UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended . . . . . . .September 30, 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 No.) (I.R.S. Employer Identification
of incorporation or organization)
40 Wantage Avenue, Branchville, New Jersey 07890
------------------------------------------ -----------
(Address of principal executive offices) (Zip Code)
973-948-3000
------------------------------
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date:
Common stock, par value $2 per share, outstanding as of October 31, 1999:
27,483,281
-1-
SELECTIVE INSURANCE GROUP, INC.
Consolidated Balance Sheets
-------------------------------
(dollars in thousands, except shares)
(unaudited)
ASSETS September 30 December 31
- ------ 1999 1998
Investments: ------------ ----------
Debt securities, held-to-maturity -
at amortized cost (fair value of
$296,187-1999; $373,179-1998)......... $ 292,461 358,380
Debt securities, available-for-sale -
at fair value (amortized cost of
$1,171,041-1999; $1,033,628-1998)..... 1,167,766 1,075,276
Equity securities, available-for-sale -
at fair value (cost of
$114,870-1999; $135,758-1998)......... 223,447 269,991
Short-term investments -
at cost which approximates fair value 11,802 50,905
Other investments - at fair value.......... 16,372 16,087
--------- ---------
Total investments ...................... 1,711,848 1,770,639
Cash....................................... 9,400 7,931
Interest and dividends due or accrued ..... 23,164 22,537
Premiums and other receivables............. 297,639 240,125
Reinsurance recoverable on paid losses
and loss expenses..................... 11,013 11,495
Reinsurance recoverable on unpaid losses and
loss expenses......................... 207,275 140,453
Prepaid reinsurance premiums............... 32,243 31,685
Deferred Federal income tax................ 4,434 -
Deferred Federal income tax................ 21,172 -
Real estate, furniture and equipment....... 51,250 50,950
Deferred policy acquisition costs.......... 119,386 109,774
Goodwill................................... 46,761 20,391
Other assets............................... 27,634 26,188
--------- ---------
Total assets............................ $ 2,563,219 2,432,168
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Liabilities:
- -----------
Reserve for losses......................... $ 1,113,099 1,014,386
Reserve for loss expenses.................. 182,954 178,888
Unearned premiums.......................... 445,506 400,143
Convertible subordinated debentures........ 6,167 6,219
Short-term debt ........................... 46,782 28,287
Notes payable.............................. 82,572 82,572
Current Federal income tax................. - 86
Deferred Federal income tax................ - 7,226
Other liabilities ......................... 112,976 106,778
--------- ---------
Total liabilities....................... 1,990,056 1,824,585
--------- ---------
Stockholders' Equity:
- --------------------
Common stock of $2 par value per share:
Authorized shares-180,000,000
Issued: 37,871,096-1999; 37,416,237-1998 75,742 74,833
Additional paid-in capital................. 52,491 45,449
Retained earnings.......................... 508,420 477,118
Accumulated other comprehensive income..... 68,446 114,323
Treasury stock - at cost
(shares: 10,280,698-1999; 8,892,335-1998) (124,101) (97,990)
Deferred compensation expense and notes
receivable from stock sales.......... (7,835) (6,150)
--------- ---------
Total stockholders' equity ............. 573,163 607,583
--------- ---------
Total liabilities and stockholders' equity $ 2,563,219 2,432,168
========= =========
See accompanying notes to unaudited consolidated financial statements.
-2-
PAGE
SELECTIVE INSURANCE GROUP, INC.
Consolidated Statements of Income
----------------------------------
(dollars in thousands, except per share amounts)
Unaudited Unaudited
Quarter ended Six Months Ended
September 30 September 30
1999 1998 1999 1998
------ ------ ------ ------
Revenues:
- --------
Net premiums written.................$ 211,166 196,447 633,950 581,547
Net increase in unearned premiums
and prepaid reinsurance
premiums ....................... (11,503) (10,059) (44,805) (45,051)
------- ------- ------- -------
Net premiums earned ................. 199,663 186,388 589,145 536,496
Net investment income earned......... 23,756 23,604 70,684 72,792
Net realized gains (losses).......... (1,160) (91) 31,041 2,788
Diversified insurance
services revenue................. 14,592 4,060 31,087 10,341
Other income......................... 817 992 2,314 2,654
------- ------- ------- -------
Total revenues.................... 237,668 214,953 724,271 625,071
------- ------- ------- -------
Expenses:
- --------
Losses incurred ..................... 141,299 112,431 387,862 325,824
Loss expenses incurred............... 18,674 20,418 55,622 55,491
Policy acquisition costs............. 61,765 59,379 184,446 170,964
Dividends to policyholders........... 1,356 1,040 4,806 3,740
Interest expense..................... 2,463 2,437 6,780 7,003
Diversified insurance
service expenses................. 12,048 3,424 27,514 8,667
Other expenses....................... 1,692 394 4,242 1,376
------- ------- ------- -------
Total expenses.................... 239,297 199,523 671,272 573,065
------- ------- ------- -------
Income (loss) before
Federal income tax............... (1,629) 15,430 52,999 52,006
------- ------- ------- -------
Federal income tax expense (benefit):
Current.............................. (1,432) 2,459 13,045 7,614
Deferred............................. (2,132) 39 (3,619) 1,894
------- ------- ------- -------
Total Federal income tax
expense (benefit)............... (3,564) 2,498 9,426 9,508
------- ------- ------- -------
Net income...........................$ 1,935 12,932 43,573 42,498
======= ======= ======= =======
Earnings per share:
- ------------------
Basic.............................$ 0.07 0.46 1.60 1.48
Diluted ..........................$ 0.07 0.43 1.51 1.37
Dividends to stockholders............$ 0.15 0.14 0.44 0.42
See accompanying notes to unaudited consolidated financial statements.
-3-
PAGE
SELECTIVE INSURANCE GROUP, INC.
Consolidated Statements of Stockholders' Equity
-----------------------------------------------
(dollars in thousands, except per share amounts)
Unaudited Unaudited
September 30 September 30
1999 1998
-------- --------
Common stock:
Beginning of year....................... $ 74,833 $ 72,728
Dividend reinvestment plan
(shares: 48,536 - 1999; 37,116 - 1998).. 97 74
Convertible subordinated debentures
(shares: 7,342 - 1999; 80,928 - 1998)... 14 162
Stock purchase and compensation plans
(shares: 398,981 - 1999; 491,871 - 1998) 798 984
------ ------
End of period........................... 75,742 73,948
------ ------
Additional paid-in capital:
Beginning of year....................... 45,449 30,450
Dividend reinvestment plan.............. 801 785
Convertible subordinated debentures..... 28 410
Stock purchase and compensation plans... 6,213 6,177
------ ------
End of period........................... 52,491 37,822
------ ------
Retained earnings:
Beginning of year....................... 477,118 439,811
Net income.............................. 43,573 43,573 42,498 42,498
Cash dividends to stockholders
($.44 per share-1999;
$.42 per share-1998).................. (12,271) (12,325)
------- -------
End of period........................... 508,420 469,984
------- -------
Accumulated other comprehensive
(loss)/income:
Beginning of year....................... 114,323 89,051
Other comprehensive income-increase
(decrease) in net unrealized gains on
available-for-sale securities, net of
deferred income tax effect............ (45,877)(45,877) 7,630 7,630
------- ------ ------ ------
End of period........................... 68,446 96,681
Comprehensive income (2,304) 50,128
===== ======
Treasury stock:
Beginning of year....................... (97,990) (59,785)
Acquisition of treasury stock
(shares: 1,388,363 - 1999;
1,419,162 - 1998)....................... (26,111) (30,964)
------- ------
End of period........................... (124,101) (90,749)
------- ------
Deferred compensation expense and notes
receivable from stock sales:
Beginning of year....................... (6,150) (6,939)
Deferred compensation expense........... (3,974) (1,047)
Amortization of deferred compensation
expense and amounts received on notes.. 2,289 1,082
------- ------
End of period........................... (7,835) (6,904)
------- ------
Total stockholders' equity...............$ 573,163 580,782
======= =======
See accompanying notes to unaudited consolidated financial statements.
-4-
PAGE
SELECTIVE INSURANCE GROUP, INC.
Consolidated Statements of Cash Flows
-------------------------------------
Unaudited
Nine months ended September 30
(dollars in thousands) 1999 1998
---- ----
Operating Activities
- --------------------
Net income................................... $ 43,573 42,498
Adjustments to reconcile net income to
net cash provided by operating activities:
(Increase) decrease in interest and dividends
due or accrued.......................... (627) 1,775
Increase in premiums and other receivables... (49,271) (56,226)
Decrease in reinsurance recoverable
on paid losses and loss expenses........ 482 1,003
Increase in reserves for losses and loss
expenses, net of reinsurance recoverable
on unpaid losses and loss expenses...... 35,957 13,144
Increase in unearned premiums, net of
prepaid reinsurance premiums............ 44,805 45,051
Decrease (increase) in net Federal income tax (8,216) 1,254
Increase in deferred policy acquisition costs (9,612) (17,190)
Depreciation and amortization................ 8,940 6,500
Net realized gains on investments............ (31,041) (2,788)
Other - net.................................. 11,637 (3,374)
------ ------
Net adjustments.............................. 3,054 (10,851)
------ ------
Net cash provided by operating activities.... 46,627 31,647
------ ------
Investing Activities
- --------------------
Purchase of debt securities, held-to-maturity - (12,682)
Purchase of debt securities, available-for-sale (297,564) (116,063)
Purchase of equity securities, available-for-sale (7,119) (32,250)
Purchase of other investments................ (443) (15,451)
Purchase of Selective HR Solutions
(Net of cash equivalents acquired of $1,127). (23,001) -
Purchase of Consumer Health Network Plus, LLC (6,003) -
Sale of debt securities, available-for-sale.. 127,901 59,902
Redemption and maturities of debt securities,
held-to-maturities...................... 65,939 52,264
Redemption and maturities of debt securities,
available-for-sale...................... 24,979 66,454
Sale of equity securities, available-for-sale 66,136 16,387
Proceeds from other investments.............. 160 5,316
Decrease in net payable for security
transactions............................ (14,164) (3,715)
Net additions to real estate, furniture
and equipment........................... (5,182) (9,341)
------ ------
Net cash (used in) provided by
investing activities.................... $ (68,361) (10,821)
------ ------
Financing Activities
- --------------------
Dividends to stockholders.................... $ (12,271) (12,325)
Acquisition of treasury stock................ (26,111) (30,964)
Proceeds from short-term debt................ 18,495 7,380
Net proceeds from dividend reinvestment plan. 898 859
Net proceeds from stock purchase and
compensation plans...................... 7,011 7,161
Increase in deferred compensation expense and
proceeds received on notes receivable
from stock sales........................ (3,922) (995)
------ ------
Net cash used in financing activities........ (15,900) (28,884)
------ ------
Net (decrease) increase in short-term
investments and cash.................... (37,634) 13,584
Short-term investments and cash at
beginning of year....................... 58,836 33,798
------ ------
Short-term investments and cash at
end of period........................... $ 21,202 47,382
====== ======
Supplemental disclosures of cash flows information
- --------------------------------------------------
Cash paid during the period for:
Interest..................................... $ 7,873 7,679
Federal income tax........................... 17,628 8,254
Supplemental schedule of
non-cash financing activity:
Conversion of convertible subordinated
debentures.............................. 42 573
See accompanying notes to unaudited consolidated financial statements.
