 23,619
IN WITNESS WHEREOF, SRI Corporation has made this Certificate under its
seal and the hands of its President and Secretary this 9th day of May, 1983.
SRI CORPORATION
Russell R. Moffett
By: ___________________________
Russell R. Moffett, President
Attest:
James M. Cooper, Jr.
___________________________
James M. Cooper, Jr.
Secretary
STATE OF NEW JERSEY |
COUNTY OF SUSSEX | SS
BE IT REMEMBERED, that on the 9th day of May, 1983, before me, the
subscriber, An Attorney at Law of New Jersey, personally appeared James M.
Cooper, Jr., who being by me duly sworn on his oath says that he is the
Secretary of the foregoing SRI Corporation, the corporation named in the
within Instrument; that he well knows the corporate seal of said corporation;
that the seal affixed to said Instrument is the corporate seal of said
corporation; that the said seal was so affixed and the said Instrument signed
and delivered by RUSSELL R. MOFFETT, who was at the date hereof the President
of said corporation, in the presence of the deponent, and said President, at
the same time acknowledged that he signed and delivered the same as his
voluntary act and deed, and as the voluntary act and deed of said
corporation, by virtue of authority from its Board of Directors, and that
deponent, at the same time, subscribed his name to said Instrument as an
attesting witness to the execution thereof.
James M. Cooper, Jr.
By: ______________________
James M. Cooper, Jr.
Sworn and Subscribed to
before me, at Branchville,
New Jersey, the date aforesaid.
Lewis P. Dolan, Jr.
_________________________
Lewis P. Dolan, Jr.
Attorney at Law of New Jersey
PAGE
CERTIFICATE OF AMENDMENT F I L E D
--------------------------- May 13,1981
to the DONALD LAN
-------- Secretary of State
CERTIFICATE OF INCORPORATION
------------------------------
of
----
SRI CORPORATION
-----------------
PURSUANT TO N.J.S. 14A:7-15.1(3), SRI Corporation, a New Jersey
Corporation, under its seal and the hands of its President and Secretary,
does hereby certify as follows:
FIRST: The name of the corporation is SRI Corporation.
SECOND: On February 6, 1981, the Board of Directors of SRI Corporation
duly adopted a resolution declaring it advisable that Paragraph 4 of the
Certificate of Incorporation of SRI Corporation be amended to read as
follows:
"4. The total authorized capital shares of the corporation
shall be divided into two classes and shall consist of 10,000,000
shares of common stock having a Par Value of $2 per share (herein
called Common Stock') and 5,000,000 shares of preferred stock
without par value (herein called Preferred Stock')."
THIRD: On May 1, 1981, at a regular meeting of the Shareholders of SRI
Corporation, the foregoing resolution was duly adopted.
FOURTH: The number of shares of capital stock outstanding at the time
of the adoption of the amendment was 3,972,105. The total number of shares
entitled to vote thereon was 3,972,105.
FIFTH: The number of shares voting for and against such amendment is
as follows:
NUMBER OF SHARES NUMBER OF SHARES
VOTING FOR AMENDMENT VOTING AGAINST AMENDMENT
------------------------- -----------------------------
2,160,021 10,262
IN WITNESS WHEREOF, SRI Corporation has made this certificate under its
seal and the hands of its President and Secretary this 7th day of May, 1981.
SRI CORPORATION
W. Richard Wilson
By: ___________________________
W. Richard Wilson, President
Attest:
Russell Moffett
___________________________
Russell Moffett, Secretary
STATE OF NEW JERSEY:
SS
COUNTY OF SUSSEX
BE IT REMEMBERED, that on this 7th day of May, 1981, before me the
subscriber An Attorney at Law of New Jersey, personally appeared Russell
Moffett, who being by me duly sworn on his oath says that he is the Secretary
of SRI Corporation, the corporation named in the foregoing Instrument; that
he well knows the corporate seal of said corporation; that the seal affixed
to said Instrument is the corporate seal of said corporation; that the said
seal was so affixed and the said Instrument signed and delivered by W.
Richard Wilson, who was at the date hereof, the President of said
corporation, in the presence of deponent, and said President, at the same
time acknowledged that he signed and delivered the same as his voluntary act
and deed, and as the voluntary act and deed of said corporation, by virtue of
authority from its Board of Directors, and that deponent, at the same time,
subscribed his name to said Instrument as an attesting witness to the
execution thereof.
Russell Moffett
By: ______________________
Russell Moffett
Sworn and Subscribed to
before me, at Branchville,
New Jersey, the date aforesaid.
Lewis P. Dolan, Jr.
_________________________
Lewis P. Dolan, Jr.
Attorney at Law of New Jersey
PAGE
CERTIFICATE OF AMENDMENT F I L E D
--------------------------- Dec 17,1979
to the DONALD LAN
-------- Secretary of State
CERTIFICATE OF INCORPORATION
------------------------------
of
----
SRI CORPORATION
-----------------
PURSUANT to N.J.S. 14A:7-15.1(3), SRI Corporation, a New Jersey
corporation, under its seal and the hands of its President and Secretary,
does hereby certify as follows:
FIRST: The name of the corporation is SRI Corporation
SECOND: A resolution of the Board approving a division of the
Company's common stock was adopted November 2, 1979.
THIRD: The division of the Company's common stock will not adversely
affect the rights or preferences of the holders of outstanding shares of the
common stock and will not increase the number of authorized but unissued
shares.
FOURTH: The class of shares subject to the division is the common
stock of the Company. The number of shares of common stock subject to this
division is the 1,1OO,OOO shares issued and presently outstanding which shall
be divided into 2,200,OO0 shares. The par value of the common stock of the
company shall be reduced from $4 per share to $2 per share.
FIFTH: Paragraph Fourth of the Certificate of Incorporation is amended
to read as follows:
FOURTH: The total authorized capital shares of the corporation
shall be divided into two classes and shall consist of 5,000,OOO shares
of common stock having a Par Value of $2 per share (herein called
Common Stock'), and 5,0OO,OOO shares of preferred stock without par
value (herein called Preferred Stock')."
SIXTH; The division of shares shall become effective on December 15,
1979, for each share of stock held by shareholders of record on December
1,1979.
IN WITNESS WHEREOF, SRI Corporation has made this certificate under its
seal and the hands of its President and Secretary this 30th day of November,
1979.
SRI CORPORATION
W. Richard Wilson
By: ___________________________
W. Richard Wilson, President
Attest:
Russell Moffett
___________________________
Russell Moffett, Secretary
STATE OF NEW JERSEY: SS
COUNTY OF SUSSEX:
BE IT REMEMBERED,that on this 30th day of November, 1979, before me the
subscriber An Attorney at Law of New Jersey, personally appeared Russell
Moffett, who being by me duly sworn on his oath, says that he is the
Secretary of SRI Corporation, the corporation named in the foregoing
Instrument; that he well knows the corporate seal of said corporation; that
the seal affixed to said Instrument is the corporate seal of said
corporation; that the said seal was so affixed and the said Instrument signed
and delivered by W. Richard Wilson, who was at the date hereof, the President
of said corporation, in the presence of deponent, and said President, at the
same time acknowledged that he signed and delivered the same as his voluntary
act and deed, and as the voluntary act and deed of said corporation, by
virtue of authority from its Board of Directors, and that deponent, at the
same time, subscribed his name to said Instrument as an attesting witness to
the execution thereof.
Russell Moffett
By: ______________________
Russell Moffett
Sworn and Subscribed to
before me, at Branchville,
New Jersey, the date aforesaid.
Lewis P. Dolan, Jr.
_________________________
Lewis P. Dolan, Jr.
Attorney at Law of New Jersey
PAGE
CERTIFICATE OF AMENDMENT F I L E D
--------------------------- May 29,1979
to the DONALD LAN
-------- Secretary of State
CERTIFICATE OF INCORPORATION
------------------------------
of
----
SRI CORPORATION
-----------------
Pursuant to N.J.S. 17:26-1, SRI Corporation, a New Jersey corporation,
under its seal and the hands of its President and Secretary, does hereby
certify as follows:
FIRST: The location of the principal office of the corporation in New
Jersey is Wantage Avenue, in the Borough of Branchville, Sussex County, and
the name of the agent therein and in charge thereof upon whom process against
the corporation may be served is W. Richard Wilson.
SECOND: On March 5, 1979, the Board of Directors of SRI Corporation
duly adopted a resolution declaring it advisable that Paragraph Fourth of the
Certificate of Incorporation of SRI Corporation be amended to read as
follows:
FOURTH: The total authorized capital shares of the corporation
shall be divided into two classes and consist of 5,OOO,OOO shares
of common stock having a par value of $4 per share (herein called
"Common Stock") and 5,OOO,OOO shares of preferred stock without par
value (herein called "Preferred Stock").
The preferred shares are senior to the common shares and the common
shares are subject to the rights and preferences of preferred
shares as established by the Board of Directors.
All or any part of the shares of Preferred Stock may be issued by
the corporation from time to time for such consideration as may be
determined upon and fixed by the Board of Directors as provided by
law.
The designations and the powers, preferences and rights and the
qualifications, limitations and restrictions thereof, of the
Preferred Stock shall be as follows:
l. The Board of Directors is expressly authorized at any time,
and from time to time, to provide for the issuance of shares of
Preferred Stock, in one or more series, with such voting rights,
full or limited, but not to exceed one vote per share, or without
voting powers and with such designations, preferences and relative,
participating, optional and other special rights and
qualifications, limitations or restrictions thereof as shall be
expressed in the resolution or resolutions providing for the issue
thereof adopted by the Board of Directors, and as are not expressed
in this Certificate of Incorporation or any amendment thereto
including (but without limiting the generality of the foregoing)
the following:
A. The number of shares constituting such series and
designation thereof to distinguish such shares of such series from
the shares of all other series.
B. The voting powers of such series, whether full, limited
or none, the dividend rate of such series the conditions and dates
upon which such dividends shall be payable, the preference or
relation which such dividends shall bear to the dividends payable
on any other class or classes or on any other series of capital
stock, and whether such dividends shall be cumulative or
non-cumulative.
C. The terms and provisions, governing the redemption of
shares of such series, if redeemable.
D. The terms and provisions governing the operation of
retirement or sinking funds, if any, for the retirement or purchase
of shares of such series.
E. The rights of holders of shares of such series upon the
dissolution of, or upon distribution, of the assets of the
corporation.
F. Whether or not the shares of such series shall be
convertible into or exchangeable for shares of any other class or
classes or of any other series of any other class or classes of
capital stock of the corporation, and if provision be made for
conversion or exchange the times, prices, rates, adjustments and
other terms and conditions of such conversion or exchange.
G. Any other preferences, any relative, participating
optional and other special rights and qualifications, limitations
or restrictions of such series."
THIRD: On May 4, 1979, at a regular meeting of the Shareholders of SRI
Corporation, the foregoing resolution was duly adopted.
FOURTH: The number of shares of common stock outstanding at the time
of the adoption of the amendment was l,lOO,OOO. The total number of shares
entitled to vote thereon was 1,100,000.
FIFTH: The number of shares voting for and against such amendment is
as follows:
NUMBER OF SHARES NUMBER OF SHARES
VOTING FOR AMENDMENT VOTING AGAINST AMENDMENT
------------------------- -----------------------------
812,528 40,372
IN WITNESS WHEREOF, SRI Corporation has made this certificate under its
seal and the hands of its President and Secretary this 16th day of May, 1979.
SRI CORPORATION
W. Richard Wilson
By: ___________________________
W. Richard Wilson, President
Attest:
Russell Moffett
___________________________
Russell Moffett, Secretary
STATE OF NEW JERSEY: SS
COUNTY OF SUSSEX:
BE IT REMEMBERED, that on this 16th day of May, 1979 before me the
subscriber An Attorney at Law of New Jersey, personally appeared Russell
Moffett who being by me duly sworn on his oath, says that he is the Secretary
of SRI Corporation, the corporation named in the foregoing Instrument; that
he well knows the corporate seal of said corporation; that the seal affixed
to said Instrument is the corporate seal of said corporation; that the said
seal was so affixed and the said Instrument signed and delivered by W.
Richard Wilson, who was at the date hereof the President of said corporation,
in the presence of deponent, and said President, at the same time
acknowledged that he signed and delivered the same as his voluntary act and
deed, and as the voluntary act and deed of said corporation, by virtue of
authority from its Board of Directors, and that deponent, at the same time
subscribed his name to said Instrument as an attesting witness to the
execution thereof.
Russell Moffett
By: ______________________
Russell Moffett
Sworn and Subscribed to
before me, at Branchville,
New Jersey, the date aforesaid.
Lewis P. Dolan, Jr.
_________________________
Lewis P. Dolan, Jr.
Attorney at Law of New Jersey
PAGE
CERTIFICATE OF INCORPORATION FILED and RECORDED
------------------------------ Aug 9, 1977
of GEORGE W. LEE
---- Assistant Secretary
SRI CORPORATION of State
-----------------
THIS IS TO CERTIFY THAT, there is hereby organized a corporation under
and by virtue of N.J.S. 14A:l-1 et seq., the "New Jersey Business Corporation
Act."
1. The name of the corporation is
SRI CORPORATION
2. The address (and zip code) of this corporation's initial registered
office is Wantage Avenue, Branchville, New Jersey O7826.
and the name of this corporation's initial registered agent at such
address is W. Richard Wilson.
3. The purposes for which this corporation is organized are:
To engage in any activity within the purposes for which corporations may
be organized under the "New Jersey Business Corporation Act." N.J.S. 14A:l-1
et seq.
4. The aggregate number of shares which the corporation shall have
authority to issue is: 5,OOO,OOO (five million) shares having a par value of
Four Dollars per share.
5. The first Board of Directors of this corporation shall consist of
eleven Directors and the name and address of each person who is to serve as
such Director is:
Name Address Zip Code
------ ---------- -----------
Richard M. Bartlett Yardley
Pennsylvania l9O67
Ross E. Roe Branchville
New Jersey O7826
Lewis P. Dolan, Jr. 9 Franklin Street
Newton, New Jersey O7860
Gerald S. Shay Branchville
New Jersey O7826
William M. Kearns, Jr Madison
New Jersey O7960
Louis P. Thebault New Vernon
New Jersey
O796O
Frank E. Mazuy Newton
New Jersey 07960
Frank P. Weiler Branchville
New Jersey 07826
Jesse Grant Roe, 2nd Branchville
New Jersey 07826
W. Richard Wilson Newton
New Jersey 07960
William M. Rue 33 Cranbury Neck Road
Cranbury, New Jersey 08512
6. The name and address of each incorporator is:
Name Address Zip Code
------ ---------- -----------
Lewis P. Dolan, Jr. 9 Franklin Street
Newton, New Jersey O786O
IN WITNESS WHEREOF, each individual incorporator, each being over the
age of eighteen years, has signed this Certificate; or if the incorporator be
a corporation, has caused this Certificate to be signed by its authorized
officers, this 4th day of August 1977.
Lewis P. Dolan Jr.
______________________
Lewis P. Dolan Jr.
PAGE
EXHIBIT 10.6
CONSENT OF BOARD OF DIRECTORS TO ACTION
BY UNANIMOUS WRITTEN CONSENT
The undersigned, being all the Directors of Selective Insurance Group, Inc.,
a New Jersey Corporation, (the "Company"), acting by unanimous written
consent without a meeting, do hereby adopt the following resolutions
effective December 31, 1997:
WHEREAS, Selective Insurance Group, Inc. (the "Company") has in
effect the Selective Insurance Group, Inc. Directors' Plan
(the "Plan"), which Plan provides certain retirement benefits to
present and former nonemployee directors (the "Participants"); and
WHEREAS, the Board of Directors of the Company (the "Board")
desires (i) to terminate the Plan effective as of December 31, 1997
(the "Effective Date"), (ii) to fully vest all accrued benefits under
the Plan to Participants whose benefits thereunder are not vested
as of the Effective Date, and (iii) to provide for the payment of
accrued benefits to Participants, all in the manner hereinafter set
forth in these resolutions; it is therefore
RESOLVED, that effective as of the Effective Date the accrued
benefits of all Participants under the Plan be, and the same
hereby are, fully vested as of the Effective Date; and it is
further
RESOLVED, that all Participants or their executors,
administrators, personal representatives or beneficiaries
who have commenced receiving benefits under the Plan prior
to the Effective Date shall continue to receive benefits equal
to benefits payable in accordance with the provisions of the
Plan as in effect prior to the Effective Date; and it is further
RESOLVED, that each Participant who is a director of the Company
as of the Effective Date shall be entitled to receive his or
her benefits under the Plan which are accrued up to and
including the Effective Date, in accordance with these
resolutions hereinbelow, based upon his or her period of service
as a director of the Company from the date of commencement of
such service up to and including the Effective Date; and it is
further
RESOLVED, that as of the Effective Date the amount of benefits
accrued for each Participant who is a director of the Company
on the Effective Date shall be converted into units
(a "Unit" or "Units") issued to each such Participant, with the
number of Units issued to each such Participant to be determined
by dividing the amount of his or her accrued benefits as of
the Effective Date by the average of the high and low sale
prices of a share of the Company's common stock
("Common Stock") as reported on the Nasdaq National Market on
the Effective Date (the "Fair Market Value on the Effective Date");
and it is further
PAGE
RESOLVED, that (i) each Unit shall accrue an amount equal to the
amount of dividends as and when declared and paid from time to
time on a share of Common Stock, (ii) said amounts accrued with
respect to each Unit shall be deemed reinvested in Units on the
same basis as dividends are reinvested in shares of Common Stock
under the Company's dividend reinvestment plan for stockholders
in effect from time to time (the "Dividend Reinvestment Plan"),
and (iii) each such reinvested Unit shall have a value equal to
the fair market value of a share of Common Stock on the date
of such dividend reinvestment under the Dividend Reinvestment Plan;
and it is further
RESOLVED, that on the effective date of such Participant's
termination of service as a director of the Company as determined
by the Board ("Retirement Date"), such Participant shall be
entitled to receive the value of his or her Units in cash, either
in a lump sum or in equal annual installments over a period
of up to fifteen years, at the election of such Participant,
the lump sum or installment payment, as the case may be, to
be determined by dividing the accrued Units to be distributed
by the average high and low of the Company's Common Stock as
reported on the Nasdaq National Market on the Retirement
Date or appropriate anniversary thereof in the case of
installment payments; provided, however, that in the event that
any such Participant shall cease to serve as a director of
the Company following a "change in control" of the Company,
as hereafter defined, such Participant shall be immediately
entitled to receive in cash, either in a lump sum or in equal
annual installments over a period of five years, at the election
of such Participant, the value of his or her Units as
aforementioned; and it is further
RESOLVED, that in the event of the death of any such Participant
prior to the receipt by such Participant of the value of his or
her Units, as hereinabove provided, the surviving spouse of such
Participant shall be entitled to receive in cash, either in a lump
sum or in equal annual installments over a period of up to fifteen
years, at the election of such surviving spouse, or if such
Participant shall have no surviving spouse the executor(s)
or administrator(s) of the estate of such Participant on behalf
of such estate, shall be entitled to receive in cash, in a
lump sum, the value of the Units held by such deceased Participant
on the date of his or her death and not theretofore paid by
the Company, said Units to be valued as hereinabove provided;
and it is further
RESOLVED, that for the purposes hereof a "change in control"
shall be deemed to occur upon the first to occur of any of the
following events:
(i) The acquisition by any person or group,
including, without limitation, any current
stockholder or stockholders of the Company,
of securities of the Company resulting in
such person's
2
PAGE
or group's owning of record
or beneficially twenty-five percent (25%)
or more, of any class of voting securities
of the Company;
(ii) The acquisition by any person or group,
including, without limitation, any current
stockholder or stockholders of the Company,
of securities of the Company resulting in
such person's or group's owning of record
or beneficially twenty percent (20%)
or more, but less than twenty-five percent
(25%), of any class of voting securities
of the Company, if the Board adopts
a resolution that such acquisition
constitutes a change in control;
(iii)The sale or disposition of all or substantially
all of the assets of the Company;
(iv) The reorganization, recapitalization, merger,
consolidation or other business combination
involving the Company the result of which
is the ownership by the shareholders of
the Company of less than eighty percent (80%)
of those voting securities of the resulting
or acquiring entity having the power to
elect a majority of the board of directors
of such entity; or
(v) A change in the membership in the Board
which, taken in conjunction with any other
prior or concurrent changes, results in twenty
percent (20%) or more of the Board's
membership being persons not nominated by
the Company's management or the Board as set
forth in the Company's then most recent
proxy statement, excluding changes resulting
from substitutions by the Board because
of retirement or death of a director or
directors, removal of a director or
directors by the Board or resignation
of a director or directors due to demonstrated
disability or incapacity; and it is further
RESOLVED, that the rights to receive payments in respect of
Units pursuant to these resolutions shall be nonforfeitable and
shall inure to the benefit of such Participants and their
respective surviving spouses, executor(s), administrator(s) and
heirs, as the case may be; and it is further
3
PAGE
RESOLVED, that in the event that the number of outstanding
shares of Common Stock is changed as a result of a stock
dividend, stock division or other adjustment or change
in the capital structure of the Company, or in the event
that outstanding shares of Common Stock are exchanged for securities
of the Company or another company by reason of any merger,
consolidation, reorganization or similar change, the
Committee on Directors of the Board (the "Committee") shall
make an appropriate adjustment in the number of Units
issued to each Participant pursuant hereto; and it is further
RESOLVED, that the Committee shall administer the benefits
provided hereunder, and the interpretation of said Committee
with respect hereto shall be final, conclusive and binding on all
Participants and the Company; and it is further
RESOLVED, that the Plan be, and it hereby is, terminated
as of the Effective Date; and it is further
RESOLVED, that the proper officers of the Company be,
and each of them hereby is, authorized and empowered,
to execute and deliver, for and on behalf of the Company, all
such further agreements, instruments and documents, as they,
or any of them, shall deem necessary or appropriate in order to
carry into effect the intents and purposes of the foregoing
negotiations.
/S/ David Brown /s/ Joan Lamm-Tennant
----------------------- ------------------------
A. David Brown Joan Lamm-Tennant
/s/ William A. Dolan, II /s/ S. Griffin McClellan III
----------------------- ------------------------
William A. Dolan, II S. Griffin McClellan III
/s/ James W. Entringer /s/ Russell R. Moffett
----------------------- ------------------------
James W. Entringer Russell R. Moffett
/s/ William C. Gray /s/ Gregory E. Murphy
----------------------- ------------------------
William C. Gray Gregory E. Murphy
4
PAGE
/s/ C. Edward Herder /s/ William M. Rue
----------------------- ------------------------
C. Edward Herder William M. Rue
/s/ Frederick H. Jarvis /s/ Thomas D. Sayles, Jr.
----------------------- ------------------------
Frederick H. Jarvis Thomas D. Sayles, Jr.
/s/ William M. Kearns, Jr. J. Brian Thebault
----------------------- ------------------------
William M. Kearns, Jr. J. Brian Thebault
5
PAGE
EXHIBIT 10.15
- -------------------------------------------------------------------------
SIGI ACQUISITION COMPANY LLC
LIMITED LIABILITY COMPANY AGREEMENT
Agreement Effective as of September 9, 1997
- -------------------------------------------------------------------------
PAGE
SIGI ACQUISITION COMPANY LLC
LIMITED LIABILITY COMPANY AGREEMENT
This Limited Liability Company Agreement (the "Agreement") is made as of
the 9th day of September, 1997 by and between SIGI Acquisition Company LLC
(the "LLC") and the entities identified as the Members on Schedule A
attached hereto (such entities and their respective successors in interest
being hereinafter referred to collectively as the "Members" and individually
as a "Member").
WHEREAS, the LLC has been formed as a limited liability company under the
Delaware Limited Liability Company Act (as amended, the "Act") on September
9, 1997; and
WHEREAS, the Members desire to set out fully their rights, obligations
and duties regarding the LLC and its assets and liabilities.
NOW, THEREFORE, in consideration of the mutual covenants expressed
herein, the parties hereby agree as follows:
ARTICLE I
Organization and Power
----------------------
1.01 Organization. The LLC has been formed by the filing of its
Certificate of Formation with the Delaware Secretary of State pursuant to
the Act. Additions to or amendments of the Certificate of Formation shall
be authorized by the Members as provided in Section 2.05. The Certificate
of Formation, as so amended from time to time, is referred to herein as
the "Certificate."
1.02 Purposes and Powers. The Company is organized to pursue any
lawful purpose with the exception of the business of granting policies of
insurance, or assuming insurance risks or banking as defined in Section 126
of Title 8. The Company shall possess all powers not otherwise prohibited
by law.
1.03 Principal Place of Business. The principal office and place of
business of the LLC shall initially be 40 Wantage Avenue, Branchville, NJ
07890. The Members may change the principal office or place of business of
the LLC at any time and may cause the LLC to establish other offices or
places of business in various jurisdictions as the Members deem advisable.
The registered office of the LLC shall be located at 1201 Market Street,
Suite 1600, Wilmington, Delaware 19801, and the registered agent of the LLC
at that address shall be PHS Corporate Services, Inc. or such other office
and agent as the Members shall determine.
1.04 Foreign Qualification. The Members shall cause the LLC to
comply, to the extent legally possible, with all requirements necessary
to qualify the LLC as a foreign limited
-1-
PAGE
liability company in each jurisdiction in which the LLC conducts business.
To the extent required by law or as the Members determine is otherwise
advisable, the Members shall execute, acknowledge, swear to and deliver all
certificates and other instruments conforming with this Agreement that are
necessary or appropriate to qualify, continue and terminate the LLC as a
foreign limited liability company in all jurisdictions in which the LLC
conducts business.
1.05 Fiscal Year. The fiscal year of the LLC shall be the calendar
year or such other fiscal year as may be required under the Internal Revenue
Code of 1986, as amended (the "Code").
1.06 Term. The existence of the LLC shall be perpetual.
ARTICLE II
Members and Management
----------------------
2.01 Members. The initial Members of the LLC and their addresses
shall be listed on Schedule A and said schedule shall be amended from time
to time to reflect the withdrawal of Members or the admission of additional
Members pursuant to this Agreement. Each Member shall be notified of
changes in Schedule A, which shall constitute the record list of the Members
for all purposes of this Agreement.
2.02 Admission of New Members. Additional persons may be admitted
to the LLC as members and may participate in the profits, losses,
distributions and capital contributions of the LLC upon such terms as are
established by the holders of at least a majority of the Membership
Interests (as defined in Section 2.05), which may include the establishment
of classes or groups of Members having different relative rights, powers
and duties, including without limitation, rights and powers which are
superior to those of existing Members, or the right to vote as a separate
class or group on specified matters by amendment of this Agreement. New
Members shall be admitted when all conditions to their admission have been
satisfied and their identity, ownership of and Membership Interests and
capital contributions under Section 4.02 shall be established by amendment
of Schedule A.
2.03 Meetings of Members.
(A) Meetings of Members may be called for any proper purpose at
any time by the holders of at least 50% of the Membership Interests. The
Members calling the meeting shall determine the date, time and place of each
meeting, and written notice thereof shall be given to each Member not less
than 10 days or more than 60 days prior to the date of the meeting. Notice
shall be sent to Members of record on the date when the meeting is called.
The business of each meeting of Members shall be limited to the purposes
described in the notice.
-2-
PAGE
(B) Persons holding a majority of the Membership Interests
shall constitute a quorum for the transaction of any business at a meeting
of Members. Members may attend a meeting in person or by proxy. Members
may also participate in a meeting, by means of conference telephone or
similar communications equipment which permits all Members present to hear
each other. If less than a quorum of the Members is present, the meeting
may be adjourned by the chairman to a later date, time and place. Notice
of an adjourned meeting shall be given to all Members who did not attend
the meeting so adjourned. When an adjourned meeting is reconvened, any
business may be transacted which might have been transacted at the meeting
as originally called.
(C) A complete list of Members entitled to vote at any meeting
of Members or any adjournment thereof shall be made available at such
meeting and for a period of 10 days prior thereto. The list shall reflect
the current names and addresses of each Member and their Membership
Interests and shall be subject to inspection by any Member at the meeting
and during the ten-day period prior thereto at the principal office of the
LLC.
(D) The Members shall elect from the Membership a chairman to
preside at all meetings. The chairman shall determine the order of business
and the procedures to be followed at each meeting of Members.
2.04 Action Without a Meeting. Any action required or permitted to
be taken at any meeting of Members may be taken without a meeting if one or
more written consents to such action shall be signed by the holders of the
amount of Membership Interests required to approve the action being taken.
Such written consents shall be delivered to the principal office of the LLC
within 60 days after the first consent is so delivered. All Members who did
not consent shall be given prompt notice of any action taken by written
consent of Members without a meeting.
2.05 Voting Rights. Unless otherwise required by the Act or
expressly provided otherwise in this Agreement, all actions, approvals and
consents to be taken or given by the Members under the Act, this Agreement
or otherwise shall require the affirmative vote or written consent of the
holders of a majority of the membership interests in that time specified on
Schedule A (herein, the "Membership Interests").
2.06 No Right to Withdraw. No Member shall have any right to resign
or withdraw from the LLC or to receive any distribution or the repayment of
its capital contribution except as provided in Section 5.02 and Article VII
upon dissolution and liquidation of the LLC.
2.07 Management; Authority. The management of the LLC shall be
vested in the Members in their capacity as members acting by a vote of the
holders of a majority of the Membership Interests. Any action taken by a
Member and the signature of the Member on any agreement, contract, indenture
or other document on behalf of the LLC shall be sufficient to bind
-3-
PAGE
the LLC and shall conclusively evidence the authority of the Member and the
LLC with respect thereto.
Notwithstanding the foregoing:
(a) Members may, from time to time, designate one or more
persons to be officers of the LLC. Any officers so designated shall have
such authority and perform such duties as the Members may, from time to
time, delegate to them. The Members may assign titles to particular
officers. The Members shall delegate to such officers the authority and
duties that are set forth in the resolution appointing the officer. Each
officer shall hold office until his successor shall be duly designated and
shall qualify or until his death or until he shall resign or shall have been
removed in the manner hereinafter provided. Any number of offices may be
held by the same person. The salaries or other compensation, if any, of
the officers and agents of the LLC shall be fixed from time to time by the
Members.
(b) Any officer may resign as such at any time. Such
resignation shall be made in writing and shall take effect at the time
specified therein, or if no time is specified, at the time of its receipt
by the Members. The acceptance of a resignation shall not be necessary
to make it effective, unless expressly so provided in the resignation. Any
officer may be removed as such, either with or without cause, by a majority
of the Members. Designation of an officer shall not of itself create any
contract rights. Any vacancy occurring in any office of the LLC may be
filled by the Members.
2.08 Limitation of Liability. Except as otherwise provided in
the Act, no Member or officer of the LLC shall be obligated personally for
any debt, obligation or liability of the LLC or of any other Member or
officer solely by reason of being a Member or officer of the LLC. Except
as otherwise provided in the Act, by law or expressly in this Agreement,
no Member or officer shall have any fiduciary or other duty to another
Member or officer with respect to the business and affairs of the LLC.
No Member shall have any responsibility to restore any negative balance
in his capital accounts or to contribute to or in respect of the liabilities
or obligations of the LLC or return distributions made by the LLC except as
required by the Act or other applicable law; provided, however, that
Members are responsible for their failure to make required capital
contributions under Section 4.02.
2.09 Rights to Information. Members shall have the right to receive
from the LLC upon request a copy of the Certificate and of this Agreement,
as amended from time to time, and such other information regarding the LLC
as is required by the Act, subject to reasonable conditions and standards
established by the Members, which may include, without limitation,
withholding or restrictions on the use of confidential information.
ARTICLE III
-4-
PAGE
Transactions with Interested Persons
------------------------------------
Unless entered into in bad faith, no contract or transaction between the
LLC and one or more of its Members, or between the LLC and any other
corporation, partnership, association or other organization in which one or
more of its Members have a financial interest or are directors, managers or
officers, shall be voidable solely for this reason or solely because said
Member was present or participated in the authorization of such contract or
transaction if:
(a) the material facts as to the relationship or interest of
said Member and as to the contract or transaction were disclosed or known
to the other Members and the contract or transaction was authorized by the
disinterested Members; or
(b) the contract or transaction was fair to the LLC as of the
time it was authorized, approved or ratified by the disinterested Members;
and no Member interested in such contract or transaction, because of
such interest, shall be liable to the LLC or to any other person or
organization for any loss or expense incurred by reason of such contract or
transaction or shall be accountable for any gain or profit realized from
such contract or transaction.
ARTICLE IV
Contributions and Capital Accounts
----------------------------------
4.01 Capital Accounts. A separate capital account shall be
maintained for each Member, including a Member who hereafter acquires an
interest in the LLC, in accordance with the requirements of Section 704(b)
of the Code and the IRS Regulations promulgated thereunder.
4.02 Contributions. Each Member shall make contributions to the
capital of the LLC (herein "Capital Contributions") in the aggregate amount
specified for such Member on Schedule A. All Capital Contributions shall be
paid in cash unless otherwise specified on Schedule A or agreed to by the
Members. Except as set forth on Schedule A, no Member shall be entitled or
required to make any contribution to the capital of the LLC; provided,
however, the LLC may borrow from its Members as well as from banks or other
lending institutions to finance its working capital or the acquisition of
assets upon such terms and conditions as shall be approved by the Members,
and any such loans by Members shall not be considered Capital Contributions
or reflected in their capital accounts.
ARTICLE V
-5-
PAGE
Allocations and Distributions
-----------------------------
5.01 Allocation of Profits and Losses. Allocation of profits
and losses shall be made to the Members in accordance with Sections 704(b)
and (c) of the Code. To the extent permitted by Section 704(b) and (c) of
the Code, such allocations shall be made to the Members in proportion to
their Membership Interests.
5.02 Distributions of LLC Funds. Except as otherwise provided in
this Article, all LLC funds which are determined by the Members to be
available for distribution shall be distributed to the Members in proportion
to their Membership Interests. Distributions may be limited as provided in
the Act.
5.03 Distributions Upon Dissolution. Proceeds from a sale of all or
substantially all of the assets of the LLC and amounts available upon
dissolution, after payment of, or adequate provision for, the debts and
obligations of the LLC then due and owing, and the liquidation of any
remaining assets of the LLC, shall be distributed and applied in the
following priority:
(a) First, to fund reserves for liabilities not then due and
owing and for contingent liabilities to the extent deemed appropriate by
the Members, provided that upon the expiration of such period of time as
the Members shall deem advisable, the balance of such reserves remaining
after payment of such contingencies shall be distributed in the manner set
forth in Section 5.03(b); and
(b) Second, to the Members as provided in Section 5.02.
5.04 Distribution of Assets in Kind. No Member shall have the
right to require any distribution of any assets of the LLC in kind. If any
assets of the LLC are distributed in kind, such assets shall be distributed
on the basis of their fair market value as determined by the Members. Any
Member entitled to any interest in such assets shall, unless otherwise
determined by the Members, receive separate assets of the LLC, and not an
interest as tenant-in-common with other Members so entitled, in each asset
being distributed.
ARTICLE VI
Transfers of Interests
----------------------
6.01 General Restrictions on Transfer.
(a) No Member may transfer all or any part of its interest in
the LLC except with the approval of all of the other Members, which may be
withheld or denied for any reason or for no reason.
-6-
PAGE
(b) Every transfer of an interest in the LLC permitted
hereunder shall be subject to the following requirements:
(1) The transferee shall establish that the proposed
transfer will not cause or result in a breach of any agreement binding upon
the LLC or any violation of law, including without limitation, federal or
state securities laws, and that the proposed transfer would not cause the
LLC to be an investment company as defined in the Investment Company Act of
1940, as amended;
(2) The transferee shall establish to the satisfaction of
the Members that the transferee is financially responsible and of good
character and that the transfer would not adversely affect the
classification of the LLC for federal income tax purposes or have a
substantial adverse effect with respect to federal income taxes payable by
the LLC; and
(3) The transferee shall execute a counterpart of this
Agreement and such other documents or instruments as may be required by the
Members to reflect the provisions hereof.
