PAGE 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one) FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Fee required)
For the fiscal year ended.....December 31, 1998.................
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No fee required)
For the transition period from....................to...........
Commission file number 0-8641
SELECTIVE INSURANCE GROUP, INC.
(Exact name of registrant as specified in its charter)
New Jersey
------------------------------------------------------------
(State or Other Jurisdiction of Incorporation or Organization)
22-2168890
-------------------------------
(IRS Employer Identification No.)
40 Wantage Avenue, Branchville, New Jersey 07890
------------------------------------------ ------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code 973-948-3000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
-------------------
8 3/4% Convertible Subordinated Debentures due January 1, 2008
(Title of class)
Common Stock, par value $2 per share
(Title of class)
Preferred Share Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months and (2) has been subject to
such filing requirements for the past 90 days.
[X] Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant based on last sale price on the Nasdaq National Market on
February 16, 1999.
Common Stock, par value $2 per share: $507,024,352
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of February 16, 1999.
Common Stock, par value $2 per share: 28,198,681
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the Selective Insurance Group, Inc. 1998 Annual Report to
Stockholders ("1998 Annual Report") are incorporated by reference to Parts
I, II, and IV of this report.
Portions of the definitive Proxy Statement for the 1998 Annual Meeting of
Stockholders ("Proxy Statement") are incorporated by reference to Part III
of this report.
PAGE 2
Forward-looking statements
- - - --------------------------
Some of the statements in this annual report on form 10K are not
historical facts and are "forward-looking statements" (as defined in the
Private Securities Litigation Act of 1995). These statements use words such
as "believes," "expects," "intends," "may," "will," "should," "anticipates"
(or the negative forms of those words) and describe our strategies, goals,
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 forward
looking statements 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;
- the effects of competition from other insurers and the trend toward
self-insurance;
- risks which we face in entering new markets and diversifying the
products and services we offer;
- weather-related events and other catastrophes;
- Year 2000 readiness; and
- other risks which we identify in future filings with the Securities
and Exchange Commission, although we do not promise to update
forward-looking statements to reflect actual results or changes in
assumptions or other factors that could affect these statements. See
Item 1. "Business" Risk Factors.
PART I
------
Item 1. Business.
- - - ------------------
General
- - - -------
Selective is a customer-focused, regional property and casualty company
providing a broad range of value-added insurance, alternative risk
management products, and managed care and related services to small and
medium-sized businesses, light industry, public entities, and individuals
through approximately 870 independent agents in 16 eastern and midwestern
states. The Company is rated A+("Superior") by both A.M. Best and Standard &
Poor's insurance rating services. Selective common stock trades on The
Nasdaq National Market under the symbol SIGI and Selective has paid
stockholder dividends for 70 consecutive years. Commercial insurance
products represent approximately 70% of net premiums earned. Selective also
offers personal insurance products to individuals and families, which
represent approximately 30% of net premiums earned. Commercial and personal
products are distributed principally in suburban and rural areas of New
Jersey, Pennsylvania, New York, Maryland, South Carolina, Virginia, North
Carolina, Georgia, Delaware, and Illinois. In 1996, the Company began
writing insurance in Illinois, the first state of a six-state expansion into
the Midwest, which in 1997 and 1998 also included Iowa, Indiana, Wisconsin,
Michigan and Ohio. In 1998, we began writing insurance in Rhode Island, and
intend to begin writing insurance in Connecticut, Minnesota, Missouri, and
Kentucky in 1999.
The Company offers its insurance products through Selective Insurance
Company of America ("SICA"), Selective Way Insurance Company ("SWIC"),
Selective Insurance Company of the Southeast ("SISE"), Selective Insurance
Company of South Carolina ("SISC") and Selective Insurance Company of New
York ("SINY"), formerly Exchange Insurance Company, (collectively, the
"Insurance Subsidiaries"). In November 1997, the Company acquired the assets
of Alta Services LLC ("Alta"), formerly MCSI/MRSI, a managed care company
that provides medical claims handling services to the insurance industry. In
December 1998, the Company acquired the assets of PDA Software Services,
Inc., ("PDA") a software developer specializing in the insurance industry,
in a share exchange accounted for under the purchase method. See Item 1.
"Business" Strategy.
The following table shows the distribution of net premiums written by
state for the periods indicated:
- - - ---------------------------------------------------------------------------
Year Ended December 31,
1998 1997 1996
- - - ---------------------------------------------------------------------------
Written Premium Distribution by State
New Jersey 51.5% 58.5 59.7
Pennsylvania 11.2 10.9 10.9
New York 9.0 7.7 7.1
Maryland 5.6 5.0 4.4
South Carolina 5.1 4.4 4.9
Virginia 5.0 4.5 4.7
North Carolina 2.6 2.4 2.8
Georgia 2.3 2.1 2.1
Delaware 2.1 2.6 3.1
Illinois 2.1 1.1 0.2
Indiana 1.0 0.3 0.0
Other states 2.5 0.5 0.1
----- ----- -----
Total 100.0% 100.0 100.0
===== ===== =====
Page 3
For the ten years ended December 31, 1998, the Company's average
statutory loss and loss expense ratio and average statutory combined ratio
were 70.2% and 104.8%, respectively. The Company's average statutory loss
and loss expense ratio during this period outperformed the property and
casualty industry's average ratio, as reported by A.M. Best Company, Inc.
("A.M. Best"), by 9.8 points. We attribute this performance to strong
relationships with independent insurance agencies, expertise in underwriting
property and casualty insurance risks, penetration of suburban and rural
market areas in the Mid-Atlantic and Southeastern and, recently the Midwest
states, and conservative loss and loss expense reserving practices. For the
ten years ended December 31, 1998, the Company's average statutory
underwriting expense ratio was 33.4% compared to 26.4% for the property and
casualty insurance industry. The Company's historical statutory underwriting
expense ratio is higher than the industry average, primarily due to the
impact of taxes and assessments in New Jersey from 1990 through 1996 (which
accounted for approximately 1.6 points of the average ratio) and labor costs
(which accounted for approximately 8.0 points of the average ratio). The
industry average expense ratio reflects the inclusion of direct writers of
insurance which generally have lower distribution costs. The Company's
average statutory combined ratio outperformed the property and casualty
industry average statutory combined ratio by 3.0 points for this ten-year
period. The statutory combined ratio is not as favorable as the loss and
loss expense ratio in comparison to the industry primarily due to the impact
of the Company's underwriting expense ratio as previously described. The
table on page 4 sets forth certain Company and industry ratios.
Recent Developments
- - - -------------------
The Company has announced that first quarter earnings for 1999 will be
reduced by a combination of catastrophe losses and an unusual number of
large property claims. In addition, recent changes in the personal auto
insurance rate reduction law in New Jersey will result in reduced earnings
for Selective in 1999, although not in the first quarter.
In January 1999, the industry suffered substantial weather-related
catastrophe losses. The Company incurred catastrophe losses in a number of
its operating areas, particularly New Jersey, Pennsylvania and New York, the
three largest states in net premiums written. The losses for the quarter
attributable to catastrophes will be approximately $4.5 million, compared to
$2 million during the first quarter of 1998.
With respect to large property losses (claims in excess of $100,000),
the Company incurred about $3 million more in the first quarter than during
the same period in 1998. The Company believes that these claims represent an
unusual occurrence that happens from time to time in the property and
casualty business. Only one such loss occurred in the Company's new states
in the Midwest, and the losses are not concentrated in any individual state
or type of business.
The combined effect of the 1999 catastrophe losses and the increase in
1999 large property losses will add approximately 4.0 points to the combined
ratio for the first quarter of 1999. After-tax earnings for the quarter will
be reduced approximately $5 million, or $0.16 per diluted share.
Due to recent changes in the New Jersey personal auto insurance rate
reduction law, annual premiums in this line will be reduced by approximately
15% or $24 million. Previously, the Company had estimated premium reductions
of 11.5% or $17 million based on the law as adopted in May 1998. Giving
effect to anticipated loss cost savings and the impact of variable expenses,
and the rate adequacy in this line, the Company expects that after-tax
annual earnings will be reduced by about $3 million, or $.10 per diluted
share. The Company has considered the rate adequacy in this line, and its
impact on the computation of any premium refund obligation under New
Jersey's excess profits law, when establishing its reserves. With the
reduction in premiums provided for under the law, the possibility of an
excess profits refund obligation (which is calculated on a three-year
rolling basis; see Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations") will be reduced
substantially.
Page 4
Simple
Average of
All Periods Years Ended December 31,
Presented 1998 1997 1996 1995
- - - ----------------------------------------------------------------------------
Certain Company Ratios(1):
Loss 59.0% 59.9 56.8 60.6 60.4
Loss expense 11.2 10.3 11.4 10.8 10.8
Underwriting expense 33.4 32.2 31.2 30.8 29.4
Policyholders' dividends 1.1 0.7 0.7 0.7 1.0
Combined ratio(3) 104.8 103.2 100.1 102.9 101.6
Growth (decline) in net
premiums written 5.7 4.4 3.7 (8.6) 8.5
Certain Industry Ratios(1)(4):
Loss 67.1 63.3 60.3 65.4 65.7
Loss expense 12.9 12.9 12.5 12.9 13.2
Underwriting expense 26.4 27.3 27.1 26.4 26.3
Policyholders' dividends 1.3 1.5 1.7 1.1 1.4
Combined ratio(3) 107.8 105.0 101.6 105.8 106.5
Growth in net premiums written 3.4 1.7 2.8 3.4 3.6
Company Favorable
(Unfavorable) to Industry:
Combined ratio 3.0 1.8 1.5 2.9 4.9
Growth in net premiums written 2.3 2.7 0.9 (12.0) 4.9
(1) The ratios and percentages are based upon Statutory Accounting
Practices ("SAP").
(2) In 1993, this ratio includes the one-time restructuring charge of $9.0
million, which increased the ratio by 1.5 points.
(3) A combined ratio under 100% generally indicates an underwriting
profit and a combined ratio over 100% generally indicates an
underwriting loss. Because of investment income, a company may still
be profitable although its combined ratio exceeds 100%.
(4) Source: A.M. Best. The industry ratios for 1998 have been estimated
by A.M. Best.
- - - ----------------------------------------------------------------------------
Simple
Average of
All Periods Years Ended December 31,
Presented 1994 1993 1992 1991
- - - ----------------------------------------------------------------------------
Certain Company Ratios(1):
Loss 59.0% 60.6 60.3 58.2 56.6
Loss expense 11.2 11.1 11.5 11.3 11.3
Underwriting expense 33.4 31.6 35.5(2) 37.0 38.3
Policyholders' dividends 1.1 1.0 1.2 1.3 1.5
Combined ratio(3) 104.8 104.3 108.5(2) 107.9 107.6
Growth (decline) in net
premiums written 5.7 14.8 8.9 13.0 3.8
Certain Industry Ratios(1)(4):
Loss 67.1 68.1 66.7 74.7 68.5
Loss expense 12.9 13.0 12.8 13.4 12.6
Underwriting expense 26.4 26.0 26.3 26.6 26.4
Policyholders' dividends 1.3 1.3 1.1 1.2 1.3
Combined ratio(3) 107.8 108.5 106.9 115.7 108.8
Growth in net premiums written 3.4 3.8 6.2 2.0 2.4
Company Favorable
(Unfavorable) to Industry:
Combined ratio 3.0 4.2 (1.6)(2) 7.8 1.2
Growth in net premiums written 2.3 11.0 2.7 11.0 1.4
(1) The ratios and percentages are based upon Statutory Accounting
Practices ("SAP").
(2) In 1993, this ratio includes the one-time restructuring charge of $9.0
million, which increased the ratio by 1.5 points.
(3) A combined ratio under 100% generally indicates an underwriting profit
and a combined ratio over 100% generally indicates an underwriting loss.
Because of investment income, a company may still be profitable
although its combined ratio exceeds 100%.
(4) Source: A.M. Best. The industry ratios for 1998 have been estimated
by A.M. Best.
- - - ---------------------------------------------------------------------------
Simple
Average of
All Periods Years Ended December 31,
Presented 1990 1989
- - - ---------------------------------------------------------------------------
Certain Company Ratios(1):
Loss 59.0% 57.9 58.8
Loss expense 11.2 12.5 10.9
Underwriting expense 33.4 36.1 32.2
Policyholders' dividends 1.1 1.6 1.5
Combined ratio(3) 104.8 108.0 103.4
Growth (decline) in net
premiums written 5.7 2.9 5.1
Certain Industry Ratios(1)(4):
Loss 67.1 69.4 69.2
Loss expense 12.9 12.9 12.7
Underwriting expense 26.4 26.0 26.0
Policyholders' dividends 1.3 1.2 1.3
Combined ratio(3) 107.8 109.6 109.2
Growth in net premiums written 3.4 4.5 3.2
Company Favorable
(Unfavorable) to Industry:
Combined ratio 3.0 1.6 5.8
Growth in net premiums written 2.3 (1.6) 1.9
(1) The ratios and percentages are based upon Statutory Accounting
Practices ("SAP").
(2) In 1993, this ratio includes the one-time restructuring charge of $9.0
million, which increased the ratio by 1.5 points.
(3) A combined ratio under 100% generally indicates an underwriting profit
and a combined ratio over 100% generally indicates an underwriting loss.
Because of investment income, a company may still be profitable
although its combined ratio exceeds 100%.
(4) Source: A.M. Best. The industry ratios for 1998 have been estimated by
A.M. Best.
Page 5
Strategy
- - - --------
The Company's primary focus has been on improving its underwriting
results, generating profitable growth and enhancing relationships with
independent agents who are aligned with our strategic objectives. The
principal elements of our strategies are to:
(i) generate an underwriting profit and increase premium volume;
(ii) reduce expenses and improve productivity through increased
automation and controlled expenses;
(iii) diversify geographically and develop new products and services;
and
(iv) continue to build and reward employees that are committed to the
Company and its objectives.
Generate an Underwriting Profit and Increase Premium Volume
In 1998, net premiums written increased by 4% over 1997. The conversion
of New Jersey personal automobile policies from six-month to annual terms
(the "Conversion") increased 1997 net premiums written by approximately $30
million for renewal business, while 1998 net premiums written included a
one-time adjustment of $4 million reflecting the buy out of certain
reinsurance arrangements (the "Reinsurance Buy Out"). Excluding the effects
of the Conversion and the Reinsurance Buy Out, net premiums written for 1998
increased by about 8%. Premium growth during the year was impacted by a
highly competitive commercial lines marketplace and a continuing move by
customers toward self-insurance programs, which particularly impacts the
community services and organizations business.
Strategic Business Units. The customer-focused Strategic Business Units
("SBUs") define customer groups that the Company believes offer profitable
growth potential. The SBUs evaluate the marketplace and provide products and
services specifically developed to meet the needs of agents and insureds in
a particular market or territory. Through its strategic business units, the
Company has enhanced the insurance products and services we offer to meet
the diverse needs of specific customer groups. The Company is aggressively
developing new business opportunities in alternative insurance markets, with
underwriting and sales efforts aimed at self-insured accounts as well as
groups and associations.
The SBUs also provide a variety of services to the branch offices,
agency management specialists ("AMSs") and agents, such as leads for new
accounts, technical training, analysis of underwriting results and other
specialized resources. Focusing on profitability is a principal strategy for
each SBU. The SBUs analyze the results by business class, territory and
agency to determine profitability, thereby allowing the Company to be more
attuned to areas of opportunity.
Alignment of Agents' Interests. Selective continues to work to align
the interests of the agents with the Company's strategic objectives. The
field underwriting program, introduced four years ago and expanded in 1998,
puts agency management specialists (AMSs) in the agent's office where they
can respond quickly to business opportunities. AMSs are experienced
underwriters with strong marketing and communication skills. We developed a
parallel program for claims, putting our claims management specialists
(CMSs) into the field to work on site with agents, insureds and claimants.
On-site inspections, personal interviews and face-to-face negotiations are
expected to result in more accurate loss settlements and increased fraud
detection. Working in the field, the CMSs gain knowledge about potential
exposures, and expand the role of the claims staff in the areas of loss
control and risk management. Each branch office has restructured its claim
operation and over 130 CMSs have been placed in the field.
Selective has maintained a strong relationship with its agency network
by providing superior service and a stable marketplace as well as applying
consistent underwriting standards. We wrote $213 million of direct new
business in 1998, a 27% increase over the prior year and believes this
growth reflects the quality of the relationships our field and regional
staffs are building with agents. The Company also continues to stress the
quality of its business. We carefully maintain underwriting discipline and
constantly review our business for quality, both at regional and corporate
levels. Selective's account-by-account approach supports our continuing
efforts to retain established accounts with favorable underwriting results,
which are the quality core of our business. Retention of profitable accounts
is a key goal of senior management. This becomes an increasingly difficult
challenge in this highly competitive marketplace, and Selective continues to
reject accounts that it believes are recklessly priced. However, retention
improvement in commercial lines for 1998 was encouraging.
Selective provides economic incentives for the agents. Profit sharing
commissions permit profitable agents the opportunity to earn additional
commissions of up to approximately 13% of their direct premiums written. In
addition, agents can purchase Selective common stock at a 5% discount with
no brokerage fees through the agents' stock purchase plan. During the last
four years, agents have invested $7 million in Selective stock through this
plan.
Reduce Expenses and Improve Productivity
The objective continues to be the reduction of expenses through
increased efficiency and automation. This objective is designed to reduce
the underwriting and loss expense ratios by improving the productivity and
efficiency of internal operations. At December 31, 1998, the insurance
operations work force numbered 1,655. Productivity, as measured by net
premiums written per employee, in 1998 was $455,000 up from $435,000 in
1997, excluding the effects of the Conversion on renewal business ($30
million) and new business ($6 million) in 1997. See Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
In 1999, the Company will implement strategic technology initiatives that
will begin to create a seamless work environment between Selective and
agents. These initiatives include new Windows-based claims and
Page 6
commercial lines underwriting systems and Internet technologies that will
give our agents and employees quick access to policy, claim and billing
information.
Controlled Expenses. The loss expense ratio has averaged 10.8% for the
three-year period ended December 31, 1998 and has decreased 1.2 points from
11.5% in 1993 to 10.3% in 1998. The Company has been able to reduce this
ratio by reducing the legal fees incurred in the course of the claim
settlement process. More aggressive management of litigation files by the
examiners together with an expansion of the staff counsel operations
(attorneys employed by the Company to represent the interests of insureds)
helped to drive this decrease. Staff counsel's average suit cost is nearly
58% or $2,500 lower than outside counsel. The ongoing program to reduce
legal fees also includes: (i) fixed fee schedules for cases handled by
outside counsel; (ii) arbitration services to avoid higher costs associated
with going to trial; and (iii) legal fee audit review services to help
identify billing errors.
The Company continues to focus on loss cost containment initiatives.
These initiatives include: (i) a comprehensive managed care program which
reduced 1998 workers' compensation and automobile costs by $26 million; (ii)
a special investigative unit and claims professionals which saved more than
$12 million in 1998 by uncovering fraudulent claims; (iii) a voluntary
automobile repair shop program which saved $2 million of repair costs in
1998 while maintaining a 93% customer service satisfaction rating; and (iv)
an estimate auto and property review program through American Computer
Estimating (ACE) which saved over $1 million. In November 1997, in
anticipation of the continued growth of managed care medical cost
containment and other medical claims services, the Company acquired the
assets of Alta Services LLC. Alta, the newest SBU, is a critical part
of the claim strategy. In addition to its full managed care product, Alta
customizes its products for specific customer needs, such as first report
of injury, bill audits and re-pricing, medical pre-certifications and
independent medical examinations.
Automation. Insurance is a detailed, paper-intensive business.
Available computer technology offers significant potential for utilizing
automation to support objectives to reduce expenses.
The Commercial Lines Automated System ("CLAS"), originally introduced in
1995 and completed in 1996, eliminates a number of manual steps, reducing
the time it takes to process commercial insurance products. With instant
access to the information, underwriters and claim adjusters are readily able
to answer questions, process changes quickly, verify coverages and work more
efficiently with agents to quote new business. Using Selective-specific
software in their offices, the agents can obtain initial pricing on
accounts. That information can be transferred electronically between the
agent, the AMS and branch office, thus enabling Selective to provide faster
turnaround on policy issuance and coverage revisions. During 1998 and in
early 1999 the product has been enhanced to make a "Windows" version
available. Workers' compensation enhancements to CLAS will be completed in
1999. This project will also involve significant enhancements which are
expected to make it easier for agents to conduct business with the Company.
Agents currently have the ability to electronically send and receive
personal lines policy information. All agents can electronically make
inquiries on the Company's claims and billing systems. In 1999, the Company
plans to continue its expansion of its "Agency Interface" capabilities to
begin to electronically interface with agents on commercial lines products.
An extranet product is being developed that will give our agents and
employees quick access to policy, claim and billing information.
Claims management specialists, equipped with laptop computers, have
electronic access to current claim information, have the ability to
authorize claim payments, and can input log notes from the field. A project
team is developing a new claims system planned for implementation beginning
in 1999, that is intended to enhance the claims adjusting process via laptop
computer by enabling complete claims entry and access to database
information from the field.
With PDA Software Services, Inc., our newest acquisition, we are
building a proprietary flood system that will allow agents to automatically
rate and issue policies over the Internet. When this system is completed in
1999, we will save about $1 million annually in vendor fees and will have
the potential to become a servicing carrier for other companies that write
flood business.
Diversification
Geographic Diversification. One of the Company's strategies is to
improve the geographic balance of its business through a long-term
diversification strategy. Geographic diversification reduces exposure to the
regulatory environment and weather-related catastrophes of any one
jurisdiction. Currently 51.5% of business is written in New Jersey, a
decrease of approximately 7 percentage points from 1997, with most of the
remaining business in Pennsylvania, New York, Maryland, South Carolina,
Virginia, North Carolina, Georgia, Delaware, and Illinois. In 1996, the
Company began writing insurance in Illinois, the first state of a six-state
expansion into the Midwest, which in 1997 and 1998 also included Iowa,
Indiana, Wisconsin, Michigan and Ohio. In 1998, we began writing insurance
in Rhode Island and intend to begin writing insurance in Connecticut,
Minnesota, Missouri, and Kentucky in 1999. The Company believes that these
areas offer growth opportunities in the middle-market segments targeted by
Selective and offer a stable regulatory and legal environment. In 1997, we
opened a Midwest field and systems office in Columbus, Ohio to support its
expansion into the Midwest.
In addition to the expansion strategy, the Company continues to focus on
increasing its penetration in the other Eastern states where it currently
does business. Personal lines business, now predominantly written in New
Jersey, has been expanded during the last two years with the introduction of
a new or enhanced personal lines program in seven states.
Page 7
Product and Service Diversifications. The business of insurance
involves risk assumption and is often subject to the uncertainties of market
cycles and weather-related catastrophes. To enhance operating income and
provide greater earnings stability, the Company has focused on developing or
acquiring fee-based operations that are related to and enhance our core
insurance operations.
Fee-For-Service. Selective writes flood insurance (provided through the
Personal Lines SBU) under the auspices of the National Flood Insurance
Program, the premiums from which are ceded 100% to the Federal government.
As a servicing carrier, not an underwriter, Selective bears no risk of
policyholder loss. The Company receives a servicing fee from which it pays
agency commissions and other related expenses. In 1998, the flood unit
generated revenue of $8 million, and generated a net before tax profit of
$2 million. In 1999, the Company expects the flood program to be expanded
into all 50 states and to reduce processing costs through a new policy
writing system.
Insurance products have traditionally been purchased as a package of
services, which includes underwriting, policy issuance, loss control, and
claim handling. As agents and businesses seek more innovative ways to solve
insurance problems, many want to customize the services they purchase.
SelecTech generates fees by providing third-party administrative services to
self-insured accounts. SelecTech's diverse service portfolio includes:
unbundled claim handling, loss control, risk management, medical cost
containment, actuarial services, and administrative support.
We purchased Alta in 1997 as we recognized that managed care was
changing the nature of medical claims associated with workers' compensation
and automobile. Alta's approach to managed care has become a critical part
of our claim strategy, and also provides the opportunity to sell medical
management services to self-insureds and other insurance carriers. Net
revenue in 1998 was $12 million (includes $7 million from insurance
subsidiaries) and Alta generated a net profit of $1 million (includes $0.3
million from insurance subsidiaries).
As we invested in new technology, we recognized that the skills we are
developing are also opportunities to generate additional revenue. We
purchased PDA in 1998 to lead the development of innovative technology that
will meet our business needs and generate additional income by providing
these systems and services to the insurance community.
Alternative Markets. The insurance industry broadly defines the
alternative market as any program in which clients self-insure part or all
of their insurable exposures. Historically, the practice of self-insuring
was limited to the largest corporations, who, as buyers, were more
sophisticated in insurance risk and exposure management. The Company
believes that middle market companies now have begun to utilize the
alternative market with increasing frequency. Industry statistics show that
the number of companies participating in the alternative market has expanded
rapidly during the last decade, now approaching 35% of commercial insurance
premiums in the United States. Industry experts predict that 70% of all
commercial lines premium dollars could be tied into an alternative market
mechanism within ten years. The Company's strategy is to offer the
alternative market products to meet the coverage and risk financing needs of
the Company's independent agents and their customers for large accounts,
self-insured groups, and associations. The Selective Risk Managers SBU
("SRM") was formed to focus on business opportunities in alternative
insurance markets and to lead underwriting and sales efforts for large
accounts, self-insured, group and association business. While primarily
focused on developing customized primary insurance or reinsurance products
for the commercial SBUs, SRM also generates fee income for the Insurance
Subsidiaries by collecting ceding commissions and placement fees. During
1998, SRM received 155 alternative market program submissions from
independent insurance agents. In addition to developing and marketing
alternative insurance products, SRM promotes the services of SelecTech and
Alta.
Employee Rewards
The annual cash incentive programs are based on the achievement of
specific business objectives and on individual and team performance measured
by the achievement of business performance goals related to increased
profitability and premium growth and improving service. These goals were
developed from the Company's overall strategy for growth and profitability.
Employees set individual and team targets that go beyond their normal
responsibilities. Total incentive compensation (including payroll taxes)
amounted to $5 million, $9 million and $5 million for 1998, 1997 and 1996,
respectively.
In addition to annual cash incentive programs, under the stock option
plan II, the Compensation Committee may grant stock options or make
restricted or unrestricted grants of common stock. The primary purpose of
stock options and restricted stock is to retain and reward employees whose
contributions and expertise are key to the success of the business. All
full-time/part time employees whose contributions have a direct impact on
our business objectives and strategies are eligible.
Page 8
Industry Segments
- - - -----------------
The Company's subsidiaries are primarily engaged in writing property and
casualty insurance. The Company has classified its business into four
segments, each of which is managed separately. The four segments are
commercial lines, personal lines, investment operations, and fee-for-service
operations. All segments are evaluated based on their GAAP underwriting or
operating results which are prepared using the accounting policies described
in Note 1 to the Consolidated Financial Statements on page 32 through page
34 of the 1998 Annual Report, incorporated herein by reference. For
Financial Information pertaining to the industry segments, see Note 17 to
the Consolidated Financial Statements on page 44 of the 1998 Annual Report,
incorporated herein by reference.
Commercial Insurance
The Company's commercial insurance coverages consist of the following:
Workers' Compensation coverage insures employers against employee claims
resulting from work-related injuries. Compensation is payable regardless of
who was at fault. There are four types of benefits payable under workers'
compensation policies: medical benefits, vocational rehabilitation benefits,
disability benefits and death benefits. Because the Insurance Subsidiaries
write voluntary workers' compensation, they are also required to write
involuntary coverage. Involuntary workers' compensation business is written
through the National Council on Compensation Insurance, Inc. ("NCCI").
Effective January 1, 1995, Selective withdrew from the New Jersey NCCI and
chose to accept direct assignments of involuntary workers' compensation
coverage in an effort to reduce processing costs and improve the loss
experience of this business through better loss control, managed care and
risk management.
Commercial Automobile coverage insures policyholders against losses
incurred from bodily injury, bodily injury to third parties, property damage
to an insured's vehicle (including fire and theft) and property damage to
other vehicles and property as a result of automobile accidents involving
commercial vehicles. These policies may include uninsured motorist coverage.
Because the insurance subsidiaries write voluntary commercial automobile
insurance, they are also required by law to write involuntary coverage
through the Commercial Automobile Insurance Plan ("CAIP").
Liability coverage insures policyholders against third party liability
for bodily injury and property damage, including liability for products
sold, and the defense of claims alleging such damages. The liability lines
continue to reflect the potential exposure to environmental claims. The
emergence of these claims is slow and highly unpredictable. Environmental
liabilities are contingent on very complex legal and coverage issues making
reliable estimation of the exposure difficult. For additional information
about the Company's exposure to environmental liabilities and other reserve
liabilities, see Notes 1(j), 15 and 19(a) to the Consolidated Financial
Statements on pages 33, 43, 45 and 46, respectively, of the 1998 Annual
Report, all of which are incorporated herein by reference.
Property coverage insures policyholders against commercial property
damage caused by fire, wind, hail, water, theft and vandalism, and other
perils.
Umbrella coverage affords policyholders liability protection
supplemental to that provided under primary liability policies and insures
against catastrophic losses. Umbrella coverage normally is written in
conjunction with other commercial insurance to provide a complete insurance
package for commercial accounts.
Bonds is responsible for writing fidelity and surety, including but not
limited to: bid, performance, maintenance, supply, site plan and subdivision
bonds.
Page 9
In 1998, Selective's commercial insurance products were developed and
marketed through six SBUs. The following table sets forth, for all
commercial lines SBUs; and by each commercial lines SBU, the net premiums
written, net premiums earned, underwriting income or loss on a generally
accepted accounting principles ("GAAP") basis and the statutory combined
ratio for the periods indicated:
1998 Commercial SBU Highlights
(dollars in thousands)
- - - ----------------------------------
Net Net GAAP Statutory
Premiums Premiums Underwriting Combined
Written Earned Income (Loss) Ratio(1)
- - - ------------------------------------------------------------------------
All Commercial SBUs 1998 $524,571 506,020 (32,871) 105.8%
1997 472,460 465,826 (13,305) 103.6
1996 475,104 477,474 (24,846) 105.3
Contractors 1998 195,471 184,013 (19,013) 109.8
1997 168,056 163,262 (8,071) 105.5
1996 157,722 158,317 (6,813) 104.5
Mercantile and
Service(3) 1998 148,936 143,282 (9,698) 106.4
1997 135,151 135,046 (3,158) 102.9
1996 139,092 139,441 (11,786) 108.8
Community Services(3) 1998 70,777 76,049 (1,516) 102.7
and Organizations 1997 74,022 79,620 (2,607) 104.5
1996 96,702 100,864 (4,598) 104.2
Habitational and(3) 1998 56,883 54,525 (3,452) 105.7
Recreational 1997 51,828 49,063 (298) 100.6
1996 46,029 43,725 (3,260) 107.9
Manufacturing and 1998 39,888 36,047 (2,277) 105.3
Processing 1997 31,711 29,485 (116) 100.4
1996 28,006 27,638 375 98.9
Bonds 1998 12,546 11,937 3,041 76.1
1997 11,398 8,946 3,794 57.6
1996 6,965 6,815 1,142 78.7
Other (2) 1998 70 167 44 N/M
1997 294 404 (2,849) N/M
1996 588 674 94 N/M
(1) Industry standard not generally accepted accounting principles.
(2) The calendar year results reflect loss and loss expense savings
(development) for accident years prior to 1993 (the year in which the
SBUs were formed).
(3) Certain business classes were reclassified from the Mercantile and
Service and Habitational and Recreational Stragetic Business Units
to the Community Services and Organizations Strategic Business Unit
(formerly the Public Entities Strategic Business Unit). Prior amounts
have been reclassified to conform with the 1998 presentation.
N/M Not meaningful
The commercial SBUs' net premiums earned represented approximately 70%
of the total net premiums earned in 1998. The commercial SBUs' net premiums
written increased 11%, or $52 million. This increase included $167 million
of net premiums written attributable to new business, after deducting
reinsurance costs of approximately $7 million, generated principally by the
increase in the number of AMSs, the Midwestern expansion, and the
strengthening of agency relationships. The increases in net premiums written
were partially offset by: i) a reduction in existing business (renewal
retention) attributable to a highly competitive commercial lines marketplace
as well as non-renewals resulting from the company's regular review of its
business (approximately $102 million); ii) workers' compensation rate
decreases and premium credits, which lowered net premiums written by
approximately $20 million; and iii) lower premium volume of approximately
$10 million due to agency terminations. The significant growth in new
business resulted in an increase in most of the commercial SBUs' net
premiums written.
For the three-year period ended December 31, 1998, the commercial SBUs,
in total, average statutory combined ratio was 104.9%. The 1998 combined
ratio of 105.8% deteriorated by 2.2 points, compared to 1997. The 1998
results reflected numerous weather-related storm and severe fire losses,
which increased the commercial lines ratio by 1.4 points. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The commercial SBUs consist of the following:
The Contractors SBU focuses on providing commercial insurance coverage
for key business segments in the construction industry including carpentry,
electrical, excavating, plumbing and landscaping, as well as many other
special artisan classes. In 1998, the Contractors SBU's net premiums earned
represented 36% of total net premiums earned for commercial insurance. For
the three-year period ended December 31, 1998, the average statutory
combined ratio for this SBU was 106.6%. Contractors generated a statutory
combined ratio of 109.8% in 1998, up from 105.5% in 1997. This increase was
primarily
Page 10
driven by poor results in the commercial automobile line of insurance,
particularly within the construction specialty trade business class. The
Company is taking steps to improve the results in the commercial line of
insurance, including pricing analysis, reunderwriting and increased loss
control.
The Mercantile and Service SBU focuses on providing commercial insurance
coverage to retail stores, offices, religious institutions, wholesalers and
service businesses. In 1998, the Mercantile and Service SBU's net premiums
earned represented 28% of the total net premiums earned for commercial
insurance. For the three-year period ended December 31, 1998, the average
statutory combined ratio for this SBU was 106.0%. Mercantile and Service
generated a statutory combined ratio of 106.4% in 1998 up from 102.9% in
1997. The increase in the 1998 combined ratio was primarily attributable to
weather-related catastrophe claims which added 2.3 points.
The Community Services and Organizations (CSO) SBU focuses on providing
commercial insurance coverage for public entities including: municipalities;
school boards; and volunteer fire departments and rescue squads. In 1998,
the CSO SBU's net premiums earned represented 15% of the total net premiums
earned for commercial insurance. For the three-year period ended December
31, 1998, the average statutory combined ratio for this SBU was 103.8%. CSO
generated a statutory combined ratio of 102.7% in 1998, down from 104.5% in
1997.
The Habitational and Recreational SBU focuses on providing commercial
insurance coverage to hotels and motels, condominiums, property owner
associations, golf courses, country clubs, restaurants, membership
organizations and other miscellaneous types of recreational industries. In
1998, this SBU's net premiums earned represented 11% of the total net
premiums earned for commercial insurance. For the three-year period ended
December 31, 1998, the average statutory combined ratio for this SBU was
104.7%. Habitational and Recreational generated a statutory combined ratio
of 105.7% in 1998 up from 100.6% in 1997. The higher 1998 combined ratio was
primarily attributable to weather-related catastrophe claims which increased
the combined ratio by 7.0 points.
The Manufacturing and Processing SBU focuses on providing commercial
insurance coverage for light industrial and processing businesses with low
product liability exposures. In 1998, the Manufacturing and Processing SBU's
net premiums earned represented 7% of the total net premiums earned for
commercial insurance. For the three-year period ended December 31, 1998, the
average statutory combined ratio for this SBU was 101.5%. Manufacturing and
Processing generated a statutory combined ratio of 105.3% in 1998 up from
100.4% in 1997. This increase was driven by a deterioration in the workers
compensation line of business from mandated rate decreases and from
competitive forces.
The Bonds SBU focuses on providing commercial insurance coverage for
fidelity and surety, including but not limited to: bid, performance,
maintenance, supply, site plan and subdivision bonds. In 1998, the Bonds
SBU's net premiums earned represented 2% of the total net premiums earned
for commercial insurance. For the three-year period ended December 31, 1998,
the average statutory combined ratio for this SBU was 70.8%. An underwriting
profit has been achieved in twenty-two out of the last twenty-three years in
the Company's Bond business.
Page 11
Personal Insurance
The following table sets forth, by personal lines coverages, the net
premiums written, net premiums earned, underwriting income or loss on a GAAP
basis and the statutory combined ratio for the periods indicated:
Personal Lines SBU Highlights
(dollars in thousands)
- - - ----------------------------------
Net Net GAAP Statutory
Premiums Premiums Underwriting Combined
Written Earned Income (Loss)(2)Ratio (1)(2)
Total 1998 $224,302 216,972 7,885 97.1%
Personal 1997 245,178 210,442 10,283 94.1
Lines SBU 1996 217,167 217,473 2,864 98.4
Automobile 1998 190,215 186,897 (178) 100.9
1997 223,047 187,656 4,044 96.9
1996 194,118 193,721 4,261 97.5
Homeowners 1998 27,489 23,466 5,837 76.4
1997 15,647 16,079 3,987 72.8
1996 15,611 16,245 (3,005) 118.9
Other 1998 6,598 6,609 2,226 37.4
1997 6,484 6,707 2,252 69.3
1996 7,438 7,507 1,608 79.2
(1) Industry standard not generally accepted accounting principles.
(2) Flood has been removed from the personal lines underwriting income
and reclassed as fee-for-service business.
The Personal Lines SBU represented approximately 30% of the total net
premiums earned in 1998. The personal lines SBU 1998 net premiums written,
excluding the effect of the Conversion, increased 4%, or $9 million. This
increase is primarily due to a reduction in the amount of premium ceded
under the New Jersey Homeowners Quota Share Reinsurance Program, which added
$12 million in homeowners net premiums written ($4 million of which is due
to a one-time buyout of prior year ceded reinsurance unearned premium
reserves). In addition, the personal lines SBU introduced enhanced products
in some of the Company's territories in order to expand its personal
insurance segment. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
For the three-year period ended December 31, 1998, the personal lines
SBU average statutory combined ratio was 96.5%. The combined ratio for 1998
increased by 3.0 points to 97.1%, which was partially due to severe fire and
weather-related catastrophes which increased the 1998 combined ratio by 0.7
points.
The Company's personal insurance coverages consist of the following:
Personal Automobile coverage insures individuals against losses incurred
from bodily injury, bodily injury to third parties, property damage to an
insured's vehicle (including fire and theft), property damage to other
vehicles and other property as a result of automobile accidents involving
personal vehicles. These policies may include uninsured motorist coverage.
In 1998, personal automobile net premiums earned represented 86% of the
total net premiums earned for personal insurance. For the three-year period
ended December 31, 1998, the average statutory combined ratio for this
coverage was 98.4%. See additional discussion on Automobile Insurance
Regulation on pages 3 and 19.
Homeowners coverage insures individuals for losses to their residences
and personal property such as those caused by fire, wind, hail, water
damage, theft and vandalism and against third party liability claims.
Additional coverage for specific personal property items can be purchased on
a scheduled personal property basis. In 1998, homeowners net premiums earned
represented 11% of the total net premiums earned for personal insurance. For
the three-year period ended December 31, 1998, the average statutory
combined ratio for this coverage was 89.4%. On a statutory basis, homeowners
coverage generated a combined ratio of 76.4% in 1998, up from 72.8% in 1997.
In 1998, weather-related and fire catastrophe claims increased the 1998
combined ratio by 5.2 points. Excluding the catastrophes, improvements in
this line were attributable to an aggressive homeowners inspection program
that was completed to ensure that all property values reflect the amount
necessary to replace the home in the event of a loss, which increase premium
levels and reduce catastrophe reinsurance costs.
Personal Catastrophe Liability coverage, included in the "Other"
category in the personal lines table, affords policyholders liability
protection supplemental to that provided under automobile and homeowners
policies and insures against catastrophic losses. This coverage normally is
written in conjunction with other personal insurance. In 1998, net premiums
earned for personal catastrophe liability coverage represented 1% of the
total net premiums earned for personal insurance.
Page 12
Investments
For information about investments, see the section entitled
"Investments" on pages 14 and 15, and Notes 1(c) and 4 to the Consolidated
Financial Statements on pages 32, 35 and 36 of the 1998 Annual Report,
incorporated herein by reference.
Fee-For-Service Operations
In addition to its risk-bearing insurance activities, the Company also
engages in providing insurance-related servicing activities designed to
generate fee income. The Company believes that leveraging its insurance
knowledge to generate fee income will allow it to further diversify its
business, utilize market opportunities created by the movement of insureds
to alternative market products, decrease its underwriting expense ratios,
and reduce the impact on its business resulting from insurance cycles and
weather-related catastrophic losses.
Selective writes flood insurance under the auspices of the National
Flood Insurance Program, the premiums from which are ceded 100% to the
Federal government. As a servicing carrier, not an underwriter, Selective
bears no risk of policyholder loss. The Company receives a servicing fee
from which it pays agency commissions and other related expenses. In 1998,
the flood direct premiums written increased by 28% to $24 million, and
generated a net profit of $2 million. In 1999, the Company expects the flood
program to be expanded into all 50 states and to reduce processing costs
through a new policy writing system.
In anticipation of growth in alternative market insurance solutions,
SelecTech, a third party administrator, was formed to generate fee income by
providing third party administration services for public entities that
self-insure and use other means of alternative insurance. The services
provided include, but are not limited to: claims administration, loss
control and risk management.
The Alta SBU was formed when Selective purchased the assets of Alta in
November 1997, to more fully integrate its claim operation within its
medical case management program. Its array of services include
rehabilitation and occupational services, medical bill review, workers'
compensation managed care programs, and hospital bill audits. Alta also
offers the same services for a fee to self-insured businesses and other
insurance companies.
As we invested in new technology, we recognized that the skills we are
developing are also opportunities to generate additional revenue. We
purchased PDA in 1998 to lead the development of innovative technology that
will meet our business needs and generate additional income by providing
these systems and services to the insurance community.
Marketing and Distribution
- - - --------------------------
The Company's products are developed and marketed through nine SBUs.
These customer-focused SBUs evaluate the marketplace and provide a broad
range of products and services specifically developed to meet the needs of
the agents and insureds in a particular market or territory including
business opportunities in the insurance alternative markets.
The Insurance Subsidiaries sell their insurance products exclusively
through a network of approximately 870 independent insurance agencies
supported by nine full-service branch offices. The Company has maintained a
strong relationship with its agency network by providing superior service, a
stable marketplace and applying consistent underwriting standards. During
the three-year period 1994 through 1996, the agency force, in total,
decreased by approximately 300 agencies. Approximately 90% of this reduction
was due to terminations, with the remaining 10% being attributed to
consolidations within the agency population. During 1998, the agency force
increased by approximately 20 agencies. The majority of this increase was
due to new agency appointments in the Midwest Region, Great Lakes Region,
and Rhode Island where the Company began writing business in 1997 and 1998.
The Company's continuing focus on profitable premium growth is closely
linked to the quality of its relationships with the independent agents who
sell its products and services. The Company believes that its business model
of SBUs, field offices, AMSs and CMSs enhances its level of service to its
independent insurance agents.
Underwriting
- - - ------------
New commercial insurance is underwritten by branch AMSs who apply
underwriting guidelines for particular policies and types of customers. Each
AMS is supported by an underwriting team, which is responsible for policy
renewal and processing. In addition, home office staff specialists and the
SBUs provide additional technical support and services to the branch offices
when needed. Substantially all of the personal insurance underwriting
activities are conducted at the home office under supervision of the
centralized Personal Lines SBU.
The branch offices and the SBUs work together to develop pricing, growth
and profitability objectives. The branch AMSs deal directly with independent
insurance agencies, and their regular interaction provides the Company with
information as to the agencies' needs for products and pricing. This
information is used by the branch offices and SBUs to develop the necessary
products, pricing and applicable underwriting guidelines.
For certain classes of business and policy limits (with the exception of
umbrella policies), certain agencies have the authority to bind the
Insurance Subsidiaries. The Insurance Subsidiaries have a period, generally
60 days after the effective date of coverage, during which they can cancel
undesirable risks. During the 60 day period, the Insurance Subsidiaries are
required to pay any claim which would be covered under such policies. The
Company's agents' handbook sets forth underwriting criteria for particular
policies and insureds. When a risk falls outside of the established
guidelines, the agencies must contact their respec-
Page 13
tive branch AMS to obtain authorization to bind coverage. Insurance accounts
that exceed the branch AMS's authority requires home office approval.
Policies that are accepted become subject to regulatory limitations on
policy cancellations and, except for nonpayment of premiums, generally may
not be canceled after the first 60 days other than at renewal upon
prescribed prior notice of cancellation.
Claims
- - - ------
Claims on policies are investigated and settled primarily by more than
100 CMSs who are in the field, and assigned to key agents. Losses are
reported directly by the agent to its CMS who investigates and resolves the
claim in person with the policyholder. This enables the Company to
physically inspect and settle losses in person promptly and accurately. In
locales where there is insufficient claims volume to justify the cost of an
internal claims staff, or when a particular claims expertise is required,
the Insurance Subsidiaries use independent adjusters to investigate and
resolve claims.
The Company's claims policy emphasizes the timely investigation and
settlement of meritorious claims for appropriate amounts, maintenance of
timely and adequate reserves for claims, and the cost-effective delivery of
claims services by controlling loss and loss expenses. Claims settlement
authority levels are established for each CMS and supervisor based on their
expertise and experience. The setting of reserves and disposition of
property and liability claims in excess of $100,000 field authority, per
claim, requires home office review and approval. All claims reported with
loss codes classified as "danger signals" (i.e., mortality, loss involving a
minor) are reported to a central claim unit where they are closely
monitored. The Company also refers all environmental claims to a centralized
environmental claims unit which specializes in the claim management of these
exposures.
While claims adjusting has been moved into the field, recovery,
subrogation, fraud and workers' compensation claims handling are centralized
at the Corporate office. The Company has instituted internal procedures to
screen claims for potential fraud. When fraud is suspected, the claim is
reviewed by the Company or outside fraud investigator to determine the
appropriate action before payment is authorized. The automated claims system
enables tracking of claims suspected to be fraudulent to determine the
savings of nonpayment of such claims. In addition, the Company has
introduced anti-fraud training and educational programs for its employees.
Reinsurance
- - - -----------
The Insurance Subsidiaries follow the customary industry practice of
ceding a portion of their risks and paying to reinsurers a portion of the
premiums received under the policies. This reinsurance program permits
greater diversification of business and the ability to offer increased
coverage while limiting maximum net losses. The Insurance Subsidiaries are
parties to reinsurance contracts under which certain types of policies are
automatically reinsured without the need for approval by the reinsurer of
individual risks covered ("treaty reinsurance"), reinsurance contracts
handled on an individual policy or per-risk basis requiring the agreement of
the reinsurer as to each risk insured ("facultative reinsurance") and
certain automatic facultative arrangements that permit the Company to
automatically reinsure risks within certain specified limits ("automatic
facultative reinsurance"). Reinsurance does not legally discharge an
insurer from its liability for the full face amount of its policies, but
does make the reinsurer liable to the insurer to the extent of the
reinsurance ceded.
The Company has a Reinsurance Security Committee ("Reinsurance
Committee") that reviews and approves all reinsurers who do business with
the Company. The Reinsurance Committee reviews the financial condition of
the reinsurer as well as applicable company ratings from: (i) A.M. Best;
(ii) Insurance Solvency International; and (iii) Standard & Poor's Insurance
Rating Services ("Standard & Poor's"). Further information is obtained from
reinsurance brokers, direct reinsurers and market information sources.
Company guidelines require a reinsurer to have an "A-" or better rating by
A.M. Best. However, the Reinsurance Committee may approve reinsurers who
have ratings below "A-" or who have not yet been assigned a rating.
The Company continuously monitors the reinsurance program to determine
that its protection is not excessive, but adequate to ensure the
availability of funds to provide for losses while maintaining adequate funds
for business growth. The primary reinsurers are American Re-Insurance
Company, Zurich Reinsurance Company of America, St. Paul Reinsurance
Management Corporation and Axa Re (Paris). In addition, the Company cedes
no-fault claims for medical benefits in excess of $75,000 to the New Jersey
Unsatisfied Claim and Judgment Fund ("UCJF").
The Company maintains treaty excess of loss programs which cover each
property occurrence in excess of $750,000 up to $15 million and each
casualty occurrence in excess of $2 million up to $50 million, except for
commercial umbrella which is reinsured up to $10 million. In certain
instances where greater capacity is needed for a larger property or casualty
risk, facultative reinsurance is purchased.
Effective January 1, 1999, the Company revised its property catastrophe
program. The revised program provides a higher level of protection against
catastrophe losses at a lower cost when compared with the 1998 program. The
new catastrophe program is in six layers and covers: (i) 95% of losses in
excess of $15 million up to $25 million; (ii) 95% of losses in excess of $25
million up to $50 million; (iii) 95% of losses in excess of $50 million up
to $85 million; (iv) 95% of losses in excess of $95 million up to $130
million; and (v) 95% of losses in excess of $130 million up to $165 million.
The layer of $10 million in losses in excess of $85 million has been
retained in full by the Company, as has the $15 million in losses underlying
the 1st layer. The Company believes that the 1999 property catastrophe
program, coupled with the Homeowners Quota Share Program (which contained no
per-occurrence limit), provides adequate protection for the Company if
catastrophe losses were to occur.
Page 14
Within the casualty treaty is a Year 2000 coverage. This is a
catastrophe cover within the top four layers which consists of $38 million
in excess of $12 million. This cover will define all Year 2000 occurrences
as one event. The coverage protects against any Year 2000 claim which is
asserted in the 36-month period beginning on July 1, 1998.
Pooling Arrangements
- - - --------------------
The Insurance Subsidiaries participate in intercompany pooling and
expense sharing arrangements ("pool" or "pooling agreement"). The pool
permits each Insurance Subsidiary to rely on the capacity of the entire
pool, rather than only its own capital and surplus and it prevents any one
Insurance Subsidiary from suffering any undue losses, as all Insurance
Subsidiaries share underwriting profits and losses in proportion to their
pool participation percentages. The pool permits all Insurance Subsidiaries
to obtain a uniform rating from A.M. Best and Standard & Poor's.
The pool participation percentage of each Insurance Subsidiary reflects
the ratio of that subsidiary's policyholders' surplus to the Company's
aggregate policyholders' surplus. The percentages are as follows:
SICA...............55.5%
SWIC...............21.5%
SISC................9.0%
SISE................7.0%
SINY................7.0%
Through the pooling agreement, SICA assumes from the other Insurance
Subsidiaries, net of applicable reinsurance, all of their combined premiums,
losses, loss expenses and underwriting expenses and SICA cedes to the other
Insurance Subsidiaries 44.5% of the Insurance Subsidiaries' combined
premiums, losses, loss expenses and underwriting expenses. Through the pool,
the Insurance Subsidiaries also share underwriting and administration
expenses. Accounts are rendered within forty five days after the end of the
calendar quarter and are settled within sixty days after the end of the
calendar quarter. The pool may be terminated at the end of any calendar
month by any Insurance Subsidiary giving ninety days prior notice of
termination.