-5-
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 a 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 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 was previously effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. Earlier application was
encouraged, but was permitted only as of the beginning of any fiscal
quarter that begins after issuance of financial statements of prior
periods. In June 1999, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 137, which
defers the effective date of FASB 133 to all fiscal quarters of
fiscal years beginning after June 15, 2000. The Company does not
anticipate the adoption of this statement to have a material effect
on the Company's result of operations or financial condition.
-6-
PAGE
4. Segment Information
===================
The Company is primarily engaged in writing property and casualty
insurance. The Company has classified its business into three segments
which are Insurance Operations (commercial lines underwriting, personal
lines underwriting), Investments, and Diversified Insurance Services
(formerly called Fee-For-Service Operations). The insurance segments
are evaluated based on their GAAP underwriting results, and the
diversified insurance operations are evaluated based on results of
operations in accordance with Generally Accepted Accounting Principals
("GAAP"). The following summaries present income before Federal income
taxes and revenues for the individual segments:
Income or (Loss) before Federal Income Tax By Segment
-----------------------------------------------------
Unaudited Unaudited
Quarter ended Nine Months ended
September 30, September 30,
(in thousands) 1999 1998 1999 1998
---------------------------------------------------------------------
Insurance Operations:
Commercial lines
underwriting $(17,389) (10,098) (36,580) (23,049)
Personal lines
underwriting (5,916) 3,583 (5,983) 4,647
------- ------ ------ ------
Total insurance
Operations (23,305) (6,515) (42,563) (18,402)
Investments:
Net investment income 23,756 23,604 70,684 72,792
Net realized gain or
(loss) on investments (1,160) (91) 31,041 2,788
------ ------ ------- ------
Total investments 22,596 23,513 101,725 75,580
Diversified Insurance
Services 2,544 636 3,573 1,674
------ ------ ------- ------
Total all segments 1,835 17,634 62,735 58,852
------ ------ ------- ------
Interest expense (2,463) (2,437) (6,780) (7,003)
General corporate
(loss)/income (1,001) 233 (2,956) 157
------ ------ ------- ------
Income before
Federal income tax $ (1,629) 15,430 52,999 52,006
====== ====== ======= ======
Revenue By Segment
------------------
Unaudited Unaudited
Quarter ended Nine Months ended
September 30, September 30,
(in thousands) 1999 1998 1999 1998
---------------------------------------------------------------------
Insurance Operations:
Commercial lines net
premiums earned $142,634 131,006 417,914 375,138
Personal lines net
premiums earned 57,029 55,382 171,231 161,358
------- ------- ------- -------
Total insurance
Operations 199,663 186,388) 589,145 536,496
Investments:
Net investment income 23,756 23,604 70,684 72,792
Net realized gain or
(loss) on investments (1,160) (91) 31,041 2,788
------- ------- ------- -------
Total investments 22,596 23,513 101,725 75,580
Diversified Insurance
Services 14,592 4,060 31,087 10,341
------- ------- ------- -------
Total all segments 236,851 213,961 721,957 622,417
======= ======= ======= =======
-7-
PAGE
5. Reinsurance
===========
The following is a table of assumed and ceded amounts by income statement
caption:
Quarter ended Nine months ended
September 30 September 30
------------- ------------------
(in thousands) 1999 1998 1999 1998
- -------------------------------------------------------------------------
Net premiums written:
Assumed $ 5,336 5,600 15,574 17,644
Ceded (23,596) (23,661) (61,379) (58,630)
Net premiums earned:
Assumed $ 5,228 4,990 16,315 17,623
Ceded (21,677) (18,272) (60,821) (59,779)
Losses incurred:
Assumed $ 3,849 3,778 11,129 14,035
Ceded (71,920)(1)(2) (10,126) (105,567)(1)(2) (38,457)
Loss expenses incurred:
Assumed $ 286 425 1,222 1,620
Ceded (844) (381) (2,013) (1,983)
(1) As a write your own carrier for the Federal government, the Company
incurred approximately 2,000 flood claims from Hurricane Floyd. These
claims generated $33 million in incurred losses ceded to the National
Flood Insurance Program (NFIP) for both the Quarter and Nine Months
1999.
(2) The Company is reinsured for losses incurred in excess of $75,000 on
all New Jersey Personal Injury Protection (PIP) claims. During 1999,
the Company performed a comprehensive review of New Jersey PIP claims
and determined that 27 claims should be re-classified to "lifetime"
benefit status. Adjusting outstanding loss reserves to new ultimate
projections resulted in additional loss reserves of $29 million for
Third Quarter 1999 and $40 million for Nine Months 1999. Because
these claims had all breached the $75,000 retention limit,
substantially all of these additional reserves were ceded to the New
Jersey Unsatisfied Claims Judgement Fund for reimbursement to the
Company in accordance with state law.
Forward-looking statements
==========================
Some of the statements in this report are not historical facts and are
"forward-looking statements" (as defined in the Private Securities
Litigation Reform Act of 1995). These statements use words such as
"believes," "expects," "intends," "may," "will," "should," "anticipates,"
and other similar words and, among other things, describe our current
strategies, opinions, expectations of future results and other forward-
looking information. We derive forward-looking information from
information which we currently have and numerous assumptions which we
make. We cannot assure that results which we anticipate will be achieved,
since results may differ materially because of both known and unknown
risks and uncertainties which we face. Factors which could cause actual
results to differ materially from our expectations include, but are not
limited to: the effects of economic conditions and conditions which
affect the market for property and casualty insurance; laws, rules and
regulations which apply to insurance companies, including the impact of
personal automobile reform legislation in New Jersey; the effects of
competition from other insurers and banks, and the trend toward self-
insurance; risks we face in entering new markets and diversifying the
products and services we offer; weather-related events and other
catastrophes affecting our insureds; our ability to obtain rate increases
and to retain business; the
-8-
PAGE
performance of our independent insurance agencies; Year 2000 readiness;
and other risks and uncertainties we identify in filings with the
Securities and Exchange Commission, although we do not promise to update
such forward-looking statements to reflect actual results or changes in
assumptions or other factors that could affect these statements.
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 to the "Company" mean Selective Insurance Group, Inc. and its
consolidated subsidiaries, collectively. References to "Selective" mean
Selective Insurance Group, Inc.
Results of Operations
=====================
The following discussion is a comparison of Third Quarter Ended September
30, 1999 ("Third Quarter 1999"), and Nine Months Ended September 30, 1999
("Nine Months 1999"), to Third Quarter Ended September 30, 1998 ("Third
Quarter 1998"), and Nine Months Ended September 30, 1998 ("Nine Months
1998").
Operating Segments
==================
The Company is primarily engaged in writing property and casualty
insurance. The Company has classified its business into three segments,
each of which is managed separately. The three segments are Insurance
Operations (commercial lines underwriting and personal lines
underwriting), Investments and Diversified Insurance Services (formerly
called Fee-For-Service Operations). All segments are evaluated based on
their underwriting or operating results, which are prepared in accordance
with Generally Accepted Accounting Principles ("GAAP"). For an additional
description of these accounting policies, refer to Note 1 to the
Company's Consolidated Financial Statements on pages 32, 33 and 34 of the
1998 Annual Report on Form 10-K for the year ended December 31, 1998.
See note 4 to the September 30, 1999 Unaudited Consolidated Financial
Statements on page 7 of this Form 10-Q for revenues and related income
before Federal income taxes for each individual segment discussed below.
-9-
PAGE
Insurance Operations
Unaudited Unaudited
Quarter ended Nine months ended
Total Insurance Operations September 30, September 30,
1999 1998 1999 1998
- -------------------------------------------------------------------------
Net premiums written $ 211,166 196,447 633,950 581,547
Net (increase)decrease
in unearned premiums (11,503) (10,059) (44,805) (45,051)
------- ------- ------- -------
Net premiums earned 199,663 186,388 589,145 536,496
Losses and loss
expenses incurred 159,973 132,849 443,484 381,315
Net underwriting expenses
incurred 61,639 59,014 183,418 169,843
Dividends to policyholders 1,356 1,040 4,806 3,740
------- ------- ------- -------
Underwriting gain or (loss) (23,305) (6,515) (42,563) (18,402)
======= ======= ======= =======
GAAP Ratios:
Loss and loss expense ratio 80.1% 71.3% 75.3% 71.1%
Underwriting expense ratio 30.9% 31.7% 31.1% 31.6%
Dividends to
policyholders ratio 0.7% 0.5% 0.8% 0.7%
---- ---- ---- ----
Combined ratio 111.7% 103.5% 107.2% 103.4%
===== ===== ===== =====
For Third Quarter 1999, insurance net premiums written increased $15
million, or 8%, compared to Third Quarter 1998. Net premiums written
increased $52 million, or 9%, during Nine Months 1999 as compared to Nine
Months 1998. These results reflect new business of $61 million for Third
Quarter 1999 and $177 million for Nine Months 1999, partially offset by
premiums lost to competition due to a highly competitive commercial and
personal lines marketplace. The increased net premiums written during
both 1999 and 1998 resulted in increased net premiums earned of 7%, or
$13 million for Third Quarter 1999 and 10%, or $53 million, for Nine
Months 1999, compared to the same periods one year ago.