Until the foregoing requirements are met, the LLC need not recognize the
transferee for any purpose under this Agreement and the transferee shall be
entitled only to the rights of a transferee who is not a member under the
Act. A transferee shall not be admitted as a Member without the approval of
all of the Members.
(c) If the transferee is admitted as a Member or is already a
Member, the Member transferring his interest shall be relieved of liability
under this Agreement with respect to the transferred interest arising or
accruing on or after the effective date of the transfer, unless the
transferor affirmatively assumes such liability.
(d) Any person who acquires in any manner an interest or any
part thereof in the LLC, whether or not such person has accepted and assumed
in writing the terms and provisions of this Agreement or been admitted as a
Member, shall be deemed by the acquisition of such interest to have agreed
to be subject to and bound by all of the provisions of this Agreement with
respect to such interest, including without limitation, the provisions
hereof with respect to any subsequent transfer of such interest.
(e) Any transfer in violation of any provision of this
Agreement shall be null and void and ineffective to transfer any interest in
the LLC and shall not be binding upon or be recognized by the LLC. Any
transferee of an interest in the LLC transferred in violation of any
provision of this Agreement shall not be treated or deemed to be a Member
for any purpose. In the event that any Member shall at any time transfer
its interest in violation of any provision of this Agreement, in addition to
all rights and remedies at law and equity the LLC and the other Members
shall have and be entitled to an order restraining or enjoining such
transaction, it being
-7-
PAGE
expressly acknowledged and agreed that damages at law would be an inadequate
remedy for a transfer and violation of this Agreement.
ARTICLE VII
Dissolution, Liquidation, and Termination
-----------------------------------------
7.01 Dissolution. The LLC shall dissolve and its affairs shall
be wound up on the earlier to occur of (i) an event of dissolution specified
in Section 18-801 of the Act, unless the LLC is continued with the consent
of all Members as provided in Section 18-801 or (ii) the written consent of
the holders of at least a majority of the Membership Interests.
7.02 Liquidation and Termination. On dissolution of the LLC,
the holders of at least a majority of the Membership Interests may appoint
one or more Members as liquidating trustee. The liquidating trustee shall
proceed diligently to wind up the affairs of the LLC and make final
distributions as provided herein and in the Act. The costs of liquidation
shall be borne as a LLC expense. Until final distribution, the liquidating
trustee shall continue to operate the LLC properties with all of the power
and authority of the Members. The steps to be accomplished by the
liquidating trustee are as follows:
(a) as promptly as possible after dissolution and again after
final liquidation, the liquidating trustee shall cause an accounting to be
made by a firm of independent public accountants of the LLC's assets,
liabilities, and operations through the last day of the calendar month in
which the dissolution occurs or the final liquidation is completed, as
applicable;
(b) the liquidating trustee shall pay, satisfy or discharge
from LLC funds all of the debts, liabilities and obligations of the LLC
(including, without limitation, all expenses incurred in liquidation) or
otherwise make adequate provision for payment and discharge thereof
(including, without limitation, the establishment of a cash escrow fund for
contingent liabilities in such amount and for such term as the liquidating
trustee may reasonably determine); and
(c) all remaining assets of the LLC shall be distributed to the
Members in accordance with Section 5.03.
7.03 Certificate of Cancellation. On completion of the distribution
of LLC assets as provided herein, the LLC shall be terminated, and any
Member (or such other person or persons as the Act may require or permit)
shall file a Certificate of Cancellation with the Secretary of State of
Delaware under the Act, cancel any other filings made pursuant to Section
1.03, and take such other actions as may be necessary to terminate the
existence of the LLC.
-8-
PAGE
ARTICLE VIII
General Provisions
------------------
8.01 Offset. Whenever the LLC is to pay any sum to any Member, any
amounts that Member owes the LLC may be deducted from that sum before
payment.
8.02 Headings. The descriptive headings herein are inserted
for convenience only and do not constitute part of this agreement.
8.03 Notices. Except as expressly set forth to the contrary in this
Agreement, all notices, requests, or consents provided for or permitted to
be given under this Agreement must be in writing and shall be given either
by registered or certified mail, addressed to the recipient, with return
receipt requested, by hand delivering the writing to the address of the
recipient, by nationally-recognized overnight courier guaranteeing next
business day delivery, or by facsimile transmission; and a notice, request,
or consent given under this Agreement is effective on receipt by the Person
to whom it is sent. All notices, requests, and consents to be sent to a
Member must be sent to or made at the addresses given for that Member on
Schedule A, or such other address as that Member may specify by notice to
the other Members. Any notice, request, or consent to the LLC must be given
to the LLC at the address set forth in Section 1.03, or such other addresses
as the LLC may specify by notice to the Members. Whenever any notice is
required to be given by law, the Certificate of Formation or this Agreement,
a written waiver thereof, signed by the Person entitled to notice, whether
before or after the time stated therein, shall be deemed equivalent to the
giving of such notice.
8.04 Entire Agreement: Supersedure. This Agreement constitutes the
entire agreement of the Members relating to the LLC and supersedes all prior
contracts or agreements with respect to the LLC, whether oral or written.
8.05 Effect of Waiver or Consent. A waiver or consent, express or
implied, to or of any breach or default by any person in the performance by
that person of its obligations with respect to the LLC is not a consent or
waiver to or of any other breach or default in the performance by that
person of the same or any other obligations of that person with respect to
the LLC. Failure on the part of a person to complain of an act of any
person or to declare any person in default with respect to the LLC,
irrespective of how long that failure continues, does not constitute a
waiver by that person of its rights with respect to that default until the
applicable statute-of-limitations period has run.
8.06 Amendment or Modification. This Agreement may be amended or
modified from time to time only by a written instrument signed by the
Members holding at least a majority of the Membership Interests; provided,
however, that an amendment or modification reducing a Member's Membership
Interest (other than to reflect changes otherwise provided by this Agreement)
is effective only with that Member's consent.
-9-
PAGE
8.07 Binding, Effect. Subject to the restrictions on transfers
set forth in this Agreement, this Agreement is binding on and inures to
the benefit of the Members and their respective heirs, legal
representatives, successors, and assigns.
8.08 Governing Law: Severability. This Agreement is governed by and
shall be construed in accordance with the law of the State of Delaware,
excluding any conflict-of-laws rule or principle that might refer the
governance or the construction of this Agreement to the law of another
jurisdiction. In the event of a direct conflict between the provisions of
this Agreement and any provision of the Certificate, or any mandatory
provision of the Act, the applicable provision of the Certificate or the Act
shall control. If any provision of this Agreement or the application
thereof to any person or circumstance is held invalid or unenforceable to
any extent, the remainder of this Agreement and the application of that
provision shall be enforced to the fullest extent permitted by law.
8.09 Further Assurances. In connection with this Agreement and the
transactions contemplated hereby, each Member shall execute and deliver any
additional documents and instruments and perform any additional acts that
may be necessary or appropriate to effectuate and perform the provisions of
this Agreement and such transactions, as reasonably requested by the other
Members.
8.10 Waiver of Certain Rights. Each Member irrevocably waives any
right it may have to maintain any action for dissolution of the LLC or for
partition of the property of the LLC.
8.11 Notice to Members of Provisions of this Agreement. By
executing this Agreement, each Member acknowledges that it has actual
notice of (a) all of the provisions of this Agreement, including, without
limitation, the restrictions on the transfer of Membership Interests set
forth in Article VI, and (b) all of the provisions of the Certificate.
Each Member hereby agrees that this Agreement constitutes adequate notice
of all such provisions, and each Member hereby waives any requirement that
any further notice thereunder be given.
8.12 Execution in Counterparts; Execution by Fax. This Agreement
may be executed in any number of counterparts, each of which shall be deemed
to be an original as against any party whose signature appears thereon, and
all of such shall together constitute one and the same instrument. This
Agreement shall become binding when one or more counterparts hereof,
individually or taken together, shall bear the signatures of all of the
parties reflected hereon as the signatories. Execution of this Agreement
may be delivered by fax transmission.
8.13 Number and Gender. Where the context so indicates, the
masculine includes the feminine and the neuter, the neuter includes the
masculine and the feminine and the singular includes the plural.
-10-
PAGE
8.14 Definition of Person. For the purposes of this Agreement,
"person" means any natural person, partnership (whether general or limited),
limited liability company, trust, estate, association or corporation.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the 9th day of September, effective as of the date first set forth above.
MEMBERS
SELECTIVE INSURANCE COMPANY OF
THE SOUTHEAST
By:/S/ Thornton R. Land
------------------------------
Name: Thornton R. Land
Title:General Counsel
SELECTIVE WAY INSURANCE COMPANY
By: /s/ Thornton R. Land
--------------------------------
Name: Thornton R. Land
Title:Executive Vice President
and General Counsel
-11-
PAGE
SCHEDULE A
----------
Members
-------
Capital Membership
Name and Address Contributions Interests
---------------- ------------- ----------
Selective Insurance Company of the Southeast $2,000,000 25%
2550 West Tyvol Road
Suite 400
Charlotte, NC 28217
704-357-1913 (ph)
704-357-1914 (f)
Selective Way Insurance Company $6,000,000 75%
40 Wantage Avenue
Branchville, NJ 07890
973-948-3000 (ph)
973-948-0282 (f)
-12-
PAGE
EXHIBIT 17.a
INTERESTS AND LIABILITIES AGREEMENT
(hereinafter referred to as the "Agreement")
to the
NEW JERSEY HOMEOWNERS QUOTA SHARE TREATY
(hereinafter referred to as the "Contract")
between
SELECTIVE INSURANCE COMPANY OF AMERICA
SELECTIVE WAY INSURANCE COMPANY
SELECTIVE INSURANCE COMPANY OF THE SOUTHEAST
SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA
EXCHANGE INSURANCE COMPANY
and/or any insurance affiliates which are now owned
or hereafter may be acquired by
The Selective Insurance Group
(hereinafter either individually or collectively
referred to as the "Company")
and
(hereinafter referred to as the "Subscribing Reinsurer")
It is mutually agreed by and between the Company on the one part and the
Subscribing Reinsurer on the other part, that the Subscribing Reinsurer's
share in the interest and liabilities of the Reinsurers as set forth in
the Contract attached hereto and forming a part of this Agreement shall be
for % of the 85% Quota Share.
The share of the Subscribing Reinsurer in the interests and liabilities
of the Reinsurers in respect of the said Contract shall be separate and
apart from the shares of the other reinsurers in the said Contract, and
the interests and liabilities of the Subscribing Reinsurer shall not be
joint with those of the other reinsurers and in no event shall the
Subscribing Reinsurer participate in the interests and liabilities of the
other reinsurers.
This Agreement and the Contract attached hereto shall take effect from
12:01 a.m., Eastern Standard
Effective: January 1, 1997
3645-24
DOC: January 13, 1997
PAGE
Time, January 1, 1998, unless cancelled in accordance with the
terms and conditions of Article 3, Term and Cancellation.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed, in duplicate, by their duly authorized representatives this 10th
day of February, 1997.
SELECTIVE INSURANCE COMPANY OF AMERICA
SELECTIVE WAY INSURANCE COMPANY
SELECTIVE INSURANCE COMPANY OF THE SOUTHEAST
SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA
EXCHANGE INSURANCE COMPANY
and/or any insurance affiliates which are now owned
or hereafter may be acquired by
The Selective Insurance Group
- ------------------------------------------------------------------------
and on this day of , 199__.
Effective: January 1, 1997
3645-24
DOC: January 13, 1997
PAGE
NEW JERSEY HOMEOWNERS QUOTA SHARE TREATY
TABLE OF CONTENTS
-----------------
Article Page
- ------- ----
Preamble............................................... 1
1 Business Covered....................................... 1
2 Exclusions............................................. 2
3 Term and Cancellation.................................. 2
4 Territory.............................................. 3
5 Contract Detail........................................ 3
6 Definition of Loss Occurrence.......................... 4
7 Extra Contractual Obligations.......................... 5
8 Excess of Original Policy Limits....................... 5
9 Indemnification and Errors and Omissions............... 6
10 Reinsurance Follows Original Policies.................. 6
11 Notice of Loss......................................... 7
12 Losses................................................. 7
13 Loss Expenses.......................................... 7
14 Premium and Commissions................................ 8
15 Currency............................................... 10
16 Accounts, Reports and Payments......................... 10
17 Loss and Unearned Premium Reserves..................... 11
18 Sunset and Commutation................................. 12
19 Federal Excise Tax..................................... 13
20 Service of Suit (U.S.A.)............................... 14
21 Insolvency............................................. 14
22 Access to Company's Records............................ 15
23 Arbitration............................................ 16
24 Intermediary........................................... 16
Effective: January 1, 1997
3645-24
DOC: January 13, 1997
PAGE
NEW JERSEY HOMEOWNERS QUOTA SHARE TREATY
(hereinafter referred to as the "Contract")
In consideration of the mutual covenants hereinafter contained and subject
to all the terms and conditions hereinafter set forth
VARIOUS INSURANCE AND/OR REINSURANCE COMPANIES AND/OR
UNDERWRITING MEMBERS OF LLOYD'S
(hereinafter collectively referred to as the "Reinsurers")
one of whom is
THE "SUBSCRIBING REINSURER" WHOSE NAME
APPEARS ON THE INTERESTS AND LIABILITIES AGREEMENT
ATTACHING TO AND FORMING A PART OF THIS CONTRACT
do hereby indemnify, as herein provided and specified, the
SELECTIVE INSURANCE COMPANY OF AMERICA
SELECTIVE WAY INSURANCE COMPANY
SELECTIVE INSURANCE COMPANY OF THE SOUTHEAST
SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA
EXCHANGE INSURANCE COMPANY
and/or any insurance affiliates which are now owned or hereafter may be
acquired by
The Selective Insurance Group
(hereinafter either individually or collectively referred to as the
"Company")
ARTICLE 1
---------
BUSINESS COVERED
- ----------------
This Contract applies to risks located in the State of New Jersey with
respect to all sections of coverage written and classified by the Company
as Homeowners, Condominium, Tenants and Mobile Homeowners insurances.
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ARTICLE 2
---------
EXCLUSIONS
- ----------
A. As per original policy terms and conditions.
B. This Contract excludes all liability of the Company arising by
contract, operation of law, or otherwise, from its participation or
membership, whether voluntary or involuntary, in any insolvency fund.
"Insolvency fund" includes any guaranty fund, insolvency fund, plan,
pool, association, fund or other arrangement, howsoever denominated,
established or governed; which provides for any assessment of or
payment or assumption by the Company of part or all of any claim,
debt, charge, fee, or other obligation of an insurer, or its
successors or assigns, which has been declared by any competent
authority to be insolvent, or which is otherwise deemed unable to meet
any claim, debt, charge, fee or other obligation in whole or in part.
ARTICLE 3
---------
TERM AND CANCELLATION
- ---------------------
This Contract shall apply to all cessions commencing on and after
12:01 a.m., Eastern Standard Time, January 1, 1996, and shall remain in
force until 12:01 a.m., Eastern Standard Time, January 1, 1998.
Notwithstanding the above, the portfolio of unearned premiums and unexpired
liability as of 12:01 a.m., Eastern Standard Time, January 1, 1997, shall
be assumed by the Reinsurers under this Contract and nothing herein
contained shall alter or affect the continuity granted, insofar as this
portfolio assumption is concerned, by the said preceding Contract. In
consideration of the foregoing, the Company shall pay to the Reinsurers
hereunder the unearned premiums calculated on the monthly pro rata basis as
of January 1, 1997, less provisional commission allowed the Company by the
Reinsurers and in consequence thereof, the Reinsurers hereunder shall be
liable for all losses under the said preceding Contract occurring subsequent
to 12:01 a.m., Eastern Standard Time, January 1, 1997.
In the event of non-renewal of this Contract, the liability of the
Reinsurers shall remain in force to the natural expiration or cancellation
or next anniversary date whichever comes first. However, at the option of
the Company this Contract may be cancelled on a cut-off basis. In the event
of the Company exercising this cut-off option, the Reinsurers shall incur no
liability for losses occurring subsequent to the date of termination, but
shall remain liable for all losses outstanding as of the date of termina-
tion. In the event of the Company withdrawing the cessions as provided for
herein, it shall debit the Reinsurers with a sum equal to the pro rata
unearned premiums on unexpired cessions at the respective date, less the
rate of commission allowed by the Reinsurers on such cessions, provided
such option is exercised prior to the termination of this Contract.
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If any law or regulation of the federal, state or local government of any
jurisdiction in which the Company is doing business should render illegal
the arrangements made in this Contract, the Contract can be terminated
immediately, insofar as it applies to such jurisdiction, by the Company
giving notice to the Reinsurers to such effect.
This Contract may be altered or amended in any of its terms and conditions
by mutual consent of the parties, either by endorsement hereof or by an
instrument in writing attached hereto and formally signed.
ARTICLE 4
---------
TERRITORY
- ---------
This Contract covers risks located in New Jersey and/or as provided in the
original policies.
ARTICLE 5
---------
CONTRACT DETAIL
- ---------------
The Company shall cede under this Contract and the Reinsurers shall accept
by way of reinsurance eighty five percent (85%) quota share of all business
covered hereunder.
The liability of the Reinsurers for any interest shall attach simultaneously
with the liability of the Company.
The maximum cession hereunder is $850,000 (being 85% of $1,000,000) per
policy as respects Coverage A, Section I, except with respect to Section II,
for which the Company agrees to a maximum cession of $425,000 (being 85% of
$500,000) per policy.
In no event, however, shall the Reinsurers' liability exceed $95,000,000 in
any one Loss Occurrence, as defined in Article 6, Definition of Loss
Occurrence.
The Company shall maintain net for its own account on each and every risk
the remaining 15% subject to Excess of Loss Reinsurances.
With respect to Extra Contractual Obligations, as defined in Article 7,
Extra Contractual Obligations, the Reinsurers shall be liable to pay up to
100% of the Extra Contractual loss recoverable hereunder, but the
contractual loss plus the Extra Contractual Obligation shall not exceed
Coverage A, Section I Treaty Limits. Furthermore, the Extra Contractual
loss recoverable hereunder shall be the Reinsurers' pro rata share equal to
the percentage ceded hereunder.
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ARTICLE 6
---------
DEFINITION OF LOSS OCCURRENCE
- -----------------------------
The term "Loss Occurrence" shall mean the sum of all individual losses
directly occasioned by any one disaster, accident or loss or series of
disasters, accidents or losses arising out of one event which occurs within
the state of New Jersey. However, the duration and extent of any one "Loss
Occurrence" shall be limited to all individual losses sustained by the
Company occurring during any period of 168 consecutive hours arising out of
and directly occasioned by the same event except that the term "Loss
Occurrence" shall be further defined as follows:
A. As regards windstorm, hail, tornado, hurricane, cyclone, including
ensuing collapse and water damage, all individual losses sustained by
the Company occurring during any period of 72 consecutive hours arising
out of and directly occasioned by the same event. However, the event
need not be limited to one state or province or states or provinces
contiguous thereto.
B. As regards riot, riot attending a strike, civil commotion, vandalism
and malicious mischief, all individual losses sustained by the Company
occurring during any period of 72 consecutive hours within the area of
one municipality or county and the municipalities or counties
contiguous thereto arising out of and directly occasioned by the same
event. The maximum duration of 72 consecutive hours may be extended
in respect of individual losses which occur beyond such 72 consecutive
hours during the continued occupation of an insured's premises by
strikers, provided such occupation commenced during the aforesaid
period.
C. As regards earthquake (the epicenter of which need not necessarily be
within the territorial confines referred to in the opening paragraph
of this Article) and fire following directly occasioned by the
earthquake, only those individual fire losses which commence during
the period of 168 consecutive hours may be included in the Company's
"Loss Occurrence".
D. As regards "Freeze", only individual losses directly occasioned by
collapse, breakage of glass and water damage (caused by bursting of
frozen pipes and tanks) may be included in the Company's "Loss
Occurrence".
Except for those "Loss Occurrences" referred to in paragraphs A. and B.
above, the Company may choose the date and time when any such period of
consecutive hours commences provided that it is not earlier than the date
and time of the occurrence of the first recorded individual loss sustained
by the Company arising out of that disaster, accident or loss and provided
that only one such period of 168 consecutive hours shall apply with respect
to one event.
However, as respects those "Loss Occurrences" referred to in paragraphs A.
and B. above, if the disaster, accident or loss occasioned by the event is
of greater duration than 72 consecutive hours, then the Company may divide
that disaster, accident or loss into two or more "Loss Occurrences" provided
no two periods overlap and no individual loss is included in more than one
such period
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and provided that no period commences earlier than the date and time of the
occurrence of the first recorded individual loss sustained by the Company
arising out of that disaster, accident or loss.
No individual losses occasioned by an event that would be covered by 72
hours clauses may be included in any "Loss Occurrence" claimed under the
168 hours provision.
ARTICLE 7
---------
EXTRA CONTRACTUAL OBLIGATIONS
- -----------------------------
This Contract shall protect the Company for any Extra Contractual Obliga-
tions within the limitations of Article 5, Contract Detail. "Extra
Contractual Obligations" are defined as those liabilities not covered under
any other provision of this Contract and which arise from the handling of
any claim on business covered hereunder, such liabilities arising because
of, but not limited to, the following: failure by the Company to settle
within the policy limit, or by reason of alleged or actual negligence, fraud
or bad faith in rejecting an offer of settlement or in the preparation of
the defense or in the trial of any action against its insured or reinsured
or in the preparation or prosecution of an appeal consequent upon such
action.
The date on which any Extra Contractual Obligation is incurred by the
Company shall be deemed, in all circumstances, to be the date of the
original accident, casualty, disaster or loss occurrence.
However, this Article shall not apply where the loss has been incurred due
to the fraud of a member of the Board of Directors or a Corporate Officer of
the Company acting individually or collectively or in collusion with any
individuals or corporation or any other organization or party involved in
the presentation, defense or settlement of any claim covered hereunder.
ARTICLE 8
---------
EXCESS OF ORIGINAL POLICY LIMITS
- --------------------------------
This Contract shall protect the Company, within the limitations of
Article 5, Contract Detail, in connection with ultimate net loss in excess
of the limit of its original policy, such loss in excess of the limit having
been incurred because of failure by it to settle within the policy limit or
by reason of alleged or actual negligence, fraud or bad faith in rejecting
an offer of settlement or in the preparation of the defense or in the trial
of any action against its insured or reinsured or in the preparation or
prosecution of an appeal consequent upon such action.
However, this Article shall not apply where the loss has been incurred due
to fraud by a member of the Board of Directors or a Corporate Officer of the
Company acting individually or
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PAGE
collectively or in collusion with any individual or corporation or any
other organization or party involved in the presentation, defense or
settlement of any claim covered hereunder.
For the purposes of this Article, the word "loss" shall mean any amounts for
which the Company would have been contractually liable to pay had it not
been for the limit of the original policy.
ARTICLE 9
---------
INDEMNIFICATION AND ERRORS AND OMISSIONS
- ----------------------------------------
Any recitals in this Contract of the terms and provisions of any original
insurance or reinsurance are merely descriptive. The Reinsurers are
reinsuring, to the amount herein provided, the obligations of the Company
under any original insurance or reinsurance. The Company shall be the sole
judge as to:
A. what shall constitute a claim or loss covered under any original
insurance or reinsurance written by the Company;
B. the Company's liability thereunder;
C. the amount or amounts which shall be proper for the Company to pay
thereunder.
The Reinsurers shall be bound by the judgment of the Company as to the
obligation(s) and liability(ies) of the Company under any original insurance
or reinsurance, subject to the terms and conditions of this Contract.
Any inadvertent error, omission or delay in complying with the terms and
conditions of this Contract shall not be held to relieve either party hereto
from any liability which would attach to it hereunder if such error,
omission or delay had not been made, provided such error, omission or delay
is rectified immediately upon discovery.
ARTICLE 10
----------
REINSURANCE FOLLOWS ORIGINAL POLICIES
- -------------------------------------
All reinsurances for which the Reinsurers shall be liable by subscribing to
this Contract shall be subject in all respects to the same rates, terms,
conditions, interpretations, waivers, the exact proportion of premiums paid
to the Company and to the same modifications, alterations and cancellations
as the respective insurances of the Company to which such reinsurances
relate, the true intent of this Contract being that the Reinsurers shall, in
every case to which this Contract applies and in the proportion specified
herein, follow the fortunes of the Company.
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ARTICLE 11
----------
NOTICE OF LOSS
- --------------
In the event of loss which may cause a claim to the Reinsurers in the
estimated amount of $500,000 or more, notice of such loss shall be advised
to the Reinsurers as soon as possible.
ARTICLE 12
----------
LOSSES
- ------
A. The Company alone and at its full discretion shall adjust, settle or
compromise all claims and losses. All such adjustments, settlements
and compromises, including ex gratia payments, shall be binding on the
Reinsurers in proportion to their participation. The Company shall
likewise at its sole discretion commence, continue, defend, compromise,
settle or withdraw from actions, suits or proceedings and generally do
all such matters and things relating to any claim or loss as in its
judgement may be beneficial or expedient; and all loss payments made
shall be shared by the Reinsurers proportionately. The Reinsurers
shall, on the other hand, benefit proportionately from all reductions
of losses by salvage, compromise or otherwise.
B. In respect of all business covered hereunder in the event of a loss
being intimated or reported to the Company or its agent before the
Company's net retention has been established, the Company,
nevertheless, shall be entitled to claim on the Reinsurers in
conformity with the limits which the Company usually retains net and
cedes hereunder upon such risk or risks in the same or similar
localities as established by its books and/or practices. However,
upon request of the Reinsurers, the Company will produce evidence of
its practice applicable to any such case forming the subject of inquiry
or investigation.
C. Losses due by the Reinsurers to the Company in an amount not exceeding
$500,000 on any one loss shall be carried to account; but when the
amount due from the Reinsurers as a result of any one loss and its
expenses equals or exceeds $500,000 any one loss or Loss Occurrence, as
defined in Article 6, Definition of Loss Occurrence, it will, at the
option and upon demand of the Company, be paid by special remittance
immediately upon receipt of a special loss account which shall be
prepared by the Company and shall contain all relevant details in
connection with the loss.
ARTICLE 13
----------
LOSS EXPENSES
- -------------
A. The Reinsurers shall be liable for their proportionate share of all
expenses incurred by the Company in connection with the investigation
and settlement or contesting the validity of specific claims or losses
or alleged losses (except as hereinafter provided). In addition, the
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Reinsurers shall be liable for their proportional share of legal
expenses and costs incurred in connection with coverage questions and
legal actions connected hereto.
B. When the Company uses its own field employees or officials instead of
outside adjusters to settle losses, the Company shall be permitted to
include a pro rata share of the salaries and expenses of the said field
employees according to the time occupied in adjusting such losses and
also the expenses of said officials incurred in connection with the
losses, but no salaries of such officials or any normal overhead
charge, such as rent, postage, lighting, cleaning, heating, etc., shall
be included.
C. Unallocated loss expenses, being operating expense classifications not
attributable to specific losses, are excluded hereunder. These are
defined as administrative expenses of personnel assigned to claims
sections and the expenses of non-claim departments involved in the
administrative claim work (other than the Company's Legal Department as
specified above.)
ARTICLE 14
----------
PREMIUM AND COMMISSIONS
- -----------------------
A. With respect to all business, the Reinsurers shall be paid premiums at
the gross rates applicable, less a provisional commission of 37%.
B. The provisional commission of 37% shall be adjusted after the expira-
tion of this Contract on an earned/incurred basis as follows:
Loss and Allocated Loss Adjustment Expense Ratio Commission
------------------------------------------------ ----------
60% or Higher 30.00%
59% 31.00%
58% 32.00%
57% 33.00%
56% 34.00%
55% 35.00%
54% 36.00%
53% (Provisional) 37.00%
52% 38.00%
51% 39.00%
50% 40.00%
49% 41.00%
48% 42.00%
47% 43.00%
46% 44.00%
45% 45.00%
44% 46.00%
43% 47.00%
Effective: January 1, 1997 8 of 17
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42% 48.00%
41% 49.00%
40% or Lower 50.00%
"Premiums earned" for the purposes of the commission adjustment shall mean
the total premiums written during the twelve month calendar period, plus the
reserve for unearned premiums at the beginning of the twelve month calendar
period, minus the reserve for unearned premiums at the end of the twelve
month calendar period.
"Losses incurred" shall mean the net loss and allocated loss adjustment
expenses recovered during the twelve month calendar period on losses
occurring during that period, plus the outstanding loss reserve, including
losses incurred but not reported, at the end of that twelve month calendar
period on losses occurring during that twelve month calendar period. Extra
Contractual Obligations losses, as defined in Article 7, Extra Contractual
Obligations, and losses in excess of original policy limits, as defined in
Article 8, Excess of Original Policy Limits, are to be included in the
losses incurred definition subject to the Contract Limit, if applicable.
The Company shall retain 50% of the Loss and Allocated Loss Adjustment
Expense Ratio between 65% and 75% for the term of this Contract.
C. The calculation of adjusted commission shall be prepared and submitted
by the Company 84 months after January 1, 1998 and in accordance with
Article 18, Sunset and Commutation.
D. The commission allowances which the Reinsurers, in accordance with the
preceding stipulations, will pay to the Company, include provisions for
all taxes, assessments and expenses falling on the business transacted
under this Contract; and in the event of the Reinsurers being compelled
to make returns to the Insurance Departments or other departments of
any state, District of Columbia, province, county or city, or any
board, bureau or association, and consequently being obliged to pay
taxes or assessments direct to such department, board, bureau or
association on the premium received from the Company under this
Contract, such taxes or assessment shall be refunded by the Company to
the Reinsurers. This Section shall have no application to federal or
dominion government taxes or to any federal, dominion, state, District
of Columbia, province or municipal excess profits or income taxes.
E. If any amount of reserves for losses and loss expense that had been
used in any calculation of adjusted commission are indicated by
subsequent developments to have been underestimated or overestimated,
such calculation shall be revised at the request of either party. The
Company shall refund to the Reinsurers, or the Reinsurers shall pay to
the Company, such amount as will give effect to the revisions.
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ARTICLE 15
----------
CURRENCY
- --------
Wherever the word "Dollars" or the sign "$" appear in this Contract, they
shall be construed to mean United States Dollars, excepting in those cases
where the policies are issued by the Company in Canadian Dollars in which
cases they shall mean Canadian Dollars.
For purposes of this Contract, where the Company received premiums or pays
losses in currencies other than United States or Canadian currency, such
premiums and losses shall be converted into United States Dollars at the
actual rates of exchange at which these premiums and losses are entered in
the Company's books.
ARTICLE 16
----------
ACCOUNTS, REPORTS AND PAYMENTS
- ------------------------------
A. The Company shall furnish to the Reinsurers monthly accounts of
business ceded hereunder within 45 days after the close of each month,
showing premiums due the Reinsurers, adjustments to premium reserves,
if any, and commissions, Federal Excise Tax, if any, and paid losses
due from the Reinsurers, supported by statistical details as set forth
herein. The balance shown to be due by each account shall be payable
by the debtor party within 45 days after the close of the month
accounted for.
B. The statistical details referred to in the preceding paragraph shall
be comprised of:
1. Premiums less return premiums summarized by major classes.
2. Paid loss and paid loss adjustment expense summarized by major
classes and segregated into years of occurrence.
3. Outstanding losses summarized by major classes and segregated into
years of occurrence.
4. Total unearned premiums each month and at the end of each year
summarized by major classes.
C. In addition, the Company shall forward with its current account,
particulars of every loss and its expenses paid therein which are in
excess of $500,000 any one loss or Loss Occurrence, as defined in
Article 6, Definition of Loss Occurrence, to the Contract and also
shall forward details of the aggregate settlement made in respect of
any event which is recognized by the Reinsurers to be a catastrophe.
It is agreed, however, that when the amount due from the Reinsurers
as a result of any one loss exceeds their proportion of $500,000,
they will at the option and upon demand of the
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Company make payment by special remittance immediately upon receipt
of a special loss account which shall be prepared by the Company and
shall contain all relevant details in connection with the loss.
ARTICLE 17
----------
LOSS AND UNEARNED PREMIUM RESERVES
- ----------------------------------
(This Article applies to those Reinsurers who do not qualify for credit by
any state or any other governmental authority having jurisdiction over the
Company's loss and unearned premium reserves.)
A: Where a Letter of Credit Trust Agreement is used, the following clause
shall apply:
It is agreed that when the Company files with the Insurance Department
or establishes reserves for claims covered hereunder and unearned
premium, as required by law, the Company shall forward to the Reinsurers
a statement showing the proportion of such loss and unearned premium
reserves which is applicable to the Reinsurers. The Reinsurers hereby
agree to apply for and secure delivery to the Company of a clean,
irrevocable and unconditional Letter of Credit, with a minimum term of
one year, that is issued or confirmed, and presentable and payable in
the United States by any bank or trust company, and is in a format
acceptable to the governmental authority having jurisdiction over the
Company's reserves in an amount equal to the Reinsurers' proportion of
said loss and unearned premium reserves.
The Company and the Reinsurers agree that such Letter of Credit shall
be subject to the terms of a separate Letter of Credit Trust Agreement,
and that said trust agreement shall be in a form acceptable to the
governmental authority having jurisdiction over the Company's loss and
unearned premium reserves.
The designated bank shall have no responsibility whatsoever in connec-
tion with the propriety of withdrawals made by the Company or the
disposition of funds withdrawn, except to see that withdrawals are made
only upon the order of properly authorized representatives of the
Company.
B: Where a Letter of Credit Trust Agreement is not used, the following
clause shall apply:
It is agreed that when the Company files with the Insurance Department
or establishes reserves for claims covered hereunder and unearned
premium, as required by law, the Company shall forward to the Reinsurers
a statement showing the proportion of such loss and unearned premium
reserves which is applicable to the Reinsurers. The Reinsurers hereby
agree to apply for and secure delivery to the Company of a clean,
irrevocable and unconditional Letter of Credit, with a minimum term of
one year, that is issued or confirmed, and presentable and payable in
the United States by any bank or trust company, and is in a format
acceptable to the governmental authority having jurisdiction over the
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Company's reserves in an amount equal to the Reinsurers' proportion of
said loss and unearned premium reserves.
The Company and the Reinsurers agree that the Letter of Credit provided
by the Reinsurers under this provision may be drawn upon at any time,
notwithstanding any other provisions in this Contract, and be utilized
by the Company or any successor by operation of law of the Company,
including, without limitation, any liquidator, rehabilitator, receiver
or conservator of such Company for the following purposes:
1. to reimburse the Company for the Reinsurers' share of surrenders
and benefits or losses paid by the Company under the terms and
provisions of the policies reinsured under this Contract;
2. to reimburse the Company for the Reinsurers' share of premium
returned to the owners of policies reinsured under this Contract
on account of cancellation of such policies;
3. to fund an account with the Company in an amount at least equal to
the deduction, for reinsurance ceded, from the Company's liabilities
for policies ceded under this Contract. Such amount shall include,
but not be limited to, amounts for policy reserves, reserves for
claims and losses incurred (including losses incurred but not
reported), loss adjustment expenses, and unearned premiums;
4. to pay any other amounts the Company claims are due under this
Contract;
5. to return any amounts drawn down on Letters of Credit in excess of
the actual amounts required for 1., 2. and 3. above, or in case of
4. above, any amounts which are subsequently determined not to be
due.