Reserves for Net Losses and Loss Expenses
- - - -----------------------------------------
The table on page 16 provides information about reserves for net losses
and loss expenses. See also Notes 15 and 19(a) to the Consolidated Financial
Statements on pages 43, 45 and 46 of the 1998 Annual Report, all of which
are incorporated herein by reference.
Significant periods of time can elapse between the occurrence of an
insured loss, the reporting of the loss to the insurer and the insurer's
payment of that loss. To recognize liabilities for unpaid losses and loss
expenses, insurers establish reserves as balance sheet liabilities
representing estimates of amounts needed to pay reported and unreported net
losses and loss expenses.
When a claim is reported to an insurance subsidiary, its claims
personnel establish a "case reserve" for the estimated amount of the
ultimate payment. The amount of the reserve is primarily based upon a
case-by-case evaluation of the type of claim involved, the circumstances
surrounding each claim and the policy provisions relating to the type of
losses. The estimate reflects the informed judgment of such personnel based
on general insurance reserving practices, as well as the experience and
knowledge of the claims person. Until the claim is resolved, these estimates
are revised as deemed necessary by the responsible claims personnel based on
subsequent developments and periodic reviews of the cases.
In accordance with industry practice, the Company maintains, in addition
to case reserves, estimates of reserves for losses and loss expenses
incurred but not yet reported ("IBNR"). The Company projects its estimate of
ultimate losses and loss expenses at each reporting date. The difference
between (i) projected ultimate loss and loss expense reserves and (ii) case
loss reserves and loss expense reserves thereon is carried as the IBNR
reserve. By using both estimates of reported claims and IBNR determined
using generally accepted actuarial reserving techniques, the Company
estimates the ultimate net liability for losses and loss expenses. The
ultimate actual liability may be higher or lower than reserves established.
The Company does not discount to present value that portion of its loss and
loss expense reserves expected to be paid in future periods. However, the
loss reserves include anticipated recoveries from salvage and subrogation.
Reserves are reviewed for adequacy on a periodic basis. When reviewing
reserves, the Company analyzes historical data and estimates the impact of
various factors such as: (i) per claim information; (ii) Company and
industry historical loss experience; (iii) legislative enactments, judicial
decisions, legal developments in the imposition of damages, and changes in
political attitudes; and (iv) trends in general economic conditions,
including the effects of inflation. This process assumes that past
experience, adjusted for the effects of current developments and anticipated
trends, is an appropriate basis for predicting future events. There is no
precise method, however, for subsequently evaluating the impact of any
specific factor on the adequacy of reserves because the eventual deficiency
or redundancy is affected by many factors.
Page 15
The anticipated effect of inflation is implicitly considered when
estimating reserves for net losses and loss expenses. While anticipated
increases due to inflation are considered in estimating ultimate claim
costs, the increase in the average severity of claims is caused by a number
of factors that vary with the individual type of policy written. Future
average severities are projected based on historical and anticipated trends
and also are adjusted for anticipated changes in general economic trends.
After taking into account all relevant factors, the Company believes
that the reserve for net losses and loss expenses at December 31, 1998, is
adequate to provide for the ultimate net costs of claims incurred as of that
date. Establishment of appropriate reserves is an inherently uncertain
process and there can be no certainty that currently established reserves
will prove adequate in light of subsequent actual experience. The Company
receives an actuarial opinion as to the adequacy of its reserves from its
Vice President and Actuary but does not receive an independent actuarial
opinion as to such reserves.
The table on the top of page 16 represents the development of balance
sheet net reserves for 1988 through 1998. The top three lines of the table
reconcile gross Generally Accepted Accounting Principles ("GAAP") reserves
to net GAAP reserves for unpaid losses and loss expenses recorded at the
balance sheet date for each of the indicated years. The upper portion of the
table shows the re-estimated amount of the previously recorded net reserves
based on experience as of the end of each succeeding year. The estimate is
either increased or decreased as more information becomes known about the
frequency and severity of claims for individual years.
The "cumulative redundancy (deficiency)" represents the aggregate change
in the estimates over all prior years. For example, the 1991 reserve
developed a $13 million redundancy over the course of the succeeding seven
years. That amount has been included in income over the past six years.
The lower section of the table shows the cumulative amount paid with
respect to the previously recorded reserves as of the end of each succeeding
year. For example, as of December 31, 1998, the Company paid $460 million of
the currently estimated $533 million of losses and loss expenses that were
incurred through the end of 1989; thus, the difference, an estimated $73
million of losses and loss expenses incurred through 1989, remained unpaid
as of December 31, 1998.
In evaluating this information, it should be noted that each amount
includes the total of all changes in amounts for prior periods. For example,
the amount of redundancy to losses settled in 1997, but incurred in 1994,
will be included in the cumulative redundancy (deficiency) amounts in 1994,
1995 and 1996. This table does not present accident or policy year
development data, which certain readers may be more accustomed to analyzing.
Conditions and trends that have affected development of the reserves in the
past may not necessarily occur in the future. Accordingly, it may not be
appropriate to extrapolate redundancies or deficiencies based on this table.
Environmental Reserves
- - - ----------------------
Reserves established for liability insurance continue to reflect
exposure to environmental claims, both asbestos and non-asbestos. These
claims have arisen primarily under older policies containing exclusions for
environmental liability which certain courts, in interpreting such
exclusions, have determined do not bar such claims. The emergence of these
claims is slow and highly unpredictable. Since 1986, policies issued by the
insurance subsidiaries have contained a more expansive exclusion for losses
related to environmental claims. The Company's asbestos and non-asbestos
environmental claims have arisen primarily from exposures in municipal
government, small commercial risks and homeowners policies.
"Asbestos claims" means those claims presented to the Company in which
bodily injury is alleged to have occurred as a result of exposure to
asbestos and/or asbestos-containing products. During the past two decades,
the insurance industry has witnessed the emergence and development of an
increasing number of asbestos claims. Over this time period, the various
issues concerning coverage and the industry's obligations under its policies
have largely been resolved, thus permitting the Company to reserve with a
higher degree of certainty. At December 31, 1998, asbestos claims
constituted 80% of the Company's total outstanding environmental claims.
"Non-asbestos claims" means all pollution and environmental claims
alleging bodily injury or property damage presented, or expected to be
presented, to the Company other than asbestos. These claims include
landfills, leaking underground storage tanks, oil spills, air pollution,
lead poisoning and general contamination. In past years, landfill claims
have accounted for a significant portion of the Company's environmental
claims unit's litigation costs.
The Company refers all environmental claims to a centralized
environmental claim unit, which specializes in the claim management of these
exposures. Environmental reserves are evaluated on a case-by-case basis. As
cases progress, the ability to assess potential liability often improves.
Reserves are then adjusted accordingly. In addition, each case is reviewed
in light of other factors affecting liability, including judicial
interpretation of coverage issues.
The table on the bottom of page 16 summarizes the number of asbestos and
non-asbestos claims outstanding at December 31, 1998.
Page 16
Analysis of Net Loss Expense Development
- - - ----------------------------------------
(in millions)
1988 1989 1990 1991
Gross reserves for unpaid
losses and loss
expenses at
December 31 $ 534.5 622.8 669.2 731.5
Reinsurance recoverable
on unpaid losses
and loss expenses at
December 31 $ (80.2) (100.5) (87.0) (91.9)
Net reserves for unpaid
losses and loss
expenses at
December 31 $ 454.3 522.3 582.2 639.6
Net reserves estimated as of:
One year later 446.8 523.8 585.7 634.3
Two years later 445.3 528.2 583.1 626.3
Three years later 448.1 523.8 577.0 626.5
Four years later 447.0 520.3 581.2 626.8
Five years later 443.5 523.7 583.6 625.3
Six Years later 447.2 529.7 582.8 627.1
Seven years later 454.7 530.0 585.7 626.8
Eight years later 457.3 531.4 586.4
Nine years later 458.5 533.1
Ten years later 460.0
Cumulative redundancy
(deficiency) $ (5.7) (10.8) (4.2) 12.8
===== ===== ===== =====
Cumulative amount of
net resrves paid
through:
One year later $ 135.0 158.2 174.5 183.7
Two years later 222.4 264.5 288.1 308.8
Three years later 285.4 335.8 371.7 391.3
Four years later 322.7 385.8 422.5 447.7
Five years later 350.7 413.7 452.0 481.4
Six Years later 366.3 430.0 472.8 502.6
Seven years later 376.6 443.5 487.0 516.0
Eight years later 387.2 452.6 496.3
Nine years later 394.2 460.2
Ten years later 400.0
- - - -----------------------------------------------------------------------------
1992 1993 1994 1995
Gross reserves for unpaid
losses and loss
expenses at
December 31 $ 870.2 917.7 999.4 1,120.1
Reinsurance recoverable
on unpaid losses
and loss expenses at
December 31 $(132.6) (114.0) (111.5) (121.4)
Net reserves for unpaid
losses and loss
expenses at
December 31 $ 737.6 803.7 887.9 998.7
Net reserves estimated as of:
One year later 734.8 801.0 900.6 989.5
Two years later 732.5 790.0 899.5 977.6
Three years later 718.7 788.5 894.9 974.4
Four years later 716.5 782.9 894.7
Five years later 717.3 780.3
Six Years later 716.4
Seven years later
Eight years later
Nine years later
Ten years later
Cumulative redundancy
(deficiency) $ 21.2 23.4 (6.8) 24.3
===== ===== ===== =====
Cumulative amount of
net resrves paid
through:
One year later $ 219.5 224.6 259.4 280.4
Two years later 352.3 382.3 443.4 481.6
Three years later 451.4 497.7 573.7 628.0
Four years later 517.2 567.4 661.3
Five years later 556.3 611.1
Six Years later 580.6
Seven years later
Eight years later
Nine years later
Ten years later
- - - -----------------------------------------------------------------------------
1996 1997 1998
Gross reserves for unpaid
losses and loss
expenses at
December 31 $1,189.8 1,161.2 1,193.3
Reinsurance recoverable
on unpaid losses
and loss expenses at
December 31 $ (150.2) (124.2) (140.5)
Net reserves for unpaid
losses and loss
expenses at
December 31 $1,039.6 1,037.0 1,052.8
Net reserves estimated as of:
One year later 1,029.5 1,034.5
Two years later 1,028.1
Three years later
Four years later
Five years later
Six Years later
Seven years later
Eight years later
Nine years later
Ten years later
Cumulative redundancy
(deficiency) $ 11.5 2.5
===== =====
Cumulative amount of
net resrves paid
through:
One year later $ 303.6 313.7
Two years later 519.6
Three years later
Four years later
Five years later
Six Years later
Seven years later
Eight years later
Nine years later
Ten years later
- - - -----------------------------------------------------------------------------
Environmental Claims Activity
- - - -----------------------------
1998 1997 1996
Asbestos Related Claims (1)
Claims at beginning of year 1,723 1,715 1,449
Claims received during year 597 323 360
Claims closed during year (655) (315) (94)
----- ----- -----
Claims at end of year 1,665 1,723 1,715
===== ===== =====
Average net los settlement on
closed claims $ 148 526 717
Non-Asbestos Related Claims (1)
Claims at beginning of year 337 306 306
Claims received during year 291 232 238
Claims closed during year (221) (201) (238)
----- ----- -----
Claims at end of year 407 337 306
===== ===== =====
Average net los settlement on
closed claims $ 22,772 19,855 9,331
(1) The number of environmental claims presented in the tables includes
all multiple claimants who are associated with the same site or incident.
Page 17
Year 2000 Issues
- - - ----------------
See Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for a discussion of Year 2000 issues.
Regulation
- - - ----------
General
Insurance companies are subject to supervision and regulation in the
states in which they are domiciled and in which they transact business. Such
supervision and regulation relate to numerous aspects of an insurance
company's business and financial condition. The primary purpose of such
supervision and regulation is the protection of policyholders. The extent of
regulation varies but generally is derived from state statutes which
delegate regulatory, supervisory and administrative authority to state
insurance departments. The Company believes that it is in compliance with
applicable regulatory requirements in all material respects as of the date
of this report. Although the U.S. Federal government does not directly
regulate the insurance industry, Federal initiatives from time to time can
have an impact on the industry.
State Regulation
The authority of the state insurance departments extends to such matters
as the establishment of standards of solvency, which must be met and
maintained by insurers, the licensing of insurers and agents, the imposition
of restrictions on investments, premium rates for property and casualty
insurance, the payment of dividends and distributions, the provisions which
insurers must make for current losses and future liabilities, the deposit of
securities for the benefit of policyholders and the approval of policy
forms. State insurance departments also conduct periodic examinations of the
financial and business affairs of insurance companies and require the filing
of annual and other reports relating to the financial condition of insurance
companies. Regulatory agencies require that premium rates not be excessive,
inadequate or unfairly discriminatory. In general, the Insurance
Subsidiaries must file all rates for personal and commercial insurance with
the insurance department of each state in which they operate.
All states have enacted legislation that regulates insurance holding
company systems. Each insurance company in a holding company system is
required to register with the insurance supervisory agency of its state of
domicile and furnish information concerning the operations of companies
within the holding company system that may materially affect the operations,
management or financial condition of the insurers. Pursuant to these laws,
the respective departments may examine the Parent and the Insurance
Subsidiaries at any time, require disclosure or prior approval of material
transactions of the Insurance Subsidiaries with any affiliate and require
prior approval or notice of certain transactions, such as dividends or
distributions to the Parent from the Insurance Subsidiary domiciled in that
state.
NAIC Guidelines
The Insurance Subsidiaries are subject to the general statutory
accounting practices and reporting formats established by the National
Association of Insurance Commissioners ("NAIC"). The NAIC also promulgates
model insurance laws and regulations relating to the financial and
operational regulation of insurance companies, which includes the Insurance
Regulating Information System ("IRIS"). IRIS identifies eleven industry
ratios and specifies "usual values" for each ratio. Departure from the usual
values on four or more of the ratios can lead to inquiries from individual
state insurance commissioners as to certain aspects of an insurer's
business. The Insurance Subsidiaries have, in recent years, met all of the
IRIS test ratios. For additional information regarding statutory accounting,
see Note 13 to the Consolidated Financial Statements on page 42 of the 1998
Annual Report.
NAIC rules and regulations generally are not directly applicable to an
insurance company until they are adopted by applicable state legislatures
and departments of insurance. NAIC model laws and regulations have become
increasingly important in recent years, due primarily to the NAIC's
Financial Regulations Standards and Accreditation Program. Under this
program, states which have adopted certain required model laws and
regulations and meet various staffing and other requirements are
"accredited" by the NAIC. Such accreditation reflects an eventual nationwide
regulatory network of accredited states. All of the states in which the
Insurance Subsidiaries are domiciled, with the exception of New York, are
accredited.
The NAIC Model Act was adopted by the NAIC to, among other things,
enhance the regulation of insurer insolvency. This act includes certain
risk-based capital ("RBC") requirements for property and casualty insurance
companies. These requirements are designed to assess capital adequacy and to
raise the level of protection that statutory surplus provides for
policyholders. The NAIC Model Act measures the major areas of risk to which
property and casualty insurers are exposed: (i) asset risk, which is the
risk of default and decline in market value of assets; (ii) credit risk,
which is the risk that ceded reinsurance and other receivables might not be
collected; (iii) underwriting risk, which is the risk that prices or
reserves are inadequate; and (iv) off balance sheet risk, which includes
excessive premium growth and contingent liabilities. Insurers having less
total adjusted capital than required by the act are subject to varying
degrees of regulatory action depending on the level of capital inadequacy.
The model law establishes four levels of regulatory action. The extent
of regulatory intervention and action increases as the ratio of an insurer's
total adjusted capital, as defined in the model law, to its Authorized
Control Level ("ACL"), as calculated under the model law, decreases. The
first action level, the Company Action Level, requires an insurer to submit
a comprehensive financial plan of corrective actions to the insurance
regulators if total adjusted capital falls below 200% of the ACL amount. The
second action level, the Regulatory Action Level, requires an insurer to
submit a plan containing corrective actions and per-
Page 18
mits the insurance regulators to perform an examination or other analysis
and issue a corrective order if total adjusted capital falls below 150% of
the ACL amount. The Authorized Control Level, the third action level, allows
the regulators to take any action they deem necessary, including placing the
insurer under regulatory control or rehabilitate or liquidate an insurer, in
addition to the aforementioned actions if total adjusted capital falls below
the ACL amount. The fourth action level is the Mandatory Control Level which
requires the regulators to place the insurer under regulatory control if
total adjusted capital falls below 70% of the ACL amount. Based upon the
1998 statutory financial statements for the Insurance Subsidiaries, each
Insurance Subsidiary's total adjusted capital exceeded the Company Action
Level, and the risk-based capital ratios are as follows:
SICA..............492%
SWIC..............638%
SISE..............608%
SISC..............595%
SINY..............543%
For additional information about insurance regulation, see the section
entitled "Insurance Regulation" on page 26 of the 1998 Annual Report, which
is herein incorporated by reference.
Risk Factors
The risks and uncertainties described below are not the only ones
Selective faces. There may be additional risks and uncertainties. If any of
the following risks actually occur, Selective's business, financial
condition or results of operations could materially be affected. In such
case, the trading price of the Common Stock could decline significantly.
Catastrophes and Weather-Related Events
- - - ---------------------------------------
Property and casualty insurance companies frequently experience losses
from catastrophes and other weather-related events. Such catastrophes may
have a material adverse effect on our operations. Catastrophes are caused by
various events including windstorms, hurricanes, earthquakes, tornadoes,
hail, severe winter weather and fires. We cannot predict how severe a
particular catastrophe may be until after it occurs. The extent of our
losses from such catastrophes is a function of the total amount of losses
our clients incur, the number of our clients affected, the frequency of such
events and the severity of the particular catastrophe. Most catastrophes are
restricted to small geographic areas. However, hurricanes, floods and
earthquakes may produce significant damage in large, heavily populated
areas.
Geographic Concentration
- - - ------------------------
Our property and casualty insurance business is concentrated
geographically. Approximately 54% of our net premiums are earned from
insurance policies written in New Jersey. Other East Coast states, including
Pennsylvania, New York, Maryland, Virginia, South Carolina, Delaware, North
Carolina and Georgia and several Midwestern states, including Iowa,
Illinois, Indiana, Ohio, Michigan and Wisconsin, account for substantially
all of our other business. Therefore, unusually severe storms or other
natural disasters which destroy property in these states could adversely
effect our operations. Because our business is concentrated in a limited
number of markets, we may be exposed to risks of adverse developments which
are greater than the risks of having business in more markets.
Our revenues and profitability also are subject to prevailing economic,
regulatory, demographic and other conditions in the states in which we write
insurance. In particular, while our personal automobile insurance results in
New Jersey have been more favorable over the past three years, the future
regulatory environment in New Jersey is uncertain.
Competition
- - - -----------
We compete with regional and national insurance companies, including
direct writers of insurance coverage. Many of these competitors are larger
than we are and have greater financial, technical and operating resources.
The property and casualty insurance industry is highly competitive on the
basis of both price and service. There are many companies competing for the
same insurance customers in the geographic areas in which we operate,
particularly outside of New Jersey. If our competitors price their premiums
more aggressively, they may adversely affect our underwriting results. The
insurance industry continues to experience pricing competition, which has
impacted our commercial business. We will not abandon our underwriting
principle of writing insurance risk policies which we believe are favorable
at prices we believe to be fair in order to compete on the basis of price.
In addition, because our insurance products are marketed through independent
insurance agencies, most of which represent more than one insurance company,
we face competition within each agency.
We also face competition from the implementation of self-insurance,
primarily in the commercial insurance line area. Many of our customers and
potential customers are examining the risks of self-insuring as an
alternative to traditional insurance. Another competitive factor in the
industry involves banks stepping up efforts to break the barriers between
various segments of the financial services industry, including insurance.
These efforts pose new challenges to insurance companies and agents from
industries traditionally outside the insurance business.
Page 19
Regulation
- - - ----------
We are subject to extensive supervision and regulation in the states in
which we transact business. Such supervision and regulation relate to
numerous aspects of our business and financial condition. The primary
purpose of such supervision and regulation is the protection of insurance
policyholders, and not shareholders or other investors. Our business can be
adversely affected by automobile insurance regulations and any other
regulations affecting property and casualty insurance companies. Changes in
workers' compensation, insurance, health care or managed care laws or
regulations, or their interpretations, may also have an adverse effect on
our business. The extent of regulation varies but generally is derived from
state statutes. These statutes delegate regulatory, supervisory and
administrative authority to state insurance departments. Although the U.S.
Federal government does not directly regulate the insurance industry,
Federal initiatives from time to time can impact the insurance industry.
In addition, many proposals intended to control the cost and
availability of health care services have been debated in Congress and state
legislatures. Although we do not write health insurance, rules and
regulations affecting healthcare services can affect workers' compensation,
commercial and personal automobile, liability and other insurance which we
do write. We cannot determine what health care reform legislation will be
adopted by Congress or any state legislature. We also cannot determine the
nature and effect, if any, that the adoption of health care legislation or
regulations (or changing interpretations) at the federal or state level
would have on us.
Certain other regulatory risks are as follows:
Automobile Insurance Regulation
During 1997, the Governor of New Jersey signed into law an insurance
reform bill. This enacted law: (i) eliminates automatic approval of annual
"cost-of-living" premium increases in favor of "expedited rate filings" of
3% or less, which do not require prior approval from the insurance
commissioner; (ii) prohibits insurers from not renewing "good" drivers
("good drivers" are those who have no more than one at-fault accident or
four insurance point moving violations within a five-year period); (iii)
eliminates the bad driver surcharge system in favor of a tier rating system;
and (iv) requires automobile insurers to write an amount of automobile
insurance in urban territories equal to their average statewide market
share.
In March 1999, this personal automobile insurance law in New Jersey
became effective which will provide for a statewide average premium
reduction of 15%. As a result, the Company anticipates that annual premiums
in this line may be reduced by approximately $24 million. The financial
impact of the new law will be partially offset by the Company's rate
adequacy in this line and potentially significant cost reductions through
the use of medical protocols, anti-fraud provisions and other procedures
provided for in the law. Taking into account variable costs and taxes,
annual earnings may be reduced by approximately $3 million. The Company
originally anticipated that the law, passed in May 1998 would result in an
overall reduction in premium of $18 million, or 11.5%, because the mandated
rate reductions on personal auto coverages were expected to be lower.
However, due to action by the New Jersey legislature in March 1999, we
believe premiums may be reduced by approximately 15%.
New Jersey insurance regulations require insurers to write all personal
automobile coverage presented to them from drivers with eight points or less
on their driving record. While we are required to write such coverage, the
rates we charge reflect the insured's motor vehicle record and incidence of
at-fault accidents. Drivers whose poor driving record makes them ineligible
to otherwise obtain insurance must purchase insurance from the Personal
Automobile Insurance Plan. We receive a proportionate share of Personal
Automobile Insurance Plan business based on our voluntary personal
automobile writings. Pennsylvania, Delaware, the District of Columbia,
Virginia, Georgia and New York also maintain similar risk plans. Each plan
requires an insurance company to accept its proportionate share of this
business based upon its share of the voluntary market. In addition, we are
required to write involuntary coverage for a Commercial Automobile Insurance
Plan, because we voluntarily write commercial automobile insurance.
Involuntary coverage is insurance for those insureds which are otherwise not
able to obtain insurance in the marketplace.
South Carolina insurance regulations require insurers to write all
personal and certain commercial automobile coverage presented to them by
drivers. Although we are required to write all new applications, we are able
to transfer up to 35% of this business to the South Carolina Reinsurance
Facility (the "SCRF"). This mechanism allows us to move less desirable risks
to the SCRF. Effective March 1, 1999, as a result of a recent South Carolina
law, insurers will no longer be required to accept all applications for
automobile insurance coverage. In addition, this law will eliminate the SCRF
and replace it with a joint underwriting association known as the South
Carolina Associated Auto Insurers Plan (the "SCAAIP"). On March 1, 1999, we
may begin refusing to renew policies currently ceded to the SCRF. We, like
all automobile insurers licensed in South Carolina, will be a member of the
SCAAIP. As a member of the SCAAIP, we will share in its profit or loss.
South Carolina law requires that the SCAAIP be self-sustaining. On March 1,
2003, the SCAAIP will be replaced by an assigned risk plan. This plan will
assign risks which are unable to obtain coverage voluntarily to insurers
based on their market share. We are unable at this time to assess the impact
of these changes on our results of operations.
Page 20
Workers' Compensation Insurance Regulation
Because we voluntarily write workers' compensation insurance, we are
required by state law to write involuntary coverage. Insurance companies
that underwrite voluntary workers' compensation insurance can either write
involuntary coverage assigned by state regulatory authorities or participate
in a sharing arrangement. We currently write involuntary coverage assigned
to us directly from the State of New Jersey.
Homeowners Insurance Regulation
New Jersey regulations prohibit us from canceling or not renewing
homeowners insurance policies for any arbitrary, capricious or unfairly
discriminatory reason or without adequate notice to the insured. We are
subject to regulatory provisions that are designed to address problems in
the homeowners property insurance marketplace. These provisions are designed
to address problems in the availability and affordability of such insurance.
These provisions take two forms, voluntary and involuntary. Voluntary
provisions, such as the New Jersey Windstorm Market Assistance Program,
generally do not result in assessments to us. This program is designed to
assist property owners in New Jersey coastal areas in obtaining homeowners
insurance. We have the option to accept or decline to write insurance
offered to us through the program. Involuntary provisions, such as the New
Jersey Fair Access to Insurance Requirements, generally result in
assessments to us. The New Jersey Fair Access to Insurance Requirements
writes fire and extended coverage on homeowners for those individuals unable
to secure insurance elsewhere. Insurance companies who voluntarily write
homeowner's insurance in New Jersey are assessed a portion of any deficit
from the New Jersey Fair Access to Insurance Requirements based on their
share of the voluntary market. Similar involuntary plans exist in the
District of Columbia and most other states where we operate.
Restrictions in Declaring Dividends and Distributions
- - - -----------------------------------------------------
As an insurance holding company, our principal assets consist of the
capital stock of our insurance subsidiaries. We cannot declare dividends on
our Common Stock unless our insurance subsidiaries can pay dividends to us.
Our insurance subsidiaries may only declare dividends to us if they are
permitted to do so under the insurance regulations of their respective
domicile states. All of the states in which our insurance subsidiaries are
domiciled (including New Jersey, New York, North Carolina and South
Carolina), regulate the payment of dividends.
Some states, such as New Jersey, New York and South Carolina require
that we give notice to the relevant state insurance commissioner prior to
declaring any dividends and distributions. During the notice period, the
state insurance commissioner may disallow all or part of the proposed
dividend if it determines that the insurer's surplus as regards
policyholders is not reasonable in relation to the insurer's liabilities and
adequate to its financial needs, or in the case of New Jersey, if the
regulatory authority determines that the insurer is otherwise in a hazardous
financial condition.
Loss Reserves Adequacy
- - - ----------------------
We are required to maintain loss reserves. These reserves provide
capital for our estimated liability for losses and expenses associated with
reported and unreported claims for each accounting period. Our reserve
amounts are estimates of what we expect the ultimate settlement and
administration of what claims will cost. Reserve amounts are based on facts
and circumstances of which we are aware, predictions of future events,
estimates of future trends in claims severity and frequency and other
subjective factors. There is no method for precisely estimating our ultimate
liability.
We regularly review our reserving techniques and our overall amount of
reserves. We also review:
* information regarding each claim for losses;
* our loss history and the industry's loss history;
* legislative enactments, judicial decisions and legal developments
regarding damages;
* changes in political attitudes; and
* trends in general economic conditions, including inflation.
We receive an actuarial opinion regarding the adequacy of our loss
reserves from our Vice President and Actuary. However, we do not receive an
independent actuarial opinion. Although our reserves have been adequate in
the past, we cannot guarantee they will be adequate in the future. If our
reserves are inadequate, we will be required to increase reserves. That
would result in an increase in losses and a reduction in our net income and
stockholders' equity for the period in which the deficiency in reserves is
identified.
Availability of Reinsurance
- - - ---------------------------
We transfer our exposure to certain risks to others through reinsurance
arrangements with other insurance companies. Under our reinsurance
arrangements, another insurer assumes a specified portion of our losses and
allocated loss adjustment expense in exchange for a specified portion of
policy premiums. The availability, amount and cost of reinsurance depend on
general market conditions and may vary significantly. Any decrease in the
amount of our reinsurance will increase our risk of loss. Furthermore, we
face a credit risk with respect to reinsurance. When we obtain reinsurance,
we are still liable for those transferred risks if the reinsurer cannot meet
those obligations. Therefore, the insolvency or inability of our reinsurer's
to meet its financial obligations could materially affect our operations.
Page 21
Investment Income
- - - -----------------
We, like many other property and casualty insurance companies, depend on
income from our investment portfolio for a significant portion of our
revenues and earnings. Any significant decline in our investment income
would have an adverse effect on our results.
Cyclical Industry
- - - -----------------
Historically, the property and casualty insurance industry has been
cyclical. Over the past several years, the industry has been in a downturn
which has resulted in a decline in premium rates. The decline in premium
rates has adversely affected our underwriting results. Furthermore, the
industry's profitability is affected by unpredictable developments,
including, natural disasters (such as hurricanes, windstorms, earthquakes,
hail, explosions and fires); fluctuations in interest rates and other
changes in the investment environment that affect returns on our
investments; inflationary pressures that affect the size of losses; and
judicial decisions that affect insurers' liabilities. The demand for
property and casualty insurance, particularly commercial lines, can also
vary with the overall level of economic activity.
Reliance Upon Independent Insurance Agents
- - - ------------------------------------------
We market and sell our insurance products through independent,
non-exclusive insurance agencies and brokers. Agencies and brokers are not
obligated to promote our insurance products and they may also sell our
competitors' insurance products. As a result, our business depends in part
on the marketing efforts of these agencies and brokers. Therefore, we must
offer insurance products and services that meet the requirements of the
clients and customers of these agencies and brokers. As we diversify and
expand our business geographically, we may need to expand our network of
agencies and brokers to successfully market our products. If these agencies
and brokers fail to market our products successfully, our business may be
adversely impacted.
Ratings
- - - -------
Insurance companies are rated by rating agencies to provide meaningful
information on specific insurance companies. Higher ratings generally
indicate financial stability and a strong ability to pay claims. Ratings are
assigned by rating agencies to insurers based upon factors relevant to
policyholders. Ratings are not recommendations to buy, hold or sell our
common stock.
Currently, we are rated "A+" (Superior) by A.M. Best. Ratings by A.M.
Best in the insurance industry range from "A++" (Superior) to "F" (in
Liquidation). According to A.M. Best, an insurer with an "A++" or "A+"
rating has demonstrated superior overall performance. During 1998, A.M. Best
continued our "A+" rating.
We also have an "A+" claims-paying rating from Standard & Poor's.
According to Standard & Poor's, insurers with this rating offer good
financial security, but their ability to meet policyholder obligations is
susceptible to adverse economic and underwriting conditions. Claims-paying
ability ratings by Standard & Poor's for the industry range from "AAA
(Superior)" to "R (Regulatory Action)". Insurers with a rating of "BBB-" or
better, such as Selective, are considered to have a secure claims-paying
ability. During 1998, Standard & Poor's reaffirmed our "A+" rating.
We cannot be sure that we will maintain our current A.M. Best or
Standard & Poor's ratings. Our business could be adversely effected if we
receive a significant downgrade in these ratings.
Anti-takeover Measures
- - - ----------------------
We own, directly or indirectly, all of the shares of stock of our
subsidiaries domiciled in the States of New Jersey, New York, North Carolina
and South Carolina. State insurance laws require prior approval by state
insurance departments of any acquisition of control of a domestic insurance
company or of any company which controls a domestic insurance company.
"Control" is generally presumed to exist through the ownership of 10% or
more of the voting securities of a domestic insurance company or of any
company which controls a domestic insurance company. Any purchaser of 10%
or more of the outstanding shares of our Common Stock will be presumed to
have acquired control of our subsidiaries unless the relevant insurance
commissioner determines otherwise. Accordingly, any purchase of 10% or more
of our outstanding Common Stock would require prior action by all or some of
the insurance commissioners of the above-referenced states.
In addition, certain other factors may discourage, delay or prevent a
change of control of our Company. These include, among others, provisions in
our Restated Certificate of Incorporation, as amended, relating to
supermajority voting and fair price requirements with respect to certain
business combinations, staggered terms for our directors, supermajority
voting requirements to amend the foregoing provisions, our preferred share
purchase rights plan, guaranteed payments which are to be made to certain
officers upon a change of control of our company, and the ability of our
Board of Directors to issue "blank check" preferred stock.
The New Jersey Shareholders Protection Act provides, among other things,
that a New Jersey corporation, such as Selective, may not engage in certain
specified transactions (including certain business combinations) with a
shareholder having indirect or direct beneficial ownership of 10% or more of
the stock for a period of five years following the date on which such
shareholder became an interested shareholder, unless that transaction is
approved by the board of directors of the corporation prior to such date.
These provisions also could have the effect of depriving shareholders of an
opportunity to receive a premium over the prevailing market price in the
event of an attempted hostile takeover.
Page 22
Year 2000 Computer Problems
- - - ---------------------------
See the Year 2000 discussion in the Financial condition; liquidity and
capital resources section of the 1998 Annual Report beginning with the
second paragraph on page 25 through page 26, herein incorporated by
reference. See also Item 7 of this report.
Our acquisitions of other companies subject us to risks.
As part of our overall strategy to enhance our technical skills needed
to support the core property and insurance business, we acquire or invest in
other complementary companies, products or technologies. For example, we
recently acquired PDA Software Services, Inc. in furtherance of these
objectives. Risks commonly encountered in such transactions include:
* the difficulty of assimilating the operations and personnel of the
combined companies;
* the potential disruption of the ongoing business;
* the inability to retain key personnel;
* a decrease in reported earnings due to acquisition costs and
charges;
* the dilution of shareholders;
* the difficulty in maintaining controls, procedures and policies; and
* the impairment of relationships with employees and customers as a
result of any integration of new personnel.
In addition, as we complete acquisitions of companies which compete in
different markets than we do, we may face risks associated with entering
those new markets.
Regulation of Dividends and Distribution
- - - ----------------------------------------
For information regarding regulation of restrictions on dividends and
distributions, see Risk Factors - "We may be restricted in declaring
dividends and distributions" below and Item 5. "Market for Registrant's
Common Equity and Related Stockholder Matters."
Competition
- - - -----------
The Company competes with other regional and national insurance
companies, self-insurers and direct writers of insurance coverages. Many of
these competitors are larger than the Company with greater economic
resources. The property and casualty insurance industry is highly
competitive on the basis of both price and service. There are numerous
companies competing for this business in the geographic areas in which the
Insurance Subsidiaries operate, particularly outside of New Jersey. The
Company's competitors could undertake actions which could adversely affect
the Company's underwriting results, such as pricing premiums more
aggressively. The insurance industry continues to experience pricing
competition, which has impacted the Company's commercial business. Selective
will not abandon its underwriting business fundamentals to compete solely
on the basis of price. In addition, because the Company's insurance products
are marketed through independent insurance agencies, most of which represent
more than one insurance company, the Company faces competition within each
agency. However, the Company believes that the loss of any particular
independent insurance agency would not have a material adverse effect on
the Company's financial position and operating results.
The Company believes that as a regional company it has certain
competitive advantages over national companies in the states in which its
insurance businesses are concentrated, including a closer relationship with
its agents and a better knowledge of its operating territories. The Company
believes that the branch offices, SBUs, AMSs and CMSs further enhance its
relationship with agents and policyholders by enabling the Company to
provide competitive service and underwriting.
The Company also faces competition from the implementation of
self-insurance, as many insureds are examining the risks of self-insuring
as an alternative to traditional insurance. Another competitive factor in
the industry involves banks stepping up efforts to break the barriers
between various segments of the financial services industry, including
insurance. These efforts pose new challenges to insurance companies and
agents from industries traditionally outside the insurance business.
Developed several years ago in anticipation of growth in alternative
market insurance solutions, the Company formed SelecTech to generate fee
income by providing third party administration services for public entities
that self-insure and use other means of alternative insurance. The services
provided include, but are not limited to: claims administration, loss
control, risk management and reinsurance.
In 1997, the Company formed Selective Risk Managers to focus on business
opportunities in alternative insurance markets and to lead underwriting and
sales efforts for large accounts, self-insured, group and association
business. While primarily focused on providing primary insurance or
reinsurance on alternative market programs, Selective Risk Managers also
generates fee income by collecting ceding commissions and placement fees.
Ratings
- - - -------
For information regarding ratings assigned to the Company by rating
agencies assessing the Company's financial capacity to meet its obligations
to policyholders, see Risk Factors - "Ratings."
Page 23
Item 2. Properties.
- - - --------------------
Information required under this item is incorporated herein by reference
to the sections entitled "Subsidiaries," "Regional Offices," "Field
Underwriting Office," "Information Systems Offices," "Subsidiary Offices,"
and "Properties" on page 49 of the 1998 Annual Report. The Company's
facilities are substantially fully utilized and are adequate for the conduct
of the Company's business.
Item 3. Legal Proceedings.
- - - ---------------------------
Information required under this item is incorporated herein by reference
to Note 19(A) to the Consolidated Financial Statements on pages 45 and 46 of
the 1998 Annual Report.
Item 4. Submission of Matters to a Vote of Security Holders.
- - - -------------------------------------------------------------
None
PART II
-------
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
- - - ----------------------------------------------------------------------
Information required under this item regarding the principal market on
which the Company's common stock is traded and the number of holders thereof
is incorporated herein by reference to the section entitled "Common Stock
Information" on page 49 of the 1998 Annual Report.
Information required under this item regarding the price range of the
Company's common stock and frequency and amount of dividends is incorporated
herein by reference to the section entitled "Quarterly Financial
Information" on page 47; and the section entitled "Financial condition;
liquidity and capital resources" on page 23 up to the first full paragraph
on page 25 of the 1998 Annual Report.
Item 6. Selected Financial Data.
- - - ---------------------------------
Information required under this item is incorporated herein by reference
to the first column on page 16 and related notes on page 17 of the 1998
Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
- - - -------------------------------------------------------------------------
Information required under this item is incorporated herein by reference
to the section entitled "Results of operations" on pages 18 through 22; the
section entitled "Federal Income Taxes" on page 23; and the section entitled
"Financial condition; liquidity and capital resources" on pages 23 through
to the first full paragraph on page 26, of the 1998 Annual Report.
Item 7A. Market Risk Disclosures for Financial Instruments.
- - - ------------------------------------------------------------
Market Risk is the risk of potential loss in fair value arising from
adverse fluctuations in interest rates, market rates and prices, foreign
currency exchange rates, and other relevant market rate or price changes.
The following is a discussion of the Company's primary market risk exposures
and how they are currently managed as of December 31, 1998. The Company's
market risk sensitive instruments are for other than trading purposes.
The Company's investment policy is conservative with the long-term
objective of maximizing after-tax yield while providing liquidity and
preserving assets and stockholders' equity. The current investment mix is
81% debt securities, 15% equity securities and 4% short-term and other
investments. The Company has no direct exposure to foreign exchange or
commodity risks.
To reduce the sensitivity of interest rate fluctuations, the Company
invests its debt portfolio primarily in intermediate-term debt securities.
At year-end 1998, 93% of the portfolio was ten years or less to maturity,
and the average life was 5.0 years.
The Company's portfolio of marketable equity securities is exposed to
equity price risk arising from potential volatility in equity market prices.
The Company attempts to minimize the exposure to equity price risk by
maintaining a diversified portfolio limiting concentrations in any one
company or industry.
For the Company's investment portfolio, there were no significant
changes in the Company's primary market risk exposures or in how those
exposures are managed compared to the year ended December 31, 1997. The
Company does not currently anticipate significant changes in its primary
market risk exposures or in how those exposures are managed in future
reporting periods based upon what is known or expected to be in effect in
future reporting periods.
Several statistical techniques are used to measure potential loss in
fair value of market risk sensitive instruments. One technique is
Sensitivity Analysis, defined as the measurement of potential loss in
future earnings, fair values or cash flows of market sensitive instruments
resulting from one or more selected hypothetical changes in interest rates
and other market rates or prices over a selected time. In the Company's
sensitivity analysis model, a hypothetical change in market rates and price
is selected that is expected to reflect reasonably possible near-term
changes in those rates and prices. The term "near-term" means a period of
time going forward up to one year from the date of the consolidated
financial statements.
Page 24
In the analysis the Company included the following financial
instruments: investments in debt securities, investments in equity
securities, convertible debentures, and senior notes. The primary market
risk to the Company's market sensitive instruments is interest rate risk and
equity price risk. The Company's sensitivity model uses a 100 basis point
increase in interest rates and a 10% decrease in equity values at December
31, 1998 to determine a hypothetical change in the fair value of those
financial instruments. For interest rate sensitive instruments the model
assumes a parallel shift in the yield curve. In addition, the timing of
calls and prepayments cannot be estimated with precision. This analysis is
not intended to provide a precise forecast of the effect of changes in
market interest rates and equity prices on the Company's income or
stockholders' equity. Further, the calculations do not take into account
any actions the Company may take in response to market fluctuations.
The following table presents the sensitivity analysis (adverse scenario)
of each component of market risk as of December 31, 1998.
Fair Value Estimated Fair value
(in thousands) @ 12/31/98 after Hypothetical change
- - - ---------------------------------------------------------------------------
Assets:
Investments in debt securities 1,448,455 1,388,348
Investments in equity securities 269,991 242,992
Liabilities:
Convertible debentures 17,942 19,736
8.77% Senior notes 60,666 63,637
7.84% Senior notes 30,257 31,463
In addition to the above scheduled investments, the Company has a
revolving line of credit. An increase in interest rates of 100 basis points
would result in additional annual interest expense of $0.3 million.
Item 8. Financial Statements and Supplementary Data.
- - - -----------------------------------------------------
The consolidated financial statements and supplementary data of the
Company are incorporated herein by reference to pages 28 through 46,
inclusive, of the 1998 Annual Report. An index to the consolidated financial
statements is contained in Item 14 (a)(1) of this report, and the Quarterly
Financial Information is incorporated herein by reference to page 47 of the
1998 Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
- - - -------------------------------------------------------------------------
None
PART III
--------
The Company will file with the Securities and Exchange Commission,
within 120 days after the end of the fiscal year covered by this report, a
definitive Proxy Statement pursuant to Regulation 14A under the Securities
Exchange Act of 1934 in connection with its 1998 Annual Meeting of
Stockholders, which meeting includes the election of directors. In
accordance with General Instruction G(3) of Form 10-K, the information
required by Items 10, 11, 12 and 13 below is incorporated herein by
reference to the Proxy Statement.
Item 10. Directors and Executive Officers of the Registrant.
- - - -------------------------------------------------------------
Incorporated herein by reference to the sections entitled: (i) "Election
of Directors," "Nominees," "Continuing Directors" and "Stock Ownership of
Directors and Officers" in the Proxy Statement, (ii) "Executive Compensation
and Other Information" and (iii) "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Proxy Statement.
Item 11. Executive Compensation.
- - - ---------------------------------
Incorporated herein by reference to the sections entitled: (i)
"Compensation of Directors," "Compensation Committee Interlocks and Insider
Participation," and "Report of the Selective Insurance Group, Inc. Salary
and Employee Benefits Committee" in the Proxy Statement and (ii) "Summary
Compensation Table," "Footnotes to Summary Compensation Table," "Stock
Options and Stock Appreciation Rights," "Options and SAR Exercises and
Holdings," "Pension Plans" in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- - - -------------------------------------------------------------------------
Incorporated herein by reference to the sections entitled: (i) "General
Matters" in the Proxy Statement; and (ii) "Nominees," "Continuing Directors"
and "Stock Ownership of Directors and Officers" in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
- - - ---------------------------------------------------------
Incorporated herein by reference to the section entitled "Interest of
Management and Others in Certain Transactions" in the Proxy Statement.
Page 25
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
- - - --------------------------------------------------------------------------
(a) The following documents are filed as a part of (or incorporated by
reference) in this report:
(1) Consolidated financial statements:
The consolidated financial statements of the Company, with Independent
Auditors' Report thereon, listed below are incorporated herein by
reference to pages 27 through 46, inclusive, of the 1998 Annual Report.
1998
Annual
Report
Page
------
Independent Auditors' Report............................. 27
Consolidated Balance Sheets at December 31, 1998 and 1997 28
Consolidated Statements of Income for the years
ended December 31, 1998, 1997 and 1996................... 29
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996..... 30
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996................... 31
Notes to Consolidated Financial Statements.............. 32-46
(2) Financial statement schedules:
The financial statement schedules, with Independent Auditors' Report
thereon, required to be filed are listed below by page number as filed
in this report. All other schedules are omitted as the information
required is inapplicable, immaterial, or the information is presented
in the consolidated financial statements or related notes.
Form10-K
Page
--------
Independent Auditors' Report............................ 27
Schedule I Summary of Investments - Other than
Investments in Related Parties at
December 31, 1998..................... 28
Schedule II Condensed Financial Information of
Registrant at December 31, 1998
and 1996, and for the year ended
December 31, 1998, 1997 and 1996...... 29-31
Schedule III Supplementary Insurance Information
for the year ended December 31,
1998, 1997 and 1996................... 32-34
Schedule IV Reinsurance for the year ended
December 31, 1998, 1997 and 1996...... 35
Page 26
Schedule V Allowance for Uncollectible Premiums
and Other Receivables for the year
ended December 31, 1998, 1997 and 1996 36
Schedule VI Supplemental Information for the
year ended December 31, 1998, 1997
and 1996.............................. 37
(3) Exhibits:
The exhibits required by Item 601 of Regulation SK are listed in the
Exhibit Index, which immediately precedes the exhibits filed with this Form
10-K or incorporated in this report by reference, and is incorporated herein
by this reference.
(b) Reports on Form 8-K.
The Company filed a current report on Form 8-K on February 2, 1999.
The report included information with respect to the amended and restated
rights plan of the registrant under Item 5, "Other Events".
PAGE 27
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholders
Selective Insurance Group, Inc.
Under date of February 2, 1999, we reported on the consolidated balance
sheets of Selective Insurance Group, Inc. and its subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of
income, stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1998, as contained in the 1998 Annual
Report to stockholders. These consolidated financial statements and our
report thereon are incorporated by reference in the annual report on Form
10-K for the year 1998. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedules as listed in the accompanying index. These
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
KPMG LLP
New York, New York
February 2, 1999
PAGE 28
SCHEDULE I
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1998
Type of investment Amortized cost Fair Carrying
(in thousands) or cost value amount
Debt securities:
Held-to-maturity:
U.S. government and government
agencies $ 12,649 13,112 12,649
Obligations of states and
political subdivisions 317,070 330,763 317,070
Mortgage-backed securities 28,661 29,304 28,661
Total debt securities, --------- --------- ---------
held-to-maturity 358,380 373,179 358,380
Available-for-sale:
U.S. government and government
agencies 105,141 109,140 109,140
Obligations of states and
political subdivisions 397,310 416,474 416,474
Corporate securities 460,425 477,030 477,030
Asset-backed securities 34,788 35,124 35,124
Mortgage-backed securities 35,964 37,508 37,508
Total debt securities, --------- --------- ---------
available-for-sale 1,033,628 1,075,276 1,075,276
Equity securities, available-for-sale:
Common stocks:
Public utilities 2,573 7,350 7,350
Banks, trust and insurance
companies 33,844 37,611 37,611
Industrial, miscellaneous
and all other 99,341 225,030 225,030
Total equity securities, --------- --------- ---------
available-for-sale 135,758 269,991 269,991
Short-term investments 50,905 50,905 50,905
Other investments 16,087 16,087 16,087
--------- --------- ---------
Total investments $1,594,758 1,785,438 1,770,639
========= ========= =========
PAGE 29
SCHEDULE II
SELECTIVE INSURANCE GROUP, INC.
(Parent Corporation)
Balance Sheets
(in thousands, except share amounts) December 31,
1998 1997
- - - ----------------------------------------------------------------------------
Assets
- - - ------
Equity securities, available-for-sale
- at fair value (cost: $1,974
- 1998; $2,471 - 1997) $ 2,145 2,585
Debt securities, available-for-sale
at fair value (amortized cost: $25,216) 24,481 24,587
Short-term investments 90 347
Cash 26 45
Investment in subsidiaries 686,595 650,298
Current Federal income tax 0 774
Deferred Federal income tax 4,245 4,203
Other assets 14,053 1,676
------- -------
Total assets $ 731,635 684,515
======= =======
Liabilities and Stockholders' Equity
- - - ------------------------------------
Convertible subordinated debentures $ 6,219 6,845
Notes payable 82,572 89,714
Short-term debt 28,287 17,400
Current Federal income tax 2,981 -
Other liabilities 3,993 5,240
------- -------
Total liabilities 124,052 119,199
------- -------
Stockholders' equity:
Common stock of $2 par value per share:
Authorized shares: 180,000,000
Issued: 37,416,237 1998;
36,363,856 1997 74,833 72,728
Additional paid-in capital 45,449 30,450
Retained earnings 477,118 439,811
Accumulated other comprehensive income 114,323 89,051
Treasury stock at cost
(shares:8,892,335 1998;
7,097,462 1997) (97,990) (59,785)
Deferred compensation expense and notes
receivable from stock sales (6,150) (6,939)
------- -------
Total stockholders' equity 607,583 565,316
------- -------
Total liabilities and stockholders' equity $ 731,635 684,515
======= =======
Information should be read in conjunction with the notes to consolidated
financial statements of Selective Insurance Group, Inc. and its
Subsidiaries in the 1998 Annual Report.
PAGE 30
SCHEDULE II (Cont'd)
SELECTIVE INSURANCE GROUP, INC.
(Parent Corporation)
Statements of Income
(in thousands) Year ended December 31,
1998 1997 1996
- - - --------------------------------------------------------------------------
Revenues:
Dividends from subsidiaries $ 54,451 35,891 28,006
Net investment income earned 1,826 1,657 548
Realized gains 53 0 0
Miscellaneous income 125 34 22
------ ------ ------
56,455 37,582 28,576
------ ------ ------
Expenses:
Interest 9,409 9,592 9,185
Other operating 1,151 4,244 1,407
------ ------ ------
10,560 13,836 10,592
------ ------ ------
Income before Federal income tax
and equity in undistributed income of
subsidiaries 45,895 23,746 17,984
------ ------ ------
Federal income tax benefit:
Current (3,252) (2,660) (3,012)
Deferred (33) (1,096) (326)
------ ------ ------
(3,285) (3,756) (3,338)
------ ------ ------
Income before equity in undistributed
income of subsidiaries, net of tax 49,180 27,502 21,322
Equity in undistributed income of
subsidiaries, net of tax 4,390 42,106 34,229
------ ------ ------
Net income $ 53,570 69,608 55,551
====== ====== ======
Information should be read in conjunction with the notes to consolidated
financial statements of Selective Insurance Group, Inc. and its
Subsidiaries in the 1998 Annual Report.
PAGE 31
SCHEDULE II (Cont'd)
SELECTIVE INSURANCE GROUP, INC.
