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, 1999............
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, 1999:
27,989,766
PAGE 2
SELECTIVE INSURANCE GROUP, INC.
-------------------------------
Consolidated Balance Sheets
-------------------------------
(dollars in thousands, except share amounts)
Unaudited Audited
ASSETS March 31 December 31
- ------ 1999 1998
Investments: ------------ ----------
Debt securities, held-to-maturity -
at amortized cost (fair value of
$341,192-1999; $373,179-1998)......... $ 328,699 358,380
Debt securities, available-for-sale -
at fair value (amortized cost of
$1,083,833-1999; $1,033,628-1998)..... 1,113,142 1,075,276
Equity securities, available-for-sale -
at fair value (cost of
$135,570-1999; $135,758-1998)......... 265,847 269,991
Short-term investments
-at cost which approximates fair value 13,086 50,905
Other investments - at fair value......... 16,015 16,087
--------- ---------
Total investments ...................... 1,736,789 1,770,639
Cash....................................... 6,954 7,931
Interest and dividends due or accrued ..... 22,166 22,537
Premiums and other receivables............. 256,841 240,125
Reinsurance recoverable on paid losses
and loss expenses..................... 13,352 11,495
Reinsurance recoverable on unpaid losses and
loss expenses......................... 138,971 140,453
Prepaid reinsurance premiums............... 30,541 31,685
Real estate, furniture and equipment....... 51,065 50,950
Deferred policy acquisition costs.......... 114,154 109,774
Goodwill................................... 20,362 20,391
Other assets............................... 37,802 26,188
--------- ---------
Total assets............................ $ 2,428,997 2,432,168
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Liabilities:
- -----------
Reserve for losses......................... $ 1,022,243 1,014,386
Reserve for loss expenses.................. 179,452 178,888
Unearned premiums.......................... 413,697 400,143
Convertible subordinated debentures........ 6,191 6,219
Short-term debt ........................... 29,792 28,287
Notes payable.............................. 82,572 82,572
Current Federal income tax................. 3,652 86
Deferred Federal income tax................ 529 7,226
Other liabilities ......................... 95,479 106,778
--------- ---------
Total liabilities....................... 1,833,607 1,824,585
--------- ---------
Stockholders' Equity:
- --------------------
Common stock of $2 par value per share:
Authorized shares-180,000,000
Issued: 37,674,488-1999; 37,416,237-1998 .. 75,349 74,833
Additional paid-in capital................. 49,107 45,449
Retained earnings.......................... 487,195 477,118
Accumulated other comprehensive income..... 103,731 114,323
Treasury stock - at cost
(shares: 9,586,250-1999; 8,892,335-1998) (111,382) (97,990)
Deferred compensation expense and notes
receivable from stock sales................ (8,610) (6,150)
--------- ---------
Total stockholders' equity ............. 595,390 607,583
--------- ---------
Total liabilities and stockholders' equity $ 2,428,997 2,432,168
========= =========
See accompanying notes to unaudited consolidated financial statements.
PAGE 3
SELECTIVE INSURANCE GROUP, INC.
================================
Consolidated Statements of Income
(dollars in thousands, except per share amounts)
Unaudited
Three months ended
March 31
1999 1998
------ ------
Revenues:
- --------
Net premiums written.................... $ 207,725 188,464
Net increase in unearned premiums and
prepaid reinsurance premiums ...... (14,697) (15,908)
------- -------
Net premiums earned .................... 193,028 172,556
Net investment income earned............ 23,473 25,108
Net realized gains...................... 8,597 1,081
Fee-for-service revenue................. 8,882 3,010
Other income............................ 725 867
------- -------
Total revenues....................... 234,705 202,622
------- -------
Expenses:
- --------
Losses incurred ........................ 125,534 104,206
Loss expenses incurred.................. 18,348 17,472
Policy acquisition costs................ 60,351 54,872
Dividends to policyholders.............. 1,861 1,014
Interest expense........................ 2,162 2,276
Fee-for-service expenses................ 8,246 2,752
Other expenses.......................... 1,529 90
------- -------
Total expenses....................... 218,031 182,682
------- -------
Income before Federal income tax 16,674 19,940
------- -------
Federal income tax expense (benefit):
Current................................. 3,573 3,268
Deferred................................ (922) 716
------- -------
Total Federal income tax
expense............................ 2,651 3,984
------- -------
Net income.............................. $ 14,023 15,956
======= =======
Earnings per share:
- ------------------
Basic................................ $ 0.50 0.55
Diluted ............................. $ 0.48 0.50
Dividends to stockholders............... $ 0.14 0.14
See accompanying notes to unaudited consolidated financial statements.