All of the foregoing should be applied without diminution because of
insolvency on the part of the Company or the Reinsurers.
The designated bank shall have no responsibility whatsoever in connec-
tion with the propriety of withdrawals made by the Company or the
disposition of funds withdrawn, except to see that withdrawals are made
only upon the order of properly authorized representatives of the
Company.
ARTICLE 18
----------
SUNSET AND COMMUTATION
- ----------------------
A. Not later than 84 months after the close of the Contract year, the
Company shall advise the Reinsurers of all claims reported for said
Contract year not finally settled which are likely to result in a claim
under this Contract. The Company and the Reinsurers or their respective
representatives shall, by mutual agreement, determine and capitalize
such claims. Payment by the Reinsurers of their proportion of the
amount or amounts so mutually agreed, shall
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constitute a complete and final release of the Reinsurers of
liability in respect of such claim (or claims).
B. If agreement cannot be reached, the Company and the Reinsurers shall
mutually appoint an Actuary or Appraiser to investigate, determine
and capitalize such claims. If both parties then agree, the Reinsurers
shall pay their proportion of the amount so determined to be the
capitalized value of such claims.
C. If the parties fail to agree, then any difference shall be settled by a
panel of three Actuaries, one to be chosen by each party and the third
by the two so chosen. If either party refuses or neglects to appoint an
Actuary within thirty days, the other party may appoint two Actuaries.
If the two Actuaries fail to agree on the selection of a third Actuary
within thirty days of their appointment, each of them shall name two,
of whom the other shall decline one and the decision shall be made by
drawing lots. All the Actuaries shall be Fellows of the Casualty
Actuarial Society or of the American Academy of Actuaries. None of the
Actuaries shall be under the control of either party to this Contract.
Each party shall submit its case to its Actuary within thirty days of
the appointment of the third Actuary. The decision in writing of any
two Actuaries, when filed with the parties hereto, shall be final and
binding on both parties. The expense of the Actuaries and of the
Commutation shall be equally divided between the two parties. Said
Commutation shall take place in Branchville, New Jersey, unless some
other place is mutually agreed upon by the Company and the Reinsurers.
ARTICLE 19
----------
FEDERAL EXCISE TAX
- ------------------
(This Article applies only to those Reinsurers, domiciled outside the United
States of America who are not exempt from the Federal Excise Tax.)
The Reinsurers have agreed to allow for the purpose of paying the Federal
Excise Tax the percentage specified by United States law of the premium
payable hereon to the extent such premium is subject to Federal Excise Tax.
In the event of any return of premium becoming due hereunder, the Reinsurers
will deduct the percentage specified by United States law from the amount of
the return and the Company or its agent should take steps to recover the Tax
from the United States Government.
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ARTICLE 20
----------
SERVICE OF SUIT (U.S.A.)
- ------------------------
(This Article applies only to those Reinsurers not domiciled in the United
States of America, and/or not authorized in any state, territory and/or
district of the United States where authorization is required by insurance
regulatory authorities.)
It is agreed that in the event of the failure of the Reinsurers to pay any
amount claimed to be due under this Contract, the Reinsurers, at the request
of the Company, will submit to the jurisdiction of any court of competent
jurisdiction within the United States of America and will comply with all
requirements necessary to give such court jurisdiction; and all matters
arising hereunder shall be determined in accordance with the law and
practice of such court. Nothing in this Article constitutes or should be
understood to constitute a waiver of the Reinsurers' rights to commence an
action in any court of competent jurisdiction in the United States, to
remove an action to a United States District Court, or to seek a transfer
of a case to another court as permitted by the laws of the United States or
of any state in the United States.
Service of process in such suit may be made upon Mendes and Mount, 750
Seventh Avenue, New York, New York 10019-6879 (hereinafter, "agent for
service of process") and in any suit instituted against any Reinsurer(s)
upon this Contract, the Reinsurer(s) will abide by the final decision of
such court or of any appellate court in the event of an appeal.
The above named are authorized and directed to accept service of process on
behalf of the Reinsurers in any such suit and/or upon the request of the
Company to give a written undertaking to the Company that the agent for
service of process will enter a general appearance on behalf of the
Reinsurers in the event such a suit shall be instituted.
Further, pursuant to any statute of any state, territory or district of the
United States of America which makes provision therefor, the Reinsurers
hereby designate the Superintendent, Commissioner or Director of Insurance
or other officer specified for that purpose in the statute, or his successor
or successors in office, as their true and lawful attorney upon whom may be
served any lawful process in any action, suit or proceeding instituted by or
on behalf of the Company or any beneficiary hereunder arising out of this
Contract and hereby designate the agent for service of process as the firm
to whom the said officer is authorized to mail such process or a true copy
thereof.
ARTICLE 21
----------
INSOLVENCY
- ----------
In the event of the insolvency of the Company, this reinsurance shall be
payable directly to the Company, or to its liquidator, receiver, conservator
or statutory successor on the basis of the liability of the Company without
diminution because of the insolvency of the Company or because
Effective: January 1, 1997 14 of 17
3645-24
DOC: January 13, 1997
PAGE
the liquidator, receiver, conservator or statutory successor of the Company
has failed to pay all or a portion of any claim. It is agreed, however,
that the liquidator, receiver, conservator or statutory successor of the
Company shall give written notice to the Reinsurers of the pendency of a
claim against the Company indicating the policy or bond reinsured, which
claim would involve a possible liability on the part of the Reinsurers
within a reasonable time after such claim is filed in the conservation or
liquidation proceeding or in the receivership, and that during the pendency
of such claim, the Reinsurers may investigate such claim and interpose, at
their own expense, in the proceeding where such claim is to be adjudicated
any defense or defenses that they may deem available to the Company or its
liquidator, receiver, conservator or statutory successor. The expense thus
incurred by the Reinsurers shall be chargeable, subject to the approval of
the court, against the Company as part of the expense of conservation or
liquidation to the extent of a pro rata share of the benefit which may
accrue to the Company solely as a result of the defense undertaken by the
Reinsurers.
Where two or more Reinsurers are involved in the same claim and a majority
in interest elect to interpose defense to such claim, the expense shall be
apportioned in accordance with the terms of the reinsurance Contract as
though such expense had been incurred by the Company.
As to all reinsurance made, ceded, renewed or otherwise becoming effective
under this Contract, the reinsurance shall be payable as set forth above by
the Reinsurers to the Company or to its liquidator, receiver, conservator or
statutory successor, except as provided by Sections 4118(a)(1)(A) and
1114(c) of the New York Insurance Law or except (1) where the Contract
specifically provides another payee in the event of the insolvency of the
Company, and (2) where the Reinsurers, with the consent of the direct
insured or insureds, have assumed such policy obligations of the Company as
direct obligations of the Reinsurers to the payees under such policies and
in substitution for the obligations of the Company to such payees. Then,
and in that event only, the Company, with the prior approval of the
certificate of assumption on New York risks by the Superintendent of
Insurance of the State of New York, is entirely released from its obligation
and the Reinsurers pay any loss directly to payees under such policy.
ARTICLE 22
----------
ACCESS TO COMPANY'S RECORDS
- ---------------------------
The Reinsurers or their duly designated representatives shall have access to
the books, documents and records of the Company at all reasonable times for
the purpose of obtaining information concerning this Contract or the subject
matter thereof.
Effective: January 1, 1997 15 of 17
3645-24
DOC: January 13, 1997
PAGE
ARTICLE 23
----------
ARBITRATION
- -----------
As a precedent to any right of action hereunder, if any dispute shall arise
between the parties to this Contract with reference to the interpretation of
this Contract or their rights with respect to any transaction involved,
whether such dispute arises before or after termination of this Contract,
such dispute, upon the written request of either party, shall be submitted
to three arbitrators, one to be chosen by each party, and the third by the
two so chosen. If either party refuses or neglects to appoint an arbitrator
within thirty days after the receipt of written notice from the other party
requesting it to do so, the requesting party may appoint two arbitrators.
If the two arbitrators fail to agree in the selection of a third arbitrator
within thirty days of their appointment, each of them shall name two, of
whom the other shall decline one and the decision shall be made by drawing
lots. All arbitrators shall be active or retired disinterested officers of
insurance or reinsurance companies or Underwriters at Lloyd's, London not
under the control of either party to this Contract.
The arbitrators shall interpret this Contract as an honorable engagement and
not as merely a legal obligation. They are relieved of all judicial
formalities and may abstain from following the strict rules of law. They
shall make their award with a view to effecting the general purpose of this
Contract in a reasonable manner rather than in accordance with a literal
interpretation of the language. Each party shall submit its case to its
arbitrator within thirty days of the appointment of the third arbitrator.
The decision in writing of any two arbitrators, when filed with the parties
hereto, shall be final and binding on both parties. Judgment may be entered
upon the final decision of the arbitrators in any court having jurisdiction.
Each party shall bear the expense of its own arbitrator and shall jointly
and equally bear with the other party the expense of the third arbitrator
and of the arbitration. Said arbitration shall take place in the city in
which the Company's Head Office is located unless some other place is
mutually agreed upon by the parties to this Contract.
ARTICLE 24
----------
INTERMEDIARY
- ------------
Guy Carpenter & Company, Inc. is hereby recognized as the intermediary
negotiating this Contract for all business hereunder. All communications
(including but not limited to notices, statements, premiums, return
premiums, commissions, taxes, losses, loss adjustment expenses, salvages,
and loss settlements) relating thereto shall be transmitted to the Company
or the Reinsurers through Guy Carpenter & Company, Inc., Two World Trade
Center, New York, New York 10048. Payments by the Company to the
intermediary shall be deemed to constitute payment to the Reinsurers.
Payments by the Reinsurers to the intermediary shall be deemed to
Effective: January 1, 1997 16 of 17
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DOC: January 13, 1997
PAGE
constitute payment to the Company only to the extent that such payments
are actually received by the Company.
Effective: January 1, 1997 17 of 17
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DOC: January 13, 1997
PAGE
TERMINATION ADDENDUM
to the
NEW JERSEY HOMEOWNERS QUOTA SHARE TREATY
(hereinafter referred to as the "Contract")
between
SELECTIVE INSURANCE COMPANY OF AMERICA
SELECTIVE WAY INSURANCE COMPANY
SELECTIVE INSURANCE COMPANY OF THE SOUTHEAST
SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA
EXCHANGE INSURANCE COMPANY
and/or any insurance affiliates which are now owned or hereafter may be
acquired by
The Selective Insurance Group
(hereinafter either individually or collectively referred to as the
"Company")
and
(hereinafter referred to as the "Subscribing Reinsurer")
It is hereby mutually agreed, that effective 12:01 a.m., Eastern Standard
Time, January 1, 1997, the Contract (effective 1/1/96) is terminated in
accordance with the terms of Article 3, Term and Cancellation, of the
Contract.
All other terms and conditions shall remain unchanged.
Termination Addendum 1 of 3
Effective: January 1, 1997
3645-24
PAGE
IN WITNESS WHEREOF, the parties hereto have caused this Termination
Addendum to be executed, in duplicate, by their duly authorized
representatives this day of , 199__.
SELECTIVE INSURANCE COMPANY OF AMERICA
SELECTIVE WAY INSURANCE COMPANY
SELECTIVE INSURANCE COMPANY OF THE SOUTHEAST
SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA
EXCHANGE INSURANCE COMPANY
and/or any insurance affiliates which are now owned or hereafter may be
acquired by
The Selective Insurance Group
Termination Addendum 2 of 3
Effective: January 1 1997
3645-24
PAGE
and on this day of , 199__.
Termination Addendum 3 of 3
Effective: January 1, 1997
3645-24
PAGE
SUMMARY OF CHANGES
to the
SELECTIVE INSURANCE COMPANY
NEW JERSEY HOMEOWNERS QUOTA SHARE TREATY
This Contract effective January 1, 1997 differs from the previous Contract
effective January 1, 1996 in the following manner:
1. Throughout the Contract, all dates have been amended to reflect the
current 12 month period of the Contract.
2. Interests and Liabilities Agreement; A new third paragraph has been
introduced to reflect the commencement and expiration of the Contract.
3. Article 3, Term and Cancellation; The first paragraph has been amended
to reflect the current 12 month period of the Contract and the third
paragraph has been amended to reflect the language of the placement
slip.
4. Article 8, Excess of Original Policy Limits; The first paragraph has
been amended to delete the phrase "within Coverage A, Section I Treaty
limits hereof" and replace it with "within the limitations of
Article 5, Contract Detail".
5. Article 14, Premium and Commissions; Section B has been amended to
reflect the language of the placement slip including amending the
sliding scale commission adjustment calculations, deleting all
references to deficit and credit carryforward calculations, and
replacing the phrase "Contract year" with "the twelve month calendar
period". Expiring Sections C and D have been deleted in accordance
with the placement slip.
Effective: January 1, 1997
3645-24
PAGE
EXHIBIT 17.b
INTERESTS AND LIABILITIES AGREEMENT
(hereinafter referred to as the "Agreement")
to the
PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT
(hereinafter referred to as the "Contract")
between
The Insurance Companies comprising THE SELECTIVE INSURANCE GROUP, including,
but not limited to:
SELECTIVE INSURANCE COMPANY OF AMERICA
SELECTIVE WAY INSURANCE COMPANY
SELECTIVE INSURANCE COMPANY OF THE SOUTHEAST
SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA
EXCHANGE INSURANCE COMPANY
and/or any insurance affiliates which are now owned or hereafter may be
acquired by The Selective Insurance Group.
(hereinafter referred to collectively or individually as the "Company")
and
(hereinafter referred to as the "Subscribing Reinsurer")
It is mutually agreed by and between the Company on the one part, and the
Subscribing Reinsurer on the other part that the Subscribing Reinsurer's
share in the interests and liabilities of the Reinsurers as set forth in
the Contract attached hereto and forming a part of this Agreement,
effective 12:01 a.m., Standard Time at the location of the risk or risks,
January 1, 1997, to 12:01 a.m., Standard Time at the location of the risk
or risks, January 1, 1998, shall be for:
% of up to $45,000,000 each Loss Occurrence.
% of up to $25,000,000 each Loss Occurrence.
% of up to $35,000,000 each Loss Occurrence.
Effective: January 1, 1997
3645-21
DOC: January 20, 1997
PAGE
The share of the Subscribing Reinsurer in the interests and liabilities of
all Reinsurers in respect of the said Contract shall be separate and apart
from the shares of the other reinsurers to the said Contract, and the
interests and liabilities of the Subscribing Reinsurer shall not be joint
with those of the other reinsurers and in no event shall the Subscribing
Reinsurer participate in the interests and liabilities of the other
reinsurers.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives this day of
, 199__.
SELECTIVE INSURANCE COMPANY OF AMERICA
SELECTIVE WAY INSURANCE COMPANY
SELECTIVE INSURANCE COMPANY OF THE SOUTHEAST
SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA
EXCHANGE INSURANCE COMPANY
and/or any insurance affiliates which are now owned or hereafter may be
acquired by The Selective Insurance Group.
- ------------------------------------------------------------------------
Effective: January 1, 1997
3645-21
DOC: January 20, 1997
PAGE
and on this day of , 199__.
- ----------------------------------------------------------------------
Effective: January 1, 1997
3645-21
DOC: January 20, 1997
PAGE
PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT
TABLE OF CONTENTS
-----------------
Article Page
- ------- ----
Preamble.............................................. 1
1 Term.................................................. 2
2 Exclusions............................................ 2
3 Definitions........................................... 4
4 Self-Insured Obligations.............................. 5
5 Reinsuring Clause..................................... 6
6 Reinstatement......................................... 6
7 Premium............................................... 7
8 Ultimate Net Loss..................................... 8
9 Net Retained Lines.................................... 8
10 Loss Settlements...................................... 9
11 Currency.............................................. 9
12 Taxes................................................. 10
13 Federal Excise Tax.................................... 10
14 Errors and Omissions.................................. 10
15 Access to Records..................................... 10
16 Insolvency............................................ 11
17 Arbitration........................................... 12
18 Service of Suit....................................... 12
19 Loss Reserves......................................... 13
20 Intermediary.......................................... 15
Attachments
- -----------
Pools, Associations And Syndicates Exclusion Clause.. 16
Nuclear Incident Exclusion Clause - Physical Damage -
Reinsurance - U.S.A.................................. 18
Nuclear Incident Exclusion Clause - Physical Damage -
Reinsurance - Canada................................. 20
Effective: January 1, 1997
3645-21
DOC: January 20, 1997
PAGE
PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT
(hereinafter referred to as the "Contract")
In consideration of the mutual covenants hereinafter contained and upon the
terms and conditions hereinafter set forth
VARIOUS INSURANCE AND/OR REINSURANCE COMPANIES
AND/OR UNDERWRITING MEMBERS OF LLOYD'S
(hereinafter collectively referred to as the "Reinsurers")
one of whom is
THE "SUBSCRIBING REINSURER" WHOSE NAME APPEARS
ON THE INTERESTS AND LIABILITIES AGREEMENT
ATTACHING TO AND FORMING A PART OF THIS CONTRACT
do hereby indemnify, as herein provided and specified,
SELECTIVE INSURANCE COMPANY OF AMERICA
SELECTIVE WAY INSURANCE COMPANY
SELECTIVE INSURANCE COMPANY OF THE SOUTHEAST
SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA
EXCHANGE INSURANCE COMPANY
and/or any insurance affiliates which are now owned or hereafter may be
acquired by The Selective Insurance Group.
(hereinafter referred to collectively or individually as the "Company")
PREAMBLE
- --------
The Reinsurers hereby reinsure the excess liability of the Company resulting
from losses occurring during the term of this Contract, covering anywhere in
the world, under all of its policies, other than policies or portions
thereof hereinafter excluded, subject to the following conditions:
Effective: January 1, 1997 1 of 21
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PAGE
ARTICLE 1
---------
TERM
- ----
The term of this Contract shall be from 12:01 a.m., Standard Time at the
location of the risk or risks, January 1, 1997, to 12:01 a.m., Standard
Time at the location of the risk or risks, January 1, 1998.
Should this Contract terminate while a Loss Occurrence, as defined in
Article 3, Definitions, is in progress, the Reinsurers shall nevertheless
be liable to the extent of their interest, subject to the other conditions
of this Contract, for all losses resulting from such Loss Occurrence,
whether such losses arise before or after such termination, provided that
no part of such Loss Occurrence shall be recoverable from any renewal of
this Contract.
ARTICLE 2
---------
EXCLUSIONS
- ----------
This Contract shall not apply to and specifically excludes:
A. Loss or liability excluded by the provisions of the "Pools,
Associations and Syndicates Exclusion Clause" attached hereto.
B. Any risks written by the Company's Aviation Department or written by
the Company as a member of an Aviation Insurance Group. However, with
respect to Property business, the exclusion shall not apply to
stationary ground risks, cargo and/or aircraft property damage.
C. Accident and Health business.
D. Fidelity business, except when written as a miscellaneous hazard in
Inland Marine transportation policies.
E. All business classified by the Company as Casualty, (including the
Casualty sections of Homeowners, Farmowners and Commercial Multiple
Peril policies).
F. Boiler and Machinery.
G. Workers' Compensation and Employers' Liability business.
H. Hail on growing or standing crops.
I. Livestock Mortality.
J. Mortgage Impairment Insurance with respect to Flood and Earthquake.
Effective: January 1, 1997 2 of 21
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PAGE
K. Stop loss reinsurance, quota share treaty reinsurance, and surplus
treaty reinsurance assumed from other insurance and reinsurance
companies and from Lloyd's Syndicates.
L. Contract Surety and Credit Insurance.
M. Liability excluded under the provisions of the "Nuclear Incident
Exclusion Clause - Physical Damage - Reinsurance - U.S.A." and the
"Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance -
Canada", attached hereto.
N. Liability arising from participation or membership in an Insolvency
Fund.
O. Financial Guarantee and Insolvency business.
P. War Risks.
Q. Loss/or damage/or costs/or expenses arising from seepage and/or
pollution and/or contamination, other than contamination from smoke
damage. Nevertheless, this exclusion does not preclude any payment of
the cost of removal of debris of property damaged by a loss otherwise
covered hereunder, but subject always to a limit of twenty-five percent
of the Company's property loss under the original policy.
R. Losses in respect of overhead transmission and distribution lines and
their supporting structures, other than those on or within 150 meters
(or 500 feet) of the insured premises. It is understood and agreed
that public utilities extension and/or suppliers extension and/or
contingent business interruption coverages are not subject to this
exclusion, provided that these are not part of a transmitters or
distribution policy.
S. Notwithstanding any other provision of this Contract, the Reinsurers
shall not be liable to the Company for any Extra Contractual
Obligations or Losses in Excess of Policy Limits.
"Extra Contractual Obligations" means those liabilities of the Company,
together with any legal costs and expenses incurred in connection
therewith, paid or payable by the Company as a result of an action
against it or its reassured, by any assured or reassured, the assignee
of any assured or reassured, or a third party claimant, which arise
from the handling of any claim on any insurance contract, such
liabilities arising because of, but not limited to, the following:
failure by the Company or its reassured to settle within the policy
limit, or by reason of alleged or actual negligence, fraud, or bad
faith in rejecting an offer of settlement or in the preparation of the
defense or in the trial of any action against its assured or reassured
or in the preparation or prosecution of an appeal consequent upon such
action.
"Losses in Excess of Policy Limits" means those losses of the Company
or its reassured in excess of the limit of any contract of insurance
or reinsurance reinsured hereunder, such loss in excess of the limit
having been incurred because of failure by the Company or its reassured
to settle within the policy limit or by reason of alleged or actual
negligence, fraud, or bad faith in rejecting an offer of settlement or
in the preparation of the defense or in the
Effective: January 1, 1997 3 of 21
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DOC: January 20, 1997
PAGE
trial of any action against its assured or reassured or in the
preparation or prosecution of an appeal consequent upon such action.
No inference shall be drawn from the foregoing exclusion of liabilities
that this Contract or any portion of this Contract otherwise covers
such liabilities in the absence of said exclusion.
It is understood that Exclusion B. shall not apply when such hazards are
incidental to and form a minor part of the usual operations of the assured.
These Exclusions, other than M., N., O. and P. shall also not apply in the
event of the Company being interested without its knowledge on an excluded
risk, either by an existing assured extending its operations or by an
inadvertent acceptance by an agent or otherwise; this Contract shall attach
in respect of such prohibited risk, but only until discovery by the
Management of the Home Office and then only for thirty (30) days thereafter.
ARTICLE 3
--------
DEFINITIONS
- -----------
A. The term "policies" wherever used herein, shall mean all policies,
contracts, binders and other evidences of insurance and reinsurance,
whether oral or written, heretofore issued or which may be issued
hereafter by the Company.
B. The term "Loss Occurrence" shall mean the sum of all individual losses
directly occasioned by any one disaster, accident or loss or series of
disasters, accidents or losses arising out of one event which, with
respect to Continental U.S. losses and/or Canadian losses, occurs within
the area of one state of the United States or province of Canada and
states or provinces contiguous thereto and to one another. However,
the duration and extent of any one "Loss Occurrence" shall be limited to
all individual losses sustained by the Company occurring during any
period of 168 consecutive hours arising out of and directly occasioned
by the same event except that the term "Loss Occurrence" shall be
further defined as follows:
1. As regards windstorm, hail, tornado, hurricane, cyclone, including
ensuing collapse and water damage, all individual losses sustained
by the Company occurring during any period of 72 consecutive hours
arising out of and directly occasioned by the same event. However,
the event need not be limited to one state or province or states or
provinces contiguous thereto.
2. As regards riot, riot attending a strike, civil commotion, vandalism
and malicious mischief, all individual losses sustained by the
Company occurring during any period of 72 consecutive hours within
the area of one municipality or county and the municipalities or
counties contiguous thereto arising out of and directly occasioned
by the same event. The maximum duration of 72 consecutive hours may
be extended in respect of individual losses which occur beyond such
72 consecutive hours during the
Effective: January 1, 1997 4 of 21
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PAGE
continued occupation of an assured's premises by strikers, provided
such occupation commenced during the aforesaid period.
3. As regards earthquake (the epicenter of which need not necessarily
be within the territorial confines referred to in the opening
paragraph of this Section B.) and fire following directly occasioned
by the earthquake, only those individual fire losses which commence
during the period of 168 consecutive hours may be included in the
Company's "Loss Occurrence".
4. As regards "Freeze", only individual losses directly occasioned by
collapse, breakage of glass and water damage (caused by bursting of
frozen pipes and tanks) may be included in the Company's "Loss
Occurrence".
For all those "Loss Occurrences" the Company may choose the date and time
when any such period of consecutive hours commences provided that it is not
earlier than the date and time of the occurrence of the first recorded
individual loss sustained by the Company arising out of that disaster,
accident or loss and provided that only one such period of 168 consecutive
hours shall apply with respect to one event, except for any "Loss
Occurrence" referred to in sub-paragraphs 1. and 2. above where only one
such period of 72 consecutive hours shall apply with respect to one event,
regardless of the duration of the event.
No individual losses occasioned by an event that would be covered by 72
hours clauses may be included in any "Loss Occurrence" claimed under the
168 hours provision.
C. The term "premium income" shall mean gross earned premiums on business
covered hereunder, less return premiums for cancellations and
reductions.
ARTICLE 4
---------
SELF-INSURED OBLIGATIONS
- ------------------------
There shall be included herein all obligations of the Company assumed by it
as a self-insurer or self-insured obligations in excess of any valid and
collectible insurance available to the Company to the same extent as if all
types of insurance described in the Contract were afforded under the
broadest form of policy(ies) issued by the Company.
An insurance or reinsurance wherein any of the companies hereby reinsured
and/or its affiliated and/or subsidiary companies are named as the insured
or reinsured party, either alone or jointly with some other party, shall be
deemed to be an insurance or reinsurance coming within the scope of this
Contract, notwithstanding that no legal liability may arise in respect
thereof by reason of the fact that any of the companies hereby reinsured
and/or its affiliated and/or subsidiary companies may not be obligated by
law to pay a claim to itself and/or its affiliated and/or subsidiary
companies.
Effective: January 1,1997 5 of 21
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PAGE
In respect of all such business, the Company shall include in the premium
income hereunder, as defined in Article 3, Definitions, the premiums that
would be paid were such obligations covered by a normal policy or policies.
ARTICLE 5
---------
REINSURING CLAUSE
- -----------------
The Reinsurers will pay to the Company for any loss under this Contract,
whenever the Company has paid or advanced or agreed to pay or advance or
become liable to pay as the result of any one Loss Occurrence, as defined
in Article 3, Definitions, an amount of Ultimate Net Loss, as defined in
Article 8, Ultimate Net Loss, the excess of the appropriate retention(s),
as set forth in the following Schedule, and the sum recoverable hereunder
for each Loss Occurrence shall be 100% of the amount of Ultimate Net Loss
the excess of the appropriate retention(s), but not more than the amount of
the limit of the Reinsurers' liability for each Excess Layer, as set forth
in the following Schedule, and subject further to the limitations set forth
in Article 6, Reinstatement.
Schedule
--------
Retention
(each Loss Limit of Reinsurers' Liability
Occurrence) (each Loss Occurrence)
----------- ------------------------------
A. First Excess Layer $10,000,000 $45,000,000 the excess of
$10,000,000.
B. Third Excess Layer $75,000,000 $25,000,000 the excess of
$75,000,000.
C. Fourth Excess Layer $100,000,000 $35,000,000 the excess of
$100,000,000.
The Company shall retain 100% of the Second Excess Layer with limits of
$20,000,000 excess of $55,000,000.
ARTICLE 6
---------
REINSTATEMENT
- -------------
In the event of any portion of the limit under this Contract being exhausted
by loss, each Loss Occurrence, as defined in Article 3, Definitions, reduces
the amount of indemnity provided under this Contract by the amount paid.
The amount so exhausted shall be automatically reinstated from the time of
the Loss Occurrence, and for each amount so reinstated the Company agrees to
pay to the Reinsurers an additional reinsurance premium calculated at pro
rata of the premium (excluding
Effective: January 1, 1997 6 of 21
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PAGE
reinstatement premium) as respects the fraction of indemnity exhausted and
100% of the premium regardless of the unexpired term of this Contract, to
be settled simultaneously with the payment of losses by the Reinsurers.
Nevertheless, the Reinsurers' liability shall never be more than 100% of:
In respect of all Loss
In respect of any one Occurrences during the
Loss Occurrence the term of this Contract
--------------------- -------------------------
A. First Excess Layer $45,000,000 $90,000,000
B. Third Excess Layer $25,000,000 $50,000,000
C. Fourth Excess Layer $35,000,000 $70,000,000
ARTICLE 7
---------
PREMIUM
- -------
The Company shall pay to the Reinsurers a deposit reinsurance premium for
each layer as provided in the following Schedule. It is agreed that the
final developed premium for each layer, calculated by applying the
following rates to the Company's premium income, as defined in Article 3,
Definitions, shall also be subject to a minimum premium for the layer as
follows:
Schedule
--------
Annual Reinsurance Premiums
---------------------------
Rate Deposit Premium Minimum Premium
---- --------------- ---------------
A. First Excess Layer 2.795% $4,400,000 $3,520,000
B. Third Excess Layer 0.754% $1,187,500 $950,000
C. Fourth Excess Layer 0.778% $1,225,000 $980,000
Deposit premiums shall be paid to the Reinsurers in equal semi-annual
installments at January 1, 1997, and July 1, 1997. As soon as practicable
after the January 1, 1998 expiration of this Contract, the Company shall
furnish to the Reinsurers a statement of the premium income, as defined in
Article 3, Definitions, accounted for by the Company during the term of this
Contract, and adjustment shall then be made in accordance with the foregoing
Schedule.
Effective: January 1, 1997 7 of 21
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ARTICLE 8
---------
ULTIMATE NET LOSS
- -----------------
The term "Ultimate Net Loss" shall mean the amount paid or payable by the
Company in settlement of losses or liability, after deducting all
recoveries, all salvage and all amounts due from any other reinsurers
(except as noted in Article 9, Net Retained Lines) and shall include all
adjustment and legal expenses in connection with the adjustment and
settlement of claims including an allowance for salaried adjusters or other
salaried employees employed by the Company while diverted from normal duties
to the service of field adjustment in connection with losses for which claim
is made hereunder, at the per diem rate normally applied in the Company's
books to such employees, plus expenses incurred by such employees in
connection with such adjustments. Also, expenses of the Company's officials
incurred in connection with the loss, but no salaries of the Company's
officials or any normal overhead charges, such as rent, postage, lighting,
heating, cleaning, etc., shall be included.
All salvage and recoveries received subsequent to a loss settlement under
this Contract shall be applied as if received prior to said loss settlement,
and all necessary adjustments shall be made between the Company and the
Reinsurers.
Nothing in this Article shall be construed to mean that losses under this
Contract are not recoverable until the Company's Ultimate Net Loss has been
ascertained.
ARTICLE 9
---------
NET RETAINED LINES
- ------------------
Except as otherwise specifically provided, this Contract applies only to
that portion of any insurance or reinsurance which the Company retains for
its own account (including the Company's net retention in all underlying
reinsurance programs) and, in calculating the amount of loss hereunder and
also in computing the amount or amounts in excess of which this Contract
attaches, only loss in respect of that portion of any insurance or
reinsurance which the Company retains net for its own account shall be
included.
The amount of the Reinsurers' liability hereunder in any Loss Occurrence,
as defined in Article 3, Definitions, shall not be increased by reason of
the inability of the Company to collect from any other reinsurers, whether
specific or general, any amount which may have become due from them, whether
such inability arises from the insolvency of such other reinsurers or not.
Notwithstanding the preceding paragraphs, the Company has in effect an 85%
New Jersey Homeowners Quota Share Reinsurance Contract, where a portion of
the recoveries shall inure to the benefit of the Company, subject to a
minimum net retention, any one loss occurrence, as
Effective: January 1, 1997 8 of 21
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PAGE
defined therein, of not less than $1,000,000, any and all recoveries in
excess of the $1,000,000 minimum net retention shall inure to the benefit
of the Reinsurers hereunder.
It is warranted that in addition to the initial net loss retentions
hereunder, the Company shall retain for its own account and not reinsured in
any way at least 5% of the excess loss covered under this Contract.
ARTICLE 10
----------
LOSS SETTLEMENTS
- ----------------
The Company shall advise the Reinsurers promptly of all Loss Occurrences,
as defined in Article 3, Definitions, which, in the opinion of the Company,
may result in a claim under this Contract and shall also keep the Reinsurers
advised of any subsequent material developments in connection therewith.
All loss settlements made by the Company, provided they are within the terms
of the original policies and of this Contract, shall be unconditionally
binding on the Reinsurers, who agree to pay all amounts for which they may
be liable immediately upon being furnished by the Company with reasonable
evidence of the amount due or to be due.
ARTICLE 11
----------
CURRENCY
- --------
For purposes of this Contract, the net retained liability, as defined in
Article 9, Net Retained Lines, and the Ultimate Net Loss of the Company, as
defined in Article 8, Ultimate Net Loss, and the limit of the Reinsurers'
liability, as determined in Article 5, Reinsuring Clause, shall be
considered in terms of the Canadian currency for all policies issued by the
Company in Canadian Dollars and in terms of United States Dollars for all
other policies. If a Loss Occurrence, as defined in Article 3, Definitions,
involves policies issued in both United States and Canadian Dollars, the net
retained liability and the Ultimate Net Loss of the Company and the limit of
the Reinsurers' liability shall be apportioned between the two currencies in
the proportion that the Ultimate Net Loss in each currency bears to the
total Ultimate Net Loss of the Company. All loss payments hereunder shall
be made in United States or Canadian Dollars in accordance with these
provisions.
Payment of the reinsurance premium hereunder at the rate specified in
Article 5, Reinsuring Clause, shall be made in Canadian Dollars for policies
issued by the Company in Canadian Dollars and in United States Dollars for
all other policies.
Effective: January 1, 1997 9 of 21
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PAGE
ARTICLE 12
----------
TAXES
- -----
In consideration of the terms under which this Contract is issued, the
Company agrees not to claim any deduction in respect of the premium hereon
when making Canadian tax returns or tax returns, other than Income or
Profits Tax returns, to any state or territory of the United States of
America or the District of Columbia.
ARTICLE 13
----------
FEDERAL EXCISE TAX
- ------------------
(This Article applies only to those Reinsurers, excepting Underwriters at
Lloyd's, London and other Reinsurers exempt from the Federal Excise Tax, who
are domiciled outside the United States of America.)
The Reinsurers have agreed to allow for the purpose of paying the Federal
Excise Tax the percentage specified by United States law of the premium
payable hereon to the extent such premium is subject to Federal Excise Tax.
In the event of any return of premium becoming due hereunder, the Reinsurers
will deduct the percentage specified by United States law from the amount of
the return and the Company or its agent should take steps to recover the tax
from the U.S. Government.
ARTICLE 14
----------
ERRORS AND OMISSIONS
- --------------------
Any inadvertent delay, omission or error shall not be held to relieve either
party hereto from any liability which would attach to it hereunder if such
delay, omission or error had not been made, provided such delay, omission or
error is rectified as soon as practicable upon discovery.
ARTICLE 15
----------
ACCESS TO RECORDS
- -----------------
The Reinsurers or their designated representatives shall have access at any
reasonable time to all records of the Company which pertain in any way to
this Contract.