During the Third Quarter 1999, Standard and Poors, an independent rating
agency, re-affirmed its A+ (superior) rating of the Company's insurance
subsidiaries.
The combined ratio increased 8.2 points to 111.7%, for Third Quarter 1999
and 3.8 points to 107.2%, for Nine Months 1999. The ratio of losses and
loss expenses incurred to net premiums earned increased 8.8 points for
Third Quarter 1999 to 80.1% and increased 4.2 points to 75.3% for Nine
Months 1999, compared to the same period one year ago. Catastrophes added
7.0 and 2.2 points to Third Quarter 1999 and 1998, and 3.3 and 1.8 points
to Nine Months 1999 and 1998. The most notable catastrophe during Third
Quarter 1999 was Hurricane Floyd which resulted in losses and loss
expenses of $13.5 million. This single event, which flooded states from
South Carolina to New York and caused an estimated industry-wide insured
loss by the Property Claims Unit of Insurance Service Office, Inc. of
$1.3 billion, added 6.8 points of the 7.0 point catastrophe impact on
the loss and loss expense ratio for Third Quarter 1999 and 2.2 of the 3.3
points for Nine Months 1999.
The underwriting expense ratio declined 0.8 points to 30.9% for Third
Quarter 1999 and 0.5 points to 31.1% for Nine Months 1999, when compared
to the same periods one year ago. The lower ratio for Nine Months 1999
was primarily a result of a decrease in the commissions incurred due to
lower commission incentives to agents and a 0.5 point decrease for Third
Quarter 1999 and 0.4 point decrease for Nine Months 1999 in the annual
cash incentive award accrual for employees. Overall, productivity in
Third Quarter 1999, as measured by fiscal year net premiums written per
employee, was approximately $472,000, up from $439,000 for Third Quarter
1998. The increase is due primarily to growth in net premiums written in
1999 without a corresponding increase in insurance operations' staff.
-10-
PAGE
Commercial Lines
GAAP Insurance Operation Results
Unaudited Unaudited
Quarter ended Nine months ended
Commercial Lines September 30, September 30,
1999 1998 1999 1998
- -------------------------------------------------------------------------
Net premiums written 157,081 140,643 459,916 411,878
Net (increase)decrease
in unearned premiums (14,447) (9,637) (42,002) (36,740)
------- ------- ------- -------
Net premiums earned 142,634 131,006 417,914 375,138
Losses and loss
expenses incurred 110,947 94,223 309,305 263,208
Net underwriting expenses
incurred 47,720 45,841 140,383 131,239
Dividends to policyholders 1,356 1,040 4,806 3,740
------- ------- ------- -------
Underwriting gain or loss (17,389) (10,098) (36,580) (23,049)
======= ======= ======= =======
GAAP Ratios:
Loss and loss expense ratio 77.8% 71.9% 74.0% 70.1%
Underwriting expense ratio 33.5% 35.0% 33.6% 35.0%
Dividends to
policyholders ratio 0.9% 0.8% 1.2% 1.0%
----- ----- ----- -----
Combined ratio 112.2% 107.7% 108.8% 106.1%
===== ===== ===== =====
Commercial Lines Underwriting consists of six strategic business units
("SBUs") which accounted for approximately 74% of net premiums written
during Third Quarter 1999 and 73% for Nine Months 1999. Net premiums
written increased $16 million, or 12%, for Third Quarter 1999, and $48
million, or 12%, for Nine Months 1999 compared to the same periods in 1998.
These increases were reflected in the performance of all commercial SBUs and
included $47 million in new business for Third Quarter 1999 and $136 million
in new business for Nine Months 1999. We believe that 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 expansion of its operations in Midwestern states
and New England as well as the Company's strong agency relationships. The
Company's ability to continue growing its book of business going forward
depends on competitive forces in the marketplace, as we implement commercial
lines price increases. The commercial lines pricing environment is changing
as the market appears to have at least stabilized, and the Company is
achieving modest price increases in most of our territories. We are closely
monitoring pricing initiatives implemented earlier this year and we are
working with our agents on an account-by-account basis to achieve rates
while maintaining flexibility to retain our best business. We expect the
benefit of price increases will begin impacting our results in the second
half of 2000. The increases in net premiums written were partially offset by
premiums lost due to a highly competitive marketplace.
For Third Quarter 1999, the Commercial Lines combined ratio increased 4.5
points to 112.2% and 2.7 points to 108.8% for Nine Months 1999, when
compared to the same periods one year ago. The higher combined ratios
reflected the loss and loss expense ratio increasing by 5.9 points for
Third Quarter and 3.9 points for Nine Months 1999, when compared with the
same periods in 1998. The
-11-
PAGE
increase for Third Quarter 1999 reflects $6
million in weather-related catastrophe losses and a $2 million increase in
severe property losses over the same period in 1998. The increase for Nine
Months 1999 also reflects $6 million in weather-related catastrophe losses
and a $9 million increase in severe property losses. These losses increased
the combined ratio by 6.0 points for Third Quarter 1999 and 3.5 points for
Nine Months 1999. Additionally, inadequacy of commercial lines pricing has
adversely affected results throughout the industry over the past two years.
With little margin left in the premium dollar to absorb major events and
catastrophes, the market is at the point where generating an adequate return
is extremely difficult.
The higher loss and loss expense ratios were partially offset by decreases
in the underwriting expense ratio of 1.5 for Third Quarter 1999 and 1.4
points for Nine Months 1999. Our lower expense levels reflect decreases in
employee cash incentive awards of approximately 0.5 points for Third Quarter
1999 and 0.4 points for Nine Months 1999; and a decrease in the commission
ratio, due to lower profit sensitive commissions, of 1.5 (for Third Quarter
1999) and 0.7 points (for Nine Months 1999).
Personal Lines
GAAP Insurance Operation Results
Unaudited Unaudited
Quarter ended Nine months ended
Personal Lines September 30, September 30,
1999 1998 1999 1998
Net premiums written 54,085 55,804 174,034 169,669
Net (increase)decrease
in unearned premiums 2,944 (422) (2,803) (8,311)
------ ------ ------- -------
Net premiums earned 57,029 55,382 171,231 161,358
Losses and loss
expenses incurred 49,026 38,626 134,179 118,107
Net underwriting expenses
incurred 13,919 13,173 43,035 38,604
------ ------ ------- -------
Underwriting gain or loss (5,916) 3,583 (5,983) 4,647
====== ====== ======= =======
GAAP Ratios:
Loss and loss expense ratio 86.0% 69.7% 78.4% 73.2%
Underwriting expense ratio 24.4% 23.8% 25.1% 3.9%
----- ----- ----- -----
Combined ratio 110.4% 93.5% 103.5% 97.1%
===== ===== ===== =====
Personal Lines Underwriting net premiums written decreased $2 million, or
3.0%, for Third Quarter 1999, and increased $4 million, or 2.6% for Nine
Months 1999 when compared with the same periods in 1998. Excluding the
effect of the change in the New Jersey Homeowners Quota Share Reinsurance
Program which increased premiums written by $4 million in the First Quarter
of 1998, net premiums written increased $8 million, or 5% for Nine Months
1999. Overall, premium growth was impacted by new business written of $14
million in Third Quarter 1999 and $41 million in Nine Months 1999. New
business in territories outside of New Jersey amounted to $7 million and
$17 million for Third Quarter 1999 and Nine Months 1999, respectively. This
new business reflects the expansion efforts in Personal Lines in states
outside of New Jersey. Premiums written in New Jersey, for Third Quarter
1999 and Nine Months 1999, were reduced by approximately $5 million and
$10 million, respectively,
-12-
PAGE
due to the 15% rate rollback mandated by the New
Jersey auto reform legislation effective March 1999. Nevertheless, overall
Personal Lines premium in New Jersey for both Third Quarter and Nine Months
1999 remained level with the comparable periods in 1998, with growth in
Urban Enterprise Zone (UEZ) business offsetting a decline in premium written
on a voluntary basis. The UEZ Program requires New Jersey Auto insurers to
write, at the Company's voluntary rate levels, an amount of urban auto
insurance proportionate to their market share which is currently estimated
at 3.5% for Selective. By June 1999, the Company had fully met its 1999
UEZ obligation by writing approximately 7,000 policies. "Liability-only"
policies comprise 93% of the Company's UEZ business and the Company's New
Jersey liability rates charged are not sufficient to offset the higher
claim frequency experienced by this business. The Company does not believe
it will be assigned additional UEZ policies before 2001.
The Personal Lines SBU combined ratio was 110.4% for Third Quarter 1999 and
103.5% for Nine Months 1999, up 16.9 points from Third Quarter 1998 and 6.4
points from Nine Months 1998. These increases were primarily due to (i)
increased catastrophe losses which added 7.5 points to Third Quarter 1999
loss and loss expense ratio (an increase of 6.5 points over 1998) and 3.0
points to Nine Months 1999 (an increase of 2.1 points over 1998); (ii)
increased Urban Enterprise Zone Business, which has loss ratios much higher
than other personal lines business as described above; (iii) the effects of
the New Jersey 15% rate rollback on personal automobile premiums; and (iv)
the underwriting expense ratio for personal lines was adversely affected by
a reduction in commissions accrued by the Company under the New Jersey
Homeowner's Quota Share Program. The decrease in commissions accrued due
to Hurricane Floyd is approximately $1 million for both Third Quarter and
Nine Months 1999.