PAGE 4
SELECTIVE INSURANCE GROUP, INC.
===============================
Consolidated Statements of Stockholders' Equity
(dollars in thousands, except per share amounts)
Unaudited Unaudited
March 31 March 31
1999 1998
-------- --------
Common stock:
Beginning of year....................... $ 74,833 $ 72,728
Dividend reinvestment plan
(shares: 15,690 - 1999; 10,488 - 1998).. 31 21
Convertible subordinated debentures
(shares: 3,954 - 1999; 3,671 - 1998).... 8 7
Stock purchase and compensation plans
(shares: 238,607 - 1999; 277,364 - 1998) 477 555
------ ------
End of period........................... 75,349 73,311
------ ------
Additional paid-in capital:
Beginning of year....................... 45,449 30,450
Dividend reinvestment plan.............. 258 264
Convertible subordinated debentures..... 11 18
Stock purchase and compensation plans... 3,389 4,886
------ ------
End of period........................... 49,107 35,618
------ ------
Retained earnings:
Beginning of year....................... 477,118 439,811
Net income.............................. 14,023 14,023 15,956 15,956
Cash dividends to stockholders
($.14 per share)....................... (3,946) (4,127)
------- -------
End of period........................... 487,195 451,640
------- -------
Accumulated other comprehensive income:
Beginning of year....................... 114,323 89,051
Other comprehensive income-increase
(decrease) in net unrealized gains on
available-for-sale securities, net of
deferred income tax effect............ (10,592)(10,592) 15,032 15,032
------- ------ ------ ------
End of period........................... 103,731 104,083
Comprehensive income 3,431 30,988
===== ======
Treasury stock:
Beginning of year....................... (97,990) (59,785)
Acquisition of treasury stock
(shares: 693,915 - 1999; 17,613 - 1998). (13,392) (460)
------- ------
End of period........................... (111,382) (60,245)
------- ------
Deferred compensation expense and notes
receivable from stock sales:
Beginning of year....................... (6,150) (6,939)
Deferred compensation expense........... (3,048) (3,413)
Amortization of deferred compensation
expense and amounts received on notes.. 588 673
------- ------
End of period........................... (8,610) (9,679)
------- ------
Total stockholders' equity
(per share: $21.20 - 1999; $20.13 - 1998.$ 595,390 594,728
======= =======
PAGE 5
SELECTIVE INSURANCE GROUP, INC.
Consolidated Statements of Cash Flows
Unaudited
Three months ended March 31
(dollars in thousands) 1999 1998
---- ----
Operating Activities
- --------------------
Net income ................................ $ 14,023 15,956
------ ------
Adjustments to reconcile net income to
net cash provided by operating activities:
Decrease in interest and dividends due or
accrued ................................. 371 909
Increase in premiums and other receivables. (16,716) (13,324)
(Increase) decrease in reinsurance recoverable
on paid losses and loss expenses ........ (1,857) 1,307
Increase in reserves for losses and
loss expenses, net of reinsurance recoverable
on unpaid losses and loss expenses....... 9,903 1,154
Increase in unearned premiums, net of prepaid
reinsurance premiums..................... 14,698 15,908
Decrease in net Federal income tax ........ 2,573 3,330
Increase in deferred policy acquisition costs (4,380) (5,390)
Depreciation and amortization.............. 2,339 2,239
Net realized gains on investments ......... (8,597) (1,081)
Other - net ............................... (11,643) (17,664)
------ ------
Net adjustments ........................... (13,309) (12,612)
------ ------
Net cash provided by operating activities.. 714 3,344
------ ------
Investing Activities
- --------------------
Purchase of debt securities, held-to-maturity - (12,682)
Purchase of debt securities,
available-for-sale ...................... (75,323) (32,913)
Purchase of equity securities,
available-for-sale ...................... (2,840) (11,056)
Purchase of other investments.............. (31) -
Sale of debt securities, available-for-sale 22,026 4,276
Redemption and maturities of debt securities,
held-to-maturities....................... 29,685 13,692
Redemption and maturities of debt securities,
available-for-sale ...................... 3,018 27,536
Sale of equity securities, available-for-sale 11,646 2,784
Proceeds from other investments ........... 103 11
(Decrease) increase in net payable for security
transactions ............................ (11,279) 904
Net additions to real estate, furniture and
equipment ............................... (1,841) (3,094)
------ ------
Net cash used in investing activities...... $ (24,836) (10,542)
------ ------
See accompanying notes to unaudited consolidated financial statements.
