PAGE 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended ..........March 31, 1998............
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from.................to..................
Commission file number: 0-8641
SELECTIVE INSURANCE GROUP, INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-2168890
- - --------------------------- ----------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
40 Wantage Avenue, Branchville, New Jersey 07890
------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
973-948-3000
-------------------------------
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date:
Common stock, par value $2 per share, outstanding as of April 30, 1998:
29,554,543
PAGE 2
PART I FINANCIAL INFORMATION
==============================
Item 1. Financial Statements.
- - ------------------------------
SELECTIVE INSURANCE GROUP, INC.
-------------------------------
Consolidated Balance Sheets
-------------------------------
(dollars in thousands)
(unaudited)
ASSETS March 31 December 31
- - ------ 1998 1997
Investments: ------------ ----------
Debt securities, held-to-maturity -
at amortized cost (fair value of
$423,641-1998; $426,251-1997)......... $ 409,165 410,169
Debt securities, available-for-sale -
at fair value (amortized cost of
$1,010,436-1998; $1,009,060-1997)..... 1,045,618 1,044,390
Equity securities, available-for-sale -
at fair value (cost of
$129,877-1998; $120,602-1997)......... 254,822 222,273
Short-term investments
(at cost which approximates fair value) 16,105 28,781
Other investments - at fair value......... 20,665 20,077
--------- ---------
Total investments ...................... 1,746,375 1,725,690
Cash....................................... 6,373 5,017
Interest and dividends due or accrued ..... 22,565 23,474
Premiums and other receivables............. 210,110 196,786
Reinsurance recoverable on paid losses
and loss expenses..................... 9,781 11,088
Reinsurance recoverable on unpaid losses and
loss expenses......................... 136,788 124,197
Prepaid reinsurance premiums............... 25,425 31,189
Deferred Federal income tax................ - 6,489
Real estate, furniture and equipment....... 47,092 45,465
Deferred policy acquisition costs.......... 103,500 98,110
Excess of cost over fair value of net
assets acquired....................... 17,001 17,337
Other assets............................... 28,080 21,349
--------- ---------
Total assets............................ $ 2,353,090 2,306,191
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- - ------------------------------------
Liabilities:
- - -----------
Reserve for losses......................... $ 997,753 984,393
Reserve for loss expenses.................. 177,161 176,776
Unearned premiums.......................... 383,910 373,766
Convertible subordinated debentures........ 6,819 6,845
Short-term debt ........................... 15,500 17,400
Notes payable.............................. 89,714 89,714
Current Federal income tax................. 4,361 1,747
Deferred Federal income tax................ 2,321 -
Other liabilities ......................... 80,823 90,234
--------- ---------
Total liabilities....................... 1,758,362 1,740,875
--------- ---------
Stockholders' Equity:
- - --------------------
Common stock of $2 par value per share:
Authorized shares-180,000,000
Issued: 36,655,379-1998; 36,363,856-1997 .. 73,311 72,728
Additional paid-in capital................. 35,618 30,450
Accumulated other comprehensive income - net
unrealized gains on available-for-sale
securities, net of deferred income
tax effect............................ 104,083 89,051
Retained earnings.......................... 451,640 439,811
Treasury stock - at cost
(shares: 7,115,075-1998; 7,097,462-1997) (60,245) (59,785)
Deferred compensation expense and notes
receivable from stock sales................ (9,679) (6,939)
--------- ---------
Total stockholders' equity ............. 594,728 565,316
--------- ---------
Total liabilities and stockholders' equity $ 2,353,090 2,306,191
========= =========
See accompanying notes to unaudited consolidated financial statements.
PAGE 3
SELECTIVE INSURANCE GROUP, INC.