In March 1999, New Jersey Automobile Insurance Cost Reduction Act (AICRA)
became effective and provides for a statewide average premium reduction of
15%. In September 1999, the Company's plan to reduce medical costs, as
allowed under AICRA (ie: limited medical treatments and the use of treatment
plans), was approved by the state. The Company's plan is administered by
Alta Services which has the opportunity to earn additional fee income by
also handling the medical cost savings programs for other auto insurers in
New Jersey. While it is too soon to determine the precise impact of the new
law on automobile claim costs, the Company believes that the cost savings
will not fully offset the mandatory 15% reduction. The combination of the
Company's cost control initiatives and those allowed under AICRA cannot
totally offset the underlying rate inadequacy. As a result, the Company now
expects the loss ratio for the New Jersey Personal Automobile line of
business, which represents approximately 20% of Selective's insurance
revenue, to increase by approximately 5 to 9 points by the end of 2000. On a
per share basis, the Company estimates this will result in a reduction of
future net income of between $.17 per diluted share to $.31 per share.
The excess profits law in New Jersey 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. For the period ended December 31, 1998, the Company did
not incur an
-13-
PAGE
obligation to make an excess profit premium refund. The
premium reductions imposed by the recently required New Jersey AICRA, the
apparent lack of equivalent cost savings in the law, and the effect of
policy assignments the Company was required to take pursuant to the state's
UEZ law, will diminish the likelihood of a future excess profits refund.
Nevertheless, due to the excess profits calculation formula, it is possible
the Company could incur a refund obligation for the period ending December
31, 1999.
Diversified Insurance Services
In addition to its risk-bearing insurance activities, the Company also
provides insurance services which generate fee income. The Company believes
that using its insurance knowledge to generate fee income from these related
businesses will allow it to further diversify, 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 revenue and pre-tax income of the diversified insurance services
businesses are shown in the table below:
Unaudited Unaudited
Quarter ended September 30, Quarter ended September 30,
(in thousands) 1999 1998 1999 1998
- ---------------------------------------------------------------------------
Net Net Pre-tax Pre-tax
Revenue Revenue Profit (loss) Profit (loss)
------- ------- ------------- -------------
Alta Services $ 1,372 $ 1,818 $ 157 $ 54
CHN Plus 860 - 241 -
Flood Services 3,729 2,242 1,753 582
PDA Software
Services 3,826 - (78) -
Selective HR
Solutions 4,805 - 471 -
----- ----- ----- ----
Totals $14,592 $ 4,060 $ 2,544 $ 636
====== ===== ===== ====
Unaudited Unaudited
Nine months ended September 30, Nine months ended September 30,
(in thousands) 1999 1998 1999 1998
- ----------------------------------------------------------------------------
Net Net Pre-tax Pre-tax
Revenue Revenue Income (loss) Income (loss)
------- ------- ------------- -------------
Alta Services $ 4,727 $ 4,491 $ 765 $ 192
CHN Plus 860 - 241 -
Flood Services 8,044 5,850 2,571 1,482
PDA Software
Services 12,651 - (475) -
Selective HR
Solutions 4,805 - 471 -
------ ------ ----- -----
Totals $31,087 $10,341 $ 3,573 $ 1,674
====== ====== ===== =====
-14-
PAGE
Alta Services
Alta Services manages workers' compensation and automobile medical claims
for the underwriting subsidiaries of the Company, for unrelated companies,
and for self-insured businesses. Alta bears no underwriting risk and
offers a full array of medical management services. Alta creates new
products as opportunities are presented, including, for example, medical
pre-certifications required under the new personal automobile law in New
Jersey, AICRA. Alta's managed care program with Selective Insurance has
been approved by New Jersey under the new law. This provides another
marketing opportunity for Alta. Alta Services has the opportunity to earn
additional fee income by also handling the medical cost savings programs
for other auto insurers in New Jersey. Alta has identified several new
customers for this service. Other significant activities affecting year to
date results as compared to prior year results were the loss of two major
customers who on an annual basis generated approximately $2 million in net
revenue. About 40% of this decrease is reflected in results for Nine Months
1999. These two customers changed their business strategy in New Jersey as a
result of the automobile law changes.
CHN Plus
In July 1999, in order to create additional business synergies in the
Diversified Insurance Operations, the Company purchased Consumer Health
Network, ("CHN") a nationally accredited preferred provider organization
("PPO"). A PPO puts together a network of physicians to provide services to
managed care organizations at a reduced cost. In exchange for decreased fees
charged for these services, the managed care providers agree to direct
patients through this network of physicians. CHN's network has
approximately 38,000 medical providers in the New Jersey, New York and
Connecticut area and is a critical part of Selective's current managed care
program and alternative market programs. CHN is continuing to expand their
network of physicians that will not only better serve to improve CHN's
product, it will enhance the services provided through Selective's other
subsidiaries. CHN was purchased for $6 million in cash and added $0.2
million in after-tax net income to Third Quarter 1999.
Flood Services
During Third Quarter 1999, Flood experienced a significant increase in
revenues (approximately $1.25 million) and claim income as a result of
processing approximately 2,000 flood claims related to Hurricane Floyd.
In addition to generating higher revenue for the quarter, we believe that
Hurricane Floyd has also heightened customer awareness regarding the need
for flood coverage creating significant increases in the number of new
applications. Management estimates the increase in the number of new
applications to be approximately 50% as compared to previous months. The
Company has also expanded its Flood operations to all states and has
appointed 121 new flood-only agents (bringing the total number of agents to
approximately 2,600), expanded its marketing program, and has begun placing
representatives in the field to work closely with our agents. The Flood
Services Unit generates fee income acting as a servicing carrier for the
National Flood Insurance Program without incurring underwriting risk. (See
footnote 5 on page 8 of this Form 10-Q for a description of the Flood
Services Unit.)
-15-
PAGE
The Flood Services unit is internally developing its own processing system
to rate and issue policies over the Internet. The system, which management
expects to be complete during the second quarter in 2000, is expected to
eliminate the need to purchase support services from an outside vendor and
result in an estimated $1 million in annual income before Federal income
taxes cost savings.
PDA Software Services
PDA Software Services is a software developer which specializes in the
insurance industry, and also provides processing services to public
and private sector organizations. PDA is transitioning its service to
provide more processing services rather than the development of custom
software. This will generate a more stable and predictable revenue stream.
The pre-tax loss of PDA for Third Quarter and Nine Months 1999 reflected
charges totaling $0.3 million and $1.0 million, respectively, for goodwill
and retention bonuses. The retention bonuses will continue as charges
against income through 2002.
Selective HR Solutions
The Company also purchased Selective HR Solutions in July 1999, (formerly
known as Modern Employers, Inc.) a professional employer organization
("PEO"). A PEO is a service organization that provides payroll and human
resource services to small businesses. The Company believes this acquisition
provides an opportunity to cross-sell insurance and other non-insurance
products and services to the Selective HR Solution's customer base and to
use the Company's existing distribution system of 900 independent agents to
expand Selective HR Solution's customer base. The acquisition continues the
Company's expansion of the services it provides for the independent agent.
CHN's network of providers and customers is expected to be another market
for Selective HR solutions revenue. The potential to utilize and leverage
existing business relationships between the members of the network and CHN's
management lends itself to the opportunity for the growth of Selective HR
Solution's customer base. The Company believes that the synergies that exist
between itself, Alta Services, CHN Plus, and Selective HR Solutions will
allow for their expansion into two new geographic areas, New Jersey and
North Carolina, by the end of the first quarter 2000. During the same time-
frame, Selective HR Solutions will be utilizing the Insurance Company's
existing distribution system of 900 independent agents to increase their
presence in both Georgia and Maryland. During the remainder of the upcoming
year, Selective HR Solutions is working on strategic plans to expand their
presence into six additional geographic areas. Selective HR Solutions was
purchased for cash in an amount equal to 8.5 times the 1999 Earnings Before
Interest, Taxes, Depreciation and Amortization ("EBITDA"). Management paid
$25 million for Selective HR Solutions and expects the final price to
increase to $27 to $30 million based on contingencies.
Investments
Net investment income earned for Third Quarter 1999 increased 1% or $0.2
million compared with Third Quarter 1998. For Nine Months 1999 net
investment income decreased 3% or $2 million when compared to the same
period in 1998. This decrease resulted from: 1) redemptions and maturities
of higher yielding debt securities reinvested at lower fixed income yields
currently available in the marketplace; and 2) a decrease in available cash
due to cash used for the
-16-
PAGE
Company's stock repurchase program. The Company has
a 4.3% annualized after-tax investment yield for Nine Months 1999, a 0.2
point decrease from 4.5% for the same period in 1998.
Net realized gains for Nine Months 1999 increased $28 million to $31
million. These gains were realized from the sale of equities as a part of a
decision to reduce exposure in the equity market resulting from our regular
review of the investment portfolio. Net realized losses for Third Quarter
1999 increased $1 million compared to Third Quarter 1998 and were realized
as a result of sales of investments to partially offset gains recognized
earlier in the year. Realized losses were incurred during Third Quarter 1999
related to a bond swap involving approximately $100 million in par value.
The acquired bonds have a higher yield which will generate additional annual
income before Federal income taxes of approximately $750,000. Proceeds from
the equity sales have also been invested in taxable bonds which will also
generate additional annual investment income before Federal income taxes of
approximately $2.0 million.