PAGE 6
SELECTIVE INSURANCE GROUP, INC.
Consolidated Statements of Cash Flows, continued
Unaudited
Three months ended March 31
(dollars in thousands) 1999 1998
---- ----
Financing Activities
- --------------------
Dividends to stockholders ................. $ (3,946) (4,127)
Acquisition of treasury stock ............. (13,392) (460)
Proceeds (payment) from short-term debt ... 1,505 (1,900)
Net proceeds from dividend reinvestment plan 289 285
Net proceeds from stock purchase and
compensation plans....................... 3,866 5,441
Increase in deferred compensation expense and
proceeds received on notes receivable from
stock sales ............................. (2,996) (3,361)
------ ------
Net cash used in by financing activities... (14,674) (4,122)
------ ------
Net decrease in short-term investments and cash (38,796) (11,320)
Short-term investments and cash at beginning
of year.................................. 58,836 33,798
------ ------
Short-term investments and cash at end
of period ............................... $ 20,040 22,478
====== ======
Supplemental disclosures of cash flow information
- -------------------------------------------------
Cash paid during the period for:
Interest .................................. $ 3,028 2,971
Federal income tax ........................ - 654
Supplemental schedule of non-cash financing activity:
- ----------------------------------------------------
Conversion of convertible subordinated
debentures .............................. 28 26
See accompanying notes to unaudited consolidated financial statements.
PAGE 7
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, 1998.
2. Reclassifications
Certain amounts in the Company's prior year consolidated financial
statements have been reclassified to conform with the 1999 presentation.
Such reclassification had no effect on the Company's net income or
stockholders' equity.
3. Current Accounting Pronouncements
---------------------------------
In June of 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No, 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FASB 133"). FASB 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, (collectively
referred to as derivatives) and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999, earlier application is encouraged, but it is
permitted only as of the beginning of any fiscal quarter that begins after
issuance of this statement. This Statement should not be applied
retroactively to financial statements of prior periods. The Company does
not currently invest in derivative securities, therefore the adoption of
this statement is not expected to have a material effect on the Company's
results of operations or financial condition.
PAGE 8
4. Segment Information
-------------------
The following summary presents revenues (net investment income in the case
of the investments segment) and pretax income for the individual segments:
(in thousands) 1999 1998
- ----------------------------------------------------------------
Income Income
Revenue (loss) Revenue (loss)
- ----------------------------------------------------------------
Commercial Lines
Underwriting $136,772 (12,265) 118,835 (5,003)
Personal Lines
Underwriting 56,256 (614) 53,721 206
Investments 23,473 23,473 25,108 25,108
Fee-for-service
Operations 8,882 636 3,010 258
------- ------- ------- -------
Totals $225,383 11,230 200,674 20,569
======= ======= ======= =======
Net realized on gains
on investments 8,597 1,081
Interest expense (2,162) (2,276)
General corporate
(expenses)/income (991) 566
Income before ------- -------
Federal income tax $ 16,674 19,940
======= =======
PAGE 9
5. Reinsurance
-----------
The following is a table of assumed and ceded amounts by income statement
caption:
Quarter ended March 31
(in thousands) 1999 1998
- -------------------------------------------------------------------------
Net premiums written:
Assumed $ 7,803 6,435
Ceded (18,204) (14,663)
Net premiums earned:
Assumed $ 6,659 5,474
Ceded (19,347) (20,427)
Losses incurred:
Assumed $ 4,420 4,826
Ceded (14,386) (15,968)
Loss expenses incurred:
Assumed $ 621 480
Ceded (45) (958)
6. Lines of Credit
---------------
At March 31, 1999 and March 31, 1998, there was $29.8 million and
$15.5 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 5.3% and 6.0% for the respective
periods.
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.
PAGE 10
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
- ---------------------
The following discussion is a comparison of the Quarter Ended March
31,1999("First Quarter 1999") to the Quarter Ended March 31, 1998 ("First
Quarter 1998").
Revenues
- --------
Net premiums increased $19 million, or 10.2%, during the First Quarter 1999
as compared to the same period in 1998. These results reflect $56 million in
new business, partially offset by premiums lost due to a highly competitive
commercial lines marketplace and premiums non-renewed as a result of the
Company's regular review of its business.