================================
Consolidated Statements of Income
(unaudited)
(in thousands, except per share data)
Three months ended
March 31
1998 1997
------ ------
Revenues:
- - --------
Net premiums written.................... $ 188,464 175,184
Net increase in unearned premiums and
prepaid reinsurance premiums ...... (15,908) (4,603)
------- -------
Net premiums earned .................... 172,556 170,581
Net investment income earned............ 25,108 24,432
Net realized gains...................... 1,081 978
Other income............................ 2,191 1,175
------- -------
Total revenues....................... 200,936 197,166
------- -------
Expenses:
- - --------
Losses incurred ........................ 104,206 99,541
Loss expenses incurred.................. 17,333 19,063
Policy acquisition costs................ 54,614 51,653
Dividends to policyholders.............. 1,014 1,205
Interest expense........................ 2,276 2,286
Other expenses.......................... 1,553 1,888
------- -------
Total expenses....................... 180,996 175,636
------- -------
Income before Federal income tax 19,940 21,530
------- -------
Federal income tax expense:
Current................................. 3,268 3,458
Deferred................................ 716 1,371
------- -------
Total Federal income tax
expense............................ 3,984 4,829
------- -------
Net income.............................. $ 15,956 16,701
======= =======
Earnings per share:
- - ------------------
Basic................................ $ 0.55 0.58
Diluted ............................. $ 0.50 0.55
Dividends to stockholders............... $ 0.14 0.14
See accompanying notes to unaudited consolidated financial statements.
PAGE 4
SELECTIVE INSURANCE GROUP, INC.
Consolidated Statements of Cash Flows
(unaudited)
Quarter ended March 31
(in thousands) 1998 1997
---- ----
Operating Activities
- - --------------------
Net income ................................ $ 15,956 16,701
------ ------
Adjustments to reconcile net income to
net cash provided by operating activities:
Decrease in interest and dividends due or
accrued ................................. 909 1,318
Increase in premiums and other receivables. (13,324) (7,181)
Decrease (increase) in reinsurance recoverable
on paid losses and expenses ............. 1,307 (2,693)
Increase (decrease)in reserves for losses and
loss expenses, net of reinsurance recoverable
on unpaid losses and loss expenses....... 1,154 (3,982)
Increase in unearned premiums and prepaid
reinsurance premiums..................... 15,908 4,603
Increase in net Federal income tax payable. 3,330 2,579
Increase in deferred policy acquisition costs (5,390) (2,450)
Depreciation and amortization.............. 2,239 1,904
Net realized gains on investments ......... (1,081) (978)
Other - net ............................... (17,664) (11,255)
------ ------
Net adjustments ........................... (12,612) (18,135)
------ ------
Net cash provided by (used in)
operating activities..................... 3,344 (1,434)
------ ------
Investing Activities
- - --------------------
Purchase of debt securities, held-to-maturity (12,682) (8,980)
Purchase of debt securities,
available-for-sale ...................... (32,913) (59,632)
Purchase of equity securities,
available-for-sale ...................... (11,056) (2,270)
Sale of debt securities, available-for-sale 4,276 16,001
Redemption and maturities of debt securities,
held-to-maturity ........................ 13,692 13,479
Redemption and maturities of debt securities,
available-for-sale ...................... 27,536 5,173
Sale of equity securities, available-for-sale 2,784 2,257
Proceeds of other investments ............. 11 196
Increase in net payable from security
transactions ............................ 904 2,810
Net additions to real estate, furniture and
equipment ............................... (3,094) (814)
------ ------
Net cash used in investing activities ..... $ (10,542) (31,780)
------ ------
PAGE 5
Financing Activities
- - --------------------
Dividends to stockholders ................. $ (4,127) (4,101)
Acquisition of treasury stock ............. (460) (654)
Principal (payment) proceeds from
short-term debt ......................... (1,900) 35,000
Net proceeds from issuance of common stock. 5,726 5,567
Increase in deferred compensation expense and
proceeds received on notes receivable from
stock sales ............................. (3,361) (4,258)
------ ------
Net cash (used in) provided by financing
activities .............................. (4,122) 31,554
------ ------
Net decrease in short-term investments and cash (11,320) (1,660)
Short-term investments and cash at beginning
of year.................................. 33,798 40,022
------ ------
Short-term investments and cash at end
of period ............................... $ 22,478 38,362
====== ======
Supplemental disclosures of cash flow information
- - -------------------------------------------------
Cash paid during the period for:
Interest .................................. $ 2,971 2,368
Federal income tax ........................ 654 2,250
Supplemental schedule of non-cash financing activity:
- - ----------------------------------------------------
Conversion of convertible subordinated
debentures .............................. 26 30
See accompanying notes to unaudited consolidated financial statements.