Federal Income Taxes
Total Federal income tax expense (benefit) decreased by $6 million for Third
Quarter, which produced an overall tax benefit of $4 million. The decrease
reflects the higher underwriting losses of a $14 million increase in
underwriting losses and related tax benefit generated by that loss. The
expense for Nine Months 1999 remained unchanged at $9 million, as the higher
underwriting losses of $24 million were more than offset by the $28 million
increase in net realized gain on investments. The Company's effective tax
rate was 17.8% for Nine Months 1999, compared with 18.3% for Nine Months
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.
Financial Condition, Liquidity and Capital Resources
====================================================
Selective is an insurance holding company whose principal assets are its
investments in its insurance and diversified insurance services
subsidiaries. As an insurance holding company, Selective meets its cash
requirements through dividends from its insurance subsidiaries, the payments
of which are subject to state regulatory requirements and proceeds from the
sales of the Company's common stock and debt.
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 and principal
payments on the senior notes and dividends to policyholders and stock-
holders. The insurance subsidiaries satisfy their obligations and cash
outflow through premium collections, interest and dividend income and
maturities of investments.
The Company's cash requirements also include the cost of shares of common
stock repurchased under its common stock repurchase program. On November 2,
1999, the Company's Board of Directors (the "Board") authorized the
repurchase of an additional one million shares of Selective's common stock
under the repurchase program, bringing the overall number of shares
authorized to be repurchased to 6 million. As of September 30, 1999, the
Company had repurchased a total of 3.8 million shares at a total cost of $77
million under
-17-
PAGE
the program, of which 1.4 million shares were repurchased
during Nine Months 1999 at a total cost of $26 million.
At September 30, 1999, there was $46.8 million compared with $28.3 million,
of short-term debt outstanding under the two lines of credit that the
Company has available. The increase in the outstanding balance was due to
borrowings to fund the purchase of CHN Plus, $6 million; the purchase of
Selective HR Solutions, $24 million; and the repurchase of our stock of $26
million. These increases were partially offset by pay downs made upon
receipt of dividends from the insurance subsidiaries. The weighted average
interest rate on these borrowings was 5.5% and 5.7% for the respective
periods. For Nine Months 1999, cash provided by operating activities was
$47 million, up $15 million over the same period one year ago. The Company
expects to generate cash from operations over the balance of the year.
Total assets increased 5%, or $131 million, from December 31, 1998 to
September 30, 1999. The growth was due to: (i) an increase in reinsurance
recoverable on unpaid losses and loss expense of $67 million due to an
increase in Personal Injury Protection (PIP) claims of $40 million ceded
to the Unsatisfied Claim Judgement Fund (The Company completed a
comprehensive review of lifetime claim benefits and adjusted outstanding
loss projections to the new ultimate loss projections. Since incurred
losses on these claims have exceeded the retention level, increases to
reserves are ceded to reinsurer at 100%); and flood claims of $33 million
due to Hurricane Floyd ceded to the Federal Government (See footnote 5 on
page 8 of this Form 10-Q); (ii) an increase in premiums and other
receivables of $58 million; and (iii) deferred policy acquisition costs
(policy acquisition costs which are deferred and amortized over the life of
the policy period) of $10 million primarily due to the increased premium
volume; (iv) a $26 million increase in goodwill related to the third
quarter acquisition of Selective HR Solutions and CHN Plus; and (v) a $28
million increase, which resulted in a deferred tax asset of $21 million,
due primarily to a $71 million decrease in unrealized gains in the
available-for-sale investment portfolio. The above increases were partially
offset by a $59 million decrease in total investments. The cash proceeds
of these sales were used to repurchase the Companies common stock.
The rise in total liabilities of 9%, or $165 million, from December 31,
1998 to September 30, 1999 was mainly attributable to (i) an increase of
$103 million in reserves for loss and loss expenses as follows: $33 million
in flood claims from Hurricane Floyd, $12 million in other catastrophe
claims, and $40 million in PIP claims (See footnote 5 on page 8 of this
Form 10-Q); (ii) an increase of $45 million in unearned premiums; and (iii)
an increase of $18 million in short-term debt as described above.
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, prior to the end of 1999, 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 effect associated with such compliance.
-18-
PAGE
The Company prepared for potential Year 2000 issues (the "Y2K" issue) that
could affect its information systems, mainframe applications, personal
computers (PCS), communications systems, and non-information systems of the
Company's suppliers and independent insurance agents. The Company's
preparations included 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. Senior management has implemented a policy to review
all changes to the production environment between now and December 31, 1999
to ensure that only the most critical changes will be made. Programming
teams will continue to monitor any code before it is introduced to a major
system to ensure the new code does not cause a new Y2K problem.
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 were completed for all
major systems in June 1999. A Y2K code audit performed using an automated
tool to identify and correct potential Y2K coding issues is complete and
issues identified have been corrected. 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 network
equipment is complete and all critical PCS have been upgraded.
A series of global system integration Y2K readiness tests intended to
synchronize all systems have been conducted 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 business users, identified minimal necessary changes to program code.
Required changes were completed at the time of identification. The Company
began its final system integration test in July 1999. This test includes the
remediated claims system as well as a new financial reporting system, which
became operational after the 1998 tests were completed. A separate system
environment is being used to mimic the production environment for this test.
The Y2K replica of the production environment has been successfully run
through dates in February 2000 including the February 29, 2000 leap year
date. The testing will culminate with emulating March 31, 2000 processing
which is scheduled for late November.
The Company anticipates Y2K readiness in all critical areas. Although Y2K
testing has been successful, the Company has still adopted a contingency
planning strategy that addresses mission critical and non-mission critical
business processes. Some of the contingency plans include: two months of
Information System Department supplies are on-hand to mitigate interruptions
in operations, vacation schedules have been modified for key personnel,
policies will be renewed ahead of normal dates to eliminate any backlog
during the first half of January 2000, information system support teams have
been assigned to critical systems and regional underwriting and claim
offices to monitor system availability on January 1, 2000, and system
activity will be limited over the rollover into the new year. 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 also has updated disaster recovery
plans for all regional offices, legal offices, subsidiaries and mission
critical corporate departments.
-19-
PAGE
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 complete which has identified agents who may not be Y2K compliant.
The Company's regional offices are developing contingency plans to allow
them to work with the small percentage of agents who may not be Y2K
compliant.
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 remittances. Contingency plans have been refined to
allow the Company to carry on operations if such scenarios were to occur.
The contingency plans include provisions to undertake manual processing in
such situations. 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 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. As part of the Company's
contingency planning, alternate vendors for critical services have been
identified. The Company has a vendor to process payment receipts through a
lockbox that could not be quickly replaced. While it has been determined
that this vendor is Y2K ready, detailed contingency plans have been done
as a backup.
The failure to correct a material Y2K problem could result in interruption
to normal business activities operations, such as policy underwriting and
claims payment. Such failure 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 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 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 $2.6 million, and as of
September 30, 1999, the Company has incurred approximately $2.5 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,
-20-
PAGE
1998, 1997 and 1996 are approximately $0.8
million, $0.5 million, $0.7 million, and $0.1 million, respectively. The
remaining $0.5 million expended has been capitalized.
In addition to evaluating and addressing Y2K issues relating to possible
business interruption, the Company has also evaluated its Y2K exposure
relating to software development and insurance policy coverages.
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 omission
insurance policy was purchased which provides $10 million coverage for any
Y2K claim resulting from any work performed by PDA after January 1, 1998.
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
policies issued do not include coverage for 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 has used the
Insurance Services Office Y2K exclusionary endorsements on most 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 $12 million retention. The treaty covers any Y2K claim that is
asserted in the 36 month period beginning on July 1, 1998.
The Company does not presently anticipate that costs 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.
Recent Legislation and Competition with Banks
=============================================
On November 4, 1999, the Financial Services Modernization Act of 1999 (the
"Act") was adopted and signed into law by the President on November 12,
1999. The Act permits banks to engage in non-banking, financial service
businesses, including the underwriting of insurance. The Act repeals
provisions of federal law which historically prohibited banks from engaging
in the insurance business. While the impact on the Company of the Act is
uncertain, we may face additional insurance underwriting competition from
banks as a result of the Act. The Company already faces potential
competitive risks from banks, because banks have acquired insurance
agencies in states where we sell insurance, including some agencies which
sell insurance written by us and are important to our business. We believe
that some banks could have business strategies for operating their
insurance agencies that differ from strategies we think are important for
the distribution of our insurance products through independent insurance
agencies. If those banks were to acquire additional insurance agencies
which are important to us in states where we do business, we would have to
seek to replace those insurance agencies. As a result of the Act, banks
will also be able to write property and casualty insurance and could
compete directly with us by selling insurance through their own insurance
agencies.
-21-
PAGE
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 10-K for the year ended
December 31, 1998.
Part II Other Information
==========================
Item 5. Other Information.
==========================
On November 2, 1999, the Board of Directors of Selective adopted certain
amendments to Selective's By-Laws. Among other things, under the By-Laws,
as amended, (i) the proposal of business by a stockholder to be considered
at an annual meeting, which is not in the form of a proposal requested to
be included in Selective's proxy statement, and/or nominations of persons
for election as directors at an annual meeting, require advance written
notice to Selective (including certain additional information as specified
in the By-Laws, as amended) not less than ninety nor more than one hundred
twenty days prior to the first anniversary of the preceding year's annual
meeting, (ii) such proposals and/or nominations may be made only by persons
who were stockholders of record at the time of the advance written notice
and (iii) business which may be conducted at a special meeting of
stockholders is limited to the business included in Selective's notice of
the special meeting.
A copy of the By-Laws, as amended, is annexed to this report under
Exhibit 3.2, and reference is made to that exhibit for the full text of
Selective's By-Laws, as amended.
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.
-22-
PAGE
SIGNATURES
==========
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SELECTIVE INSURANCE GROUP, INC.
-------------------------------
Registrant
Date: November 15, 1999
By: /s/Gregory E. Murphy
---------------------
Gregory E. Murphy,
President, and
Chief Operating Officer
Date: November 15, 1999
By: /s/David B. Merclean
---------------------
David B. Merclean,
Senior Vice President and
Chief Financial Officer
-23-
PAGE
SELECTIVE INSURANCE GROUP, INC.