Effective: January 1, 1997 10 of 21
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ARTICLE 16
----------
INSOLVENCY
- ----------
In the event of the insolvency of the Company, this reinsurance shall be
payable directly to the Company, or to its liquidator, receiver, conservator
or statutory successor on the basis of the liability of the Company under
the policies or contracts reinsured without diminution because of the
insolvency of the Company or because the liquidator, receiver, conservator
or statutory successor of the Company has failed to pay all or a portion of
any claim. It is agreed, however, that the liquidator, receiver,
conservator, or statutory successor of the Company shall give written notice
to the Reinsurers of the pendency of a claim against the Company indicating
the policy or bond reinsured, which claim would involve a possible liability
on the part of the Reinsurers within a reasonable time after such claim is
filed in the conservation or liquidation proceeding or in the receivership,
and that during the pendency of such claim, the Reinsurers may investigate
such claim and interpose, at their own expense, in the proceeding where such
claim is to be adjudicated any defense or defenses that they may deem
available to the Company or its liquidator, receiver, conservator or
statutory successor. The expense thus incurred by the Reinsurers shall be
chargeable, subject to the approval of the court, against the Company as
part of the expense of conservation or liquidation to the extent of a pro
rata share of the benefit which may accrue to the Company solely as a result
of the defense undertaken by the Reinsurers.
Where two or more Reinsurers are involved in the same claim and a majority
in interest elect to interpose defense to such claim, the expense shall be
apportioned in accordance with the terms of the reinsurance Contract as
though such expense had been incurred by the Company.
As to all reinsurance made, ceded, renewed or otherwise becoming effective
under this Contract, the reinsurance shall be payable as set forth above by
the Reinsurers to the Company or to its conservator, liquidator or statutory
successor, (except as provided by Section 4118(a)(1)(A) and Section 1114(c)
of the New York Insurance Law or) except (1) where the Contract specifically
provides another payee in the event of the insolvency of the Company, and
(2) where the Reinsurers, with the consent of the direct assured or
assureds, have assumed such policy obligations of the Company as direct
obligations of the Reinsurers to the payees under such policies and in
substitution for the obligations of the Company to such payees. Then, and
in that event only, the Company, with the prior approval by the
Superintendent of Insurance of the State of New York of the certificate of
assumption on New York risks, is entirely released from its obligation and
the Reinsurers pay any loss directly to payees under such policy.
Should any party hereto be placed in rehabilitation or liquidation or should
a rehabilitator, liquidator, receiver, conservator or other person or entity
of similar capacity be appointed as respects such party, all amounts due any
of the parties hereto whether by reason of premiums, losses or otherwise
under this Contract or any other Contract(s) of reinsurance heretofore or
hereafter entered into between the parties (whether or not any such
Contract(s) be assumed or ceded) shall at all times be subject to the right
of offset at any time and from time to time, and upon the exercise of same,
only the net balance shall be due and payable in accordance with
Effective: January 1, 1997 11 of 21
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Section 7427 of the Insurance Law of the State of New York to the extent
such statute or any other applicable law, statute or regulation governing
such offset shall apply.
ARTICLE 17
----------
ARBITRATION
- -----------
As a precedent to any right of action hereunder, if any dispute shall arise
between the parties to this Contract with reference to the interpretation of
this Contract or their rights with respect to any transaction involved,
whether such dispute arises before or after termination of this Contract,
such dispute, upon the written request of either party, shall be submitted
to three arbitrators, one to be chosen by each party, and the third by the
two so chosen. If either party refuses or neglects to appoint an arbitrator
within thirty days after the receipt of written notice from the other party
requesting it to do so, the requesting party may appoint two arbitrators.
If the two arbitrators fail to agree in the selection of a third arbitrator
within thirty days of their appointment, each of them shall name two, of
whom the other shall decline one and the decision shall be made by drawing
lots. All arbitrators shall be active or retired disinterested executive
officers of insurance or reinsurance companies or Underwriters at Lloyd's,
London not under the control of either party to this Contract.
The arbitrators shall interpret this Contract as an honorable engagement and
not as merely a legal obligation. They are relieved of all judicial
formalities and may abstain from following the strict rules of law. They
shall make their award with a view to effecting the general purpose of this
Contract in a reasonable manner rather than in accordance with a literal
interpretation of the language. Each party shall submit its case to its
arbitrator within thirty days of the appointment of the third arbitrator.
The decision in writing of any two arbitrators, when filed with the parties
hereto, shall be final and binding on both parties. Judgment may be entered
upon the final decision of the arbitrators in any court having jurisdiction.
Each party shall bear the expense of its own arbitrator and shall jointly
and equally bear with the other party the expense of the third arbitrator
and of the arbitration. Said arbitration shall take place in the city in
which the Company's Head Office is located unless some other place is
mutually agreed upon by the parties to this Contract.
ARTICLE 18
----------
SERVICE OF SUIT
- ---------------
(This Article applies only to those Reinsurers not domiciled in the United
States of America, and/or not authorized in any state, territory and/or
district of the United States where authorization is required by insurance
regulatory authorities.)
Effective: January 1, 1997 12 of 21
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PAGE
It is agreed that in the event of the failure of a Subscribing Reinsurer to
pay any amount claimed to be due under this Contract, the Subscribing
Reinsurer, at the request of the Company, will submit to the jurisdiction
of any court of competent jurisdiction within the United States of America
and will comply with all requirements necessary to give such court
jurisdiction; and all matters arising hereunder shall be determined in
accordance with the law and practice of such court. Nothing in this Article
constitutes or should be understood to constitute a waiver of the
Subscribing Reinsurer's rights to commence an action in any court of
competent jurisdiction in the United States, to remove an action to a United
States District Court, or to seek a transfer of a case to another court as
permitted by the laws of the United States or of any state in the United
States.
Service of process in such suit may be made upon Mendes and Mount, 750
Seventh Avenue, New York, New York 10019-6879 (hereinafter, "agent for
service of process") and in any suit instituted against a Reinsurer upon
this Contract, that Reinsurer will abide by the final decision of such court
or of any appellate court in the event of an appeal.
The above named are authorized and directed to accept service of process on
behalf of the Reinsurer in any such suit and/or upon the request of the
Company to give a written undertaking to the Company that the agent for
service of process will enter a general appearance on behalf of the
Reinsurer in the event such a suit shall be instituted.
Further, pursuant to any statute of any state, territory or district of the
United States of America which makes provision therefor, the Reinsurers
hereby designate the Superintendent, Commissioner or Director of Insurance
or other officer specified for that purpose in the statute, or his successor
or successors in office, as their true and lawful attorney upon whom may be
served any lawful process in any action, suit or proceeding instituted by or
on behalf of the Company or any beneficiary hereunder arising out of this
Contract and hereby designate the agent for service of process as the firm
to whom the said officer is authorized to mail such process or a true copy
thereof.
ARTICLE 19
----------
LOSS RESERVES
- -------------
(This Article applies to those Reinsurers who do not qualify for credit by
any state or any other governmental authority having jurisdiction over the
Company's loss reserves.)
A: Where a Letter of Credit Trust Agreement is used, the following clause
shall apply:
It is agreed that when the Company files with the Insurance Department
or establishes reserves for claims covered hereunder, as required by
law, the Company will forward to the Reinsurers a statement showing the
proportion of such loss reserves which is applicable to the Reinsurers.
The Reinsurers hereby agree to apply for and secure delivery to the
Company of a clean, irrevocable and unconditional Letter of Credit, with
a minimum term of
Effective: January 1, 1997 13 of 21
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PAGE
one year, that is issued or confirmed, and presentable and payable in
the United States by any bank or trust company that must be issued or
confirmed by a bank member of the Federal Reserve System, and is in a
format acceptable to the governmental authority having jurisdiction
over the Company's loss reserves in an amount equal to the Reinsurers'
proportion of said loss reserves. Under no circumstances shall any
amount relating to reserves in respect of incurred but not reported
losses be funded in the amount of the Letter of Credit. The foregoing
shall not affect the Company's authority to draw upon the Letter of
Credit to cover all obligations due or which become due to the Company
under this Contract, including losses incurred but not reported, in the
event that a nonrenewal or nonextension notice is received from the
issuing bank.
The Company and the Reinsurers agree that such Letter of Credit will be
subject to the terms of a separate Letter of Credit Trust Agreement,
and that said trust agreement shall be in a form acceptable to the
governmental authority having jurisdiction over the Company's loss
reserves.
The designated bank shall have no responsibility whatsoever in
connection with the propriety of withdrawals made by the Company or the
disposition of funds withdrawn, except to see that withdrawals are made
only upon the order of properly authorized representatives of the
Company.
B: Where a Letter of Credit Trust Agreement is not used, the following
clause shall apply:
It is agreed that when the Company files with the Insurance Department
or establishes reserves for claims covered under this Contract, as
required by law, the Company will forward to the Reinsurers a statement
showing the proportion of such loss reserves which is applicable to the
Reinsurers. The Reinsurers hereby agree to apply for and secure
delivery to the Company of a clean, irrevocable and unconditional Letter
of Credit, with a minimum term of one year, that is issued or confirmed,
and presentable and payable in the United States by any bank or trust
company that must be issued or confirmed by a bank member of the Federal
Reserve System, and is in a format acceptable to the governmental
authority having jurisdiction over the Company's loss reserves in an
amount equal to the Reinsurers' proportion of said loss reserves. Under
no circumstances shall any amount relating to reserves in respect of
incurred but not reported losses be funded in the amount of the Letter
of Credit. The foregoing shall not affect the Company's authority to
draw upon the Letter of Credit to cover all obligations due or which
become due to the Company under this Contract, including losses incurred
but not reported, in the event that a nonrenewal or nonextension notice
is received from the issuing bank.
The Company and the Reinsurers agree that the Letter of Credit provided
by the Reinsurers under this provision may be drawn upon at any time,
notwithstanding any other provisions in this Contract, and be utilized
by the Company or any successor by operation of law of the Company,
including, without limitation, any liquidator, rehabilitator, receiver
or conservator of such insurer for the following purposes:
Effective: January 1, 1997 14 of 21
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PAGE
1. to reimburse the Company for the Reinsurers' share of surrenders
and benefits or losses paid by the Company under the terms and
provisions of the policies reinsured under this Contract,
2. to fund an account with the Company in an amount at least equal to
the deduction, for reinsurance ceded, from the Company's liabilities
for policies ceded under this Contract. Such amount shall include,
but not be limited to, amounts for policy reserves, reserves for
claims and losses incurred (including losses incurred but not
reported), and loss adjustment expenses,
3. to pay any other amounts the Company claims are due under this
Contract,
4. to return any amounts drawn down on Letters of Credit in excess of
the actual amounts required for 1. and 2. above, or in case of 3.
above, any amounts which are subsequently determined not to be due.
All of the foregoing should be applied without diminution because of
insolvency on the part of the Company or the Reinsurers.
The designated bank shall have no responsibility whatsoever in
connection with the propriety of withdrawals made by the Company or the
disposition of funds withdrawn, except to see that withdrawals are made
only upon the order of properly authorized representatives of the
Company.
ARTICLE 20
----------
INTERMEDIARY
- ------------
Guy Carpenter & Company, Inc. is hereby recognized as the Intermediary
negotiating this Contract for all business hereunder. All communications
(including but not limited to notices, statements, premiums, return
premiums, commissions, taxes, losses, loss adjustment expenses, salvages,
and loss settlements) relating thereto shall be transmitted to the Company
or the Reinsurers through Guy Carpenter & Company, Inc., Two World Trade
Center, New York, New York 10048. Payments by the Company to the
Intermediary shall be deemed to constitute payment to the Reinsurers.
Payments by the Reinsurers to the Intermediary shall be deemed to constitute
payment to the Company only to the extent that such payments are actually
received by the Company.
Effective: January 1, 1997 15 of 21
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PAGE
POOLS, ASSOCIATIONS AND SYNDICATES EXCLUSION CLAUSE
---------------------------------------------------
SECTION A
- ---------
Excluding:
(a) All Business derived directly or indirectly from any Pool,
Association or Syndicate which maintains its own reinsurance
facilities.
(b) Any Pool or Scheme (whether voluntary or mandatory) formed after
March 1, 1968 for the purpose of insuring Property whether on a
country-wide basis or in respect of designated areas. This
exclusion shall not apply to so-called Automobile Insurance Plans
or other Pools formed to provide coverage for Automobile Physical
Damage.
SECTION B
- ---------
It is agreed that business written by the Company for the same perils, which
is known at the time to be insured by, or in excess of underlying amounts
placed in the following Pools, Associations or Syndicates, whether by way of
insurance or reinsurance, is excluded hereunder:
Industrial Risk Insurers; Associated Factory Mutuals; Improved Risk
Mutuals.
Any Pool, Association or Syndicate formed for the purpose of writing
Oil, Gas or Petro-Chemical Plants and/or Oil or Gas Drilling Rigs.
United States Aircraft Insurance Group, Canadian Aircraft Insurance
Group, Associated Aviation Underwriters, American Aviation Underwriters.
Section B does not apply:
(a) Where the Total Insured Value over all interests of the risk in
question is less than $300,000,000. Except in relation to
business where Hartford and I.R.I. are jointly insuring a risk,
the Total Insured Value over all interests of the risk in question
is less than $500,000,000.
(b) To interests traditionally underwritten as Inland Marine or Stock
and/or Contents written on a Blanket basis.
(c) To Contingent Business Interruption, except when the Company is
aware that the key location is known at the time to be insured in
any Pool, Association or Syndicate named above, other than as
provided for under Section B (a).
(d) To risks as follows: Offices, Hotels, Apartments, Hospitals,
Educational Establishments, Public Utilities (other than Railroad
Schedules) and Builders Risks on the classes of risks specified in
this subsection (d) only.
Effective: January 1, 1997 16 of 21
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PAGE
SECTION C
- ---------
NEVERTHELESS the Reinsurers specifically agree that liability accruing to
the Company from its participation in Residual Market Mechanisms, including
but not limited to,
(1) The following so-called "Coastal Pools"
ALABAMA INSURANCE UNDERWRITING ASSOCIATION
FLORIDA WINDSTORM UNDERWRITING ASSOCIATION
LOUISIANA INSURANCE UNDERWRITING ASSOCIATION
MISSISSIPPI WINDSTORM UNDERWRITING ASSOCIATION
NORTH CAROLINA INSURANCE UNDERWRITING ASSOCIATION
SOUTH CAROLINA WINDSTORM AND HAIL UNDERWRITING ASSOCIATION
TEXAS CATASTROPHE PROPERTY INSURANCE ASSOCIATION
GEORGIA UNDERWRITING ASSOCIATION
VIRGINIA PROPERTY INSURANCE ASSOCIATION
(2) All "Fair Plan" and "Rural Risk Plan" Business, for all perils
otherwise protected hereunder shall not be excluded, except that this
Contract does not include any increase in such liability resulting
from:
(i) The inability of any other participant in such Residual Market
Mechanisms, including but not limited to, "Coastal Pool" and/or
"Fair Plan" and/or "Rural Risk Plan", to meet its liability.
(ii) Any Claim against such Residual Market Mechanisms, including but
not limited to, "Coastal Pool" and/or "Fair Plan", and/or "Rural
Risk Plan" or any participant therein, including the Company,
whether by way of subrogation or otherwise, brought by or on
behalf of any insolvency fund (as defined in the Insolvency Funds
Exclusion Clause incorporated in this Contract).
- ---------------------------------------------------------------------------
NOTES: Wherever used herein the terms:
"Company" shall be understood to mean "Company", "Reinsured",
"Reassured" or whatever other term is used in the
attached reinsurance document to designate the
reinsured company or companies.
"Agreement" shall be understood to mean "Agreement", "Contract",
"Policy" or whatever other term is used to designate
the attached reinsurance document.
"Reinsurers" shall be understood to mean "Reinsurers",
"Underwriters" or whatever other term is used in the
attached reinsurance document to designate the
reinsurer or reinsurers.
Effective: January 1, 1997 17 of 21
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PAGE
NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE -
REINSURANCE - U.S.A.
1. This Reinsurance does not cover any loss or liability accruing to the
Reassured, directly or indirectly, and whether as Insurer or Reinsurer,
from any Pool of Insurers or Reinsurers formed for the purpose of
covering Atomic or Nuclear Energy risks.
2. Without in any way restricting the operation of paragraph (1) of this
clause, this Reinsurance does not cover any loss or liability accruing
to the Reassured, directly or indirectly and whether as Insurer or
Reinsurer, from any insurance against Physical Damage (including
business interruption or consequential loss arising out of such
Physical Damage) to:
I. Nuclear reactor power plants including all auxiliary property on
the site, or
II. Any other nuclear reactor installation, including laboratories
handling radioactive materials in connection with reactor
installations, and "critical facilities" as such, or
III. Installations for fabricating complete fuel elements or for
processing substantial quantities of "special nuclear material",
and for reprocessing, salvaging, chemically separating, storing or
disposing of "spent" nuclear fuel or waste materials, or
IV. Installations other than those listed in paragraph (2) III above
using substantial quantities of radioactive isotopes or other
products of nuclear fission.
3. Without in any way restricting the operations of paragraphs (1) and (2)
hereof, this Reinsurance does not cover any loss or liability by
radioactive contamination accruing to the Reassured, directly or
indirectly, and whether as Insurer or Reinsurer, from any insurance on
property which is on the same site as a nuclear reactor power plant or
other nuclear installation and which normally would be insured therewith
except that this paragraph (3) shall not operate
(a) where Reassured does not have knowledge of such nuclear reactor
power plant or nuclear installation, or
(b) where said insurance contains a provision excluding coverage for
damage to property caused by or resulting from radioactive
contamination, however caused. However on and after 1st January
1960 this sub-paragraph (b) shall only apply provided the said
radioactive contamination exclusion provision has been approved by
the Governmental Authority having jurisdiction thereof.
4. Without in any way restricting the operations of paragraphs (1), (2)
and (3) hereof, this Reinsurance does not cover any loss or liability
by radioactive contamination accruing to the Reassured, directly or
indirectly, and whether as Insurer or Reinsurer, when such radioactive
contamination is a named hazard specifically insured against.
Effective: January 1, 1997 18 of 21
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PAGE
5. It is understood and agreed that this clause shall not extend to risks
using radioactive isotopes in any form where the nuclear exposure is
not considered by the Reassured to be the primary hazard.
6. The term "special nuclear material" shall have the meaning given it in
the Atomic Energy Act of 1954 or by any law amendatory thereof.
7. Reassured to be sole judge of what constitutes:
(a) substantial quantities, and
b) the extent of installation, plant or site.
12/12/57
NMA 1119
- -------------------------------------------------------------------------
NOTES: Wherever used herein the terms:
"Reassured" shall be understood to mean "Company", "Reinsured",
"Reassured" or whatever other term is used in the
attached reinsurance document to designate the
reinsured company or companies.
"Agreement" shall be understood to mean "Agreement", "Contract",
"Policy" or whatever other term is used to designate
the attached reinsurance document.
"Reinsurers" shall be understood to mean "Reinsurers",
"Underwriters" or whatever other term is used in the
attached reinsurance document to designate the
reinsurer or reinsurers.
Effective: January 1, 1997 19 of 21
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PAGE
NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE - CANADA
1. This Contract does not cover any loss or liability accruing to the
Reassured, directly or indirectly, and whether as Insurer or Reinsurer,
from any Pool of Insurers or Reinsurers formed for the purpose of
covering Atomic or Nuclear Energy risks.
2. Without in any way restricting the operation of paragraph 1 of this
clause, this Contract does not cover any loss or liability accruing to
the Reassured, directly or indirectly, and whether as Insurer or
Reinsurer, from any insurance against Physical Damage (including
business interruption or consequential loss arising out of such
Physical Damage) to:
(a) Nuclear reactor power plants including all auxiliary property on
the site, or
(b) Any other nuclear reactor, installation, including laboratories
handling radioactive materials in connection with reactor
installations, and critical facilities as such, or
(c) Installations for fabricating complete fuel elements or for
processing substantial quantities of prescribed substances, and
for reprocessing, salvaging, chemically separating, storing or
disposing of spent nuclear fuel or waste materials, or
(d) Installations other than those listed in (c) above using
substantial quantities of radioactive isotopes or other products
of nuclear fission.
3. Without in any way restricting the operation of paragraphs 1 and 2 of
this clause, this Contract does not cover any loss or liability by
radioactive contamination accruing to the Reassured, directly or
indirectly, and whether as Insurer or Reinsurer from any insurance on
property which is on the same site as a nuclear reactor power plant or
other nuclear installation and which normally would be insured
therewith, except that this paragraph 3 shall not operate.
(a) where the Reassured does not have knowledge of such nuclear reactor
power plant or nuclear installation, or
(b) where the said insurance contains a provision excluding coverage
for damage to property caused by or resulting from radioactive
contamination, however caused.
4. Without in any way restricting the operation of paragraphs 1, 2 and 3
of this clause, this Contract does not cover any loss or liability by
radioactive contamination accruing to the Reassured, directly or
indirectly, and whether as Insurer or Reinsurer, when such radioactive
contamination is a named hazard specifically insured against.
5. This clause shall not extend to risks using radioactive isotopes in any
form where the nuclear exposure is not considered by the Reassured to
be the primary hazard.
6. The term "prescribed substances" shall have the meaning given it by the
Atomic Energy Control Act or by any law amendatory thereof.
Effective: January 1, 997 20 of 21
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PAGE
7. The Reassured to be sole judge of what constitutes:
(a) substantial quantities, and
(b) the extent of installation, plant or site.
8. Without in any way restricting the operation of paragraphs 1, 2, 3
and 4 of this clause, this Contract does not cover any loss or
liability accruing to the Reassured, directly or indirectly, and
whether as Insurer or Reinsurer, caused:
(a) by any nuclear incident as defined in the Nuclear Liability Act or
any other nuclear liability act, law or statute, or any law
amendatory thereof or nuclear explosion, except for ensuing loss or
damage which results directly from fire, lightning or explosion of
natural, coal or manufactured gas; or
(b) by contamination by radioactive material.
NOTE: - Without in any way restricting the operation of paragraph 1, 2, 3
and 4 of this clause, paragraph 8 of this clause shall only apply to all
original contracts of the Reassured whether new, renewal or replacement
which become effective on or after December 31, 1992.
NMA 1980
(1/1/93)
- --------------------------------------------------------------------------
NOTES: Wherever used herein the terms:
"Reassured" shall be understood to mean "Company", "Reinsured",
"Reassured" or whatever other term is used in the
attached reinsurance document to designate the
reinsured company or companies.
"Contract" shall be understood to mean "Agreement", "Contract",
"Policy" or whatever other term is used to designate
the attached reinsurance document.
"Reinsurers" shall be understood to mean "Reinsurers",
"Underwriters" or whatever other term is used in the
attached reinsurance document to designate the
reinsurer or reinsurers.
Effective: January 1, 1997 21 of 21
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PAGE
SUMMARY OF CHANGES
to the
THE SELECTIVE INSURANCE GROUP
PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT
This Contract effective January 1, 1997, follows the 1996 Contract with the
exception of the following:
1. Throughout the Contract, all dates, rates, and premium amounts have
been amended to reflect the terms of the firm order, and the current
structure of:
First - $45MM xs $10MM
Third - $25MM xs $75MM
Fourth - $35MM xs $100MM.
2. Article 3, Definitions; Paragraph C. has been amended to delete the
phrase "less premiums inuring to the benefit of the Reinsurers hereunder"
in accordance with the placement slip.
3. Article 5, Reinsuring Clause; All limits and retentions have been
amended to reflect the current structure in #1 above. The following
sentence has also been added "The Company shall retain 100% of the Second
Excess Layer with limits of $20,000,000 excess of $55,000,000", in
accordance with the placement slip.
4. Article 6, Reinstatement; The first paragraph has been amended to
delete the reference to "annual premium"; add the phrase "(excluding
reinstatement premiums)"; amend the last line to read "to be settled
simultaneously"; and amend the Reinsurers' limit of liability in accordance
with the placement slip.
5. Article 9, Net Retained Lines; The first paragraph has been amended to
read "otherwise specifically provided", and the third paragraph has been
amended to delete the reference to "various underlying reinsurances" and
replace it with the reference to the Company's 85% New Jersey Homeowners
Quota Share, in accordance with the placement slip.
6. Article 20, Catastrophe Claims Trust Fund Settlement; This Article has
been deleted in accordance with the placement slip.
Effective: January 1, 1997
3645-21
PAGE
EXHIBIT 11
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
Years ended December 31,1997, 1996 and 1995
(in thousands, except per Income Shares Per Share
share amounts) (Numerator) (Denominator) Amount
- ---------------------------------------------------------------------
1997
- ----
Basic EPS
Net Income available
to common stockholders $ 69,608 28,909 $ 2.41
====
Effect of Dilutive Securities
Restricted stock - 404
8.75% convertible
subordinated debentures 396 971
Stock Options 263 641
------ ------
Diluted EPS
Income available to common
stockholders + assumed
conversions $ 70,267 30,925 $ 2.27
====== ====== ====
- ------------------------------------------------------------------------
1996
- ----
Basic EPS
Net Income available
to common stockholders $ 55,551 28,860 $ 1.92
====
Effect of Dilutive Securities
Restricted stock - 224
8.75% convertible
subordinated debentures 413 1,003
Stock Options (339) 273
------ ------
Diluted EPS
Income available to common
stockholders + assumed
conversions $ 55,625 30,360 $ 1.83
====== ====== ====
- -------------------------------------------------------------------------
1995
- ----
Basic EPS
Net Income available
to common stockholders $ 53,042 28,481 $ 1.86
====
Effect of Dilutive Securities
Restricted stock - 90
8.75% convertible
subordinated debentures 421 1,035
Stock Options 437 240
------ ------
Diluted EPS
Income available to common
stockholders + assumed
conversions $ 53,900 29,846 $ 1.81
====== ====== ====
PAGE
EXHIBIT 13
ANNUAL REPORT PAGES 18 THRU 53, AND 57
INVESTMENTS
- -----------
PIE CHART - reflecting the following relationships
- ------------------------------------------------------------
Classification of Investments ($ in millions)
Dollar Percentage
------ ----------
Taxable debt securities $ 766 44%
Tax-advantaged debt securities 689 40%
Equity securities 222 13%
Short-term investments 29 2%
Other 20 1%
------ ---
Total Investments $1,726 100%
- ------------------------------------------------------------
Investments and investment policy
- ---------------------------------
Investment income is an important source of revenue for the Company, and
the return on its investment portfolio has a material effect on the Company's
net income. The Company's investment policy is conservative with the
long-term objective of maximizing after-tax yield while providing liquidity
and preserving assets and stockholders' equity. The Company's current
investment mix is 84% debt securities, 13% equity securities and 3%
short-term and other investments.
Investments are made in compliance with regulatory requirements and with
careful attention to the present and prospective Federal income tax
positions. Company investment policy requires that purchases of debt
securities must be "A" rated or better, although the Company may purchase up
to 5%, measured at the time of purchase, of debt securities that are rated
lower than "A." High credit quality has always been a cornerstone of the
Company's investment strategy. This high quality strategy is evident by the
fact that over 99% of the debt security portfolio is of investment grade.
Further emphasizing this superior quality is the fact that 41% of the debt
securities have a Moody's rating of "Aaa" (or its Standard & Poor's
equivalent), which is considered to be the highest credit quality. Though not
the sole consideration, investment commitments are made with considerable
emphasis on limiting credit risk.
Liquidity requirements are emphasized in response to an unpredictable
underwriting environment and the need to
CHART
- ---------------------------------------
Debt Securities
Quality Analysis
(Moody's Rating/Standard & Poor' Rating)
Rating Percent
------ -------
Aaa/AAA 41%
Aa/AA 27
A/A 26
Baa/BBB 6
Other <1
-----
100.0%
- ----------------------------------------
BAR GRAPH
- ----------------------
Debt Securities
Maturities
($ in millions)
Years $ Amount
- ----- --------
1 $129
2 $186
3 $134
4 $161
5 $181
6 $134
7 $133
8 $193
9 $ 84
10 $ 92
11 $ 7
12 $ 11
13 $ 0
14 $ 0
15 $ 5
15+ $ 5
Total Carrying Value: $1,455
Average Life: 4.9 Years
- ---------------------------
Page 18
PAGE
minimize the exposure to catastrophic events. To provide liquidity while
maintaining consistent performance, the Company's debt securities are
distributed so that some issues are always approaching maturity, thereby
providing a source of predictable cash flow.
At year-end 1997, 72% of the Company's debt securities were classified
as available-for-sale. This classification provides greater portfolio
management flexibility.
To reduce the sensitivity to interest rate fluctuations, the Company
invested in intermediate-term debt securities. At year-end 1997, 98% of the
portfolio was ten years or less to maturity and the average life was 4.9
years compared with 5.1 years at December 31, 1996.
Net investment income earned, after taxes, increased 3% in 1997 to $76
million compared to $74 million in 1996. The increase in 1997 primarily
resulted from additional investment assets of approximately $100 million
acquired with the cash provided by the Company's operating activities during
1997 and 1996. In addition, the Company invested proceeds from short-term
borrowings at a higher after-tax rate than the after-tax borrowing rate.
However, the increase was partially offset by lower yields on the
reinvestment of proceeds from maturities and redemptions of $249 million
during 1997 and 1996 of higher yielding debt securities. The level of
interest rates available in the marketplace has been lower than the average
yield on the Company's debt securities portfolio and on securities that are
being redeemed. Therefore, the growth of investment income is expected to be
highly dependent on an increase in investment assets resulting from the
addition of new cash generated from the Company's operations.
During 1997, the equity portfolio experienced an increase in net
unrealized gains, before-tax, of $40 million, which represented approximately
60% of the statutory surplus growth for 1997. At year-end 1997, the equity
portfolio represented 13% of the Company's total investments compared to 7%
at December 31, 1994. That growth, for the most part, reflected the
extraordinary rise in the U.S. equities markets from 1994 to 1997, coupled
with additional equity securities purchased by the Company.
The Company will continue to follow the investment philosophy that has
historically proven successful. The strategy will be to continue to purchase
debt securities in sectors that represent the most attractive relative value
considering the Company's Federal income tax position and, over time,
increase equity holdings.
Managing the Company's investment risk by adhering to these strategies
is intended to protect the interests of its stockholders as well as those of
its policyholders and, at the same time, enhance the Company's financial
strength and underwriting capacity.
BAR GRAPH
- ---------------------------------------
Total Assets
($ in billions)
$1.7 $1.9 $2.1 $2.2 $2.3
1993 1994 1995 1996 1997
- ---------------------------------------
BAR GRAPH
- ---------------------------------------
Investment Assets
($ in billions)
$1.2 $1.3 $1.6 $1.6 $1.7
1993 1994 1995 1996 1997
- ---------------------------------------
BAR GRAPH
- ---------------------------------------------------------
Net Investment Income Earned
($ in millions)
Year 1993 1994 1995 1996 1997
Dollar Amount $77 $81 $92 $97 $101
After-tax yield 5.1 5.1% 5.0% 4.7% 4.6%
Before-tax yield 6.8% 6.5% 6.4% 6.1% 6.0%
- ---------------------------------------------------------
Page 19
PAGE
Ten-Year Financial Highlights
- ------------------------------
(number of weighted average shares 1997 1996 1995 1994
and dollars in thousands, except per
share data)
Net premiums written 1,2 $ 717,618 692,239 757,021 697,941
Net premiums earned 2 676,268 694,947 742,817 680,270
Net investment income earned 3 100,530 96,952 91,640 80,657
Net realized gains 3 6,021 2,786 900 4,230
Total revenues 788,381 798,972 839,098 768,330
GAAP Underwriting loss 4,5,6,7 (1,783) (20,027) (16,725) (34,466)
Operating income 8 65,694 53,740 52,457 35,526
Net income 8,9 69,608 55,551 53,042 38,276
Total assets 10 2,306,191 2,189,737 2,119,804 1,870,718
Debt outstanding 96,559 103,769 111,292 111,378
Stockholders' equity 565,316 474,299 436,749 329,164
Statutory premiums to surplus ratio 11 1.5:1 1.7:1 2.1:1 2.4:1
Statutory combined ratio 11 100.1% 102.9 101.6 104.3
GAAP combined ratio 100.3% 102.9 102.3 105.1
Yield on investment, before-tax 6.0% 6.1 6.4 6.5
Debt to capitalization 14.6% 18.0 20.3 25.3
Return on average equity 13.4% 12.2 13.9 11.7
Per share data:
Operating income:
Basic 10 $ 2.27 1.86 1.84 1.28
Diluted 10 2.15 1.77 1.79 1.20
Net income:
Basic 9,10 2.41 1.92 1.86 1.38
Diluted 9,10 2.27 1.83 1.81 1.29
Dividends to stockholders 10 0.56 0.56 0.56 0.56
Stockholders' equity 10 19.32 16.31 15.17 11.62
Price range of common stock:
High 10 28 3/8 19 3/8 19 3/16 15 3/8
Low 10 18 5/16 15 1/2 12 1/4 11 1/2
Close 10 27 19 17 3/4 12 5/8
Other:
Number of weighted average shares:
Basic 10 28,909 28,860 28,481 27,759
Diluted 10 30,925 30,360 29,846 29,356
Page 20
- ----------------------------------------------------------------------------
PAGE
Ten-Year Financial Highlights
- ------------------------------
(number of weighted average shares 1993 1992 1991 1990
and dollars in thousands, except per
share data)
Net premiums written 1,2 $ 607,462 560,360 500,283 482,735
Net premiums earned 2 594,919 539,792 503,726 470,681
Net investment income earned 3 77,326 73,516 68,501 64,508
Net realized gains 3 4,528 3,943 3,580 9,888
Total revenues 679,598 619,565 577,920 547,169
GAAP underwriting loss 4,5,6,7 (53,985) (41,674) (38,067) (38,444)
Operating income 8 19,735 24,845 24,429 24,491
Net income 8,9 22,678 53,915 27,293 32,402
Total assets 10 1,725,736 1,639,033 1,321,120 1,240,916
Debt outstanding 61,291 63,681 14,470 15,173
Stockholders' equity 322,807 311,705 269,998 248,274
Statutory premiums to surplus ratio 11 2.6:1 2.5:1 2.5:1 2.7:1
Statutory combined ratio 11 108.5% 107.9 107.6 108.0
GAAP combined ratio 109.1% 107.7 107.6 108.2
Yield on investment, before-tax 6.8% 7.2 7.6 7.5
Debt to capitalization 16.0% 17.0 5.1 5.8
Return on average equity 7.1% 18.5 10.5 13.5
Per share data:
Operating income:
Basic 10 $ 0.73 0.93 0.93 0.94
Diluted 10 0.71 0.92 0.91 0.88
Net income:
Basic 9,10 0.83 2.02 1.03 1.25
Diluted 9,10 0.81 1.93 1.01 1.16
Dividends to stockholders 10 0.56 0.55 0.52 0.51
Stockholders' equity 10 11.74 11.60 10.17 9.46
Price range of common stock:
High 10 15 1/2 11 3/4 9 10 1/8
Low 10 10 1/4 8 6 1/2 6 1/4
Close 10 15 1/4 11 8 3/8 6 5/8
Other:
Number of weighted average shares:
Basic 10 27,271 26,690 26,388 25,942
Diluted 10 29,133 28,869 28,502 28,222
- -----------------------------------------------------------------------------
Ten-Year Financial Highlights
- ------------------------------
(number of weighted average shares 1989 1988
and dollars in thousands, except per
share data)
Net premiums written 1,2 $ 462,615 440,715
Net premiums earned 2 449,950 425,809
Net investment income earned 3 59,831 52,800
Net realized gains 3 2,557 1,232
Total revenues 516,061 481,693
GAAP underwriting loss 4,5,6,7 (14,736) (4,818)
Operating income 8 38,520 40,488
Net income 8,9 40,566 41,511
Total assets 10 1,190,183 1,055,135
Debt outstanding 35,755 23,836
Stockholders' equity 230,434 213,686
Statutory premiums to surplus ratio 11 2.6:1 2.6:1
Statutory combined ratio 11 103.4% 101.1
GAAP combined ratio 103.3% 101.1
Yield on investment, before-tax 7.5% 7.6
Debt to capitalization 13.4% 10.0
Return on average equity 18.3% 21.1
Per share data:
Operating income:
Basic 10 $ 1.45 1.50
Diluted 10 1.37 1.39
Net income:
Basic 9,10 1.53 1.54
Diluted 9,10 1.43 1.43
Dividends to stockholders 10 .46 .40
Stockholders' equity 10 9.18 7.86
Price range of common stock:
High 10 10 8 13/16
Low 10 7 1/4 6 7/16
Close 10 9 1/2 7 11/16
Other:
Number of weighted average shares:
Basic 10 26,580 27,039
Diluted 10 29,806 30,413
1. Net premiums written in 1997 were increased by approximately
$36 million due to a conversion of New Jersey personal automobile
policies from six-month to annual terms. This conversion had no effect
on net premiums earned. See Financial Review for a more detailed
discussion.