(Parent Corporation)
Statements of Cash Flows
(in thousands) Year ended December 31,
1998 1997 1996
- - - --------------------------------------------------------------------------
Operating Activities:
Net income $ 53,570 69,608 55,551
------ ------ ------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in undistributed income of
subsidiaries, net of tax (4,390) (42,106) (34,229)
Increase (decrease) in net Federal
income tax 3,730 (2,357) (618)
Net realized gains on investments (53) - -
Other, net (11,925) 2,704 389
------ ------ ------
Net adjustments (12,638) (41,759) (34,458)
------ ------ ------
Net cash provided by operating
activities 40,932 27,849 21,093
------ ------ ------
Investing Activities:
Purchase of other investments (6,601) 0 0
Sale of equity securities,
available-for-sale 551 (25,182) 0
------ ------ ------
Net cash used in
investing activities (6,050) (25,182) 0
------ ------ ------
Financing Activities:
Proceeds from short-term debt 10,887 17,400 0
Principal payment on note payable (7,143) (7,143) (7,143)
Dividends to stockholders (16,263) (16,398) (16,268)
Acquisition of treasury stock (38,205) (9,105) (4,251)
Net proceeds from issuance of
common stock 16,479 13,407 7,959
Increase in deferred compensation
expense and notes receivable from
stock sale (913) (5,750) (2,915)
Net cash used in ------ ------ ------
financing activities (35,158) (7,589) (22,618)
------ ------ ------
Net decrease in cash and
short-term investments (276) (4,922) (1,525)
Cash and short-term investments at
beginning of year 392 5,314 6,839
Cash and short-term investments at ------ ------ ------
end of year $ 116 392 5,314
====== ====== ======
Information should be read in conjunction with the notes to consolidated
financial statements of Selective Insurance Group, Inc. and its
Subsidiaries in the 1998 Annual Report.
PAGE 32
SCHEDULE III
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
Year ended December 31, 1998
Deferred Reserve for
Segment policy losses and Net
acquisition loss Unearned premiums
(in thousands) costs expenses premiums earned
- - - ---------------------------------------------------------------------------
Commercial $ 81,034 801,687 252,240 506,020
Personal 28,740 251,134 116,218 216,972
Reinsurance recoverable
on unpaid loss
and loss expenses - 140,453 - -
Prepaid reinsurance
premiums - - 31,685 -
Interest and general
corporate expenses - - - -
------- --------- ------- -------
Total $109,774 1,193,274 400,143 722,992
======= ========= ======= =======
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
Year ended December 31, 1998
Losses and Amortization
Segment loss of deferred Other Net
expenses policy Acqui- Operating premiums
(in thousands) incurred sition costs expenses written
- - - ---------------------------------------------------------------------------
Commercial $ 352,863 142,473 36,509 524,571
Personal 154,937 50,530 11,340 224,302
Reinsurance recoverable
on unpaid loss
and loss expenses
- - - -
Prepaid reinsurance
premiums - - - -
Interest and general
corporate expenses - - 10,585 -
------- ------- ------ -------
Total $ 507,800 193,003 58,434 748,873
======= ======= ====== =======
NOTE: A meaningful allocation of net investment income of $99,196 and net
realized loss on investments of $2,139 is considered impracticable because
the Company does not maintain distinct investment portfolios for each
segment.
PAGE 33
SCHEDULE III (Cont'd)
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
Year ended December 31, 1997
Deferred Reserve for
Segment policy losses and Net
acquisition loss Unearned premiums
(in thousands) costs expenses premiums earned
- - - ---------------------------------------------------------------------------
Commercial $ 73,800 789,197 233,688 465,826
Personal 24,310 247,775 108,889 210,442
Reinsurance recoverable
on unpaid loss
and loss expenses
- 124,197 - -
Prepaid reinsurance
premiums - - 31,189 -
Interest and general
corporate expenses - - - -
------ --------- ------- -------
Total $98,110 1,161,169 373,766 676,268
====== ========= ======= =======
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
Year ended December 31, 1997
Losses and Amortization
Segment loss of deferred Other Net
expenses policy Acqui- Operating premiums
(in thousands) incurred sition costs expenses written
- - - ---------------------------------------------------------------------------
Commercial $ 311,419 134,002 33,360 472,440
Personal 149,794 40,722 9,491 245,178
Reinsurance recoverable
on unpaid loss
and loss expenses
- - - -
Prepaid reinsurance
premiums - - - -
Interest and general
corporate expenses - - 13,769 -
------- ------- ------ -------
Total $ 461,213 174,724 56,620 717,618
======= ======= ====== =======
NOTE: A meaningful allocation of net investment income of $100,530 and net
realized gains on investments of $6,021 is considered impracticable because
the Company does not maintain distinct investment portfolios for each
segment. Certain reclassifications have been made to conform with 1998
presentation.
PAGE 34
SCHEDULE III (Cont'd)
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
Year ended December 31, 1996
Deferred Reserve for
Segment policy losses and Net
acquisition loss Unearned premiums
(in thousands) costs expenses premiums earned
- - - ---------------------------------------------------------------------------
Commercial $ 65,515 794,358 227,074 477,474
Personal 17,635 245,227 74,153 217,473
Reinsurance recoverable
on unpaid loss
and loss expenses
- 150,208 - -
Prepaid reinsurance
premiums - - 30,813 -
Interest and general
corporate expenses - - - -
------ --------- ------- -------
Total $83,150 1,189,793 332,040 694,947
====== ========= ======= =======
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
Year ended December 31, 1996
Losses and Amortization
Segment loss of deferred Other Net
expenses policy Acqui- Operating premiums
(in thousands) incurred sition costs expenses written
- - - ---------------------------------------------------------------------------
Commercial $ 338,011 135,099 28,210 475,072
Personal 158,715 45,471 10,651 217,167
Reinsurance recoverable
on unpaid loss
and loss expenses
- - - -
Prepaid reinsurance
premiums - - - -
Interest and general
corporate expenses - - 10,646 -
------- ------- ------ -------
Total $ 496,726 180,570 49,507 692,239
======= ======= ====== =======
NOTE: A meaningful allocation of net investment income of $96,952 and net
realized gains on investments of $2,786 is considered impracticable because
the Company does not maintain distinct investment portfolios for each
segment. Certain reclassifications have been made to conform with 1998
presentation.
PAGE 35
SCHEDULE IV
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
REINSURANCE
Years ended December 31, 1998, 1997 and 1996
% of
Ceded to Assumed amount
Gross other from other Net assumed
(in thousands) amount companies companies amount to net
- - - -----------------------------------------------------------------------------
1998
Premiums earned:
Accident and health ins. $ 270 - - 270 -
Property and liability ins. 780,572 79,089 21,239 722,723 2.9
------- ------ ------ -------
Total premiums earned $ 780,842 79,089 21,239 722,992 2.9
======= ====== ====== =======
1997
Premiums earned:
Accident and health ins. $ 297 - - 297 -
Property and liability ins. 739,647 84,384 20,708 675,971 3.1
------- ------ ------ -------
Total premiums earned $ 739,944 84,384 20,708 676,268 3.1
======= ====== ====== =======
1996
Premiums earned:
Accident and health ins. $ 799 - - 799 -
Property and liability ins. 760,557 95,765 29,356 694,148 4.2
------- ------- ------ -------
Total premiums earned $ 761,356 95,765 29,356 694,947 4.2
======= ======= ====== =======
PAGE 36
SCHEDULE V
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
ALLOWANCE FOR UNCOLLECTIBLE PREMIUMS AND OTHER RECEIVABLES
Years ended December 31, 1998, 1997 and 1996
(in thousands)
- - - ----------------------------------------------------------------------------
1998 1997 1996
Balance, January 1 $ 3,056 3,302 3,450
Additions 1,996 2,331 3,502
Deletions (2,312) (2,577) (3,650)
----- ----- -----
Balance, December 31 $ 2,740 3,056 3,302
===== ===== =====
PAGE 37
SCHEDULE VI
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTAL INFORMATION
Years ended December 31, 1998, 1997 and 1996
Losses and loss expenses
incurred related to Paid
Affiliation with Registrant (1) (2) losses
current prior and loss
(in thousands) year years expenses
- - - ---------------------------------------------------------------------------
Consolidated Property/
Casualty Subsidiaries:
Year ended Dec. 31, 1998 $510,319 (2,519) 491,951
Year ended Dec. 31, 1997 $471,337 (10,124) 463,826
Year ended Dec. 31, 1996 $505,904 (9,178) 455,824
Note: The other information required in this schedule (e.g., deferred
policy acquisition costs, reserves for losses and loss expenses, unearned
premiums, net premiums earned, net investment income, amortization of
deferred policy acquisition costs, and net premiums written) is contained
in Schedule III in this report. In addition, the Company does not discount
loss reserves.
PAGE
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SELECTIVE INSURANCE GROUP, INC.
By: /s/ James W. Entringer March 31, 1999
-------------------------------
James W. Entringer, Chairman of
the Board and Chief Executive Officer
By: /s/ Gregory E. Murphy March 31, 1999
-------------------------------
Gregory E. Murphy, President and
Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
By: /s/ James W. Entringer March 31, 1999
-------------------------------
James W. Entringer, Chairman of
the Board and Chief Executive Officer
By: /s/ Gregory E. Murphy March 31, 1999
-------------------------------
Gregory E. Murphy, President and
Chief Operating Officer
By: /s/ David B. Merclean March 31, 1999
-------------------------------
David B. Merclean, Senior Vice
President and Chief Financial Officer
By: /s/ Paul D. Bauer March 31, 1999
-------------------------------
Paul D. Bauer, Director
By: /s/ A. David Brown March 31, 1999
-------------------------------
A. David Brown, Director
By: /s/ William A. Dolan, II March 27 1998
-------------------------------
William A. Dolan, II, Director
By: /s/ William C. Gray, D.V.M. March 31, 1999
-------------------------------
William C. Gray, D.V.M., Director
By: /s/ C. Edward Herder March 31, 1999
-------------------------------
C. Edward Herder, Director
By: /s/ Frederick H. Jarvis March 31, 1999
-------------------------------
Frederick H. Jarvis, Director
By: /s/ William M. Kearns,Jr. March 31, 1999
-------------------------------
William M. Kearns, Jr., Director
By: /s/ Joan Lamm-Tennant, Ph.D. March 31, 1999
-------------------------------
Joan Lamm-Tennant, Ph.D.
Director
By: /s/ S. Griffin McClellan, III March 31, 1999
-------------------------------
S. Griffin McClellan, III
Director
By: /s/ William M. Rue March 31, 1999
-------------------------------
William M. Rue, Director
By: /s/ Thomas D. Sayles, Jr. March 31, 1999
-------------------------------
Thomas D. Sayles, Jr.
Director
By: /s/ J. Brian Thebault March 31, 1999
-------------------------------
J. Brian Thebault, Director
PAGE
EXHIBIT INDEX
* Exhibits included within this 10K filing
P Paper filing under cover of Form SE
Exhibit
Number
- - - ------
2 Agreement and Plan of Merger, dated as of March 27, 1992, among
Selective Insurance Group, Inc., Niagara Acquisition Co., Niagara
Exchange Corporation, Riedman Corporation, PSCO Partners Limited
Partnership, PSCO Bermuda Partners, PSCO Fund Limited and Charles
J. Clauss (incorporated herein by reference to Exhibit 1 to the
Company's Current Report on Form 8-K dated March 30, 1992, filed
with the Securities Exchange Commission on April 7, 1992, File
No. 0-8641).
3.1 Restated Certificate of Incorporation of Selective Insurance Group,
Inc., dated August 4, 1977, as amended through November 6, 1997
(incorporated herein by reference to Exhibit 3.1 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997,
File No. 0-8641).
3.2 The Company's By-Laws, adopted on August 26, 1977, amended through
May 1, 1992 (incorporated herein by reference to Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1994, File No. 0-8641).
4.1 The form of Indenture dated December 29, 1982, between the
Selective Insurance Group, Inc. and Midlantic National Bank, as
Trustee relating to the Company's 8 3/4% Subordinated Convertible
Debentures due 2008 (incorporated herein by reference to Exhibit
4.3 to the Company's Registration Statement on Form S-3 No.
2-80881).
4.2 Rights Agreement dated November 3, 1989 between Selective Insurance
Group, Inc. and Midlantic National Bank (incorporated herein by
reference to Exhibit 4.2 to the Company's Annual Report on Form
10-K for the year ended December 31, 1994, File No. 0-8641).
4.3 Amendment, dated February 2, 1999, to the Rights Agreement between
Selective Insurance Company of America and First Chicago Trust,
(incorporated herein by reference to the Company's Current Report
on Form 8-K filed February 2, 1999, File No. 0-8641.)
10.1 The Selective Insurance Retirement Savings Plan as amended through
August 15, 1996 (incorporated herein by reference to Exhibit 4 to
the Company's Registration Statement on Form S-8 No. 333-10477).
10.2 Amendment, dated May 2, 1997, to the Selective Insurance Retirement
Savings Plan in Exhibit 10.1 above (incorporated herein by
reference to Exhibit 10.6 to the Company's Quarterly Report on Form
10Q for the quarter ended June 30, 1997, File No. 0-8641).
10.3 The Retirement Income Plan for Employees of Selective Insurance
Company of America, as amend- ed through May 6, 1994 (incorporated
herein by reference to Exhibit 10.2 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1994, File No.
0-8641).
10.4 The Company's Stock Option Plan as amended through May 6, 1988
(incorporated herein by reference to Exhibit 4 to the Company's
Registration Statement on Form S-8 No. 33-22450).
10.5 Directors' Plan. A retirement and total and permanent disability
plan for directors as amended through May 5, 1989 (incorporated
herein by reference to Exhibit 10.4 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1994, File No.
0-8641).
10.6 Resolutions adopted by the Selective Insurance Group, Inc. Board of
Directors on December 31, 1997 with respect to the Directors' Plan
in Exhibit 10.5 above (incorporated herein by reference to Exhibit
10.6 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, File No. 0-8641).
10.7 Deferred Compensation Plan for Directors (incorporated herein by
reference to Exhibit 10.5 to the Company's Annual Report on Form
10-K for the year ended December 31, 1993, File No. 0-8641).
10.8 The Company's 1987 Employee Stock Purchase Savings Plan
(incorporated herein by reference to Exhibit 10.6 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1993,
File No. 0-8641).
10.9 Amendment, dated May 2, 1997, to the 1987 Employee Stock Purchase
Savings Plan in Exhibit 10.8 above (incorporated herein by
reference to Exhibit 10.5 to the Company's Quarterly Report on Form
10Q for the quarter ended june 30, 1997, File No. 0-8641).
10.10 The Selective Insurance Rewards Program adopted January 1, 1994,
which replaced the Annual Incentive Compensation Plan (incorporated
herein by reference to Exhibit 10.7 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1994, File No.
0-8641).
10.11 The Selective Insurance Group, Inc. Stock Purchase Plan for
Independent Insurance Agents as amended through December 1, 1995
(incorporated herein by reference to Exhibit 10.8 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995,
File No. 0-8641).
10.12 The Selective Insurance Group, Inc. Stock Option Plan for Directors
as amended through November 1, 1991 (incorporated herein by
reference to Exhibit 4.1 to the Company's Registration Statement on
Form S-8 No. 33-36368).
* 10.12a The Selective Insurance Group, Inc. Stock Option Plan for Directors
as amended through November 1, 1998, filed herewith.
10.13 Selective Insurance Group, Inc. Stock Option Plan II, as amended
through October 9, 1997, and related forms of option agreements
(incorporated herein by reference to Exhibits 4.1 to the Company's
Registration Statement on Form S-8 No. 333-37501).
* 10.13a The Selective Insurance Group, Inc. Stock Option Plan II, as
amended through July 28, 1998, filed herewith.
10.14 The Selective Insurance Group, Inc. Stock Compensation Plan for
Nonemployee Directors (incorporated herein by reference to Exhibit
4 to the Company's Registration Statement on Form S-8 No.
333-10465).
10.15 SIGI Acquisition Company LLC Limited Liability Company Agreement
(incorporated herein by reference to Exhibit 10.15 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997,
File No. 0-8641).
10.16 Employment, Termination and Severance Agreements.
10.16a Employment Agreement with James W. Entringer, dated September 1,
1993, as amended (incorporated herein by reference to Exhibit 10.12
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1993, File No. 0-8641).
10.16b Amendment, dated September 1, 1996, to the Employment Agreement in
Exhibit 10.16(a) above (incorporated herein by reference to Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996, File No. 0-8641).
10.16c Amendment, dated May 1, 1998, to the Employment Agreement in
Exhibit 10.16(a) and (b) above (incorporated herein by reference to
Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998, File No. 0-8641).
10.16d Amendment, dated September 1, 1996, to the Employment Agreement in
Exhibit 10.16(c) above (incorporated herein by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996, File No. 0-8641).
10.16e Employment Agreement with Thornton R. Land , dated September 1,
1993, as amended (incorporated herein by reference to Exhibit 10.15
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1993, File No. 0-8641).
10.16f Amendment, dated September 1, 1996, to the Employment Agreement in
Exhibit 10.16(e) above (incorporated herein by reference to Exhibit
10.3 to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996, File No. 0-8641).
10.16g Employment Agreement with Gregory E. Murphy, dated August 1, 1995
(incorporated herein by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1995, File No. 0-8641).
10.16h Employment Agreement with Donald E. Williams, dated August 1, 1995
(incorporated herein by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1995, File No. 0-8641).
10.16i Employment Agreement with Jamie Ochiltree, III, dated October 31,
1995 (incorporated herein by reference to Exhibit 10.11f to the
Company's Annual Report on Form 10-K for the year ended December
31, 1995, File No. 0-8641).
10.16j Employment Agreement, dated May 2, 1997, between Selective
Insurance Company of America and James W. Coleman, Jr.
(incorporated herein by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10Q for the quarter ended June 30, 1997,
File No. 0-8641).
10.16k Form of Termination Agreement, between the Company and each of
Messrs. Entringer, Addesso and Land, as amended (incorporated
herein by reference to Exhibit 10.16 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1993, File No.
0-8641).
10.16l Termination Agreement, dated August 1, 1995, between Selective
Insurance Company of America and Gregory E. Murphy (incorporated
herein by reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1995, File
No. 0-8641).
10.16m Termination Agreement, dated August 1, 1995, between Selective
Insurance Company of America and Donald E. Williams (incorporated
herein by reference to Exhibit 10.4 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1995, File
No. 0-8641).
10.16n Termination Agreement, dated August 1, 1995, between Selective
Insurance Company of America and Jamie Ochiltree (incorporated
herein by reference to Exhibit 10.11j to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995, File No.
0-8641).
10.16o Termination Agreement, dated May 2, 1997, between Selective
Insurance Company of America and James W. Coleman, Jr.
(incorporated herein by reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10Q for the quarter ended June 30, 1997,
File No. 0-8641).
10.16p Severance agreement with Walter H. Hallowell, dated July 12, 1994
(incorporated herein by reference to Exhibit 10.15 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1994,
File No. 0-8641).
10.16q Amendment, dated May 1, 1998, to the Employment Agreement in
Exhibit 10.16(g) above (incorporated herein by reference to Exhibit
10.4 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998, File No. 0-8641).
* 10.16r Amendment, dated October 31, 1998, to the Employment Agreement in
Exhibit 10.16(i) above, filed herewith.
* 10.16s Amendment, dated December 16, 1998, to the Termination Agreement;s
between messrs. Entringer and Land and the Company in
Exhibit 10.16(k) above, filed herewith.
* 10.16t Amendment, dated December 16, 1998, to the Termination Agreement in
Exhibit 10.16(l) above, filed herewith.
* 10.16u Amendment, dated December 16, 1998, to the Termination Agreement in
Exhibit 10.16(m) above, filed herewith.
* 10.16v Amendment, dated December 16, 1998, to the Termination Agreement in
Exhibit 10.16(n) above, filed herewith.
* 10.16w Amendment, dated December 16, 1998, to the Termination Agreement in
Exhibit 10.16(o) above, filed herewith.
* 10.16x Form of Termination Agreement, dated December 16, 1998, between
Selective Insurance Company of America and David B. Merclean, filed
herewith.
* 10.16y Amendment, dated December 16, 1998, to the Termination Agreement in
Exhibit 10.16(x) above, filed herewith.
10.17 Property Reinsurance Contracts.
10.17a New Jersey Homeowners Quota Share Treaty between Selective
Insurance Company of America, Selective Way Insurance Company,
Selective Insurance Company of the Southeast, Selective Insurance
Company of South Carolina, and Selective Insurance Company of New
York and various insurance and/or reinsurance companies (Contract
No. 3645-24), (incorporated herein by reference to Exhibit 10.17a
to the Company's Annual Report on Form 10-K for the year ended
December 31,1997, File No. 0-8641).
* 10.17b Property Catastrophe Excess of Loss Reinsurance Contract between
various insurance and/or reinsurance companies and/or underwriting
members of Lloyd's and Selective Insurance Company of America,
Selective Way Insurance Company, Selective Insurance Company of the
Southeast, Selective Insurance Company of South Carolina and
Selective Insurance Company of New York, filed herewith.
10.17c Property Per Risk Reinsurance Agreement between Selective Insurance
Company of America, Selective Way Insurance Company, Selective
Insurance Company of the Southeast, Selective Insurance Company of
South Carolina, Selective Insurance Company of New York, and
American Re-Insurance Company and/or St. Paul Reinsurance
Management Corporation (Contract No. 3525-0087), (incorporated
herein by reference to Exhibit 10.14g to the Company's Annual
Report on Form 10-K for the year ended December 31,1996, File No.
0-8641).
10.18 Casualty Reinsurance Contracts.
10.18a Casualty Excess of Loss Reinsurance Agreement between Selective
Insurance Company of America, Selective Way Insurance Company,
Selective Insurance Company of the Southeast, Selective Insurance
Company of South Carolina, Selective Insurance Company of New York,
and various insurance and/or reinsurance companies (Contract No.
3525-0090), (incorporated herein by reference to Exhibit 10.15g to
the Company's Annual Report on Form 10K for the year ended December
31, 1996, File No. 0-8641).
10.19 Form of Note Purchase Agreement dated as of November 15, 1992 with
respect to Selective Insurance Group, Inc. 7.84% Senior Notes due
November 15, 2002 (incorporated herein by reference to Exhibit 99.1
to the Company's Post-Effective Amendment No. 1 to the Registration
Statement on Form S-3, No. 33-30833).
10.20 Form of Note Purchase Agreement dated as of August 1, 1994 with
respect to Selective Insurance Group, Inc. 8.77% Senior Notes due
August 1, 2005 (incorporated herein by reference to Exhibit 99.2 to
the Company's Post-Effective Amendment No. 1 to the Registration
Statement on Form S-3, No. 33-30833).
10.21 Promissory Note of $25,000,000 Revolving Line of Credit with State
Street Bank and Trust Company (incorporated herein by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997, File No. 0-8641).
10.22 Amendment, dated June 30, 1997, to the Promissory Note of
$25,000,000 Revolving Line of Credit with State Street Bank and
Trust Company in Exhibit 10.21 above, (incorporated herein by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997, File No. 0-8641).
10.23 Commercial Loan Note of $25,000,000 Line of Credit with Summit Bank
as amended through June 30, 1997, (incorporated herein by reference
to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997, File No. 0-8641).
* 10.24 Amendment, dated November 6, 1998, to the Promissory Note of
$25,000,000 Revolving Line of Credit with State Street Bank and
Trust Company in Exhibit 10.21 above, filed herewith.
10.25 Amendment, dated June 30, 1998, to the Promissory Note of
$25,000,000 Revolving Line of Credit with State Street Bank and
Trust Company in Exhibit 10.21 above, (incorporated herein by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998, File No. 0-8641).
10.26 Amendment, dated May 31, 1998, to the Commercial Loan Note of
$25,000,000 Line of Credit with Summit Bank in Exhibit 10.23 above,
(incorporated herein by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998,
File No. 0-8641).
* 11 Computation of earnings per share, filed herewith.
* 13 Portions of the 1998 Annual Report to Stockholders incorporated by
reference into this Form 10-K, filed herewith.
* 21 Subsidiaries of Selective Insurance Group, Inc., filed herewith.
* 23 Consent of Independent Auditors, filed herewith.
* 27 Financial Data Schedule, filed herewith.
P 99 Combined 1998 statutory Schedule P for the Selective Insurance
Group. (information from reports furnished to state insurance
regulatory authorities, filed concurrently herewith under cover of
Form SE).
PAGE
EXHIBIT 10.12a
SELECTIVE INSURANCE GROUP, INC.
STOCK OPTION PLAN FOR DIRECTORS
-------------------------------
I. PURPOSE
-------
The purpose of this Stock Option Plan for Directors (the "Plan") of
Selective Insurance Group, Inc. (the "Company") is to encourage ownership of
the Company's common stock, $2.00 par value ("Common Stock"), by outside
directors of the Company, whose services are considered essential to the
Company's progress, and to thereby provide them with a further incentive to
continue as directors of the Company.
II. PARTICIPATION IN THE PLAN
-------------------------
All directors of the Company who are not full-time employees of the
Company or any subsidiary of the Company ("Director(s)") shall participate
in the Plan except for any Director who shall elect in a written notice to
the Secretary of the Company not to participate in the Plan.
III. COMMON STOCK SUBJECT TO THE PLAN
--------------------------------
The maximum number of shares of Common Stock available for the exercise
of options granted under the Plan ("Option(s)") shall be two hundred
thousand (200,000) shares. Such number of shares of Common Stock shall be
subject to adjustment as provided in Section VIII of the Plan. If any
outstanding Option expires or is terminated for any reason without having
been exercised in full, the shares of Common Stock covered by the
unexercised portion of such Option shall again become available for the
grant of Options.
IV. NONSTATUTORY STOCK OPTIONS
--------------------------
All Options shall be nonqualifed Options and shall not be entitled to
tax treatment under Section 422A of the Internal Revenue Code of 1986, as
amended to date, and as may be amended from time to time (the "Code").
V. TERMS, CONDITIONS AND FORM OF OPTIONS
-------------------------------------
(a) Option Agreements. Each Option granted under the Plan shall be
evidenced by a written agreement in the form annexed hereto as
Exhibit A-1.
(b) Grant of Options. An Option to purchase one thousand five hundred
(1,500) shares of Common Stock shall be granted automatically to
each Director on March 1 or, if March 1 is not a business day, on
the next succeeding business day of each year, commencing March 1,
1990, during the term of the Plan.
(c) Options Not Transferable. Each Option shall not be transferable by
the optionee except by will, or by the laws of descent and
distribution and shall be exercised during the lifetime of the
optionee only by the optionee or the optionee's guardian or legal
representative. No Option or interest therein may be transferred,
assigned, pledged or hypothecated by the optionee, whether by
operation of law or otherwise, or be made subject to execution,
attachment or similar process.
(d) Exercise of Option. Each Option shall become exercisable on the
first anniversary of the date upon which it was granted; provided,
however, that any outstanding Option that is not yet exercisable
shall become exercisable in full (i) upon the retirement of the
optionee because of total and permanent disability or upon the
death of the optionee, as hereinafter provided or (ii) six months
after the retirement of the optionee for any other reason. No
Option shall be exercisable after the expiration of ten (10) years
from the date upon which such Option is granted.
(e) Exercise by Representative Following Death or Disability of
Director. In the event of the death or disability of an optionee,
any Option outstanding as of the date of death or disability may be
exercised, in whole or in part, by the optionee's executor,
administrator, guardian or legal representative in accordance with
the terms of such Option.
PAGE
(f) Exercise of Options. Options may be exercised by written notice
to the Company addressed to the office of the Secretary of the
Company and accompanied by payment in cash or in shares of Common
Stock of the Company for the full exercise price for the shares as
to which they are exercised.
VI. MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS
----------------------------------------------
No Option shall be extended or renewed, and no Option shall be granted
in substitution for any Option granted. No Option shall be modified or
amended without the consent of the optionee or the optionee's executor,
administrator, guardian or legal representative.
VII. OPTION EXERCISE PRICE
---------------------
The exercise price for each share of Common Stock covered by an Option
shall be equal to the Fair Market Value of a share of Common Stock on the
date of grant of such Option and shall be payable in cash. For the purposes
of the Plan, the term "Fair Market Value" shall mean the average of the
highest and lowest quoted selling prices for a share of Common Stock on the
date of grant of an Option, or, if the date of grant of the Option is not a
business day, on the next succeeding business day, as reported on the NASDAQ
National Market System. If there is no sale of Common Stock reported on
such date, "Fair Market Value" shall mean the average of the highest asked
and lowest bid prices for a share of common Stock on such date as reported
on the NASDAQ National Market System.
VIII.GENERAL PROVISIONS
------------------
(a) Assignments. The rights and benefits under this Plan may not be
assigned except as provided in Section V hereof.
(b) Term of the Plan. No Options shall be granted more than ten (10)
years after the effective date of this Plan.
(c) Limitation of Rights. Neither the Plan, nor the granting of an
Option, nor any other action taken pursuant to the Plan, shall
constitute or be evidence of any agreement or understanding,
express or implied, that the Company will retain a Director for any
period of time or at any particular rate of compensation. An
optionee shall have no rights as a stockholder with respect to the
shares covered by such optionee's Options until the date of the
issuance to such optionee of a stock certificate therefor, and no
adjustment will be made for dividends or other rights for which the
record date precedes the date such certificate is issued.
(d) Adjustments. In the event of any merger, consolidation,
reorganization, recapitalization, stock dividend, stock split, or
other changes in the corporate structure or capitalization
affecting Common Stock, adjustments shall be made in the number
(including the aggregate numbers specified in Section III) and kind
of shares which are or may become subject to Options granted or to
be granted hereunder.
(e) Effective Date. This Plan shall take effect on and as of March 1,
1990, upon approval of the Plan by the stockholders or the Company.
In no event shall any Option become exercisable until twenty (20)
days after the filing with the Securities and Exchange Commission
of a registration statement on Form S-8, or such other form of
registration statement, if any, as shall be required.
(f) Amendment. The Board of Directors of the Company may suspend or
discontinue the Plan at any time. The Plan may be amended by the
Board of Directors but may not be amended more than once every six
(6) months so as to: (i) change the class of persons eligible to
receive Options; (ii) change the timing of grants of Options; or
(iii) change the amount of Options to be granted to Directors under
the Plan, other than amendments made to comport with changes in the
Code or rules thereunder.
(g) Administrative Discretion. No discretion concerning decisions
regarding the Plan shall be afforded to any person who is not a
"disinterested person," as defined in Rule 16b-3 under the
Securities Exchange Act of 1934, or any successor rule, as in
effect from time to time.
PAGE
(h) Notice. Any written notice to the Company required by any of the
provisions of this Plan or the Option Agreement under the Plan
shall be addressed to the Secretary of the Company and shall become
effective when it is received.
IX. GOVERNING LAW
-------------
This Plan and all determinations made and actions taken pursuant hereto
shall be governed by the law of the State of New Jersey and construed
accordingly.
PAGE
EXHIBIT 10.13a
SELECTIVE INSURANCE STOCK OPTION PLAN II
I. PURPOSE
This Selective Insurance Stock Option Plan II (the "Plan") is intended to
encourage employees of Selective Insurance Group, Inc. (the "Company") and
its subsidiaries to own stock in the Company and to provide incentive to
further the success of the Company.
II. SHARES SUBJECT TO THE PLAN
There will be reserved for issuance upon the exercise of Options granted
under the Plan 4,200,000 shares of the Company's Common Stock which may be
unissued or reacquired shares. If any option granted expires or terminates
for any reason without having been exercised in full, the unpurchased shares
shall again become available for the purposes of the Plan.
III. ADMINISTRATION
The Plan shall be administered by a Compensation Committee (the "Committee")
appointed by the Board of Directors of the Company. The Committee shall
consist of two (2) or more directors of the Company, all of whom shall be
both "Non-Employee Directors" within the meaning of Rule 6b-3 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
"Outside Directors" as defined for the purposes of Section 162(m) of the
Internal Revenue Code of 1986, as amended (the "Code"). Subject to the
terms and conditions of the Plan, the Committee shall have the exclusive
authority to select the terms and conditions of Option Agreements (as
hereinafter defined) and whether an option will be granted to an employee as
a stock option which qualifies as an incentive Stock Option under Section
422 of the Code (hereinafter referred to as a "Qualified Option") or a Stock
Option which does not qualify under the Code (hereinafter referred to as a
"Non-Qualified Option"). The Committee shall determine the number of shares
of Common Stock to be acquired by the exercise of Qualified Options and Non-
Qualified Options, the term during which the Qualified Options and Non-
Qualified Options may be exercised and the application or withdrawal of any
restrictions which may be deemed appropriate in its discretion. (Qualified
Options and Non-Qualified Options are sometimes collectively hereinafter
referred to as "Options" or "Stock Options.")
IV. ELIGIBLE PARTICIPANTS
All employees of the Company and its subsidiaries shall be eligible to
participate in the Plan. No member of the Committee shall be eligible to
participate in this Plan. The Committee shall:
(a) determine the employees of the Company and its subsidiaries to
whom Qualified Options and Non-Qualified Options may be granted; and
(b) grant Options, from time to time, to such eligible participants
as it may select.
PAGE
V. TERMS AND CONDITIONS OF OPTIONS
Qualified Options and Non-Qualified Options shall be in such form and on
such terms and conditions as the Committee shall, from time to time, approve
subject to the following terms and conditions:
(a) The aggregate fair market value (determined at the time the
option is granted) of the shares with respect to which Qualified Options are
exercisable for the first time by a participant during any calendar year
shall not exceed $100,000. To the extent permitted by the Code, Qualified
Options granted in excess of such amount may be deemed or amended to be Non-
Qualified Options.
(b) The option price per share shall not be less than its fair market
value on the date of such grant.
(c) The term of the option shall not be more than ten (10) years from
the date such option is granted.
(d) Qualified Options shall not be transferable, and Non-Qualified
Options shall not be transferable unless expressly authorized by the
Committee in accordance with the provisions of Section V(e) of the Plan,
except by will or by the laws of descent and distribution, and during the
lifetime of the person to whom an Option is granted he/she alone may
exercise it.
(e) Notwithstanding anything in the Plan to the contrary, the
Committee may, in its discretion, authorize all or any portion of Non-
Qualified Options granted or to be granted to any participant under the
Plan to be on terms which permit the transfer thereof by such participant
to any (i) spouse, child, stepchild, grandchild, parent, stepparent,
grandparent, sibling, mother-in-law, father-in-law, son-in-law,
daughter-in-law, brother-in-law or sister-in-law, including adoptive
relationships, or any other family member of such participant to whom the
Corporation may lawfully offer and sell Common Stock from time to time
pursuant to the exercise of Non-Qualified Options by the use of a
Registration Statement on Form S-3 or Form S-8 under the Securities Act of
1933, as amended, (collectively, "Immediate Family Members"), (ii) any
trust or trusts for the exclusive benefit of any Immediate Family Members,
and/or (iii) any entity or entities owned solely by any Immediate Family
Members, provided that (x) there may be no consideration for any such
transfer, (y) the stock option agreement or amendment to the stock option
agreement pursuant to which such transferable options are granted or are
otherwise made transferable must be approved by the Committee and provide
for such transferability only in a manner consistent with the provisions of
the Plan, and (z) subsequent transfers of transferred Non-Qualified Options
shall be prohibited except in accordance with Section V(d) of the Plan.
The Committee may in its discretion, impose as a condition of transfer-
ability of any Non-Qualified Options such additional restrictions and
limitations on such Non-Qualified Options and shares of Common Stock
acquired pursuant to the exercise thereof, including, without limitation,
restrictions or limitations on the resale of such shares of Common Stock,
as the Committee shall deem appropriate. Following the transfer of any
Non-Qualified Options, the transferred Non-Qualified Options, shall continue
to be subject to the same terms and conditions as were applicable immediately
PAGE
prior to such transfer together with any such additional restrictions and
limitations as shall be imposed by the Committee, and the provisions of the
Plan shall continue to apply to such transferred Non-Qualified Options.
(f) No Qualified Option shall be granted to an employee who, at the
time the option is granted, owns stock representing more than 10 percent of
the total combined voting power of all classes of stock of the employer.
This stock ownership limitation will not apply if the option price is at
least 110 percent of the fair market value (at the time the option is
granted) of the stock subject to the option and the option by its terms is
not exercisable more than five (5) years from the date it is granted.
(g) Options to purchase no more than 40,000 shares of Common Stock
may be granted (together with related Stock Appreciation Rights under
Article XIII hereof) to any eligible participant during any twelve-month
period during the term of the Plan.
VI. GRANTS OF COMMON STOCK
The Committee may, in its discretion, at any time or from time to time,
make restricted or unrestricted grants of Common Stock, or grant rights to
receive Common Stock, to eligible participants in the Plan in addition to
or in substitution for Options and/or SARs granted hereunder. The right to
receive no more than 40,000 shares of Common Stock shall be granted to any
participant in the Plan during any twelve-month period during the term of
the Plan. Each such grant to an executive officer of the Company shall be
expressly subject to the attainment of one or more performance-related
objectives based on return on equity, per share earnings, reduction of
costs, increase in premiums written or earned, total return to stockholders,
combined ratio or loss and loss expense ratio of the Company, or a
subsidiary or subsidiaries of the Company, as shall be determined by the
Committee at or prior to the date of grant and set forth in an award
agreement.
For purposes of this section, the executive officers of the Company shall
include each person who is an "executive officer" of the Company, as defined
in Rule 3b-7 under the Securities Exchange Act of 1934 and shall, in any
event, include each person who is a "Covered Employee" for the purposes of
Section 162(m) under the Internal Revenue Code of 1986, as amended.
Each such grant also shall be subject to such vesting period or other terms,
conditions, restrictions and limitations as shall be determined by the
Committee in its discretion and set forth in an award agreement. The number
of shares of Common Stock available for such grants shall be included in the
total number of shares of Common Stock reserved for issuance under the Plan,
and the number of shares of Common Stock awarded pursuant to such grants
shall reduce the number of shares of Common Stock available for the purposes
of the Plan as set forth in Section II hereof, provided that any such shares
of Common Stock that shall be forfeited because of the failure of any
condition or restriction of an award shall again be available for the
purposes of the Plan. Notwithstanding the terms and conditions set forth in
an award agreement, the Committee, in its discretion, may accelerate the
time at which any award may vest due to a change in circumstances, including
but not limited to death, disability, retirement, financial hardship, or
change in control of the Company. In case the number of outstanding shares
of Common Stock of the Company is changed as a result of
PAGE
a stock dividend, stock split or other readjustments or if the outstanding
shares of Common Stock shall be exchanged for securities of the Company or
another Company by reason of any merger, consolidation or other similar
corporate change, the Committee shall make an appropriate adjustment in the
number of shares subject to each then outstanding grant of Common Stock. No
award agreement shall impose any obligation on the Company to continue to
employ any employee.
VII. TERMINATION OF EMPLOYMENT
If an employee shall cease to be employed by the Company for any reason
other than disability or death, then any outstanding Qualified Option
granted to such employee shall terminate three (3) months after the date
of termination of employment, and any outstanding Non-Qualified Option
granted to such employee shall terminate twelve (12) months after the date
of termination.
VIII. DISABILITY
If an employee shall cease to be employed by the Company as a result of
disability, then any Options that are exercisable by the employee at the
time employment ceases may be exercised within twelve (12) months after the
date that such employee's employment ceases.
IX. DEATH
If an employee's death occurs while employed by the Company, his/her estate,
representative or beneficiary shall have the right to exercise those Options
granted to the employee which were exercisable by him/her at the time of
his/her death at any time within twelve (12) months after the date of
his/her death.
X. CHANGES IN CAPITAL STOCK
In case the number of outstanding shares of Common Stock of the Company is
changed as a result of a stock dividend, stock split or other readjustments
or if the outstanding shares of Common Stock of the Company shall be
exchanged for securities of the Company or another company by reason of any
merger, consolidation or other similar corporate change, the Committee shall
make an appropriate adjustment in the aggregate number of shares which may
be subject to Stock Options granted under the Plan and in the number of
shares subject to and the option price of each then outstanding option.
XI. EXERCISE OF OPTIONS
An employee electing to exercise an option shall give written notice to the
Company of such election and the number of shares of Common Stock that
he/she has elected to acquire. An employee will have no rights of a
stockholder with respect to shares of Common Stock to be acquired upon the
exercise of an option until the issuance to him/her of a certificate
representing said shares.
PAGE
XII. OPTION AGREEMENTS
Agreements granting Options under the Plan ("Option Agreements") shall be
in writing duly executed and delivered by or on behalf of the Company and
the optionee and shall contain such terms and conditions as the Committee
deems advisable. If there is any conflict between the terms and conditions
of any Option Agreements and of the Plan, the terms and conditions of the
Plan shall control. Option Agreements shall clearly specify whether Options
granted pursuant to the Plan are either Qualified Options or Non-Qualified
Options.
XIII. PAYMENT
The option price shall be payable upon the exercise of the option and shall
be paid in cash or in shares of Common Stock of the Company. If shares of
Common Stock are tendered as payment of the option price, the value of any
such stock shall be the fair market value per share of Common Stock as of
the date of exercise.
XIV. STOCK APPRECIATION RIGHTS
A Stock Appreciation Right ("SAR") may be granted in conjunction with any
Qualified Option or any Non-Qualified Option under the Plan. If a SAR is
exercised, the employee shall surrender the related Qualified Option or
Non-Qualified Option or portion thereof.
The SAR shall be subject to the same terms and conditions as the Qualified
Option or Non-Qualified Option in connection with which the SAR was granted.
Upon exercise of the SAR, the employee will receive payment of the amount
determined by subtracting the option exercise price per share of Common
Stock from the fair market value per share of Common Stock on the exercise
date and multiplying this amount by the number of SARs being exercised.
Payment of the amount determined above shall be made in stock, cash or
partly in stock and partly in cash as the Committee shall determine in its
absolute discretion at the time of exercise. The number of SARs granted an
employee will be determined by the Committee in its sole discretion, subject
to the limitations set forth in Article V, Section (f) of the Plan.
XV. TERM OF PLAN
The Plan shall terminate ten (10) years after the effective date of the
Plan, and no option shall be granted pursuant to the Plan after termination
of the Plan.
XVI. CONTINUANCE OF EMPLOYMENT
Neither the Plan nor any Option Agreements shall impose any obligation on
the Company to continue to employ any employee.
PAGE
XVII. EFFECTIVE DATE
The Plan shall become effective as of September 1, 1992, subject to the
approval no later than September 1, 1993, by the holders of a majority of
the outstanding shares of Common Stock represented at a duly held meeting
of stockholders.
XVIII.AMENDMENTS
This Plan may be amended by recommendation of the Committee and approval
of the Board of Directors to the extent permitted by law. In no event shall
the Committee amend the Plan to: (a) change the purchase price of the stock,
(b) extend any option date, or (c) extend the termination date of the Plan.
(Plan as Amended July 28, 1998)
PAGE
EXHIBIT 10.16i
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
AMENDMENT NO. 1, dated as of October 31, 1998 among SELECTIVE INSURANCE
GROUP, INC., a New Jersey corporation ("Selective"), having an office at 40
Wantage Avenue, Branchville, New Jersey 07826, SELECTIVE INSURANCE COMPANY
OF AMERICA, a New Jersey corporation ("SICA"), having an office at 40
Wantage Avenue, Branchville, New Jersey 07826, and JAMIE OCHILTREE, III,
having an address at 21 Lambert Drive, Sparta, New Jersey 07871 (the
"Executive"), to Employment Agreement dated as of October 31, 1995 among
SICA and the Executive (the "Employment Agreement").
WHEREAS, SICA and the Executive have executed and delivered the
Employment Agreement and Selective has guaranteed all of the obligations of
SICA as the Employer under the Employment Agreement; and
WHEREAS, the parties hereto desire to amend the Employment Agreement to
modify the description of the duties of the Executive as set forth in
Section 4(a) of the Employment Agreement, to extend the term thereof and to
modify the Salary (as defined in Section 3 of the Employment Agreement)
provided for therein.
THEREFORE, in consideration of the premises and the mutual covenants
hereinafter set forth, the parties hereto agree as follows:
1. The term of employment under the Employment Agreement is hereby
extended for a period of three (3) years commencing October 31, 1998 (the
"Renewal Term"), and all references in the Agreement to the term thereof or
the Executive's term of employment thereunder shall include the Renewal
Term.
2. The Salary, as defined and provided for in Section 3 of the
Employment Agreement, shall be paid to the Executive during the Renewal Term
at a rate of not less than One Hundred Ninety Seven Thousand Six Hundred
Dollars ($197,600.00) per year.
PAGE
3. The Executive is presently serving as an Executive Vice President of
SICA and Selective, and all references in the Employment Agreement to
Executive serving as Senior Vice President of the Company (as defined in the
Employment Agreement) are hereby amended to refer to the Executive as an
Executive Vice President of the Company (as defined in the Employment
Agreement) and Selective.
4. Selective reaffirms that it guarantees to the Executive the full
performance by SICA of all of its obligations under the Employment Agreement
as amended herein.
5. Except as amended herein, the Employment Agreement shall continue in
full force and effect on and after the date hereof.
IN WITNESS WHEREOF, this Amendment has been duly executed by the
Executive and on behalf of Selective and SICA by their duly authorized
officers, as of the date and year first above written.
SELECTIVE INSURANCE GROUP, INC.
By:/S/ James W. Entringer
------------------------
Name: James W. Entringer
Title: Chairman and Chief
Executive Officer
SELECTIVE INSURANCE COMPANY
OF AMERICA
By:/s/ James W. Entringer
------------------------
Name: James W. Entringer
Title: Chairman and Chief
Executive Officer
/s/ Jamie Ochiltree, III
------------------------
Executive
PAGE
EXHIBIT 10-16S
AMENDMENT NO. 2 TO TERMINATION AGREEMENT
----------------------------------------
AMENDMENT NO. 2, dated as of December 31, 1998 among SELECTIVE
INSURANCE GROUP, INC., a New Jersey corporation ("Selective"), having an
office at 40 Wantage Avenue, Branchville, New Jersey 07826, SELECTIVE
INSURANCE COMPANY OF AMERICA, a New Jersey corporation ("SICA"), having an
office at 40 Wantage Avenue, Branchville, New Jersey 07826, and JAMES W.
ENTRINGER, having an address of P.O. Box 2812, Branchville, New Jersey
07826 (the "Executive"), to Termination Agreement dated as of September 1,
1993 among SICA and the Executive, as previously amended by Amendment No. 1
thereto dated as of January 31, 1994 (as so amended, the "Termination
Agreement").
WHEREAS, SICA and the Executive have executed and delivered the
Termination Agreement, and Selective has guaranteed all of the obligations
of SICA under the Termination Agreement; and
WHEREAS, the parties hereto desire to amend the Termination Agreement
as provided herein.
THEREFORE, in consideration of the premises and the mutual covenants
hereinafter set forth, the parties hereto agree as follows:
1. Subsection 5(f) of the Termination Agreement is hereby
deleted in its entirety, and replaced with a new subsection 5(f) to read
in its entirety as follows:
(f) In the event that any payments or benefits
which the Executive is entitled to receive from
the Company under this Agreement, together with
any other payments or benefits which the Executive
is entitled to receive from the Company (including,
without limitation, any amounts payable under any
employment contract with the Company or any stock
option, stock bonus, incentive compensation or other
employee benefit plan of the Company), in the
aggregate would constitute an "excess parachute
payment" (as defined in Section 280G(b) of the
Code), the Company shall pay to the Executive an
amount constituting the greater to the Executive
on a net after-tax basis (as hereinafter provided)
of (i) the amount of payments
PAGE
and benefits which the Executive is entitled to
receive from the Company under this Agreement,
together with any other payments and benefits
which the Executive is entitled to receive from
the Company, reduced, in such order of priority
and amounts as the Executive shall elect, to the
largest amount as will result in no portion of the
aggregate of such payments being subject to the
excise tax imposed by Section 4999 of the Code,
or any successor or substitute provision of the
Code (the "Section 4999 Tax"), or (ii) the amount
of payments and benefits to which the Executive is
entitled to receive from the Company under this
Agreement, together with such other payments and
benefits which the Executive is entitled to receive
from the Company, plus an amount in cash equal to
(x) the amount of such "excess parachute payment"
multiplied by (y) twenty percent (20%). The
aggregate amounts described in clause (i) and in
clause (ii) of this subsection 5(f) shall be
calculated on a net after-tax basis giving effect
to the obligation of the Executive to pay any
applicable taxes on such aggregate amounts
(including, without limitation, all federal,
state and local income taxes at the maximum
applicable rates, any Section 4999 Tax and any
other tax payable thereon at the maximum
applicable rate).
2. Subsection 5(g) of the Termination Agreement is hereby deleted
in its entirety and replaced with a new subsection 5(g) to read in its
entirety as follows:
(g) In the event that the Executive shall
receive from the Company the amount specified
in clause (i) of subsection 5(f) and the
Internal Revenue Service (the "IRS") or a
court of competent jurisdiction shall
determine that any portion of the payments
and benefits paid or payable to the Executive
pursuant to this Agreement shall constitute
an "excess parachute payment" subject to a
Section
-2-
PAGE
4999 tax, the Company shall pay to the
Executive in cash such additional amount as
is necessary so that the aggregate amounts
received by the Executive under this Agreement,
after giving effect to the obligation of the
Executive to pay any applicable taxes on such
aggregate amounts (including, without limitation
all federal, state and local income taxes, any
Section 4999 Tax and any other taxes payable
thereon), shall not be less than the net
after-tax amount which the Executive would have
been entitled to receive under clause (i) of
subsection 5(f) had such Section 4999 Tax not
been imposed. The Company shall pay such
additional amount to the Executive within
thirty (30) days after the Executive gives
written notice to the Company that such
determination has been made by the IRS or
a court of competent jurisdiction.
3. The following new Section 5(h) is hereby added to the
Agreement:
(h) Any dispute or controversy between the
Executive and the Company regarding payments
under this Section 5 of this Agreement shall
be conclusively settled by an independent
accounting firm acceptable to each of the
parties hereto, or, if no firm is acceptable
to both parties hereto, each of the Executive
and the Company shall select an accounting firm
acceptable to it, and such accounting firms shall
together designate an independent accounting
firm to settle such dispute or controversy,
and such settlement shall be binding upon both
parties, provided, however, that any accounting
firm designated to settle any dispute or
controversy hereunder shall not have been
previously retained by either party for a
period of at least two (2) years subsequent
to the date of this settlement of such
dispute or controversy. The
-3-
PAGE
Company or the Escrow Agent, as the case may
be, may withhold from any benefits payable
under this Agreement all federal, state, city
or other taxes as shall be required pursuant
to any law or governmental regulation or ruling.
4. The capitalized defined terms used in this Amendment shall
have the same meanings as are ascribed to them in the Termination Agreement
unless otherwise defined herein.
5. Except as amended herein, the Termination Agreement shall
continue in full force and effect on and after the date hereof.
IN WITNESS WHEREOF, this Amendment has been duly executed by the
Executive and on behalf of Selective and SICA by their duly authorized
officers, as of the date and year first above written.
SELECTIVE INSURANCE GROUP, INC.