INDEX TO EXHIBITS
===============================
Exhibit No.
3.2 The Company's By-Laws as amended through November 2, 1999,
filed herewith.
11 Statement Re: Computation of Per Share Earnings, filed herewith.
27 Financial Data Schedule, filed herewith.
-24-
Exhibit 3.2
RESOLVED, that the By-Laws of the Company be amended, effective
November 2, 1999, as follows:
1) Deleting Section 3 in its entirety and substituting the
following in its stead:
MEETINGS OF STOCKHOLDERS
Section 3A. The annual meeting of the stockholders shall be
held at a time to be affixed by the Board of Directors on the
first Friday in May in each year at the principal office of the
Company, or at such other place within or without the State of
New Jersey as a majority of the directors may previously
designate for the election of directors and for the transaction
of such other business as may properly be brought before the
meeting. Notice thereof shall be given by the Secretary by
mailing a notice to each stockholder to the address appearing on
the Company records at least ten days prior to the meeting.
Special meetings of the stockholders may be held at the
principal office of the Company, or at such other place within or
without the State of New Jersey as the directors may previously
designate, whenever called by the affirmative vote of a majority
of the whole Board of Directors or by the President. Notice of
such a special meeting, indicating briefly the object or objects
thereof, shall be mailed to each stockholder at his address as
the same appears on the stock books of the Company at least ten
days previous to the time of holding such meeting. Such notice
shall be completely given upon mailing.
A majority in amount of the stock issued and outstanding
represented by the holders in person or by proxy shall be
requisite and sufficient to constitute a quorum at any meeting of
the stockholders for the election of directors or for the
transaction of other business.
Section 3B. (a) (i) The proposal of business by a
stockholder to be considered at an annual meeting of
stockholders, which proposal is not in the form of a proposal
requested by such stockholder to be included pursuant to Rule
14a-8 under the Securities Exchange Act of 1934 (the "Exchange
Act") in the Company's proxy statement for such annual meeting,
and/or nominations of persons for election to the Board of
Directors of the Company at an annual meeting of stockholders,
may be made by a stockholder who was a stockholder of record at
the time of giving of notice provided for in Section 3B(a)(ii)
hereof, who is entitled to vote at such annual meeting and who
has complied with the notice procedures set forth in said Section
3B(a)(ii).
-1-
PAGE
(ii) For any such business and/or nominations to be
properly brought before an annual meeting by a stockholder, the
stockholder must have given timely notice thereof in writing to
the Secretary of the Company, and such business must be a proper
matter for stockholder action. To be timely, a stockholder's
notice shall be delivered to the Secretary of the Company at the
principal executive offices of the Company not less than ninety
nor more than one hundred twenty days prior to the first
anniversary of the preceding year's annual meeting; provided
however, that in the event that the date of the annual meeting is
more than thirty days before or more than sixty days after such
anniversary date, notice by the stockholder to be timely shall be
so delivered not less than ninety days nor more than one hundred
twenty days prior to such annual meeting or ten days following
the day on which public announcement of the date of such meeting
is first made. In no event shall the public announcement of an
adjournment of an annual meeting commence a new time period for
the giving of a stockholder's notice as described above. Such
stockholder's notice shall set forth (A) as to any such business
that the stockholder proposes to bring before the meeting, a
brief description of such business, the reasons for conducting
such business at the meeting, any material interest of such
stockholder in such business and the beneficial owner, if any, on
whose behalf the proposal is made; (B) as to each person whom the
stockholder proposes to nominate for election as a director, all
information relating to such person that would be required to be
disclosed in a solicitation of proxies for the election of such
person as a director pursuant to Regulation 14A under the
Exchange Act (including such person's written consent to being
named in the proxy statement as a nominee and to serving as a
director if so elected); and (C) as to the stockholder giving
the notice and the beneficial owner, if any, on whose behalf the
proposal or nomination is made (1) the name and address of such
stockholder, as they appear on the Company's books, and of such
beneficial owner, and (2) the class and number of shares of the
Company which are owned beneficially and of record by such
stockholder and such beneficial owner.
(iii) Notwithstanding anything in Section 3B(a)(ii)
hereof to the contrary, in the event that the number of directors
to be elected to the Board of Directors of the Company is to be
increased and there is no public announcement naming all of the
nominees for directors or specifying the size of the increased
Board of Directors made by the Company at least one hundred days
prior to the first anniversary of the preceding year's annual
meeting, a stockholder's notice required under Section 3B(a)(ii)
hereof shall also be considered timely, but only with respect to
nominees for any new positions created by such increase in the
number of directors, if it shall be delivered to the Secretary of
the Company at the principal executive offices of the Company not
less than ten days following the day on which such public
announcement is first made by the Company.
(b) Only such business shall be conducted at a special
meeting of stockholders as shall have been brought before the
meeting pursuant to the Company's notice of meeting. Nominations
of persons for election to the Board of Directors may be made at
a special meeting of stockholders at which directors are to be
elected
-2-
PAGE
pursuant to the Company's notice of meeting (i) by or at the
direction of the Board of Directors or (ii) by any stockholder of
the Company who is a stockholder of record at the time of giving
of notice provided for in Section 3B(a)(ii) hereof and this
Section 3B(b), who is entitled to vote at the meeting and who has
complied with the notice procedures set forth in said Section
3B(a)(ii) and this Section 10(b). In the event the Company calls
a special meeting of stockholders for the purpose of electing one
or more persons to the Board of Directors, any such stockholder
may nominate a person or persons (as the case may be) for
election to such position(s) as specified in the Company's notice
of meeting if the stockholder's notice required by said Section
3B(a)(ii) and this Section 3B(b) shall be delivered to the
Secretary of the Company at the principal executive offices of
the Company not less than ninety days nor more than one hundred
twenty days prior to such special meeting or ten days following
the day on which public announcement is first made of the date of
the special meeting and of the nominees proposed by the Board of
Directors to be elected at such meeting. In no event shall the
public announcement of an adjournment of a special meeting
commence a new time period for the giving of a stockholder's
notice as described above.
(c) Except as otherwise provided by applicable law, the
Chairman of the meeting shall have the authority to determine
whether a nomination or any business proposed to be brought
before the meeting was made or proposed (as the case may be) in
accordance with the procedures set forth in this Section 3B, and,
if any proposed nomination or business is not in compliance with
this By-Law, to declare that such defective proposal or
nomination shall be disregarded.
(d) For purposes of this Section 3B, a "public
announcement" shall mean disclosure in a press release issued by
the Company and reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a
document publicly filed by the Company with the Securities and
Exchange Commission pursuant to Section 13, 14 or 15(d) of the
Exchange Act.
(e) In addition to the requirements of the foregoing
provisions of this Section 3B, a stockholder shall also comply
with all applicable requirements of the Exchange Act and the
rules and regulations thereunder with respect to the matters set
forth herein. Nothing in this By-Law shall be deemed to affect
any rights of stockholders to request inclusion of proposals in
the Company's proxy statement pursuant to Rule 14a-8 under the
Exchange Act.
2) Deleting Section 8 in its entirey and substituting the
following in its stead:
MEETINGS OF THE BOARD OF DIRECTORS
Section 8. Regular meetings of the Board shall be held at a
time and place to be fixed by the Board of Directors.
-3-
PAGE
The Chairman or President may call a special meeting of the
Board of Directors when in his opinion the interests of the
Company require it. It shall be the duty of the President or
Secretary to call a special meeting of the Board at the request,
in writing, of any three of the directors; and if the President
or Secretary fails or refuses to do so any three directors may
call a special meeting of the Board.
At any meeting of the Board of Directors a majority shall
constitute a quorum but a lesser number may adjourn the meeting
from time to time until a quorum appears.
Twenty-Four (24) hours notice of the time and place of any
meeting of the Board of Directors shall be given to all directors
but business transacted at any meeting at which all directors are
present shall be legal even though no notice of said meeting was
given.
-4-
PAGE
BY-LAWS
SELECTIVE INSURANCE GROUP, INC.
OFFICES
Section 1. The principal office of the corporation shall be
located at Wantage Avenue, Branchville, New Jersey. The
corporation may also establish and have offices at such other
place or places as may from time to time be designated by the
Board of Directors.
SEAL
Section 2. The corporation shall have a seal with the name
of the corporation, the year of its organization, the words
"Corporate Seal" and the state of its incorporation thereon.
MEETINGS OF STOCKHOLDERS
Section 3. The annual meeting of the stockholders shall be
held at a time to be affixed by the Board of Directors on the
first Friday in May in each year at the principal office of the
Company, or at such other place within the State of New Jersey as
a majority of the directors may previously designate for the
election of directors and for the transaction of such other
business as may properly be brought before the meeting. Notice
thereof shall be given by the Secretary by mailing a notice to
each stockholder to the address appearing on the Company records
at least ten days prior to the meeting.
Special meetings of the stockholders may be held at the
principal office of the Company, or at such other place within
the State of New Jersey as the directors may previously
designate, whenever called by the affirmative vote of a majority
of the whole Board of Directors or by the President. Notice of
such a special meeting, indicating briefly the object or objects
thereof, shall be mailed to each stockholder at his address as
the same appears on the stock books of the Company at least ten
days previous to the time of holding such meeting. Such notice
shall be completely given upon mailing.
A majority in amount of the stock issued and outstanding
represented by the holders in person or by proxy shall be
requisite and sufficient to constitute a quorum at any meeting of
the stockholders for the election of directors or for the
transaction of other business.
-5-
PAGE
INSPECTORS OF ELECTION
Section 4. At the annual meeting of the stockholders, two
stockholders, not candidates for the office of director, shall be
appointed as inspectors of the election, whose duty it shall be
honestly and fairly to conduct such election, and who shall
furnish a certificate over their signatures of the result
thereof, which certificate shall be presented to and filed by the
Secretary.