2. Net premiums written and earned for 1993 were reduced by $41 million
and $26 million, respectively, for premiums ceded to the New Jersey
Homeowners Quota Share Reinsurance Program and increased by $42 million and
$39 million, respectively, from business written by Niagara Exchange
Corporation. Net premiums written and earned for 1991 were increased by
$11 million due to an adjustment from the New Jersey Unsatisfied Claim and
Judgment Fund ("UCJF"). Net premiums written and earned for 1995 were
increased by $10 million reflecting a lower UCJF assessment - See Financial
Review for a more detailed discussion.
3. Net investment income and net realized gains are presented before
the effects of Federal income taxes.
4. The 1993 underwriting loss included a $9 million restructuring
charge for the cost of the early retirement program, along with severance
benefits provided to terminated employees.
5. The 1996, 1995, 1994, 1993, 1992, 1991 and 1990 underwriting losses
included taxes and assessments imposed as a result of the Fair Automobile
Insurance Reform Act adopted in New Jersey in the amounts of $2 million,
$7 million, $7 million, $6 million, $13 million, $12 million and
$10 million, respectively.
6. The 1993, 1992 and 1991 underwriting losses included assessments from
the Market Transition Facility of New Jersey in the amount of $12 million,
$8 million and $11 million, respectively.
7. The 1991 underwriting loss included a $10 million increase in the
involuntary loss from business assigned to the Company from the National
Workers' Compensation Reinsurance Pool.
8. Operating income and net income for 1991, 1990, 1989, and 1988
included permanent tax benefits of $1 million, $3 million, $1 million,
and $2 million, respectively, resulting from the fresh start
deductions for loss reserve discounting under the Tax Reform Act of 1986 and
salvage and subrogation recoverable under the Budget Reconciliation Act of
1990.
9. Net income for 1992 increased by $26 million due to the adoption of
two accounting policies, Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("FASB 109"), and a change in the method of
deferring policy acquisition costs. FASB 109 increased net income by $20
million ($0.76 per basic share and $0.70 per diluted share) and the change
in deferred policy acquisition costs increased net income by $6 million
($.23 per basic share and $.21 per diluted share).
10. Certain amounts in prior years have been adjusted to conform with the
1997 presentation and the Company's 2 for 1 common stock split declared
October 28, 1997 and effective December 1,1997.
11. Calculated on the basis of industry standards (statutory basis)
prescribed by the National Association of Insurance Commissioners, which
standards differ from generally accepted accounting principles.
Page 21
PAGE
FINANCIAL REVIEW
- ----------------
Results of operations
- ---------------------
Comparison of 1997 to 1996
- --------------------------
Financial Highlights
(dollars in thousands)
- ----------------------
Better
1997 1996 (Worse)
---- ---- ------
Net premiums written $ 717,618 692,239 4%
Net premiums written per employee 1 $ 454 433 5%
Operating income $ 65,694 53,740 22%
Statutory combined ratio 100.1% 102.9 (2.8)points
Return on average equity 13.4% 12.2 1.2points
1 Includes employee count for property and casualty insurance operations
only.
Revenues
- --------
Net premiums written for 1997 increased by 4%, or $25 million, compared
to 1996. The conversion of New Jersey personal automobile policies from
six-month to annual terms (the "Conversion") increased 1997 net premiums
written by approximately $36 million, while 1996 net premiums written
included a one-time adjustment of $8 million reflecting the Company's buy out
of certain reinsurance arrangements (the "Reinsurance Buy Out"). Excluding
the effects of the Conversion and the Reinsurance Buy Out, net premiums
written for 1997 decreased by about $3 million. The decline in net premiums
written occurred primarily due to decreases in the personal lines and public
entities Strategic Business Units ("SBUs"). The lower levels of 1997 and 1996
net premiums written (excluding the Conversion, which had no effect on net
premiums earned) resulted in a modest decrease in 1997 total net premiums
earned of 3%, or $19 million, compared to 1996.
During 1997, the Company generated approximately $156 million of net
premiums written attributable to new business, after deducting reinsurance
costs of $7 million, a 55% increase over 1996. Most of the new business
growth was attributable to the Company's field underwriting activities and an
increase in the number of agency management specialists ("AMSs") to more than
60 by year-end 1997. The AMS is the key contact between the independent agent
and Selective, and focuses on the business and expertise of the agencies.
The personal lines SBU 1997 net premiums written, excluding the effect
of the Conversion, decreased 4%, or $8 million, compared to 1996. This
decrease reflected a reduction in the number of policies in-force in the
personal automobile insurance line of approximately 5%, or 5,300 policies,
partially offset by $2 million generated from a 1996 rate increase in New
Jersey personal automobile insurance.
Excluding the Reinsurance Buy Out, the commercial SBUs net premiums
written increased 1%, or $5 million, compared to 1996. This increase included
$132 million of net premiums written attributable to new business, after
deducting reinsurance costs of approximately $6 million, which was primarily
offset by: (i) lower premium volume of approximately $21 million due to
agency terminations; (ii) a reduction in existing business (renewal
retention) attributable to a highly competitive commercial lines marketplace
as well as nonrenewals resulting from the Company's reunderwriting
(reevaluating) of certain business classes and/or accounts; (iii) workers'
compensation rate decreases, which lowered net premiums written by
approximately $18 million; and (iv) lower net premiums written in the public
entities SBU, primarily due to a shift in business to the alternative
markets.
The significant growth in new business resulted in the Company
generating an increase in most of the commercial SBUs' net premiums written.
However, the public entities SBU net premiums written were down $23 million
in 1997, primarily due to the trend towards self-insurance and other
alternative risk sharing mechanisms.
Alternative markets, such as self-insurance mechanisms, have become more
prevalent in the industry and reduce the demand for traditional insurance,
but create opportunities to offer services for a fee to self-insured
entities. Because of the trend towards self-insurance, the Company organized
Selective Technical Administrative Resources, Inc. in 1993, a part of the
Selective Risk Managers SBU, to provide third-party administrative services
for public entities that self-insure and use other means of alternative
insurance. The services provided include, but are not limited to: claims
administration, loss control, risk management and reinsurance.
Bar Graph
- -----------------------------------------
Net Premiums Written
($ in millions)
$608 $698 $757 $692 $718
1993 1994 1995 1996 1997
- ------------------------------------------
Page 22
PAGE
In 1998, net premiums written are expected to be adversely affected by
the following factors: (i) a reduction in renewal premiums due to agency
terminations; (ii) rate reductions and credits mainly in the commercial SBUs
due to competition and improving loss trends; and (iii) a reduction in some
existing business due to the current competitive conditions, reevaluation of
certain underwriting risks, and other factors. The Company anticipates these
decreases will be offset by the continued growth in new business due to: (i)
an increase in AMS staffing; (ii) midwestern expansion; (iii) introduction of
personal lines products in five states; and (iv) continued penetration into
new and existing independent agency books of business and territories.
Net investment income earned for 1997, before tax, increased 4%, or $4
million, over 1996. The increase was mainly due to the income generated from
investments acquired with cash provided by the Company's operating activities
during 1997 and 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 after-tax rate than the after-tax borrowing
rate. The growth in investment income was partially offset by lower yields on
amounts made available for reinvestment by redemptions and maturities of $249
million of higher yielding debt securities during 1997 and 1996. The
Company's overall after-tax investment yield was 4.6% in 1997, down slightly
from 4.7% in 1996. The level of interest rates available in the marketplace
for new or reinvested cash has been lower than both the average yield on the
debt securities portfolio and the securities that are being redeemed.
Therefore, the growth of investment income will continue to be highly
dependent on new cash generated from the Company's operations.
Expenses
- --------
The ratio of losses and loss expenses incurred to net premiums earned
was 68.2% in 1997, a 3.1 point decrease from the ratio of 71.3% in 1996. The
decrease in the 1997 loss and loss expense ratio was primarily attributable
to the absence of weather-related catastrophe claims in 1997. During 1996,
the Company incurred $18 million of losses, net of $7 million of reinsurance,
from weather-related catastrophe claims, which increased the loss and loss
expense ratio for 1996 by 2.7 points and primarily impacted the personal
lines, mercantile and service, public entities, and habitational and
recreational SBUs. Absent weather-related catastrophe claims, the loss and
loss expense ratio improved slightly over 1996, reflecting favorable loss
experience in most of the commercial SBUs, modestly offset by a higher
personal lines SBU ratio.
For 1997, the loss and loss expense ratio for the commercial SBUs
decreased 3.9 points, to 66.8%, compared to 70.7% for 1996. Absent the
effects of the 1996 weather-related claims of 3.0 points, the commercial SBUs
1997 loss and loss expense ratio improved 0.9 points with the most notable
improvements in the mercantile and service, habitational and recreational,
and bonds SBUs. These improvements were in most business classes and
commercial lines of insurance in these SBUs.
Workers' compensation continued its favorable trend in most of the
commercial SBUs, primarily due to reduced frequency and severity of claims.
These results were attributable to: (i) reduced health care costs for
workers' compensation (approximately $11 million) due to managed care; (ii)
programs which permit injured employees to return to work earlier in
alternative job categories; (iii) fee schedules which limit the amount that
health care providers can charge; (iv) loss control programs which promote
workplace safety; and (v) various favorable legislative reforms.
The improvements were partially offset by unfavorable results in the
commercial automobile line of insurance in most of the SBUs. The adverse
results in this line were due to frequency and severity of claims in 1997 and
an increase in prior years' estimated ultimate loss costs due to higher than
expected paid and incurred loss experience. The commercial automobile line of
insurance remains a concern in 1998 for all SBUs writing this line. An effort
is under way to improve the commercial automobile results, including pricing
analysis, reunderwriting and increased loss control.
In anticipation of the continued growth of managed care medical cost
containment and other medical claims services, the Company acquired the
assets of Alta Services ("Alta") in the fourth quarter of 1997. Alta is a
managed care company that does not bear underwriting risks and provides a
wide range of medical claims handling services to the insurance industry. For
the past several years, Alta has provided services to Selective for the
Company's managed care program. The managed care program reduced workers'
compensation and automobile medical bill costs by $11 million and $5 million,
respectively. With the addition of Alta, the Company is in the position of
giving customers access to quality medical and rehabilitation services, while
enhancing claims management through in-house managed care expertise.
The personal lines SBU loss and loss expense ratio of 71.3% for 1997
increased slightly, or 0.6 points, compared to 70.7% for 1996 (excluding the
effects of weather-
Bar Graph
- --------------------------------------
Statutory Loss and Loss Expense Ratio
71.8% 71.7% 71.2% 71.3% 68.2%
1993 1994 1995 1996 1997
- --------------------------------------
Page 23
related catastrophe claims which added 1.9 points to the 1996 ratio). The
homeowners line of insurance improved due to rate increases
and lower reinsurance costs. In addition, New Jersey personal automobile
results continued to be favorable and generated a loss and loss expense
ratio of 73.1% for 1997 and 73.3% in 1996.
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 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.
If the Company's current profitability continues in its New Jersey
personal automobile business, it may be possible that the Company will incur
an excess profit premium refund obligation. The Company has considered the
potential effect of such excess profits in establishing its reserves.
During 1997, the Governor of New Jersey signed into law an automobile
insurance reform bill. This legislation: (i) eliminates automatic approval
of annual cost-of-living premium increases in favor of "expedited rate
filings" of 3% or less, which do not require prior approval from the
insurance commissioner; (ii) prohibits insurers from non-renewing good
drivers (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 January 1998, a legislative Joint Committee of the New Jersey Senate
and Assembly on Automotive Insurance Reform was empaneled to review several
issues including: (i) reduction of policy limits to reduce premium cost; (ii)
review of risk classification and rating; and (iii) reduction in fraud. The
Company cannot presently predict the form or timing of any initiatives which
will result from the committee deliberations, nor can the Company estimate
the financial impact, if any, that such initiatives may have on the Company
and its operations.
Policy acquisition costs expressed as a percentage of net premiums
earned for 1997 were 31.3%, up from 30.7% in 1996. The increase reflected
record profit sharing incentives for both agents and employees for the
exceptional 1997 performance, partially offset by reinsurance profit sharing
commission benefits to the Company due to improved reinsurance results in
1997. The net impact of these profit sharing arrangements increased the ratio
by 0.4 points. In addition, the 1997 total dollar amount of labor costs
(excluding employee incentive compensation awards) and other operating costs
grew modestly, and when compared to the lower levels of 1997 net premiums
earned, increased the ratio by 0.8 points. These increases were partially
offset by a decrease of 0.5 points due mainly to the elimination of the New
Jersey Fair Automobile Insurance Reform Act ("FAIRA") assessments and fewer
assignments of high operating expense assigned risk business.
Productivity, as measured by net premiums written per employee, in 1997
was $454,000, up from $433,000 in 1996. However, excluding the effects of the
Conversion in 1997, the net premiums written per employee was $431,000, down
slightly from 1996. The decrease was due to the lower levels of net premiums
written.
Total Federal income tax expense in 1997 was $21 million (an effective
tax rate of 23.5%), a $7 million increase compared to $14 million (an
effective tax rate of 19.6%) in 1996. The effective tax rate for 1997 was
higher than 1996 primarily due to the tax benefits from the higher level of
1996 underwriting losses due to the weather-related claims. The Company's
effective tax rate differs from the Federal corporate rate of 35% primarily
as a result of tax-exempt investment income.
Income
- ------
For the third consecutive year, operating income (income excluding net
realized gains, net of tax effect) reached an all-time high, increasing by
22% to $66 million in 1997, or $2.15 per diluted share, compared to $54
million, or $1.77 per diluted share, in 1996. The Company recognized net
realized gains (net of tax effect) for 1997 of $4 million, or $.12 per
diluted share compared to $2 million, or $.06 per diluted share, in 1996. Net
income for 1997 increased 25% to $70 million, or $2.27 per diluted share,
from $56 million, or $1.83 per diluted share, in 1996. Operating and net
income for 1996 included weather-related losses, net of tax, of $12 million,
or $0.39 per diluted share.
Bar Graph
- --------------------------------------
Statutory Underwriting Expense Ratio
35.5% 31.6% 29.4% 30.8% 31.2%
1993 1994 1995 1996 1997
- --------------------------------------
Bar Graph
- --------------------------------------
Net Premiums Written Per Employee *
($ in thousands)
$317 $386 $458 $433 $454
1993 1994 1995 1996 1997
- --------------------------------------
* Includes employee count for property and casualty insurance operations
only.
Page 24
PAGE
Results of operations
- ---------------------
Comparison of 1996 to 1995
- --------------------------
- -----------------------------------------------------------------------------
Financial Highlights
(dollars in thousands)
- ---------------------- Annual
Increase
1996 1995 (Decrease)
--------------------------------------
Net premiums written $ 692,239 757,021 (9) %
Net premiums written per employee1$ 433 458 (5) %
Operating income $ 53,740 52,457 2 %
Statutory combined ratio 102.9% 101.6 (1.3)points
Return on average equity 12.2% 13.9 (1.7)points
1 includes employee count for property and casualty insurance operation
only.
Revenues
Net premiums written for 1996 decreased by 9%, or $65 million, compared
to 1995. Most of the premium decline occurred in the SBUs writing commercial
insurance, where net premiums written were down 11%, or $60 million. In
addition, the personal lines SBU net premiums written were down 2%, or $5
million. The lower net premiums written resulted in a decline in total net
premiums earned of 6%, or $48 million, in 1996 over 1995.
During 1996, net premiums written in both commercial and personal
automobile lines of insurance were adversely affected by higher ceded
premiums incurred for the New Jersey Unsatisfied Claim and Judgment Fund
("UCJF"). The Company recorded a total ceded premium assessment charge of $7
million in 1996 compared to $1 million in 1995. The 1996 assessment was
comparable with assessments in years prior to 1995. The 1995 assessment
included a one-time benefit of an excess cash position at the UCJF, which
resulted in a lower assessment for that year.
The modest reduction in the personal lines SBU net premiums written for
1996 reflected higher UCJF ceded premiums of $4 million and a reduction in
the number of policies in-force in the personal automobile line of 4%, or
4,700 policies. These items were partially offset by additional premiums
written of approximately $6 million generated from rate increases in New
Jersey personal automobile insurance.
Most commercial lines SBUs experienced lower net premiums written for
1996, primarily due to: (i) higher premiums recorded in 1995 as a result of
the reduction in a premium processing backlog of approximately $25 million;
(ii) lower premium volume of approximately $20 million due to agency
terminations; (iii) a reduction in existing business (renewal retention)
attributable to a highly competitive commercial lines marketplace as well as
nonrenewals resulting from the Company's reunderwriting (reevaluating) of
certain business classes and/or accounts; (iv) workers' compensation rate
decreases, which lowered premiums written by $8 million; and (v) a trend
towards self-insurance mechanisms and other alternative markets, particularly
in the public entities SBU, which reduced net premiums written by
approximately $5 million.
Rate reductions in 1996 of approximately $8 million in premiums occurred
in the workers' compensation line of insurance principally due to the impact
of improving loss trends. The improvement in the loss trends reflected: (i)
reduced health care costs (approximately $3 million) due to managed care;
(ii) programs which permit injured employees to return to active work earlier
in alternative job categories; (iii) fee schedules which limit the amount
that health care providers can charge; (iv) loss control programs which
promote workplace safety; and (v) various favorable legislative reforms.
Partially offsetting the reduction in net premiums written in 1996 was
new business net premiums written aggregating approximately $85 million
written by the commercial lines SBUs and the Company's revision of certain
reinsurance programs. The program revisions reduced ceded premiums and
increased net premiums written by $19 million (including a one-time
adjustment of $8 million, due to the Reinsurance Buy Out).
Net investment income earned for 1996 increased 6%, or $5 million, over
1995. The increase was mainly due to the income generated from investments
acquired with cash provided by operating activities during 1996 and 1995. The
growth in investment income was partially offset by redemptions and
maturities of higher yielding debt securities of $229 million during 1996 and
1995, reinvested at lower fixed income yields available in the marketplace.
These factors, together with the effect of the increase in fair value of
available-for-sale securities recognized during 1995, reduced the Company's
overall after-tax investment yield to 4.7% in 1996, down from 5.0% in 1995.
Expenses
- --------
The ratio of losses and loss expenses incurred to net premiums earned
remained consistent at slightly above 71% in 1996 and 1995. During 1996, the
Company incurred $18 million of losses, net of $7 million of reinsurance,
from weather-related catastrophe claims, which increased the loss and loss
expense ratio for 1996 by 2.7 points. Absent weather-related catastrophe
claims, this ratio improved over 1995, reflecting favorable loss experience
in the workers' compensation line of insurance which lowered the overall loss
and loss expense ratio by approximately 2 points. The improved workers'
compensation results reflected the positive loss trends of reduced frequency
and severity of claims attributable to: (i) reduced health care costs due to
managed care (approximately $3 million); (ii) programs which permit injured
employees to return to work earlier in alternative job categories; (iii) fee
schedules
Page 25
PAGE
which limit the amount that health care providers can charge; (iv)
loss control programs which promote workplace safety; and (v) various
favorable legislative reforms. The favorable workers' compensation results
were experienced throughout most of the commercial lines SBUs.
The personal lines SBU loss and loss expenses for 1996, excluding
weather-related catastrophe claims, improved slightly as a result of better
loss experience in the homeowners line of insurance due to rate increases and
lower reinsurance costs, as well as the continued favorable New Jersey
automobile business results. New Jersey personal automobile generated a loss
and loss expense ratio of 73.3%.
Policy acquisition costs expressed as a percentage of net premiums
earned for 1996 were 30.7%, up from 29.9% in 1995. The ratio reflected an
approximate 1 point increase due to the relationship of labor costs and other
operating expenses expressed as a percentage of net premiums earned,
partially offset by lower premium taxes and assessments, principally the $5
million reduction in the FAIRA assessment in 1996. While the total dollar
amount of labor costs and other operating costs remained relatively stable,
the lower levels of premiums earned significantly impacted this ratio.
Productivity in 1996, as measured by net premiums written per employee,
was $433,000, down from $458,000 in 1995. The decrease was due to the
lowerlevels of net premiums written, as described above.
Total Federal income tax expense in 1996 was $14 million (an effective
tax rate of 19.6%) and $12 million (an effective tax rate of 18.3%) in 1995.
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
- ------
Operating income (income excluding net realized gains, net of tax
effect), increased 2% to $54 million in 1996, or $1.77 per diluted share,
compared to $52 million, or $1.79 per diluted share in 1995. The Company
recognized net realized gains (net of tax effect) for 1996 of $2 million, or
$.06 per diluted share, compared to $1 million, or $.02 per diluted share, in
1995. Net income for 1996 increased 5% to $56 million, or $1.83 per diluted
share, from $53 million, or $1.81 per diluted share, in 1995.
Federal income taxes
- --------------------
The Company's total net deferred tax asset amounted to $6 million at
December 31, 1997, compared to $31 million at 1996. The deferred tax asset
at year-end 1997 reflected, for the most part, the required discounting of
loss and loss expense reserves for tax purposes that began in 1987 and the
ability to deduct only 80% of the net unearned premium reserve, offset by
the deferred tax liabilities on unrealized gains on securities,
available-for-sale. The decrease in the deferred tax asset of $25 million
from December 31, 1996, reflected the deferred tax liability associated
with the increase in unrealized gains recorded on securities,
available-for-sale.
The Company had taxable income and pretax financial statement income for
the periods indicated as follows:
- ------------------------------------------------------
(in millions) 1997 1996 1995
- ------------------------------------------------------
Current taxable
income $51.7 27.7 48.0
Pretax financial
statement income $91.0 69.1 64.9
As of December 31, 1997, the Company can fully realize the deferred tax
asset in the available tax loss carry-back years. Based on the Company's
historical levels of current taxable income and pretax financial statement
income, the Company believes that it is more likely than not that the
existing net deductible temporary differences will reverse during periods in
which the Company will generate net taxable income. However, there can be no
assurance that the Company will generate any earnings or any specific level
of earnings in future years.
Financial condition; liquidity and capital resources
- ----------------------------------------------------
Selective Insurance Group, Inc. ("Parent") is an insurance holding
company, the principal assets of which are its investments in its insurance
subsidiaries. The primary means of meeting its liquidity requirements is
through dividends from its insurance subsidiaries, the payment of which is
governed by state regulatory requirements. Dividends are generally payable
only from earned surplus as reported on the insurer's annual statement as of
the preceding December 31.
The Parent's cash requirements principally include: (i) dividends to
stockholders; (ii) interest payments on its outstanding debt; (iii) annual
principal payments of $7 million on the $50 million 7.84% Senior Notes, due
November 15, 2002 ("7.84% Senior Notes"); and (iv) general corporate
expenses. As of December 31, 1997, these cash requirements, net of applicable
income taxes, aggregated approximately $32 million annually (assuming the
current dividend level). However, the Parent acquires cash as a result of
Federal tax benefits paid to it by its subsidiaries, and receives cash from
the sale of its common stock under various stock plans and the dividend
reinvestment program, and from investment income, all of which reduce the
need for subsidiary dividends by approximately $7 million annually to $25
million.
Based upon the 1997 statutory financial statements, the insurance
subsidiaries are able to pay the Parent, in 1998, ordinary dividends in the
aggregate amount of $62 million. There can be no assurance that the insurance
subsidiaries will be able to pay dividends to the Parent in the future in an
amount sufficient to enable the Parent to meet its liquidity requirements.
For additional information regarding regulatory limitations on the payment of
dividends by the insurance subsidiaries to the Parent and amounts available
for the payment of such dividends, see note 12 to the consolidated financial
statements.
Dividends to stockholders are declared and paid at the discretion of the
Parent's Board of Directors (the "Board") based upon the Company's operating
results, financial condition, capital requirements, contractual restrictions
and other relevant
Page 26
PAGE
factors. The Parent has paid regular quarterly cash dividends to its
stockholders for 69 consecutive years and plans to continue to pay
quarterly cash dividends. For information regarding restrictions on the
Parent's ability to pay dividends to its stockholders, see note 7(b) to
the consolidated financial statements.
The Parent's cash requirements also include the cost of any shares of
common stock repurchased under its common stock repurchase program. On July
29, 1996, the Board authorized management to repurchase up to two million
shares of Selective 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 December 31,
1997, the Parent had purchased a total of 593,000 shares at a total cost of
$13 million under the program.
Cash provided by operating activities amounted to $51 million, $90
million and $177 million in 1997, 1996 and 1995, respectively. The decreasing
trend in cash provided by operating activities from 1995 to 1997 principally
reflects the receipt of $32 million and $43 million less in cash received
from premiums in 1997 and 1996, respectively. In addition, loss and loss
expenses paid increased $10 million in 1997 compared to 1996, and increased
$40 million (including $16 million of loss and loss expense payments due to
the weather-related catastrophe claims) for 1996 compared to 1995. Loss and
loss expenses paid have been affected by the faster rate at which outstanding
claims are processed due, in part, to the placement of claims management
specialists ("CMSs") in the field and improved litigation management. These
factors have resulted in a modest acceleration of claim and claim expense
payments with a corresponding reduction in outstanding claim counts.
Bar Graph
- ----------------------------------------
Operating Cash Flow
($ in millions)
$78 $120 $177 $90 $51
1993 1994 1995 1996 1997
- ----------------------------------------
Since cash inflow from premiums is received in advance of required cash
outflow to settle claims, the Company accumulates funds which it then
invests, and investments represented 75% of the Company's total assets as of
December 31, 1997. Cash outflow requirements can be unpredictable due to
uncertainties regarding settlement dates for unpaid claims and the potential
for large and/or catastrophic losses occurring either individually or in the
aggregate. The Company maintains reinsurance programs to ensure the
availability of funds and to protect the Company against unusually serious
occurrences or catastrophes in which a number of claims could produce an
extraordinary aggregate loss. In addition, the Company's investment program
is structured with staggered maturities so that liquidation of debt
securities, available-for-sale should not be necessary in the ordinary course
of business.
Effective January 1, 1998, the Company revised its property catastrophe
program and its New Jersey Homeowners Quota Share Program ("Homeowners Quota
Share Program"). The revised program provides protection against higher
levels of catastrophe losses at a lower cost when compared with the 1997
program. The new catastrophe program is in four layers and covers: (i) 95% of
losses in excess of $10 million up to $55 million; (ii) 50% of losses in
excess of $55 million up to $85 million; and (iii) 95% of losses in excess of
$85 million up to $150 million in two layers. In addition, the Homeowners
Quota Share Program was reduced from 85% to 75%, and all homeowners liability
premium has been removed from this program. The provisional commission
received from the reinsurers has been increased from 38.5% to 45%, and the
occurrence limit has been removed completely. The Company believes that the
1998 property catastrophe program, coupled with the Homeowners Quota Share
Program, provides adequate protection for the Company if catastrophe losses
were to occur. The Company expects its 1998 costs for both the catastrophe
and Homeowner Quota Share programs to be reduced by approximately $2 million
compared to 1997.
Total assets at December 31, 1997, were $2.3 billion, representing an
increase of $116 million, or 5%, from December 31, 1996. The growth in total
assets was primarily due to an increase in total investments of $102 million.
The growth in the Company's investment portfolio reflected the cash provided
by operating activities of $51 million and a $56 million increase in the net
unrealized gains on available-for-sale securities. In addition, the impact
of the Conversion increased premiums receivable by approximately $36 million
and increased deferred acquisition costs (policy acquisition costs which are
deferred and amortized over the life of the policy period) associated with
the Conversion by approximately $8 million.
Partially offsetting these increases was a decrease of $25 million in
the deferred Federal income tax asset, primarily due to the increase in net
unrealized gains on the available-for-sale securities and the decrease in
reinsurance recoverable on unpaid losses and loss expenses of $26 million,
principally due to the settlement in 1997 of the higher level of flood claims
from the 1996 weather-related storms. The flood risk is ceded 100% to the
National Flood Insurance Program. Therefore, the Company is a service
provider and not an underwriter of this type of insurance and bears no risk
of policyholder loss.
Bar Graph
- -------------------------------------
Stockholders' Equity Per Share
$11.74 $11.62 $15.17 $16.31 $19.32
1993 1994 1995 1996 1997
- -------------------------------------
Page 27
PAGE
The rise in total liabilities of $25 million, or 1%, from December 31,
1996, to December 31, 1997, was primarily attributable to borrowings of $17
million on the lines of credit which the Company had outstanding at December
31, 1997. Unearned premiums increased by $42 million, due primarily to the
effects of the Conversion. These increases were partially offset by a $29
million decrease in gross loss and loss expense reserves attributed to: (i)
1996 flood claims ($11 million) settled in 1997; (ii) a higher level of
claims settled due to CMS deployment and improved litigation management; and
(iii) reduced overall exposures reflecting a lower level of net premiums
earned in 1996 and 1997. In addition, there was a $7 million decrease in
notes payable as a result of a principal payment on the 7.84% Senior Notes.
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, the Company completed
an impact analysis and began to convert or modify its applications in 1997.
While recognizing that some uncertainty exists, the Company anticipates that
its automated information systems will be "Year 2000" compliant by
mid-to-late 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's independent agency force has been consulted on the importance of
this issue, and the Company 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 business sector, and
under the error and omissions ("E&O") insurance coverages and directors and
officers liability ("D&O") insurance coverages. The Company does not actively
participate in these markets, nor does it actively 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.
Insurance regulation
- --------------------
The Company is subject to regulation under applicable insurance
statutes, including insurance holding company statutes, of the various states
in which the Company operates. Insurance regulation is intended to provide
solvency and other safeguards for policyholders rather than to protect
stockholders of insurance companies or insurance holding companies. Insurance
laws of the various states provide regulatory agencies with broad
administrative powers, including the power to grant or revoke licenses to
transact insurance business, and to regulate trade practices, investments,
premium rates, the deposit of securities, the form and content of financial
statements, insurance policies, accounting practices, the maintenance of
specified reserves and capital, the payment of dividends, and establish
maximum levels of profits or returns for a line of insurance.
Analysis of reserves for losses and loss expenses
- --------------------------------------------------
Significant periods of time can elapse between the occurrence of an
insured loss, the reporting of the loss to the insurer and the insurer's
payment of that loss. To recognize liabilities for unpaid losses and loss
expenses, insurers establish reserves as balance sheet liabilities
representing estimates of amounts needed to pay reported and unreported net
losses and loss expenses.
When a claim is reported to an insurance subsidiary, its claims
personnel establish a "case reserve" for the estimated amount of the ultimate
payment. The amount of the reserve is primarily based upon a case-by-case
evaluation of the type of claim involved, the circumstances surrounding each
claim and the policy provisions relating to the type of losses. The estimate
reflects the informed judgment of such personnel based on general insurance
reserving practices, as well as the experience and knowledge of the claims
person. Until the claim is resolved, these estimates are revised as deemed
necessary by the responsible claims personnel based on sub-
- ----------------------------------------------------------------------------
Roll-forward Of Reserves For Losses
And Loss Expenses
(in thousands)
- ----------------------------------------------------------------------------
1997 1996 1995
Net reserves for losses and loss expenses
at beginning of year $1,039,585 998,683 887,854
Provision for losses and loss expenses
for claims occurring in the current year 471,506 504,843 516,219
Increase (decrease) in estimated losses
and loss expenses for claims
occurring in prior years (10,124) (9,178) 12,682
--------- --------- ---------
1,500,967 1,494,348 1,416,755
--------- --------- ---------
Net losses and loss expenses paid
for claims occurring during:
Current year 160,410 174,398 158,692
Prior years 303,585 280,365 259,380
--------- --------- ---------
463,995 454,763 418,072
--------- --------- ---------
Net reserves for losses and loss expenses
at end of year 1,036,972 1,039,585 998,683
Reinsurance recoverable on unpaid losses
and loss expenses at end of year 124,197 150,208 121,369
--------- --------- ---------
Gross reserves for losses and loss
expenses at end of year $ 1,161,169 1,189,793 1,120,052
========= ========= =========
Page 28
PAGE
sequent developments and periodic reviews of the cases.
In accordance with industry practice, the Company maintains, in addition
to case reserves, estimates of reserves for losses and loss expenses
incurred but not yet reported ("IBNR"). The Company projects its estimate of
ultimate losses and loss expenses at each reporting date. The difference
between (i) projected ultimate loss and loss expense reserves and (ii) case
loss reserves and loss expense reserves thereon is carried as the IBNR
reserve. (See note 1(j) and note 15 to the consolidated financial statements
for a discussion of assumptions used in establishing IBNR reserves.)
By using both estimates of reported claims and IBNR determined using
generally accepted actuarial reserving techniques, the Company estimates the
ultimate net liability for losses and loss expenses. The ultimate actual
liability may be higher or lower than reserves established. The Company does
not discount to present value that portion of its loss and loss expense
reserves expected to be paid in future periods. However, the loss reserves
include anticipated recoveries from salvage and subrogation.