The increase in 1999 net premiums written resulted in an increase in net
premiums earned. After an insurance policy is sold, net premiums written
are recorded for the sales transaction and then earned over the life of the
insurance policy (which is generally a one-year term). The growth in the
1999 net premiums written resulted in an increase of 12%, or $20 million in
net premiums earned for the First Quarter 1999 when compared with the same
period in 1998.
Industry Segments
- -----------------
The Company is primarily engaged in writing property and casualty insurance.
The Company has classified its business into four segments, each of which is
managed separately. The four segments are commercial lines, personal lines,
investments, and fee-for-service. All segments are evaluated based on their
underwriting or operating results, which are prepared using the accounting
policies described in Note 1 on pages 32, 33 and 34 of the 1998 Annual
Report, incorporated herein by reference.
Commercial Lines Insurance
The commercial lines segment consists of six Strategic Business
Units ("SBUs") which account for approximately 72% of net premiums written
during the First Quarter 1999. Net premiums increased $17 million, or 12.7%
during this period resulting from increases in all commercial SBUs. These
results reflect $43
PAGE 11
million in new business, partially offset by premiums lost due to a highly
competitive commercial lines marketplace and premiums non-renewed as a
result of the Company's regular review of its business. The development of
new business is primarily due to the Company's increase in the number of
field underwriters (the key contact between the independent agent and the
Company), the Company's Midwestern expansion and the Company's strengthening
of agency relationships.
For the First Quarter 1999 the Commercial Lines statutory combined ratio
was 108.2%, up over the First Quarter 1998. The 1999 results reflected
weather-related catastrophe losses of $3.8 million, which increased
the ratio by 2.8 points, as well as increased severe property losses of
approximately $3.3 million, which increased the ratio by 2.4 points over the
prior year.
Personal Lines Insurance
The Personal Lines SBU net premiums written increased $3 million, or 4.5%,
for the First Quarter 1999. This change was driven by new business written
of $13 million, partially offset by premiums lost due to competitive
reasons. In the First Quarter of 1998, a change in New Jersey Homeowners
Quota Share Reinsurance Program increased premiums by $4 million. Excluding
this buy-out, personal lines net premiums written increased $7 million, or
13.4%.
For the First Quarter 1999, the Personal Lines SBU statutory combined ratio
was 101.8%, up 2.8 points, over First Quarter 1998. The personal lines
underwriting ratio increased 1.5 points to 26.1%. This is due primarily to
an increase in expenses relating to the expansion of personal lines in
several states outside New Jersey.
Investments
Net investment income earned for the First Quarter 1999 decreased 6.5%, or
$1.6 million, compared to the same period in 1998. The decrease was driven
by: 1) redemptions and maturities of higher yielding debt securities
reinvested at lower fixed income yields currently available in the
marketplace; 2) a decrease in available cash due to the stock repurchase
program and 3) a decreased cash flow due to acceleration of claim
settlements, a 1998 change to pay commissions and a shift by customers
toward multiple pay plans. The Company's overall annualized pre-tax
investment yield decreased to 5.6% for First Quarter 1999 down from 5.9%
for the same period in 1998.
Net Capital Gains increased $4.9 million to $5.6 million for the First
Quarter 1999 due to the sale of equity securities as a result of the
Company's regular review of the investment portfolio.
PAGE 12
Fee-For-Service
In addition to its risk-bearing insurance activities, the Company also
provides insurance-related services 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, avail itself of
market opportunities created by the movement of insureds to alternative
market products, and reduce the impact on its business resulting from
underwriting cycles and weather-related catastrophe losses. The net revenues
and pre-tax income of the fee-for-service businesses are shown in the table
below.
The Company is in the process of expanding its Flood operations to all
states in 1999, and is internally developing its own processing system to
rate and issue policies over the internet. When completed in 1999, the
system will eliminate the need to purchase support services from an outside
vendor and result in overall savings. This system will also then be made
available for the use of other companies through the marketing activities
of PDA Computer Services, either on a processing fee basis or through a
license agreement. The Company has also appointed 1,200 new flood-only
agents, expanded its marketing program, and began placing representatives
in the field to work closely with our agents.
Alta Services manages workers' compensation and automobile medical claims
on a non-riskbearing basis for the underwriting subsidiaries of the Company,
for unrelated companies, and for self-insured businesses. Alta offers a
full array of medical management services and creates new products as
opportunities are presented, including, for example, medical pre-
certifications required under the new personal automobile law in New Jersey.