PAGE 6
Notes to Unaudited Consolidated Financial Statements
- - ----------------------------------------------------
1. Basis of Presentation
---------------------
The interim financial statements are unaudited but reflect all adjustments
which, in the opinion of management, are necessary to provide a fair
statement of the results of the Selective Insurance Group, Inc. and its
consolidated subsidiaries (collectively, the "Company") for the interim
periods presented. References herein to "Selective" are to Selective
Insurance Group, Inc. All such adjustments are of a normal recurring
nature. The results of operations for any interim period are not
necessarily indicative of results for the full year. These financial
statements should be read in conjunction with the financial statements and
notes thereto contained in the Company's annual report on Form 10-K for the
year ended December 31, 1997.
2. Adoption of Accounting Policies
-------------------------------
During the first quarter of 1998, the Company adopted the following
accounting policies:
(a) The American Institute of Certified Public Accountants issued Statement
of Position No. 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal-Use" ("SOP 98-1"). SOP 98-1 provides
guidance on accounting for the costs of computer software developed or
obtained for internal-use and when such costs incurred should and should not
be capitalized. SOP 98-1 is effective for all fiscal years beginning after
December 15, 1998. The provisions of SOP 98-1 should be applied to
internal-use software costs incurred in those fiscal years for all projects,
including those projects in progress upon initial application of the
statement. Earlier application is encouraged in fiscal years for which
annual financial statements have not been issued.
(b) Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income ("FASB 130"), was adopted during the first quarter of
1998. FASB 130 requires the Company to report total comprehensive income in
condensed financial statements of interim periods.
The following is a presentation of the Company's total comprehensive income
for the quarters ended March 31, 1998 and 1997.
(in thousands) Quarter ended March 31
1998 1997
---- ----
Net income $ 15,956 16,701
------ ------
Other comprehensive income (loss),
net of tax:
Unrealized holding gains (losses)
arising during period on available-for-
sale securities, net of tax 15,735 (7,929)
Less: reclassification adjustment for
realized gains, net of tax, included
in net income (703) (636)
------ ------
Other comprehensive income (loss),
net of tax 15,032 (8,565)
------ ------
Total comprehensive income $ 30,988 8,136
====== ======
PAGE 7
3. Reinsurance
-----------
The following is a table of assumed and ceded amounts by income statement
caption:
Quarter ended March 31
(in thousands) 1998 1997
- - -------------------------------------------------------------------------
Net premiums written:
Assumed $ 6,435 7,687
Ceded (14,663) (18,230)
Net premiums earned:
Assumed $ 5,474 5,795
Ceded (20,427) (20,526)
Losses incurred:
Assumed $ 4,826 3,121
Ceded (1) (15,968) (3,423)
Loss expenses incurred:
Assumed $ 480 489
Ceded (958) (384)
(1) The increase in ceded losses incurred for the first quarter of 1998
mainly reflected flood claims, in 1998, which generated reinsurance
loss recoveries in the first quarter of 1998 of $7 million. The
flood business is ceded 100% to the National Flood Insurance Program
and therefore, the Company is a servicer of this type of insurance
and bears no risk of policyholder loss.
4. Lines of Credit
---------------
At March 31, 1998 and March 31, 1997, there was $15.5 million and $35
million, respectively, of short-term debt outstanding under the two lines
of credit that the Company has available; the weighted average interest
rate on these borrowings was 5.9% and 5.5% for the respective periods.
5. 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.
6. Reclassifications
-----------------
Certain amounts in the Company's prior year consolidated financial
statements have been reclassified to conform with the 1998 presentation.
Such reclassification had no effect on the Company's net income or
stockholders' equity.
PAGE 8
Forward-looking statements
- - --------------------------
This quarterly report on Form 10-Q contains certain statements that
are not historical facts and are considered "forward-looking statements"
(as defined in the Private Securities Litigation 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.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
---------------------------------------------------------------
The following discussion relates to the Company's results of operations,
financial condition and liquidity for the interim periods indicated.
References herein to the "Company" are references to Selective Insurance
Group, Inc. and its consolidated subsidiaries, collectively. References
herein to "Selective" are to Selective Insurance Group, Inc.