Reserves are reviewed for adequacy on a periodic basis. When reviewing
reserves, the Company analyzes historical data and estimates the impact of
various factors such as: (i) per claim information; (ii) Company and industry
historical loss experience; (iii) legislative enactments, judicial
- ---------------------------------------------------------------------------
Analysis Of Net Loss And
Loss Expense Development
(in millions)
- ---------------------------------------------------------------------------
1987 1986 1989 1990
Gross reserves for unpaid
losses and loss expenses
at December 31 $475.3 534.5 622.8 669.2
Reinsurance recoverable
on unpaid losses
and loss expenses
at December 31 $(85.3) (80.2) (100.5) (87.0)
Net reserves for unpaid
losses and loss expenses
at December 31 $390.0 454.3 522.3 582.2
Net reserves estimated as of:
One year later 388.7 446.8 523.8 585.7
Two years later 382.8 445.3 528.2 583.1
Three years later 382.4 448.1 523.8 577.0
Four years later 389.1 447.0 520.3 581.2
Five years later 390.5 443.5 523.7 583.6
Six years later 389.3 447.2 529.7 582.8
Seven years later 392.3 454.7 530.0 585.7
Eight years later 399.7 457.3 531.4
Nine years later 403.2 458.5
Ten years later 403.3
Cumulative redundancy
(deficiency) $(13.3) (4.2) (9.1) (3.5)
===== ===== ===== =====
Cumulative amount of
net reserves paid
through:
One year later $131.3 135.0 158.2 174.5
Two years later 203.0 222.4 264.5 288.1
Three years later 254.0 285.4 335.8 371.7
Four years later 288.4 322.7 385.8 422.5
Five years later 307.8 350.7 413.7 452.0
Six years later 322.6 366.3 430.0 472.8
Seven years later 330.8 376.6 443.5 487.0
Eight years later 337.6 387.2 452.6
Nine years later 345.5 394.2
Ten years later 351.3
- --------------------------------------------------------------------------
Analysis Of Net Loss And
Loss Expense Development
(in millions)
- --------------------------------------------------------------------------
1991 1992 1993 1994
Gross reserves for unpaid
losses and loss
expenses at
December 31 $ 731.5 870.2 917.7 999.4
Reinsurance recoverable
on unpaid losses
and loss expenses at
December 31 $ (91.9) (132.6) (114.0) (111.5)
Net reserves for unpaid
losses and loss
expenses at
December 31 $ 639.6 737.6 803.7 887.9
Net reserves estimated as of:
One year later 634.3 734.8 801.0 900.6
Two years later 626.3 732.5 790.0 899.5
Three years later 626.5 718.7 788.5 894.9
Four years later 626.8 716.5 782.9
Five years later 625.3 717.3
Six years later 627.1
Seven years later
Eight years later
Nine years later
Ten years later
Cumulative redundancy
(deficiency) $ 12.5 20.3 20.8 (7.0)
====== ===== ===== =====
Cumulative amount of
net reserves paid
through:
One year later $ 183.7 219.5 224.6 259.4
Two years later 308.8 352.3 382.3 443.4
Three years later 391.3 451.4 497.7 573.7
Four years later 447.7 517.2 567.4
Five years later 481.4 556.3
Six years later 502.6
Seven years later
Eight years later
Nine years later
Ten years later
- --------------------------------------------------------------------------
Analysis Of Net Loss And
Loss Expense Development
(in millions)
- --------------------------------------------------------------------------
1995 1996 1997
Gross reserves for unpaid
losses and loss
expenses at
December 31 $1,120.1 1,189.8 1,161.2
Reinsurance recoverable
on unpaid losses
and loss expenses at
December 31 $ (121.4) (150.2) (124.2)
Net reserves for unpaid
losses and loss
expenses at
December 31 $ 998.7 1,039.6 1,037.0
Net reserves estimated as of:
One year later 989.5 1,029.5
Two years later 977.6
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Cumulative redundancy
(deficiency) $ 21.1 10.1
==== ====
Cumulative amount of
net reserves paid
through:
One year later $ 280.4 303.6
Two years later 481.6
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Page 29
PAGE
decisions, legal developments in the imposition of damages, and changes in
political attitudes; and (iv) trends in general economic conditions,
including the effects of inflation. This process assumes that past
experience, adjusted for the effects of current developments and anticipated
trends, is an appropriate basis for predicting future events. There is no
precise method, however, for subsequently evaluating the impact of any
specific factor on the adequacy of reserves because the eventual deficiency
or redundancy is affected by many factors.
The anticipated effect of inflation is implicitly considered when
estimating reserves for net losses and loss expenses. While anticipated
increases due to inflation are considered in estimating ultimate claim costs,
the increase in the average severity of claims is caused by a number of
factors that vary with the individual type of policy written. Future average
severities are projected based on historical and anticipated trends and also
are adjusted for anticipated changes in general economic trends.
After taking into account all relevant factors, the Company believes
that the provision for losses and loss expenses at December 31, 1997, is
adequate to provide for the ultimate net costs of claims incurred as of that
date. Establishment of appropriate reserves is an inherently uncertain
process and there can be no certainty that currently established reserves
will prove adequate in light of subsequent actual experience. The Company
receives an actuarial opinion as to the adequacy of its reserves from its
Vice President and Actuary but does not receive an independent actuarial
opinion as to such reserves.
The table on page 28 is a roll-forward of the Company's reserves for
losses and loss expenses and the effects on income for the years 1995 through
1997. The roll-forward shows a reserve decrease, or redundancy, of $10
million in 1997 and $9 million in 1996; and a reserve increase, or
deficiency, of $13 million in 1995.
The $10 million and $9 million redundancies experienced in 1997 and
1996, respectively, were principally due to a $13 million and a $9 million
redundancy in the workers' compensation line for those respective periods.
These redundancies included reserve reductions of approximately $4 million
and $11 million in the National Workers' Compensation Reinsurance Pool
business ("NCCI"), respectively. Effective January 1, 1995, Selective
withdrew from the New Jersey NCCI and chose to accept direct assignments of
involuntary workers' compensation coverage in an effort to reduce processing
costs and improve the loss experience of this business through better loss
control, managed care and risk management. In addition, during 1997 the
voluntary business and direct assignments of the workers' compensation line
of insurance included reserve reductions of approximately $9 million. During
1997 and 1996, incurred loss estimates for workers' compensation (including
NCCI) decreased due to greater than anticipated savings from the use of
managed care and various favorable legislative reforms. The 1997 workers'
compensation redundancy was partially offset by a $7 million reserve
deficiency in commercial automobile due to higher than expected paid and
incurred loss and loss expenses.
The table on page 29 represents the development of balance sheet net
reserves for 1987 through 1997. The top three lines of the table reconcile
gross Generally Accepted Accounting Principles ("GAAP") reserves to net GAAP
reserves for unpaid losses and loss expenses recorded at the balance sheet
date for each of the indicated years. The upper portion of the table shows
the re-estimated amount of the previously recorded net reserves based on
experience as of the end of each succeeding year. The estimate is either
increased or decreased as more information becomes known about the frequency
and severity of claims for individual years.
The "cumulative redundancy (deficiency)" represents the aggregate change
in the estimates over all prior years. For example, the 1991 reserve
developed a $13 million redundancy over the course of the succeeding six
years. That amount has been included in income over the past six years.
The lower section of the table shows the cumulative amount paid with
respect to the previously recorded reserves as of the end of each succeeding
year. For example, as of December 31, 1997, the Company paid $453 million of
the currently estimated $531 million of losses and loss expenses that were
incurred through the end of 1989; thus, the difference, an estimated $78
million of losses and loss expenses incurred through 1989, remained unpaid as
of December 31, 1997.
In evaluating this information, it should be noted that each amount
includes the total of all changes in amounts for prior periods. For example,
the amount of redundancy to losses settled in 1997, but incurred in 1994,
will be included in the cumulative redundancy (deficiency) amounts in 1994,
1995 and 1996. This table does not present accident or policy year
development data, which certain readers may be more accustomed to analyzing.
Conditions and trends that have affected development of the reserves in the
past may not necessarily occur in the future. Accordingly, it may not be
appropriate to extrapolate redundancies or deficiencies based on this table.
Page 30
PAGE
Environmental reserves
- ---------------------
Reserves established for liability insurance continue to reflect
exposure to environmental claims, both asbestos and non-asbestos. These
claims have arisen primarily under older policies containing exclusions for
environmental liability which certain courts, in interpreting such
exclusions, have determined do not bar such claims. The emergence of these
claims is slow and highly unpredictable. Since 1986, policies issued by the
insurance subsidiaries have contained a more expansive exclusion for losses
related to environmental claims. The Company's asbestos and non-asbestos
environmental claims have arisen primarily from exposures in municipal
government, small commercial risks and homeowners policies.
"Asbestos claims" means those claims presented to the Company in which
bodily injury is alleged to have occurred as a result of exposure to asbestos
and/or asbestos-containing products. During the past two decades, the
insurance industry has witnessed the emergence and development of an
increasing number of asbestos claims. Over this time period, the various
issues concerning coverage and the industry's obligations under its policies
have largely been resolved, thus permitting the Company to reserve with a
higher degree of certainty. At December 31, 1997, asbestos claims constituted
84% of the Company's total outstanding environmental claims. Although
individual asbestos claims constitute a large percentage of the total number
of the Company's environmental claims, the net case reserves constitute 5% of
the total net reserves for environmental claims at December 31, 1997.
"Non-asbestos claims" means all pollution and environmental claims
alleging bodily injury or property damage presented, or expected to be
presented, to the Company other than asbestos. These claims include
landfills, leaking underground storage tanks, oil spills, air pollution, lead
poisoning and general contamination. In past years, landfill claims have
accounted for a significant portion of the Company's environmental claims
unit's litigation costs.
The Company refers all environmental claims to a centralized
environmental claim unit, which specializes in the claim management of these
exposures. The Company evaluates its environmental reserves on a case-by-case
basis. As cases progress, the Company's ability to assess potential liability
often improves. Reserves are then adjusted accordingly. In addition, each
case is reviewed in light of other factors affecting liability, including
judicial interpretation of coverage issues.
At December 31, 1997, the Company's reserves for environmental claims
amounted to $55 million on a gross basis and $49 million net of reinsurance
(net basis). The Company's case reserves for known environmental claims,
excluding IBNR, were $26 million on a gross basis and $22 million on a net
basis, in connection with 2,060 claims, including multiple claimants who are
associated with the same site or incident. These claims involved about 1,845
lawsuits. Of the 2,060 total outstanding environmental claims, 1,723 claims
are asbestos related, of which 1,557 arise from only two insureds. One such
insured manufactured asbestos-containing products, while the other supplied
asbestos-containing products. The reserve associated with these two insureds
amounted to $5 million on a gross basis and $1 million on a net basis.
About 130 of the non-asbestos claims involve approximately 30 landfills.
The landfill sites account for approximately $11 million on a gross basis and
net basis. The remaining claims, which represent about $10 million both on a
gross basis and net basis, involve leaking underground storage tanks, and air
pollution, as well as other asbestos claims. Litigation costs associated with
environmental claims have been significant, particularly for landfill claims.
As of December 31, 1997, the Company's total IBNR reserves for
environmental exposures was $29 million on a gross basis and $27 million on a
net basis. There are significant uncertainties in estimating the Company's
exposure to environmental IBNR claims resulting from lack of historical data,
long reporting delays, uncertainty as to the number and identity of claimants
and complex legal and coverage issues on which courts have reached different
and sometimes inconsistent conclusions. The standards for establishing
appropriate environmental IBNR reserves are still developing.
The table on page 32 provides a roll-forward of the Company's gross and
net environmental incurred losses and loss expenses and related reserves
thereon. The Company's total environmental claims gross incurred losses and
loss expenses for 1997 decreased by $19 million when compared to 1996. The
decrease was primarily due an increase in IBNR of $12 million in the 1996
gross incurred losses and loss expenses. In addition, the Company
successfully resolved several significant environmental claims during 1997
which reduced the potential liabilities for environmental claims by $7
million on a gross basis and $1 million, net of reinsurance. These claims
included an insured owner/operator of a landfill site which was
Environmental Claims Activity
- -----------------------------
1997 1996 1995
Asbestos Related Claims (1) ----- ----- -----
- --------------------------
Claims at beginning of year 1,715 1,449 1,252
Claims received during year 323 360 250
Claims closed during year (315) (94) (53)
----- ----- -----
Claims at end of year 1,723 1,715 1,449
===== ===== =====
Average net loss settlement on closed claims $ 526 717 102
Non-Asbestos Related Claims (1)
- -------------------------------
Claims at beginning of year 306 306 274
Claims received during year 232 238 271
Claims closed during year (201) (238) (239)
----- ---- ----
Claims at end of year 337 306 306
===== ==== ====
Average net loss settlement on closed claims $19,855 9,331 7,769
(1) The number of environmental claims presented in the tables includes all
multiple claimants who are associated with the same site or incident.
Page 31
PAGE
remediated pursuant to the New Jersey Spill Act, several significant
leaking underground storage tank claims and an insured owner of a
manufacturing facility which required remediation.
The Company's total environmental claims gross incurred losses and loss
expenses for 1996 increased by $9 million when compared to 1995. This
increase was due to several factors including a $12 million increase in IBNR.
In 1996, the Company was able to achieve a greater quantification of
potential liabilities and actuarial modeling to project future ultimate
settlement costs and related IBNR amounts. In 1996, the Company successfully
concluded several significant claims, which reduced the Company's
non-asbestos environmental gross incurred loss and loss expense reserves by
approximately $1 million. These claims included an insured dry cleaning
company alleged to have contributed to contamination at a Superfund site, an
insured who owned and operated a landfill site listed on the Federal
Government's National Priorities List, and a carbon monoxide death claim.
After reinsurance, total incurred losses and loss expenses for 1996
environmental claims amounted to $2 million.
At December 31, 1997, the Company established a range of reasonably
possible losses for known environmental exposures of approximately $8 million
to $36 million on a gross basis, and $7 million to $30 million, on a net
basis. At December 31, 1997, the Company's total reserves for environmental
exposures amounted to $55 million, on a gross basis, (including IBNR reserves
of $29 million) and $49 million, on a net basis, (including IBNR reserves of
$27 million). In addition, the Company has established a range of reasonably
possible IBNR losses for non-environmental net claims at December 31, 1997,
of approximately $428 million to $528 million and at December 31, 1996, of
approximately $422 million to $524 million. For each major product line of
business, incurred and/or paid loss and loss expense projections were
calculated using standard actuarial techniques on both an optimistic and
pessimistic basis to construct an IBNR range for that product line. The
overall range for non-environmental IBNR was selected based on statistical
combinations of the ranges of the individual product lines. The Company's net
IBNR reserves for non-environmental claims were $502 million and $496 million
at December 31, 1997, and 1996, respectively.
Based on the Company's aggregate reserve for net losses and loss
expenses at December 31, 1997, the Company does not expect that liabilities
associated with environmental and nonenvironmental claims will have a
materially adverse impact on its future liquidity, financial position and
results of operations. However, given the complexity of coverage and other
legal issues and the significant assumptions used in estimating environmental
claims, actual results could significantly differ from the Company's current
estimates.
For additional information on environmental reserves, see note 15 to the
consolidated financial statements.
Impact of inflation
- -------------------
Inflation affects the Company, like other companies in the property and
casualty insurance industry, by contributing to higher losses, loss expenses
and operating costs, as well as greater investment income resulting from the
higher interest rates which can prevail in an inflationary period. Premium
rates, however, may not keep pace with inflation since regulation and
competitive forces generally limit the Company's ability to increase premium
rates.
The Company considers inflationary trends in estimating its reserves for
claims reported and for incurred but not reported claims. The Company
believes that its policy of timely recording and settling of claims has
helped it to lessen the potential effect that inflation can have on claims
which remain open for several years.
- ---------------------------------------------------------------------------
Roll-forward of Environmental Incurred Losses and Loss Expenses
(in thousands)
- ---------------------------------------------------------------------------
1997
----
Asbestos Gross Net
- --------
Environmental reserves (including IBNR)
for losses and loss expenses at the beginning of year $ 9,982 5,873
Incurred losses and loss expenses (1,449) (1,233)
Less losses and loss expenses paid (256) (256)
----- -----
Environmental reserves (including IBNR)
for losses and loss expenses at the end of year 8,277 4,384
===== =====
Non-Asbestos
- ------------
Environmental reserves (including IBNR)
for losses and loss expenses at the beginning of year 53,421 44,530
Incurred losses and loss expenses (887) 5,238
Less losses and loss expenses paid (6,076) (4,917)
------ ------
Environmental reserves (including IBNR)
for losses and loss expenses at the end of year 46,458 44,851
====== ======
Total Environmental Claims
- --------------------------
Environmental reserves (including IBNR)
for losses and loss expenses at the beginning of year 63,403 50,403
Incurred losses and loss expenses (2,336) 4,005
Less losses and loss expenses paid (6,332) (5,173)
------ ------
Environmental reserves (including IBNR)
for losses and loss expenses at the end of year $ 54,735 49,235
====== ======
- ---------------------------------------------------------------------------
1996
----
Asbestos Gross Net
- --------
Environmental reserves (including IBNR)
for losses and loss expenses at the beginning of year $ 7,801 7,801
Incurred losses and loss expenses 2,407 (1,702)
Less losses and loss expenses paid (226) (226)
----- -----
Environmental reserves (including IBNR)
for losses and loss expenses at the end of year 9,982 5,873
===== =====
Non-Asbestos
- ------------
Environmental reserves (including IBNR)
for losses and loss expenses at the beginning of year 45,465 45,465
Incurred losses and loss expenses 14,289 3,312
Less losses and loss expenses paid (6,333) (4,247)
------ ------
Environmental reserves (including IBNR)
for losses and loss expenses at the end of year 53,421 44,530
====== ======
Total Environmental Claims
- --------------------------
Environmental reserves (including IBNR)
for losses and loss expenses at the beginning of year 53,266 53,266
Incurred losses and loss expenses 16,696 1,610
Less losses and loss expenses paid (6,559) (4,473)
------ ------
Environmental reserves (including IBNR)
for losses and loss expenses at the end of year $ 63,403 50,403
====== ======
- ---------------------------------------------------------------------------
1995
----
Asbestos Gross Net
- --------
Environmental reserves (including IBNR)
for losses and loss expenses at the beginning of year $ 7,501 7,501
Incurred losses and loss expenses 489 489
Less losses and loss expenses paid (189) (189)
----- -----
Environmental reserves (including IBNR)
for losses and loss expenses at the end of year 7,801 7,801
===== =====
Non-Asbestos
- ------------
Environmental reserves (including IBNR)
for losses and loss expenses at the beginning of year 41,344 41,344
Incurred losses and loss expenses 6,779 6,779
Less losses and loss expenses paid (2,658) (2,658)
------ ------
Environmental reserves (including IBNR)
for losses and loss expenses at the end of year 45,465 45,465
====== ======
Total Environmental Claims
- --------------------------
Environmental reserves (including IBNR)
for losses and loss expenses at the beginning of year 48,845 48,845
Incurred losses and loss expenses 7,268 7,268
Less losses and loss expenses paid (2,847) (2,847)
------ ------
Environmental reserves (including IBNR)
for losses and loss expenses at the end of year $ 53,266 53,266
====== ======
Page 32
PAGE
INDEPENDENT AUDITORS REPORT
- ---------------------------
The Board of Directors and Stockholders
Selective Insurance Group, Inc.
- ---------------------------------------
We have audited the accompanying consolidated balance sheets of
Selective Insurance Group, Inc. and subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Selective Insurance Group, Inc. and subsidiaries at December 31, 1997 and
1996, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/S/ KPMG Peat Marwick LLP
New York, New York
January 22, 1998
Page 33
PAGE
CONSOLIDATED BALANCE SHEETS
- ---------------------------
December 31, 1997 1996
(dollars in thousands)
- ----------------------------------------------------------------------------
ASSETS
- ------
Investments:
- -----------
Debt securities, held-to-maturity at amortized cost
(fair value: $426,251-1997; $445,273-1996) $ 410,169 432,792
Debt securities, available-for-sale at fair value
(amortized cost: $1,009,060-1997; $965,965-1996) 1,044,390 985,372
Equity securities, available-for-sale at fair value
(cost: $120,602-1997; $99,383-1996) 222,273 161,096
Short-term investments
(at cost which approximates fair value) 28,781 33,924
Other investments at fair value
(at cost which approximates fair value) 20,077 10,530
--------- -------
Total investments 1,725,690 1,623,714
Cash 5,017 6,098
Interest and dividends due or accrued 23,474 24,167
Premiums and other receivables, net of allowance
for uncollectible accounts of:
$3,056-1997; $3,302-1996 196,786 152,008
Reinsurance recoverable on paid losses
and loss expenses 11,088 7,863
Reinsurance recoverable on unpaid losses
and loss expenses 124,197 150,208
Prepaid reinsurance premiums 31,189 30,813
Deferred Federal income tax 6,489 30,771
Real estate, furniture and equipment at cost, net of
accumulated depreciation of:
$39,053-1997; $38,527-1996 45,465 48,993
Deferred policy acquisition costs 98,110 83,150
Excess of cost over fair value of net assets acquired,
net of accumulated amortization of:
$3,686-1997; $3,068-1996 17,337 9,894
Other assets 21,349 22,058
--------- ---------
Total assets $2,306,191 2,189,737
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Liabilities:
- -----------
Reserve for losses $ 984,393 1,015,601
Reserve for loss expenses 176,776 174,192
Unearned premiums 373,766 332,040
Convertible subordinated debentures 6,845 6,912
Short-term debt 17,400 -
Notes payable 89,714 96,857
Current Federal income tax 1,747 3,729
Other liabilities 90,234 86,107
--------- ---------
Total liabilities 1,740,875 1,715,438
--------- ---------
Stockholders' Equity:
- --------------------
Common stock of $2 par value per share:
Authorized shares: 180,000,000
Issued: 36,363,856-1997; 35,822,174-1996 72,728 71,644
Additional paid-in capital 30,450 18,060
Net unrealized gains on securities, available-for-sale,
net of deferred income tax effect 89,051 52,728
Retained earnings 439,811 386,601
Treasury stock at cost
(shares: 7,097,462-1997; 6,733,262-1996) (59,785) (50,680)
Deferred compensation expense and notes receivable
from stock sales (6,939) (4,054)
--------- ---------
Total stockholders' equity 565,316 474,299
Commitments and contingencies (notes 8 and 15) --------- --------
Total liabilities and stockholders' equity $2,306,191 2,189,737
========= =========
See accompanying notes to consolidated financial statements.
Page 34
PAGE
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------
Year ended December 31, 1997 1996 1995
(in thousands, except per share data)
- ----------------------------------------------------------------------------
Revenues:
- --------
Net premiums written $ 717,618 692,239 757,021
Net decrease (increase) in unearned
premiums and prepaid reinsurance premiums (41,350) 2,708 (14,204)
------- ------- -------
Net premiums earned 676,268 694,947 742,817
Net investment income earned 100,530 96,952 91,640
Net realized gains 6,021 2,786 900
Other income 5,562 4,287 3,741
------- ------- -------
Total revenues 788,381 798,972 839,098
------- ------- -------
Expenses:
- --------
Losses incurred 383,996 420,943 448,291
Loss expenses incurred 77,386 74,722 80,610
Policy acquisition costs 211,494 213,372 222,418
Dividends to policyholders 4,855 5,035 7,530
Interest expense 9,592 9,185 9,296
Other expenses 10,038 6,626 6,055
------- ------- -------
Total expenses 697,361 729,883 774,200
------- ------- -------
Income before Federal income tax 91,020 69,089 64,898
------- ------- -------
Federal income tax expense (benefit):
- ------------------------------------
Current 16,688 9,947 16,736
Deferred 4,724 3,591 (4,880)
------- ------- -------
Total Federal income tax expense 21,412 13,538 11,856
------- ------- -------
Net income $ 69,608 55,551 53,042
======= ======= =======
Earnings per share:
- ------------------
Basic $ 2.41 1.92 1.86
Diluted $ 2.27 1.83 1.81
See accompanying notes to consolidated financial statements.
Page 35
PAGE
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
- ----------------------------------------------
Year ended December 31, 1997 1996 1995
(dollars in thousands, except per share amounts)
- -----------------------------------------------------------------------------
Common stock:
- ------------
Beginning of year $ 71,644 70,588 69,624
Dividend reinvestment plan
(shares: 49,206-1997; 68,104-1996;
73,256-1995) 98 136 146
Convertible subordinated debentures
(shares: 9,448-1997; 53,632-1996;
12,130-1995) 19 108 24
Stock purchase and compensation plans
(shares: 483,028-1997; 406,082-1996;
396,718-1995) 967 812 794
------- ------- -------
End of year 72,728 71,644 70,588
------- ------- -------
Additional paid-in capital:
- --------------------------
Beginning of year 18,060 10,777 4,553
Dividend reinvestment plan 1,033 1,011 1,018
Convertible subordinated debentures 48 272 60
Stock purchase and compensation plans 11,309 6,000 5,146
------- ------- -------
End of year 30,450 18,060 10,777
------- ------- -------
Net unrealized gains (losses) on securities,
available-for-sale, net of deferred income
tax effect:
- --------------------------------------------
Beginning of year 52,728 56,740 (8,149)
Increase in net unrealized gains on securities,
available-for-sale due to reclassification
in 1995 net of deferred income tax effect - - 12,896
Increase (decrease) in net unrealized gains on
securities, available-for-sale, net of
deferred income tax effect 36,323 (4,012) 51,993
------- ------- -------
End of year 89,051 52,728 56,740
------- ------- -------
Retained earnings:
- -----------------
Beginning of year 386,601 347,318 310,272
Net income 69,608 55,551 53,042
Cash dividends to stockholders
($.56 per share) (16,398) (16,268) (15,996)
------- ------- -------
End of year 439,811 386,601 347,318
------- ------- -------
Treasury stock:
- --------------
Beginning of year (50,680) (46,429) (46,144)
Acquisition of treasury stock
(shares: 364,200-1997; 238,884-1996;
18,742-1995) (9,105) (4,251) (285)
------- ------- -------
End of year (59,785) (50,680) (46,429)
------- ------- -------
Deferred compensation expense and notes
receivable from stock sales:
- ---------------------------------------
Beginning of year (4,054) (2,245) (992)
Deferred compensation expense (6,016) (2,984) (1,753)
Amounts received on notes and amortization of
deferred compensation expense 3,131 1,175 500
------- ------- -------
End of year (6,939) (4,054) (2,245)
------- ------- -------
Total stockholders' equity
(per share: $19.32 1997; $16.31 1996;
$15.17 1995) $565,316 474,299 436,749
======= ======= =======
The Company also has authorized, but not issued, 5,000,000 shares of
preferred stock without par value of which 300,000 shares have been
designated Series A junior preferred stock without par value.
See accompanying notes to consolidated financial statements.
Page 36
PAGE
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------
Year ended December 31, 1997 1996 1995
(in thousands)
- ----------------------------------------------------------------------------
OPERATING ACTIVITIES
- --------------------
Net income $ 69,608 55,551 53,042
------ ------ ------
Adjustments to reconcile net income to
net cash provided by operating activities:
- --------------------------------------------
Decrease (increase) in reserves for losses and loss
expenses, net of reinsurance recoverable
on unpaid losses and loss expenses (2,613) 40,902 110,829
Net increase (decrease) in unearned premiums
and prepaid reinsurance premiums 41,350 (2,708) 14,204
Increase (decrease) in net Federal income tax 2,743 5,327 (6,914)
Depreciation and amortization 8,143 5,950 5,939
Increase (decrease) in premiums and other
receivables (44,778) 13,186 (8,856)
Increase in deferred policy acquisition costs (14,960) (950) (1,200)
Decrease (increase) in interest and dividends
due or accrued 693 (548) (1,798)
(Increase) decrease in reinsurance recoverable
on paid losses and loss expenses (3,225) (2,694) 1,020
Net realized gains (6,021) (2,786) (900)
Other net (9) (21,004) 12,037
------ ------ ------
Net adjustments (18,677) 34,675 124,361
------ ------- ------
Net cash provided by operating activities 50,931 90,226 177,403
------ ------- -------
INVESTING ACTIVITIES
- --------------------
Purchase of debt securities, held-to-maturity (41,409) (65,277) (168,414)
Purchase of debt securities,
available-for-sale (148,492) (173,506) (99,104)
Purchase of equity securities,
available-for-sale (33,275) (30,931) (26,374)
Purchase of other investments (17,681) - -
Sale of debt securities, held-to-maturity - - 2,000
Sale of debt securities, available-for-sale 54,107 49,626 25,467
Redemption and maturities of debt securities,
held-to-maturity 63,979 72,111 64,457
Redemption and maturities of debt securities,
available-for-sale 51,768 61,215 31,490
Sale of equity securities, available-for-sale 19,734 10,917 26,950
Proceeds from other investments 1,205 191 65
Increase (decrease) in net payable from security
transactions 4,553 (1,377) (744)
Net additions to real estate, furniture
and equipment (4,055) (4,588) (2,969)
------- ------- -------
Net cash used in investing activities (49,566) (81,619) (147,176)
------- ------- -------
FINANCING ACTIVITIES
- --------------------
Dividends to stockholders (16,398) (16,268) (15,996)
Acquisition of treasury stock (9,105) (4,251) (285)
Principal payment of notes payable (7,143) (7,143) -
Proceeds from short-term debt 17,400 - -
Net proceeds from issuance
of common stock 13,407 7,959 7,104
Increase in deferred compensation expense
and amounts received on notes receivable
from stock sale (5,750) (2,915) (1,686)
------- ------- -------
Net cash used in financing activities (7,589) (22,618) (10,863)
------- ------- -------
Net (decrease) increase in short-term
investments and cash (6,224) (14,011) 19,364
Short-term investments and cash
at beginning of year 40,022 54,033 34,669
------- ------- -------
Short-term investments and cash
at end of year $ 33,798 40,022 54,033
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
- -------------------------------------
Cash paid during the year for:
- -----------------------------
Interest $ 9,224 9,597 9,156
Federal income tax 18,669 8,211 18,769
Supplemental schedule of noncash investing
and financing activities:
- -------------------------------------------
Conversion of convertible subordinated
debentures 67 380 84
Reclassification from debt securities, held-to-maturity
to debt securities, available-for-sale at
amortized cost - - 351,352
See accompanying notes to consolidated financial statements.
Page 37
PAGE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
December 31, 1997, 1996, 1995
NOTE 1 Summary of Significant Accounting Policies
- --------------------------------------------------
(a) Consolidation Policy
The consolidated financial statements include the accounts of Selective
Insurance Group, Inc. ("Selective") and its subsidiaries (collectively, the
"Company"). All significant intercompany accounts and transactions have been
eliminated in the accompanying consolidated financial statements.
(b) Adoption of Accounting Policies
In 1997, the Company adopted the following accounting policies:
(1) The Company adopted the Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" ("FASB 129"). FASB 129 incorporates
required disclosures about capital structure that had already been included
in a number of previously existing separate statements and opinions.
(2) The Company adopted the FASB Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("FASB 128"). FASB 128 supersedes
Accounting Principles Board Opinion No. 15 ("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 (i.e. securities such as options, warrants, convertible securities or
contingent stock agreements). FASB 128 replaced the calculation of primary
and fully diluted earnings per share under APB 15, with basic and diluted
earnings per share. Unlike primary earnings per share, basic earnings per
share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share, which gives effect to all dilutive
potential common stock, is very similar to the previously reported fully
diluted earnings per share. All earnings per share amounts for all periods
have been presented and restated to conform to FASB 128 requirements.
(c) Investments
Debt securities, held-to-maturity are carried at amortized cost because
management has the ability and intent to hold such securities until maturity.
Securities, available-for-sale are carried at fair value. Fair values are
based on quoted market prices, if available, or from independent pricing
services. Net unrealized gains and losses on debt securities,
held-to-maturity are not reflected in consolidated net income or
stockholders' equity. Net unrealized gains and losses on securities,
available-for-sale, net of deferred income tax effect, are not reflected in
consolidated net income, but are included as a separate component of
stockholders' equity. No material investments of the Company were non-income
producing for the years ended December 31, 1997 and 1996.
Realized gains and losses are determined on the basis of the cost of
specific investments sold and are credited or charged to income. However,
when a decline in fair value of these investments is considered to be other
than temporary, such investments are written down to their net realizable
value.
In November 1995, a Special Report was issued from the FASB allowing a
transfer of securities between investment categories. During the fourth
quarter of 1995, the Company transferred certain securities, held-to-maturity
with an amortized cost of $351,352,000 to the securities, available-for-sale
category to provide greater portfolio management flexibility. The transfer of
securities resulted in an unrealized gain, net of deferred income tax effect,
of $12,896,000.
(d) Reinsurance
The Company records its ceded reinsurance transactions on a gross basis
on the balance sheet which results in reinsurance recoverables on unpaid
losses and loss expenses and ceded unearned premiums (prepaid reinsurance).
The Company also discloses reinsurance amounts for ceded premiums written and
earned and ceded loss and loss expenses incurred.
(e) Stock-Based Compensation
The Company adopted the FASB Statement of Financial Accounting Standard
No. 123, "Accounting for Stock-Based Compensation" ("FASB 123") effective
January 1, 1996. FASB 123 establishes financial accounting and reporting
standards for stock-based compensation plans which include requirements for
the computing of "fair value" for stock options at date of grant using a
mathematical model and expensing the charges over the related service period
based on this calculated value. As permitted by FASB 123, the Company will
continue to use the accounting method prescribed by Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25").
Under APB 25, the Company's compensation cost is measured as the excess, if
any, of the quoted market price of the Company's common stock at the date of
grant over the amount an employee must pay to acquire the stock. For stock
appreciation rights ("SARs"), and certain restricted stock, additional
compensation expense is recognized based on the increases or decreases in the
fair value of the Company's common stock. Companies using APB 25 are required
to make pro forma footnote disclosures of net income and earnings per share
as if the fair value method of accounting, as defined in FASB 123, had been
applied.
(f) Real Estate, Furniture and Equipment
The value of real estate, furniture and equipment is stated at cost less
accumulated depreciation. Provisions for depreciation are computed using the
straight-line method over the estimated useful lives of the assets, which
range from three to forty years for financial statement purposes and the
straight-line method and various accelerated methods for Federal income tax
purposes.
(g) Deferred Policy Acquisition Costs
Policy acquisition costs are directly related to the writing of an
insurance policy and consist primarily of commissions, labor costs, state
premium taxes and assessments and other direct underwriting expenses. These
costs are deferred and amortized over the life of the policies as premiums
are earned in order to
Page 38
PAGE
facilitate a matching of revenues and expenses. The deferred policy
acquisition costs are limited to the sum of unearned premiums and
anticipated investment income less anticipated losses and loss adjustment
expenses, policyholder dividends and other expenses for maintenance of
policies in force. The investment yields assumed for each reporting period,
which are based upon the Company's actual average investment yield,
before-tax, were 6.0%, 6.1% and 6.4% for 1997, 1996 and 1995, respectively.
(h) Goodwill
Goodwill from the excess of the cost over the fair market value of the
net assets of acquired companies is being amortized using the straight-line
method over periods ranging from nine to forty years.
On November 14, 1997, the Company acquired the net assets of MCSI/MRSI,
in a newly formed subsidiary, Alta Services LLC, a non-risk bearing managed
care company. The total purchase price was approximately $8,291,000, with the
possibility of up to $10,000,000 of additional purchase price if certain
growth and profitability objectives are achieved over the next five years.
The purchase price included approximately $8,060,000 of goodwill, which is
being amortized over nine years.
The Company continually evaluates the amortization period of its
intangible assets. Estimates of useful lives are revised when circumstances
or events indicate that the original estimate is no longer appropriate. No
impairment losses have been recognized in any of the periods presented.
(i) Use of Estimates
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported financial statement
balances, as well as the disclosure of contingent assets and liabilities.
Actual results could differ from those estimates.
(j) Reserves for Losses and Loss Expenses
When a claim is reported to an insurance subsidiary, its claims personnel
establish a "case reserve" for the estimated amount of the ultimate payment.
The amount of the reserve is primarily based upon a case-by-case evaluation
of the type of claim involved, the circumstances surrounding each claim and
the policy provisions relating to the type of loss. The estimate reflects the
informed judgment of such personnel based on general insurance reserving
practices, as well as the experience and knowledge of the claims personnel.
Until the claim is resolved, these estimates are revised as deemed necessary
by the responsible claims office based on subsequent developments and
periodic reviews of the cases.
In accordance with industry practice, the Company also maintains reserves
for estimated losses and loss expenses incurred but not yet reported
("IBNR"). The Company projects its estimate of ultimate losses and loss
expenses at each reporting date. The difference between projected ultimate
loss and loss expense reserves and case reserves and loss expense reserves
thereon is carried as an IBNR reserve.
The internal assumptions considered by the Company in the estimation of
the IBNR amounts for both environmental and non-environmental reserves at the
Company's reporting dates are based on: (i) an analysis of both paid and
incurred loss and loss expense development trends; (ii) an analysis of both
paid and incurred claim count development trends; (iii) the exposure
estimates for reported claims; (iv) recent development on exposure estimates
with respect to individual large claims and the aggregate of all claims; (v)
the rate at which new environmental claims are being reported; (vi) actuarial
modeling of environ-mental claims; and (vii) patterns of events observed by
claims personnel or reported to them by defense counsel. External factors
identified by the Company in the estimation of IBNR for both environmental
and non-environmental IBNR reserves include: legislative enactments, judicial
decisions, legal developments in the determination of liability and the
imposition of damages; and trends in general economic conditions, including
the effects of inflation. Adjustments to IBNR are made periodically to take
into account changes in the volume of business written, claims frequency and
severity, the mix of business, claims processing and other items as described
above that are expected by management to affect the Company's reserves for
losses and loss expenses over time.