SelecTech provides third party administrative services to self-insured
accounts, and works closely with Alta Services to provide risk management
alternative solutions.
PDA Software Services is a software developer acquired in December, 1998,
which specializes in the insurance industry, and which also provides
processing services to public and private sector organizations. The Company
purchased PDA to serve as a distribution and processing services platform in
connection with its flood and other systems initiatives. Consequently, its
net revenues and operating results are not anticipated to reflect these new
initiatives until after 1999. The pre-tax profits of PDA for the first
quarter reflected charges totalling $340,000 for goodwill and retention
bonuses intended to retain key PDA personnel. The retention bonuses will
continue as charges against income through 2002.
Page 13
Quarter ended March 31, Quarter ended March 31,
(in thousands) 1999 1998
- --------------------------------------------------------------------------
Net Pre-tax Net Pre-tax
Revenue Profit Revenue Profit
------- ------- ------- -------
Flood $ 1,927 $ 360 $1,685 $ 397
Alta Services 1,655 347 1,158 (111)
SelecTech 216 63 167 (28)
PDA Software
Services 5,084 (134) - -
------- ------- ------ -----
Totals $ 8,882 $ 636 $3,010 $ 258
======= ======= ====== =====
Expenses
- --------
The ratio of losses and loss expenses incurred to net premiums earned for
the First Quarter of 1999 was 74.8%, compared to 70.6% for the first
quarter of 1998. The First Quarter 1999 loss and loss expenses included
weather-related catastrophe claims of $4 million and a $3.3 million
increase in severe property losses (before-tax), which increased the loss
and loss expense ratio by 2.2 points and 1.7 points, respectively. The
weather-related losses primarily impacted the Habitational & Recreational
and Mercantile & Service SBU's.
Overall, the commercial lines loss and loss expense ratio increased by
5.5 points. The increase for the first quarter of 1999 reflected weather-
related catastrophe claims of $4 million that added 2.8 points, and
increased large commercial property losses of $3.3 million that added 1.7
points. The majority of these large, non-catastrophe property losses were on
policies in force two years or more and in the primary operating territories
of New York, New Jersey, Pennsylvania and North Carolina.
The personal lines SBU loss and loss expense ratio increased by 1.5 points
to 75.7%. These results include $0.5 million in catastrophe losses which
added 0.9 points to the ratio.
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.
PAGE 14
For the three-year period ended December 31, 1998, the Company does not
believe it will incur an obligation to make an excess profit premium refund.
The premium reductions imposed by the recently enacted NJ Auto Insurance
Cost Reduction Act will make the possibility of incurring this obligation
less likely in future years. However, if the Company's current
profitability continues in its New Jersey personal automobile business, it
may be possible that it will incur an excess profit premium refund
obligation in the future. The Company considers the potential effect of such
excess profits in establishing its accruals.
In March 1999, a new personal automobile insurance law in New Jersey became
effective which will provide for a statewide average premium reduction of
15%. As a result, the Company anticipates that annual premiums in this line
may be reduced by approximately $24 million. The financial impact of the new
law will be partially offset by the Company's rate adequacy in this line and
potentially significant cost reductions through the use of medical
protocols, anti-fraud provisions and other procedures provided for in the
law. Taking these into account and variable costs and taxes, annual earnings
may be reduced by approximately $3 million. The impact on the Company's
earnings will not be fully reflected in 1999, due to the April 1999
effective date of the rollback. In addition, the state has recently delayed
implementation of the medical cost savings provisions of the law. In May,
we believe the state will issue guidelines regulating insurers' medical
pre-certification plans. We expect Selective's plan will be approved soon
after the guidelines are released, with the result that the delay will not
have a material impact on medical cost savings. However, there can be no
assurance that the guidelines will be issued without delay, or that they
will be consistent with the Company's expectations, in which case it is
possible that the anticipated medical savings may not be fully realized and
that the Company's earnings could be further impacted.
Productivity in the First Quarter 1999, as measured by net premiums written
per employee, was approximately $466,000, up from $455,000 for 1998. The
increase is due primarily to growth in net premiums written in 1999.
The ratio of policy acquisition costs to net premiums earned for the first
quarter of 1999 decreased to 31.3% from 31.8% for the same period in 1998.