Results of Operations
- - ---------------------
Comparison of First Quarter of 1998 to First Quarter of 1997
- - ------------------------------------------------------------
Revenues
- - --------
Net premiums written for the first quarter of 1998 increased 8%, or
$13 million, over the same period in 1997. This growth reflected an
increase of 10%, or $11 million, of net premiums written in the commercial
Strategic Business Units ("SBU"), and a modest increase of 3%, or $2
million, in the personal lines SBU net premiums. The 8% increase in net
premiums written recorded for the first quarter of 1998 translated into a
modest increase in total net premiums earned of 1%, or $2 million, in the
first quarter of 1998 compared to the same period in 1997.
The increase in commercial SBUs net premiums written in the first quarter
of 1998 was in all commercial SBUs except for public entities. This
increase reflected $41 million of net premiums written from new business
in the commercial SBUs for the quarter ended March 31, 1998, a 43% increase
compared to the same period in 1997. This growth in new business was
primarily due to an increase in staffing of field underwriters (the key
contact between the independent agent and the Company) and the Company's
Midwestern expansion. The additional new business premiums written were
offset primarily by: (i) rate reductions and credits of approximately
$6 million due to competition and improving loss trends; (ii) a reduction
in renewal premiums of $4 million due to agency terminations; and (iii) a
reduction in some existing business due to the current competitive
conditions, re-evaluation of certain underwriting risks, and other factors.
The $2 million increase in the personal lines SBU net premiums written in
the first quarter of 1998 reflected the reduction in the New Jersey
Homeowners Quota Share Reinsurance Program from 85% to 75% and the removal
of all homeowners liability premium from this program. These changes
resulted in a $6 million increase in homeowners net premiums written ($4
million of which was due to a one-time adjustment reflecting the buy out
of the ceded
Page 9
reinsurance unearned premium reserves from the previous year program).
This increase was partially offset by a reduction in personal automobile
net premiums written of $4 million mainly in New Jersey due to a reduction
in existing business resulting from competition and re-evaluation of
certain underwriting risks.
Net investment income earned for the first quarter of 1998 increased 3%, or
$.7 million, over the same period in 1997. The modest increase was derived
primarily from investments which generate income, in part, from changes in
market value. In addition, investments acquired from cash provided by
operating activities during 1997 generated additional 1998 investment
income. The growth in investment income was partially offset by redemptions
and maturities of higher yielding debt securities reinvested at lower fixed
income yields currently available in the marketplace during the first
quarter of 1998 and throughout 1997. These factors reduced the Company's
overall annualized investment yield for the quarter to 5.9% for 1998, down
from 6.1% for the same period in 1997.
Expenses
- - --------
The ratio of losses and loss expenses incurred to net premiums earned for
the first quarter of 1998 was 70.5%, compared to 69.5% for the first quarter
of 1997. The first quarter of 1998 loss and loss expense ratio included
1998 ice storm damage claims which primarily impacted the habitational and
recreational, mercantile and service, and personal lines SBUs. These
weather-related claims, in excess of $1 million, increased the loss and
loss expense ratio by .7 points for the first quarter of 1998.
Overall, the commercial SBUs loss and loss expense ratio increased by
.9 points. This .9 point increase included .7 points of 1998 ice storm
damage claims. Excluding the effects of the 1998 weather-related claims,
the commercial SBUs loss and loss expense ratio increased by .2 points.
This increase is attributable to unfavorable results in the commercial
automobile line of insurance in most of the SBUs, which increased the total
commercial SBUs loss and loss expense ratio by 3.4 points. The adverse
results in this line of insurance were mainly due to a few severe claims
and a slight increase in frequency of claims. The Company has been
reviewing this line of insurance, which include pricing analysis,
loss control and in some cases re-evaluating risk selection. Partially
offsetting the commercial automobile results were improvements in the
general liability and commercial property lines of insurance in most of the
commercial SBUs.
The personal lines SBU loss and loss expense ratio increased by 1.6 points.
This 1.6 point increase included .7 points of 1998 ice storm damage claims.
Excluding the impact of the 1998 weather-related storms, the personal lines
SBU loss and loss expense ratio increased mainly due to a few severe
personal automobile claims during the first quarter of 1998.