By: /s/ Gregory E. Murphy
-----------------------
Name: Gregory E. Murphy
Title: President
SELECTIVE INSURANCE COMPANY
OF AMERICA
By: /s/ Gregory E. Murphy
------------------------
Name: Gregory E. Murphy
Title: President
/s/ James W. Entringer
---------------------------
James W. Entringer
-4-
PAGE
AMENDMENT NO. 2 TO TERMINATION AGREEMENT
----------------------------------------
AMENDMENT NO. 2, dated as of December 31, 1998 among SELECTIVE
INSURANCE GROUP, INC., a New Jersey corporation ("Selective"), having an
office at 40 Wantage Avenue, Branchville, New Jersey 07826, SELECTIVE
INSURANCE COMPANY OF AMERICA, a New Jersey corporation ("SICA"),having an
office at 40 Wantage Avenue, Branchville, New Jersey 07826,
and THORNTON R. LAND, having an address at 78 Onderdonk Road, Warwick,
New York 10990 (the "Executive"), to Termination Agreement dated
as of September 1, 1993 among SICA and the Executive, as previously amended
by Amendment No. 1 thereto dated as of January 31, 1994 (as so amended, the
"Termination Agreement").
WHEREAS, SICA and the Executive have executed and delivered the
Termination Agreement, and Selective has guaranteed all of the obligations
of SICA under the Termination Agreement; and
WHEREAS, the parties hereto desire to amend the Termination Agreement
as provided herein.
THEREFORE, in consideration of the premises and the mutual covenants
hereinafter set forth, the parties hereto agree as follows:
1. Subsection 5(f) of the Termination Agreement is hereby deleted
in its entirety, and replaced with a new subsection 5(f) to read in its
entirety as follows:
(f) In the event that any payments or benefits which
the Executive is entitled to receive from the Company
under this Agreement, together with any other payments
or benefits which the Executive is entitled to receive
from the Company (including, without limitation, any
amounts payable under any employment contract with the
Company or any stock option, stock bonus, incentive
compensation or other employee benefit plan of the
Company), in the aggregate would constitute an "excess
parachute payment" (as defined in Section 280G(b) of
the Code), the Company shall pay to the Executive an
amount constituting the greater to the Executive on a
net after-tax basis (as hereinafter
PAGE
provided) of (i) the amount of payments and benefits
which the Executive is entitled to receive from the
Company under this Agreement, together with any other
payments and benefits which the Executive is entitled
to receive from the Company, reduced, in such order of
priority and amounts as the Executive shall elect, to
the largest amount as will result in no portion of the
aggregate of such payments being subject to the excise
tax imposed by Section 4999 of the Code, or any
successor or substitute provision of the Code (the
"Section 4999 Tax"), or (ii) the amount of payments
and benefits to which the Executive is entitled to
receive from the Company under this Agreement,
together with such other payments and benefits which
the Executive is entitled to receive from the Company,
plus an amount in cash equal to (x) the amount of such
"excess parachute payment" multiplied by (y) twenty
percent(20%). The aggregate amounts described in
clause (i) and in clause (ii) of this subsection 5(f)
shall be calculated on a net after-tax basis giving
effect to the obligation of the Executive to pay any
applicable taxes on such aggregate amounts (including,
without limitation, all federal, state and local income
taxes at the maximum applicable rates, any Section 4999
Tax and any other tax payable thereon at the maximum
applicable rate).
2. Subsection 5(g) of the Termination Agreement is hereby
deleted in its entirety and replaced with a new subsection 5(g) to read
in its entirety as follows:
(g) In the event that the Executive shall receive from
the Company the amount specified in clause (i) of
subsection 5(f) and the Internal Revenue Service (the
"IRS") or a court of competent jurisdiction shall
determine that any portion of the payments and
benefits paid or payable to the Executive pursuant
to this Agreement shall constitute an "excess
-2-
PAGE
parachute payment" subject to a Section 4999 tax,
the Company shall pay to the Executive in cash such
additional amount as is necessary so that the
aggregate amounts received by the Executive under
this Agreement, after giving effect to the obligation
of the Executive to pay any applicable taxes on such
aggregate amounts (including, without limitation all
federal, state and local income taxes, any Section
4999 Tax and any other taxes payable thereon), shall
not be less than the net after-tax amount which the
Executive would have been entitled to receive under
clause (i) of subsection 5(f) had such Section 4999
Tax not been imposed. The Company shall pay such
additional amount to the Executive within thirty (30)
days after the Executive gives written notice to the
Company that such determination has been made by the
IRS or a court of competent jurisdiction.
3. The following new Section 5(h) is hereby added to the Agreement:
(h) Any dispute or controversy between the Executive
and the Company regarding payments under this
Section 5 of this Agreement shall be conclusively
settled by an independent accounting firm
acceptable to each of the parties hereto, or, if
no firm is acceptable to both parties hereto, each
of the Executive and the Company shall select an
accounting firm acceptable to it, and such
accounting firms shall together designate an
independent accounting firm to settle such dispute
or controversy, and such settlement shall be
binding upon both parties, provided, however, that
any accounting firm designated to settle any
dispute or controversy hereunder shall not have
been previously retained by either party for a
period of at least two (2) years subsequent to
the date of this settlement of such dispute or
controversy. The
-3-
PAGE
Company or the Escrow Agent, as the case may be,
may withhold from any benefits payable under this
Agreement all federal, state, city or other taxes
as shall be required pursuant to any law or
governmental regulation or ruling.
4. The capitalized defined terms used in this Amendment shall
shall have the same meanings as are ascribed to them in the Termination
Agreement unless otherwise defined herein.
5. Except as amended herein, the Termination Agreement shall
continue in full force and effect on and after the date hereof.
IN WITNESS WHEREOF, this Amendment has been duly executed by the
Executive and on behalf of Selective and SICA by their duly authorized
officers, as of the date and year first above written.
SELECTIVE INSURANCE GROUP, INC.
By: /s/ James W. Entringer
-------------------------
Name: James W. Entringer
Title: Chairman and Chief
Executive Officer
SELECTIVE INSURANCE COMPANY
F AMERICA
By:/s/ James W. Entringer
-------------------------
Name: James W. Entringer
Title: Chairman and Chief
Executive Officer
/s/ Thornton R. Land
-------------------------
Thornton R. Land
-4-
PAGE
EXHIBIT 10.16t
AMENDMENT NO. 1 TO TERMINATION AGREEMENT
----------------------------------------
AMENDMENT NO. 1, dated as of December 31, 1998 among SELECTIVE
INSURANCE GROUP, INC., a New Jersey corporation ("Selective"), having an
office at 40 Wantage Avenue, Branchville, New Jersey 07826, SELECTIVE
INSURANCE COMPANY OF AMERICA, a New Jersey corporation ("SICA"), having an
office at 40 Wantage Avenue, Branchville, New Jersey 07826, and GREGORY E.
MURPHY, having an address at 10 Condit Road, Mountain Lakes, New Jersey
07046 (the "Executive"), to Termination Agreement dated as of August 1, 1995
among SICA and the Executive (the "Termination Agreement").
WHEREAS, SICA and the Executive have executed and delivered the
Termination Agreement, and Selective has guaranteed all of the
obligations of SICA under the Termination Agreement; and
WHEREAS, the parties hereto desire to amend the Termination
Agreement as provided herein.
THEREFORE, in consideration of the premises and the mutual
covenants hereinafter set forth, the parties hereto agree as follows:
1. Subsection 5(f) of the Termination Agreement is hereby
deleted in its entirety, and replaced with a new subsection 5(f) to
read in its entirety as follows:
(f)In the event that any payments or benefits
which the Executive is entitled to receive
from the Company under this Agreement, together
with any other payments or benefits which the
Executive is entitled to receive from the Company
(including, without limitation, any amounts
payable under any employment contract with the
Company or any stock option, stock bonus,
incentive compensation or other employee benefit
plan of the Company), in the aggregate would
constitute an "excess parachute payment" (as
defined in Section 280G(b) of the Code), the
Company shall pay to the Executive an amount
constituting the greater to the Executive on a
net after-tax basis (as hereinafter provided)
of (i) the amount of payments and benefits
which the Executive is
PAGE
entitled to receive from the Company under
this Agreement, together with any other
payments and benefits which the Executive
is entitled to receive from the Company,
reduced, in such order of priority and amounts as
the Executive shall elect, to the largest amount
as will result in no portion of the aggregate of
such payments being subject to the excise tax
imposed by Section 4999 of the Code, or any
successor or substitute provision of the Code
(the "Section 4999 Tax"), or (ii) the amount of
payments and benefits to which the Executive is
entitled to receive from the Company under this
Agreement, together with such other payments and
benefits which the Executive is entitled to receive
from the Company, plus an amount in cash equal to
(x) the amount of such "excess parachute payment"
multiplied by (y) twenty percent (20%). The
aggregate amounts described in clause (i) and in
clause (ii) of this subsection 5(f) shall be
calculated on a net after-tax basis giving effect
to the obligation of the Executive to pay any
applicable taxes on such aggregate amounts
(including, without limitation, all federal, state
and local income taxes at the maximum applicable
rates, any Section 4999 Tax and any other tax
payable thereon at the maximum applicable rate).
2. Subsection 5(g) of the Termination Agreement is hereby
deleted in its entirety and replaced with a new subsection 5(g) to read in
its entirety as follows:
(g) In the event that the Executive shall receive
from the Company the amount specified in clause
(i) of subsection 5(f) and the Internal Revenue
Service (the "IRS") or a court of competent
jurisdiction shall determine that any portion of
the payments and benefits paid or payable to the
Executive pursuant to this Agreement shall constitute
an "excess parachute payment" subject to a Section
4999 tax, the Company shall pay to the
-2-
PAGE
Executive in cash such additional amount as is
necessary so that the aggregate amounts received
by the Executive under this Agreement, after
giving effect to the obligation of the Executive
to pay any applicable taxes on such aggregate
amounts (including, without limitation all federal,
state and local income taxes, any Section 4999 Tax
and any other taxes payable thereon), shall not be
less than the net after tax amount which the
Executive would have been entitled to receive under
clause (i) of subsection 5(f) had such Section 4999
Tax not been imposed. The Company shall pay such
additional amount to the Executive within thirty (30)
days after the Executive gives written notice to
the Company that such determination has been made by
the IRS or a court of competent jurisdiction.
3. The following new Section 5(h) is hereby added to the
Agreement:
(h) Any dispute or controversy between the Executive
and the Company regarding payments under this
Section 5 of this Agreement shall be conclusively
settled by an independent accounting firm acceptable
to each of the parties hereto, or, if no firm is
acceptable to both parties hereto, each of the
Executive and the Company shall select an accounting
firm acceptable to it, and such accounting firms
shall together designate an independent accounting
firm to settle such dispute or controversy, and
such settlement shall be binding upon both parties,
provided, however, that any accounting firm designated
to settle any dispute or controversy hereunder shall
not have been previously retained by either party
for a period of at least two (2) years subsequent
to the date of this settlement of such dispute or
controversy. The
-3-
PAGE
Company or the Escrow Agent, as the case may be,
may withhold from any benefits payable under this
Agreement all federal, state, city or other taxes
as shall be required pursuant to any law or
governmental regulation or ruling.
4. The capitalized defined terms used in this Amendment shall
have the same meanings as are ascribed to them in the Termination Agreement
unless otherwise defined herein.
5. Except as amended herein, the Termination Agreement shall
continue in full force and effect on and after the date hereof.
IN WITNESS WHEREOF, this Amendment has been duly executed by the
Executive and on behalf of Selective and SICA by their duly authorized
officers, as of the date and year first above written.
SELECTIVE INSURANCE GROUP, INC.
By: /s/ James W. Entringer
-------------------------
Name: James W. Entringer
Title: Chairman and Chief
Executive Officer
SELECTIVE INSURANCE COMPANY
OF AMERICA
By: /s/ James W. Entringer
-------------------------
Name: James W. Entringer
Title: Cairman and Chief
Executive Officer
/s/ Gregory E. Murphy
-------------------------
Gregory E. Murphy
-4-
PAGE
EXHIBIT 10.16u
AMENDMENT NO. 1 TO TERMINATION AGREEMENT
----------------------------------------
AMENDMENT NO. 1, dated as of December 31, 1998 among SELECTIVE INSURANCE
GROUP, INC., a New Jersey corporation ("Selective"), having an office at 40
Wantage Avenue, Branchville, New Jersey 07826, SELECTIVE INSURANCE COMPANY
OF AMERICA, a New Jersey corporation ("SICA"), having an office at 40
Wantage Avenue, Branchville, New Jersey 07826, and DONALD E. WILLIAMS,
having an address of P.O. Box 111, Branchville, New Jersey 07826 (the
"Executive"), to Termination Agreement dated as of August 1, 1995 among SICA
and the Executive (the "Termination Agreement").
WHEREAS, SICA and the Executive have executed and delivered the
Termination Agreement, and Selective has guaranteed all of the obligations
of SICA under the Termination Agreement; and
WHEREAS, the parties hereto desire to amend the Termination Agreement as
provided herein.
THEREFORE, in consideration of the premises and the mutual covenants
hereinafter set forth, the parties hereto agree as follows:
1. Subsection 5(f) of the Termination Agreement is hereby
deleted in its entirety, and replaced with a new subsection 5(f) to read in
its entirety as follows:
(f) In the event that any payments or benefits which
the Executive is entitled to receive from the Company
under this Agreement, together with any other
payments or benefits which the Executive is entitled
to receive from the Company (including, without
limitation, any amounts payable under any employment
contract with the Company or any stock option, stock
bonus, incentive compensation or other employee benefit
plan of the Company), in the aggregate would constitute
an "excess parachute payment" (as defined in
Section 280G(b) of the Code), the Company shall pay
to the Executive an amount constituting the greater to
the Executive on a net after-tax basis (as hereinafter
provided) of (i) the amount of payments and benefits
which the Executive is
PAGE
entitled to receive from the Company under this
Agreement, together with any other payments and
benefits which the Executive is entitled to receive
from the Company, reduced, in such order of
priority and amounts as the Executive shall
elect, to the largest amount as will result in no
portion of the aggregate of such payments being subject
to the excise tax imposed by Section 4999 of the Code,
or any successor or substitute provision of the Code
(the "Section 4999 Tax"), or (ii) the amount of
payments and benefits to which the Executive is
entitled to receive from the Company under this
Agreement, together with such other payments and
benefits which the Executive is entitled to receive
from the Company, plus an amount in cash equal to (x)
the amount of such "excess parachute payment"
multiplied by (y) twenty percent (20%). The aggregate
amounts described in clause (i) and in clause (ii) of
this subsection 5(f) shall be calculated on a net after-
tax basis giving effect to the obligation of the
Executive to pay any applicable taxes on such aggregate
amounts (including, without limitation, all federal,
state and local income taxes at the maximum applicable
rates, any Section 4999 Tax and any other tax payable
thereon at the maximum applicable rate).
2. Subsection 5(g) of the Termination Agreement is hereby
deleted in its entirety and replaced with a new subsection 5(g) to read in
its entirety as follows:
(g) In the event that the Executive shall receive from
the Company the amount specified in clause (i) of
subsection 5(f) and the Internal Revenue Service (the
"IRS") or a court of competent jurisdiction shall
determine that any portion of the payments and
benefits paid or payable to the Executive pursuant to
this Agreement shall constitute an "excess parachute
payment" subject to a Section 4999 tax, the Company
shall pay to the
-2-
PAGE
Executive in cash such additional amount as is
necessary so that the aggregate amounts received by
the Executive under this Agreement, after giving
effect to the obligation of the Executive to pay any
applicable taxes on such aggregate amounts (including,
without limitation all federal, state and local income
taxes, any Section 4999 Tax and any other taxes
payable thereon), shall not be less than the net after-
tax amount which the Executive would have been
entitled to receive under clause (i) of subsection
5(f) had such Section 4999 Tax not been imposed. The
Company shall pay such additional amount to the
Executive within thirty (30) days after the Executive
gives written notice to the Company that such
determination has been made by the IRS or a court of
competent jurisdiction.
3. The following new Section 5(h) is hereby added to the
Agreement:
(h) Any dispute or controversy between the Executive
and the Company regarding payments under this
Section 5 of this Agreement shall be conclusively
settled by an independent accounting firm acceptable
to each of the parties hereto, or, if no firm is
acceptable to both parties hereto, each of the
Executive and the Company shall select an
accounting firm acceptable to it, and such
accounting firms shall together designate an
independent accounting firm to settle such dispute
or controversy, and such settlement shall be binding
upon both parties, provided, however, that any
accounting firm designated to settle any dispute or
controversy hereunder shall not have been previously
retained by either party for a period of at least two
(2) years subsequent to the date of this settlement
of such dispute or controversy. The
-3-
PAGE
Company or the Escrow Agent, as the case may be,
may withhold from any benefits payable under this
Agreement all federal, state, city or other taxes
as shall be required pursuant to any law or
governmental regulation or ruling.
4. The capitalized defined terms used in this Amendment shall
have the same meanings as are ascribed to them in the Termination Agreement
unless otherwise defined herein.
5. Except as amended herein, the Termination Agreement shall
continue in full force and effect on and after the date hereof.
IN WITNESS WHEREOF, this Amendment has been duly executed by the
Executive and on behalf of Selective and SICA by their duly authorized
officers, as of the date and year first above written.
SELECTIVE INSURANCE GROUP, INC.
By:/s/ James W. Entringer
-------------------------
Name: James W. Entringer
Title: Chairman and Chief
Executive Officer
SELECTIVE INSURANCE COMPANY
OF AMERICA
By:/s/ James W. Entringer
-------------------------
Name: James W. Entringer
Title: Chairman and Chief
Executive Officer
/s/ Donald E. Williams
-------------------------
Donald E. Williams
-4-
PAGE
EXHIBIT 10.16v
AMENDMENT NO. 1 TO TERMINATION AGREEMENT
----------------------------------------
AMENDMENT NO. 1, dated as of December 31, 1998 among SELECTIVE
INSURANCE GROUP, INC., a New Jersey corporation ("Selective"), having an
office at 40 Wantage Avenue, Branchville, New Jersey 07826, SELECTIVE
INSURANCE COMPANY OF AMERICA, a New Jersey corporation ("SICA"), having an
office at 40 Wantage Avenue, Branchville, New Jersey 07826, and JAMIE
OCHILTREE III, having an address at 21 Lambert Drive, Sparta, New Jersey
07871 (the "Executive"), to Termination Agreement dated as of October 31,
1995 among SICA and the Executive (the "Termination Agreement").
WHEREAS, SICA and the Executive have executed and delivered the
Termination Agreement, and Selective has guaranteed all of the obligations
of SICA under the Termination Agreement; and
WHEREAS, the parties hereto desire to amend the Termination Agreement
as provided herein.
THEREFORE, in consideration of the premises and the mutual covenants
hereinafter set forth, the parties hereto agree as follows:
1. Subsection 5(f) of the Termination Agreement is hereby deleted
in its entirety, and replaced with a new subsection 5(f) to read in its
entirety as follows:
(f) In the event that any payments or benefits which the
Executive is entitled to receive from the Company under
this Agreement, together with any other payments or
benefits which the Executive is entitled to receive
from the Company (including, without limitation, any
amounts payable under any employment contract with the
Company or any stock option, stock bonus, incentive
compensation or other employee benefit plan of the
Company), in the aggregate would constitute an "excess
parachute payment" (as defined in Section 280G(b) of
the Code), the Company shall pay to the Executive an
amount constituting the greater to the Executive on a
net after tax basis (as hereinafter provided) of (i)
the amount of payments and benefits which the Executive is
PAGE
entitled to receive from the Company under this
Agreement, together with any other payments and
benefits which the Executive is entitled to receive
from the Company, reduced, in such order of priority
and amounts as the Executive shall elect, to the
largest amount as will result in no portion of the
aggregate of such payments being subject to the excise
tax imposed by Section 4999 of the Code, or any successor
or substitute provision of the Code (the "Section 4999
Tax"), or (ii) the amount of payments and benefits to
which the Executive is entitled to receive from the
Company under this Agreement, together with such other
payments and benefits which the Executive is entitled
to receive from the Company, plus an amount in cash
equal to (x) the amount of such "excess parachute
payment" multiplied by (y) twenty percent (20%). The
aggregate amounts described in clause (i) and in clause
(ii) of this subsection 5(f) shall be calculated on a
net after-tax basis giving effect to the obligation of
the Executive to pay any applicable taxes on such
aggregate amounts (including, without limitation, all
federal, state and local income taxes at the maximum
applicable rates, any Section 4999 Tax and any other
tax payable thereon at the maximum applicable rate).
2. Subsection 5(g) of the Termination Agreement is hereby deleted
in its entirety and replaced with a new subsection 5(g) to read in its
entirety as follows:
(g) In the event that the Executive shall receive from
the Company the amount specified in clause (i) of
subsection 5(f) and the Internal Revenue Service (the
"IRS") or a court of competent jurisdiction shall
determine that any portion of the payments and
benefits paid or payable to the Executive pursuant to
this Agreement shall constitute an "excess parachute
payment" subject to a Section 4999 tax, the Company
shall pay to the
-2-
PAGE
Executive in cash such additional amount as is
necessary so that the aggregate amounts received by
the Executive under this Agreement, after giving effect
to the obligation of the Executive to pay any
applicable taxes on such aggregate amounts (including,
without limitation all federal, state and local income
taxes, any Section 4999 Tax and any other taxes payable
thereon), shall not be less than the net after-tax amount
which the Executive would have been entitled to receive
under clause (i) of subsection 5(f) had such
Section 4999 Tax not been imposed. The Company shall
pay such additional amount to the Executive within
thirty (30) days after the Executive gives written notice
to the Company that such determination has been made by
the IRS or a court of competent jurisdiction.
3. The following new Section 5(h) is hereby added to the Agreement:
(h) Any dispute or controversy between the Executive
and the Company regarding payments under this
Section 5 of this Agreement shall be conclusively
settled by an independent accounting firm acceptable
to each of the parties hereto, or, if no firm is
acceptable to both parties hereto, each of the
Executive and the Company shall select an accounting
firm acceptable to it, and such accounting firms shall
together designate an independent accounting firm to
settle such dispute or controversy, and such
settlement shall be binding upon both parties,
provided, however, that any accounting firm designated
to settle any dispute or controversy hereunder shall
not have been previously retained by either party for
a period of at least two (2) years subsequent to the
date of this settlement of such dispute or
controversy. The
-3-
PAGE
Company or the Escrow Agent, as the case may be,
may withhold from any benefits payable under this
Agreement all federal, state, city or other taxes as
shall be required pursuant to any law or governmental
regulation or ruling.
4. The capitalized defined terms used in this Amendment shall
have the same meanings as are ascribed to them in the Termination Agreement
unless otherwise defined herein.
5. Except as amended herein, the Termination Agreement shall
continue in full force and effect on and after the date hereof.
IN WITNESS WHEREOF, this Amendment has been duly executed by the
Executive and on behalf of Selective and SICA by their duly authorized
officers, as of the date and year first above written.
SELECTIVE INSURANCE GROUP, INC.
By /s/ James W. Entringer
---------------------------
Name: James W. Entringer
Title: Chairman and Chief
Executive Officer
SELECTIVE INSURANCE COMPANY
OF AMERICA
By: /s/ James W. Entringer
--------------------------
Name: James W. Entringer
Title: Chairman and Chief
Executive Officer
/s/ Jamie Ochiltree III
--------------------------
Jamie Ochiltree III
-4-
PAGE
EXHIBIT 10.16w
AMENDMENT NO. 1 TO TERMINATION AGREEMENT
----------------------------------------
AMENDMENT NO. 1, dated as of December 31, 1998 among SELECTIVE
INSURANCE GROUP, INC., a New Jersey corporation ("Selective"), having an
office at 40 Wantage Avenue, Branchville, New Jersey 07826, SELECTIVE
INSURANCE COMPANY OF AMERICA, a New Jersey corporation ("SICA"), having an
office at 40 Wantage Avenue, Branchville, New Jersey 07826, and JAMES W.
COLEMAN, JR., having an address at 83 Main Street, Ogdensburg, New Jersey
07439 (the "Executive"), to Termination Agreement dated as of May 2, 1997
among SICA and the Executive (the "Termination Agreement").
WHEREAS, SICA and the Executive have executed and delivered the
Termination Agreement, and Selective has guaranteed all of the obligations
of SICA under the Termination Agreement; and
WHEREAS, the parties hereto desire to amend the Termination Agreement
as provided herein.
THEREFORE, in consideration of the premises and the mutual covenants
hereinafter set forth, the parties hereto agree as follows:
1. Subsection 5(f) of the Termination Agreement is hereby deleted
in its entirety, and replaced with a new subsection 5(f) to read in its
entirety as follows:
(f) In the event that any payments or benefits which
the Executive is entitled to receive from the Company
under this Agreement, together with any other payments
or benefits which the Executive is entitled to receive
from the Company (including, without limitation, any
amounts payable under any employment contract with the
Company or any stock option, stock bonus, incentive
compensation or other employee benefit plan of the
Company), in the aggregate would constitute an "excess
parachute payment" (as defined in Section 280G(b)
of the Code), the Company shall pay to the Executive
an amount constituting the greater to the Executive on
a net after-tax basis (as hereinafter provided) of
(i) the amount of payments and benefits which the
Executive is
PAGE
entitled to receive from the Company under this
Agreement, together with any other payments and
benefits which the Executive is entitled to receive
from the Company, reduced, in such order of priority
and amounts as the Executive shall elect, to the
largest amount as will result in no portion of the
aggregate of such payments being subject to the excise
tax imposed by Section 4999 of the Code, or any
successor or substitute provision of the Code(the
"Section 4999 Tax"), or (ii) the amount of payments
and benefits to which the Executive is entitled to
receive from the Company under this Agreement,
together with such other payments and benefits
which the Executive is entitled to receive from the
Company, plus an amount in cash equal to (x) the
amount of such "excess parachute payment" multiplied
by (y) twenty percent (20%). The aggregate amounts
described in clause (i) and in clause (ii) of this
subsection 5(f) shall be calculated on a net after
tax basis giving effect to the obligation of the
Executive to pay any applicable taxes on such
aggregate amounts (including, without limitation,
all federal, state and local income taxes at the
maximum applicable rates, any Section 4999 Tax and
any other tax payable thereon at the maximum
applicable rate).
2. Subsection 5(g) of the Termination Agreement is here-by deleted
in its entirety and replaced with a new subsection 5(g) to read in its
entirety as follows:
(g) In the event that the Executive shall receive
from the Company the amount specified in clause (i)
of subsection 5(f) and the Internal Revenue Service
(the "IRS") or a court of competent jurisdiction
shall determine that any portion of the payments and
benefits paid or payable to the Executive pursuant
to this Agreement shall constitute an "excess
parachute payment" subject to a Section 4999 tax,
the Company shall pay to the
-2-
PAGE
Executive in cash such additional amount as is
necessary so that the aggregate amounts received
by the Executive under this Agreement, after giving
effect to the obligation of the Executive to pay any
applicable taxes on such aggregate amounts (including,
without limitation all federal, state and local income
taxes, any Section 4999 Tax and any other taxes payable
thereon), shall not be less than the net after-tax
amount which the Executive would have been entitled
to receive under clause (i) of subsection 5(f) had
such Section 4999 Tax not been imposed. The Company
shall pay such additional amount to the Executive
within thirty (30) days after the Executive gives
written notice to the Company that such determination
has been made by the IRS or a court of competent
jurisdiction.
3. The following new Section 5(h) is hereby added to the
Agreement:
(h) Any dispute or controversy between the Executive
and the Company regarding payments under this
Section 5 of this Agreement shall be conclusively
settled by an independent accounting firm acceptable
to each of the parties hereto, or, if no firm is
acceptable to both parties hereto, each of the
Executive and the Company shall select an
accounting firm acceptable to it, and such
accounting firms shall together designate an
independent accounting firm to settle such
dispute or controversy, and such settlement
shall be binding upon both parties, provided,
however, that any accounting firm designated to
settle any dispute or controversy hereunder shall
not have been previously retained by either party
for a period of at least two (2) years subsequent
to the date of this settlement of such dispute or
controversy. The
-3-
PAGE
Company or the Escrow Agent, as the case may be, may
withhold from any benefits payable under this
Agreement all federal, state, city or other taxes as
shall be required pursuant to any law or
governmental regulation or ruling.
4. The capitalized defined terms used in this Amendment shall
have the same meanings as are ascribed to them in the Termination Agreement
unless otherwise defined herein.
5. Except as amended herein, the Termination Agreement shall
continue in full force and effect on and after the date hereof.
IN WITNESS WHEREOF, this Amendment has been duly executed by the
Executive and on behalf of Selective and SICA by their duly authorized
officers, as of the date and year first above written.
SELECTIVE INSURANCE GROUP, INC.
By: /s/ James W. Entringer
--------------------------
Name: James W. Entringer
Title: Chairman and Chief
Executive Officer
SELECTIVE INSURANCE COMPANY
OF AMERICA
By: /s/ James W. Entringer
---------------------------
Name: James W. Entringer
Title: Chairman and Chief
Executive Officer
/s/ James W. Coleman, Jr.
---------------------------
James W. Coleman, Jr.
-4-
PAGE
EXHIBIT 10.16x
TERMINATION AGREEMENT
---------------------
TERMINATION AGREEMENT dated as of November 3, 1998, by and between
SELECTIVE INSURANCE COMPANY OF AMERICA (the "Company"), a New Jersey
corporation, having an office at 40 Wantage Avenue, Branchville, New Jersey
07826, and David B. Merclean (the "Executive"), having an address at 8
Demarest Drive, Mendham, New Jersey 07945.
W I T N E S S E T H:
WHEREAS, the Company recognizes the Executive to be a valuable
management employee of the Company; and
WHEREAS, the Company recognizes that a change in control of Selective
Insurance Group, Inc., the Company's parent corporation ("Selective"), could
occur in the future, and that it is of importance to the Company and to
Selective and its stockholders to provide for the continuity of management
and its uninterrupted attention and dedication to the business affairs of
the Company; and
WHEREAS, the Board of Directors of the Company (the "Board") has
determined that appropriate steps should be taken to encourage the continued
attention and dedication of principal members of the Company's management to
their assigned duties in circumstances arising from the possibility of a
change in control of Selective; and
WHEREAS, the Company has determined that an arrangement of the type set
forth herein will serve the purpose of attracting desirable persons for
executive positions with the Company, will induce the Executive to remain
with the Company, and will enhance the Executive's ability to assess and
advise the Board as to whether any proposal involving a change in the
control would be in the best interests of the Company, Selective and its
shareholders and to take such other action regarding such proposal without
being influenced by the prospects of his own future employment with the
Company; and
WHEREAS, the Company and the Executive wish to set forth their
agreements as to the subject and procedures contemplated hereunder
acknowledging, however, that this Agreement supplements any employment
agreement that may be in effect from time to time between the Executive and
the Company and sets forth the severance benefits which the Company agrees
will be provided to the Executive in the event the Executive's employment
with the Company is
PAGE
terminated subsequent to a change of control of Selective under the
circumstances hereinbelow described.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the Company and the Executive hereby agree as follows:
1. Term of Agreement.
The term of this Agreement (the "Term") shall commence on the date
hereof and shall continue in effect until November 3, 2001, provided,
however, that commencing on November 3, 2001 and each November 3 thereafter
(each such November 3 being hereinafter referred to as an "Extension Date"),
the Term shall automatically be extended for one (1) additional year, unless
at least twenty-four (24) months prior to an Extension Date, the Company or
the Executive shall have given written notice in the manner hereinafter
prescribed that the Term shall not be extended as of the next Extension
Date; and, provided further, that if a "Change in Control" of Selective, as
defined in Section 2 hereof, shall have occurred during the term, as the
same may be extended, this Agreement shall terminate on the last day of the
twenty-four (24) month period commencing on the date that such Change in
Control shall have occurred. Notwithstanding anything in this Section 1 to
the contrary, this Agreement shall terminate if the Executive or the Company
terminates the Executive's employment prior to the date on which a Change in
Control shall occur.
2. Change in Control.
(a) For the purposes of this Agreement, a "change in control of
Selective" (a "Change in Control") shall mean the occurrence of an event of
a nature that would be required to be reported in response to Item 1(a) of a
Current Report on Form 8-K, as in effect on the date hereof, pursuant to
Sections 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") provided, however, that a Change in Control shall, in any
event, conclusively be deemed to have occurred upon the first to occur of
any one of the following events:
(i) The acquisition by any person or group,
including, without limitation, any current
shareholder or shareholders of Selective, of
securities of Selective resulting in such
person's or group's owning of record or
-2-
PAGE
beneficially twenty-five percent (25%) or more,
of any class of voting securities of Selective;
(ii) The acquisition by any person or group,
including, without limitation, any current
shareholder or shareholders of Selective, of
securities of Selective resulting in such
person's or group's owning of record or
beneficially twenty percent (20%) or more,
but less than twenty-five percent (25%), of
any class of voting securities of Selective,
if the Board adopts a resolution that such
acquisition constitutes a Change in Control;
(iii) The sale or disposition of all or
substantially all of the assets of Selective;
(iv) The reorganization, recapitalization,
merger, consolidation or other business
combination involving Selective the result
of which is the ownership by the shareholders
of Selective of less than eighty percent (80%)
of those voting securities of the resulting or
acquiring entity having the power to elect a
majority of the board of directors of such
entity; or
(v) A change in the membership in the Board
of Directors of Selective (the "Selective Board")
which, taken in conjunction with any other prior
or concurrent changes, results in twenty percent
(20%) or more of the Selective Board's membership
being persons not nominated by Selective's
management or Selective's Board as set forth in
Selective's then most recent proxy statement,
excluding changes resulting from substitutions
by Selective's Board because of retirement or
death of a director or directors, removal of a
director or directors by Selective's Board or
resignation of a director or directors due to
demonstrated disability or incapacity.
(b) Notwithstanding anything in the foregoing Section 2(a) to the
contrary, no Change in Control shall be deemed to have occurred for the
purposes of this Agreement by virtue of any transaction which results in the
Executive, or a group of persons which includes the Executive, acquiring,
directly or indirectly, voting securities of Selective.
(c) For the purpose of Section 2(a) the following definitions shall
apply:
(i) the terms "person" and "beneficial
owner" shall have the meanings set forth in
Regulation 13D under the Exchange Act, as such
Regulation exists on the date hereof;
(ii) the term "voting security" shall include
any security that has, or may have upon an event
of default or in respect to any transaction, a
right to vote on any matter upon which the holder
of any class of common stock of Selective would
have a right to vote;
(iii) the term "group" shall have the meaning
set forth in Section 13(d)(3) of the Exchange
Act; and
(iv) the term "substantially all of the assets
of Selective" shall mean more than fifty percent
(50%) of Selective's assets on a consolidated
basis, as shown in Selective's most recent audited
balance sheet.
3. Continuation of Employment.
Notwithstanding any termination date as may be specified in any
employment agreement in effect from time to time between the Company and the
Executive, in the event of a Change in Control, the Company agrees to
continue to employ the Executive, and, subject to the provisions of Section
4 hereof, the Executive agrees to continue in the employ of the Company, in
the capacity in which the Executive was serving, and with the duties,
responsibilities and status of the Executive immediately prior to such
Change in Control or in such other capacity as shall be agreeable to the
Executive, for a term commencing on the date on which the Change in Control
shall have occurred and ending three (3) years after the date on which the
Change in Control shall have occurred. Commencing on the date three (3)
years after the date on which the Change in Control shall have occurred and
each anniversary date of the Change in Control thereafter (each such date
being hereinafter referred to as a "Renewal Date"), the term of the
Executive's employment shall automatically be renewed for one (1) additional
year unless at least twenty-four (24) months prior to a Renewal Date the
Company or the Executive shall have given written notice in the manner
hereinafter prescribed that such employment shall not be renewed as of such
Renewal Date. The provisions of this Section 3 shall survive any
termination of this Agreement pursuant to Section 1 hereof after a Change in
Control and shall continue in full force and effect.
4. Termination of Employment Following Change in Control.
The Executive shall be entitled to the benefits provided in Section 5
hereof upon the termination of his employment during the term of this
Agreement, as the same may be extended, after a Change in Control has
occurred, unless such termination is: (a) due to the Executive's death or
Retirement, (b) by the Company for Cause or Disability, or (c) by the
Executive other than for Good Reason (as such foregoing capitalized terms
are hereinafter defined).
(i) Termination by the Executive or by the
Company of the Executive's employment based
on "Retirement" shall mean termination: (A)
at such age as shall be established by the
Board prior to a Change in Control for
mandatory or normal retirement of Company
executives in general, which shall not be
less than age 65, or (B) at any other
retirement age set by mutual agreement of
the Company and the Executive and approved
by the Board.
(ii) Termination by the Company of the
Executive's employment based on "Disability"
shall mean termination because of the
Executive's physical injury or physical or
mental illness which causes him to be absent
from his duties with the Company on a
full-time basis for a continuous period in
excess of the greater of: (A) the period of
disability constituting permanent disability
as specified under the Company's long-term
disability insurance coverage applicable to
the Executive prior to a Change in Control or
(B) six (6) calendar months, unless within
thirty (30) days after Notice of Termination
(as hereinafter defined) is thereafter given
the Executive shall have returned to the
full-time performance of his duties.
(iii) Termination by the Company of the
Executive's employment based on "Cause" shall
mean termination upon: (A) the Executive's
conviction of a felony (as evidenced by a
binding and final judgment, order or decree
of a court of competent jurisdiction, in effect
after exhaustion or lapse of all rights of
appeal), (B) the continued willful failure by
the Executive to perform substantially his
duties with the Company (other than any such
failure resulting from his incapacity due to
physical injury or physical or mental illness)
for a period of thirty (30) days after a demand
for substantial performance is delivered to the
Executive by the Board of Directors of the
Company which specifically identifies the
manner in which the Board of Directors believes
that the Executive has not substantially
performed his duties, or (C) willful misconduct
in the performance of the Executive's duties
and obligations to the Company which constitute
common law fraud or other gross malfeasance
of duty; provided, however, that no termination
for Cause pursuant to clauses (B) or (C) shall
occur unless and until there shall have been
delivered to the Executive a copy of a
resolution duly adopted by the affirmative
vote of not less than sixty-six and two thirds
percent (66 2/3%) of the entire membership of
the Board, excluding the Executive, at a
meeting of the Board called and held for the
purpose (after reasonable notice to the
Executive and an opportunity for the Executive,
together with his counsel, to be heard before
the Board), finding that in good faith opinion
of the Board the Executive was guilty of the
conduct set forth in such clause (B) or (C)
and specifying the particulars thereof in
reasonable detail. For purposes of this clause
(iii), no act, or failure to act, on the part
of the Executive shall be considered "willful"
unless done or omitted to be done by the
Executive in bad faith and without reasonable
belief that his action or omission was in, or
not opposed to, the best interests of the
Company. Any act, or failure to act, based
upon authority given pursuant to a resolution
duly adopted by the Board or based upon the
advice of counsel for the Company shall be
conclusively presumed to have been done or
omitted to have been done by the Executive
in good faith and in the best interests of
the Company.
(iv) Termination by the Executive of his
employment for "Good Reason" shall mean (A)
termination by the Executive based on: (1)
any reduction in his base salary below the
annualized rate in effect on the date
preceding the date on which a Change in
Control shall have occurred or the Company's
failure to increase (within 12 months of the
Executive's last increase in base salary)
the Executive's base salary after a Change
in Control in an amount which at least equals,
on a percentage basis, changes in the Consumer
Price Index, all items, for New Jersey in the
preceding twelve (12) months; or (2) a failure
by the Company to continue in effect, or the
material reduction of any of Executive's
benefits under, any Plan (as hereinafter
defined) in which the Executive was
participating on the date preceding the date
on which a Change in Control shall have
occurred (or Plans providing the Executive
with at least substantially similar benefits)
other than as a result of the normal
expiration of any such Plan in accordance
with its terms as in effect on the date
preceding the date on which a Change in
Control shall have occurred, or the taking
of any action, or the failure to act, by the
Company which would adversely affect the
Executive's continued participation in any
of such Plans on at least as favorable a basis
to him as was the case on the date preceding
the date on which a Change in Control shall
have occurred or which would materially reduce
the Executive's benefits in the future under
any such Plans or deprive the Executive of
any material benefit enjoyed by him at the
time of the Change in Control; or (3) without
the Executive's express prior written consent,
the assignment to the Executive of any duties
inconsistent with his positions, duties,
responsibilities and status with the Company
immediately prior to a Change in Control, or
any diminution in the Executive's
responsibilities as an executive of the
Company as compared with those he had as an
executive of the Company immediately prior
to a Change in Control, or any change in the
Executive's titles or office as in effect
immediately prior to a Change in Control, or
any removal of the Executive from, or failure
to re-elect him to, any of such positions,
except in connection with the termination of
the Executive's employment for Cause,
Disability or Retirement or as a result of
the Executive's death or by his termination
of his employment other than for Good Reason;
or (4) without the Executive's express prior
written consent, the imposition of a
requirement by the Company that the Executive
be based anywhere other than where the
Executive's office is located on the date
preceding the date on which a Change in
Control shall have occurred; or (5) without
the Executive's express prior written consent,
any reduction in the number of paid vacation
days to which the Executive was entitled as
of the date preceding the date on which a
Change in Control shall have occurred; or
(6) a failure by the Company to provide the
Executive with office, secretarial, computer
and other support services and facilities
consistent with his position in the Company
and substantially equivalent to those
available to the Executive on the date
preceding the date on which a Change in
Control shall have occurred; or (7) the
failure by the Company to obtain from any
successor to the business of the Company,
as set forth in Section 13, the assent to
this Agreement, as described in such
Section 13; or (8) subsequent to a Change
in Control, any purported termination of
the Executive's employment which is not
effected pursuant to a Notice of Termination
(as hereinafter defined) satisfying the
requirements of Section 4(v) (and, if
applicable, Section 4(iii)), and for
purposes of this Agreement no such purported
termination shall be effective; or
(9) any breach by the Company of any of the
terms and conditions of any employment
agreement between the Company and the
Executive or any agreement between the
Company and the Executive providing for
incentive compensation, stock options,
stock appreciation rights, stock bonuses,
pension benefits, group insurance or any
similar benefits; or (10) any requirement
by the Company that the Executive be absent
from Executive's office on business travel
or otherwise more than forty-five (45) days
in any calendar year or for more than
fourteen (14) consecutive days at any time,
or (B) a voluntary termination by the
Executive upon Notice of Termination given
by the Executive to the Company no later
than six (6) months after the occurrence
of a Change in Control, provided that
Executive shall not thereafter violate
the provisions of any agreement between
the Executive and the Company relating to
nondisclosure of confidential information
or noncompetition with the Company.
For purposes of this Agreement, a "Plan"
shall mean any plan, contract,
authorization or arrangement, whether
or not set forth in any formal written
documents, providing for compensation,
incentive compensation, non-qualified
supplemental retirement benefits, stock
options (whether or not in tandem with
stock appreciation rights), stock
appreciation rights, long-term incentives,
stock bonuses or restricted stock grants
or any employee benefit plan such as a
pension, retirement, profit sharing,
medical, disability, accident, life
insurance plan or a relocation plan or
policy or any other plan, program, policy
or arrangement of the Company intended to
benefit the Executive or employees of the
Company generally.
(v) Any termination of the Executive's
employment by the Company or by the
Executive shall be communicated by a
Notice of Termination to the other party
hereto. For purposes of this Agreement,
a "Notice of Termination" shall mean a
written notice given in the manner
hereinafter prescribed which shall
indicate the specific termination
provision in this Agreement relied
upon and shall set forth in reasonable
detail the facts and circumstances
claimed to provide a basis for
termination of the Executive's employment
under the provision so indicated and
shall specify the date of termination
in accordance with this Agreement.
(vi) "Date of Termination" following a
Change in Control shall mean: (A) if the
employment is to be terminated by the
Company for Disability, thirty (30) days
after Notice of Termination is given
(provided that the Executive shall not
have returned to the performance of the
Executive's duties on a full-time basis
during such thirty (30) day period), or
(B) if the employment is to be terminated
by either party for any other reason, the
date on which Notice of Termination is given.
(vii) In the event of dispute as to the
Executive's termination under Section 4(iv)
the matter shall be forthwith submitted to
binding arbitration as hereinafter provided.
5. Payment of Benefits.
(a) If an event has occurred pursuant to Section 4 hereof which
entitles the Executive to the benefits and rights set forth in this Section
5, the Executive shall receive from the Company, or from the Escrow Agent
(as hereinafter defined), as the case may be, within five (5) days following
the Date of Termination (except as otherwise provided) all of the following
benefits, other than those benefits which he specifically elects by written
notice to the Company or to the Escrow Agent, as the case may be, not to
receive:
(i) earned but unpaid base salary through
the Date of Termination at the rate in
effect immediately prior to the time a
Notice of Termination is given plus any
incentive compensation, benefits or awards
(including both the cash and stock components)
which pursuant to the terms of any Plans
have been accrued, earned or have become
payable, but which have not yet been paid
to the Executive (including any amounts
which previously had been deferred at the
Executive's request); and
(ii) as severance pay and in lieu of any
further salary for periods subsequent to
the Date of Termination (including any
payments of salary provided for by any
employment agreement with the Company),
an amount in cash equal to the Executive's
"annualized includible compensation for
the base period" (as defined in Section
280G(d)(1) of the Internal Revenue Code
of 1986, as amended (the "Code")),
multiplied by a factor of 2.99.
(b) If an event has occurred pursuant to Section 4 hereof which
entitles the Executive to the benefits and rights set forth in this Section
5, the Executive shall be entitled to the benefits of any stock options,
stock appreciation rights, restricted stock grants, stock bonuses or other
benefits theretofore granted by the Company to the Executive under any Plan,
whether or not provided for in any agreement with the Company, provided,
however, that, except to the extent requiring approval of Selective's
stockholders, (i) all unvested stock options, stock appreciation rights,
restricted stock grants, stock bonuses, long-term incentives and similar
benefits shall be deemed to be vested in full on the Date of Termination,
notwithstanding any provision to the contrary or any provision requiring any
act or acts by the Executive in any agreement with the Company or Selective
or any Plan, and (ii) to the extent that any such stock options, stock
appreciation rights, restricted stock grants, stock bonuses, long-term
incentives or similar benefits shall require by its terms the exercise
thereof by the Executive, the last date to exercise the same shall,
notwithstanding any provision to the contrary in any agreement or any Plan,
shall be the later to occur of (A) the last date provided for such exercise
in any agreement or Plan evidencing any such stock options, stock
appreciation rights, restricted stock grants, stock bonuses, long-term
incentives or similar benefits or (B) the close of business on the date
which shall be one hundred twenty (120) days after the Date of Termination
and (iii) if the vesting pursuant hereto of any such stock options, stock
appreciation rights, restricted stock grants, stock bonuses, long-term
incentives or similar benefits shall have the effect of subjecting the
Executive to liability under Section 16(b) of the Exchange Act or any
similar provision of law, the vesting date thereof shall be deemed to be the
first day after the Termination Date on which such vesting may occur without
subjecting the Executive to such liability.
(c) If an event has occurred pursuant to Section 4 hereof which
entitles the Executive to the benefits and rights set forth in this Section
5, the Company shall maintain in full force and effect, for the continued
benefit of the Executive and his dependents for a period terminating on the
earliest of: (i) three (3) years after the Date of Termination or (ii) the
commencement date of equivalent benefits from a new employer, all insured
and self-insured employee welfare benefit Plans in which the Executive was
entitled to participate immediately prior to the Date of Termination,
provided that the Executive's continued participation is not barred under
the general terms and provisions of such Plans. In the event that the
Executive's participation in any such Plan is barred by its terms, the
Company, at its sole cost and expense, shall arrange to have issued for the
benefit of the Executive and his dependents individual policies of insurance
providing benefits substantially similar (on an after-tax basis) to those
which the Executive otherwise would have been entitled to receive under
such Plans pursuant to this Section 5(c). If, at the end of three (3)
years after the Termination Date, the Executive has not previously
received or is not receiving equivalent benefits from a new employer, or is
not otherwise receiving such benefits, the Company shall arrange, at its
sole cost and expense, to enable him to convert his and his dependents'
coverage under such Plans to individual policies or programs upon the same
terms as employees of the Company may apply for such conversions upon
termination of employment.
(d) Except as specifically provided in Section 5(c) above, the amount
of any payment provided for in this Section 5 shall not be reduced, offset
or subject to recovery by the Company by reason of any compensation earned
by the Executive as the result of employment by another employer after the
Date of Termination, or otherwise. The Executive shall not be required to
mitigate any amounts payable or benefits provided under this Agreement by
seeking or accepting other employment.
(e) The rights and benefits provided herein shall be in addition to,
and not (except as provided in this Agreement) to the exclusion of, any
other rights and benefits that may be available to the Executive in regard
to or arising out of the termination of the Executive's employment,
including claims for breach of contract or for violation of relevant
employment, worker's compensation or employee benefits laws. The
prosecution or enforcement of rights granted by this Agreement or the
election to take benefits under this Agreement shall in no manner
constitute an election of rights or remedies by the Executive other than in
respect of this Agreement.
(f) Notwithstanding anything in this Agreement to the contrary, if
any of the payments or benefits provided for in this Agreement, together
with any other payments or benefits which the Executive has the right to
receive from the Company (including, without limitation, any amounts
payable under any employment contract with the Company), would constitute
a "parachute payment" (as defined in Section 280G(b)(2) of the Code), the
payments and benefits due to the Executive shall be reduced, in such order
of priority and amount as the Executive shall elect, to the largest amount
as will result in no portion of such payments being subject to the excise
tax imposed by Section 4999 of the Code. Notwithstanding anything in the
foregoing to the contrary, any dispute or controversy regarding whether any
payments under this Agreement must be reduced pursuant to this Section 5(f)
shall be conclusively settled by an independent accounting firm acceptable
to each of the parties hereto, or, if no firm is acceptable to both parties
hereto, each of the Executive and the Company shall select an accounting
firm acceptable to it, and such accounting firms shall together designate an
independent accounting firm to settle such dispute or controversy, and such
settlement shall be binding upon both parties, provided, however, that any
accounting firm designated to settle any dispute or controversy hereunder
shall not have been previously retained by either party for a period of a
least two (2) years subsequent to the date of this settlement of such
dispute or controversy. The Company or the Escrow Agent, as the case may
be, may withhold from any benefits payable under this Agreement all federal,
state, city or other taxes as shall be required pursuant to any law or
governmental regulation or ruling.
(g) In the event that a court of competent jurisdiction shall
determine that any portion of the payment and benefits paid to the Executive
pursuant to this Agreement shall have constituted a "parachute payment" (as
defined in Section 280G(b)(2) of the Code) and subject to an excise tax
under Section 4999(a) of the Code, the Company shall pay to the Executive in
cash such additional amount as is necessary so that the total amount
received by the Executive under this Agreement, after payment of any
applicable taxes on such total amount (including, without limitation,
federal, state or local income taxes, any taxes imposed by Section 4999
(a) of the Code and any taxes in respect of any amount payable to the
Executive under this Section 5(g)) shall not be less than the net after tax
amount that the Executive would have been entitled to receive under this
Agreement had such excise tax under Section 4999(a) not been imposed. The
Company shall pay such additional amount to the Executive within thirty (30)
days after the Executive gives written notice to the Company that such
determination has been made by a court of competent jurisdiction.