The ratio primarily reflects an increase of $20 million, or 12% in the net
premiums earned during the period. Underwriting labor costs decreased
approximately $0.4 million dollars in the First Quarter 1999 primarily due
to the decrease in the annual cash incentive program portion of compensation
expense, which amounted to $0.5 million of the overall decrease. The
reduction in incentive compensation was partially offset by higher salaries
due to increased field employees and Midwest expansion. Commission expenses
decreased slightly as a percentage of net premiums earned primarily due to
decreasing commission incentives to agents and an increase in ceding flood
commissions received by the Company.
PAGE 15
Total Federal income tax expense decreased by $1 million to $3 million for
First Quarter of 1999 compared to $4 million for the First Quarter of 1998.
The Company's effective tax rate was 15.9% for the first quarter of 1999,
compared with 20.0% for the First Quarter of 1998. The Company's effective
tax rate differs from the Federal corporate rate of 35% primarily as a
result of the tax-exempt investment income. The effective tax rate for the
first quarter of 1999 was lower than the first quarter of 1998, mainly due
to the higher level of underwriting losses in 1999.
Page 16
Income
- ------
The table below shows operating income, net realized gains, and net income,
including per diluted share amounts for the quarters ended March 31, 1999
and 1998.
- -----------------------------------------------------------------------------
Quarter ended
($ in thousands, March 31
except for per share data) 1999 1998
- -----------------------------------------------------------------------------
Operating income, excluding
net realized gains
(net of tax) $ 8,435 15,253
Net realized gain,
net of tax 5,588 703
Net income 14,023 15,956
Per diluted share:
Operating income (1) .29 .48
Net realized gain .19 .02
Net income(1) .48 .50
- ----------------------------------------------------------------------------
(1) Operating and Net Income for the First Quarter 1999 was reduced by
approximately $5 million after reinsurance and taxes, due to catastrophe and
increased large property losses, or $.18 per basic and $.16 per diluted
share.
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 of investments.
PAGE 17
The Company's cash requirements also include the cost of shares of common
stock repurchased under its common stock repurchase program. On May 7,
1999, the Company's Board of Directors (the "Board") authorized management
to repurchase an additional one million shares of its common stock under
the repurchase program, bringing the overall number of authorized shares to
5 million. 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 May 4, 1999, the Company had
repurchased a total of 3.4 million shares at a total cost of $70 million
under the program, of which 1.0 million shares were repurchased from January
1, 1999 through May 4, 1999, at a total cost of $20 million.
On May 7, 1999, the Company's Board of Directors also approved a 7% increase
to the stockholders quarterly dividend from $0.14 per share to $0.15 per
share, beginning with the dividend payable June 1, 1999.
For the First Quarter 1999 and 1998, cash provided by operating activities
was $.7 million and $3 million respectively. The higher levels of net
premiums written during 1999 were offset by an increase in claims paid,
including a portion of the previously noted weather-related catastrophe and
increased large commercial property losses. The rate at which outstanding
claims are being paid and closed has increased due to the implementation of
claims management specialists ("CMSs") in the field and improved litigation
management. The Company believes that the deployment of the CMSs and the
enhanced litigation management programs will result, over the long-term, in
more favorable claim settlements. Also a trend toward installment plans for
premium collections has reduced cash inflow for First Quarter 1999. The
Company expects to generate cash from operations over the balance of the
year.
Total assets decreased .1%, or $3 million, from December 31, 1998 to March
31, 1999. This was principally due to a decrease in investments of $34
million which reflects unrealized losses of $16 million and $13 million of
funds utilized to purchase Selective stock under the Company's repurchase
program. This decrease was offset by: (i) an increase in premiums and other
receivables of $17 million due to higher premium levels as well as the
previously mentioned trend toward installment plans; (ii) deferred policy
acquisition costs (policy acquisition costs which are deferred and amortized
over the life of the policy period) of $4 million primarily due to the
increased premium volume; and (iii) a $12 million increase in other assets
due to a prepayment to the UCJF of $8 million and a $4 million increase in
receivable from underwriting pools and the N.J. Guaranty Fund.
The rise in total liabilities of 0.5%, or $9 million, from December 31,
1998 to March 31, 1999 was mainly attributable to increases of $14 million
and $8 million in unearned premiums and reserves for losses and loss
expenses, respectively. These increases are driven by the 10% increase in
net premiums written. The
PAGE 18
increase in reserves for loss and loss expenses also reflects a portion of
the $7 million in weather-related catastrophe losses and increased large
property claims experienced in the quarter. These increases were partially
offset by a $13 million decrease in contingent commissions payable primarily
as a result of agents profit sharing payments made in the First Quarter 1999.