There is an excess profits law in New Jersey, which sets a maximum profit
level on personal automobile insurance. Under New Jersey regulations, an
insurer's excess profits earned on direct insurance written in New Jersey on
private passenger automobiles, as determined pursuant to an actuarial
formula
PAGE 10
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.
For the three-year period ended December 31, 1997, the Company does not
believe it will incur an obligation to make an excess profit premium
refund. However, 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 in the future. The
Company considers the potential effect of such excess profits in
establishing its reserves.
The New Jersey legislature has proposed personal automobile insurance
reform legislation which, if enacted, will be effective as of January 1,
1999. The Company presently anticipates the legislative proposal will be
adopted substantially in its current form. The proposed legislation is
expected to reduce average statewide automobile insurance premiums by 15%,
with the greatest reductions being applicable to liability-only policies.
The Company anticipates that, if the proposed legislation is enacted,
its New Jersey personal automobile direct premiums written will be reduced
between 11% and 12%, or approximately $17 million. This is less than the
average of 15% because a higher proportion of Selective's policies provide
physical damage coverage, on which the rate reduction will be lower.
The proposed legislation also contains provisions that are intended to
generate savings to the insurance industry. The Company believes that the
effect on its overall financial results due to the loss of premiums as a
result of rate reductions will be partially offset by proposed changes
included in the legislation, including: (i) changes in the state's no-fault
law; (ii) increased fraud prosecution initiatives; and (iii) the elimination
of unnecessary medical tests and the use of medical fee schedules that
should reduce loss and loss expenses.
The Company is currently unable to estimate the extent of such savings and
believes the new law will not significantly impact its overall after-tax
financial results for a number of reasons. These reasons include a
concurrent reduction in policy acquisition costs (commissions, premium taxes,
etc.) with lower premium volume, and lower costs as a result of the savings
provisions included in the proposed legislation. In addition, the reduction
in premiums written as a result of the proposed legislation should reduce the
possibility of a future NJ Excess Profits premium refund obligation, and no
related provision will therefore be required.
The ratio of policy acquisition costs to net premiums earned for the first
quarter of 1998 increased to 31.7% from 30.3% for the same period in 1997.
The ratio primarily reflects an increase in the relationship of commission
expense and labor costs expressed as a percentage of net premiums earned,
which added approximately .9 points and .5 points, respectively, to the
ratio. Labor costs increased primarily due to the Company's focus on net
premiums
Page 11
written growth which resulted in hiring approximately 30 addtional persons
to increase field underwriting and the support for the Company's expansion
into the Midwest. Commission expenses increased as a percentage of net
premiums earned primarily due to: (i) commission incentives to agents to
increase profitable business with the Company which resulted in an increase
of .3 points; (ii) an increase in the proportion of commercial premiums as
a percentage of total net premiums written which pay a higher commission
rate than personal lines and resulted in a .2 point increase; and
(iii) a reduction to the New Jersey Homeowners Quota Share Reinsurance
Program which reduced the Company's level of commission expense
reimbursement, and resulted in a .4 point increase.
Total Federal income tax expense decreased by $1 million to $4 million for
the first quarter of 1998 compared to $5 million for the first quarter of
1997. The Company's effective tax rate was 20.0% for the first quarter of
1998, compared with 22.4% for the first quarter of 1997. The Company's
effective tax rate differs from the Federal corporate rate of 35% primarily
as a result of the tax-exempt investment income. The effective tax rate for
the first quarter of 1998 was lower than the first quarter of 1997, mainly
due to the higher level of underwriting losses in 1998.
Income
- - ------
The table below shows operating income, net realized gains, and net income,
including per diluted share amounts for the quarters ended March 31, 1998
and 1997.
- - -----------------------------------------------------------------------------
Quarter ended
($ in thousands, March 31
except for per share data) 1998 1997
- - -----------------------------------------------------------------------------
Operating income, excluding
net realized gains
(net of tax) $ 15,253 16,065
Net realized gain,
net of tax 703 636
Net income 15,956 16,701
Per diluted share:
Operating income .48 .53
Net realized gain .02 .02
Net income .50 .55
- - ----------------------------------------------------------------------------
Page 12
Financial Condition, Liquidity and Capital Resources
- - ----------------------------------------------------
Selective is an insurance holding company whose principal assets are its
investments in its insurance subsidiaries. As an insurance holding company,
Selective meets its cash requirements through proceeds from the sales of the
Company's common stock and dividends from its insurance subsidiaries, the
payments of which are subject to state regulatory requirements.