RIGHTS OF STOCKHOLDERS
Section 5. Every stockholder shall be entitled at any
meeting of the stockholders to one vote for each share of stock
held by him.
Section 6. The Board of Directors shall have power to close
the stock transfer books of the Company for a period not
exceeding fifty days preceding the date of any meeting of
stockholders or the date for payment of any dividend, or the date
for the allotment of rights, or the date when any change or
conversion or exchange of capital stock shall go into effect;
provided that, in lieu of so closing the stock transfer books,
the Board may fix in advance a date, not exceeding fifty days
preceding the date of any meeting of stockholders, or the date
for the payment of any dividend, or the date for the allotment of
rights, or the date when any change or conversion or exchange of
capital stock shall go into effect, as a record date for the
determination of the stockholders entitled to notice of, and to
vote at, any such meeting, or entitled to receive payment of any
such dividend, or any such allotment of rights, or to exercise
the rights in respect to any such change, conversion or exchange
of capital stock, and in such case only stockholders of record on
the date so fixed shall be entitled to such notice of, and to
vote at, such meeting or to receive payment of such dividend, or
allotment of rights or exercise of such rights, as the case may
be, and notwithstanding any transfer of any stock on the books of
the Company after any such record date fixed as aforesaid.
Certificates of stock of the Company shall be in such form
as the Board of Directors shall from time to time prescribe and
shall be signed by the President or a Vice President and by
either the Treasurer or an Assistant Treasurer or the Secretary
or an Assistant Secretary. The board shall have power to appoint
one or more Transfer Agents and/or one or more Registrars for the
transfer and/or registration of the certificates of stock and may
require that stock certificates shall be countersigned and/or
registered by a Transfer Agent and/or Registrar; provided, that
when any certificate is signed by a Transfer Agent and registered
by a Registrar, if the Board shall by resolution so provide, the
signatures of the officers of the Company who sign such
certificate may be facsimiles and the seal of the Company
imprinted thereon.
Shares of stock of the Company shall be transferable on the
books of the Company by the holder of record thereon in person or
by duly authorized attorney and upon the surrender of the
certificate properly endorsed.
-6-
PAGE
No stockholder shall be personally liable for any of the
debts or obligations of the Company or for any assessment on his
stock.
Stockholders shall have no right to any division of the
assets or profits of the Company or to any dividends therefrom,
except as the Board of Directors shall from time to time declare.
DIRECTORS
Section 7A. The business and affairs of the Company shall
be managed by a Board of Directors which shall have and may
exercise all of the powers of the Company, except such as are
expressly conferred upon the stockholders by law, by the Restated
Certificate of Incorporation or by these By-laws. Subject to the
rights of the holders of shares of any series of Preferred Stock
then outstanding, the Board of Directors shall consist of not
less than seven (7) nor more than twenty (20) 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 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.
Section 7B. Vacancies, however caused, occurring in the
Board, and newly created directorships resulting from an increase
in the authorized number of directors may be filled by the
affirmative vote of a majority of the remaining Directors at any
regular or special meeting.
Section 7C. No present or former employee of the Company
(excluding its Chief Executive Officer) who has attained his 68th
birthday, shall be eligible for election as a Director of the
Company; except, however, those Directors presently serving who
are over the age of 65 may be reelected until their 72nd
birthday.
No other person who has attained his 72nd birthday shall be
eligible for election as a Director.
-7-
PAGE
Section 7D. Members of the Board of Directors shall receive
such compensation as the Board of Directors may from time to time
direct or determine.
MEETINGS OF THE BOARD OF DIRECTORS
Section 8. Regular meetings of the Board shall be held at a
time and place to be fixed by the Board of Directors.
The President may call a special meeting of the Board of
Directors when in his opinion the interests of the Company
require it. It shall be the duty of the President or Secretary
to call a special meeting of the Board at the request, in
writing, of any three of the directors; and if the President or
Secretary fails or refuses to do so any three directors may call
a special meeting of the Board.
At any meeting of the Board of Directors a majority shall
constitute a quorum but a lesser number may adjourn the meeting
from time to time until a quorum appears.
Two days' notice of the time and place of any meeting of the
Board of Directors shall be given to all directors but business
transacted at any meeting at which all directors are present
shall be legal even though no notice of said meeting was given.
EXECUTIVE COMMITTEE
Section 9. The Board of Directors shall annually at its
organizational meeting elect an Executive Committee consisting of
the Chief Executive Officer and a minimum of three other
directors who shall constitute the Executive Committee, as fixed
by the Board of Directors. The Executive Committee shall meet at
the call of the Chief Executive Officer, or any two members. The
Executive Committee shall have authority, when the Board of
Directors is not in session, to take action upon any matters that
may be brought before it, excepting the Company's investments,
and shall report its proceedings to the Board of Directors at the
Board's next meeting. A majority of the Executive Committee
shall constitute a quorum thereof.
The Chief Executive Officer shall be Chairman of the
Executive Committee.
The action of a majority of the Executive Committee
expressed in meetings or by writing, cable or telegram, without a
meeting shall, for all purposes, constitute the action of the
Committee and have the same effect as if assented to by all.
FINANCE COMMITTEE
Section 9A. The Board of Directors shall annually elect
from its members a chairman and a minimum of three other
directors, who shall constitute the Finance Committee, as fixed
by the Board of Directors. The Finance Committee shall meet on
-8-
PAGE
twenty-four hours' notice at the call of such chairman or any two
members. The Finance Committee shall have authority to purchase
and sell stocks, bonds, notes and other securities, to sell
properties acquired in foreclosure suits or in satisfaction of
debts, and otherwise to invest and reinvest the funds of the
Company. All such purchases, sales, investments and
reinvestments must be reported to the Board at its next meeting.
A majority of the Finance Committee shall constitute a quorum
thereof.
The action of a majority of the Finance Committee, expressed
in meetings, or by writing, cable, or telegram without meeting,
shall, for all purposes, constitute the action of the Committee
and have the same effect as if assented to by all.
AUDITING COMMITTEE
Section 10. The Board of Directors shall annually arrange
for an audit of the Company's accounts by a certified public
accountant. It shall fix the number of and elect from its
members an Auditing Committee none of whom shall be an officer of
the Company. The Committee shall examine the report of such
audit and report to the Board any matters therein requiring
action or consideration. Such Auditing Committee or the
accountant shall have the right of access at all reasonable times
to the accounts, books and vouchers of the Company, and the
officers of the Company shall supply such information and
explanation as may be necessary for the full performance of their
duties.
OTHER COMMITTEES
Section 11. The Board of Directors shall have the power to
create other committees, and the President shall have the power
to appoint the members thereof.
NOTICE TO DIRECTORS, OFFICERS AND COMMITTEE MEMBERS
Section 12. Any notice required to be given to any
director, officer or committee member under the provisions of
these By-Laws or otherwise shall be duly and sufficiently given
if mailed to such director, officer or committee member at his
address as the same appears on the stock books of the Company
(or, in the case of an officer who is not a stockholder, at his
address appearing on the payroll records), or if given personally
or by telephone, telegram or radiogram. Such notice shall be
completely given upon mailing, or upon personal or telephonic
notification, or upon the sending of a telegram or radiogram, to
such director, officer or committee member, as the case may be,
at his home address as the same appears on the books of the
Company. Any such notice may be waived by any director, officer
or committee member to whom it is required to be given either
before or after the meeting or occurrence for which such notice
is required.
OFFICERS
Section 13A. The Board of Directors immediately after the
annual meeting of the stockholders shall meet and elect or
appoint a Chairman of the Board of Directors,
-9-
PAGE
President, Vice President, Secretary and Treasurer. They may
appoint such other officers as the needs of the corporation may
from time to time require. All officers shall serve for one
year, or until the election and qualification of their
successors, subject to the power of the directors to remove any
officer at pleasure by a majority vote of the Board. Any two
offices except those of the President and Vice President may be
held by the same person. The compensation of the officers shall
be fixed by the Board of Directors.
Section 13B. President. In the absence of the Chairman of
the Board, the President shall preside at all meetings of the
Board of Directors and shall act as temporary chairman at and
call to order all meetings of the stockholders. If the Chairman
of the Board of Directors shall be designated as chief executive
officer, the President shall exercise such powers and duties as
may be prescribed by the Chairman of the Board. In the absence
of the designation of the Chairman of the Board as chief
executive officer, the President shall be chief executive officer
of the Corporation and shall perform all duties commonly incident
to his office, and shall have general supervision of the affairs
of the Corporation, subject to the approval of the Board of
Directors. At the first regular meeting of the Board of
Directors of the corporation in each year, the President shall
submit a complete report of the operations and the business of
the corporation for the previous fiscal year, together with a
statement of the corporation's affairs at the close of such year,
and shall submit a similar report at each annual meeting of the
stockholders.
The President shall also report to the Board from time to
time all matters coming to his notice, relating to the interests
of the corporation, that should be brought to the attention of
the Board.
Section 13C. Vice President. The Vice President shall have
and exercise all the powers and duties of the President in case
of his absence or inability to act, and shall perform such other
duties as may be prescribed by the Board of Directors.
Section 13D. Secretary. The Secretary shall attend all
meetings of the Board of Directors and of the stockholders, and
shall record all votes and the minutes of all proceedings in a
book to be kept for that purpose. The secretary shall give or
cause to be given notice of all meetings of the stockholders and
the Board of Directors, and shall affix the seal of the
corporation to such papers as may require it. He shall have
charge of the corporation's seal, the stock certificate book and
such other books and papers as the Board of Directors may
prescribe. The Secretary shall make such reports of the Board of
Directors as they may request, and shall prepare and cause to be
filed such reports and statements as may be required by law.