Year 2000
- ---------
Many currently installed computer systems and software products use only
two digits to identify a year in the date field with the assumption that
the first two digits of the year are always "19." Consequently, on January
1, 2000, computers that are not "Year 2000" compliant may read the year as
1900. Systems that calculate, compare or sort using the incorrect date may
malfunction. As a result, during the next year, computer systems and/or
software used by many companies may need to be upgraded to comply with such
"Year 2000" requirements. Significant uncertainty exists in the software
industry concerning the potential effects associated with such compliance.
The Company is preparing for the potential Year 2000 issues (the "Y2K"
issue) that could affect its information systems, mainframe applications,
personal computers (PCS), communications systems, and non-information
technology equipment. Y2K issues associated with the information systems
of the Company's suppliers and independent insurance agents are also being
addressed. The Company's preparations include modification, replacement and
testing of hardware and software, development of contingency plans, and
efforts to identify and address Y2K issues associated with third parties
who are material to the Company's operations.
The Company has a number of critical business systems, including,
policy underwriting, billing, decision support, claims and financial
reporting systems. Remediation efforts commenced in 1997, and by 1998 over 9
million lines of computer code were inspected with approximately 900,000
lines of code revised in all major systems other than the claims system. The
claims system remediation is currently in progress, and is estimated to be
completed in June, 1999. In connection with hardware issues, a mainframe
(enterprise server) upgrade was completed in August 1998, and an inventory
of all Personal Computers (PCS) and network equipment was completed at that
time. Necessary upgrading or replacement of PCS and network equipment is
underway, and is expected to be completed in the second quarter of 1999.
A series of global system integration tests will be run to test Y2K
readiness, and are intended to synchronize all systems, and to ensure that
routine maintenance remains Y2K compatible. Two of these tests were
successfully completed in 1998. The 1998 tests, which included testing by
programmers and
PAGE 19
business users, identified minimal necessary changes to program code.
Required changes were completed at the time of identification.
Two additional such tests are scheduled for 1999, and they will include the
remediated claims system when completed, as well as a new financial
reporting system, which became operational after the 1998 tests were
completed.
The Company anticipates Y2K readiness in all critical areas, and estimates
it is 90% complete in its preparation and remediation. As noted above,
testing is 50% complete. The Company has adopted a contingency planning
strategy that addresses mission critical and non-mission critical business
processes. The Company has a Disaster Recovery Plan for the Information
Systems Department, providing for the continuation of data processing
operations at an off-site disaster recovery facility.
The Company's Y2K awareness initiative addresses its interaction with its
independent agents, suppliers and customers. The Company's main business
customers are independent insurance agents. The Company has provided Y2K
information to all of its independent agents, its representatives have
spoken at agency functions, and it has conducted an agent's technology
fair, all intended to provide as much Y2K information as possible to help
our agents address the issue in their businesses. In addition, the Company
has established a Y2K hotline for questions. An agency Y2K systems
readiness survey is 90% complete which will identify agents who may not be
Y2K compliant.
The Company's suppliers include software vendors, service providers and
material suppliers. Each of the vendors has been contacted by the Company
to obtain written confirmation on the status of their Y2K readiness. All
critical vendors have indicated readiness and are currently being tested.
The Company believes that most significant Y2K insurance claims are likely
to occur in the information technology business sector, and under errors
and omissions (E&O) and directors and officers liability (D&O) insurance
coverages. The Company has not significantly participated in the technology
business sector, nor has it significantly written E&O and D&O coverage
types. The Company has also communicated to agents and policyholders that
it will not cover Y2K losses, with the possible exception of certain
losses involving property damage or bodily injury which can not be
quantified at this time. The Company is using the Insurance Services Office
Y2K exclusionary endorsements on most new and renewal commercial lines
policies. In addition, the Company's casualty excess of loss treaty was
amended, effective July 1, 1998, to include as covered losses all Y2K
losses aggregated as a single event, with protection totaling $38 million
in excess of a $12 million retention. The coverage protects against any
Y2K claim which is asserted in the 36 month period beginning on July 1,
1998.
The Company has projected what it believes to be the most reasonably likely
worst case scenarios related to potential Y2K failures and disruptions.
These scenarios include computer system failures occurring within its
independent agency distribution system and the Company's out-sourced
processing of premium
PAGE 20
remittances. Contingency plans have been developed that will allow the
Company to carry on operations if such scenarios were to occur. The
contingency plans include provisions to undertake manual processing in
situations where business partner computer systems are not functioning
normally. Manual processing would reduce the Company's overall efficiency,
however, it would not materially impact the Company's ability to operate.