6. Escrow of Benefits.
(a) At any time after the occurrence of a Change in Control, the
Company shall, upon the written request of the Executive, promptly deliver
to a bank or other institution acceptable to the Executive, as escrow agent
(the "Escrow Agent"), an amount of cash or certificates of deposit, treasury
bills or irrevocable letters of credit adequate to fully fund the
obligations of the Company under this Agreement.
(b) The escrow agreement or arrangement between the Company and the
Escrow Agent shall provide that amounts payable to the Executive under this
Agreement shall be paid by the Escrow Agent to the Executive five (5) days
after written demand therefore by the Executive to the Escrow Agent, with a
copy to the Company, certifying that such amounts are due and payable under
this Agreement because of the occurrence of an event specified under Section
4 hereof. Such escrow agreement or arrangements shall also provide that if
the Company shall, prior to payment by the Escrow Agent, object in writing
to the Escrow Agent, with a copy to the Executive, as to the payment of any
amounts demanded by the Executive under this Agreement, certifying that such
amounts are not due and payable to the Executive because an event specified
in Section 4 hereof has not occurred, such dispute shall be resolved by
binding arbitration as hereinafter set forth.
(c) Such escrow agreement or arrangements shall further provide that
any dispute described in Section 6(b) hereof shall be forthwith submitted to
binding arbitration as hereinafter provided.
7. Arbitration.
Any disputes arising under Section 4(iv) or Section 6(b) hereof shall
be forthwith submitted to binding arbitration by three (3) arbitrators in
Newark, New Jersey, under the expedited rules of the American Arbitration
Association then obtaining. One such arbitrator shall be selected by each
of the Company and the Executive, and the two arbitrators so selected shall
select the third arbitrator. Selection of all three arbitrators shall be
made within thirty (30) days after the date the dispute arose. Such
arbitration shall be limited solely to a determination of whether or not an
event has occurred pursuant to Section 4 of this Agreement which entitles
the Executive to the benefits and rights set forth in Section 5 of this
Agreement. The written decision of the arbitrators shall be rendered within
ninety (90) days after selection of the third arbitrator. The decision of
the arbitrators shall be final and binding on the Company and the Executive
and may be entered by either party in any court having jurisdiction.
8. Enforcement of Rights.
The Company, and any survivor of any business combination with the
Company causing rights to accrue to the Executive under this Agreement,
shall pay all the Executive's legal, accounting and arbitration fees and
expenses and costs as they become due, which the Executive may become
obligated to pay in obtaining, enforcing, retaining or defending any right
or benefit provided by this Agreement, whether in respect of any enforcement
undertaken or demand made by the Executive that is successful or in respect
of any enforcement undertaken or demand made in good faith by the Executive
that is not successful. If judgment is rendered against any of such
persons, it will pay the Executive, unless expressly included in the
judgment, prejudgment interest from the date of the Notice of Termination at
the prime rate being charged by Midlantic National Bank on the date of the
Notice of Termination.
9. Executive's Commitment.
The Executive agrees that subsequent to his period of employment with
the Company, he will not at any time communicate or disclose to any
unauthorized person, without the written consent of the Company, any
proprietary or confidential information concerning the business affairs,
products or customers of the Company which, if disclosed, would have a
material adverse effect upon the business or operations of the Company and
its subsidiaries, taken as a whole; it being understood, however, that the
obligations of this Section 9 shall not apply to the extent that the
aforesaid matters: (a) are disclosed in circumstances where the Executive
is legally required to do so or (b) become generally known to and available
for use by the public otherwise than by the Executive's wrongful act or
omission.
10. Severability.
If any one or more of the provisions (or any part thereof) of this
Agreement would be, invalid, illegal or unenforceable in any respect under
applicable law, then such provision (or any part thereof) shall be deemed
modified to the extent necessary to render it valid while most nearly
preserving its original intent; no provision (or any part thereof) of this
Agreement shall be affected by another provision (or any part thereof) of
this Agreement being held invalid.
11. Notice.
For the purposes of this Agreement, notices, requests, demands and all
other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given: (i) when delivered personally, or
(ii) three (3) days after having been mailed by registered or certified
mail, return receipt requested, or (iii) one (1) day after having been sent
by telegraph or mailed by express mail or other overnight courier service,
postage, telegraph, courier and registry fees, as the case may be, prepaid
and addressed to the addresses set forth in the first paragraph of this
Agreement or to such other address as either party may have furnished to the
other in writing in accordance herewith, except that notice of change of
address shall be effective only upon receipt. All notices to the Company
shall be directed to the attention of the President of the Company.
12. Merger; Amendment; Waiver.
(a) This Agreement supersedes all other agreements, arrangements and
understandings, and merges all negotiations and discussions, with respect to
the subject matter hereof; provided, however, that this Agreement shall not,
except to the extent specifically provided herein, supersede or limit the
rights, duties or obligations that the Executive may have under any written
employment agreement with the Company.
(b) This Agreement may be amended or modified only by a writing signed
by both parties. No further agreement between the parties shall be deemed
to supersede, amend or modify this Agreement unless a statement to that
effect is made in such future agreement or the enforcement of such agreement
would give rise to conflicting obligations between the Executive on the one
hand and the Company, its successor or other bound party on the other hand;
in the latter case, however, this Agreement shall be deemed to be
superseded, amended or modified only to the extent necessary to avoid such
conflict.
(c) The waiver of the non-performance of any obligation under this
Agreement shall apply to that non-performance only and shall not constitute
a waiver, modification or amendment of this provision giving rise to such
obligation.
13. Successors; Binding Agreement.
(a) The Company will require any successor (whether direct or
indirect, by merger, consolidation or other combination other than a sale of
assets) to the business of the Company, by agreement in form and substance
satisfactory to the Executive, to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place. Failure of
the Company to obtain such agreement prior to the effectiveness of any such
succession shall constitute Good Reason for termination by the Executive of
his employment, and, if a Change in Control shall have occurred, the
Executive shall be entitled to the benefits set forth in Section 5 of this
Agreement, except that for purposes of implementing the foregoing, the date.
On which any such succession becomes effective shall be deemed the Date of
Termination. As used in this Agreement, the "Company" shall mean the
Company as hereinbefore defined, and any successor and assign to its
business as aforesaid which executes and delivers the agreement provided for
in this Section 13 or which otherwise becomes bound by all the terms and
provisions of this Agreement by operation of law.
(b) This Agreement shall inure to the benefit of and be enforceable by
the personal or legal representatives, executors, administrators,
successors, heirs, distributees, devises and legatees of the Executive. If
the Executive should die while any amount would still be payable to him
hereunder if he had continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this
Agreement to the Executive's devisee, legatee or other designee or, if there
be no such designee, to his estate.
14. Governing Law.
This Agreement is being made in the State of New Jersey and shall be
governed by, and interpreted and construed with reference to, the laws of
New Jersey.
15. Headings.
Headings in this Agreement are for convenience of reference only and
shall not be used to construe or interpret this Agreement.
16. Counterparts.
This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereunder have executed this Agreement
as of the date first above written.
SELECTIVE INSURANCE COMPANY OF AMERICA
By: /s/ James W. Entringer
----------------------
James W. Entringer,
Chairman and
Chief Executive Officer
/s/ David B. Merclean
----------------------
David B. Merclean
In consideration of the covenants of the Executive hereinabove set
forth, Selective hereby guarantees to the Executive the full performance by
the Company of all of its obligations under the foregoing Termination
Agreement.
SELECTIVE INSURANCE GROUP, INC.
By: /s/ James W. Entringer
-----------------------
James W. Entringer,
Chairman and
Chief Executive Officer
PAGE
EXHIBIT 10.16y
AMENDMENT NO. 1 TO TERMINATION AGREEMENT
----------------------------------------
AMENDMENT NO. 1, dated as of December 31, 1998 among SELECTIVE
INSURANCE GROUP, INC., a New Jersey corporation ("Selective"), having an
office at 40 Wantage Avenue, Branchville, New Jersey 07826, SELECTIVE
INSURANCE COMPANY OF AMERICA, a New Jersey corporation ("SICA"), having an
office at 40 Wantage Avenue, Branchville, New Jersey 07826, and DAVID B.
MERCLEAN, having an address at 8 Demarest Drive, Mendham, New Jersey 07945
(the "Executive"), to Termination Agreement dated as of November 3, 1998
among SICA and the Executive (the "Termination Agreement").
WHEREAS, SICA and the Executive have executed and delivered the
Termination Agreement, and Selective has guaranteed all of the obligations
of SICA under the Termination Agreement; and
WHEREAS, the parties hereto desire to amend the Termination Agreement
as provided herein.
THEREFORE, in consideration of the premises and the mutual covenants
hereinafter set forth, the parties hereto agree as follows:
1. Subsection 5(f) of the Termination Agreement is hereby deleted
in its entirety, and replaced with a new subsection 5(f) to read in its
entirety as follows:
(f) In the event that any payments or benefits which
the Executive is entitled to receive from the Company
under this Agreement, together with any other payments
or benefits which the Executive is entitled to receive
from the Company (including, without limitation, any
amounts payable under any employment contract with the
Company or any stock option, stock bonus, incentive
compensation or other employee benefit plan of the
Company), in the aggregate would constitute an "excess
parachute payment" (as defined in Section 280G(b) of
the Code), the Company shall pay to the Executive an
amount constituting the greater to the Executive on a
net after-tax basis (as hereinafter provided) of (i)
the amount of payments and benefits which the
Executive is
PAGE
entitled to receive from the Company under this
Agreement, together with any other payments and
benefits which the Executive is entitled to receive
from the Company, reduced, in such order of priority
and amounts as the Executive shall elect, to the
largest amount as will result in no portion of the
aggregate of such payments being subject to the
excise tax imposed by Section 4999 of the Code, or
any successor or substitute provision of the Code
(the "Section 4999 Tax"), or (ii) the amount of
payments and benefits to which the Executive is
entitled to receive from the Company under this
Agreement, together with such other payments and
benefits which the Executive is entitled to receive
from the Company, plus an amount in cash equal to (x)
the amount of such "excess parachute payment"
multiplied by (y) twenty percent (20%). The aggregate
amounts described in clause (i) and in clause (ii) of
this subsection 5(f) shall be calculated on a net
after-tax basis giving effect to the obligation of
the Executive to pay any applicable taxes on such
aggregate amounts (including, without limitation, all
federal, state and local income taxes at the maximum
applicable rates, any Section 4999 Tax and any other
tax payable thereon at the maximum applicable rate).
2. Subsection 5(g) of the Termination Agreement is hereby deleted
in its entirety and replaced with a new subsection 5(g) to read in its
entirety as follows:
(g) In the event that the Executive shall receive from
the Company the amount specified in clause (i) of
subsection 5(f) and the Internal Revenue Service
(the "IRS") or a court of competent jurisdiction
shall determine that any portion of the payments and
benefits paid or payable to the Executive pursuant
to this Agreement shall constitute an "excess
parachute payment" subject to a Section 4999 tax,
the Company shall pay to the
-2-
PAGE
Executive in cash such additional amount as is
necessary so that the aggregate amounts received
by the Executive under this Agreement, after giving
effect to the obligation of the Executive to pay any
applicable taxes on such aggregate amounts
(including, without limitation all federal, state
and local income taxes, any Section 4999 Tax and
any other taxes payable thereon), shall not be less
than the net after-tax amount which the Executive
would have been entitled to receive under clause (i)
of subsection 5(f) had such Section 4999 Tax not been
imposed. The Company shall pay such additional
amount to the Executive within thirty (30) days after
the Executive gives written notice to the Company
that such determination has been made by the IRS or a
court of competent jurisdiction.
3. The following new Section 5(h) is hereby added to the Agreement:
(h) Any dispute or controversy between the Executive
and the Company regarding payments under this Section 5
of this Agreement shall be conclusively settled by an
independent accounting firm acceptable to each of the
parties hereto, or, if no firm is acceptable to both
parties hereto, each of the Executive and the Company
shall select an accounting firm acceptable to it, and
such accounting firms shall together designate an
independent accounting firm to settle such dispute or
controversy, and such settlement shall be binding upon
both parties, provided, however, that any accounting
firm designated to settle any dispute or controversy
hereunder shall not have been previously retained by
either party for a period of at least two (2) years
subsequent to the date of this settlement of such
dispute or controversy. The
-3-
PAGE
The Company or the Escrow Agent, as the case may be,
may withhold from any benefits payable under this
Agreement all federal, state, city or other taxes as
shall be required pursuant to any law or governmental
regulation or ruling.
4. The capitalized defined terms used in this Amendment shall
have the same meanings as are ascribed to them in the Termination Agreement
unless otherwise defined herein.
5. Except as amended herein, the Termination Agreement shall
continue in full force and effect on and after the date hereof.
IN WITNESS WHEREOF, this Amendment has been duly executed by the
Executive and on behalf of Selective and SICA by their duly authorized
officers, as of the date and year first above written.
SELECTIVE INSURANCE GROUP, INC.
By: /s/ James W. Entringer
--------------------------
Name: James W. Entringer
Title: Chairman and Chief
Executive Officer
SELECTIVE INSURANCE COMPANY
OF AMERICA
By: /s/ James W. Entringer
------------------------
Name: James W. Entringer
Title: Chairman and Chief
Executive Officer
/s/ David B. Merclean
------------------------
David B. Merclean
-4-
PAGE
EXHIBIT 10.17b
INTERESTS AND LIABILITIES AGREEMENT
(hereinafter referred to as the "Agreement")
to the
PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT
(hereinafter referred to as the "Contract")
between
The Insurance Companies comprising THE SELECTIVE
INSURANCE GROUP, including, but not limited to:
SELECTIVE INSURANCE COMPANY OF AMERICA
SELECTIVE WAY INSURANCE COMPANY
SELECTIVE INSURANCE COMPANY OF THE SOUTHEAST
SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA
SELECTIVE INSURANCE COMPANY OF NEW YORK
and/or any insurance affiliates which are now owned or hereafter
may be acquired by The Selective Insurance Group.
(hereinafter referred to collectively or individually as the "Company")
and
(hereinafter referred to as the "Subscribing Reinsurer")
It is mutually agreed by and between the Company on the one part, and the
Subscribing Reinsurer on the other part that the Subscribing Reinsurer's
share in the interests and liabilities of the Reinsurers as set forth in the
Contract attached hereto and forming a part of this Agreement, effective
12:01 a.m., Eastern Standard Time, January 1, 1998, to 12:01 a.m., Eastern
Standard Time, January 1, 1999, shall be for:
____% of up to $45,000,000 each Loss Occurrence for the First Excess Layer.
____% of up to $30,000,000 each Loss Occurrence for the Second Excess Layer.
____% of up to $40,000,000 each Loss Occurrence for the Third Excess Layer.
____% of up to $25,000,000 each Loss Occurrence for the Fourth Excess Layer.
PAGE
The share of the Subscribing Reinsurer in the interests and liabilities of
all Reinsurers in respect of the said Contract shall be separate and apart
from the shares of the other reinsurers to the said Contract, and the
interests and liabilities of the Subscribing Reinsurer shall not be joint
with those of the other reinsurers and in no event shall the Subscribing
Reinsurer participate in the interests and liabilities of the other
reinsurers.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives this day of , 199__.
SELECTIVE INSURANCE COMPANY OF AMERICA
SELECTIVE WAY INSURANCE COMPANY
SELECTIVE INSURANCE COMPANY OF THE SOUTHEAST
SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA
SELECTIVE INSURANCE COMPANY OF NEW YORK
and/or any insurance affiliates which are now owned or hereafter
may be acquired by The Selective Insurance Group.
- - - --------------------------------------------------------------------------
PAGE
and on this day of , 199__.
- - - --------------------------------------------------------------------------
PAGE
PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT
TABLE OF CONTENTS
------------------
Article Page
- - - ------- ----
Preamble............................................... 1
1 Term................................................... 1
2 Exclusions............................................. 2
3 Definitions............................................ 4
4 Self-Insured Obligations............................... 5
5 Reinsuring Clause...................................... 6
6 Reinstatement.......................................... 6
7 Premium................................................ 7
8 Ultimate Net Loss...................................... 8
9 Net Retained Lines..................................... 8
10 Loss Settlements....................................... 9
11 Currency............................................... 9
12 Taxes.................................................. 10
13 Federal Excise Tax..................................... 10
14 Errors and Omissions................................... 10
15 Access to Records...................................... 11
16 Insolvency............................................. 11
17 Arbitration............................................ 12
18 Service of Suit........................................ 13
19 Loss Reserves.......................................... 14
20 Intermediary........................................... 15
Attachments
- - - -----------
Pools, Associations And Syndicates Exclusion Clause.... 17
Nuclear Incident Exclusion Clause - Physical Damage -
Reinsurance - U.S.A.................................... 19
Nuclear Incident Exclusion Clause - Physical Damage -
Reinsurance - Canada................................... 21
PAGE
PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT
(hereinafter referred to as the "Contract")
In consideration of the mutual covenants hereinafter contained and upon the
terms and conditions hereinafter set forth
VARIOUS INSURANCE AND/OR REINSURANCE COMPANIES
AND/OR UNDERWRITING MEMBERS OF LLOYD'S
(hereinafter collectively referred to as the "Reinsurers")
one of whom is
THE "SUBSCRIBING REINSURER" WHOSE NAME APPEARS
ON THE INTERESTS AND LIABILITIES AGREEMENT
ATTACHING TO AND FORMING A PART OF THIS CONTRACT
do hereby indemnify, as herein provided and specified,
SELECTIVE INSURANCE COMPANY OF AMERICA
SELECTIVE WAY INSURANCE COMPANY
SELECTIVE INSURANCE COMPANY OF THE SOUTHEAST
SELECTIVE INSURANCE COMPANY OF SOUTH CAROLINA
SELECTIVE INSURANCE COMPANY OF NEW YORK
and/or any insurance affiliates which are now owned or hereafter
may be acquired by The Selective Insurance Group.
(hereinafter referred to collectively or individually as the "Company")
PREAMBLE
- - - --------
The Reinsurers hereby reinsure the excess liability of the Company resulting
from losses occurring during the term of this Contract, covering anywhere in
the world, under all of its policies, other than policies or portions
thereof hereinafter excluded, subject to the following conditions:
ARTICLE 1
---------
TERM
- - - ----
The term of this Contract shall be from 12:01 a.m., Eastern Standard Time,
January 1, 1998, to 12:01 a.m., Eastern Standard Time, January 1, 1999.
1 OF 22
PAGE
Should this Contract terminate while a Loss Occurrence, as defined in the
Definitions Article, is in progress, the Reinsurers shall nevertheless be
liable to the extent of their interest, subject to the other conditions of
this Contract, for all losses resulting from such Loss Occurrence, whether
such losses arise before or after such termination, provided that no part
of such Loss Occurrence shall be recoverable from any renewal of this
Contract.
ARTICLE 2
---------
EXCLUSIONS
- - - ----------
This Contract shall not apply to and specifically excludes:
A. Loss or liability excluded by the provisions of the "Pools, Associations
and Syndicates Exclusion Clause" attached hereto.
B. Any risks written by the Company's Aviation Department or written by the
Company as a member of an Aviation Insurance Group. However, with
respect to Property business, the exclusion shall not apply to stationary
ground risks, cargo and/or aircraft property damage.
C. Accident and Health business.
D. Fidelity business, except when written as a miscellaneous hazard in
Inland Marine transportation policies.
E. All business classified by the Company as Casualty, (including the
Casualty sections of Homeowners, Farmowners and Commercial Multiple Peril
policies).
F. Boiler and Machinery.
G. Workers' Compensation and Employers' Liability business.
H. Hail on growing or standing crops.
I. Livestock Mortality.
J. Mortgage Impairment Insurance with respect to Flood and Earthquake.
K. Stop loss reinsurance, quota share treaty reinsurance, and surplus treaty
reinsurance assumed from other insurance and reinsurance companies and
from Lloyd's Syndicates.
L. Contract Surety and Credit Insurance.
M. Liability excluded under the provisions of the "Nuclear Incident
Exclusion Clause - Physical Damage - Reinsurance - U.S.A." and the
"Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance -
Canada", attached hereto.
2 OF 22
PAGE
N. Liability arising from participation or membership in an Insolvency Fund.
O. Financial Guarantee and Insolvency business.
P. War Risks.
Q. Loss/or damage/or costs/or expenses arising from seepage and/or pollution
and/or contamination, other than contamination from smoke damage.
Nevertheless, this exclusion does not preclude any payment of the cost of
removal of debris of property damaged by a loss otherwise covered
hereunder, but subject always to a limit of twenty-five percent of the
Company's property loss under the original policy.
R. Losses in respect of overhead transmission and distribution lines and
their supporting structures, other than those on or within 150 meters (or
500 feet) of the insured premises. It is understood and agreed that
public utilities extension and/or suppliers extension and/or contingent
business interruption coverages are not subject to this exclusion,
provided that these are not part of a transmitters or distribution
policy.
S. Notwithstanding any other provision of this Contract, the Reinsurers
shall not be liable to the Company for any Extra Contractual Obligations
or Losses in Excess of Policy Limits.
"Extra Contractual Obligations" means those liabilities of the Company,
together with any legal costs and expenses incurred in connection
therewith, paid or payable by the Company as a result of an action
against it or its reinsured, by any insured or reinsured, the assignee of
any insured or reinsured, or a third party claimant, which arise from the
handling of any claim on any insurance contract, such liabilities arising
because of, but not limited to, the following: failure by the Company or
its reassured to settle within the policy limit, or by reason of alleged
or actual negligence, fraud, or bad faith in rejecting an offer of
settlement or in the preparation of the defense or in the trial of any
action against its insured or reinsured or in the preparation or
prosecution of an appeal consequent upon such action.
"Losses in Excess of Policy Limits" means those losses of the Company or
its reassured in excess of the limit of any contract of insurance or
reinsurance reinsured hereunder, such loss in excess of the limit having
been incurred because of failure by the Company or its reinsured to
settle within the policy limit or by reason of alleged or actual
negligence, fraud, or bad faith in rejecting an offer of settlement or in
the preparation of the defense or in the trial of any action against its
insured or reinsured or in the preparation or prosecution of an appeal
consequent upon such action.
No inference shall be drawn from the foregoing exclusion of liabilities
that this Contract or any portion of this Contract otherwise covers such
liabilities in the absence of said exclusion.
It is understood that Exclusion B. shall not apply when such hazards are
incidental to and form a minor part of the usual operations of the insured.
These Exclusions, other than M., N., O. and P. shall also not apply in the
event of the Company being interested without its knowledge on an
3 OF 22
PAGE
excluded risk, either by an existing insured extending its operations or by
an inadvertent acceptance by an agent or otherwise; this Contract shall
attach in respect of such prohibited risk, but only until discovery by the
Management of the Home Office and then only for thirty (30) days thereafter.
ARTICLE 3
---------
DEFINITIONS
- - - -----------
A. The term "policies" wherever used herein, shall mean all policies,
contracts, binders and other evidences of insurance and reinsurance,
whether oral or written, heretofore issued or which may be issued
hereafter by the Company.
B. The term "Loss Occurrence" shall mean the sum of all individual losses
directly occasioned by any one disaster, accident or loss or series of
disasters, accidents or losses arising out of one event which, with
respect to Continental U.S. losses and/or Canadian losses, occurs within
the area of one state of the United States or province of Canada and
states or provinces contiguous thereto and to one another. However, the
duration and extent of any one "Loss Occurrence" shall be limited to all
individual losses sustained by the Company occurring during any period of
168 consecutive hours arising out of and directly occasioned by the same
event except that the term "Loss Occurrence" shall be further defined as
follows:
1. As regards windstorm, hail, tornado, hurricane, cyclone, including
ensuing collapse and water damage, all individual losses sustained by
the Company occurring during any period of 72 consecutive hours
arising out of and directly occasioned by the same event. However,
the event need not be limited to one state or province or states or
provinces contiguous thereto.
2. As regards riot, riot attending a strike, civil commotion, vandalism
and malicious mischief, all individual losses sustained by the Company
occurring during any period of 72 consecutive hours within the area of
one municipality or county and the municipalities or counties
contiguous thereto arising out of and directly occasioned by the same
event. The maximum duration of 72 consecutive hours may be extended
in respect of individual losses which occur beyond such 72 consecutive
hours during the continued occupation of an insured's premises by
strikers, provided such occupation commenced during the aforesaid
period.
3. As regards earthquake (the epicenter of which need not necessarily be
within the territorial confines referred to in the opening paragraph
of this Section B.) and fire following directly occasioned by the
earthquake, only those individual fire losses which commence during
the period of 168 consecutive hours may be included in the Company's
"Loss Occurrence".
4 OF 22
PAGE
4. As regards "freeze", only individual losses directly occasioned by
collapse, breakage of glass and water damage (caused by bursting of
frozen pipes and tanks) may be included in the Company's "Loss
Occurrence".
For all those "Loss Occurrences" the Company may choose the date and time
when any such period of consecutive hours commences provided that it is
not earlier than the date and time of the occurrence of the first
recorded individual loss sustained by the Company arising out of that
disaster, accident or loss and provided that only one such period of 168
consecutive hours shall apply with respect to one event, except for any
"Loss Occurrence" referred to in sub-paragraphs 1. and 2. above where
only one such period of 72 consecutive hours shall apply with respect to
one event, regardless of the duration of the event.
No individual losses occasioned by an event that would be covered by 72
hours clauses may be included in any "Loss Occurrence" claimed under the
168 hours provision.
C. The term "premium income" shall mean gross earned premiums on business
covered hereunder, less return premiums for cancellations and reductions.
ARTICLE 4
---------
SELF-INSURED OBLIGATIONS
- - - ------------------------
There shall be included herein all obligations of the Company assumed by it
as a self-insurer or self-insured obligations in excess of any valid and
collectible insurance available to the Company to the same extent as if all
types of insurance described in the Contract were afforded under the
broadest form of policy(ies) issued by the Company.
An insurance or reinsurance wherein any of the companies hereby reinsured
and/or its affiliated and/or subsidiary companies are named as the insured
or reinsured party, either alone or jointly with some other party, shall be
deemed to be an insurance or reinsurance coming within the scope of this
Contract, notwithstanding that no legal liability may arise in respect
thereof by reason of the fact that any of the companies hereby reinsured
and/or its affiliated and/or subsidiary companies may not be obligated by
law to pay a claim to itself and/or its affiliated and/or subsidiary
companies.
In respect of all such business, the Company shall include in the premium
income hereunder, as defined in the Definitions Article, the premiums that
would be paid were such obligations covered by a normal policy or policies.
5 OF 22
PAGE
ARTICLE 5
---------
REINSURING CLAUSE
- - - -----------------
The Reinsurers will pay to the Company for any loss under this Contract,
whenever the Company has paid or advanced or agreed to pay or advance or
become liable to pay as the result of any one Loss Occurrence, as defined in
the Definitions Article, an amount of Ultimate Net Loss, as defined in the
Ultimate Net Loss Article, the excess of the appropriate retention(s), as
set forth in the following Schedule, and the sum recoverable hereunder for
each Loss Occurrence shall be 100% of the amount of Ultimate Net Loss the
excess of the appropriate retention(s), but not more than the amount of the
limit of the Reinsurers' liability for each Excess Layer, as set forth in
the following Schedule, and subject further to the limitations set forth in
the Reinstatement Article.
Schedule
--------
Retention
(each Loss Limit of Reinsurers' Liability
Occurrence) (each Loss Occurrence)
----------- ------------------------------
A.First Excess Layer $10,000,000 $45,000,000 the excess of
$10,000,000.
B.Second Excess Layer $30,000,000 $30,000,000 the excess of
$55,000,000.
C.Third Excess Layer $85,000,000 $40,000,000 the excess of
$85,000,000.
D.Fourth Excess Layer $125,000,000 $25,000,000 the excess of
$125,000,000.
ARTICLE 6
---------
REINSTATEMENT
- - - -------------
In respect of coverage provided under the First, Third, and Fourth Excess
Layers only, in the event of any portion of the limit under this Contract
being exhausted by loss, each Loss Occurrence, as defined in the Definitions
Article, reduces the amount of indemnity provided under this Contract by the
amount paid. The amount so exhausted shall be automatically reinstated from
the time of the Loss Occurrence, and for each amount so reinstated the
Company agrees to pay to the Reinsurers an additional reinsurance premium
calculated at pro rata of the premium (excluding reinstatement premium) as
respects the fraction of indemnity exhausted and 100% of the premium
regardless of the unexpired term of this Contract, to be settled
6 OF 22
PAGE
simultaneously with the payment of losses by the Reinsurers. The Second
Excess Layer only provides one limit under the Reinsuring Clause Article,
with no reinstatement of that limit.
Nevertheless, the Reinsurers' liability shall never be more than 100% of:
In respect of all Loss
In respect of any one Occurrences during the
Loss Occurrence term of this Contract
--------------------- ----------------------
A.First Excess Layer $45,000,000 $90,000,000
B.Third Excess Layer $40,000,000 $80,000,000
C.Fourth Excess Layer $25,000,000 $50,000,000
ARTICLE 7
---------
PREMIUM
- - - -------
The Company shall pay to the Reinsurers a deposit reinsurance premium for
each layer as provided in the following Schedule. It is agreed that the
final developed premium for each layer, calculated by applying the following
rates to the Company's premium income, as defined in the Definitions
Article, shall also be subject to a minimum premium for the layer as
follows:
Schedule
--------
Annual Reinsurance Premiums
---------------------------
Rate Deposit Premium Minimum Premium
---- --------------- ---------------
A.First Excess Layer 2.342% $3,735,000 $2,988,000
B.Second Excess Layer Flat $850,000 $850,000
C.Third Excess Layer 0.702% $1,120,000 $896,000
D.Fourth Excess Layer 0.274% $437,500 $350,000
In respect of coverage provided under the Second Excess Layer only, the
Company shall pay to the Reinsurers additional premiums which are calculated
as follows if incurred losses are:
Incurred Losses of Additional Premium
------------------ ------------------
Less than $2,500,000 $0
7 OF 22
PAGE
Between $2,500,000 and $7,500,000 $1,000,000
Between $7,500,000 and $15,000,000 $1,500,000
Between $15,000,000 and $30,000,000 $2,000,000
Deposit premiums shall be paid to the Reinsurers in equal semi-annual
installments at January 1, 1998, and July 1, 1998. As soon as practicable
after the January 1, 1999 expiration of this Contract, the Company shall
furnish to the Reinsurers a statement of the premium income, as defined in
the Definitions Article, accounted for by the Company during the term of
this Contract, and adjustment shall then be made in accordance with the
foregoing Schedules.
ARTICLE 8
---------
ULTIMATE NET LOSS
- - - -----------------
The term "Ultimate Net Loss" shall mean the amount paid or payable by the
Company in settlement of losses or liability, after deducting all
recoveries, all salvage and all amounts due from any other reinsurers
(except as noted in the Net Retained Lines Article) and shall include all
adjustment and legal expenses in connection with the adjustment and
settlement of claims including an allowance for salaried adjusters or other
salaried employees employed by the Company while diverted from normal duties
to the service of field adjustment in connection with losses for which claim
is made hereunder, at the per diem rate normally applied in the Company's
books to such employees, plus expenses incurred by such employees in
connection with such adjustments. Also, expenses of the Company's officials
incurred in connection with the loss, but no salaries of the Company's
officials or any normal overhead charges, such as rent, postage, lighting,
heating, cleaning, etc., shall be included.
All salvage and recoveries received subsequent to a loss settlement under
this Contract shall be applied as if received prior to said loss settlement,
and all necessary adjustments shall be made between the Company and the
Reinsurers.
Nothing in this Article shall be construed to mean that losses under this
Contract are not recoverable until the Company's Ultimate Net Loss has been
ascertained.
ARTICLE 9
---------
NET RETAINED LINES
- - - ------------------
Except as otherwise specifically provided, this Contract applies only to
that portion of any insurance or reinsurance which the Company retains for
its own account (including the Company's net retention in all underlying
reinsurance programs) and, in calculating the amount of loss hereunder and
also in computing the amount or amounts in excess of which this Contract
8 OF 22
PAGE
attaches, only loss in respect of that portion of any insurance or
reinsurance which the Company retains net for its own account shall be
included.
The amount of the Reinsurers' liability hereunder in any Loss Occurrence, as
defined in the Definitions Article, shall not be increased by reason of the
inability of the Company to collect from any other reinsurers, whether
specific or general, any amount which may have become due from them, whether
such inability arises from the insolvency of such other reinsurers or not.
Notwithstanding the preceding paragraphs, the Company has in effect a 75%
New Jersey Homeowners Quota Share Reinsurance Contract, where a portion of
the recoveries shall inure to the benefit of the Company, subject to a
minimum net retention, any one loss occurrence, as defined therein, of not
less than $1,000,000, any and all recoveries in excess of the $1,000,000
minimum net retention shall inure to the benefit of the Reinsurers
hereunder.
It is warranted that in addition to the initial net loss retentions
hereunder, the Company shall retain for its own account and not reinsured in
any way at least 5% of the excess loss covered under this Contract.
ARTICLE 10
----------
LOSS SETTLEMENTS
- - - ----------------
The Company shall advise the Reinsurers promptly of all Loss Occurrences, as
defined in the Definitions Article, which, in the opinion of the Company,
may result in a claim under this Contract and shall also keep the Reinsurers
advised of any subsequent material developments in connection therewith.
All loss settlements made by the Company, provided they are within the terms
of the original policies and of this Contract, shall be unconditionally
binding on the Reinsurers, who agree to pay all amounts for which they may
be liable immediately upon being furnished by the Company with reasonable
evidence of the amount due or to be due.
ARTICLE 11
----------
CURRENCY
- - - --------
For purposes of this Contract, the net retained liability, as defined in the
Net Retained Lines Article, and the Ultimate Net Loss of the Company, as
defined in the Ultimate Net Loss Article, and the limit of the Reinsurers'
liability, as determined in the Reinsuring Clause Article, shall be
considered in terms of the Canadian currency for all policies issued by the
Company in Canadian Dollars and in terms of United States Dollars for all
other policies. If a Loss Occurrence, as defined in the Definitions
Article, involves policies issued in both United States and Canadian
Dollars, the net retained liability and the Ultimate Net Loss of the Company
and the limit of the
9 OF 22
PAGE
Reinsurers' liability shall be apportioned between the two currencies in the
proportion that the Ultimate Net Loss in each currency bears to the total
Ultimate Net Loss of the Company. All loss payments hereunder shall be made
in United States or Canadian Dollars in accordance with these provisions.
Payment of the reinsurance premium hereunder at the rate specified in the
Reinsuring Clause Article, shall be made in Canadian Dollars for policies
issued by the Company in Canadian Dollars and in United States Dollars for
all other policies.
ARTICLE 12
----------
TAXES
- - - -----
In consideration of the terms under which this Contract is issued, the
Company agrees not to claim any deduction in respect of the premium hereon
when making Canadian tax returns or tax returns, other than Income or
Profits Tax returns, to any state or territory of the United States of
America or the District of Columbia.
ARTICLE 13
----------
FEDERAL EXCISE TAX
- - - ------------------
(This Article applies only to those Reinsurers, excepting Underwriters at
Lloyd's, London and other Reinsurers exempt from the Federal Excise Tax, who
are domiciled outside the United States of America.)
The Reinsurers have agreed to allow for the purpose of paying the Federal
Excise Tax the percentage specified by United States law of the premium
payable hereon to the extent such premium is subject to Federal Excise Tax.
In the event of any return of premium becoming due hereunder, the Reinsurers
will deduct the percentage specified by United States law from the amount of
the return and the Company or its agent should take steps to recover the tax
from the U.S. Government.
ARTICLE 14
----------
ERRORS AND OMISSIONS
- - - --------------------
Any inadvertent delay, omission or error shall not be held to relieve either
party hereto from any liability which would attach to it hereunder if such
delay, omission or error had not been made, provided such delay, omission or
error is rectified as soon as practicable upon discovery.
10 OF 22
PAGE
ARTICLE 15
----------
ACCESS TO RECORDS
- - - -----------------
The Reinsurers or their designated representatives shall have access at any
reasonable time to all records of the Company which pertain in any way to
this Contract.
ARTICLE 16
----------
INSOLVENCY
- - - ----------
In the event of the insolvency of the Company, this reinsurance shall be
payable directly to the Company, or to its liquidator, receiver, conservator
or statutory successor on the basis of the liability of the Company under
the policies or contracts reinsured without diminution because of the
insolvency of the Company or because the liquidator, receiver, conservator
or statutory successor of the Company has failed to pay all or a portion of
any claim. It is agreed, however, that the liquidator, receiver,
conservator, or statutory successor of the Company shall give written notice
to the Reinsurers of the pendency of a claim against the Company indicating
the policy or bond reinsured, which claim would involve a possible liability
on the part of the Reinsurers within a reasonable time after such claim is
filed in the conservation or liquidation proceeding or in the receivership,
and that during the pendency of such claim, the Reinsurers may investigate
such claim and interpose, at their own expense, in the proceeding where such
claim is to be adjudicated any defense or defenses that they may deem
available to the Company or its liquidator, receiver, conservator or
statutory successor. The expense thus incurred by the Reinsurers shall be
chargeable, subject to the approval of the court, against the Company as
part of the expense of conservation or liquidation to the extent of a pro
rata share of the benefit which may accrue to the Company solely as a result
of the defense undertaken by the Reinsurers.
Where two or more Reinsurers are involved in the same claim and a majority
in interest elect to interpose defense to such claim, the expense shall be
apportioned in accordance with the terms of the reinsurance Contract as
though such expense had been incurred by the Company.
As to all reinsurance made, ceded, renewed or otherwise becoming effective
under this Contract, the reinsurance shall be payable as set forth above by
the Reinsurers to the Company or to its conservator, liquidator or statutory
successor, (except as provided by Section 4118(a)(1)(A) and Section 1114(c)
of the New York Insurance Law or) except (1) where the Contract specifically
provides another payee in the event of the insolvency of the Company, and
(2) where the Reinsurers, with the consent of the direct insured or
insureds, have assumed such policy obligations of the Company as direct
obligations of the Reinsurers to the payees under such policies and in
substitution for the obligations of the Company to such payees. Then, and
in that event only, the Company, with the prior approval by the
Superintendent of Insurance of the State
11 OF 22
PAGE
of New York of the certificate of assumption on New York risks, is entirely
released from its obligation and the Reinsurers pay any loss directly to
payees under such policy.
Should any party hereto be placed in rehabilitation or liquidation or should
a rehabilitator, liquidator, receiver, conservator or other person or entity
of similar capacity be appointed as respects such party, all amounts due any
of the parties hereto whether by reason of premiums, losses or otherwise
under this Contract or any other Contract(s) of reinsurance heretofore or
hereafter entered into between the parties (whether or not any such
Contract(s) be assumed or ceded) shall at all times be subject to the right
of offset at any time and from time to time, and upon the exercise of same,
only the net balance shall be due and payable in accordance with Section
7427 of the Insurance Law of the State of New York to the extent such
statute or any other applicable law, statute or regulation governing such
offset shall apply.
ARTICLE 17
----------
ARBITRATION
- - - -----------
As a precedent to any right of action hereunder, if any dispute shall arise
between the parties to this Contract with reference to the interpretation of
this Contract or their rights with respect to any transaction involved,
whether such dispute arises before or after termination of this Contract,
such dispute, upon the written request of either party, shall be submitted
to three arbitrators, one to be chosen by each party, and the third by the
two so chosen. If either party refuses or neglects to appoint an arbitrator
within thirty days after the receipt of written notice from the other party
requesting it to do so, the requesting party may appoint two arbitrators.
If the two arbitrators fail to agree in the selection of a third arbitrator
within thirty days of their appointment, each of them shall name two, of
whom the other shall decline one and the decision shall be made by drawing
lots. All arbitrators shall be active or retired disinterested executive
officers of insurance or reinsurance companies or Underwriters at Lloyd's,
London not under the control of either party to this Contract.
The arbitrators shall interpret this Contract as an honorable engagement and
not as merely a legal obligation. They are relieved of all judicial
formalities and may abstain from following the strict rules of law. They
shall make their award with a view to effecting the general purpose of this
Contract in a reasonable manner rather than in accordance with a literal
interpretation of the language. Each party shall submit its case to its
arbitrator within thirty days of the appointment of the third arbitrator.
The decision in writing of any two arbitrators, when filed with the parties
hereto, shall be final and binding on both parties. Judgment may be entered
upon the final decision of the arbitrators in any court having jurisdiction.
Each party shall bear the expense of its own arbitrator and shall jointly
and equally bear with the other party the expense of the third arbitrator
and of the
12 OF 22
PAGE
arbitration. Said arbitration shall take place in the city in which the
Company's Head Office is located unless some other place is mutually agreed
upon by the parties to this Contract.
ARTICLE 18
----------
SERVICE OF SUIT
- - - ---------------
(This Article applies only to those Reinsurers not domiciled in the United
States of America, and/or not authorized in any state, territory and/or
district of the United States of America where authorization is required by
insurance regulatory authorities.)
It is agreed that in the event of the failure of a Subscribing Reinsurer to
pay any amount claimed to be due under this Contract, the Subscribing
Reinsurer, at the request of the Company, will submit to the jurisdiction of
any court of competent jurisdiction within the United States of America and
will comply with all requirements necessary to give such court jurisdiction;
and all matters arising hereunder shall be determined in accordance with the
law and practice of such court. Nothing in this Article constitutes or
should be understood to constitute a waiver of the Subscribing Reinsurer's
rights to commence an action in any court of competent jurisdiction in the
United States of America, to remove an action to a United States District
Court, or to seek a transfer of a case to another court as permitted by the
laws of the United States of America or of any state in the United States of
America.
Service of process in such suit may be made upon Mendes and Mount, 750
Seventh Avenue, New York, New York 10019-6879 (hereinafter, "agent for
service of process") and in any suit instituted against a Reinsurer upon
this Contract, that Reinsurer will abide by the final decision of such court
or of any appellate court in the event of an appeal.
The above named are authorized and directed to accept service of process on
behalf of the Reinsurer in any such suit and/or upon the request of the
Company to give a written undertaking to the Company that the agent for
service of process will enter a general appearance on behalf of the
Reinsurer in the event such a suit shall be instituted.
Further, pursuant to any statute of any state, territory or district of the
United States of America which makes provision therefor, the Reinsurers
hereby designate the Superintendent, Commissioner or Director of Insurance
or other officer specified for that purpose in the statute, or his successor
or successors in office, as their true and lawful attorney upon whom may be
served any lawful process in any action, suit or proceeding instituted by or
on behalf of the Company or any beneficiary hereunder arising out of this
Contract and hereby designate the agent for service of process as the firm
to whom the said officer is authorized to mail such process or a true copy
thereof.
13 OF 22
PAGE
ARTICLE 19
----------
LOSS RESERVES
- - - -------------
(This Article applies to those Reinsurers who do not qualify for credit by
any state or any other governmental authority having jurisdiction over the
Company's loss reserves.)
A: Where a Letter of Credit Trust Agreement is used, the following clause
shall apply:
It is agreed that when the Company files with the Insurance Department or
establishes reserves for claims covered hereunder, as required by law,
the Company will forward to the Reinsurers a statement showing the
proportion of such loss reserves which is applicable to the Reinsurers.
The Reinsurers hereby agree to apply for and secure delivery to the
Company of a clean, irrevocable and unconditional Letter of Credit, with
a minimum term of one year, that is issued or confirmed, and presentable
and payable in the United States by any bank or trust company that must
be issued or confirmed by a bank member of the Federal Reserve System,
and is in a format acceptable to the governmental authority having
jurisdiction over the Company's loss reserves in an amount equal to the
Reinsurers' proportion of said loss reserves. Under no circumstances
shall any amount relating to reserves in respect of incurred but not
reported losses be funded in the amount of the Letter of Credit. The
foregoing shall not affect the Company's authority to draw upon the
Letter of Credit to cover all obligations due or which become due to the
Company under this Contract, including losses incurred but not reported,
in the event that a nonrenewal or nonextension notice is received from
the issuing bank.
The Company and the Reinsurers agree that such Letter of Credit will be
subject to the terms of a separate Letter of Credit Trust Agreement, and
that said trust agreement shall be in a form acceptable to the
governmental authority having jurisdiction over the Company's loss
reserves.
The designated bank shall have no responsibility whatsoever in connection
with the propriety of withdrawals made by the Company or the disposition
of funds withdrawn, except to see that withdrawals are made only upon the
order of properly authorized representatives of the Company.
B: Where a Letter of Credit Trust Agreement is not used, the following
clause shall apply:
It is agreed that when the Company files with the Insurance Department or
establishes reserves for claims covered under this Contract, as required
by law, the Company will forward to the Reinsurers a statement showing
the proportion of such loss reserves which is applicable to the
Reinsurers. The Reinsurers hereby agree to apply for and secure delivery
to the Company of a clean, irrevocable and unconditional Letter of
Credit, with a minimum term of one year, that is issued or confirmed, and
presentable and payable in the United States by any bank or trust company
that must be issued or confirmed by a bank member of the Federal Reserve
System, and is in a format acceptable to the governmental authority
14 OF 22
PAGE
having jurisdiction over the Company's loss reserves in an amount equal
to the Reinsurers' proportion of said loss reserves. Under no
circumstances shall any amount relating to reserves in respect of
incurred but not reported losses be funded in the amount of the Letter of
Credit. The foregoing shall not affect the Company's authority to draw
upon the Letter of Credit to cover all obligations due or which become
due to the Company under this Contract, including losses incurred but not
reported, in the event that a nonrenewal or nonextension notice is
received from the issuing bank.
The Company and the Reinsurers agree that the Letter of Credit provided
by the Reinsurers under this provision may be drawn upon at any time,
notwithstanding any other provisions in this Contract, and be utilized by
the Company or any successor by operation of law of the Company,
including, without limitation, any liquidator, rehabilitator, receiver or
conservator of such insurer for the following purposes:
1. to reimburse the Company for the Reinsurers' share of surrenders and
benefits or losses paid by the Company under the terms and provisions
of the policies reinsured under this Contract,
2. to fund an account with the Company in an amount at least equal to the
deduction, for reinsurance ceded, from the Company's liabilities for
policies ceded under this Contract. Such amount shall include, but
not be limited to, amounts for policy reserves, reserves for claims
and losses incurred (including losses incurred but not reported), and
loss adjustment expenses,
3. to pay any other amounts the Company claims are due under this
Contract,
4. to return any amounts drawn down on Letters of Credit in excess of the
actual amounts required for 1. and 2. above, or in case of 3. above,
any amounts which are subsequently determined not to be due.
All of the foregoing should be applied without diminution because of
insolvency on the part of the Company or the Reinsurers.
The designated bank shall have no responsibility whatsoever in connection
with the propriety of withdrawals made by the Company or the disposition
of funds withdrawn, except to see that withdrawals are made only upon the
order of properly authorized representatives of the Company.
ARTICLE 20
----------
INTERMEDIARY
- - - ------------
Guy Carpenter & Company, Inc. is hereby recognized as the Intermediary
negotiating this Contract for all business hereunder. All communications
(including but not limited to notices, statements, premiums, return
premiums, commissions, taxes, losses, loss adjustment expenses,
15 OF 22
PAGE
salvages, and loss settlements) relating thereto shall be transmitted to the
Company or the Reinsurers through Guy Carpenter & Company, Inc., Two World
Trade Center, New York, New York 10048. Payments by the Company to the
Intermediary shall be deemed to constitute payment to the Reinsurers.
Payments by the Reinsurers to the Intermediary shall be deemed to constitute
payment to the Company only to the extent that such payments are actually
received by the Company.
16 OF 22
PAGE
Pools, Associations And Syndicates Exclusion Clause
---------------------------------------------------
SECTION A
- - - ---------
Excluding:
(a) All Business derived directly or indirectly from any Pool,
Association or Syndicate which maintains its own reinsurance
facilities.
(b) Any Pool or Scheme (whether voluntary or mandatory) formed after
March 1, 1968 for the purpose of insuring Property whether on a
country-wide basis or in respect of designated areas. This
exclusion shall not apply to so-called Automobile Insurance Plans
or other Pools formed to provide coverage for Automobile Physical
Damage.
SECTION B
- - - ---------
It is agreed that business written by the Company for the same perils, which
is known at the time to be insured by, or in excess of underlying amounts
placed in the following Pools, Associations or Syndicates, whether by way of
insurance or reinsurance, is excluded hereunder:
Industrial Risk Insurers; Associated Factory Mutuals; Improved Risk
Mutuals.
Any Pool, Association or Syndicate formed for the purpose of writing Oil,
Gas or Petro-Chemical Plants and/or Oil or Gas Drilling Rigs.
United States Aircraft Insurance Group, Canadian Aircraft Insurance
Group, Associated Aviation Underwriters, American Aviation Underwriters.
Section B does not apply:
(a) Where the Total Insured Value over all interests of the risk in
question is less than $300,000,000. Except in relation to business
where Hartford and I.R.I. are jointly insuring a risk, the Total
Insured Value over all interests of the risk in question is less
than $500,000,000.
(b) To interests traditionally underwritten as Inland Marine or Stock
and/or Contents written on a Blanket basis.
(c) To Contingent Business Interruption, except when the Company is
aware that the key location is known at the time to be insured in
any Pool, Association or Syndicate named above, other than as
provided for under Section B (a).
(d) To risks as follows: Offices, Hotels, Apartments, Hospitals,
Educational Establishments, Public Utilities (other than Railroad
Schedules) and Builders Risks on the classes of risks specified in
this subsection (d) only.
17 OF 22
PAGE
SECTION C
- - - ---------
NEVERTHELESS the Reinsurers specifically agree that liability accruing to
the Company from its participation in Residual Market Mechanisms, including
but not limited to,
(1) The following so-called "Coastal Pools"
ALABAMA INSURANCE UNDERWRITING ASSOCIATION
FLORIDA WINDSTORM UNDERWRITING ASSOCIATION
LOUISIANA INSURANCE UNDERWRITING ASSOCIATION
MISSISSIPPI WINDSTORM UNDERWRITING ASSOCIATION
NORTH CAROLINA INSURANCE UNDERWRITING ASSOCIATION
SOUTH CAROLINA WINDSTORM AND HAIL UNDERWRITING ASSOCIATION
TEXAS CATASTROPHE PROPERTY INSURANCE ASSOCIATION
GEORGIA UNDERWRITING ASSOCIATION
VIRGINIA PROPERTY INSURANCE ASSOCIATION
(2) All "Fair Plan" and "Rural Risk Plan" Business, for all perils
otherwise protected hereunder shall not be excluded, except that
this Contract does not include any increase in such liability
resulting from:
(i) The inability of any other participant in such Residual Market
Mechanisms, including but not limited to, "Coastal Pool" and/or
"Fair Plan" and/or "Rural Risk Plan", to meet its liability.
(ii) Any Claim against such Residual Market Mechanisms, including
but not limited to, "Coastal Pool" and/or "Fair Plan", and/or
"Rural Risk Plan" or any participant therein, including the
Company, whether by way of subrogation or otherwise, brought by
or on behalf of any insolvency fund (as defined in the
Insolvency Funds Exclusion Clause incorporated in this
Contract).
- - - ---------------------------------------------------------------------------
NOTES:Wherever used herein the terms:
"Company" shall be understood to mean "Company", "Reinsured",
"Reassured" or whatever other term is used in the
attached reinsurance document to designate the reinsured
company or companies.