The overall obligations and cash outflow of the Company include: claim
settlements; commissions; labor costs; premium taxes; general and
administrative expenses; investment purchases; interest expenses; capital
expenditures with respect to the Company's automation program; principal
payments on the senior notes and dividends to policyholders and
stockholders. The insurance subsidiaries satisfy their obligations and cash
outflow through premium collections, interest and dividend income and
maturities. Cash generated by operating activities is historically low
during the first quarter due to cash incentives paid to agents and
employees, reinsurance program initial deposits and final settlement of
previous year state premium taxes and assessments. For the quarter ended
March 31, 1998, cash provided by operating activities amounted to $3 million
compared to cash used in operating activities of $1 million for the same
period in 1997. The Company expects to generate cash from operations over
the balance of the year.
Total assets increased 2%, or $47 million from December 31, 1997 to
March 31, 1998. The growth was due to: (i) an increase in total
investments of $21 million which is primarily attributable to a
$23 million increase in unrealized gains on available-for-sale securities;
(ii) an increase in premiums and other receivables of $13 million and
deferred policy acquisition costs (policy acquisition costs which are
deferred and amortized over the life of the policy period) of $5 million
primarily due to the increased premium volume; and (iii) a $13 million
increase in reinsurance recoverable on unpaid losses and loss expenses
mainly due to flood loss reserve increases of $6 million. This was offset
by a $6 million decrease in the deferred Federal income tax asset which
mainly reflected the associated deferred taxes on the increase in
unrealized gains on available-for-sale securities.
The rise in total liabilities of 1%, or $17 million, from December 31, 1997
to March 31, 1998 was mainly attributable to increases in reserves for
losses and loss expenses of $14 million due to an increase in outstanding
reserves for first quarter 1998 flood losses of $6 million and normal
reserve increases associated with the growth in business. Also contributing
to the overall increase in total liabilities was an increase in unearned
premiums of $10 million, due to the increase in net premiums written. These
increases were partially offset by a $9 million decrease in other
liabilities which reflected the payment of 1997 profit sharing incentives to
employees and agents during the first quarter of 1998.
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
Page 13
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
significantly participate in these markets, nor does it significantly write
E&O and D&O coverage types. However, the Company anticipates that there may
be "Year 2000" claims by its insureds resulting from malfunctioning
technology, which cannot be quantified at this time.
The Company does not presently anticipate that costs incurred for the
"Year 2000" will be significant or that "Year 2000" issues will have a
material impact on its results of operations or financial condition.
Page 14
Part II OTHER INFORMATION
- - --------------------------
Item 6. Exhibits and Reports on Form 8-K
- - -----------------------------------------
(a) Exhibits:
The exhibits required by Item 601 of Regulation S-K are listed in
the Exhibit Index, which immediately precedes the exhibits filed
with this Form 10-Q.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the period covered
by this report.
PAGE 15
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SELECTIVE INSURANCE GROUP, INC.
-------------------------------
Registrant
Date: May 15, 1998
By: /s/Gregory E. Murphy
-------------------------------------
Gregory E. Murphy,
President and
Chief Operating Officer
Date: May 15, 1998
By: /s/David B. Merclean
-------------------------------------
David B. Merclean,
Senior Vice President and
Chief Financial Officer
PAGE 16
SELECTIVE INSURANCE GROUP, INC.
INDEX TO EXHIBITS
Exhibit No.