Each mission critical business department has a plan for resumption of
business in which the functions to be restored are prioritized by critical
time frames. These plans will enable processing of core business to continue
for a limited time while adjustments are being made.
The failure to correct a material Y2K problem could result in interruption
to normal business activities or operations, such as policy underwriting
and claims payment. Such failures could materially and adversely affect the
Company's operations, liquidity and financial condition. The Company's Y2K
project is expected to significantly reduce the Company's level of
uncertainty about the potential problem. The Company believes its internal
information systems will have been adequately modified and safeguarded to
protect from such failures. Due to the general uncertainty inherent in the
Y2K problem, resulting in part from the uncertainty of the Y2K readiness of
independent insurance agents and third-party suppliers and customers, the
Company is unable to determine at this time whether, or to what extent, a
Y2K failure could occur. A Y2K failure could have a material adverse impact
on the Company's operations, liquidity or financial condition.
The Company acquired PDA Software Services, Inc. (PDA), in December, 1998.
As part of an extensive due diligence process, the Y2K exposures of PDA were
evaluated, and it was concluded that no material exposure to Y2K claims was
present. Additionally, a technology errors and omissions insurance policy
was purchased which provides $10 million coverage for any Y2K claim
resulting from any work performed by PDA after January 1, 1988.
The Company does not presently anticipate that costs incurred for the Y2K
project will be material. Current estimates of the compliance costs which
will be incurred to ensure Y2K readiness are $2.3 million, and as of March
31, 1999, the Company has incurred approximately $1.9 million of that
amount. The estimated amount includes both modification costs, which are
expensed as incurred, and certain system replacement costs, some of which
are capitalized and amortized. Modification costs which have been charged
to earnings in 1999, 1998, 1997 and 1996 are approximately $100,000,
$500,000, $700,000 and $100,000, respectively. The remaining $500,000
expended has been capitalized.
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. Our acquisitions
of other companies subject us to risks.
PAGE 21
Part II
-------
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
There have been no material changes in the information about market risk set
forth in the Company's Annual Report on Form 10K for the year ended December
31, 1998.
PAGE 22
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 23
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 17, 1999
By: /s/Gregory E. Murphy
-------------------------------------
Gregory E. Murphy,
President and
Chief Executive Officer
Date: May 17, 1999
By: /s/David B. Merclean
-------------------------------------
David B. Merclean,
Senior Vice President and
Chief Financial Officer
PAGE 24
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 31,1999 and 1998
(in thousands, except per Income Shares Per Share
share amounts) (Numerator) (Denominator) Amount
- ---------------------------------------------------------------------
1999
- ----
Basic EPS
Net Income available
to common stockholders $ 14,023 28,124 $ 0.50
====
Effect of Dilutive Securities
Restricted stock - 218
8.75% convertible
subordinated debentures 89 878
Stock Options (71) 221
------ ------
Diluted EPS
Income available to common
stockholders + assumed
conversions $ 14,041 29,441 $ 0.48
====== ====== ====
- ------------------------------------------------------------------------
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
====== ====== ====
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
March 31, 1999 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-31-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 1,113,142
<DEBT-CARRYING-VALUE> 328,699
<DEBT-MARKET-VALUE> 341,192
<EQUITIES> 265,847
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,736,789
<CASH> 20,040<F1>
<RECOVER-REINSURE> 13,352
<DEFERRED-ACQUISITION> 114,154
<TOTAL-ASSETS> 2,428,997
<POLICY-LOSSES> 1,201,695<F2>
<UNEARNED-PREMIUMS> 413,697
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 118,555<F3>
0
0
<COMMON> 75,349
<OTHER-SE> 520,041
<TOTAL-LIABILITY-AND-EQUITY> 2,428,997
193,028
<INVESTMENT-INCOME> 23,473
<INVESTMENT-GAINS> 8,597
<OTHER-INCOME> 9,607
<BENEFITS> 143,882<F4>
<UNDERWRITING-AMORTIZATION> 60,351
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 16,674
<INCOME-TAX> 2,651
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,023
<EPS-PRIMARY> .50
<EPS-DILUTED> .48
<RESERVE-OPEN> 1,193,274<F5>
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 1,201,695
<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, 1998 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-31-1998
<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> 3,877
<BENEFITS> 121,678<F4>
<UNDERWRITING-AMORTIZATION> 54,872
<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 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>