By using both individual estimates of reported claims and generally
accepted actuarial reserving techniques, the Company estimates the ultimate
net liability for losses and loss expenses. The ultimate actual liability may
be higher or lower than reserves established. The Company does not discount
to present value that portion of its loss reserves expected to be paid in
future periods, however, the loss reserves include anticipated recoveries for
salvage and subrogation claims. Such salvage and subrogation amounted to
$30,084,000 and $28,664,000 in 1997 and 1996, respectively.
Reserves are reviewed for adequacy on a periodic basis. When reviewing
reserves, the Company analyzes historical data and estimates the impact of
various factors such as: (i) per claim information; (ii) Company and industry
historical loss experience; (iii) legislative enactments, judicial decisions,
legal developments in the imposition of damages, and changes in political
attitudes; and (iv) trends in general economic conditions, including the
effects of inflation. This process assumes that past experience, adjusted for
the effects of current developments and anticipated trends, is an appropriate
basis for predicting future events. There is no precise method, however, for
subsequently evaluating the impact of any specific factor on the adequacy of
reserves because the eventual deficiency or redundancy is affected by many
factors. Based upon such reviews, the Company believes that the estimated
reserves for losses and loss expenses are adequate to cover the ultimate cost
of claims. The changes in these estimates, resulting from the continuous
review process and the differences between estimates and ultimate payments,
are reflected in the consolidated statements of income for the period in
which such estimates are changed.
(k) Premium Revenue
Premiums written include direct writings plus reinsurance assumed and
estimates of premiums earned but unbilled on the workers' compensation line
of insurance less reinsurance ceded to other insurers.
Page 39
PAGE
Premiums written are recognized as revenue over the period that coverage
is provided using the semi-monthly pro rata method. Unearned premiums and
prepaid reinsurance premiums represent that portion of premiums written that
are applicable to the unexpired terms of policies in force.
(l) Federal Income Tax
The Company uses the asset and liability method of accounting for income
taxes. Deferred Federal income taxes arise from the recognition of temporary
differences between financial statement carrying amounts and the tax bases of
the Company's assets and liabilities, as well as tax on net unrealized gains
or losses on securities, available-for-sale. A valuation allowance is
established when it is more likely than not that some portion of the deferred
tax asset will not be realized. The effect of a change in tax rates is
recognized in the period of enactment date.
(m) Statement of Cash Flows
Short-term investments comprise highly liquid investments that are
readily convertible into known amounts of cash. Such investments have
maturities of 90 days or less from the date of purchase.
(n) Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
(1) Investment Securities: Fair values for debt securities,
held-to-maturity are based on quoted market prices where available. For debt
securities, held-to-maturity not actively traded, fair values are estimated
using values obtained from independent pricing services. The fair values for
debt securities, available-for-sale and equity securities,
available-for-sale, which also represent the carrying amounts, are based on
quoted market prices. Fair values for other investments are not material and
are carried at either cost, or the equity method, which approximates fair
value.
(2) Indebtedness: The fair value of the Convertible Subordinated
Debentures ("Debentures") is based on quoted market prices. The fair values
of the 7.84% Senior Notes due November 15, 2002 ("7.84% Senior Notes") and
the 8.77% Senior Notes due August 1, 2005 ("8.77% Senior Notes") were
estimated using a cash flow analysis based upon Selective's current
incremental borrowing rate for the remaining term of the loan.
(o) Stock Split
All per share data presented has been adjusted for the 2 for 1 split of
Selective's common stock declared October 28, 1997 and effective December 1,
1997. In addition, all other amounts presented have been adjusted, where
applicable, to reflect the 2 for 1 stock split.
(p) Reclassifications
Certain amounts in the Company's prior years' consolidated financial
statements have been reclassified to conform with the 1997 presentation. Such
reclassification had no effect on the Company's net income or stockholders'
equity.
NOTE 2 Pending Accounting Pronouncements
- ----------------------------------------
In February of 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("FASB 132"). FASB 132 amends a number of previously
existing separate statements and establishes disclosure requirements for
pensions and other postretirement benefit plans. The adoption of FASB 132
requires only amended disclosures and will have no effect on the Company's
results of operations or financial condition.
In June of 1997, 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. The adoption of FASB 131 will be effective
for financial statements for periods beginning after December 15, 1997, and
requires comparative information for prior periods to be restated. The
adoption of FASB 131 requires only additional disclosures and will have no
effect on the Company's results of operations or financial condition.
In June of 1997, the FASB 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, (revenues, expenses, gains and losses) in a full set of
general purpose financial statements. The adoption of FASB 130 shall be
effective for financial statements for periods beginning after December 15,
1997. FASB 130 requires only additional disclosures and will have no effect
on the Company's results of operations or financial condition.
December of 1997, 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 any impact of adoption to be
reported as a change in accounting principle. The adoption of this statement
is not expected to have a material effect on the Company's results of
operations or financial condition.
In June of 1996, the FASB issued Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities" ("FASB 125"). FASB 125 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities. In December of 1996, FASB
subsequently issued Statement of Financial Accounting Standards No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB 125" ("FASB
127"), which defers certain requirements, including all applicable to the
Company, of FASB 125 for one year. The adoption of FASB 125 shall be
effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, except for
those requirements deferred in FASB 127. FASB 125 is not expected to have a
material adverse effect on the Company's results of operations or financial
condition.
Page 40
PAGE
NOTE 3 Investments
- -------------------
(a) The components of net investment income earned are as
follows:
(in thousands) 1997 1996 1995
- -----------------------------------------------------------------
Debt securities $ 93,894 91,558 86,172
Equity securities 5,002 3,168 2,629
Short-term investments 1,266 1,983 2,394
Other 1,702 1,501 1,659
------ ------ ------
101,864 98,210 92,854
Investment expenses (1,334) (1,258) (1,214)
------ ------ ------
Net investment
income earned $100,530 96,952 91,640
====== ====== ======
(b) Net unrealized gains on debt securities, held-to-maturity are
as follows:
(in thousands) 1997 1996 1995
- ----------------------------------------------------------------
Net unrealized gains $16,082 12,481 20,859
Increase (decrease) in net ====== ====== ======
unrealized gains $ 3,601 (8,378) 21,389
====== ====== ======
(c) Gross and net unrealized gains (losses) on securities,
available-for-sale are as follows:
(in thousands) 1997 1996 1995
- ----------------------------------------------------------------
Debt securities:
Gains $36,126 23,877 46,948
Losses (796) (4,470) (319)
------ ------ ------
35,330 19,407 46,629
------ ------ ------
Equity securities:
Gains 104,147 64,979 40,905
Losses (2,476) (3,266) (241)
------ ------ ------
101,671 61,713 40,664
------ ------ ------
Net unrealized gains
on available-for-sale
securities 137,001 81,120 87,293
Deferred income tax
expense (47,950) (28,392) (30,553)
------ ------ ------
Net unrealized gains
net of deferred income tax $89,051 52,728 56,740
====== ====== ======
Increase (decrease) in net
unrealized gains, net
of deferred income tax $ 36,323 (4,012) 64,889
====== ====== ======
(d) The amortized cost, estimated fair values and gross unrealized gains
(losses) of debt securities, held-to-maturity at December 31, 1997 and 1996,
respectively, are as follows:
Gross
Amortized Unrealized
Cost Gains
(in thousands) 1997 1996 1997 1996
- ---------------------------------------------------------------------------
U.S. government
and government
agencies $ 15,569 16,184 601 771
Obligations of states and
political subdivisions 357,380 371,799 14,951 12,007
Mortgage-backed securities 37,220 44,809 729 614
Total debt securities, ------- ------- ------ ------
held-to-maturity $410,169 432,792 16,281 13,392
======= ======= ====== ======
- ---------------------------------------------------------------------------
Gross
Unrealized Fair
Losses Value
(in thousands) 1997 1996 1997 1996
- ---------------------------------------------------------------------------
U.S. government
and government
agencies $ (35) (100) 16,135 16,855
Obligations of states and
political subdivisions (149) (657) 372,182 383,149
Mortgage-backed securities (15) (154) 37,934 45,269
Total debt securities, ----- ----- ------- -------
held-to-maturity $ (199) (911) 426,251 445,273
===== ===== ======= =======
(e) The cost/amortized cost, estimated fair values and gross unrealized
gains (losses) of securities, available-for-sale at December 31, 1997 and
1996, respectively, are as follows:
Cost/ Gross
Amortized Unrealized
Cost Gains
(in thousands) 1997 1996 1997 1996
- ---------------------------------------------------------------------------
U.S. government
and government
agencies $ 149,038 159,382 4,741 6,334
Obligations of states and
political subdivisions 291,210 287,006 14,810 7,744
Corporate securities 489,329 430,387 14,948 8,820
Asset-backed securities 41,060 61,797 412 568
Mortgage-backed securities 38,423 27,393 1,215 411
------- ------- ------ ------
Debt securities,
available-for-sale 1,009,060 965,965 36,126 23,877
Equity securities,
available-for-sale 120,602 99,383 104,147 64,979
Total securities, --------- ------- ------- ------
available-for-sale $1,129,662 1,065,348 140,273 88,856
========= ========= ======= ======
- ---------------------------------------------------------------------------
Gross
Unrealized Fair
Losses Value
(in thousands) 1997 1996 1997 1996
- ---------------------------------------------------------------------------
U.S. government
and government
agencies $ (43) (471) 153,736 165,245
Obligations of states and
political subdivisions - (795) 306,020 293,955
Corporate securities (753) (3,124) 503,524 436,083
Asset-backed securities - (67) 41,472 62,298
Mortgage-backed securities - (13) 39,638 27,791
------ ------ ------- -------
Debt securities,
availabe-for-sale (796) (4,470) 1,044,390 985,372
Equity securities,
available-for-sale (2,476) (3,266) 222,273 161,096
Total securities, ----- ------ --------- ---------
available-for-sale $ (3,272) (7,736) 1,266,663 1,146,468
===== ====== ========= =========
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PAGE
(f) Realized gains (losses) are as follows:
(in thousands) 1997 1996 1995
- -----------------------------------------------------------------
Debt securities,
held-to-maturity
Gains $ 209 - 362
Losses - - (98)
Debt securities,
available-for-sale
Gains 272 845 544
Losses (644) (569) (562)
Equity securities,
available-for-sale
Gains 7,878 3,532 3,062
Losses (199) (1,022) (2,408)
----- ----- -----
Net realized gains on
investments $7,516 2,786 900
Real estate losses (1,495) - -
----- ----- -----
Net realized gains $6,021 2,786 900
===== ===== =====
During 1995, the Company sold a debt security, held-to-maturity with a
$2,000,000 carrying value due to the deterioration of the issuer's
credit-worthiness. There was no gain or loss realized on the sale.
(g) The amortized cost and estimated fair value of debt securities at
December 31, 1997, by contractual maturity are shown below.
Mortgage-backed securities are included in the maturity tables using the
estimated average life. Expected maturities may differ from contractual
maturities because issuers may have the right to call or prepay obligations
with or without call or prepayment penalties.
Listed below are debt securities, held-to-maturity:
Amortized Fair
(in thousands) Cost Value
- ------------------------------------------------------------------------
Due in one year or less $ 39,059 39,662
Due after one year through
five years 259,893 267,906
Due after five years through
ten years 109,359 116,557
Due after ten years through
fifteen years 1,380 1,430
Due after fifteen years 478 696
------- -------
Total debt securities,
held-to-maturity $ 410,169 426,251
======= =======
Listed below are debt securities, available-for-sale:
Amortized Fair
(in thousands) Cost Value
- --------------------------------------------------------------------------
Due in one year or less $ 89,319 90,166
Due after one year through
five years 388,198 402,337
Due after five years through
ten years 506,748 525,965
Due after ten years through
fifteen years 20,299 21,260
Due after fifteen years 4,496 4,662
------- -------
Total debt securities,
available-for-sale $ 1,009,060 1,044,390
========= =========
(h) Certain securities were on deposit with various state regulatory
agencies to comply with insurance laws amounting to $12,965,000 and
$12,870,000 as of December 31, 1997 and 1996, respectively.
(i) The Company is not exposed to significant concentrations of credit risk
within the investment portfolio.
NOTE 4 Premium and Other Receivables
- -------------------------------------
The Company offers directly to the insured various payment plans for most
lines of insurance. Payment due dates are scheduled to minimize exposure to
premium balance charge-offs. The Company also maintains an agency billing
system with two billing options. Agents are either billed monthly or submit
an account current. Payment is due forty-five days following the end of the
accounting period for which the statement is prepared.
The Company reserves for any potential uncollectible premium amounts. The
amounts charged to expense for uncollectible items were $2,331,000,
$3,502,000 and $2,847,000 in 1997, 1996 and 1995, respectively.
NOTE 5 Policy Acquisition Costs
- --------------------------------
Changes in deferred policy acquisition costs and policy acquisition costs
expensed are summarized as follows:
(in thousands) 1997 1996 1995
- ------------------------------------------------------------------------
Deferred policy acquisition
costs:
Deferred, January 1 $ 83,150 82,200 81,000
------- ------- -------
Additions:
Commissions 103,251 99,975 104,951
Labor costs 42,250 39,633 37,559
Premium taxes and
assessments 14,528 13,527 20,084
Other 28,247 27,491 25,120
------- ------- -------
Total additions 188,276 180,626 187,714
------- ------- -------
Amortized to expense (173,316) (179,676) (186,514)
------- ------- -------
Deferred, December 31 $ 98,110 83,150 82,200
======= ======= =======
Policy acquisition costs:
Amortized to expense $ 173,316 179,676 186,514
Period costs 38,178 33,696 35,904
------- ------- -------
Total policy
acquisition costs $ 211,494 213,372 222,418
======= ======= =======
The additions to premium taxes and assessments include $7,455,000 in 1995
imposed as a result of legislation adopted in New Jersey to fund the deficit
of the New Jersey Automobile Full Insurance Underwriting Association. The
amounts amortized to expense, related to the above legislation, were
$1,987,000 and $7,382,000 in 1996 and 1995, respectively.
Page 42
PAGE
NOTE 6 Federal Income Tax
- --------------------------
(a) A reconciliation of Federal income tax on pretax earnings at the
statutory corporate rate to the effective tax rate is as follows:
1997 1996 1995
- ------------------------------------------------------------------------
Computed "expected" at
statutory rate 35.0% 35.0 35.0
Tax-exempt interest (10.9) (15.3) (17.6)
Dividends received
deduction (1.5) (1.0) (.8)
Other .9 .9 1.7
---- ---- ----
Effective tax rate 23.5% 19.6 18.3
==== ==== ====
(b) The tax effects of the significant temporary differences that give rise
to deferred tax liabilities and assets are as follows:
(in thousands) 1997 1996
- ------------------------------------------------------------------------
Deferred tax liabilities:
Deferred policy acquisition costs $ 34,339 29,103
Unrealized gains on securities,
available-for-sale 47,950 28,392
Accelerated depreciation 3,718 3,635
Other 5,601 4,729
------ ------
Total deferred tax liabilities 91,608 65,859
Deferred tax assets:
Net loss reserve discounting 65,670 66,439
Net unearned premiums 23,981 21,086
Self-insured employee benefit reserves 1,851 1,735
Pension 1,880 1,663
Other 5,265 6,257
------ ------
Total deferred tax assets 98,647 97,180
Valuation allowance recognized for
deferred tax assets 550 550
------ ------
Net deferred tax assets $ 6,489 30,771
====== ======
The Company has established a valuation allowance of $550,000 for the net
operating losses, which were acquired with Niagara Exchange Corporation and
are available under certain conditions for utilization through the year 2004.
The Company has not recognized valuation allowances on other deferred tax
assets as it believes it is more likely than not that the results of future
operations will generate sufficient taxable income to realize the deferred
tax assets. There was no change in the valuation allowance for the years
ended December 31, 1997 and 1996.
NOTE 7 Indebtedness
- --------------------
(a) Covertible Subordinated Debentures
The Debentures were issued under an Indenture dated December 29, 1982,
("Indenture".) in the principal amount of $25,000,000. The Debentures bear
interest at a rate of 8.75% per annum, which is payable on the unpaid
principal semiannually on January 1 and July 1 in each year to holders of
record at the close of business on the preceding December 15 and June 15. The
Debentures are convertible into common stock at an effective conversion price
of $7.08 per share. The principal amount of the Debentures, together with
accrued interest, are due on January 1, 2008.
The Indenture requires Selective to retire, through the operation of a
mandatory sinking fund, 5% of the original $25,000,000 aggregate principal
amount of the Debentures on January 1 of each of the years 1994 to and
including 2007. Voluntary conversions have satisfied Selective's sinking fund
obligations through the year 2007.
(b) Notes Payable
(1) On August 12, 1994, the Company entered into a $54,000,000 note
purchase agreement with various lenders covering the 8.77% Senior Notes.
The Company is required to pay $18,000,000 principal amount of the 8.77%
Senior Notes in each year commencing on August 1, 2003 and ending on August
1, 2005, inclusive, together with interest accrued thereon to the date of
payment. The unpaid principal amount of the 8.77% Senior Notes accrues
interest and is payable semiannually on February 1 and August 1 of each year
until payment in full of the principal amount.
(2) On November 24, 1992, the Company entered into a $50,000,000 note
purchase agreement with various lenders covering the 7.84% Senior Notes. The
Company made its second required principal payment of the 7.84% Senior Notes
for $7,143,000 on November 15, 1997. The Company will continue to make the
required principal payments of $7,143,000 per annum, together with interest
accrued thereon to the date of payment, until November 15, 2001, inclusive.
The outstanding principal amount of the 7.84% Senior Notes remaining on
November 15, 2002, together with interest accrued thereon, is due and payable
on such date. The unpaid principal amount of the 7.84% Senior Notes accrues
interest and is payable semiannually on May 15 and November 15 of each year
until payment in full of the principal amount.
Both note purchase agreements contain restrictive covenants common to
such agreements that limit the Company's ability to declare dividends or
incur additional indebtedness. At December 31, 1997, the amount available
for dividends to stockholders under said restrictions was $158,933,000.
(c) Short-term Debt
The Company had available revolving lines of credit amounting to
$50,000,000 and $10,000,000 at December 31, 1997 and 1996, respectively.
At December 31, 1997, $17,400,000 was outstanding under these lines.
Interest may be determined on a LIBOR, prime rate or money market rate
basis at the Companys option. At December 31, 1997 there was approximately
$195,600 in accrued interest relating to the outstanding balance and the
weighted average interest rate on these borrowings was 6.1%.
At December 31, 1996 there was no outstanding balance or unpaid interest.
The amount available under these agreements at December 31, 1997 and 1996,
was $32,600,000 and $10,000,000, respectively.
Page 43
PAGE
NOTE 8 Reinsurance
- -------------------
In the ordinary course of business, the insurance subsidiaries assume
and cede premiums with other insurance companies and various pools and
associations of which they are members. A large portion of the reinsurance is
effected under reinsurance contracts known as treaties and, in some
instances, by negotiation on each individual risk. In addition, there are
excess of loss and catastrophe reinsurance contracts which protect against
losses over stipulated amounts arising from any one occurrence or event. The
reinsurance arrangements provide greater diversification of business and can
serve to limit the maximum net loss on catastrophes and large and unusually
hazardous risks.
The insurance subsidiaries are contingently liable to the extent that
any reinsurer becomes unable to meet its contractual obligations. The Company
reviews the financial condition of its existing reinsurers for any potential
write-offs of uncollectible amounts. At December 31, 1997, the Company had
prepaid reinsurance premiums and net reinsurance recoverables with American
Re-Insurance Company (rated "A++ Superior" by A.M. Best Company, Inc.) and a
state insurance fund that amounted to $86,192,000 and $38,922,000,
respectively. The Company has a $35,000,000 trust fund agreement with
American Re-Insurance Company to secure a portion of their
coverable amounts.
The following is a table of assumed and ceded amounts by income statement
caption:
(in thousands) 1997 1996 1995
- ---------------------------------------------------------------------------
Premiums written:
Assumed $ 19,195 27,908 41,449
Ceded (84,759) (86,626) (98,379)
Premiums earned:
Assumed 20,708 29,356 49,548
Ceded (84,384) (95,765) (94,429)
Losses incurred:
Assumed 10,876 16,158 34,289
Ceded (26,995) (94,486) (52,075)
Loss expenses incurred:
Assumed 2,108 2,165 2,275
Ceded (2,490) (4,318) (1,576)
NOTE 9 Retirement Plans
- ------------------------
(a) Retirement Savings Plan
The Company offers a voluntary defined contribution retirement
savings plan with an added 401(k) feature to employees who meet
eligibility requirements. The plan allows employees to make
contributions to a number of diversified investment options including
the Company's common stock, on a before- and/or after-tax basis.
During 1997 and 1996, 14,292 and 2,994 shares of the Company's common
stock were issued under this plan, respectively. The number of shares
of the Company's common stock available to be purchased under the plan
was 982,714 at December 31, 1997. Employees can contribute up to a
maximum of 12% of their defined compensation and these contributions,
up to a maximum of 6%, are matched 50% by the Company. The Company's
contributions to the plan amounted to $1,190,000, $1,162,000 and
$1,210,000 in 1997, 1996 and 1995, respectively.
(b) Retirement Income Plan
The Company has a noncontributory defined benefit retirement
income plan covering substantially all employees who meet eligibility
requirements. The Company's funding policy provides that payments to
the pension trust shall be equal to the minimum funding requirements
of the Employee Retirement Income Security Act plus additional amounts
that may be approved by the Company from time to time. The Company has
made various amendments to the plan in order to comply with certain
Internal Revenue Code changes.
The plan's assets are generally invested in debt and equity
securities. The debt securities are invested 100% in investment grade
quality securities. The reconciliation of the funded status of the
plan and net periodic pension cost is as follows:
- ---------------------------------------------------------------------------
(in thousands) 1997 1996
- ---------------------------------------------------------------------------
Actuarial present value of pension
benefit obligations:
Vested benefits $ 33,047 26,840
Nonvested benefits 5,007 2,974
------ ------
Accumulated benefit obligation 38,054 29,814
Effect of projected future compensation
levels 16,144 14,322
------ ------
Projected benefit obligation 54,198 44,136
Fair value of plan assets (48,379) (38,799)
Items not yet recognized in earnings:
Unrecognized net loss (gain) (22) 1,259
Unrecognized prior service cost (1,565) (1,802)
------ ------
Accrued pension costs $ 4,232 4,794
====== ======
- ---------------------------------------------------------------------------
(dollars in thousands) 1997 1996 1995
- ---------------------------------------------------------------------------
Net periodic pension cost:
Benefits earned during the year $ 2,792 3,203 2,574
Interest cost on projected
benefit obligation 3,427 3,110 2,744
Return on plan assets (7,648) (3,811) (5,279)
Net amortization and deferral 4,337 1,014 3,155
Amortization of prior service cost 237 208 179
----- ----- -----
Net periodic pension cost $ 3,145 3,724 3,373
===== ===== =====
Actuarial assumptions:
Discount rate 7.25% 7.75 7.0
Projected future compensation
increase 5.0% 5.0 5.0
Long-term expected return on plan
assets 8.5% 8.5 8.5
Page 44
PAGE
(c) Postretirement Plan
The Company provides life insurance benefits ("postretirement
benefits") for retired employees. Substantially all the Company's
employees may become eligible for these benefits if they reach
retirement age while working for the Company and meet a minimum of ten
years of eligibility service. Those who retired prior to January 1,
1991, receive decreasing life insurance coverage that grades to an
ultimate amount after ten years. Those retiring on or after January 1,
1991, receive life insurance coverage in an amount equal to 50% of
their annual salary amount in effect at the end of their active
career. The estimated cost of these benefits is accrued over the
working lives of those employees expected to qualify for such benefits
as a level percentage of their payroll costs.
A reconciliation of the funded status of the plan and net
postretirement cost is presented as follows:
- --------------------------------------------------------------------------
(in thousands) 1997 1996
- --------------------------------------------------------------------------
Accumulated postretirement benefit
obligation:
Retirees $ (2,945) (2,595)
Active participants (1,595) (1,413)
Other participants (70) (52)
----- -----
Total (4,610) (4,060)
Items not yet recognized in earnings:
Unrecognized net transition obligation 640 686
Unrecognized net gain (381) (606)
----- -----
Accrued postretirement benefit cost $ (4,351) (3,980)
===== =====
- ---------------------------------------------------------------------------
(dollars in thousands) 1997 1996 1995
- ---------------------------------------------------------------------------
Net periodic postretirement cost:
Service cost $ 157 159 153
Interest cost on accumulated
postretirement benefit
obligation 315 345 305
Net amortization and deferral 32 46 46
Net periodic postretirement --- --- ---
benefit cost $ 504 550 504
=== === ===
Actuarial assumptions:
Discount rate 7.25% 7.75 7.0
Projected future compensation
increase 5.0% 5.0 5.0
(d) Retirement Plan for Nonemployee Directors
The Company maintained a nonqualified unfunded defined benefit
retirement income plan for nonemployee Directors. The estimated
accrued costs for this plan were not material. The plan was terminated
effective December 31, 1997, and as part of the termination, the
present value of each Director's future benefits, as of this date, was
converted into units based on the fair value of Selective common stock
on that date. The cash value of these units will be distributed to
each Director upon retirement, or at each Directors election, over a
period of fifteen years after such retirement. The units will accrue
amounts equivalent to dividends which will also be converted into
units based on the fair market value of Selective common stock on the
applicable dividend reinvestment dates.
NOTE 10 Incentive Compensation Plans
- -------------------------------------
The Company has incentive compensation plans in which all
employees are eligible to participate based on corporate and
individual performance goals. the total compensation costs charged to
expense in connection with the plans were $8,914,000, $4,753,000 and
$6,052,000 in 1997, 1996 and 1995, respectively.
NOTE 11 Stock Compensation Plans
- ---------------------------------
The Company has adopted the pro forma footnote disclosure-only provisions
of FASB 123. Based on the fair value method consistent with the provisions
of FASB 123, the Company's net income and earnings per share would have
been reduced to the following pro forma amounts indicated below:
- ----------------------------------------------------------------------------
(in thousands, except per share data) 1997 1996 1995
- ----------------------------------------------------------------------------
Net income:
As reported $69,608 55,551 53,042
Pro forma 69,142 54,493 52,322
Primary earnings per share:
As reported 2.41 1.92 1.86
Pro forma 2.39 1.89 1.84
Fully diluted earnings per share:
As reported 2.27 1.83 1.81
Pro forma 2.26 1.80 1.78
The fair value of each option grant is estimated on the date of
grant using the Black Scholes option-pricing model with the following
weighted average assumptions for 1997, 1996 and 1995, respectively:
(i) risk free interest rate of 5.27%, 5.34% and 5.36% for the employee
stock purchase plan and 6.04%, 6.04% and 5.92% for all other option
plans; (ii) expected life of six months for the employee stock
purchase plan and five years for all other option plans for all years;
(iii) dividend yield of 2.4%, 3.3% and 3.5%; and (iv) an expected
volatility of 21%, 20% and 22%.
The weighted-average fair value of options and stocks granted per
share, during the year for 1997, 1996 and 1995, respectively, is as
follows:
- ---------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------
Stock option plans $ 5.15 3.19 3.17
Restricted stock 18.77 17.02 13.08
Employee stock purchase plan:
Six month option 1.29 1.04 .83
15% of grant date market value 3.23 2.61 2.13
----- ----- -----
Total 4.52 3.65 2.96
Executive stock grant - - 19.00
Agents stock purchase plan:
5% of grant date market value 1.18 .85 .81
Page 45
PAGE
A summary of the option transactions under the stock option plans is as
follows:
- --------------------------------------------------------------------------
Stock Weighted
appre- average
Number ciation exercise
of shares rights price
- ---------------------------------------------------------------------------
Outstanding at
December 31, 1994 1,438,754 304,586 $11.84
Granted 1995 335,700 - 17.98
Exercised 1995 (127,134) (20,484) 9.84
Forfeited 1995 (51,824) (63,834) 11.96
------- ------- -----
Outstanding at
December 31, 1995 1,595,496 220,268 13.70
Granted 1996 386,400 - 17.67
Exercised 1996 (106,804) (18,744) 10.59
Forfeited 1996 (55,044) (51,756) 13.28
------- ------- -----
Outstanding at
December 31, 1996 1,820,048 149,768 14.76
Granted 1997 313,400 - 23.17
Exercised 1997 (156,636) (6,022) 13.89
Forfeited 1997 (40,122) (35,946) 15.26
------- ------- -----
Outstanding at
December 31, 1997 1,936,690 107,800 $16.17
======= ======= =====
Options exercisable and their weighted average exercise price at
year end are 1,663,290 and $15.05, 1,724,648 and $14.75, and 1,487,296
and $13.77 for 1997, 1996 and 1995, respectively.
The following table summarizes information about stock options
outstanding and exercisable under the stock option plans at December
31, 1997:
Options Outstanding
- --------------------------------------------------------------------------
Weighted
average
Range of remaining Weighted
exercise Number contractual life average
prices of shares in years exercise price
- --------------------------------------------------------------------------
$ 5 to 10 179,800 2.73 $ 8.42
10 to 15 830,850 6.12 13.83
15 to 20 690,240 8.41 18.09
20 to 26 235,800 9.81 24.68
------- ---- -----
$ 5 to 26 1,936,690 7.07 $16.17
========= ==== =====
Options Exercisable
- --------------------------------------------------------------------------
Weighted
Range of average
exercise Number exercise
prices of shares Price
- --------------------------------------------------------------------------
$ 5 to 10 179,800 $ 8.42
10 to 15 793,250 13.90
15 to 20 690,240 18.09
20 to 26 - -
------- ----
$ 5 to 26 1,663,290 15.05
========= =====
(a) Stock Option Plan
Under the Company's stock option plan, 107,800 shares of the
Company's common stock are reserved for issuance, upon exercise of
stock options outstanding at December 31, 1997. This plan permitted
the granting of qualified and nonqualified stock options to key
employees, which may or may not have SARs attached. Options and
related SARs were granted at not less than fair value on the date of
the grant, are required to be exercised within ten years from the date
of the grant and are exercisable immediately upon the grant. This plan
expired in August 1992 and was replaced with the Company's stock
option plan II.
Compensation expense, based on the increase or decrease in the
fair value of the Company's common stock, is charged or (credited) to
other expense in recognition of the SARs attached to the granted
options. Such amounts were $485,000, $(456,000) and $799,000 in 1997,
1996 and 1995, respectively.
(b) Stock Option Plan II
Under the Company's stock option plan II, 3,483,073 shares of the
Company's common stock are available for issuance at December 31,
1997. The plan permits the granting of qualified and nonqualified
stock options to employees, which may or may not have SARs attached.
Options and related SARs may be granted at not less than fair value on
the date of the grant and may be subject to certain vesting periods as
determined by the Company's Compensation Committee ("Committee"). Each
grant must be exercised within ten years from the date of the grant.
Under this plan, the Company granted options of 277,400, 173,700 and
151,350 for 1997, 1996 and 1995, respectively.
Under the Company's stock option plan II, the Committee may, in
its discretion, make restricted or unrestricted grants of common
stock, or grant rights to receive common stock, to employees in
addition to or in substitution for options and/or SARs granted. The
Company granted a total of 207,375, 168,454 and 69,400 restricted
shares for 1997, 1996 and 1995, respectively, of which 41,400, 12,200
and 300 shares were forfeited in 1997, 1996 and 1995, respectively.
Each such grant must be expressly subject to the attainment of one or
more performance-related objectives for certain executive officers,
and may be subject to the attainment of one or more
performance-related objectives for other employees, as determined by
the Committee and set forth in an award agreement. Each such grant
also is subject to a vesting period or other terms, conditions,
restrictions and limitations as determined by the Committee in its
discretion and set forth in an award agreement.
During the vesting period, dividends are earned and held in escrow
on the restricted shares subject to the same vesting period and
conditions as set forth in the award agreement. Effective September 3,
1996, dividends earned on the restricted shares are reinvested in the
Company's common stock at fair value. Included in the 1997 and 1996
restricted shares granted were 8,825 and 3,754 shares, respectively,
that were issued through the dividend reinvestment feature.
Deferred compensation expense is recognized for the fair value of
the restricted shares when granted and is adjusted for the increases
or decreases in the fair value of the Company's common stock for share
awards subject to performance-related objectives and is amortized
ratably over the vesting period. The unamortized amount is accounted
for as a reduction of stockholders' equity. At December 31, 1997, 1996
and 1995, respectively, deferred compensation of $6,239,000,
$2,957,000 and $947,000 was recorded as a reduction of stockholders'
equity and the amounts amortized to expense in 1997, 1996 and 1995,
respectively, were $2,733,000, $974,000 and $279,000.
Page 46
PAGE
(c) Stock Option Plan for Directors
Under the Company's stock option plan for directors, 385,000
shares of the Company's common stock are available for issuance. Each
Director who is not a full-time employee of the Company participates
in the plan and automatically receives a nonqualified option to
purchase 1,500 shares of common stock at not less than fair value on
March 1 of each year. Each option becomes exercisable one year after
the option was granted and expires no more than ten years from the
date the option is granted. Under this plan, the Company granted options
of 36,000, 39,000 and 33,000 for 1997, 1996 and 1995, respectively.
(d) Executive Stock Grant
During 1995, an officer of the Company was granted 27,728 shares
of stock. The grant contains a graduated vesting provision under which
shares vest over a four-year period beginning in 1995. At December 31,
1997, 20,796 shares were vested.
Deferred compensation is recognized for the fair value of the
shares granted and is amortized over the vesting period. The
unamortized amount of the grant is accounted for as a reduction of
stockholders' equity. At December 31, 1997, 1996 and 1995,
respectively, deferred compensation of $109,000, $241,000 and $373,000
was recorded as a reduction of stockholders' equity and the amounts
charged to expense in 1997, 1996 and 1995, respectively, were
$132,000, $132,000 and $154,000.
(e) Employee Stock Purchase Plan
Under the terms of the employee stock purchase savings plan, the
number of shares of common stock available to be purchased is 776,379.
This plan is available to all employees who meet the eligibility
requirements and provides for the issuance of options to purchase
shares of common stock. The purchase price is the lower of (i) 85% of
the closing market price at the time the option is granted or (ii) 85%
of the closing price at the time the option is exercised. The Company
issued 49,897 shares, 57,772 shares and 58,988 shares in 1997, 1996
and 1995, respectively, to employees and charged to expense $365,000,
$210,000 and $293,000 in 1997, 1996 and 1995, respectively.
(f) Agent Stock Purchase Plan
Under the terms of the agents' stock purchase plan, the number of
shares of common stock available to be purchased is 1,089,546. This
plan provides for four quarterly offerings in which independent
insurance agents can purchase the Company's common stock at a five
percent discount. The Company issued 84,996 shares, 109,986 shares and
113,768 shares in 1997, 1996 and 1995, respectively, to agents and
charged to expense $100,000, $93,000 and $92,000 in 1997, 1996 and
1995, respectively.
(g) Stock Compensation Plan for Nonemployee Directors
In May 1996, the shareholders approved the stock compensation plan
for nonemployee Directors, effective January 1, 1997. The purpose of
this plan is to provide for the payment of the annual compensation for
the Directors' services in shares of the Company's common stock. The
amount of common shares available for issuance under the plan is
388,768. The Company issued 11,232 shares during 1997 and charged to
expense $290,000.
Note 12: Stockholders Equity
- ----------------------------
The Company maintains a dividend reinvestment and stock purchase
plan, under which 422,094 shares of common stock are available for
issuance. Shares purchased under this plan are issued at fair value.