11 Statement Re Computation of per Share Earnings
27 Financial Data Schedule
EXHIBIT 11
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
Three-months ended March 31,1998 and 1997
(in thousands, except per Income Shares Per Share
share amounts) (Numerator) (Denominator) Amount
- - ---------------------------------------------------------------------
1998
- - ----
Basic EPS
Net Income available
to common stockholders $ 15,956 28,956 $ 0.55
====
Effect of Dilutive Securities
Restricted stock - 489
8.75% convertible
subordinated debentures 99 963
Stock Options (572) 707
------ ------
Diluted EPS
Income available to common
stockholders + assumed
conversions $ 15,483 31,115 $ 0.50
====== ====== ====
- - ------------------------------------------------------------------------
1997
- - ----
Basic EPS
Net Income available
to common stockholders $ 16,701 28,834 $ 0.58
====
Effect of Dilutive Securities
Restricted stock - 425
8.75% convertible
subordinated debentures 100 972
Stock Options 3 514
------ ------
Diluted EPS
Income available to common
stockholders + assumed
conversions $ 16,804 30,745 $ 0.55
====== ====== ====
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
MARCH 31, 1998 10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000230557
<NAME> SELECTIVE INSURANCE GROUP, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 1,045,618
<DEBT-CARRYING-VALUE> 409,165
<DEBT-MARKET-VALUE> 423,641
<EQUITIES> 254,822
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,746,375
<CASH> 22,478<F1>
<RECOVER-REINSURE> 9,781
<DEFERRED-ACQUISITION> 103,500
<TOTAL-ASSETS> 2,353,090
<POLICY-LOSSES> 1,174,914<F2>
<UNEARNED-PREMIUMS> 383,910
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 112,033<F3>
0
0
<COMMON> 73,311
<OTHER-SE> 521,417
<TOTAL-LIABILITY-AND-EQUITY> 2,353,090
172,556
<INVESTMENT-INCOME> 25,108
<INVESTMENT-GAINS> 1,081
<OTHER-INCOME> 2,191
<BENEFITS> 121,539<F4>
<UNDERWRITING-AMORTIZATION> 54,614
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 19,940
<INCOME-TAX> 3,984
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,956
<EPS-PRIMARY> .55
<EPS-DILUTED> .50
<RESERVE-OPEN> 1,161,169<F5>
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 1,174,914
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>EQUALS THE SUM OF SHORT-TERM INVESTMENT AND CASH.
<F2>EQUALS THE SUM OF RESERVE FOR LOSSES AND THE RESERVE FOR LOSS EXPENSE AT
THE END OF THE PERIOD.
<F3>EQUALS THE SUM OF NOTES PAYABLE, SHORT-TERM DEBT, AND CONVERTIBLE
SUBORDINATED DEBENTURES.
<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
THE BEGINNING OF THE YEAR.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE MARCH 31, 1997 10Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<CIK> 0000230557
<NAME> SELECTIVE INSURANCE GROUP, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 1,006,919
<DEBT-CARRYING-VALUE> 428,238
<DEBT-MARKET-VALUE> 436,606
<EQUITIES> 166,027
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,646,475
<CASH> 34,953
<RECOVER-REINSURE> 10,556
<DEFERRED-ACQUISITION> 85,600
<TOTAL-ASSETS> 2,217,993
<POLICY-LOSSES> 1,177,788<F1>
<UNEARNED-PREMIUMS> 334,347
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 138,739<F2>
0
0
<COMMON> 72,184
<OTHER-SE> 407,414
<TOTAL-LIABILITY-AND-EQUITY> 2,217,993
170,581
<INVESTMENT-INCOME> 24,432
<INVESTMENT-GAINS> 978
<OTHER-INCOME> 1,175
<BENEFITS> 118,604<F3>
<UNDERWRITING-AMORTIZATION> 51,653
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 21,530
<INCOME-TAX> 4,829
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,701
<EPS-PRIMARY> .58
<EPS-DILUTED> .55
<RESERVE-OPEN> 1,189,793<F4>
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 1,177,788<F5>
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>EQUALS THE SUM OF RESERVE FOR LOSSES AND THE RESERVE FOR LOSS EXPENSES.
<F2>EQUALS THE SUM OF NOTES PAYABLE, SHORT-TERM DEBT, AND CONVERTIBLE
SUBORDINATED DEBENTURES.
<F3>EQUALS THE SUM OF LOSSES INCURRED AND LOSS EXPENSES INCURRED.
<F4>EQUALS THE SUM OF RESERVE FOR LOSSES AND RESERVE FOR LOSS EXPENSES AT
THE BEGINNING OF THE YEAR.
<F5>EQUALS THE SUM OF RESERVE FOR LOSSES AND RESERVE FOR LOSS EXPENSES AT
THE END OF THE PERIOD.
</FN>
</TABLE>