"Agreement" shall be understood to mean "Agreement", "Contract",
"Policy" or whatever other term is used to designate the
attached reinsurance document.
"Reinsurers" shall be understood to mean "Reinsurers", "Underwriters"
or whatever other term is used in the attached
reinsurance document to designate the reinsurer or
reinsurers.
18 OF 22
PAGE
Nuclear Incident Exclusion Clause - Physical Damage -
Reinsurance - U.S.A.
-----------------------------------------------------
1. This Reinsurance does not cover any loss or liability accruing to the
Reassured, directly or indirectly, and whether as Insurer or Reinsurer,
from any Pool of Insurers or Reinsurers formed for the purpose of
covering Atomic or Nuclear Energy risks.
2. Without in any way restricting the operation of paragraph (1) of this
clause, this Reinsurance does not cover any loss or liability accruing
to the Reassured, directly or indirectly and whether as Insurer or
Reinsurer, from any insurance against Physical Damage (including business
interruption or consequential loss arising out of such Physical Damage)
to:
I. Nuclear reactor power plants including all auxiliary property on the
site, or
II. Any other nuclear reactor installation, including laboratories
handling radioactive materials in connection with reactor
installations, and "critical facilities" as such, or
III. Installations for fabricating complete fuel elements or for processing
substantial quantities of "special nuclear material", and for
reprocessing, salvaging, chemically separating, storing or disposing
of "spent" nuclear fuel or waste materials, or
IV. Installations other than those listed in paragraph (2) III above using
substantial quantities of radioactive isotopes or other products of
nuclear fission.
3. Without in any way restricting the operations of paragraphs (1) and (2)
hereof, this Reinsurance does not cover any loss or liability by
radioactive contamination accruing to the Reassured, directly or
indirectly, and whether as Insurer or Reinsurer, from any insurance on
property which is on the same site as a nuclear reactor power plant or
other nuclear installation and which normally would be insured therewith
except that this paragraph (3) shall not operate
(a) where Reassured does not have knowledge of such nuclear reactor power
plant or nuclear installation, or
(b) where said insurance contains a provision excluding coverage for
damage to property caused by or resulting from radioactive
contamination, however caused. However on and after 1st January 1960
this sub-paragraph (b) shall only apply provided the said radioactive
contamination exclusion provision has been approved by the
Governmental Authority having jurisdiction thereof.
4. Without in any way restricting the operations of paragraphs (1), (2) and
(3) hereof, this Reinsurance does not cover any loss or liability by
radioactive contamination accruing to the Reassured, directly or
indirectly, and whether as Insurer or Reinsurer, when such radioactive
contamination is a named hazard specifically insured against.
19 OF 22
PAGE
5. It is understood and agreed that this clause shall not extend to risks
using radioactive isotopes in any form where the nuclear exposure is not
considered by the Reassured to be the primary hazard.
6. The term "special nuclear material" shall have the meaning given it in
the Atomic Energy Act of 1954 or by any law amendatory thereof.
7. Reassured to be sole judge of what constitutes:
(a) substantial quantities, and
(b) the extent of installation, plant or site.
12/12/57
NMA 1119
- - - ---------------------------------------------------------------------------
NOTES:Wherever used herein the terms:
"Reassured" shall be understood to mean "Company", "Reinsured",
"Reassured" or whatever other term is used in the
attached reinsurance document to designate the
reinsured company or companies.
"Agreement" shall be understood to mean "Agreement", "Contract",
"Policy" or whatever other term is used to designate
the attached reinsurance document.
"Reinsurers" shall be understood to mean "Reinsurers",
"Underwriters" or whatever other term is used in the
attached reinsurance document to designate the
reinsurer or reinsurers.
20 OF 22
PAGE
Nuclear Incident Exclusion Clause - Physical Damage -
Reinsurance - Canada
-----------------------------------------------------
1. This Contract does not cover any loss or liability accruing to the
Reassured, directly or indirectly, and whether as Insurer or Reinsurer,
from any Pool of Insurers or Reinsurers formed for the purpose of
covering Atomic or Nuclear Energy risks.
2. Without in any way restricting the operation of paragraph 1 of this
clause, this Contract does not cover any loss or liability accruing to
the Reassured, directly or indirectly, and whether as Insurer or
Reinsurer, from any insurance against Physical Damage (including business
interruption or consequential loss arising out of such Physical Damage)
to:
(a) Nuclear reactor power plants including all auxiliary property on the
site, or
(b) Any other nuclear reactor, installation, including laboratories
handling radioactive materials in connection with reactor
installations, and critical facilities as such, or
(c) Installations for fabricating complete fuel elements or for processing
substantial quantities of prescribed substances, and for reprocessing,
salvaging, chemically separating, storing or disposing of spent
nuclear fuel or waste materials, or
(d) Installations other than those listed in (c) above using substantial
quantities of radioactive isotopes or other products of nuclear
fission.
3. Without in any way restricting the operation of paragraphs 1 and 2 of
this clause, this Contract does not cover any loss or liability by
radioactive contamination accruing to the Reassured, directly or
indirectly, and whether as Insurer or Reinsurer from any insurance on
property which is on the same site as a nuclear reactor power plant or
other nuclear installation and which normally would be insured therewith,
except that this paragraph 3 shall not operate.
(a) where the Reassured does not have knowledge of such nuclear reactor
power plant or nuclear installation, or
(b) where the said insurance contains a provision excluding coverage for
damage to property caused by or resulting from radioactive
contamination, however caused.
4. Without in any way restricting the operation of paragraphs 1, 2 and 3 of
this clause, this Contract does not cover any loss or liability by
radioactive contamination accruing to the Reassured, directly or
indirectly, and whether as Insurer or Reinsurer, when such radioactive
contamination is a named hazard specifically insured against.
5. This clause shall not extend to risks using radioactive isotopes in any
form where the nuclear exposure is not considered by the Reassured to be
the primary hazard.
21 OF 22
PAGE
6. The term "prescribed substances" shall have the meaning given it by the
Atomic Energy Control Act or by any law amendatory thereof.
7. The Reassured to be sole judge of what constitutes:
(a) substantial quantities, and
(b) the extent of installation, plant or site.
8. Without in any way restricting the operation of paragraphs 1, 2, 3 and 4
of this clause, this Contract does not cover any loss or liability
accruing to the Reassured, directly or indirectly, and whether as Insurer
or Reinsurer, caused:
(a) by any nuclear incident as defined in the Nuclear Liability Act or any
other nuclear liability act, law or statute, or any law amendatory
thereof or nuclear explosion, except for ensuing loss or damage which
results directly from fire, lightning or explosion of natural, coal or
manufactured gas; or
(b) by contamination by radioactive material.
NOTE: - Without in any way restricting the operation of paragraph 1, 2, 3
and 4 of this clause, paragraph 8 of this clause shall only apply to all
original contracts of the Reassured whether new, renewal or replacement
which become effective on or after December 31, 1992.
NMA 1980
(1/1/93)
- - - ---------------------------------------------------------------------------
NOTES:Wherever used herein the terms:
"Reassured" shall be understood to mean "Company", "Reinsured",
"Reassured" or whatever other term is used in the
attached reinsurance document to designate the
reinsured company or companies.
"Contract" shall be understood to mean "Agreement", "Contract",
"Policy" or whatever other term is used to designate
the attached reinsurance document.
"Reinsurers" shall be understood to mean "Reinsurers",
"Underwriters" or whatever other term is used in the
attached reinsurance document to designate the
reinsurer or reinsurers.
22 OF 22
PAGE
EXHIBIT 10.24
as of November 6, 1998
Selective Insurance Company of America
Selective Insurance Group, Inc.
40 Wantage Avenue
Branchville, New Jersey 07890-1000
Re: Letter Loan Agreement dated June 30, 1997 as heretofore modified
and extended (the "Loan Agreement")
Gentlemen:
This is to confirm our approval of your request for a modification of
the Loan Agreement so that either the Company or the Parent can borrow the
full amount of the Revolving Loan provided for in the Loan Agreement.
Accordingly we have agreed to modify paragraph 2 of the Loan Agreement to
read as follows:
2. Notice and Manner of Borrowings. Subject to the terms and
conditions hereof, and upon request by either Borrower, the Bank agrees to
make revolving loans to such Borrower provided for herein (each, a
"Revolving Loan") not to exceed $25,000,000 in aggregate of all outstanding
Revolving Loans to both Borrowers at any time.
We have also agreed to modify the Loan Agreement to add a subparagraph
9(h) as follows:
(h) To the best of Borrowers information and belief Borrower
understands the advent of the year 2000 shall not materially adversely
disrupt the Borrower's processing operations or the performance of its
information technology. Without limiting the generality of the foregoing
(i) the computer based hardware and software owned, leased and licensed by
Borrower ("Borrower's computer based systems") are being designed to or
modified to or are designed to, or have been modified to be, used prior to,
during, and after calendar year 2000 A.D. and Borrower expects such
Borrower's computer based systems will operate during each such time period
without error relating to date data, specifically including any error
relating to, the conduct of, date data which represents or references
different centuries or more than one century, and (ii) Borrower's computer
based systems will not abnormally end or provide invalid or incorrect
results as a result of date data, and (iii) Borrower expects Borrower's
computer based systems are being designed or modified or have been designed
or modified to ensure year 2000 A.D. compatibility, including date data,
century recognition, leap year,calculations which accommodate same century
and multi-century formula and date values, and date data interface values
that reflect the century.
Our approval shall not constitute a waiver of any Events of Default, if
any so exist, or any future violation of any provisions of the Loan
Agreement or any other Loan Documents.
Capitalized terms not defined herein but defined in the Loan Agreement
shall have the same meaning ascribed to such terms in the Loan Agreement.
Your execution shall also act as your representation that the execution of
this letter agreement has been authorized by all required corporate action,
that this letter agreement constitutes the valid and binding obligation of
the Borrower, is enforceable in accordance with its terms, that no Event of
Default exists and that no material adverse change of the Borrower has
occurred.
PAGE
Except as herein set forth, the Loan Agreement and all other Loan
Documents shall remain in full force and effect. Our agreement as aforesaid
is subject to your written agreement with the terms hereof by signing and
returning a copy hereof where so indicated below, along with the enclosed
Replacement Note, where so indicated below.
SUMMIT BANK
By:/s/ Richard P. Neale
-----------------------------
Name: Richard P. Neale
Title: Vice President and
Manager
Agreed to:
SELECTIVE INSURANCE COMPANY SELECTIVE INSURANCE COMPANY
OF AMERICA OF AMERICA
By:/s/ David B. Merclean By:/s/ Robert P. Rank
----------------------------- ------------------------------
Name: David B. Merclean Name: Robert P. Rank
Title: Senior Vice President Title: Senior Vice President
and Chief Financial and Chief Investment
Officer Officer
SELECTIVE INSURANCE GROUP, INC. SELECTIVE INSURANCE GROUP, INC.
By:/s/ David B. Merclean By:/s/ Robert P. Rank
----------------------------- ------------------------------
Name: David B. Merclean Name: Robert P. Rank
Title: Senior Vice President Title: Senior Vice President
and Chief Financial and Chief Investment
Officer Officer
PAGE
REPLACEMENT
REVOLVING CREDIT MASTER
PROMISSORY NOTE
$25,000,000.00 CRANFORD, NEW JERSEY
NOVEMBER 6, 1998
FOR VALUE RECEIVED, the undersigned SELECTIVE INSURANCE GROUP, INC.
(the "Borrower") promises to pay to the order of SUMMIT BANK (herein called
"Bank") at 750 Walnut Street, Cranford, NJ 07016, such sum up to Twenty
Five Million and 00/100 Dollars ($25,000,000.00), together with interest
as hereinafter provided, as may be outstanding on loans by Bank to
Borrower under a letter agreement referred to below. The principal amount
owing hereunder shall be paid to the Bank on May 31, 1999 (the "Maturity
Date") or as may otherwise be provided for in the letter agreement.
Interest on portions of the daily unpaid principal amount from time to
time outstanding hereunder shall be payable monthly on the first day of each
month during the term hereof and on the Maturity Date, at a fluctuating
interest rate per annum of the Adjusted Libor Rate plus twenty-eight (28)
basis points if, in accordance with the terms of the Loan Agreement,
interest on such portion is calculated based on the Adjusted Libor Rate.
This Note is issued in accordance with that certain letter agreement
dated June 30, 1997 between Borrower, Selective Insurance Company of America
and Bank (said letter agreement as amended or modified from time to time
the "Letter Agreement"). Any capitalized term used herein without
definition shall have the definition contained in the Loan Agreement. All
the terms and conditions of the Letter Agreement are incorporated herein as
though fully set forth and the Borrower acknowledges the reading and
execution of said Letter Agreement.
In addition to all remedies provided by law upon default on payment of
this Note or any installment hereof, or upon an Event of Default under the
terms of the Letter Agreement or of any obligation heretofore or hereafter
incurred by the Borrower to Bank, Bank may, at its option:
(1) Declare this note and all other loans and Obligations owing Bank
from the Borrower to be forthwith due and payable;
(2) Collect interest on the principal balance owing hereon at a rate
of two (2%) in excess of the rate provided for above, and if this Note is
referred to an attorney for collection, collect reasonable attorneys' fees;
(3) Set off the amount owing hereunder against any money owed by Bank
in any capacity to the Borrower, whether due or not, and Bank shall be
deemed to have exercised such right of set off, and to have made a charge
against any such money immediately upon the occurence of any default, even
though the actual book entries may be made at some time subsequent thereto;
and
PAGE
-1-
(4) Exercise any and all remedies provided for in the Letter Agreement
or otherwise available by applicable law.
Bank shall not, by any act, delay, omission or otherwise be deemed to
have waived any of its rights or remedies hereunder and no waiver by Bank of
its rights or remedies hereunder shall be valid against Bank unless in
writing, signed by a duly authorized officer of Bank, and then only to the
extent therein set forth. The waiver by Bank of any right or remedy
hereunder upon any occasion shall not be construed as a bar to any right or
remedy which it would otherwise have had on any future occasion.
If any payment required hereunder is not paid within 15 days of the
date due, the Borrower shall pay to Bank a late fee of 5% of the past due
amount.
The Borrower shall have the right to make prepayment of this Note, in
whole or in part, without premium or penalty. The Borrower hereby waives
presentment for payment, protest and notice of protest for nonpayment of
this Note.
This note replaces that certain Revolving Credit Master Promissory Note
of Borrower to Bank in the principal sum of $20,000,000.00 dated June 30,
1997 and is not intended to be a novation of said note or the loans
evidenced thereby.
BORROWER WAIVES TRIAL BY JURY IN ANY ACTION UNDER OR RELATING TO THIS
NOTE AND THE LOANS EVIDENCED HEREBY.
SELECTIVE INSURANCE GROUP, INC.
By:/s/ David B. Merclean
-----------------------------
Name: David B. Merclean
Title: Senior Vice President
and Chief Financial
Officer
SELECTIVE INSURANCE GROUP, INC.
By:/s/ Robert P. Rank
-----------------------------
Name: Robert P. Rank
Title: Senior Vice President
and Chief Investment
Officer
PAGE
-2-
PAGE
EXHIBIT 11
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
Years ended December 31,1998, 1997 and 1996
(in thousands, except per Income Shares Per Share
share amounts) (Numerator) (Denominator) Amount
- - - ---------------------------------------------------------------------
1998
- - - ----
Basic EPS
Net Income available
to common stockholders $ 53,570 28,480 $ 1.88
====
Effect of Dilutive Securities
Restricted stock - 534
8.75% convertible
subordinated debentures 375 926
Stock Options (989) 472
------ ------
Diluted EPS
Income available to common
stockholders + assumed
conversions $ 52,956 30,412 $ 1.74
====== ====== ====
- - - ------------------------------------------------------------------------
1997
- - - ----
Basic EPS
Net Income available
to common stockholders $ 69,608 28,909 $ 2.41
====
Effect of Dilutive Securities
Restricted stock - 404
8.75% convertible
subordinated debentures 396 971
Stock Options 263 641
------ ------
Diluted EPS
Income available to common
stockholders + assumed
conversions $ 70,267 30,925 $ 2.27
====== ====== ====
- - - -------------------------------------------------------------------------
1996
- - - ----
Basic EPS
Net Income available
to common stockholders $ 55,551 28,860 $ 1.92
====
Effect of Dilutive Securities
Restricted stock - 224
8.75% convertible
subordinated debentures 413 1,035
Stock Options (339) 273
------ ------
Diluted EPS
Income available to common
stockholders + assumed
conversions $ 55,625 30,360 $ 1.83
====== ====== ====
PAGE
EXHIBIT 13
ANNUAL REPORT PAGES 14 THRU 47 and 49
INVESTMENTS
- - - -----------
PIE CHART - reflecting the following relationships
- - - ------------------------------------------------------------
Classification of Investments (in millions)
Dollar Percentage
------ ----------
Taxable debt securities $ 641 36%
Tax-advantaged debt securities 793 45%
Equity securities 270 15%
Short-term investments 51 3%
Other 16 1%
------ ---
Total Investments $1,771 100%
- - - ------------------------------------------------------------
CHART
- - - ---------------------------------------
Debt Securities
Quality Analysis
(Moody's Rating/Standard & Poor' Rating)
Rating Percent
------ -------
Aaa/AAA 42%
Aa/AA 29
A/A 23
Baa/BBB 6
Other <1
-----
100.0%
- - - ----------------------------------------
Investments and investment policy
- - - ---------------------------------
Investment income is an important source of revenue and the return on
its investment portfolio has a material effect on net income. The Company's
investment policy is conservative with the long-term objective of maximizing
after-tax yield while providing liquidity and preserving assets and
stockholders' equity. The current investment mix is 81% debt securities, 15%
equity securities and 4% short-term and other investments.
Investments are made in compliance with regulatory requirements and with
careful attention to present and prospective Federal income tax positions.
Our investment policy allows up to 5%, as measured at the time of purchase,
of debt securities to be below investment grade. High credit quality has
always been a cornerstone of our investment strategy. This high quality
strategy is evident by the fact that over 99% of the debt security portfolio
is of investment grade. Further emphasizing this superior quality is the
fact that 42% of the debt securities have a Moody's rating of Aaa (or its
Standard & Poor's equivalent), which is considered to be the highest credit
quality. Though not the sole consideration, investment commitments are made
with considerable emphasis on limiting credit risk.
Liquidity requirements are emphasized in response to an unpredictable
underwriting environment and the need to minimize the exposure to
catastrophic
BAR GRAPH
- - - ----------------------
Debt Securities
Maturities
($ in millions)
Years $ Amount
- - - ----- --------
1 $128
2 $139
3 $159
4 $172
5 $173
6 $138
7 $198
8 $ 89
9 $102
10 $ 40
11 $ 14
12 $ 11
13 $ 10
14 $ 27
15 $ 23
15+ $ 11
Total Carrying Value: $1,434
Average Life: 5.0 Years
- - - ---------------------------
Page 14
PAGE
events. To provide liquidity, while maintaining consistent
performance, debt securities are distributed so that some issues are always
approaching maturity, thereby providing a source of predictable cash flow.
At year-end 1998, 75% of our debt securities were classified as
available-for-sale, which provides greater portfolio management flexibility.
To reduce the sensitivity to interest rate fluctuations, the Company
invests its debt portfolio primarily in intermediate-term debt securities.
At year-end 1998, 93% of the portfolio was ten years or less to maturity,
and the average life was 5.0 years.
Net investment income earned, after taxes, increased in 1998 to $77
million compared to $76 million in 1997. Net investment income earned before
taxes declined in 1998 to $99 million, from $101 million in 1997. The level
of investment income was negatively impacted by: (i) lower cash provided by
operating activities in 1998 and 1997; (ii) lower yields on the reinvested
proceeds from maturities and redemptions of $270 million during 1998 and
1997; and (iii) the use of cash to purchase common shares of the Company
(totaling $38 million in 1998). Through January 1999, we have purchased 2.8
million shares of our stock through a buy-back program, which we believe is
an efficient use of excess capital and adds shareholder value. The interest
rates currently available in the marketplace have been lower than the
average yield on the Company's debt securities portfolio. Therefore, the
growth of investment income is expected to be highly dependent on increases
in investment assets, resulting from the addition of new cash generated from
operations.
During 1998, the equity portfolio experienced an increase in net
unrealized gains, before-tax, of $33 million, which significantly
contributed to overall surplus growth. At year-end 1998, the equity
portfolio represented 15% of total investments.
We will continue to follow the investment philosophy that has
historically proven successful. The strategy will be to continue to purchase
debt securities in sectors that represent the most attractive relative value
considering our Federal income tax position and, over time, increase equity
holdings, when warranted.
Managing investment risk by adhering to these strategies is intended to
protect the interests of the Company's stockholders, as well as those of its
policyholders and, at the same time, enhance our financial strength and
underwriting capacity.
BAR GRAPH
- - - ---------------------------------------
Total Assets
(in billions)
$1.9 $2.1 $2.2 $2.3 $2.4
1994 1995 1996 1997 1998
- - - ---------------------------------------
BAR GRAPH
- - - ---------------------------------------
Investment Assets
(in billions)
$1.3 $1.6 $1.6 $1.7 $1.8
1994 1995 1996 1997 1998
- - - ---------------------------------------
BAR GRAPH
- - - ---------------------------------------------------------
Net Investment Income Earned
($ in millions)
Year 1994 1995 1996 1997 1998
Dollar Amount $81 $92 $97 $101 $99
After-tax yield 5.1 5.0% 4.7% 4.6% 4.4%
Before-tax yield 6.5% 6.4% 6.1% 6.0% 5.7%
- - - ---------------------------------------------------------
Page 15
PAGE
Ten-Year Financial Highlights
- - - ------------------------------
(number of weighted average shares 1998 1997 1996 1995
and dollars in thousands, except per
share amounts)
Net premiums written 1,2 $ 748,873 717,618 692,239 757,021
Net premiums earned 2 722,992 676,268 694,947 742,817
Net investment income earned 3 99,196 100,530 96,952 91,640
Net realized gains (losses) 3 (2,139) 6,021 2,786 900
Fee-for-service revenue 12 14,100 8,236 6,378 4,529
Total revenues 837,329 794,183 804,780 843,100
GAAP Underwriting loss 4,5,6,7,12 (24,986) (3,022) (21,982) (17,468)
Fee-for-service income 12 2,217 765 1,969 856
Operating income 8 54,961 65,694 53,740 52,457
Net income 8,9 53,570 69,608 55,551 53,042
Comprehensive income 78,842 105,931 51,539 105,035
Total assets 2,432,168 2,306,191 2,189,737 2,119,804
Debt outstanding 88,791 96,559 103,769 111,292
Stockholders' equity 607,583 565,316 474,299 436,749
Statutory premiums to surplus ratio 10 1.5:1 1.5:1 1.7:1 2.1:1
Statutory combined ratio 10,12 103.2% 100.1 102.9 101.6
GAAP combined ratio 12 103.6% 100.3 102.9 102.3
Yield on investment, before-tax 5.7% 6.0 6.1 6.4
Debt to capitalization 13.2% 14.6 18.0 20.3
Return on average equity 9.1% 13.4 12.2 13.9
Per share data:
Operating income:
Basic $ 1.93 2.27 1.86 1.84
Diluted 1.79 2.15 1.77 1.79
Net income:
Basic 11 1.88 2.41 1.92 1.86
Diluted 11 1.74 2.27 1.83 1.81
Dividends to stockholders 0.56 0.56 0.56 0.56
Stockholders' equity 21.30 19.32 16.31 15.17
Price range of common stock:
High 29 1/4 28 3/8 19 3/8 19 3/16
Low 16 11/16 18 5/16 15 1/2 12 1/4
Close 20 1/8 27 19 17 3/4
Other:
Number of weighted average shares:
Basic 28,480 28,909 28,860 28,481
Diluted 30,412 30,925 30,360 29,846
Page 16
- - - ----------------------------------------------------------------------------
PAGE
Ten-Year Financial Highlights
- - - ------------------------------
(number of weighted average shares 1994 1993 1992 1991
and dollars in thousands, except per
share amounts)
Net premiums written 1,2 $ 697,941 607,462 560,360 500,283
Net premiums earned 2 680,270 594,919 539,792 503,726
Net investment income earned 3 80,657 77,326 73,516 68,501
Net realized gains 3 4,230 4,528 3,943 3,580
Fee-for-service revenue 12 3,482 2,912 2,519 2,273
Total revenues 771,682 682,510 622,084 580,193
GAAP underwriting loss 4,5,6,7,12 (35,119) (54,530) (42,127) (38,310)
Fee-for-service income 12 591 545 453 243
Operating income 8 35,526 19,735 24,845 24,429
Net income 8,9 38,276 22,678 53,915 27,293
Comprehensive income 1,078 21,380 53,520 33,245
Total assets 1,870,718 1,725,736 1,639,033 1,321,120
Debt outstanding 111,378 61,291 63,681 14,470
Stockholders' equity 329,164 322,807 311,705 269,998
Statutory premiums to surplus ratio 10 2.4:1 2.6:1 2.5:1 2.5:1
Statutory combined ratio 10,12 104.3% 108.5 107.9 107.6
GAAP combined ratio 12 105.1% 109.1 107.7 107.6
Yield on investment, before-tax 6.5% 6.8 7.2 7.6
Debt to capitalization 25.3% 16.0 17.0 5.1
Return on average equity 11.7% 7.1 18.5 10.5
Per share data:
Operating income:
Basic $ 1.28 0.73 0.93 0.93
Diluted 1.20 0.71 0.92 0.91
Net income:
Basic 11 1.38 0.83 2.02 1.03
Diluted 11 1.29 0.81 1.93 1.01
Dividends to stockholders 0.56 0.56 0.55 0.52
Stockholders' equity 11.62 11.74 11.60 10.17
Price range of common stock:
High 15 3/8 15 1/2 11 3/4 9
Low 11 1/2 10 1/4 8 6 1/2
Close 12 5/8 15 1/4 11 8 3/8
Other:
Number of weighted average shares:
Basic 27,759 27,271 26,690 26,388
Diluted 29,356 29,133 28,869 28,502
- - - -----------------------------------------------------------------------------
Ten-Year Financial Highlights
- - - ------------------------------
(number of weighted average shares 1990 1989
and dollars in thousands, except per
share amounts)
Net premiums written 1,2 $ 482,735 462,615
Net premiums earned 2 470,681 449,950
Net investment income earned 3 64,508 59,831
Net realized gains 3 9,888 2,557
Fee-for-service revenue 12 2,059 2,154
Total revenues 549,228 518,215
GAAP underwriting loss 4,5,6,7,12 (38,439) (14,873)
Fee-for-service income (loss) 12 (5) 137
Operating income 8 24,491 38,520
Net income 8,9 32,402 40,566
Comprehensive income 22,837 48,789
Total assets 1,240,916 1,190,183
Debt outstanding 15,173 35,755
Stockholders' equity 248,274 230,434
Statutory premiums to surplus ratio 10 2.7:1 2.6:1
Statutory combined ratio 10,12 108.0% 103.4
GAAP combined ratio 12 108.2% 103.3
Yield on investment, before-tax 7.5% 7.5
Debt to capitalization 5.8% 13.4
Return on average equity 13.5% 18.3
Per share data:
Operating income:
Basic $ .94 1.45
Diluted .88 1.37
Net income:
Basic 11 1.25 1.53
Diluted 11 1.16 1.43
Dividends to stockholders .51 .46
Stockholders' equity 9.46 9.18
Price range of common stock:
High 10 1/8 10
Low 6 1/4 7 1/4
Close 6 5/8 9 1/2
Other:
Number of weighted average shares:
Basic 25,942 26,580
Diluted 28,222 29,806
1. Net premiums written in 1997 were increased by approximately
$30 million due to a conversion of New Jersey personal automobile
policies from six-month to annual terms. This conversion had no effect
on net premiums earned. See Financial Review for a more detailed
discussion.
2. Net premiums written and earned for 1993 were reduced by $41 million
and $26 million, respectively, for premiums ceded to the New Jersey
Homeowners Quota Share Reinsurance Program and increased by $42 million and
$39 million, respectively, from business written by Niagara Exchange
Corporation. Net premiums written and earned for 1991 were increased by
$11 million due to an adjustment from the New Jersey Unsatisfied Claim and
Judgment Fund ("UCJF"). Net premiums written and earned for 1995 were
increased by $10 million reflecting a lower UCJF assessment - See Financial
Review for a more detailed discussion.
3. Net investment income and net realized gains are presented before
the effects of Federal income taxes.
4. The 1993 underwriting loss included a $9 million restructuring
charge for the cost of the early retirement program, along with severance
benefits provided to terminated employees.
5. The 1996, 1995, 1994, 1993, 1992, 1991 and 1990 underwriting losses
included taxes and assessments imposed as a result of the Fair Automobile
Insurance Reform Act adopted in New Jersey in the amounts of $2 million,
$7 million, $7 million, $6 million, $13 million, $12 million and
$10 million, respectively.
6. The 1993, 1992 and 1991 underwriting losses included assessments from
the Market Transition Facility of New Jersey in the amount of $12 million,
$8 million and $11 million, respectively.
7. The 1991 underwriting loss included a $10 million increase in the
involuntary loss from business assigned to the Company from the National
Workers' Compensation Reinsurance Pool.
8. Operating income and net income for 1991, 1990 and 1989 included
permanent tax benefits of $1 million, $3 million and $1 million
respectively, resulting from the fresh start deductions for loss reserve
discounting under the Tax Reform Act of 1986 and salvage and subrogation
recoverable under the Budget Reconciliation Act of 1990.
9. Net income for 1992 increased by $26 million due to the adoption of
two accounting policies, Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("FASB 109"), and a change in the method of
deferring policy acquisition costs. FASB 109 increased net income by $20
million ($0.76 per basic share and $0.70 per diluted share) and the change
in deferred policy acquisition costs increased net income by $6 million
($.23 per basic share and $.21 per diluted share).
10. Calculated on the basis of industry standards (statutory basis)
prescribed by the National Association of Insurance Commissioners, which
standards differ from generally accepted accounting principles.
11. Certain amounts in prior years have been adjusted to conform with the
1998 presentation and the Company's 2 for 1 common stock split declared
October 28, 1997 and effective December 1,1997.
12. Flood business is included in statutory underwriting results in
accordance with prescribed statutory accounting rules. On a GAAP basis only,
flood business has been reclassified from underwriting results to Fee-for-
service. Prior years have been restated to reflect this reclass.
Page 17
PAGE
FINANCIAL REVIEW
- - - ----------------
Results of operations
- - - ---------------------
Comparison of 1998 to 1997
- - - --------------------------
Financial Highlights
(dollars in thousands)
- - - ---------------------- Annual
Increase
1998 1997 (Decrease)
---- ---- ----------
Net premiums written $ 748,873 717,618 4 %
Net premiums written per employee 1 $ 455 454 - %
Operating income $ 54,961 65,694 (16)%
Statutory combined ratio 103.2% 100.1 3.1 points
Return on average equity 9.1% 13.4 (4.3)points
1 Excludes employee of Alta, PDA and SelecTech
Revenues
Net premiums written for 1998 increased by 4% to $749 million. The
conversion of New Jersey personal automobile policies from six-month to
annual terms (the "Conversion") increased 1997 net premiums written by
approximately $30 million for renewal business. Excluding the effects of the
Conversion, and a $4 million reinsurance premium buyout adjustment in 1998,
net premiums written for 1998 increased about 8%. The increase in net
premiums written occurred across all Strategic Business Units ("SBUs") with
the exception of the commercial lines Community Services and Organizations
SBU (formerly the Public Entities SBU). The growth in net premiums written
resulted in a 7% increase in 1998 net premiums earned.
During 1998, the Company generated approximately $204 million of net
premiums written attributable to new business, after deducting reinsurance
costs of approximately $9 million, a 31% increase over 1997. The new
business growth was partially attributable to an increase in the number of
field underwriters, called agency management specialists ("AMSs"), to 83 at
the end of 1998, compared to approximately 60 one year earlier. The AMS is
the key contact between the agent and Selective and focuses on the business
and expertise of the agencies. New business is carefully reviewed by
regional managers and the SBUs to ensure that it falls within our
underwriting standards.
The commercial SBUs' net premiums written increased 11%, or $52 million.
This increase included $167 million of net premiums written attributable to
new business, after deducting reinsurance costs of approximately $7 million,
generated principally by the increase in the number of AMSs, the Company's
Midwestern expansion, and the Company's strengthening of agency
relationships. The increases in net premiums written were partially offset
by: i) a reduction in existing business (renewal retention) attributable to
a highly competitive commercial lines marketplace as well as non-renewals
resulting from the company's regular review of its business (approximately
$102 million); ii) workers' compensation rate decreases and premium credits,
which lowered net premiums written by approximately $20 million; and iii)
lower premium volume of approximately $10 million due to agency termina-
tions.
The Personal Lines SBU 1998 net premiums written, excluding the effect
of the Conversion, increased 4%, or $9 million. This increase is primarily
due to a reduction in the amount of premium ceded under the New Jersey
Homeowners Quota Share Reinsurance Program, which added $12 million in
homeowners net premiums written ($4 million of which is due to a one-time
buyout of prior year ceded reinsurance unearned premium reserves). In
addition, the Personal Lines SBU introduced enhanced products in some of the
Company's territories in order to expand its personal insurance segment.
The fee-for-service business segment generated $14 million of net
revenue, an increase of 71% over 1997. The strategy underlying this segment
is to use our core competencies to generate fee sources that do not share
the risk bearing nature of our insurance underwriting activities. In 1998,
this segment consisted of Selective Technical Administrative Resources, Inc.
("SelecTech"), Selective's flood program, Alta Services LLC ("Alta"), and
PDA Software Services, Inc ("PDA"). The flood program is pursuant to the
National Flood Insurance Program, and the Federal Government assumes all
underwriting risk. The flood program is currently being expanded to all 50
states and will eventually be made available to agents through an
Internet-based system. The increasing pres-
Bar Graph
- - - -----------------------------------------
Net Premiums Written
(in millions)
$698 $757 $692 $718 $749
1994 1995 1996 1997 1998
- - - ------------------------------------------
Page 18
PAGE
ence of alternative market mechanisms, including self-insurance, presents
opportunities for the Company to sell unbundled insurance services, and
SelecTech provides these services. The services include, but are not limited
to, claims administration, loss control, risk management, and medical cost
containment. In anticipation of the continued growth of managed care medical
cost containment and other medical claims services, the Company acquired the
assets of Alta in the fourth quarter of 1997. Alta is a managed care company
that does not bear underwriting risks and provides a wide range of medical
claims handling services to the insurance industry. Alta enables the Company
to give customers access to quality medical and rehabilitation services,
while enhancing claims management through in-house managed care expertise.
In December 1998, the Company acquired PDA, a company engaged both in
third-party data processing and custom software development. This
acquisition is expected to provide the Company with the opportunity to
leverage its technology expenditures by providing the ability to sell or
lease on a processing fee basis the systems technology created by the
Company.
Net investment income earned for 1998, before tax, decreased 1%, or $1
million. The level of investment income was adversely impacted by lower
amounts of cash generated by operations, lower fixed income yields on funds
made available for re-investment from redemptions and maturities of higher
yielding securities ($270 million for the two-year period ended December 31,
1998), and $38 million of funds used in 1998 to purchase 1.8 million shares
of Company stock. On July 28, 1998, the Board authorized the Company to
repurchase an additional two million shares, bringing the overall repurchase
authorization to four million shares. The determination to make such
purchases is made based on market conditions, available cash and alternative
investment opportunities. As of February 2, 1999, the Parent had purchased a
total of 2.8 million shares under the current program at a cost of $59
million. The Company believes such repurchases enhance shareholder value and
are an efficient use of capital.
The Company's after-tax investment yield was 4.4% in 1998, down slightly
from 4.6% in 1997. If yields on fixed income securities continue to decline
or remain at their current levels, investment income will continue to be
adversely affected as higher yielding fixed income securities in the
Company's portfolio are redeemed or mature, and any growth of investment
income will be dependent on new cash generated from operations.
Expenses
The ratio of losses and loss expenses incurred to net premiums earned
increased 2.1 points to 70.3%. The increase in the loss and loss expense
ratio was primarily attributable to severe fire and weather-related
catastrophe claims. During 1998, the Company incurred $10 million of net
losses from catastrophe claims, which amounted to 1.4 points of the loss and
loss expense ratio for 1998, as compared to $2 million, or 0.3 points for
1997. The 1998 catastrophe losses primarily impacted the results of the
Personal Lines, Mercantile and Service, and Habitational and Recreational
SBUs.
The 1998 loss and loss expense ratio for the commercial SBUs was 69.8%,
an increase of 3.0 points over 1997's ratio of 66.8%. The loss and loss
expense ratios for 1998 and 1997, after removing the effect of
weather-related catastrophe losses, were 68.1% and 66.5%, respectively, a
1.6 point increase. This deterioration occurred mostly in the property and
workers' compensation lines of insurance within the Contractors and
Manufacturing and Processing SBUs.
The workers' compensation line of insurance loss and loss expense ratio
for 1998 was 78.5%. The deterioration of 14.1 points was due principally to
continued competitive pricing conditions and state mandated rate rollbacks.
Initiatives employed to improve this line's performance include: (i) managed
care; (ii) programs which permit injured employees to return to work earlier
in alternative job categories; (iii) fee schedules which limit the amount
that health care providers can charge; and (iv) loss control programs which
promote workplace safety.
The 1998 loss and loss expense ratio for the Personal Lines SBU was
71.4%, an increase of 0.1 point over the 1997 ratio of 71.3%. Excluding
weather-related catastrophe losses, the ratio was fairly stable at 70.7% in
1998 and 71.0% in 1997. The homeowners line of insurance improved due to
lower reinsurance costs and fewer homeowner claims reported. In addi-
Bar Graph
- - - --------------------------------------
Statutory Loss and Loss Expense Ratio
71.7% 71.2% 71.3% 68.2% 70.3%
1994 1995 1996 1997 1998
- - - --------------------------------------
Page 19
PAGE
tion, the New Jersey personal automobile loss and loss expense ratio
increased to 74.7% in 1998 from 73.1% in 1997, due to higher frequency.
There is an excess profits law in New Jersey, which sets a maximum
profit level on personal automobile insurance. Under New Jersey regulations,
an insurer's excess profits earned on direct insurance written in New Jersey
on private passenger automobiles, as determined pursuant to an actuarial
formula set forth in applicable regulations ("NJ Excess Profits"), are
subject to refund or credit to policyholders. A NJ Excess Profits calcula-
tion must be made by an insurer for this purpose and submitted to the New
Jersey Department of Banking and Insurance each year for the three-year
period including the year for which the calculation is done and the two
calendar years immediately preceding such year. If the Company's current
profitability continues in its New Jersey personal automobile business, the
Company may incur an excess profit premium refund obligation. The Company
has considered the potential effect of such excess profits in establishing
its reserves.
In March 1999, a new personal automobile insurance law in New Jersey
becomes effective which will provide for a statewide average premium
reduction of 15%. As a result, the Company anticipates that annual premiums
in this line may be reduced by approximately $24 million. The financial
impact of the new law will be partially offset by the Company's rate
adequacy in this line and potentially significant cost reductions through
the use of medical protocols, anti-fraud provisions and other procedures
provided for in the law. Taking into account variable costs and taxes,
annual earnings may be reduced by approximately $3 million. The Company
originally anticipated that the law, passed in May 1998, would result in an
overall reduction in premiums of $18 million, or 11.5%, because the mandated
rate reductions on personal auto coverages were expected to be lower.
However, due to action by the New Jersey legislature in March 1999, we
believe premiums may be reduced by approximately 15%.
Policy acquisition costs expressed as a percentage of net premiums
earned for 1998 increased 1.1 points to 32.6%. The increase reflects record
profit sharing commission and special incentives for agents, which increased
the ratio by 0.6 points. The 1998 total dollar amount of labor costs
(excluding employee incentive compensation awards) and other operating costs
rose moderately (0.2 points) in relation to 1998 net premiums earned.
Productivity in 1998, as measured by net premiums written per employee,
was approximately $455,000, up from $435,000 for 1997 (the average was
$454,000 in 1997 before adjustment for the Conversion's $30 million renewal
premium). The increase is due primarily to growth in net premiums written in
1998.
Total Federal income tax expense in 1998 was $10 million (an effective
tax rate of 15.9%), an $11 million decrease compared to $21 million in 1997
(an effective tax rate of 23.5%). The effective tax rate for 1998 was lower
than 1997 primarily due to the tax benefits from the higher level of 1998
underwriting losses due, in part, to the weather-related catastrophe claims.
The Company's effective tax rate differs from the Federal corporate rate of
35% primarily as a result of tax-exempt investment income.
Income
1998, by a slight margin, was the second strongest year in the history
of the Company. Operating income (income excluding net realized gains, net
of tax effect) reached $55 million in 1998, or $1.79 per diluted share,
compared to $66 million, or $2.15 per diluted share, in 1997. Net income for
1998 was impacted by realized investment losses (net of tax effect) for 1998
of $1 million, or $.05 per diluted share, incurred as part of the Company's
tax planning strategy. Net income for 1998 decreased 23% to $54 million, or
$1.74 per diluted share, from $70 million, or $2.27 per diluted share, in
1997. Operating and net income for 1998 included weather-related catastrophe
losses, net of tax, of $7 million, or $0.22 per diluted share.
Bar Graph
- - - --------------------------------------
Statutory Underwriting Expense Ratio
31.6% 29.4% 30.8% 31.2% 32.2%
1994 1995 1996 1997 1998
- - - --------------------------------------
Page 20
PAGE
Results of operations
- - - ---------------------
Comparison of 1997 to 1996
- - - --------------------------
- - - -----------------------------------------------------------------------------
Financial Highlights
(dollars in thousands)
- - - ---------------------- Annual
Increase
1997 1996 (Decrease)
--------------------------------------
Net premiums written $ 717,618 692,239 4 %
Net premiums written per employee1$ 454 433 5 %
Operating income $ 65,694 53,740 22 %
Statutory combined ratio 100.1% 102.9 (2.8)points
Return on average equity 13.4% 12.2 1.2 points
1 Excludes employee of Alta, PDA and SelecTech
Revenues
Net premiums written for 1997 increased by 4%, or $25 million, compared
to 1996. The Conversion increased 1997 net premiums written by approximately
$36 million ($30 million for renewal business, and $6 million for new
business), while 1996 net premiums written included a one-time adjustment of
$8 million reflecting the Company's buy out of certain reinsurance
arrangements. Excluding the effects of the Conversion and the Reinsurance
Buy Out, net premiums written for 1997 decreased by about $3 million. The
decline in net premiums written occurred primarily due to decreases in the
Personal Lines and Public Entities SBUs. The lower levels of 1997 and 1996
net premiums written (excluding the Conversion, which had no effect on net
premiums earned) resulted in a modest decrease in 1997 total net premiums
earned of 3%, or $19 million, compared to 1996.
During 1997, the Company generated approximately $156 million of net
premiums written attributable to new business, after deducting reinsurance
costs of $7 million, a 55% increase over 1996. Most of the new business
growth was attributable to the Company's field underwriting activities and
an increase in the number of AMSs to approximately 60 by year-end 1997.
Excluding the Reinsurance Buy Out, the commercial SBUs' net premiums
written increased 1%, or $5 million, compared to 1996. This increase
included $132 million of net premiums written attributable to new business,
after deducting reinsurance costs of approximately $6 million, which was
primarily offset by: (i) lower premium volume of approximately $21 million
due to agency terminations; (ii) a reduction in existing business (renewal
retention) attributable to a highly competitive commercial lines marketplace
as well as non-renewals resulting from the Company's regular review of its
business; (iii) workers' compensation rate decreases, which lowered net
premiums written by approximately $18 million; and (iv) lower net premiums
written in the Public Entities SBU, primarily due to a shift in business to
the alternative markets.
The significant growth in new business resulted in the Company
generating an increase in most of the commercial SBUs' net premiums written.
However, the Public Entities SBU net premiums written were down $23 million
in 1997, primarily due to the trend towards self-insurance and other
alternative risk sharing mechanisms.
The Personal Lines SBU 1997 net premiums written, excluding the effect
of the Conversion, decreased 4%, or $8 million, compared to 1996. This
decrease reflected a reduction in the number of policies in-force in the
personal automobile insurance line of approximately 5%, or 5,300 policies,
partially offset by $2 million generated from a 1996 rate increase in New
Jersey personal automobile insurance.
Net investment income earned for 1997, before tax, increased 4%, or $4
million, over 1996. The increase was mainly due to the income generated from
investments acquired with cash provided by the Company's operating
activities during 1997 and 1996, and the investment of proceeds from
short-term borrowings during 1997. The growth in investment income was
partially offset by lower yields on amounts made available for reinvestment
by redemptions and maturities of $249 million of higher yielding debt
securities during 1997 and 1996. The Company's overall after-tax investment
yield was 4.6% in 1997, down slightly from 4.7% in 1996. The level of
interest rates available in 1997 in the marketplace for new or reinvested
cash has been lower than both the average yield on the debt securities
portfolio and the securities that are being redeemed.
Expenses
The ratio of losses and loss expenses incurred to net premiums earned was
68.2% in 1997, a 3.1 point decrease from the ratio of 71.3% in 1996. The
decrease in the 1997 loss and loss expense ratio was primarily attributable
to the very low level of weather-related catastrophe claims in 1997 ($2
million; 0.3 points). During 1996, the Company incurred $18 million of
losses, net of $7 million of reinsurance, from weather-related catastrophe
claims, which increased the loss and loss expense ratio for 1996
by 2.7 points and primarily impacted the Personal Lines, Mercantile and
Service, Public Entities, and Habitational and Recreational SBUs. Absent
weather-related catastrophe claims, the loss and loss expense ratio improved
slightly over
Page 21
PAGE
1996, reflecting favorable loss experience in most of the commercial SBUs,
modestly offset by a higher Personal Lines SBU ratio.
For 1997, the loss and loss expense ratio for the commercial SBUs
decreased 3.9 points, to 66.8%, compared to 70.7% for 1996. Absent the
effects of the 1996 weather-related claims of 3.0 points, the commercial
SBUs 1997 loss and loss expense ratio improved 0.9 points with the most
notable improvements in the Mercantile and Service, Habitational and
Recreational, and Bonds SBUs. These improvements were in most business
classes and commercial lines of insurance in these SBUs.
Workers' compensation continued its favorable trend in most of the
commercial SBUs, primarily due to reduced frequency and severity of claims.
These results were attributable to: (i) reduced health care costs for
workers' compensation (approximately $11 million) due to managed care; (ii)
programs which permit injured employees to return to work earlier in
alternative job categories; (iii) fee schedules which limit the amount that
health care providers can charge; (iv) loss control programs which promote
workplace safety; and (v) various favorable legislative reforms.
The improvements were partially offset by unfavorable results in the
commercial automobile line of insurance in most of the SBUs. The adverse
results in this line were due to frequency and severity of claims in 1997
and an increase in prior years' estimated ultimate loss costs due to higher
than expected paid and incurred loss experience.
The Personal Lines SBU loss and loss expense ratio of 71.3% for 1997
increased slightly, or 0.6 points, compared to 70.7% for 1996 (excluding the
effects of weather-related catastrophe claims which added 1.9 points to the
1996 ratio). The homeowners line of insurance improved due to rate increases
and lower reinsurance costs. In addition, New Jersey personal automobile
results continued to be favorable and generated a loss and loss expense
ratio of 73.1% for 1997 and 73.3% in 1996.
During 1997, the Governor of New Jersey signed into law an automobile
insurance reform bill. This legislation: (i) eliminated automatic approval
of annual cost-of-living premium increases in favor of "expedited rate
filings" of 3% or less, which do not require prior approval from the
insurance commissioner; (ii) prohibits insurers from non-renewing good
drivers (defined as "no more than one at fault accident or four insurance
point moving violations within a five-year period"); and (iii) eliminated
the bad driver surcharge system in favor of a tier rating system.
Policy acquisition costs expressed as a percentage of net premiums
earned for 1997 were 31.5%, up from 30.8% in 1996. The increase reflected
record profit sharing incentives for both agents and employees for the
exceptional 1997 performance, partially offset by reinsurance profit sharing
commission benefits to the Company due to improved reinsurance results in
1997. The net impact of these profit sharing commission arrangements
increased the ratio by 0.4 points. In addition, the 1997 total dollar amount
of labor costs (excluding employee incentive compensation awards) and other
operating costs grew modestly, and when compared to the lower levels of 1997
net premiums earned, increased the ratio by 0.8 points. These increases were
partially offset by a decrease of 0.5 points due mainly to the elimination
of the New Jersey Fair Automobile Insurance Reform Act ("FAIRA") assessments
and fewer assignments of high operating expense assigned risk business.
Productivity, as measured by net premiums written per employee, in 1997
was $454,000, up from $433,000 in 1996. However, excluding the effects of
the Conversion in 1997 ($30 million for renewal business, and $6 million for
new business), the net premiums written per employee was $431,000, down
slightly from 1996. The decrease was due to the lower levels of net premiums
written.
Total Federal income tax expense in 1997 was $21 million (an effective
tax rate of 23.5%), a $7 million increase compared to $14 million (an
effective tax rate of 19.6%) in 1996. The effective tax rate for 1997 was
higher than 1996 primarily due to the tax benefits from the higher level of
1996 underwriting losses due to the weather-related claims. The Company's
effective tax rate differs from the Federal corporate rate of 35% primarily
as a result of tax-exempt investment income.
Income
Operating income (income excluding net realized gains, net of tax
effect) reached an all-time high in 1997, increasing by 22% to $66 million
in 1997, or $2.15 per diluted share, compared to $54 million, or $1.77 per
diluted share, in 1996. The Company recognized net realized gains (net of
tax effect) for 1997 of $4 million, or $.12 per diluted share compared to
$2 million, or $.06 per diluted share, in 1996. Net income for 1997
increased 25% to $70 million, or $2.27 per diluted share, from $56 million,
or $1.83 per diluted share, in 1996. Operating and net income for 1996
included weather-related losses, net of tax, of $12 million, or $0.39 per
diluted share.
Page 22
PAGE
Federal income taxes
- - - --------------------
The Company had a net deferred tax liability of $7 million at December
31, 1998, as compared to a net deferred tax asset of $6 million at December
31,1997. The net deferred tax liability at year-end 1998 reflected,
primarily, the deferred tax liability on unrealized gains on securities,
available-for-sale, less the deferred tax asset for the discounting of loss
and loss expense reserves for tax purposes, and the deferred tax asset
relating to the ability to deduct only 80% of the net unearned premium
reserve. The change in the deferred tax accounts of $13 million for the year
ended December 31, 1998, principally reflects the increase in the deferred
tax liability associated with the increase in unrealized gains recorded on
securities, available-for-sale.
The Company had taxable income and pretax financial statement income for
the periods indicated as follows:
- - - ------------------------------------------------------
(in millions) 1998 1997 1996
- - - ------------------------------------------------------
Current taxable
income $27.5 51.7 27.7
Pretax financial
statement income $63.7 91.0 69.1
Based on the Company's tax loss carryback availability, and the historic
levels of current taxable income and pretax financial statement income, the
Company believes that it is more likely than not that the existing
deductible temporary differences will reverse during periods in which the
Company will generate net taxable income or have adequate carryback
availability. However, there can be no assurance that the Company will
generate any earnings or any specific level of earnings in future years.