Under a common stock repurchase program authorized by the Board of
Directors on July 29, 1996, the Company can repurchase up to 2,000,000
shares of its common stock. In 1997 and 1996, the Company acquired
336,000 shares and 257,000 shares, respectively, at a total cost of
$8,498,000 and $4,289,000, respectively.
Selective's ability to declare and pay dividends on common stock
is affected by the ability of its insurance subsidiaries to declare
and pay dividends to Selective under the regulatory limitations of the
states in which the insurance subsidiaries are domiciled. All of the
jurisdictions in which the insurance subsidiaries are domiciled,
including New Jersey, New York, North Carolina and South Carolina
regulate the payment of dividends. Dividends are generally payable only
from earned surplus as reported on the insurer's annual statement as of the
preceding December 31.
In all such jurisdictions, domestic insurers are prohibited from
paying "extraordinary dividends" without approval of the insurance
commissioner of the relevant state. Extraordinary dividends are
defined in New Jersey and South Carolina as dividends which, together
with dividends paid in the previous twelve months, exceed the greater
of (i) 10% of policyholders' surplus at the preceding December 31 or
(ii) net income, excluding realized capital gains, for the
twelve-month period ending the preceding December 31. Extraordinary
dividends are generally defined in North Carolina and New York as
dividends which, together with dividends paid in the previous twelve
months, exceed the lesser of (i) 10% of policyholders' surplus at the
preceding December 31 or (ii) net investment income, or in the case of
North Carolina, net income, excluding realized capital gains, for the
twelve-month period ending the preceding December 31. In determining
whether a dividend is "extraordinary," New York and North Carolina
allow insurance companies to carry forward undistributed net
investment income (New York) or net income (North Carolina) for two
years.
In addition to the regulation of extraordinary dividends, New
Jersey and South Carolina require notice to the relevant state
regulatory authorities of the declaration of both ordinary and
extraordinary dividends and distributions. New Jersey requires that
all dividends be reported within five days of declaration and
thirty days prior to payment. South Carolina requires that all
dividends be reported within five business days following declaration
and ten days prior to payment. During the notice period, the relevant
state regulatory authority may disallow all or part of the proposed
dividend if it determines that the insurer's surplus, with regard to
policyholders, is not reasonable in relation to the insurer's
outstanding liabilities and adequate to its financial needs or, in the
case of New Jersey, if the regulatory authority determines that the
insurer is otherwise in a hazardous financial condition.
Page 47
PAGE
Based on the 1997 statutory financial statements, the maximum
dividends that can ultimately be paid to Selective in 1998 by
Selective Insurance Company of America, Selective Way Insurance
Company, Selective Insurance Company of the Southeast, Selective
Insurance Company of South Carolina and Selective Insurance Company of
New York are $34,137,000, $14,779,000, $3,465,000, $6,263,000 and
$2,858,000, respectively.
The National Association of Insurance Commissioners ("NAIC") has
adopted risk-based capital ("RBC") requirements that require insurance
companies to calculate and report information under a risk-based
formula, which measures statutory capital and surplus needs based on a
regulatory definition of risk in a company's mix of products and its
balance sheet. The implementation of RBC did not impact the operations
of the Company's insurance subsidiaries since all of its subsidiaries
have an RBC amount above the authorized control level RBC, as defined
by the NAIC.
NOTE 13 Preferred Share Purchase Rights Plan
- ---------------------------------------------
On November 3, 1989, Selective's Board of Directors declared a
dividend of one preferred share purchase right for each share of
Selective's common stock held of record as of the close of business on
November 17, 1989. Each right entitles the registered holder to
purchase one two-hundredth of a share of series A junior preferred
stock (a "preferred share" or the "preferred shares") at an exercise
price of $75. Each two-hundredth of a preferred share has terms
designed to make it the economic equivalent of one share of common
stock, but will have one two-hundredth of a vote. The rights will be
exercisable only if a person or group acquires 20% or more of
Selective's common stock or announces a tender offer, the consummation
of which results in ownership by a person or group of 20% or more of
the common stock.
If Selective is acquired in a merger or other business combination
transaction, each right will entitle its holder to purchase, at the
right's then current exercise price, a number of the acquiring
company's common shares having a fair value at the time of twice the
right's exercise price. In addition, if a person or group acquires 20%
or more of Selective's outstanding common stock, each right will
entitle its holder (other than such person or members of such group)
to purchase, at the right's then current exercise price, a number of
shares of Selective's common stock having a fair value of twice the
right's exercise price. Under the plan, 300,000 preferred shares have
been reserved for issuance.
NOTE 14 Reconciliation of Statutory to Generally Accepted Accounting
Principles Financial Statments
- ---------------------------------------------------------------------
(a) The following is a reconciliation of the differences between the
Statutory Financial Statements and the Generally Accepted Accounting
Principles ("GAAP") Financial Statements:
- --------------------------------------------------------------------------
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------
Consolidated insurance
subsidiaries - statutory basis
net income $ 70,652 66,207 55,481
Deferred policy acquisition
costs 14,960 950 1,200
Deferred Federal income taxes (4,689) (3,830) 4,840
Net loss of subsidiaries (1,474) (357) (148)
Other, net (1,452) (735) (988)
Consolidated subsidiaries ------ ------ ------
- GAAP basis 77,997 62,235 60,385
Selective Insurance Group, Inc.,
net of intercompany equity
eliminations (8,389) (6,684) (7,343)
Consolidated financial ------ ------ ------
statement - GAAP basis
net income $ 69,608 55,551 53,042
====== ====== ======
- --------------------------------------------------------------------------
(in thousands) 1997 1996
- --------------------------------------------------------------------------
Consolidated insurance subsidiaries -
statutory surplus $ 485,936 417,664
Deferred policy acquisition costs 98,110 83,150
Deferred Federal income taxes 6,846 31,052
Loss reserves 4,186 (1,497)
Net unrealized gains - debt securities,
available-for-sale 35,330 19,407
Nonadmitted assets 17,223 14,441
Other, net (6,930) (1,827)
Consolidated subsidiaries - GAAP ------- -------
basis 640,701 562,390
Selective Insurance Group, Inc.
net of intercompany equity
eliminations (75,385) (88,091)
Consolidated financial statement - ------- -------
GAAP basis stockholders' equity $ 565,316 474,299
======= =======
(b) The insurance subsidiaries prepare their statutory financial
statements in accordance with accounting practices prescribed or
permitted by the various states of domicile. Prescribed statutory
accounting practices include state laws, regulations and general
administrative rules, as well as a variety of publications of the
NAIC. Permitted statutory accounting practices encompass all
accounting practices that are not prescribed; such practices differ
from state to state, may differ from company to company within a state
and may change in the future. Furthermore, the NAIC has a project to
codify statutory accounting practices, the result of which is expected
to constitute the only source of "prescribed" statutory accounting
practices. Accordingly, that project, when completed, will likely
change the definitions of what comprises prescribed versus permitted
statutory accounting practices and
Page 48
PAGE
may result in changes to the accounting policies that insurance enterprises
use to prepare their statutory financial statements. The insurance
subsidiaries do not have any permitted statutory accounting practices that
materially affect statutory surplus or RBC.
NOTE 15 Commitments and Contingencies
- --------------------------------------
(a) Reserves established for liability insurance continue to reflect
exposure to environmental claims, both asbestos and non-asbestos.
These claims have arisen primarily under older policies containing
exclusions for environmental liability which certain courts, in
interpreting such exclusions, have determined do not bar such claims.
The emergence of these claims is slow and highly unpredictable. Since
1986, policies issued by the insurance subsidiaries have contained a
more expansive exclusion for losses related to environmental claims.
There are significant uncertainties in estimating the Company's
exposure to environmental claims resulting from lack of historical
data, long reporting delays, uncertainty as to the number and identity
of claimants and complex legal and coverage issues. Legal issues which
arise in environmental cases include the determination of whether a
case is one for a federal or state forum, choice of law, causation,
admissibility of evidence, allocation of damages and contribution
among joint defendants, successor and predecessor liability and
whether direct action against insurers can be maintained. Coverage
issues which arise in environmental cases include the interpretation
and application of policy exclusions, the determination and
calculation of policy limits, the determination of the ultimate amount
of a loss, the extent to which a loss is covered by a policy, if at
all, the obligation of an insurer to defend a claim and the extent to
which a party can prove the existence of coverage. Courts have reached
different and sometimes inconsistent conclusions on these legal and
coverage issues. The Company does not discount to present value that
portion of its loss reserves expected to be paid in future periods.
At December 31, 1997, the Company's reserves for environmental
claims amounted to $54,735,000 on a gross basis and $49,235,000 net of
reinsurance ("net basis"). The Company's case reserves for known
environmental claims, excluding IBNR, were $25,587,000 on a gross
basis and $21,587,000 on a net basis in connection with 2,060 claims,
including multiple claimants who are associated with the same site or
incident. These claims involved about 1,845 lawsuits. Of the 2,060
total environmental claims, 1,723 claims are asbestos related, of
which 1,557 involve only two insureds. One such insured manufactured
asbestos-containing products, while the other supplied
asbestos-containing products. The reserve associated with these two
insureds amounted to $5,072,000 on a gross basis and $1,272,000 on a
net basis. About 130 of the total environmental claims involve
approximately 30 landfills. The landfill sites account for reserves of
approximately $10,927,000 on a gross basis and $10,727,000 on a net
basis. The remaining claims, which represent about $9,588,000 both on
a gross basis and net basis, involve leaking underground storage
tanks, air pollution, as well as other asbestos claims. Litigation
costs associated with environment claims have been significant,
particularly for landfill claims.
At December 31, 1997, the Company established a range of
reasonably possible losses for known environmental exposures of
approximately $8,000,000 to $36,000,000 on a gross basis, and
$7,000,000 to $30,000,000, on a net basis. At December 31, 1997, the
Company's total reserves for environmental exposures amounted to
$54,735,000, on a gross basis, (including IBNR reserves of
$29,148,000) and $49,235,000, on a net basis, (including IBNR reserves
of $27,648,000). As previously stated, there are significant
uncertainties in estimating the Company's exposure to environmental
IBNR claims resulting from lack of historical data, long reporting
delays, uncertainty as to the number and identity of claimants and
complex legal and coverage issues on which courts have reached
different and sometimes inconsistent conclusions. The standards for
establishing appropriate environmental IBNR reserves are still
developing. IBNR reserve estimation is also difficult because, in
addition to other factors, there are significant uncertainties
associated with critical assumptions in the estimation process such as
average clean-up costs, third-party costs, potentially responsible
party shares, allocation of damages, insurer litigation costs, insurer
coverage defenses and potential changes to state and federal statutes.
Moreover, normal historically-based actuarial approaches do not apply
because relevant history is not available. In addition, while models
can be applied, such models can produce significantly different
results with small changes in assumptions.
The Company has established a range of reasonably possible IBNR
losses for non-environmental net claims at December 31, 1997, of
approximately $428,000,000 to $528,000,000 and at December 31, 1996,
of approximately $422,000,000 to $524,000,000. For each major product
line of business, incurred and/or paid loss and loss expense
projections were calculated using standard actuarial techniques on
both an optimistic and pessimistic basis to construct an IBNR range
for that product line. The overall range for non-environmental IBNR
was selected based on statistical combinations of the ranges of the
individual product lines. The Company's net IBNR reserves for
non-environmental claims were $502,000,000 and $496,000,000 at
December 31, 1997, and 1996, respectively.
Based on the Company's aggregate reserve for net losses and loss
expenses at December 31, 1997, the Company does not expect that
liabilities associated with environmental and non-environmental claims
will have a materially adverse impact on its future liquidity,
financial position and results of operations. However, given the
complexity of coverage and other legal issues, and the significant
assumptions used in estimating such exposures, actual results could
significantly differ from the Company's current estimates.
Page 49
PAGE
The following table provides a roll-forward of the Company's gross
and net environmental incurred losses and loss expenses and related
reserves thereon:
- --------------------------------------------------------------------------
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------
Asbestos Gross Net Gross Net Gross Net
Environmental reserves -----------------------------------------
(including IBNR)for losses and
loss expenses at the beginning
of year $ 9,982 5,873 7,801 7,801 7,501 7,501
Incurred losses and loss expenses(1,449)(1,233) 2,407 (1,702) 489 489
Less losses and loss expenses paid (256) (256) (226) (226) (189) (189)
----- ----- ----- ----- ----- -----
Environmental reserves
(including IBNR) for losses
and loss expenses at the end
of year $ 8,277 4,384 9,982 5,873 7,801 7,801
===== ===== ===== ===== ===== =====
Non-Asbestos
Environmental reserves
(including IBNR) for losses
and loss expenses at the
beginning of year $53,421 44,530 45,465 45,465 41,344 41,344
Incurred losses and
loss expenses (887) 5,238 14,289 3,312 6,779 6,779
Less losses and loss
expenses paid (6,076)(4,917) (6,333)(4,247) (2,658)(2,658)
------ ------ ------ ------ ------ ------
Environmental reserves
(including IBNR) for losses
and loss expenses at the
end of year $46,458 44,851 53,421 44,530 45,465 45,465
====== ====== ====== ====== ====== ======
Total Environmental Claims
Environmental reserves
(including IBNR) for losses
and loss expenses $63,403 50,403 53,266 53,266 48,845 48,845
Incurred losses
and loss expenses (2,336) 4,005 16,696 1,610 7,268 7,268
Less losses and loss
expenses paid (6,332)(5,173) (6,559)(4,473) (2,847)(2,847)
------ ------ ------ ------ ------ -------
Environmental reserves
(including IBNR) for losses
and loss expenses $54,735 49,235 63,403 50,403 53,266 53,266
====== ====== ====== ====== ====== ======
(b) The Company purchases annuities from life insurance companies
to fulfill obligations under claim settlements which provide for
periodic future payments to claimants. As of December 31, 1997, the
Company had purchased such annuities in the amount of $11,413,000 for
settlement of claims on a structured basis for which the Company is
contingently liable. To the Company's knowledge, none of the issuers
of such annuities have defaulted in its obligations thereunder.
(c) The Company has various operating leases for office space and
equipment. Such lease agreements, which expire at various times, are
generally renewed or replaced by similar leases. Rental expense under
these leases amounted to $4,772,000, $4,936,000 and $5,492,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
In addition, certain leases for rented premises and equipment are
noncancelable, and liability for payment will continue even though the
space or equipment may no longer be in use. At December 31, 1997, the
total future minimum rental commitments under noncancelable leases was
$13,468,000 and such yearly amounts are as follows:
- ---------------------------------------------------------------------------
(in thousands)
- ---------------------------------------------------------------------------
1998 $ 4,948
1999 3,586
2000 2,506
2001 1,707
2002 672
After 2002 49
------
Total minimum payment required $ 13,468
======
Page 50
PAGE
NOTE 16 Earnings Per Share
- --------------------------
The following table provides a reconciliation of the numerators and
denominators of the basic and diluted EPS computations of net income for
the year ended:
(in thousands, Income Shares Per-Share
except per share amounts) (Numerator) (Denominator) Amount
- ------------------------------------------------------------------------
1997
- ----
Basic EPS
Net Income available
to common stockholders $ 69,608 28,909 $ 2.41
====
Effect of Dilutive Securities
Restricted stock - 404
8.75% convertible
subordinated debentures 396 971
Stock Options 263 641
------ ------
Diluted EPS
Income available to common
stockholders + assumed
conversions $ 70,267 30,925 $ 2.27
====== ====== ====
- ------------------------------------------------------------------------
1996
- ----
Basic EPS
Net Income available
to common stockholders $ 55,551 28,860 $ 1.92
====
Effect of Dilutive Securities
Restricted stock - 224
8.75% convertible
subordinated debentures 413 1,003
Stock Options (339) 273
------ ------
Diluted EPS
Income available to common
stockholders + assumed
conversions $ 55,625 30,360 $ 1.83
====== ====== ====
- -------------------------------------------------------------------------
1995
- ----
Basic EPS
Net Income available
to common stockholders $ 53,042 28,481 $ 1.86
====
Effect of Dilutive Securities
Restricted stock - 90
8.75% convertible
subordinated debentures 421 1,035
Stock Options 437 240
------ ------
Diluted EPS
Income available to common
stockholders + assumed
conversions $ 53,900 29,846 $ 1.81
====== ====== ====
NOTE 17 Liability for Unpaid Claims and Claim Adjustment Expenses
- ------------------------------------------------------------------
The table below provides a roll-forward of reserves for losses and loss
expenses for beginning and ending reserve balances:
- --------------------------------------------------------------------------
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------
Gross reserves for losses
and loss expenses at
beginning of year $ 1,189,793 1,120,052 999,404
Less reinsurance recoverable
on unpaid losses and loss
expenses at beginning of
year 150,208 121,369 111,550
Net reserves for losses --------- --------- ---------
and loss expenses at
beginning of year 1,039,585 998,683 887,854
Provision for losses and loss
expenses for claims
occurring in the current
year 471,506 504,843 516,219
Increase (decrease) in estimated
losses and loss expenses for
claims occurring in prior
years (10,124) (9,178) 12,682
--------- --------- ---------
1,500,967 1,494,348 1,416,755
--------- --------- ---------
Net losses and loss expenses
paid for claims occurring
during:
Current year 160,410 174,398 158,692
Prior years 303,585 280,365 259,380
--------- --------- ---------
463,995 454,763 418,072
--------- --------- ---------
Net reserves for losses and
loss expenses at end of year 1,036,972 1,039,585 998,683
Reinsurance recoverable on
unpaid losses and loss
expenses at end of year 124,197 150,208 121,369
Gross reserves for losses --------- ------- -------
and loss expenses at
end of year $ 1,161,169 1,189,793 1,120,052
========= ========= =======
The 1997 losses and loss expenses incurred included the effect of
prior year reserve redundancy of $10,124,000. The reserve redundancy
was principally due to reserve reductions in the workers' compensation
line of insurance due to greater than anticipated savings from the use
of managed care and various favorable legislative reforms. This was
partially offset by higher estimates of ultimate loss and loss expense
costs in the commercial automobile line of insurance due to higher
than expected paid and incurred loss and loss expenses.
The 1996 losses and loss expenses incurred included the effect of
prior year reserve redundancy of $9,178,000. The reserve redundancy
was principally due to reserve reductions (approximately $11,000,000)
in the National Workers' Compensation Reinsurance Pool business
("NCCI"). During 1996, incurred loss estimates for the NCCI decreased
due to greater than anticipated savings from the use of managed care
and various favorable legislative reforms.
Page 51
PAGE
The 1995 losses and loss expenses incurred included the effect of
prior year reserve deficiency of $12,682,000. The reserve deficiency
resulted from higher estimates of ultimate loss and loss expense costs
in the commercial automobile and commercial other liability lines of
insurance. The ultimate loss and loss expense costs were increased (i)
in commercial automobile due to higher than expected paid and incurred
loss and loss expenses and (ii) in commercial other liability due to
an increase in average paid cost per claim.
NOTE 18 Fair Values of Financial Instruments
- ---------------------------------------------
The following table presents the carrying amounts which are
included in the consolidated balance sheets and estimated fair values
of the Company's financial instruments as of December 31, 1997 and
1996:
- ---------------------------------------------------------------------------
1997 1996
---------------------------------------------
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
- ---------------------------------------------------------------------------
Financial assets:
Debt securities:
Held-to-maturity $ 410,169 426,251 432,792 445,273
Available-for-sale 1,044,390 1,044,390 985,372 985,372
Equity securities 222,273 222,273 161,096 161,096
Other investments 48,858 48,858 44,454 44,454
Financial liabilities:
8.77% Senior Notes 54,000 57,760 54,000 56,992
7.84% Senior Notes 35,714 36,267 42,857 43,039
------- ------- ------- -------
Notes payable 89,714 94,027 96,857 100,031
Debentures 6,845 26,079 6,912 18,524
NOTE 19 Related Party Transactions
- -----------------------------------
During the fourth quarter of 1994, certain officers of Selective
exercised stock options by giving Selective promissory notes ($992,000) in
payment for the stock purchased. The promissory notes are noninterest
bearing and are secured by shares of Selective's common stock. During 1997,
there was a lump-sum principal payment of approximately $201,000 in
settlement of a promissory note. Subsequent to this principal payment, the
officers are required to pay approximately $52,000 of the principal payment
in the aggregate of approximately $224,000 to be paid in February 2005.
The promissory notes are full recourse and subject to certain employment
requirements. At December 31, 1997, the principal amount outstnding was
$589,000.
NOTE 20 Segment Information
- ----------------------------
The Company's subsidiaries are primarily engaged in the writing of
property and casualty insurance. Inasmuch as these writings encompass
several lines of business, the Company has classified its business
accordingly into industry segments.
Income (loss) from underwriting operations consists of net premiums
earned less losses, loss expenses, underwriting expenses and dividends
to policyholders. In computing income (loss) from underwriting operations,
none of the following items have been added or deducted: net investment
income earned, net realized gains on investments, interest expense, net
general corporate expenses and Federal income tax. The Company does not
maintain distinct investment portfolios for each segment; and, therefore,
a meaningful allocation of identifiable assets, net investment income and
net realized gains on investments to each segment is considered
impracticable.
The financial information by industry segment for net
premiums earned and income (loss) from underwriting operations are as
follows:
- ---------------------------------------------------------------------------
(in thousands) 1997 1996 1995
- ---------------------------------------------------------------------------
Income Income Income
Net (loss) from Net (loss) from Net (loss) from
prem.'s und. prem.'s und. prem.'s und.
earned operations earned operations earned operations
- ---------------------------------------------------------------------------
Commercial $465,846 $(12,701) 477,506 (24,832) 521,196 (18,475)
Personal 210,442 11,522 217,473 4,819 221,587 1,762
Other (20) (604) (32) (14) 34 (12)
------- ------- ------- ------- ------- -------
Totals $676,268 $ (1,783) 694,947 (20,027) 742,817 (16,725)
======= ======= ======= ======= ======= =======
Loss from
underwriting operations $ (1,783) (20,027) (16,725)
Fee-for-service operations 119 - -
------- ------- -------
Total loss from segments
before Other (1,664) (20,027) (16,725)
Other:
Net investment
income earned 100,530 96,952 91,640
Net realized gains
on investments 6,021 2,786 900
Interest expense (9,592) (9,185) (9,296)
General corporate expenses (4,275) (1,437) (1,621)
Income before ------- ------- -------
Federal income tax $ 91,020 69,089 64,898
======= ======= =======
Page 52
PAGE
Quarterly Financial Information
- -------------------------------
1st Quarter 2nd Quarter
-------------------------------------------------
(unaudited, in
thousands, except
per share data) 1997 1996 1997 1996
- ---------------------------------------------------------------------------
Net premiums written $ 175,184 173,447 197,262 174,767
Net premiums earned 170,581 176,687 169,255 176,074
Net investment income
earned 24,432 24,011 24,694 23,783
Net realized gains (losses) 978 429 991 934
Operating income 1,2 16,065 8,611 16,459 14,963
Net income 1,2 16,701 8,890 17,103 15,570
Operating income per share:
Basic 1,2,3,4 .56 .30 .57 .52
Diluted 1,2,3,4 .53 .29 .54 .49
Net income per share:
Basic 1,2,3,4 .58 .31 .59 .54
Diluted 1,2,3,4 .55 .30 .56 .51
Dividends to stockholders 4,5 .14 .14 .14 .14
Price range of common stock:4,6
High 21 3/4 19 3/8 24 9/16 18
Low 18 5/16 17 1/8 19 3/4 15 l/2
- ---------------------------------------------------------------------------
1. Operating and net income for the first quarter of 1996 were reduced by
$6.2 million, after reinsurance and taxes, due to higher losses incurred
from numerous winter storms, or $.22 basic share and $.20 per diluted share.
2. Operating and net income for the third quarter of 1996 were reduced by
$4.2 million, after reinsurance and taxes, due to higher losses incurred
from numerous storms, or $.14 per basic and diluted share.
3. In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earning sper Share ("FASB 128"). FASB
128 replaced the calculation of primary and fully diluted earnings per share,
under Accounting Principles Board Opinion No. 15, with basic and diluted
earnings per share. The 1996 and the first three quarters of 1997 earnings
per share amounts have been restated to comply with FASB 128. FASB 128 did
not materially change the Company's earnings per share amounts.
4. All per share data presented has been adjusted for the 2 for 1 split of
Selective's common stock declared October 28, 1997 and effective December 1,
1997.
5. See note 7(b)(2) and note 12 to the consolidated financial statements
and Financial Review for a discussion of dividend restrictions.
6. These ranges of high and low prices of the Company's common stock, as
reported by the Nasdaq National Market, represent actual transactions. All
price quotations do not include retail markups, markdowns and commissions.
The range of high and low prices for common stock for the period beginning
January 1, 1998 and ending February 27, 1998 was $28 5/8 to $23 3/4 and the
last sale price on February 27, 1998 was $27 7/16.
Quarterly Financial Information
- -------------------------------
3rd Quarter 4th Quarter
-------------------------------------------------
(unaudited, in
thousands, except
per share data) 1997 1996 1997 1996
- ---------------------------------------------------------------------------
Net premiums written $ 200,680 196,765 144,492 147,260
Net premiums earned 169,916 172,106 166,516 170,080
Net investment income
earned 24,479 23,908 26,925 25,250
Net realized gains (losses) 3,386 (35) 666 1,458
Operating income 1,2 16,194 12,275 16,976 17,891
Net income 1,2 18,395 12,252 17,409 18,839
Operating income per share:
Basic 1,2,3,4 .56 .42 .58 .62
Diluted 1,2,3,4 .53 .40 .55 .59
Net income per share:
Basic 1,2,3,4 .64 .42 .60 .65
Diluted 1,2,3,4 .60 .40 .57 .62
Dividends to stockholders 4,5 .14 .14 .14 .14
Price range of common stock: 4,6
High 27 11/16 17 28 3/8 19 3/8
Low 22 5/8 15 1/2 24 7/8 16 5/8
- ----------------------------------------------------------------------------
1. Operating and net income for the first quarter of 1996 were reduced by
$6.2 million, after reinsurance and taxes, due to higher losses incurred
from numerous winter storms, or $.22 basic share and $.20 per diluted share.
2. Operating and net income for the third quarter of 1996 were reduced by
$4.2 million, after reinsurance and taxes, due to higher losses incurred
from numerous storms, or $.14 per basic and diluted share.
3. In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earning sper Share ("FASB 128"). FASB
128 replaced the calculation of primary and fully diluted earnings per share,
under Accounting Principles Board Opinion No. 15, with basic and diluted
earnings per share. The 1996 and the first three quarters of 1997 earnings
per share amounts have been restated to comply with FASB 128. FASB 128 did
not materially change the Company's earnings per share amounts.
4. All per share data presented has been adjusted for the 2 for 1 split of
Selective's common stock declared October 28, 1997 and effective December 1,
1997.
5. See note 7(b)(2) and note 12 to the consolidated financial statements
and Financial Review for a discussion of dividend restrictions.
6. These ranges of high and low prices of the Company's common stock, as
reported by the Nasdaq National Market, represent actual transactions. All
price quotations do not include retail markups, markdowns and commissions.
The range of high and low prices for common stock for the period beginning
January 1, 1998 and ending February 27, 1998 was $28 5/8 to $23 3/4 and the
last sale price on February 27, 1998 was $27 7/16.
Page 53
PAGE
Subsidiaries
- ------------
Alta Services, LLC
Niagara Exchange Corporation
Selective Insurance Company
of America
Selective Insurance Company
of New York
Selective Insurance Company
of South Carolina
Selective Insurance Company
of the Southeast
Selective Technical
Administrative Resources, Inc. (SelecTech)
Selective Way Insurance Company
Wantage Avenue
Holding Company, Inc.
Region Offices
- --------------
Chesapeak Region
Hunt Valley, Maryland
6 North Park Drive
James A. Caragher, Manager
Great Lakes Region
Indianapolis, Indiana
805 South Sunridge Court
Joseph W. Kinker, Manager
Midwest Region
Bloomington, Illinois
1701 East Empire Street
Arron O. Lamp, Manager
New York Region
Lafayette, New York
2040 Sky High Road
William S. Becker, Manager
Northern New Jersey Region
Branchville, New Jersey
40 Wantage Avenue
James McLain, Manager
Pennsylvania Region
Allentown, Pennsylvania
5050 Tilghman Street, Suite 250
Phillip Houseknecht, Manager
Southern New Jersey Region
Hamilton Township, New Jersey
One AAA Drive
Edward F. Drag, II, Manager
Southern Region
Charlotte, North Carolina
2550 West Tyvola Road, Suite 400
Margaret C. Davis, Manager
Virginia Region
Richmond, Virginia
1100 Boulders Parkway, Suite 601
James M. Allonier, Manager
Field Underwriting Office
- -------------------------
Mid-America Underwriting Office
Mansfield, Ohio
380 N. Main Street
Gregory J. Massey, Manager
Information Systems Offices
- ---------------------------
Glastonbury, Connecticut
500 Winding Brook Drive
Bradford, S. Allen, Manager
Mansfield Ohio
380 N. Main Street
Roby L. Musick, Manager
Properties
- ----------
Situated on approximately 137 acres in Branchville, New Jersey, is our
315,000 square foot facility owned by Wantage Avenue Holding Company, Inc.
All region, field underwriting and information systems office locations, as
indicated above, are leased.
Stockholders' Information
- -------------------------
Executive Office
40 Wantage Avenue
Branchville, New Jersey 07890-1000
Telephone (973) 948-3000
Registrar and Transfer Agent
- ----------------------------
First Chicago Trust Company
of New York
P.O. Box 2500
Jersey City, New Jersey 07303-2500
Telephone (800) 446-2617
Auditors
- --------
KPMG Peat Marwick LLP
757 Third Avenue
New York, New York 10017
Common Stock Information
- ------------------------
The Company's common stock trades on the Nasdaq National Market under the
symbol: SIGI. As of December 31, 1997, there were approximately 3,780
registered stockholders. Quarterly dividend and price range information are
contained on page 53 of this report.
Form 10-K
- ---------
A copy of Form 10-K as filed with the Securities and Exchange Commission,
excluding exhibits, will be provided without charge to stockholders upon
written request to:
David B. Merclean
Senior Vice President and
Chief Financial Officer
Selective Insurance Group, Inc.
40 Wantage Avenue
Branchville, New Jersey 07890-1000
The Form 10-K provided to stockholders will include only a list of
exhibits to the Form 10-K. Exhibits will be furnished to stockholders
upon payment of reproduction and mailing expenses.
Page 57
PAGE
EXHIBIT 21
SELECTIVE INSURANCE GROUP, INC. SUBSIDIARIES
Jurisdiction Percentage
in which voting securities
Name organized Parent owned
- ----- ------------ ------ -----------------
Selective Insurance Selective Insurance
Company of America New Jersey Group, Inc. 100%
Selective Way Selective Insurance
Insurance Company New Jersey Group, Inc. 100%
Selective Insurance
Company of the Selective Insurance
Southeast North Carolina Group, Inc. 100%
Selective Insurance
Company of South Selective Insurance
Carolina South Carolina Group, Inc. 100%
Wantage Avenue
Holding Company Selective Insurance
Inc. New Jersey Company of America 100%
Niagara Exchange Selective Insurance
Corporation Delaware Group, Inc. 100%
NIEX Funding
Corporation New York Niagara Exchange Corp. 100%
Selective Insurance
Company of
New York New York Niagara Exchange Corp. 87%
Selective Technical
Administrative Selective Insurance
Resources, Inc. New Jersey Group, Inc. 100%
Selective Way Insurance
Company (75%)
Selective Insurance Company
Alta Services LLC New Jersey of the Southeast (25%) N/A
PAGE
EXHIBIT 23
Consent of Independent Auditors
-------------------------------
The Board of Directors and Stockholders
Selective Insurance Group, Inc.
We consent to the incorporation by reference in Registration Statements (Nos.
333-37501, 333-10465, 333-10477, 33-36368 and 33-14620) on Form S-8, and
Registration Statements (Nos. 2-80881 and 33-28488 and 33-30833) on Form S-3
of Selective Insurance Group, Inc. (the Company) of our reports dated January
22, 1998, relating to the consolidated balance sheets of Selective Insurance
Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity and cash
flows and related schedules for each of the years in the three-year period
ended December 31, 1997, which reports appear in the December 31, 1997 Annual
Report on Form 10-K of Selective Insurance Group, Inc.
/s/ KPMG Peat Marwick LLP
March 27, 1998
Short Hills, New Jersey
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<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
DECEMBER 31, 1997 10K 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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 1,044,390
<DEBT-CARRYING-VALUE> 410,169
<DEBT-MARKET-VALUE> 426,251
<EQUITIES> 222,273
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,725,690
<CASH> 33,798<F1>
<RECOVER-REINSURE> 11,088
<DEFERRED-ACQUISITION> 98,110
<TOTAL-ASSETS> 2,306,191
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<UNEARNED-PREMIUMS> 373,766
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<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 113,959<F3>
0
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<COMMON> 72,728
<OTHER-SE> 492,588
<TOTAL-LIABILITY-AND-EQUITY> 2,306,191
676,268
<INVESTMENT-INCOME> 100,530
<INVESTMENT-GAINS> 6,021
<OTHER-INCOME> 5,562
<BENEFITS> 461,382<F4>
<UNDERWRITING-AMORTIZATION> 211,494
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 91,020
<INCOME-TAX> 21,412
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 69,608
<EPS-PRIMARY> 2.41
<EPS-DILUTED> 2.27
<RESERVE-OPEN> 1,189,793<F5>
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 1,161,169<F2>
<CUMULATIVE-DEFICIENCY> 0
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<F1>EQUALS THE SUM OF SHORT-TERM INVESTMENT AND CASH.
<F2>EQUALS THE SUM OF RESERVE FOR LOSSES AND THE RESERVE FOR LOSS EXPENSES.
EQUALS THE SUM OF RESERVE FOR LOSSES AND RESERVE FOR LOSS EXPENSE AT
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<F3>EQUALS THE SUM OF NOTES PAYABLE, SHORT-TERM DEBT, AND CONVERTIBLE
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<F4>EQUALS THE SUM OF LOSSES INCURRED AND LOSS EXPENSES INCURRED.
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<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED
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</LEGEND>
<RESTATED>
<CIK> 0000230557
<NAME> SELECTIVE INSURANCE GROUP, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 985,372
<DEBT-CARRYING-VALUE> 432,792
<DEBT-MARKET-VALUE> 445,273
<EQUITIES> 161,096
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,623,714
<CASH> 40,022<F1>
<RECOVER-REINSURE> 7,863
<DEFERRED-ACQUISITION> 83,150
<TOTAL-ASSETS> 2,189,737
<POLICY-LOSSES> 1,189,793<F2>
<UNEARNED-PREMIUMS> 332,040
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 103,769<F3>
0
0
<COMMON> 71,644
<OTHER-SE> 402,655
<TOTAL-LIABILITY-AND-EQUITY> 2,189,737
694,947
<INVESTMENT-INCOME> 96,952
<INVESTMENT-GAINS> 2,786
<OTHER-INCOME> 4,287
<BENEFITS> 495,665<F4>
<UNDERWRITING-AMORTIZATION> 213,372
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 69,089
<INCOME-TAX> 13,538
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55,551
<EPS-PRIMARY> 1.92
<EPS-DILUTED> 1.83
<RESERVE-OPEN> 1,120,052<F5>
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 1,189,793<F2>
<CUMULATIVE-DEFICIENCY> 0
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<F2>EQUALS THE SUM OF RESERVE FOR LOSSES AND THE RESERVE FOR LOSS EXPENSES.
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<F4>EQUALS THE SUM OF LOSSES INCURRED AND LOSS EXPENSES INCURRED.
<F5>EQUALS THE SUM OF RESERVE FOR LOSSES AND RESERVE FOR LOSS EXPENSES AT
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