Section 13E. Treasurer. The Treasurer shall have the care
and custody of all the funds and securities of the corporation
and shall deposit the same in the name of the corporation in such
bank or banks as the Board of Directors may designate, and shall
disburse the same under such rules and regulations as may be made
by the Board of Directors, and shall perform such other duties as
the Board of Directors may from time to time prescribe. The
Treasurer shall keep full and accurate accounts of receipts and
-10-
PAGE
disbursements in books belonging to the corporation, and shall
see that all expenditures are duly authorized and are evidenced
by proper receipts and vouchers. The Treasurer shall render to
the President and Directors at the regular meetings of the Board
of Directors, or whenever they may require it, an account of all
his transactions as Treasurer, and of the financial condition of
the corporation, and shall also make a full report of the
financial condition of the corporation at each annual meeting of
the stockholders.
Section 13F. Chairman of the Board of Directors. The
Chairman of the Board of Directors shall preside at all meetings
of the stockholders and the Board of Directors and he shall
perform such other duties and exercise such other powers as the
Board of Directors or the Executive Committee may prescribe.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 14. Elimination of Certain Liability. A Director
of the Company shall not be personally liable to the Company or
its Stockholders for damages for breach of any duty owed to the
Company 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.
An Officer of the Company shall not be personally liable to the
Company or its Stockholders for damages for breach of any duty
owed to the Company 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.
Section 14A. Indemnification and Insurance
(a) Right to Indemnification. Each person who was 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/her being or having been a Director or Officer of the Company
or of any constituent corporation absorbed by the Company in a
consolidation or merger, or by reason of his/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 Company, or the legal representative of any
such Director, Officer, Trustee, Employee or Agent, shall be
indemnified and held harmless by the Company 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 Company to provide broader indemnification rights
than said Act permitted prior to such amendment), from and
against any and all reasonable costs, disbursements and
attorney's fees, and any and all amounts paid or incurred in
satisfaction of settlements, judgments, fines and
-11-
PAGE
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/her
heirs, executors, administrators and assigns; provided, however,
that, except as provided in Section 14A. (b) hereof, the Company
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 Company. The right
to indemnification conferred in this subsection shall be a
contract right and shall include the right to be paid by the
Company 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/her
capacity as a Director or Officer in advance of the final
disposition of a proceeding shall be made only upon receipt by
the Company 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 subsection or otherwise.
The Company may, by action of the Board of Directors, provide for
indemnification and advancement of expenses to Employees and
Agents of the Company with the same scope and effect as the
foregoing indemnification of Directors and Officers.
(b) Right of Claimant to Bring Suit. If a claim under
Section 14A. (a) of this subsection is not paid in full by the
Company within thirty days after a written request has been
received by the Company, the claimant may at any time thereafter
apply to a court for an award of indemnification by the Company
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 Company 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 Company) that the
claimant has not met the standard of conduct which makes it
permissible under the New Jersey Business Corporation Act for the
Company to indemnify the claimant for the amount claimed, but the
burden of proving such defense shall be on the Company. Neither
the failure of the Company (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 Company (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.
-12-
PAGE
(c) Non-Exclusivity of Rights. The right to indemnification
and advancement of expenses provided by or granted pursuant to
this Section 14A. 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.
(d) Insurance. The Company may purchase and maintain
insurance on behalf of any Director, Officer, Employee or Agent
of the Company 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/her by reason of such person being or having
been such a Director, Officer, Employee or Agent, whether or not
the Company would have the power to indemnify such person against
such expenses and liabilities under the provisions of this
Section 14A. or otherwise.
GENERAL COUNSEL
Section 15. The Board of Directors shall annually appoint a
General Counsel of the Company whose duty it shall be to afford
and communicate to the officers, directors and committees, in
writing or otherwise, whenever requested, such counsel, legal
advice and information as may be requested to guide them in the
discharge and performance of their duties.
OFFICIAL BONDS
Section 16. The Treasurer, and such other officers and
employees as the Board of Directors may designate, shall give
bonds in such sums and with such securities and conditions as the
Board may require. The President shall have custody of all such
bonds.
FISCAL YEAR
Section 17. The fiscal year of the corporation shall be
fixed by resolution of the Board of Directors.
SIGNATURES
Section 18. All checks issued by the Company shall bear the
signatures or facsimile signatures of at least two persons
designated by the Board of Directors.
All other notes, drafts, orders for the payment of money and
all other documents requiring the signature of an officer or
officers of the corporation shall be signed by such officer or
officers or such other person or persons as the Board of
Directors
-13-
PAGE
may from time to time designate.
BOOKS OF THE COMPANY
Section 19. No stockholders, other than an officer or
director, shall have any right to inspect any account or book or
document of the Company except as such right may be conferred by
law or authorized by the Board of Directors after evidence
satisfactory to the Board is presented that such inspection is
desired for a proper purpose.
AMENDMENTS
Section 20. Not withstanding any other provision contained
in these By-laws to the contrary, Sections 7A and 7B and this
Section 20 of these By-laws may be altered, amended, supplemented
or repealed only by the affirmative vote of 66-2/3% or more of
the voting power of all of the shares of the Company entitled to
vote generally in the election of directors, voting together as a
single class.
Subject to the foregoing, these By-laws may be altered, amended,
supplemented or repealed and new By-laws may be adopted by the
Board of Directors at any meeting, provided that ten days'
notice, in writing has been given to each director of any
proposed alteration, amendment, supplemental repeal or adoption.
The affirmative vote of a majority of the whole Board shall be
necessary to accomplish any proposed alteration, amendment,
supplement, repeal or adoption. Any By-law may be altered,
amended, supplemented, repealed or adopted without such previous
notice by the vote of three-fourths of the whole Board.
-14-
EXHIBIT 11
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
For the nine-months ended September 30, 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 $ 43,573 27,283 $ 1.60
======
Effect of Dilutive Securities
Restricted stock - 667
8.75% convertible
subordinated debentures 267 874
Stock options (49) 254
------- ------
Diluted EPS
Income available to common
stockholders + assumed
conversions $ 43,791 29,078 $ 1.51
======= ====== ======
1998
- ----
Basic EPS
Net Income available
to common stockholders $ 42,498 28,716 $ 1.48
======
Effect of Dilutive Securities
Restricted stock - 532
8.75% convertible
subordinated debentures 346 940
Stock options (898) 535
------- ------
Diluted EPS
Income available to common
stockholders + assumed
conversions $ 41,946 30,723 $ 1.37
======= ====== ======
-1-
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
For the quarter ended September 30, 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 $ 1,935 27,074 $ 0.07
======
Effect of Dilutive Securities
Restricted stock - 708
8.75% convertible
subordinated debentures 88 871
Stock options (5) 260
------- ------
Diluted EPS
Income available to common
stockholders + assumed
conversions $ 2,018 28,913 $ 0.07
======= ====== ======
1998
- ----
Basic EPS
Net Income available
to common stockholders $ 12,932 28,308 $ 0.46
======
Effect of Dilutive Securities
Restricted stock - 550
8.75% convertible
subordinated debentures 149 896
Stock options (157) 281
------- ------
Diluted EPS
Income available to common
stockholders + assumed
conversions $ 12,924 30,035 $ 0.43
======= ====== ======
-2-
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
September 30, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 1,167,766
<DEBT-CARRYING-VALUE> 292,461
<DEBT-MARKET-VALUE> 296,187
<EQUITIES> 223,447
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,711,848
<CASH> 9,400
<RECOVER-REINSURE> 11,013
<DEFERRED-ACQUISITION> 119,386
<TOTAL-ASSETS> 2,563,219
<POLICY-LOSSES> 1,296,053<F1>
<UNEARNED-PREMIUMS> 445,506
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 135,521<F2>
0
0
<COMMON> 75,742
<OTHER-SE> 497,421
<TOTAL-LIABILITY-AND-EQUITY> 2,563,219
589,145
<INVESTMENT-INCOME> 70,684
<INVESTMENT-GAINS> 31,041
<OTHER-INCOME> 33,401
<BENEFITS> 443,484<F3>
<UNDERWRITING-AMORTIZATION> 184,446
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 52,999
<INCOME-TAX> 9,426
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43,573
<EPS-BASIC> 1.60
<EPS-DILUTED> 1.51
<RESERVE-OPEN> 1,193,274<F4>
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 1,296,053<F5>
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Equals the sum of Reserve for losses and the Reserve for loss expense.
<F2>Equals the sum of Notes payable, Short-term debt, and Convertible
subordinated debentures.
<F3>Equals the sum of losses incurred and loss expenses incurred.
<F4>Equals the sum of Reserve for losses and Reserve for loss expenses
at the beginning of the year.
<F5>Equals the sum of Reserve for losses and Reserve for loss expenses at
the end of the period.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This restated schedule contains summary financial information extracted
from the September 30, 1998 10Q and is qualified in its entirety by
reference to such financial statements. Certain information has been
restated to conform with current year presentation.
</LEGEND>
<RESTATED>
<CIK> 0000230557
<NAME> SELECTIVE INSURANCE GROUP, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 1,050,907
<DEBT-CARRYING-VALUE> 370,557
<DEBT-MARKET-VALUE> 388,334
<EQUITIES> 236,355
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,726,257
<CASH> 9,967
<RECOVER-REINSURE> 10,085
<DEFERRED-ACQUISITION> 115,300
<TOTAL-ASSETS> 2,410,080
<POLICY-LOSSES> 1,184,947<F1>
<UNEARNED-PREMIUMS> 417,668
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 120,766<F2>
0
0
<COMMON> 73,948
<OTHER-SE> 506,834
<TOTAL-LIABILITY-AND-EQUITY> 2,410,080
536,496
<INVESTMENT-INCOME> 72,792
<INVESTMENT-GAINS> 2,788
<OTHER-INCOME> 12,995
<BENEFITS> 381,315<F3>
<UNDERWRITING-AMORTIZATION> 170,694
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 52,006
<INCOME-TAX> 9,508
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 42,498
<EPS-BASIC> 1.48
<EPS-DILUTED> 1.37
<RESERVE-OPEN> 1,161,169<F4>
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 1,184,947<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>