Financial condition; liquidity and capital resources
- - - ----------------------------------------------------
Selective Insurance Group, Inc. ("Parent") is an insurance holding
company, the principal assets of which are its investments in its insurance
subsidiaries. The primary means of meeting its liquidity requirements is
through dividends from its insurance subsidiaries, the payment of which is
governed by state regulatory requirements. Dividends are generally payable
only from earned surplus as reported on the insurer's annual statement as of
the preceding December 31.
The Parent's cash requirements principally include: (i) dividends to
stockholders; (ii) interest payments on its outstanding debt; (iii) annual
principal payments of $7 million on the $50 million 7.84% Senior Notes, due
November 15, 2002 ("7.84% Senior Notes"); and (iv) general corporate
expenses. As of December 31, 1998, these cash requirements, net of
applicable income taxes, aggregated approximately $28 million annually
(assuming the current dividend level and excluding any repurchases of
Company stock).
The Parent acquires cash from the sale of its common stock under various
stock plans and the dividend reinvestment program, and from investment
income, all of which approximates $4 million and reduces the Parent cash
requirements from $28 million to $24 million.
Based upon the 1998 statutory financial statements, the insurance
subsidiaries are able to pay the Parent, in 1999, ordinary dividends in the
aggregate amount of $51 million. There can be no assurance that the
insurance subsidiaries will be able to pay dividends to the Parent in the
future in an amount sufficient to enable the Parent to meet its liquidity
requirements. For additional information regarding regulatory limitations on
the payment of dividends by the insurance subsidiaries to the Parent and
amounts available for the payment of such dividends, see note 11 to the
consolidated financial statements.
Dividends to stockholders are declared and paid at the discretion of the
Parent's Board of Directors (the "Board") based upon operating results,
financial condition, capital requirements, contractual restrictions and
other relevant factors. The Parent has paid regular quarterly cash dividends
to its stockholders for 70 consecutive years and plans to continue to pay
quarterly cash dividends. For additional information regarding restrictions
on the Parent's ability to pay dividends to its stockholders, see note 6(b)
to the consolidated financial statements.
Cash provided by operating activities amounted to $57 million, $51
million and $90 million in 1998, 1997 and 1996, respectively. The decreasing
trend in cash provided by operating activities from 1996 to 1998 principally
reflects reduced cash flow from underwriting activities, which were impacted
by the following items: i) a faster settlement of claims files; ii) payment
of weather-related catastrophe claims (payments were $8 million in each of
1998 and 1997, and $16 million in 1996); iii) a trend by insureds to greater
use of
Bar Graph
- - - ----------------------------------------
Operating Cash Flow
(in millions)
$120 $177 $90 $51 $57
1994 1995 1996 1997 1998
- - - ----------------------------------------
Page 23
PAGE
extended pay plans provided by the Company for competitive reasons
(an estimated cash flow reduction of $5 million in 1998); and iv) an
acceleration in the timing of payments of commissions to agents for
competitive reasons (an estimated reduction in cash flow of $10 million in
1998). The settlement rate on claims files has increased as a result of a
number of new claims handling initiatives, including the placement of claims
management specialists ("CMSs") in the field, and more aggressive management
of litigation files by the Company's examiners. In addition, the number of
law firms handling cases was reduced through consolidation, and fees were
reduced through better control of panel firm cases. These initiatives have
reduced cash flow by approximately $20 million in 1998 as compared to 1996,
and approximately $11 million in 1997 as compared to 1996 (1996 is the year
in which the initiatives were commenced, and its operating cash flow was
generally free of the impact of the higher settlement rate). The lines of
insurance most affected were general liability, commercial automobile and
personal automobile.
Since cash inflow from premiums is received in advance of the related
required cash outflow to settle claims, the Company accumulates funds which
it then invests, and investments represented 73% of the Company's total
assets as of December 31, 1998. Cash outflow requirements can vary due to
uncertainties regarding settlement dates for unpaid claims and the potential
for large and/or catastrophic losses occurring either individually or in the
aggregate. The Company maintains reinsurance programs to ensure the
availability of funds and to protect it against unusually serious
occurrences or catastrophes in which a number of claims could produce an
extraordinary aggregate loss. Effective July 1, 1998, the casualty excess
of loss treaty was amended to increase the retention from $1 million to $2
million per risk, and the property excess of loss treaty was amended to
increase the retention from $400,000 to $750,000 per risk. In addition, the
Company's investment program is structured with staggered maturities so that
liquidation of debt securities, available-for-sale should not be necessary
in the ordinary course of business.
Effective January 1, 1999, the Company revised its property catastrophe
program. The revised program provides a higher level of protection against
catastrophe losses at a lower cost when compared with the 1998 program. The
new catastrophe program is in six layers and covers: (i) 95% of losses in
excess of $15 million up to $25 million; (ii) 95% of losses in excess of $25
million up to $50 million; (iii) 95% of losses in excess of $50 million up
to $85 million; iv) 95% of losses in excess of $95 million up to $130
million; and v) 95% of losses in excess of $130 million up to $165 million.
The layer of $10 million in losses in excess of $85 million has been
retained in full by the Company, as has the $15 million in losses underlying
the 1st layer. The Company believes that the 1999 property catastrophe
program, coupled with the Homeowners Quota Share Program (which contained no
per-occurrence limit), provides adequate protection for the Company if
catastrophe losses were to occur.
Total assets at December 31, 1998, were $2.4 billion, representing a 5%
increase, or $126 million, from December 31, 1997, after the repurchase of
Company stock in the amount of $38 million. The growth in total assets was
primarily due to an increase in total investments of $45 million (due in
part to a $39 million increase in net unrealized gains on available-for-sale
securities) and an increase in premiums receivable of $43 million (due to
growth in net premiums written and the increased usage by insureds of
extended pay plans, as described previously). In addition, reinsurance
recoverable on unpaid losses and loss expenses increased by $16 million,
due to an increase in large 1998 property claims that are in the process of
settlement, as well as reserve increases on a number of pre-1998 workers'
compensation claims.
Bar Graph
- - - -------------------------------------
Stockholders' Equity Per Share
$11.62 $15.17 $16.31 $19.32 $21.30
1994 1995 1996 1997 1998
- - - -------------------------------------
Page 24
PAGE
The rise in total liabilities of $84 million, or 5%, from December 31,
1997, to December 31, 1998, was primarily attributable to an increase in
loss and loss expense reserves of $32 million, and an increase in the
unearned premium reserve of $26 million. The reserve position at December
31, 1997 resulted in a modest redundancy of $2.2 million. Loss and loss
expense reserves increased due to increased exposures correlating to the
7% growth in 1998 earned premium. The overall growth in reserves in 1998 was
2.8%, which was less than the growth in premiums due in part to the
previously discussed increase in the settlement rate of claims. The faster
settlement rate resulted in higher paid losses (approximately $20 million),
which lowered reserves to the extent of these payments. (Please refer to
notes 1(j), 15 and 19(a) to the consolidated financial statements for
additional information regarding loss reserves.) In addition, unearned
premiums increased due primarily to increased net premiums written.
The Company is preparing for the potential Year 2000 issues (the "Y2K"
issue) that could affect its information systems, mainframe applications,
personal computers (PCs), communications systems, and non-information
technology equipment. Y2K issues associated with the information systems of
the Company's suppliers and independent insurance agents are also being
addressed. The Company's preparations include modification, replacement and
testing of hardware and software, development of contingency plans, and
efforts to identify and address Y2K issues associated with third parties who
are material to the Company's operations.
The Company has a number of critical business systems, including, among
others, policy underwriting, billing, decision support, claims and financial
reporting systems. Remediation efforts commenced in 1997, and by 1998 over 9
million lines of computer code were inspected with approximately 900,000
lines of code revised in all major systems other than the claims system. The
claims system remediation is currently in progress, and is estimated to be
completed in June, 1999. In connection with hardware issues, a mainframe
(enterprise server) upgrade was completed in August 1998, and an inventory
of all Personal Computers (PCs) and network equipment was completed at that
time. Necessary upgrading or replacement of PCs and network equipment is
underway, and is expected to be completed in the second quarter of 1999.
A series of global system integration tests will be run to test Y2K
readiness, and are intended to synchronize all systems, and to ensure that
routine maintenance remains Y2K compatible. Two of these tests were
successfully completed in 1998. The 1998 tests, which included testing by
programmers and business users, identified minimal necessary changes to
program code. Required changes were completed at the time of identification.
Two additional such tests are scheduled for 1999, and they will include the
remediated claims system when completed, as well as a new financial
reporting system, which became operational after the 1998 tests were
completed.
The Company anticipates Y2K readiness in all critical areas, and
estimates it is 90% complete in its preparation and remediation. The Company
has adopted a contingency planning strategy that addresses mission critical
and non-mission critical business processes. The Company has a Disaster
Recovery Plan for the Information Systems Department, providing for the
continuation of data processing operations at an off-site disaster recovery
facility.
The Company's Y2K awareness initiative addresses its interaction with
its independent agents, suppliers and customers. The Company's main business
customers are independent insurance agents. The Company has provided Y2K
information to all of its independent agents, its representatives have
spoken at agency functions, and it has conducted an agent's technology fair,
all intended to provide as much Y2K information as possible to help our
agents address the issue in their businesses. In addition, the Company has
established a Y2K hotline for questions. An agency Y2K systems readiness
survey is currently being conducted which will identify agents who may not
be Y2K compliant.
The Company's suppliers include software vendors, service providers and
material suppliers. Each of the vendors has been contacted by the Company to
obtain written confirmation on the status of their Y2K readiness. The
majority of responses indicate Y2K readiness.
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 policy-
holders that it will not cover Y2K losses, with the possible exception of
certain losses involving property damage or bodily injury which can not be
quantified at this time. The Company is using the Insurance Services Office
Y2K exclusionary endorsements
Page 25
PAGE
on most new and renewal commercial lines policies. In addition, the
Company's casualty excess of loss treaty was amended, effective July 1,
1998, to include as covered losses all Y2K losses aggregated as a single
event, with protection totaling $38 million in excess of a $12 million
retention. The coverage protects against any Y2K claim which is asserted in
the 36 month period beginning on July 1, 1998.
The Company has projected what it believes to be the most reasonably
likely worst case scenarios related to potential Y2K failures and
disruptions. These scenarios include computer system failures occurring
within its independent agency distribution system and the Company's
out-sourced processing of premium remittances. Contingency plans have been
developed that will allow the Company to carry on operations if such
scenarios were to occur. The contingency plans include provisions to
undertake manual processing in situations where business partner computer
systems are not functioning normally. Manual processing would reduce the
Company's overall efficiency, however, it would not materially impact the
Company's ability to operate. Each mission critical business department has
a plan for resumption of business in which the functions to be restored are
prioritized by critical time frames. These plans will enable processing of
core business to continue for a limited time while adjustments are being
made.
The failure to correct a material Y2K problem could result in
interruption to normal business activities or operations, such as policy
underwriting and claims payment. Such failures could materially and
adversely affect the Company's operations, liquidity and financial
condition. The Company's Y2K project is expected to significantly reduce the
Company's level of uncertainty about the potential problem. The Company
believes its internal information systems will have been adequately modified
and safeguarded to protect from such failures. Due to the general
uncertainty inherent in the Y2K problem, resulting in part from the
uncertainty of the Y2K readiness of independent insurance agents and
third-party suppliers and customers, the Company is unable to determine at
this time whether, or to what extent, a Y2K failure could occur. A Y2K
failure could have a material adverse impact on the Company's operations,
liquidity or financial condition.
The Company acquired PDA Software Services, Inc. (PDA), in December,
1998 (see note 1(h) to the consolidated financial statements). As part of an
extensive due diligence process, the Y2K exposures of PDA were evaluated,
and it was concluded that no material exposure to Y2K claims was present.
Additionally, a technology errors and omissions insurance policy was
purchased which provides $10 million coverage for any Y2K claim resulting
from any work performed by PDA after January 1, 1988.
The Company does not presently anticipate that costs incurred for the
Y2K project will be material. Current estimates of the compliance costs
which will be incurred to ensure Y2K readiness are $2.3 million, and as of
December 31, 1998, the Company has incurred approximately $1.8 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 1998, 1997 and 1996 are approximately $500,000,
$700,000 and $100,000, respectively.
Insurance regulation
- - - --------------------
The Company is subject to regulation under applicable insurance
statutes, including insurance holding company statutes, of the various
states in which the Company operates. Insurance regulation is intended to
provide solvency and other safeguards for policyholders rather than to
protect stockholders of insurance companies or insurance holding companies.
Insurance laws of the various states provide regulatory agencies with broad
administrative powers, including the power to grant or revoke licenses to
transact insurance business, and to regulate trade practices, investments,
premium rates, the deposit of securities, the form and content of financial
statements, insurance policies, accounting practices, the maintenance of
specified reserves and capital, the payment of dividends, and establish
maximum levels of profits or returns for a line of insurance.
The United States Congress will consider financial services moderniza-
tion legislation in 1999, as they have in prior years. This legislation may
permit Banks to engage in insurance activities, and allow insurers to engage
in a wide range of financial services activities. The Company is unable to
predict whether any legislation will be enacted in 1999, or what it may
ultimately include, and the impact it may have on the property and casualty
industry.
Page 26
PAGE
INDEPENDENT AUDITORS' REPORT
- - - ---------------------------
The Board of Directors and Stockholders
Selective Insurance Group, Inc.
- - - ---------------------------------------
We have audited the accompanying consolidated balance sheets of
Selective Insurance Group, Inc. and its subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Selective Insurance Group,Inc. and its subsidiaries as of December 31, 1998
and 1997, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 1998, in conformity
with generally accepted accounting principles.
/S/ KPMG LLP
New York, New York
February 2, 1999
Page 27
PAGE
CONSOLIDATED BALANCE SHEETS
- - - ---------------------------
December 31, 1998 1997
(in thousands, except share amounts)
- - - ----------------------------------------------------------------------------
ASSETS
- - - ------
Investments:
- - - -----------
Debt securities, held-to-maturity at amortized cost
(fair value: $373,179-1998; $426,251-1997) $ 358,380 410,169
Debt securities, available-for-sale at fair value
(amortized cost: $1,033,628-1998; $1,009,060-1997) 1,075,276 1,044,390
Equity securities, available-for-sale at fair value
(cost: $135,758-1998; $120,602-1997) 269,991 222,273
Short-term investments
(at cost which approximates fair value) 50,905 28,781
Other investments 16,087 20,077
--------- -------
Total investments 1,770,639 1,725,690
Cash 7,931 5,017
Interest and dividends due or accrued 22,537 23,474
Premiums and other receivables, net of allowance
for uncollectible accounts of:
$2,740-1998; $3,056-1997 240,125 196,786
Reinsurance recoverable on paid losses
and loss expenses 11,495 11,088
Reinsurance recoverable on unpaid losses
and loss expenses 140,453 124,197
Prepaid reinsurance premiums 31,685 31,189
Deferred Federal income tax - 6,489
Real estate, furniture, and equipment at cost, net of
accumulated depreciation of:
$47,527-1998; $39,053-1997 50,950 45,465
Deferred policy acquisition costs 109,774 98,110
Excess of cost over fair value of net assets acquired,
net of accumulated amortization of:
$5,032-1998; $3,686-1997 20,391 17,337
Other assets 26,188 21,349
--------- ---------
Total assets $2,432,168 2,306,191
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- - - ------------------------------------
Liabilities:
- - - -----------
Reserve for losses $1,014,386 984,393
Reserve for loss expenses 178,888 176,776
Unearned premiums 400,143 373,766
Convertible subordinated debentures 6,219 6,845
Short-term debt 28,287 17,400
Notes payable 82,572 89,714
Current Federal income tax 86 1,747
Deferred Federal income tax 7,226 -
Other liabilities 106,778 90,234
--------- ---------
Total liabilities 1,824,585 1,740,875
--------- ---------
Stockholders' Equity:
- - - --------------------
Common stock of $2 par value per share:
Authorized shares: 180,000,000
Issued: 37,416,237-1998; 36,363,856-1997 74,833 72,728
Additional paid-in capital 45,449 30,450
Retained earnings 477,118 439,811
Accumulated other comprehensive income 114,323 89,051
Treasury stock at cost
(shares: 8,892,335-1998; 7,097,462-1997) (97,990) (59,785)
Deferred compensation expense and notes receivable
from stock sales (6,150) (6,939)
--------- ---------
Total stockholders' equity 607,583 565,316
Commitments and contingencies (notes 7 and 19) --------- --------
Total liabilities and stockholders' equity $2,432,168 2,306,191
========= =========
See accompanying notes to consolidated financial statements.
Page 28
PAGE
CONSOLIDATED STATEMENTS OF INCOME
- - - --------------------------------
Year ended December 31, 1998 1997 1996
(in thousands, except per share amounts)
- - - ----------------------------------------------------------------------------
Revenues:
- - - --------
Net premiums written $ 748,873 717,618 692,239
Net (increase) decrease in unearned
premiums and prepaid reinsurance premiums (25,881) (41,350) 2,708
------- ------- -------
Net premiums earned 722,992 676,268 694,947
Net investment income earned 99,196 100,530 96,952
Net realized gains (losses) (2,139) 6,021 2,786
Fee-for-service revenue 14,100 8,236 6,378
Other income 3,180 3,128 3,717
------- ------- -------
Total revenues 837,329 794,183 804,780
------- ------- -------
Expenses:
- - - --------
Losses incurred 433,316 383,996 420,943
Loss expenses incurred 74,484 77,217 75,783
Policy acquisition costs 235,523 212,902 214,266
Dividends to policyholders 5,329 4,855 5,035
Interest expense 9,409 9,592 9,185
Fee-for-service expenses 11,883 7,471 4,573
Other expenses 3,681 7,130 5,906
------- ------- -------
Total expenses 773,625 703,163 735,691
------- ------- -------
Income before Federal income tax 63,704 91,020 69,089
------- ------- -------
Federal income tax expense:
- - - ------------------------------------
Current 9,879 16,688 9,947
Deferred 255 4,724 (3,591)
------- ------- -------
Total Federal income tax expense 10,134 21,412 13,538
------- ------- -------
Net income $ 53,570 69,608 55,551
======= ======= =======
Earnings per share:
- - - ------------------
Basic $ 1.88 2.41 1.92
Diluted $ 1.74 2.27 1.83
See accompanying notes to consolidated financial statements.
Page 29
PAGE
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
- - - ----------------------------------------------
Year ended December 31, 1998 1997 1996
(in thousands,
except per share amounts)
- - - ----------------------------------------------------------------------------
Common stock:
- - - ------------
Beginning of year $ 72,728 71,644 70,588
Dividend reinvestment plan
(shares: 52,183-1998;
49,206-1997;
68,104-1996) 104 98 136
Convertible subordinated
debentures
(shares: 88,412-1998;
9,448-1997;
53,632-1996) 177 19 108
Stock purchase and
compensation plans
(shares: 600,113-1998;
483,028-1997;
406,082-1996) 1,201 967 812
Stock issued for acquisition
(shares: 311,673-1998) 623 - -
------- ------- -------
End of year 74,833 72,728 71,644
------- ------- -------
Additional paid-in capital:
- - - --------------------------
Beginning of year 30,450 18,060 10,777
Dividend reinvestment plan 1,046 1,033 1,011
Convertible subordinated
debentures 448 48 272
Stock purchase and
compensation plans 7,861 11,309 6,000
Stock issued for
acquisition 5,644 - -
------- ------- -------
End of year 45,449 30,450 18,060
------- ------- -------
Retained earnings:
- - - -----------------
Beginning of year 439,811 386,601 347,318
Net income 53,570 53,570 69,608 69,608 55,551 55,551
Cash dividends to
stockholders
($.56 per share) (16,263) (16,398) (16,268)
------- ------- -------
End of year 477,118 439,811 386,601
------- ------- -------
Accumulated other
comprehensive income:
- - - --------------------
Beginning of year 89,051 52,728 56,740
Other comprehensive
income-increase
(decrease) in net
unrealized gains
on available-for-sale
securities, net of
deferred income
tax effect 25,272 25,272 36,323 36,323 (4,012) (4,012)
------- ------ ------- ------ ------- ------
End of year 114,323 89,051 52,728
------- ------- -------
Comprehensive income 78,842 105,931 51,539
====== ======= ======
Treasury stock:
- - - --------------
Beginning of year (59,785) (50,680) (46,429)
Acquisition of treasury
stock
(shares: 1 794,873-1998;
364,200-1997;
238,884-1996) (38,205) (9,105) (4,251)
------- ------- -------
End of year (97,990) (59,785) (50,680)
------- ------- -------
Deferred compensation
expense and notes
receivable from stock sales:
- - - ------------------------------
Beginning of year (6,939) (4,054) (2,245)
Deferred compensation
expense (966) (6,016) (2,984)
Amortization of deferred
compensation expense
and amounts
received on notes 1,755 3,131 1,175
------- ------- -------
End of year (6,150) (6,939) (4,054)
------- ------- -------
Total stockholders' equity
(per share: $21.30 1998;
$19.32 1997;
$16.31 1996) $607,583 565,316 474,299
======= ======= =======
The Company also has authorized, but not issued, 5,000,000 shares of
preferred stock without par value of which 300,000 shares have been
designated Series A junior preferred stock without par value.
See accompanying notes to consolidated financial statements.
Page 30
PAGE
CONSOLIDATED STATEMENTS OF CASH FLOWS
- - - -------------------------------------
Year ended December 31, 1998 1997 1996
(in thousands)
- - - ----------------------------------------------------------------------------
OPERATING ACTIVITIES
- - - --------------------
Net income $ 53,570 69,608 55,551
------ ------ ------
Adjustments to reconcile net income to
net cash provided by operating activities:
Increase (decrease) in reserves for losses
and loss expenses, net of reinsurance
recoverable on unpaid losses and loss
expenses 15,849 (2,613) 40,902
Net increase (decrease) in unearned premiums
and prepaid reinsurance premiums 25,881 41,350 (2,708)
(Increase) decrease in net Federal income tax (1,411) 2,743 5,327
Depreciation and amortization 9,273 8,143 5,950
(Increase) decrease in premiums and other
receivables (37,507) (44,778) 13,186
Increase in deferred policy acquisition costs (11,664) (14,960) (950)
Decrease (increase) in interest and dividends
due or accrued 1,065 693 (548)
Increase in reinsurance recoverable
on paid losses and loss expenses (407) (3,225) (2,694)
Net realized losses (gains) 2,139 (6,021) (2,786)
Other net (162) (9) (21,004)
------ ------ ------
Net adjustments 3,056 (18,677) 34,675
------ ------- ------
Net cash provided by operating activities 56,626 50,931 90,226
------ ------- -------
INVESTING ACTIVITIES
- - - --------------------
Purchase of debt securities, held-to-maturity (12,682) (41,409) (65,277)
Purchase of debt securities,
available-for-sale (178,213) (148,492) (173,506)
Purchase of equity securities,
available-for-sale (46,131) (33,275) (30,931)
Purchase of other investments (21,030) (17,681) -
Sale of debt securities, available-for-sale 64,648 54,107 49,626
Redemption and maturities of debt securities,
held-to-maturity 64,464 63,979 72,111
Redemption and maturities of debt securities,
available-for-sale 90,392 51,768 61,215
Sale of equity securities, available-for-sale 27,891 19,734 10,917
Proceeds from other investments 20,690 1,205 191
Increase (decrease) in net payable from security
transactions 8,655 4,553 (1,377)
Net additions to real estate, furniture
and equipment (11,160) (4,055) (4,588)
------- ------- -------
Net cash provided by (used in)
investing activities 7,524 (49,566) (81,619)
------- ------- -------
FINANCING ACTIVITIES
- - - --------------------
Dividends to stockholders (16,263) (16,398) (16,268)
Acquisition of treasury stock (38,205) (9,105) (4,251)
Principal payment of notes payable (10,972) (7,143) (7,143)
Proceeds from short-term debt 10,762 17,400 -
Net proceeds from issuance
of common stock 16,479 13,407 7,959
Increase in deferred compensation expense
and amounts received on notes receivable
from stock sale (913) (5,750) (2,915)
------- ------- -------
Net cash used in financing activities (39,112) (7,589) (22,618)
------- ------- -------
Net increase (decrease) in short-term
investments and cash 25,038 (6,224) (14,011)
Short-term investments and cash
at beginning of year 33,798 40,022 54,033
------- ------- -------
Short-term investments and cash
at end of year $ 58,836 33,798 40,022
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
- - - -------------------------------------
Cash paid during the year for:
- - - -----------------------------
Interest $ 9,527 9,224 9,597
Federal income tax 11,554 18,669 8,211
Supplemental schedule of noncash
financing activities:
- - - -------------------------------------------
Conversion of convertible subordinated
debentures 626 67 380
See accompanying notes to consolidated financial statements.
Page 31
PAGE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - ------------------------------------------
December 31, 1998, 1997, 1996
NOTE 1 Summary of Significant Accounting Policies
- - - --------------------------------------------------
(a) Consolidation Policy
The consolidated financial statements include the accounts of Selective
Insurance Group, Inc. ("Selective") and its subsidiaries (collectively, the
"Company"). All significant intercompany accounts and transactions have been
eliminated.
(b) Adoption of Accounting Policies
Effective January 1, 1998, the Company adopted Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" ("FASB 130"), Statement of Financial
Accounting Standards No. 131 "Disclosures about Segments of an Enterprise
and Related Information" ("FASB 131") and Statement of Financial Accounting
Standards No. 132 "Employers' Disclosures about Pensions and Other Post
Retirement Benefits" ("FASB 132"). FASB 130 establishes standards for
reporting comprehensive income and its components, in general purpose
financial statements. FASB 131 establishes standards for reporting
information about operating segments. FASB 132 standardizes the disclosures
for pensions and other post retirement benefits to facilitate financial
analysis. Prior period comparative information has been restated to conform
with FASB 130, 131, and 132, which had no impact on the Company's results of
operations or financial condition.
During 1998, the Company adopted the American Institute of Certified
Public Accountants' ("AICPA") Statement of Position No. 97-3 "Accounting by
Insurance and Other Enterprises for Insurance related Assessments" ("SOP
97-3") and the AICPA Statement of Position No. 98-1 "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" ("SOP
98-1"). SOP 97-3 establishes standards for accounting for guaranty-fund and
certain other insurance related assessments. SOP 97-3 had no material effect
on the Company's results of operations or financial condition. SOP 98-1
provides guidance on accounting for the costs of computer software developed
or obtained for internal-use. As a result of SOP 98-1, the Company
capitalized $3 million of internal computer software development costs
during 1998, which will be amortized over a five year period.
(c) Investments
Debt securities, held-to-maturity are carried at amortized cost because
management has the ability and intent to hold such securities until
maturity. Securities, available-for-sale are carried at fair value. Net
unrealized gains and losses on debt securities, held-to-maturity are not
reflected in consolidated net income or stockholders' equity. Net unrealized
gains and losses on securities, available-for-sale, net of deferred income
tax effect, are not reflected in consolidated net income, but are included
in comprehensive income as well as accumulated other comprehensive income, a
separate component of stockholders' equity. No material investments of the
Company were non-income producing for the years ended December 31, 1998 and
1997.
Realized gains and losses are determined on the basis of the cost of
specific investments sold and are credited or charged to income. In the
event that a decline in fair value of an investment is considered to be
other than temporary, such investments are written down to their net
realizable value.
(d) Reinsurance
The Company records its ceded reinsurance transactions on a gross basis
on the balance sheet which results in reinsurance recoverables on unpaid
losses and loss expenses and ceded unearned premiums (prepaid reinsurance).
The Company also discloses reinsurance amounts for ceded premiums written
and earned and ceded loss and loss expenses incurred.
(e) Stock-Based Compensation
The Company adopted the FASB Statement of Financial Accounting Standard
No. 123, "Accounting for Stock-Based Compensation" ("FASB 123") effective
January 1, 1996. FASB 123 establishes financial accounting and reporting
standards for stock-based compensation plans. As permitted by FASB 123, the
Company will continue to use the accounting method prescribed by Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees"
("APB 25"). Companies using APB 25 are required to make pro forma footnote
disclosures of net income and earnings per share as if the fair value method
of accounting, as defined in FASB 123, had been applied.
(f) Real Estate, Furniture and Equipment
The value of real estate, furniture and equipment is stated at cost less
accumulated depreciation. Provisions for depreciation are computed using the
straight-line method over the estimated useful lives of the assets, which
range from three to forty years for financial statement purposes and the
straight-line method and various accelerated methods for Federal income tax
purposes.
(g) Deferred Policy Acquisition Costs
Policy acquisition costs are directly related to the writing of an
insurance policy and are deferred and amortized over the life of the
policies in order to facilitate a matching of revenues and expenses. The
deferred policy acquisition costs are limited to the sum of unearned
premiums and anticipated investment income less anticipated losses and loss
adjustment expenses, policyholder dividends and other expenses for
maintenance of policies in force. The investment yields assumed for each
reporting period, which are based upon the Company's actual average
investment yield, before-tax, were 5.7%, 6.0% and 6.1% for 1998, 1997 and
1996, respectively.
Page 32
PAGE
(h) Goodwill
On December 8, 1998, the Company acquired PDA Software Services, Inc.,
in a share exchange, accounted for as a purchase. The purchase price
amounted to approximately $6,601,000, and included approximately $4,400,000
of goodwill, which is being amortized over nine years. In the share
exchange, 311,673 shares of the Company's common stock were issued.
On November 14, 1997, the Company acquired the net assets of MCSI/MRSI,
in a newly formed subsidiary, Alta Services LLC, a nonrisk-bearing managed
care company. The total purchase price was approximately $8,291,000, with
the possibility of up to $10,000,000 of additional purchase price if certain
growth and profitability objectives are achieved over the next five years.
The purchase price included approximately $8,060,000 of goodwill, which is
being amortized over nine years.
(i) Use of Estimates
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported financial statement
balances, as well as the disclosure of contingent assets and liabilities.
Actual results could differ from those estimates.
(j) Reserves for Losses and Loss Expenses
In accordance with industry practice, the Company maintains reserves for
losses and loss expenses. These reserves are made up of both case reserves
and reserves for claims incurred but not yet reported ("IBNR"). Case
reserves result from a claim that has been reported to an insurance
subsidiary and is estimated at the amount of ultimate payment. Additional
IBNR reserves are established based on generally accepted actuarial
techniques. Such techniques assume that past experience, adjusted for the
effects of current developments and anticipated trends, are an appropriate
basis for predicting future events.
The internal assumptions considered by the Company in the estimation of
the IBNR amounts for both environmental and non-environmental reserves at
the Company's reporting dates are based on: (i) an analysis of both paid and
incurred loss and loss expense development trends; (ii) an analysis of both
paid and incurred claim count development trends; (iii) the exposure
estimates for reported claims; (iv) recent development on exposure estimates
with respect to individual large claims and the aggregate of all claims; (v)
the rate at which new environmental claims are being reported; (vi)
actuarial modeling of environmental claims; and (vii) patterns of events
observed by claims personnel or reported to them by defense counsel.
External factors identified by the Company in the estimation of IBNR for
both environmental and non-environmental IBNR reserves include: legislative
enactments, judicial decisions, legal developments in the determination of
liability and the imposition of damages; and trends in general economic
conditions, including the effects of inflation. Adjustments to IBNR are made
periodically to take into account changes in the volume of business written,
claims frequency and severity, the mix of business, claims processing and
other items as described that are expected by management to affect the
Company's reserves for losses and loss expenses over time.
By using both individual estimates of reported claims and generally
accepted actuarial reserving techniques, the Company estimates the ultimate
net liability for losses and loss expenses. The ultimate actual liability
may be higher or lower than reserves established. The Company receives an
actuarial opinion as to the adequacy of its reserves from its Vice President
and Actuary but does not receive an independent actuarial opinion as to such
reserves. The Company does not discount to present value that portion of its
loss reserves expected to be paid in future periods, however, the loss
reserves include anticipated recoveries for salvage and subrogation claims.
Such salvage and subrogation amounted to $31,344,000 and $30,084,000 in 1998
and 1997, respectively.
Reserves are reviewed for adequacy on a periodic basis. When reviewing
reserves, the Company analyzes historical data and estimates the impact of
various factors such as: (i) per claim information; (ii) Company and
industry historical loss experience; (iii) legislative enactments, judicial
decisions, legal developments in the imposition of damages, and changes in
political attitudes; and (iv) trends in general economic conditions,
including the effects of inflation. This process assumes that past
experience, adjusted for the effects of current developments and anticipated
trends, is an appropriate basis for predicting future events. There is no
precise method, however, for subsequently evaluating the impact of any
specific factor on the adequacy of reserves because the eventual deficiency
or redundancy is affected by many factors. Based upon such reviews, the
Company believes that the estimated reserves for losses and loss expenses
are adequate to cover the ultimate cost of claims. The changes in these
estimates, resulting from the continuous review process and the differences
between estimates and ultimate payments, are reflected in the consolidated
statements of income for the period in which such estimates are changed.
Page 33
PAGE
(k) Premium Revenue
Premiums written include direct writings plus reinsurance assumed and
estimates of premiums earned but unbilled on the workers' compensation line
of insurance, less reinsurance ceded to other insurers. Premiums written are
recognized as revenue over the period that coverage is provided using the
semi-monthly pro rata method. Unearned premiums and prepaid reinsurance
premiums represent that portion of premiums written that are applicable to
the unexpired terms of policies in force.
(l) Federal Income Tax
The Company uses the asset and liability method of accounting for income
taxes. Deferred Federal income taxes arise from the recognition of temporary
differences between financial statement carrying amounts and the tax basis
of the Company's assets and liabilities, as well as tax on net unrealized
gains or losses on securities, available-for-sale. A valuation allowance is
established when it is more likely than not that some portion of the
deferred tax asset will not be realized. The effect of a change in tax rates
is recognized in the period of enactment.
(m) Statement of Cash Flows
Short-term investments comprise of highly liquid investments that are
readily convertible into known amounts of cash. Such investments have
maturities of 90 days or less from the date of purchase.
(n) Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
(1) Investment Securities: Fair values for debt securities,
held-to-maturity are based on quoted market prices where available. For debt
securities, held-to-maturity not actively traded, fair values are estimated
using values obtained from independent pricing services. The fair values for
debt securities, available-for-sale and equity securities,
available-for-sale, which also represent the carrying amounts, are based on
quoted market prices. Fair values for other investments are not material and
are carried at either cost, or the equity method, which approximates fair
value.
(2) Indebtedness: The fair value of the Convertible Subordinated
Debentures is based on quoted market prices. The fair values of the 7.84%
Senior Notes due November 15, 2002 and the 8.77% Senior Notes due August 1,
2005 were estimated using a cash flow analysis based upon Selective's
current incremental borrowing rate for the remaining term of the loan.
(o) Reclassifications
Certain amounts in the Company's prior years' consolidated financial
statements have been reclassified to conform with the 1998 presentation.
Such reclassification had no effect on the Company's net income or
stockholders' equity.
NOTE 2 Pending Accounting Pronouncements
- - - ----------------------------------------
In June of 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("FASB 133"). FASB 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. The Company does not currently invest in derivative
securities, therefore the adoption of this statement is not expected to have
a material effect on the Company's results of operations or financial
condition.
Note 3 Policy Acquisition Costs
- - - --------------------------------
Changes in deferred policy acquisition costs and policy acquisition
costs expensed are summarized as follows:
(in thousands) 1998 1997 1996
- - - ------------------------------------------------------------------------
Deferred policy acquisitions
costs:
Deferred, January 1 $ 98,110 83,150 82,200
Additions:
Commissions 114,173 106,329 102,357
Labor costs 43,392 41,971 39,371
Premium taxes and
assessments 17,147 14,312 13,344
Other 29,955 27,072 26,448
------- ------- -------
Total additions 204,667 189,684 181,520
------- ------- -------
Amortized to expense (193,003) (174,724) (180,570)
------- ------- -------
Deferred, December 31 $ 109,774 98,110 83,150
======= ======= =======
Policy acquisition costs:
Amortized to expense $193,003 174,724 180,570
Period costs 42,520 38,178 33,696
------- ------- -------
Total policy
acquisition costs $235,523 212,902 214,266
======= ======= =======
Page 34
PAGE
NOTE 4 Investments
- - - -------------------
(a) The components of net investment income earned are as
follows:
(in thousands) 1998 1997 1996
- - - -----------------------------------------------------------------
Debt securities $ 89,928 93,894 91,558
Equity securities 5,775 5,002 3,168
Short-term investments 1,705 1,266 1,983
Other 3,140 1,702 1,501
------ ------ ------
100,548 101,864 98,210
Investment expenses (1,352) (1,334) (1,258)
------ ------ ------
Net investment
income earned $ 99,196 100,530 96,952
====== ====== ======
(b) Net unrealized gains on debt securities, held-to-maturity are
as follows:
(in thousands) 1998 1997 1996
- - - ----------------------------------------------------------------
Net unrealized gains $14,799 16,082 12,481
Increase (decrease) in net ====== ====== ======
unrealized gains $ (1,283) 3,601 (8,378)
====== ====== ======
(c) Gross and net unrealized gains (losses) on securities,
available-for-sale are as follows:
(in thousands) 1998 1997 1996
- - - ----------------------------------------------------------------
Debt securities:
Gains $44,227 36,126 23,877
Losses (2,579) (796) (4,470)
------ ------ ------
41,648 35,330 19,407
------ ------ ------
Equity securities:
Gains 140,001 104,147 64,979
Losses (5,768) (2,476) (3,266)
------ ------ ------
134,233 101,671 61,713
------ ------ ------
Net unrealized gains
on available-for-sale
securities 175,881 137,001 81,120
Deferred income tax
expense (61,558) (47,950) (28,392)
------ ------ ------
Net unrealized gains,
net of deferred income tax $114,323 89,051 52,728
====== ====== ======
Increase (decrease) in net
unrealized gains, net
of deferred income tax $ 25,272 36,323 (4,012)
====== ====== ======
(d) The amortized cost, estimated fair values and gross unrealized gains
(losses) of debt securities, held-to-maturity at December 31, 1998 and 1997,
respectively, are as follows:
Gross
Amortized Unrealized
Cost Gains
(in thousands) 1998 1997 1998 1997
- - - ---------------------------------------------------------------------------
U.S. government
and government
agencies $ 12,649 15,569 463 601
Obligations of states and
political subdivisions 317,070 357,380 13,712 14,951
Mortgage-backed securities 28,661 37,220 644 729
Total debt securities, ------- ------- ------ ------
held-to-maturity $358,380 410,169 14,819 16,281
======= ======= ====== ======
- - - ---------------------------------------------------------------------------
Gross
Unrealized Fair
Losses Value
(in thousands) 1998 1997 1998 1997
- - - ---------------------------------------------------------------------------
U.S. government
and government
agencies $ - (35) 13,112 16,135
Obligations of states and
political subdivisions (19) (149) 330,763 372,182
Mortgage-backed securities (1) (15) 29,304 37,934
Total debt securities, ----- ----- ------- -------
held-to-maturity $ (20) (199) 373,179 426,251
===== ===== ======= =======
(e) The cost/amortized cost, estimated fair values and gross unrealized
gains (losses) of securities, available-for-sale at December 31, 1998 and
1997, respectively, are as follows:
Cost/ Gross
Amortized Unrealized
Cost Gains
(in thousands) 1998 1997 1998 1997
- - - ---------------------------------------------------------------------------
U.S. government
and government
agencies $ 105,141 149,038 4,009 4,741
Obligations of states and
political subdivisions 397,310 291,210 19,373 14,810
Corporate securities 460,425 489,329 18,782 14,948
Asset-backed securities 34,788 41,060 519 412
Mortgage-backed securities 35,964 38,423 1,545 1,215
------- ------- ------ ------
Debt securities,
available-for-sale 1,033,628 1,009,060 44,228 36,126
Equity securities,
available-for-sale 135,758 120,602 140,001 104,147
Total securities, --------- ------- ------- ------
available-for-sale $1,169,386 1,129,662 184,229 140,273
========= ========= ======= ======
- - - ---------------------------------------------------------------------------
Gross
Unrealized Fair
Losses Value
(in thousands) 1998 1997 1998 1997
- - - ---------------------------------------------------------------------------
U.S. government
and government
agencies $ (10) (43) 109,140 153,736
Obligations of states and
political subdivisions (209) - 416,474 306,020
Corporate securities (2,177) (753) 477,030 503,524
Asset-backed securities (183) - 35,124 41,472
Mortgage-backed securities - - 37,508 39,638
------ ------ ------- -------
Debt securities,
availabe-for-sale (2,579) (796) 1,075,276 1,044,390
Equity securities,
available-for-sale (5,768) (2,476) 269,991 222,273
Total securities, ----- ------ --------- ---------
available-for-sale $ (8,347) (3,272) 1,345,267 1,266,663
===== ====== ========= =========
Page 35
PAGE
(f) Realized gains (losses) are as follows:
(in thousands) 1998 1997 1996
- - - -----------------------------------------------------------------
Debt securities,
held-to-maturity
Gains $ 129 209 -
Losses - - -
Debt securities,
available-for-sale
Gains 1,086 272 845
Losses (271) (644) (569)
Equity securities,
available-for-sale
Gains 5,513 7,878 3,532
Losses (8,596) (199) (1,022)
----- ----- -----
Net realized gains on
investments (2,139) 7,516 2,786
Real estate loss - (1,495) -
----- ----- -----
Net realized gains (losses) $(2,139) 6,021 2,786
===== ===== =====
(g) The amortized cost and estimated fair value of debt securities at
December 31, 1998, by contractual maturity are shown below. Mortgage-
backed securities are included in the maturity tables using the
estimated average life. Expected maturities may differ from contractual
maturities because issuers may have the right to call or prepay obligations
with or without call or prepayment penalties.
Listed below are debt securities, held-to-maturity:
Amortized Fair
(in thousands) Cost Value
- - - ------------------------------------------------------------------------
Due in one year or less $ 50,285 51,347
Due after one year through
five years 236,710 244,389
Due after five years through
ten years 64,581 70,220
Due after ten years through
fifteen years 6,321 6,531
Due after fifteen years 483 692
------- -------
Total debt securities,
held-to-maturity $ 358,380 373,179
======= =======
Listed below are debt securities, available-for-sale:
Amortized Fair
(in thousands) Cost Value
- - - --------------------------------------------------------------------------
Due in one year or less $ 76,562 77,750
Due after one year through
five years 389,521 405,870
Due after five years through
ten years 479,925 502,430
Due after ten years through
fifteen years 77,351 78,948
Due after fifteen years 10,269 10,278
------- -------
Total debt securities,
held-to-maturity $ 1,033,628 1,075,276
========= =========
(h) Certain securities were on deposit with various state regulatory
agencies to comply with insurance laws amounting to $13,197,000 and
$12,965,000 as of December 31, 1998 and 1997, respectively.
(i) The Company is not exposed to significant concentrations of credit risk
within the investment portfolio.
(j) For 1998, the components of comprehensive income, both gross and net of
tax, are as follows:
(in thousands) Gross Tax Net
- - - ---------------------------------------------------------------
Net income $ 63,704 10,134 53,570
Components of other
comprehensive income:
Unrealized holding
gains during the period 33,142 11,600 21,542
Reclassification
adjustment 5,738 2,008 3,730
------- ------- -------
Other comprehensive
income $ 38,880 13,608 25,272
Comprehensive income $ 102,584 23,742 78,842
======= ======= =======
Other comprehensive income on the consolidated statement of stock-
holders' equity is net of deferred income tax expense (benefit) of
$13,608, $19,558 and $(2,160) for 1998, 1997 and 1996, respectively.
NOTE 5 Federal Income Tax
- - - --------------------------
(a) A reconciliation of Federal income tax on pretax earnings at the
corporate rate to the effective tax rate is as follows:
1998 1997 1996
- - - ------------------------------------------------------------------------
Corporate tax rate 35.0% 35.0 35.0
Tax-exempt interest (15.8) (10.9) (15.3)
Dividends received
deduction (3.5) (1.5) (1.0)
Other .2 .9 .9
---- ---- ----
Effective tax rate 15.9% 23.5 19.6
==== ==== ====
(b) The tax effects of the significant temporary differences that give rise
to deferred tax liabilities and assets are as follows:
(in thousands) 1998 1997
- - - ------------------------------------------------------------------------
Deferred tax liabilities:
Deferred policy acquisition costs $ 38,421 34,339
Unrealized gains on securities,
available-for-sale 61,558 47,950
Accelerated depreciation 3,562 3,718
Other 4,664 5,601
------ ------
Total deferred tax liabilities 108,205 91,608
Deferred tax assets:
Net loss reserve discounting 64,956 65,670
Net unearned premiums 25,792 23,981
Self-insured employee benefit reserves 1,954 1,851
Pension 2,838 1,880
Other 5,989 5,265
------ ------
Total deferred tax (liabilities) assets 101,529 98,647
Valuation allowance recognized for
deferred tax assets 550 550
------ ------
Net deferred tax assets $ (7,226) 6,489
====== ======
The Company has established a valuation allowance of $550,000 for the net
operating losses, which were acquired with Niagara Exchange Corporation and
are available under certain conditions for utilization through the year 2004.
Page 36
PAGE
NOTE 6 Indebtedness
- - - --------------------
(a) Convertible Subordinated Debentures
The Debentures were issued under an Indenture dated December 29, 1982,
("Indenture") in the principal amount of $25,000,000, bearing interest at a
rate of 8.75% per annum, which is payable on the unpaid principal
semiannually on January 1 and July 1 in each year to holders of record at
the close of business on the preceding December 15 and June 15. The
Debentures are convertible into common stock at an effective conversion
price of $7.08 per share. The principal amount of the Debentures, including
any accrued interest, is due on January 1, 2008.
The Indenture requires the Company to retire, through the operation of a
mandatory sinking fund, 5% of the original $25,000,000 aggregate principal
amount of the debentures on January 1 of each of the years, from 1994, to
and including 2007. Voluntary conversions have satisfied this obligation
through the year 2007.
(b) Notes Payable
(1)On August 12, 1994, the Company entered into a $54,000,000 note
purchase agreement with various lenders covering the 8.77% Senior Notes.
The Company is required to pay $18,000,000 principal amount in each year
commencing on August 1, 2003 and ending on August 1, 2005, inclusive,
together with accrued interest thereon. The unpaid principal amount of the
8.77% Senior Notes accrues interest and is payable semiannually on February
1 and August 1 of each year, until the principal is paid in full.
(2) On November 24, 1992, the Company entered into a $50,000,000 note
purchase agreement with various lenders covering the 7.84% Senior Notes. The
Company made its third required principal payment of the 7.84% Senior Notes
of $7,143,000 on November 15, 1998. The Company will continue to make the
required principal payment of $7,143,000 per annum through November 15,
2001, inclusive, together with accrued interest thereon. Any outstanding
principal amount of the 7.84% Senior Notes on November 15, 2002, will be
payable on that date, including any accrued interest. The unpaid principal
amount of the 7.84% Senior Notes accrues interest and is payable
semiannually on May 15 and November 15 of each year, until the principal is
paid in full.
Both note purchase agreements contain restrictive covenants that limit
the Company's ability to declare dividends or incur additional indebtedness.
At December 31, 1998, the amount available for dividends to stockholders
under said restrictions was $213,401,000.
(c) Short-term Debt
The Company has revolving lines of credit amounting to $50,000,000 at
December 31 for both 1998 and 1997. At December 31, 1998 and 1997,
respectively, $28,287,000 and $17,400,000, was outstanding under these
lines. Interest is determined on a LIBOR, prime rate or money market rate
basis at the Company's option. At December 31, 1998 and 1997 there was
approximately $215,078 and $195,600, in accrued interest relating to the
outstanding balance and the weighted average interest rate on these
borrowings was 5.7% and 6.1%, respectively. The amount available under these
agreements at December 31, 1998 and 1997, was $21,713,000 and $32,600,000,
respectively.
Note 7 Reinsurance
- - - -------------------
In the ordinary course of business, the insurance subsidiaries assume
and cede premiums with other insurance companies and various pools and
associations of which they are members. A large portion of the reinsurance
is effected under reinsurance contracts known as treaties and, in some
instances, by negotiation on each individual risk. In addition, there are
excess of loss and catastrophe reinsurance contracts which protect against
losses over stipulated amounts arising from any one occurrence or event. The
reinsurance arrangements provide greater diversification of business and can
serve to limit the maximum net loss on catastrophes and large and unusually
hazardous risks.
The insurance subsidiaries are contingently liable to the extent that
any reinsurer becomes unable to meet its contractual obligations. The
Company reviews the financial condition of its existing reinsurers for any
potential write-offs of uncollectible amounts. At December 31, 1998, the
Company had prepaid reinsurance premiums and net reinsurance recoverables
with American Re-Insurance Company (rated "A++ Superior" by A.M. Best
Company, Inc.) and a state insurance fund that amounted to $83,833,000 and
$30,342,000, respectively. The Company has a $35,000,000 trust fund
agreement with American Re-Insurance Company to secure a portion of their
recoverable amounts.
The following is a table of assumed and ceded amounts by income
statement caption:
(in thousands) 1998 1997 1996
- - - ---------------------------------------------------------------------------
Premiums written:
Assumed $ 19,583 19,195 27,908
Ceded (79,585) (84,759) (86,626)
Premiums earned:
Assumed 21,239 20,708 29,356
Ceded (79,089) (84,384) (95,765)
Losses incurred:
Assumed 16,339 10,876 16,158
Ceded (52,067) (26,995) (94,486)
Loss expenses incurred:
Assumed 2,166 2,108 2,165
Ceded (2,349) (2,490) (4,318)
NOTE 8 Retirement Plans
- - - ------------------------
(a) Retirement Savings Plan
The Company offers a voluntary defined contribution retirement savings
plan with an added 401(k) feature to employees who meet eligibility
requirements. The plan allows employees to make contributions to a number of
diversified investment options including the Company's common stock, on a
before and/or after-tax basis. During 1998 and 1997, 35,876 and 14,292
shares of the Company's common stock were issued under this plan,
respectively.
Page 37
PAGE
The number of shares of the Company's common stock available to be
purchased under the plan was 946,838 at December 31, 1998. Employees can
contribute up to a maximum of 12% of their defined compensation and these
contributions, up to a maximum of 6%, are matched 50% by the Company. The
Company's contributions to the plan amounted to $1,597,000, $1,190,000 and
$1,162,000 in 1998, 1997 and 1996, respectively.
(b) Retirement Income Plan
The Company has a noncontributory defined benefit retirement income plan
covering substantially all employees who meet eligibility requirements. The
Company's funding policy provides that payments to the pension trust shall
be equal to the minimum funding requirements of the Employee Retirement
Income Security Act plus additional amounts that may be approved by the
Company from time to time. The Company has made various amendments to the
plan in order to comply with certain Internal Revenue Code changes.
The plan's assets are generally invested in debt and equity securities.
The debt securities are invested 100% in investment grade quality
securities. The reconciliations of the plan are as follows:
- - - ---------------------------------------------------------------------------
(in thousands) 1998 1997
- - - ---------------------------------------------------------------------------
Change in Benefit Obligation:
Benefit obigation, beginning
of year $ 54,198 44,136
Service cost 3,340 2,792
Interest cost 3,892 3,427
Actuarial losses 7,257 5,287
Benefits paid (1,708) (1,444)
------ ------
Benefit obligation, end of year $ 66,979 54,198
====== ======
Change in Fair Value of Assets:
Fair value of assets, beginning
of year $ 48,379 38,799
Actual return on plan assets
(net of expenses) 5,762 7,317
Contributions by the employer 650 3,690
Benefits paid (1,691) (1,427)
------ ------
Fair value of assets, end of year $ 53,100 48,379
====== ======
Reconciliation of Funded Status:
Funded status $ (13,879) (5,819)
Unrecognized prior service cost 1,328 1,565
Unrecognized net loss 5,545 22
------ ------
Net amount recognized $ (7,006) (4,232)
====== ======
- - - ---------------------------------------------------------------------------
(dollars in thousands) 1998 1997 1996
- - - ---------------------------------------------------------------------------
Components of Net Periodic
Benefit Cost:
Service cost $ 3,340 2,792 3,203
Interest cost 3,892 3,427 3,110
Expected return on plan assets (4,043) (3,316) (2,856)
Amortization of unrecognized
transition asset - - (102)
Amortization of unrecognized
prior service cost 237 237 208
Amortization of unrecognized
net loss 15 5 126
Settlement loss - - 35
----- ----- -----
Net periodic benefit cost $ 3,441 3,145 3,724
===== ===== =====
Weighted-Average Assumptions
as of December 31:
Discount rate 6.50% 7.25 7.75
Expected return on plan assets 8.50% 8.50 8.50
Rate of compensation increase 4.50% 5.00 5.00
All amounts in the reconciliation of funded status were recognized in
the balance sheets for 1998 and 1997. There were no amounts to be included
in other comprehensive income for the periods shown resulting from a change
in the minimum pension liability.
(c) Postretirement Plan
The Company provides life insurance benefits ("postretirement benefits")
for retired employees. Substantially all the Company's employees may become
eligible for these benefits if they reach retirement age while working for
the Company and meet a minimum of ten years of eligibility service. Those
who retired prior to January 1, 1991, receive decreasing life insurance
coverage that grades to an ultimate amount after ten years. Those retiring
on or after January 1, 1991, receive life insurance coverage in an amount
equal to 50% of their annual salary amount in effect at the end of their
active career. The estimated cost of these benefits is accrued over the
working lives of those employees expected to qualify for such benefits as a
level percentage of their payroll costs.
The reconciliations of the plan are presented as follows:
- - - ---------------------------------------------------------------------------
(in thousands) 1998 1997
- - - ---------------------------------------------------------------------------
Change in Post Retirement Obligation:
Benefit obligation, beginning
of year $ 4,610 4,060
Service cost 165 157
Interest cost 340 315
Actuarial losses 451 203
Benefits paid (251) (125)
------ ------
Benefit obligation, end of year $ 5,315 4,610
====== ======
Reconciliation of Funded Status:
Funded status $ (5,315) (4,610)
Unrecognized transition obligation 594 640
Unrecognized net (gain) loss 75 (381)
------ ------
Net amount recognized $ (4,646) (4,351)
====== ======
- - - ---------------------------------------------------------------------------
(in thousands) 1998 1997 1996
- - - ---------------------------------------------------------------------------
Components of Net Post
Retirement Cost:
Service cost $ 165 157 159
Interest cost 340 315 345
Amortization of unrecognized
transition obligation 46 46 46
Amortization of unrecognized
net gain (6) (14) -
----- ----- -----
Net post retirement cost $ 545 504 550
===== ===== =====
Weighted-Average Assumptions
as of December 31:
Discount rate 6.50% 7.25 7.75
Rate of compensation increase 4.50% 5.00 5.00
All amounts in the reconciliation of funded status were recognized in
the balance sheets for 1998 and 1997. There was no unrecognized prior
service costs for 1998 and 1997. There were no amounts to be included in
other comprehensive income for the periods shown.
Page 38
PAGE
(d) Retirement Plan for Nonemployee Directors
The Company maintained a nonqualified unfunded defined benefit
retirement income plan for nonemployee Directors. The estimated accrued
costs for this plan were not material. The plan was terminated effective
December 31, 1997, and as part of the termination, the present value of each
Director's future benefits, as of this date, was converted into units based
on the fair value of Selective common stock on that date. The cash value of
these units will be distributed to each Director upon retirement, or at each
Directors election, over a period of fifteen years after such retirement.
The units will accrue amounts equivalent to dividends which will also be
converted into units based on the fair market value of Selective common stock
on the applicable dividend reinvestment dates.
NOTE 9 Incentive Compensation Plans
- - - -------------------------------------
The Company has incentive compensation plans in which all employees are
eligible to participate based on corporate and individual performance goals.
The total compensation costs charged to expense in connection with the plans
were $5,217,000, $8,914,000 and $4,753,000 in 1998, 1997 and 1996,
respectively.
NOTE 10 Stock Compensation Plans
- - - ---------------------------------
The Company has adopted the pro forma footnote disclosure-only
provisions of FASB 123. Based on the fair value method consistent with the
provisions of FASB 123, the Company's net income and earnings per share
would have been reduced to the following pro forma amounts indicated below:
- - - ----------------------------------------------------------------------------
(in thousands, except per share amounts) 1998 1997 1996
- - - ----------------------------------------------------------------------------
Net income:
As reported $53,570 69,608 55,551
Pro forma 52,142 69,142 54,493
Basic earnings per share:
As reported 1.88 2.41 1.92
Pro forma 1.83 2.39 1.89
Diluted earnings per share:
As reported 1.74 2.27 1.83
Pro forma 1.69 2.26 1.80
The fair value of each option grant is estimated on the date of grant
using the Black Scholes option-pricing model with the following weighted
average assumptions for 1998, 1997 and 1996, respectively: (i) risk free
interest rate of 4.84%, 5.27% and 5.34% for the employee stock purchase plan
and 4.76%, 6.04% and 6.04% for all other option plans; (ii) expected life of
six months for the employee stock purchase plan and five years for all other
option plans for all years; (iii) dividend yield of 2.4%, 2.4% and 3.3%; and
(iv) an expected volatility of 23%, 21% and 20%.
The weighted-average fair value of options and stocks granted per share,
during the year for 1998, 1997 and 1996, respectively, is as follows:
- - - ---------------------------------------------------------------------------
1998 1997 1996
- - - ---------------------------------------------------------------------------
Stock option plans $ 4.00 5.15 3.19
Restricted stock 26.41 18.77 17.02
Employee stock purchase plan:
Six month option 1.36 1.29 1.04
15% of grant date market value 3.17 3.23 2.61
----- ----- -----
Total 4.53 4.52 3.65
Agents stock purchase plan:
5% of grant date market value 1.14 1.18 .85
A summary of the option transactions under the stock option plans is as
follows:
- - - --------------------------------------------------------------------------
Stock Weighted
appre- average
Number ciation exercise
of shares rights price
- - - ---------------------------------------------------------------------------
Outstanding at
December 31, 1995 1,595,496 220,268 $13.70
Granted 1996 386,400 - 17.67
Exercised 1996 (106,804) (18,744) 10.59
Forfeited 1996 (55,044) (51,756) 13.28
------- ------- -----
Outstanding at
December 31, 1996 1,820,048 149,768 14.76
Granted 1997 313,400 - 23.17
Exercised 1997 (156,636) (6,022) 13.89
Forfeited 1997 (40,122) (35,946) 15.26
------- ------- -----
Outstanding at
December 31, 1997 1,936,690 107,800 16.17
Granted 1998 240,700 - 19.90
Exercised 1998 (253,176) (3,362) 13.14
Forfeited 1998 (34,562) (60,438) 17.10
------- ------- -----
Outstanding at
December 31, 1998 1,889,652 44,000 $17.03
======= ======= =====
Options exercisable and their weighted average exercise price at year
end are 1,754,448 and $16.35, 1,663,290 and $15.05, and 1,724,648 and
$14.75, for 1998, 1997 and 1996, respectively.
The following table summarizes information about stock options
outstanding and exercisable under the stock option plans at December 31,
1998:
Options Outstanding
- - - --------------------------------------------------------------------------
Weighted
average
Range of remaining Weighted
exercise Number contractual life average
prices of shares in years exercise price
- - - --------------------------------------------------------------------------
$ 5 to 10 104,000 2.29 $ 8.68
10 to 15 692,852 5.15 13.80
15 to 20 831,800 8.01 18.27
20 to 28 261,000 8.85 24.97
------- ---- -----
$ 5 to 28 1,889,652 6.76 $17.03
========= ==== =====
Options Exercisable
- - - --------------------------------------------------------------------------
Weighted
Range of average
exercise Number exercise
prices of shares Price
- - - --------------------------------------------------------------------------
$ 5 to 10 104,000 $ 8.68
10 to 15 692,852 13.80
15 to 20 831,800 18.27
20 to 28 125,796 24.07
------- ----
$ 5 to 28 1,754,448 16.35
========= =====
Page 39
PAGE
(a) Stock Option Plan
Under the Company's stock option plan, 44,000 shares of the Company's
common stock are reserved for issuance, upon exercise of stock options
outstanding at December 31, 1998. This plan permitted the granting of
qualified and nonqualified stock options to key employees, which may or may
not have SARs attached. Options and related SARs were granted at not less
than fair value on the date of the grant, are required to be exercised
within ten years from the date of the grant and are exercisable immediately
upon the grant. This plan expired in August 1992 and was replaced with the
Company's stock option plan II.
Compensation expense, based on the increase or decrease in the fair
value of the Company's common stock, is charged or (credited) to other
expense in recognition of the SARs attached to the granted options. Such
amounts were $(1,481,000), $485,000 and $(456,000) in 1998, 1997 and 1996,
respectively.
(b) Stock Option Plan II
Under the Company's stock option plan II, 3,160,054 shares of the
Company's common stock are available for issuance at December 31, 1998. The
plan permits the granting of qualified and nonqualified stock options to
employees, which may or may not have SARs attached. Options and related SARs
may be granted at not less than fair value on the date of the grant and may
be subject to certain vesting periods as determined by the Company's
Compensation Committee ("Committee"). Each grant must be exercised within
ten years from the date of the grant. Under this plan, the Company granted
options of 207,700, 277,400 and 173,700 for 1998, 1997 and 1996,
respectively.
Under the Company's stock option plan II, the Committee may, at its
discretion, make restricted or unrestricted grants of common stock, or grant
rights to receive common stock, to employees in addition to or in
substitution for options and/or SARs granted. The Company granted a total of
169,026, 207,375 and 168,454 restricted shares for 1998, 1997 and 1996,
respectively, and 26,745, 41,400 and 12,200 shares were forfeited in 1998,
1997 and 1996, respectively. Each such grant must be expressly subject to
the attainment of one or more performance-related objectives for certain
executive officers, and may be subject to the attainment of one or more
performance-related objectives for other employees, as determined by the
Committee and set forth in an award agreement. Each such grant also is
subject to a vesting period or other terms, conditions, restrictions and
limitations as determined by the Committee in its discretion and set forth
in an award agreement.
During the vesting period, dividends are earned and held in escrow on
the restricted shares subject to the same vesting period and conditions as
set forth in the award agreement. Effective September 3, 1996, dividends
earned on the restricted shares are reinvested in the Company's common stock
at fair value. Included in the 1998 and 1997 restricted shares granted were
12,870 and 8,825 shares, respectively, that were issued through the dividend
reinvestment feature.
Deferred compensation expense is recognized for the fair value of the
restricted shares when granted and is adjusted for the increases or
decreases in the fair value of the Company's common stock for share awards
subject to performance-related objectives and is amortized ratably over the
vesting period. The unamortized amount is accounted for as a reduction of
stockholders' equity. At December 31, 1998, 1997 and 1996, respectively,
deferred compensation of $5,613,000, $6,239,000 and $2,957,000 was recorded
as a reduction of stockholders' equity and the amounts amortized to expense
in 1998, 1997 and 1996, respectively, were $1,593,000, $2,733,000 and
$974,000.
(c) Employee Stock Purchase Plan
Under the terms of the employee stock purchase savings plan, the number
of shares of common stock available to be purchased is 701,766. This plan is
available to all employees who meet the eligibility requirements and
provides for the issuance of options to purchase shares of common stock. The
purchase price is the lower of: (i) 85% of the closing market price at the
time the option is granted or (ii) 85% of the closing price at the time the
option is exercised. The Company issued 74,613 shares, 49,897 shares and
57,772 shares in 1998, 1997 and 1996, respectively, to employees and charged
to expense $235,000, $365,000 and $210,000 in 1998, 1997 and 1996,
respectively.
(d) Executive Stock and Stock Unit Awards
During 1995, an officer of the Company was granted 27,728 shares of
stock. The grant contained a graduated vesting provision under which shares
vest over a three-year period beginning in 1995. At December 31, 1998, all
shares were vested.
Deferred compensation was recognized for the fair value of the shares
granted and was amortized over the vesting period. At December 31, 1997,
deferred compensation of $109,000 was recorded as a reduction of
stockholders' equity and the amounts charged to expense in 1998, 1997 and
1996, respectively, were $110,000, $132,000 and $132,000.
During 1998, certain officers of the Company were granted phantom stock
units in lieu of grants of restricted stock. The total number of phantom
stock units awarded in 1998 was 23,000. The value of the phantom stock units
is being charged to expense over the estimated remaining employment period.
The value of the phantom stock units will be paid in cash upon retirement.
(e) Stock Option Plan for Directors
Under the Company's stock option plan for directors, 373,000 shares of
the Company's common stock are available for issuance. Each Director who is
not a full-time employee of the Company participates in the plan and
automatically receives a nonqualified option to purchase 3,000 shares of
common stock at not less than fair value on March 1 of each year. Each
option becomes exercisable one year after the option was granted and expires
no more than ten years from the date the option is granted. Under this plan,
the Company granted options of 33,000, 36,000 and 39,000 for 1998, 1997 and
1996, respectively.
Page 40
PAGE
(f) Stock Compensation Plan for Nonemployee Directors
In May 1996, the shareholders approved the stock compensation plan for
nonemployee Directors, effective January 1, 1997. The purpose of this plan
is to provide for the payment of the annual compensation for the Directors'
services in shares of the Company's common stock. The amount of common
shares available for issuance under the plan is 380,896. The Company issued
7,872 shares and 11,232 shares during 1998 and 1997, respectively and
charged to expense $243,000 and $290,000, respectively.
(g) Agent Stock Purchase Plan
Under the terms of the agents' stock purchase plan, the number of shares
of common stock available to be purchased is 1,003,874. This plan provides
for four quarterly offerings in which independent insurance agents can
purchase the Company's common stock at a 5% discount. The Company issued
85,672 shares, 84,996 shares and 109,986 shares in 1998, 1997 and 1996,
respectively, to agents and charged to expense $98,000, $100,000 and $93,000
in 1998, 1997 and 1996, respectively.
Note 11 Stockholders Equity
- - - ----------------------------
The Company maintains a dividend reinvestment and stock purchase plan,
under which 369,911 shares of common stock are available for issuance.
Shares purchased under this plan are issued at fair value.
Under a common stock repurchase program authorized by the Board of Directors
on July 29, 1996 and extended on July 28, 1998, the Company can repurchase
up to 2,000,000 shares of its common stock under each program or 4,000,000
shares in aggregate. In 1998, 1997 and 1996, the Company acquired 1,774,000
shares, 336,000 shares and 257,000 shares, respectively, at a total cost of
$37,750,000, $8,498,000 and $4,289,000, respectively.
Selective's ability to declare and pay dividends on common stock is
affected by the ability of its insurance subsidiaries to declare and pay
dividends to Selective under the regulatory limitations of the states in
which the insurance subsidiaries are domiciled. All of the jurisdictions in
which the insurance subsidiaries are domiciled, including New Jersey, New
York, North Carolina and South Carolina regulate the payment of dividends.
In all such jurisdictions, domestic insurers are prohibited from paying
"extraordinary dividends" without approval of the insurance commissioner of
the relevant state. In addition to the regulation of extraordinary
dividends, New Jersey and South Carolina require notice to the relevant
state regulatory authorities of the declaration of both ordinary and
extraordinary dividends and distributions. During the notice period, the
relevant state regulatory authority may disallow all or part of the proposed
dividend if it determines that the insurer's surplus, with regard to
policyholders, is not reasonable in relation to the insurer's outstanding
liabilities and adequate to its financial needs or, in the case of New
Jersey, if the regulatory authority determines that the insurer is otherwise
in a hazardous financial condition.
Based on the 1998 statutory financial statements, the maximum dividends
that can ultimately be paid to Selective in 1999 by Selective Insurance
Company of America, Selective Way Insurance Company, Selective Insurance
Company of the Southeast, Selective Insurance Company of South Carolina and
Selective Insurance Company of New York are $25,933,000, $12,713,000,
$3,885,000, $4,967,000 and $3,135,000, respectively.
The National Association of Insurance Commissioners ("NAIC") has adopted
risk-based capital ("RBC") requirements that require insurance companies to
calculate and report information under a risk-based formula, which measures
statutory capital and surplus needs based on a regulatory definition of risk
in a company's mix of products and its balance sheet. The implementation of
RBC did not impact the operations of the Company's insurance subsidiaries
since all of its subsidiaries have an amount above the authorized control
level RBC, as defined by the NAIC.
NOTE 12 Preferred Share Purchase Rights Plan
- - - ---------------------------------------------
On February 2, 1999, Selective's Board of Directors approved the amended
and restated stockholder rights plan to revise certain terms and conditions
of the current plan which was due to expire on November 6, 1999. The rights
to purchase one two-hundredth of a share of Selective Series A Junior
Preferred Stock at an exercise price of $80 are attached to all shares of
Selective common stock and are exerciseable ten days after an announcement
that a person or group has acquired 15% or more of the common stock
(Acquiring Person) or ten business days after a person commences or
announces its intent to make a tender offer which would result in their
acquiring 15% or more of the common stock (Acquiring Person). If a person or
group becomes an Acquiring Person, each right will entitle the holder, other
than the Acquiring Person, to purchase the number of common shares having a
market value of two times the exercise price of $80.
If Selective is acquired in a merger, or 50% or more of its assets are
sold, each right other than the rights of an Acquiring Person, will be
exerciseable to purchase shares of the acquiring company having twice the
market value of the $80 exercise price.
Before an Acquiring Person acquires 50% or more of the common shares,
Selective's Board may exchange rights, other than the rights of an Acquiring
Person, at an exchange ratio of one share of common stock per right. The
rights expire February 2, 2009, unless Selective's Board redeems them at
$.01 per right before a person or group triggers the plan or unless
Selective's Board exchanges them for common stock.
Page 41
PAGE
NOTE 13 Reconciliation of Statutory to Generally Accepted Accounting
Principles Financial Statements
- - - ---------------------------------------------------------------------
(a) The following is a reconciliation of the differences between the
Statutory Financial Statements and the Generally Accepted Accounting
Principles ("GAAP") Financial Statements:
- - - --------------------------------------------------------------------------
(in thousands) 1998 1997 1996
- - - --------------------------------------------------------------------------
Consolidated insurance
subsidiaries - statutory basis
net income $ 50,223 70,652 66,207
Deferred policy acquisition
costs 11,664 14,960 950
Deferred Federal income taxes (422) (4,689) (3,830)
Net losses of subsidiaries (304) (1,474) (357)
Other, net (2,234) (1,452) (735)
Combined subsidiaries ------ ------ ------
- GAAP basis 58,927 77,997 62,235
Selective Insurance Group, Inc.,
net of intercompany equity
eliminations (5,357) (8,389) (6,684)
Consolidated financial ------ ------ ------
statement - GAAP basis
net income $ 53,570 69,608 55,551
====== ====== ======
- - - --------------------------------------------------------------------------
(in thousands) 1998 1997
- - - --------------------------------------------------------------------------
Combined insurance subsidiaries -
statutory surplus $ 509,513 485,936
Deferred policy acquisition costs 109,774 98,110
Deferred Federal income taxes (7,007) 6,846
Loss reserves 1,426 4,186
Net unrealized gains - debt securities,
available-for-sale 41,649 35,330
Nonadmitted assets 23,252 17,223
Other, net (8,300) (6,930)
Combined subsidiaries - GAAP ------- -------
basis 670,307 640,701
Selective Insurance Group, Inc.
net of intercompany equity
eliminations (62,724) (75,385)
Consolidated financial statement - ------- -------
GAAP basis stockholders' equity $ 607,583 565,316
======= =======
(b) The insurance subsidiaries prepare their statutory financial
statements in accordance with accounting practices prescribed or permitted
by the various states of domicile. Prescribed statutory accounting practices
include state laws, regulations and general administrative rules, as well as
a variety of publications of the NAIC. Permitted statutory accounting
practices encompass all accounting practices that are not prescribed; such
practices differ from state to state, may differ from company to company
within a state and may change in the future. Furthermore, the NAIC had a
project to codify statutory accounting practices, which when adopted, is
expected to constitute the principal source of "prescribed" statutory
accounting practices.
Page 48
PAGE
NOTE 14 Earnings Per Share
- - - --------------------------
The following table provides a reconciliation of the numerators and
denominators of the basic and diluted EPS computations of net income for the
year ended:
(in thousands, Income Shares Per-Share
except per share amounts) (Numerator) (Denominator) Amount
- - - ------------------------------------------------------------------------
1998
- - - ----
Basic EPS
Net Income available
to common stockholders $ 53,570 28,480 $ 1.88
====
Effect of Dilutive Securities
Restricted stock - 534
8.75% convertible
subordinated debentures 375 926
Stock Options (989) 472
------ ------
Diluted EPS
Income available to common
stockholders + assumed
conversions $ 52,956 30,412 $ 1.74
====== ====== ====
- - - ------------------------------------------------------------------------
1997
- - - ----
Basic EPS
Net Income available
to common stockholders $ 69,608 28,909 $ 2.41
====
Effect of Dilutive Securities
Restricted stock - 404
8.75% convertible
subordinated debentures 396 971
Stock Options 263 641
------ ------
Diluted EPS
Income available to common
stockholders + assumed
conversions $ 70,267 30,925 $ 2.27
====== ====== ====
- - - -------------------------------------------------------------------------
1996
- - - ----
Basic EPS
Net Income available
to common stockholders $ 55,551 28,860 $ 1.92
====
Effect of Dilutive Securities
Restricted stock - 224
8.75% convertible
subordinated debentures 413 1,003
Stock Options (339) 273
------ ------
Diluted EPS
Income available to common
stockholders + assumed
conversions $ 55,625 30,360 $ 1.83
====== ====== ====
Page 42
PAGE
NOTE 15 Liability for Unpaid Claims and Claim Adjustment Expenses
- - - ------------------------------------------------------------------
The table below provides a roll-forward of reserves for losses and loss
expenses for beginning and ending reserve balances:
- - - --------------------------------------------------------------------------
(in thousands) 1998 1997 1996
- - - --------------------------------------------------------------------------
Gross reserves for losses
and loss expenses at
beginning of year $ 1,161,169 1,189,793 1,120,052
Less reinsurance recoverable
on unpaid losses and loss
expenses at beginning of
year 124,197 150,208 121,369
Net reserves for losses --------- --------- ---------
and loss expenses at
beginning of year 1,036,972 1,039,585 998,683
Provision for losses and loss
expenses for claims
occurring in the current
year 510,319 471,337 505,904
Increase (decrease) in estimated
losses and loss expenses for
claims occurring in prior
years (2,519) (10,124) (9,178)
--------- --------- ---------
1,544,772 1,500,798 1,495,409
--------- --------- ---------
Net losses and loss expenses
paid for claims occurring
during:
Current year 178,286 160,241 175,459
Prior years 313,665 303,585 280,365
--------- --------- ---------
491,951 463,826 455,824
--------- --------- ---------
Net reserves for losses and
loss expenses at end of year 1,052,821 1,036,972 1,039,585
Reinsurance recoverable on
unpaid losses and loss
expenses at end of year 140,453 124,197 150,208
Gross reserves for losses --------- ------- -------
and loss expenses at
end of year $ 1,193,274 1,161,169 1,189,793
========= ========= =========
The 1997 losses and loss expenses incurred included the effect of prior
year reserve redundancy of $10,124,000. The reserve redundancy was
principally due to reserve reductions in the workers' compensation line of
insurance due to greater than anticipated savings from the use of managed
care and various favorable legislative reforms. This was partially offset by
higher estimates of ultimate loss and loss expense costs in the commercial
automobile line of insurance due to higher than expected paid and incurred
loss and loss expenses.
The 1996 losses and loss expenses incurred included the effect of prior
year reserve redundancy of $9,178,000. The reserve redundancy was
principally due to reserve reductions (approximately $11,000,000) in the
National Workers' Compensation Reinsurance Pool business ("NCCI"). During
1996, incurred loss estimates for the NCCI decreased due to greater than
anticipated savings from the use of managed care and various favorable
legislative reforms.
NOTE 16 Fair Values of Financial Instruments
- - - ---------------------------------------------
The following table presents the carrying amounts which are included in
the consolidated balance sheets and estimated fair values of the Company's
financial instruments as of December 31, 1998 and 1997:
- - - ---------------------------------------------------------------------------
1998 1997
---------------------------------------------
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
- - - ---------------------------------------------------------------------------
Financial assets:
Debt securities:
Held-to-maturity $ 358,380 373,179 410,169 426,251
Available-for-sale 1,075,276 1,075,276 1,044,390 1,044,390
Equity securities 269,991 269,991 222,273 222,273
Other investments 66,992 66,992 48,858 48,858
Financial liabilities:
8.77% Senior Notes 54,000 60,666 54,000 57,760
7.84% Senior Notes 28,572 30,257 35,714 36,267
------- ------- ------- -------
Notes payable 82,572 90,923 89,714 94,027
Debentures 6,219 17,942 6,845 26,079
Page 43
PAGE
NOTE 17 Segment Information
- - - ----------------------------
The Company's subsidiaries are primarily engaged in the writing of
property and casualty insurance. The Company has classified its business
into four segments, each of which is managed separately. The four segments
are commercial lines, personal lines, investment operations, and
fee-for-service. All segments are evaluated based on their GAAP underwriting
or operating results which are prepared using the accounting policies
described in Note 1, "Summary of Significant Accounting Policies".
The commercial lines and personal lines underwriting activities are
sufficiently different in their products, regulations and marketing that
they are managed separately. These underwriting results are determined
taking into account net premiums earned, incurred losses and loss expenses,
policy acquisition costs and other underwriting expenses and policyholders
dividends. Similarly, management of the investment portfolio is separate
from the insurance underwriting segments and has, therefore, have been
classified as a segment. The fee-for-service operations are managed
independently from the other segments and, therefore, have been classified
separately. The fee-for-service segment consists of the operations of Alta,
PDA, SelecTech and the flood business managed by the Company for the
National Flood Insurance Program. The segments' results are determined
taking into account the net revenues generated in each of the businesses,
less the costs of operation.
In computing the results of each segment, no adjustment is made for net
realized gains (losses) on investments, interest expense, net general
corporate expenses or federal income taxes. The Company does not maintain
separate investment portfolios for the commercial lines and personal lines
segments, and therefore, does not allocate assets to the segments.
The following summary present revenues (net investment income in the
case of the investments segment) and pretax income for the individual
segments:
- - - ---------------------------------------------------------------------------
(in thousands) 1998 1997 1996
- - - ---------------------------------------------------------------------------
Income Income Income
Revenue (loss) Revenue (loss) Revenue (loss)
- - - ---------------------------------------------------------------------------
Commercial
Lines
Underwriting $506,020 $(32,871) 465,826 (13,305) 477,474 (24,846)
Personal
Lines
Underwriting 216,972 7,885 210,442 11,522 217,473 4,819
Investments 99,196 99,196 100,530 100,530 96,952 96,952
Fee-for-service
Operations 14,100 2,217 8,236 765 6,378 1,969
------- ------- ------- ------- ------- -------
Totals $836,288 $ 76,427 785,034 99,512 798,277 78,894
======= ======= ======= ======= ======= =======
Net realized on gains
on investments (2,139) 6,021 2,786
Interest expense (9,409) (9,592) (9,185)
General corporate expenses (1,175) (4,921) (3,406)
Income before ------- ------- -------
Federal income tax $ 63,704 91,020 69,089
======= ======= =======
NOTE 18 Related Party Transactions
- - - -----------------------------------
During the fourth quarter of 1994, certain officers of Selective
exercised stock options by giving Selective promissory notes ($992,000) in
payment for the stock purchased. The Company's noninterest bearing notes are
secured by shares of the Company's common stock. The promissory notes are
full recourse and subject to certain employment requirements.
In August 1998, certain officers of Selective purchased stock on the
open market with proceeds advanced by the Company. These officers gave
Selective promissory notes ($1,773,000). The notes bear interest at 2.5% and
are secured by the purchased shares of Selective's common stock. The
promissory notes are full recourse and subject to certain employment
requirements. The notes require the payments of interest and 7% of the
original principal each year, with the remaining balance due at the end of
ten years. At December 31, 1998, the principal amount outstanding was
$1,729,000.
Page 44
PAGE
NOTE 19 Commitments and Contingencies
- - - --------------------------------------
(a) Reserves established for liability insurance continue to reflect
exposure to environmental claims, both asbestos and non-asbestos. These
claims have arisen primarily under older policies containing exclusions for
environmental liability which certain courts, in interpreting such
exclusions, have determined do not bar such claims. The emergence of these
claims is slow and highly unpredictable. Since 1986, policies issued by the
insurance subsidiaries have contained a more expansive exclusion for losses
related to environmental claims. There are significant uncertainties in
estimating the Company's exposure to environmental claims (for both cases
and IBNR reserves) resulting from lack of historical data, long reporting
delays, uncertainty as to the number and identity of claimants and complex
legal and coverage issues. Legal issues which arise in environmental cases
include the determination of whether a case is one for a federal or state
forum, choice of law, causation, admissibility of evidence, allocation of
damages and contribution among joint defendants, successor and predecessor
liability and whether direct action against insurers can be maintained.
Coverage issues which arise in environmental cases include the
interpretation and application of policy exclusions, the determination and
calculation of policy limits, the determination of the ultimate amount of a
loss, the extent to which a loss is covered by a policy, if at all, the
obligation of an insurer to defend a claim and the extent to which a party
can prove the existence of coverage. Courts have reached different and
sometimes inconsistent conclusions on these legal and coverage issues. The
Company does not discount to present value that portion of its loss reserves
expected to be paid in future periods.
At December 31, 1998, the Company established a range of reasonably
possible losses for known environmental exposures of approximately
$10,000,000 to $43,000,000 on a gross basis, and $8,000,000 to $37,000,000,
on a net basis. At December 31, 1998, the Company's reserves for
environmental claims amounted to $54,128,000 on a gross basis (including
IBNR reserves of $25,247,000) and $48,328,000 (including IBNR reserves of
$23,447,000) on a net basis. The Company's case reserves for known
environmental claims, excluding IBNR, were $28,881,000 on a gross basis and
$24,881,000 on a net basis in connection with 2,072 claims, including
multiple claimants who are associated with the same site or incident. These
claims involved about 1,734 lawsuits. Of the 2,072 total environmental
claims, 1,665 claims are asbestos related, of which 1,424 involve only two
insureds. One such insured manufactured asbestos-containing products, while
the other supplied asbestos-containing products. The reserve associated with
these two insureds amounted to $6,320,000 on a gross basis and $2,520,000
on a net basis. About 106 of the total environmental claims involve
approximately 27 landfills. The landfill sites account for reserves of
approximately $11,089,000 on a gross basis and $10,889,000 on a net basis.
The remaining claims, which represent about $11,472,000 both on a gross
basis and net basis, involve leaking underground storage tanks, air
pollution, as well as other asbestos claims. Litigation costs associated
with environment claims have been significant, particularly for landfill
claims.
IBNR reserve estimation is often difficult because, in addition to other
factors, there are significant uncertainties associated with critical
assumptions in the estimation process such as average clean-up costs,
third-party costs, potentially responsible party shares, allocation of
damages, insurer litigation costs, insurer coverage defenses and potential
changes to state and federal statutes. Moreover, normal historically-based
actuarial approaches do not apply because relevant history is not available.
In addition, while models can be applied, such models can produce
significantly different results with small changes in assumptions.
The Company has established a range of reasonably possible IBNR losses
for non-environmental net claims at December 31, 1998, of approximately
$438,000,000 to $542,000,000 and at December 31, 1997, of approximately
$428,000,000 to $528,000,000. For each major product line of business,
incurred and/or paid loss and loss expense projections were calculated using
standard actuarial techniques on both an optimistic and pessimistic basis to
construct an IBNR range for that product line. The overall range for
non-environmental IBNR was selected based on statistical combinations of the
ranges of the individual product lines. The Company's net IBNR reserves for
non-environmental claims were $500,000,000 and $502,000,000 at December 31,
1998, and 1997, respectively.
Based on the Company's aggregate reserve for net losses and loss
expenses at December 31, 1998, the Company does not expect that liabilities
associated with environmental and non-environmental claims will have a
materially adverse impact on its future liquidity, financial position and
results of operations. However, given the complexity of coverage and other
legal issues, and the significant assumptions used in estimating such
exposures, actual results could significantly differ from the Company's
current estimates.
The table on page 46 provides a roll-forward of the Company's gross and
net environmental incurred losses and loss expenses and related reserves
thereon. The total environmental claims gross incurred losses and loss
expenses for 1998 increased by $8 million when compared to 1997. The
increase was due to the greater number of new asbestos and non-asbestos
related claims received during 1998, 888 claims received, compared to 555
claims received in 1997. The total environmental claims gross incurred
losses and loss expenses for 1997 decreased by $19 million when compared to
1996. The decrease was primarily due to an increase in IBNR of $12 million
in the 1996 gross incurred losses and loss expenses. In addition, the
Company successfully resolved several significant claims in 1997 which
reduced reserves $7 million on a gross basis and $1 million net of
reinsurance.
Page 45
PAGE
The following table provides a roll-forward of the Company's gross
and net environmental incurred losses and loss expenses and related
reserves thereon:
- - - --------------------------------------------------------------------------
(in thousands) 1998 1997 1996
- - - --------------------------------------------------------------------------
Asbestos Gross Net Gross Net Gross Net
Environmental reserves -----------------------------------------
(including IBNR)for losses and
loss expenses at the beginning
of year $ 8,277 4,384 9,982 5,873 7,801 7,801
Incurred losses and loss expenses 219 269 (1,449)(1,233) 2,407 (1,702)
Less losses and loss expenses paid (247) (247) (256) (256) (226) (226)
----- ----- ----- ----- ----- -----
Environmental reserves
(including IBNR) for losses
and loss expenses at the end
of year $ 8,249 4,406 8,277 4,384 9,982 5,873
===== ===== ===== ===== ===== =====
Non-Asbestos
Environmental reserves
(including IBNR) for losses
and loss expenses at the
beginning of year $46,458 44,851 53,421 44,530 45,465 45,465
Incurred losses and
loss expenses 5,119 4,769 (887) 5,238 14,289 3,312
Less losses and loss
expenses paid (5,698)(5,698) (6,076)(4,917) (6,333)(4,247)
------ ------ ------ ------ ------ ------
Environmental reserves
(including IBNR) for losses
and loss expenses at the
end of year $45,879 43,922 46,458 44,851 53,421 44,530
====== ====== ====== ====== ====== ======
Total Environmental Claims
Environmental reserves
(including IBNR) for losses
and loss expenses
at the beginning of year $54,735 49,235 63,403 50,403 53,266 53,266
Incurred losses
and loss expenses 5,338 5,038 (2,336) 4,005 16,696 1,610
Less losses and loss
expenses paid (5,945)(5,945) (6,332)(5,173) (6,559)(4,473)
------ ------ ------ ------ ------ -------
Environmental reserves
(including IBNR) for losses
and loss expenses
at the end of year $54,128 48,328 54,735 49,235 63,403 50,403
====== ====== ====== ====== ====== ======
(b) The Company purchases annuities from life insurance companies to
fulfill obligations under claim settlements which provide for periodic
future payments to claimants. As of December 31, 1998, the Company had
purchased such annuities in the amount of $11,215,000 for settlement of
claims on a structured basis for which the Company is contingently liable.
To the Company's knowledge, none of the issuers of such annuities have
defaulted in its obligations thereunder.
(c) The Company has not experienced any significant year 2000 problems
to date and management does not expect any significant problems that would
impair operations as the company transitions to the new century. However,
due to the magnitude and complexity of the year 2000 issue, even the most
conscientious efforts cannot guarantee that every problem will be found and
corrected prior to January 1, 2000.
(d) The Company has various operating leases for office space and
equipment. Such lease agreements, which expire at various times, are
generally renewed or replaced by similar leases. Rental expense under these
leases amounted to $5,979,000, $4,772,000 and $4,936,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
In addition, certain leases for rented premises and equipment are
noncancelable, and liability for payment will continue even though the space
or equipment may no longer be in use. At December 31, 1998, the total future
minimum rental commitments under noncancelable leases was $16,018,000 and
such yearly amounts are as follows:
- - - ---------------------------------------------------------------------------
(in thousands)
- - - ---------------------------------------------------------------------------
1999 $ 5,719
2000 4,450
2001 3,473
2002 2,032
2003 344
After 2003 -
------
Total minimum payment required $ 16,018
======
Page 46
PAGE
Quarterly Financial Information
- - - -------------------------------
1st Quarter 2nd Quarter
-------------------------------------------------
(unaudited, in
thousands, except
per share data) 1998 1997 1998 1997
- - - ---------------------------------------------------------------------------
Net premiums written $ 188,464 175,184 196,636 197,262
Net premiums earned 172,556 170,581 177,552 169,255
Net investment income
earned 25,108 24,432 24,080 24,694
Net realized gains (losses) 1,081 978 1,798 991
Fee-for-service revenue 1 3,010 1,589 3,271 1,750
Fee-for-service income 1 258 166 784 187
Operating income 2,3 15,253 16,065 12,442 16,459
Net income 2,3 15,956 16,701 13,610 17,103
Other comprehensive
income (loss) 15,032 (8,565) (195) 25,007
------ ------- ----- ------
Total Comprehensive
income 30,988 8,136 13,415 42,110
Operating income per share:
Basic 2,3 .53 .56 .43 .57
Diluted 2,3 .53 .40 .54 .43
Net income per share:
Basic 2,3 .55 .58 .47 .59
Diluted 2,3 .50 .55 .44 .56
Dividends to stockholders 4 .14 .14 .14 .14
Price range of common stock: 5
High 28 5/8 21 3/4 29 1/4 24 9/16
Low 23 3/4 18 5/16 22 3/8 19 3/4
- - - ---------------------------------------------------------------------------
1. Certain amounts in the Company's prior years' consolidated financial
statements have been reclassified to conform with the 1998 presentation.
Such reclassification had no effect on the Company's net income or
stockholders' equity.
2. Operating and net income for the second quarter of 1998 were reduced by
$2 million, after reinsurance and taxes, due to higher losses incurred
from numerous winter storms, or $.07 per basic and diluted share.
3. Operating and net income for the third quarter of 1998 were reduced by
$4.1 million, after reinsurance and taxes, due to higher losses incurred
from numerous storms, or $.14 per basic share and $.13 per diluted
share.
4. See note 6(b)(2) and note 11 to the consolidated financial statements
and Financial Review for a discussion of dividend restrictions.
5. These ranges of high and low prices of the Company's common stock, as
reported by The Nasdaq National Market, represent actual transactions.
All price quotations do not include retail markups, markdowns and
commissions. The range of high and low prices for common stock for the
period beginning January 1, 1998 and ending February 27, 1999, was
$29 1/4 to $16 11/16 and the last sale price on February 26, 1999, was
$18 7/32.
Quarterly Financial Information
- - - -------------------------------
3rd Quarter 4th Quarter
-------------------------------------------------
(unaudited, in
thousands, except
per share data) 1998 1997 1998 1997
- - - ---------------------------------------------------------------------------
Net premiums written $ 196,447 200,680 167,326 144,492
Net premiums earned 186,388 169,916 186,496 166,516
Net investment income
earned 23,604 24,479 26,404 26,925
Net realized gains (losses) (91) 3,386 (4,927) 666
Fee-for-service revenue 1 3,967 2,040 3,852 2,857
Fee-for-service income 1 671 219 504 193
Operating income 2,3 12,991 16,194 14,275 16,976
Net income 2,3 12,932 18,395 11,072 17,409
Other comprehensive
income (loss) (7,207) 15,413 17,642 4,468
------ ------ ------ ------
Total Comprehensive
income 5,725 33,808 28,714 21,877
Operating income per share:
Basic 2,3 .46 .56 .51 .58
Diluted 2,3 .53 .49 .49 .55
Net income per share:
Basic 2,3 .46 .64 .40 .60
Diluted 2,3 .43 .60 .38 .57
Dividends to stockholders 4 .14 .14 .14 .14
Price range of common stock: 5
High 23 15/16 27 11/16 23 28 3/8
Low 17 7/16 22 5/8 16 11/16 24 7/8
- - - ----------------------------------------------------------------------------
1. Certain amounts in the Company's prior years' consolidated financial
statements have been reclassified to conform with the 1998 presentation.
Such reclassification had no effect on the Company's net income or
stockholders' equity.
2. Operating and net income for the second quarter of 1998 were reduced by
$2 million, after reinsurance and taxes, due to higher losses incurred
from numerous winter storms, or $.07 per basic and diluted share.
3. Operating and net income for the third quarter of 1998 were reduced by
$4.1 million, after reinsurance and taxes, due to higher losses incurred
from numerous storms, or $.14 per basic share and $.13 per diluted
share.
4. See note 6(b)(2) and note 11 to the consolidated financial statements
and Financial Review for a discussion of dividend restrictions.
5. These ranges of high and low prices of the Company's common stock, as
reported by The Nasdaq National Market, represent actual transactions.
All price quotations do not include retail markups, markdowns and
commissions. The range of high and low prices for common stock for the
period beginning January 1, 1998 and ending February 27, 1999, was
$29 1/4 to $16 11/16 and the last sale price on February 26, 1999, was
$18 7/32.
Page 47
PAGE
Subsidiaries
- - - ------------
Alta Services, LLC
Niagara Exchange Corporation
PDA Software Services, Inc.
Selective Insurance Company
of America
Selective Insurance Company
of New York
Selective Insurance Company
of South Carolina
Selective Insurance Company
of the Southeast
Selective Technical
Administrative Resources, Inc. (SelecTech)
Selective Way Insurance Company
Wantage Avenue
Holding Company, Inc.
Region Offices
- - - --------------
Chesapeak Region
Hunt Valley, Maryland
6 North Park Drive, Suite 200
James A. Caragher, Vice President
Great Lakes Region
Indianapolis, Indiana
805 South Sunridge Court
Joseph W. Kinker, Vice President
Midwest Region
Bloomington, Illinois
1701 East Empire Street, Suite 315
Arron O. Lamp, Vice President
New York Region
Lafayette, New York
2040 Sky High Road
William S. Becker, Vice President
Northern New Jersey Region
Branchville, New Jersey
40 Wantage Avenue
James McLain, Vice President
Pennsylvania Region
Allentown, Pennsylvania
5050 Tilghman Street, Suite 250
William F. Igoe, III, Vice President
Southern New Jersey Region
Hamilton Township, New Jersey
One AAA Drive
Edward F. Drag, II, Vice President
Southern Region
Charlotte, North Carolina
3 Coliseum Centre
2550 West Tyvola Road, Suite 400
Margaret C. Davis, Vice President
Virginia Region
Richmond, Virginia
1100 Boulders Parkway, Suite 601
James M. Allonier, Vice President
Field Underwriting Office
- - - -------------------------
Mid-America Underwriting Office
Columbus, Ohio
8415 Pulsar Place, Suite 300
Gregory J. Massey, Vice President
Information Systems Offices
- - - ---------------------------
Glastonbury, Connecticut
500 Winding Brook Drive
Bradford, S. Allen, Vice President
Mansfield Ohio
380 N. Main Street
Roby L. Musick, Assistant Vice President
Subsidiary Offices
- - - ------------------
ALTA Services LLC
IBIS Plaza
3525 Quakerbridge Road
Hamilton, New Jersey 08619
PDA Software Services, Inc.
7701 College Boulevard
Overland Park, Kansas 66210
Properties
- - - ----------
Situated on approximately 137 acres in Branchville, New Jersey, is our
315,000 square foot facility owned by Wantage Avenue Holding Company, Inc.
All region, field underwriting and information systems office locations, as
indicated above, are leased.
Stockholders' Information
- - - -------------------------
Executive Office
40 Wantage Avenue
Branchville, New Jersey 07890-1000
Telephone (973) 948-3000
Registrar and Transfer Agent
- - - ----------------------------
First Chicago Trust Company,
a division of EquiServe
P.O. Box 2500
Jersey City, New Jersey 07303-2500
Telephone (800) 446-2617
Auditors
- - - --------
KPMG LLP
757 Third Avenue
New York, New York 10017
Common Stock Information
- - - ------------------------
The Company's common stock trades on the Nasdaq National Market under the
symbol: SIGI. As of December 31, 1998, there were approximately 4,335
registered stockholders.
Form 10-K
- - - ---------
A copy of Form 10-K as filed with the Securities and Exchange Commission,
excluding exhibits, will be provided without charge (exhibits will be
furnished to stockholders upon payment of reproduction and mailing expenses)
upon request to:
David B. Merclean
Senior Vice President and
Chief Financial Officer
[email protected]
Website
- - - -------
For information about Selective, including our latest financial news,
contact us at www.selectiveinsurance.com
Page 49
PAGE
EXHIBIT 21
SELECTIVE INSURANCE GROUP, INC. SUBSIDIARIES
Jurisdiction Percentage
in which voting securities
Name organized Parent owned
- - - ----- ------------ ------ -----------------
Selective Insurance Selective Insurance
Company of America New Jersey Group, Inc. 100%
Selective Way Selective Insurance
Insurance Company New Jersey Group, Inc. 100%
Selective Insurance
Company of the Selective Insurance
Southeast North Carolina Group, Inc. 100%
Selective Insurance
Company of South Selective Insurance
Carolina South Carolina Group, Inc. 100%
Wantage Avenue
Holding Company Selective Insurance
Inc. New Jersey Company of America 100%
Niagara Exchange Selective Insurance
Corporation Delaware Group, Inc. 100%
Selective Insurance
Company of
New York New York Niagara Exchange Corp. 87%
Selective Technical
Administrative Selective Insurance
Resources, Inc. New Jersey Group, Inc. 100%
Selective Way Insurance
Company (75%)
Selective Insurance Company
Alta Services LLC New Jersey of the Southeast (25%) N/A
PDA Software Selective Insurance
Services Inc. Kansas Group,Inc. 100%
PAGE
EXHIBIT 23
Consent of Independent Auditors
The Board of Directors
Selective Insurance Group, Inc.
We consent to incorporation by reference in the registration statements
(No.'s 333-10477, 33-22450, 33-36368, 333-37501 and 333-10465) on Form S-8,
and the registration statements (No.'s 2-80881 and 33-30833) on Form S-3 of
Selective Insurance Group, Inc. and its subsidiaries of our reports dated
February 2, 1999, relating to the consolidated balance sheets of Selective
Insurance Group, Inc. and its subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of income, stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1998, and all related schedules, which reports appear in the December 31,
1998 annual report on Form 10-K of Selective Insurance Group, Inc. and its
subsidiaries.
/S/ KPMG LLP
March 31, 1999
New York, New York
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
DECEMBER 31, 1998 10K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000230557
<NAME> SELECTIVE INSURANCE GROUP INC
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 1,075,276
<DEBT-CARRYING-VALUE> 358,380
<DEBT-MARKET-VALUE> 373,179
<EQUITIES> 269,991
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,770,639
<CASH> 58,836<F1>
<RECOVER-REINSURE> 11,495
<DEFERRED-ACQUISITION> 109,774
<TOTAL-ASSETS> 2,432,168
<POLICY-LOSSES> 1,193,274<F2>
<UNEARNED-PREMIUMS> 400,143
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 117,078<F3>
0
0
<COMMON> 74,833
<OTHER-SE> 532,750
<TOTAL-LIABILITY-AND-EQUITY> 2,432,168
722,992
<INVESTMENT-INCOME> 99,196
<INVESTMENT-GAINS> (2,139)
<OTHER-INCOME> 17,280
<BENEFITS> 507,800<F4>
<UNDERWRITING-AMORTIZATION> 235,523
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 63,704
<INCOME-TAX> 10,134
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 53,570
<EPS-PRIMARY> 1.88
<EPS-DILUTED> 1.74
<RESERVE-OPEN> 1,161,169<F5>
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 1,193,274
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>EQUALS THE SUM OF SHORT-TERM INVESTMENT AND CASH.
<F2>EQUALS THE SUM OF RESERVE FOR LOSSES AND THE RESERVE FOR LOSS
EXPENSES.
<F3>EQUALS THE SUM OF NOTES PAYABLE, SHORT-TERM DEBT, AND CONVERTIBLE
SUBORDINATED DEBENTURES.
<F4>EQUALS THE SUM OF LOSSES INCURRED AND LOSS EXPENSES INCURRED.
<F5>EQUALS THE SUM OF RESERVE FOR LOSSES AND RESERVE FOR LOSS EXPENSES AT
THE BEGINNING OF THE YEAR.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE DECEMBER 31, 1997 10K AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<CIK> 0000230557
<NAME> SELECTIVE INSURANCE GROUP INC
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 1,044,390
<DEBT-CARRYING-VALUE> 410,169
<DEBT-MARKET-VALUE> 426,251
<EQUITIES> 222,273
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,725,690
<CASH> 33,798<F1>
<RECOVER-REINSURE> 11,088
<DEFERRED-ACQUISITION> 98,110
<TOTAL-ASSETS> 2,306,191
<POLICY-LOSSES> 1,161,169<F2>
<UNEARNED-PREMIUMS> 373,766
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 113,959<F3>
0
0
<COMMON> 72,728
<OTHER-SE> 492,588
<TOTAL-LIABILITY-AND-EQUITY> 2,306,191
676,268
<INVESTMENT-INCOME> 100,530
<INVESTMENT-GAINS> 6,021
<OTHER-INCOME> 11,364
<BENEFITS> 461,213<F4>
<UNDERWRITING-AMORTIZATION> 212,902
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 91,020
<INCOME-TAX> 21,412
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 69,608
<EPS-PRIMARY> 2.41
<EPS-DILUTED> 2.27
<RESERVE-OPEN> 1,189,793<F5>
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 1,161,169
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>EQUALS THE SUM OF SHORT-TERM INVESTMENT AND CASH.
<F2>EQUALS THE SUM OF RESERVE FOR LOSSES AND THE RESERVE FOR LOSS EXPENSES.
<F3>EQUALS THE SUM OF NOTES PAYABLE, SHORT-TERM DEBT, AND CONVERTIBLE
SUBORDINATED DEBENTURES.
<F4>EQUALS THE SUM OF LOSSES INCURRED AND LOSS EXPENSES INCURRED.
<F5>EQUALS THE SUM OF RESERVE FOR LOSSES AND RESERVE FOR LOSS EXPENSES AT
THE BEGINNING OF THE YEAR.
</FN>
</TABLE>
