<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended...September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission file number: 0-8641
SELECTIVE INSURANCE GROUP, INC.
-------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-2168890
---------------------------- ------------------------------
State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
40 Wantage Avenue
Branchville, New Jersey 07890
---------------------------- ---------------------------
(Address of principal (Zip Code)
executive offices)
(973) 948-3000
----------------------------------
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Common stock, par value $2 per share, outstanding as of October 31, 2000:
25,124,435
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<PAGE> 2
SELECTIVE INSURANCE GROUP, INC
Consolidated Balance Sheets
<TABLE>
<CAPTION>
Unaudited
------------------------------------------------------------------------------------------------------------------
September 30, December 31,
($ in thousands, except share amounts) 2000 1999
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
INVESTMENTS:
Debt securities, held-to-maturity - at amortized cost
(fair value: $237,542 - 2000; $271,604 - 1999) $ 233,815 271,384
Debt securities, available-for-sale - at fair value
(amortized cost: $1,199,934 - 2000; $1,141,167 - 1999) 1,194,099 1,122,786
Equity securities, available-for-sale - at fair value
(cost of: $119,890 - 2000; $115,626 - 1999) 264,796 251,998
Short-term investments - (at cost which approximates fair value) 44,359 48,807
Other investments 15,545 15,963
----------- -----------
Total investments 1,752,614 1,710,938
Cash 5,627 8,588
Interest and dividends due or accrued 21,436 23,545
Premiums receivables 293,651 248,910
Other trade receivables 19,347 15,488
Reinsurance recoverable on paid losses and loss expenses 9,655 9,797
Reinsurance recoverable on unpaid losses and loss expenses 186,890 192,044
Prepaid reinsurance premiums 34,573 32,531
Current Federal income tax 6,699 4,417
Deferred Federal income tax 8,749 16,129
Real estate, furniture, equipment, and software development 56,694 54,558
Deferred policy acquisition costs 123,441 109,095
Goodwill 50,007 52,001
Other assets 28,318 29,504
----------- -----------
Total assets $ 2,597,701 2,507,545
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Reserve for losses $ 1,108,522 1,092,026
Reserve for loss expenses 178,219 181,782
Unearned premiums 459,708 413,601
Convertible subordinated debentures 3,858 6,157
Short-term debt -- 51,302
Notes payable 166,928 75,428
Other liabilities 116,933 117,285
----------- -----------
Total liabilities 2,034,168 1,937,581
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock of $2 par value per share:
Authorized shares: 180,000,000
Issued: 38,668,398 - 2000; 37,964,405 - 1999 77,337 75,929
Additional paid-in capital 60,297 53,470
Retained earnings 522,264 514,477
Accumulated other comprehensive income 90,396 76,694
Treasury stock - at cost (shares: 13,481,920 - 2000; 11,406,722 - 1999) (179,900) (143,875)
Deferred compensation expense and notes receivable from stock sales (6,861) (6,731)
----------- -----------
Total stockholders' equity 563,533 569,964
----------- -----------
Total liabilities and stockholders' equity $ 2,597,701 2,507,545
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
2
<PAGE> 3
SELECTIVE INSURANCE GROUP, INC.
Consolidated Statements of Income
<TABLE>
<CAPTION>
($ in thousands, except per
share amounts) Unaudited Unaudited
Quarter ended Nine Months ended
September 30 September 30
----------------------------- -----------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Net premiums written $ 218,658 211,166 $ 649,708 633,950
Net increase in unearned
premiums and prepaid (13,467) (11,503) (44,065) (44,805)
reinsurance premiums
--------- --------- --------- ---------
Net premiums earned 205,191 199,663 605,643 589,145
Net investment income earned 24,459 23,756 72,257 70,684
Net realized gains (losses) (72) (1,160) 2,647 31,041
Diversified insurance 20,333 14,592 56,364 31,087
services revenue
Other income 915 817 3,007 2,314
--------- --------- --------- ---------
Total revenues 250,826 237,668 739,918 724,271
--------- --------- --------- ---------
Expenses:
Losses incurred 137,369 141,299 401,237 387,862
Loss expenses incurred 20,243 18,674 56,184 55,622
Policy acquisition costs 63,335 61,765 191,701 184,446
Dividends to policyholders 2,051 1,356 5,501 4,806
Interest expense 3,787 2,463 10,029 6,780
Diversified insurance 18,694 12,048 52,465 27,514
services expenses
Other expenses 1,221 1,692 5,571 4,242
--------- --------- --------- ---------
Total expenses 246,700 239,297 722,688 671,272
--------- --------- --------- ---------
Income (loss) before Federal 4,126 (1,629) 17,230 52,999
income tax
--------- --------- --------- ---------
Federal income tax
expense(benefit):
Current (1,674) (1,432) (2,161) 13,045
Deferred 427 (2,132) 2 (3,619)
--------- --------- --------- ---------
Total Federal income tax (1,247) (3,564) (2,159) 9,426
expense (benefit)
--------- --------- --------- ---------
Net income $ 5,373 1,935 19,389 43,573
========= ========= ========= =========
Earnings per share:
Basic $ 0.22 0.07 $ 0.77 1.60
Diluted $ 0.21 0.07 $ 0.73 1.51
Dividends to stockholders $ 0.15 0.15 $ 0.45 0.44
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 4
SELECTIVE INSURANCE GROUP, INC.
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Unaudited Unaudited
September 30 September 30
($ in thousands, except per share amounts) 2000 1999
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock:
Beginning of year $ 75,929 74,833
Dividend reinvestment plan
(shares: 50,057-2000; 48,536-1999) 100 97
Convertible subordinated debentures
(shares: : 324,710-2000; 7,342-1999) 649 14
Stock purchase and compensation plans
(shares: 329,226-2000; 398,981-1999) 659 798
----------- -------
End of period 77,337 75,742
----------- -------
Additional paid-in capital:
Beginning of year 53,470 45,449
Dividend reinvestment plan 763 801
Convertible subordinated debentures 1,627 28
Stock purchase and compensation plans 4,437 6,213
----------- -------
End of period 60,297 52,491
----------- -------
Retained Earnings:
Beginning of year 514,477 477,118
Net income 19,389 19,389 43,573 43,573
Cash dividends to stockholders ($.45 per share-2000; $.44 per (11,602) (12,271)
share-1999)
----------- -------
End of period 522,264 508,420
----------- -------
Accumulated other comprehensive income:
Beginning of year 76,694 114,323
Other comprehensive income-increase (decrease) in net
unrealized gains on available-for-sale securities,
net of deferred income tax effect 13,702 13,702 (45,877) (45,877)
----------- -------- ------- -------
End of period 90,396 68,446
----------- -------
Comprehensive income (loss) 33,091 (2,304)
======== ========
Treasury stock:
Beginning of year (143,875) (97,990)
Acquisition of treasury stock
(shares: 2,075,198-2000; 1,388,363-1999) (36,025) (26,111)
----------- -------
End of period (179,900) (124,101)
----------- -------
Deferred compensation expense and notes receivable from stock sales:
Beginning of year (6,731) (6,150)
Deferred compensation expense (2,434) (3,974)
Amortization of deferred compensation expense and
amounts received on notes 2,304 2,289
----------- -------
End of period (6,861) (7,835)
----------- -------
Total stockholders' equity $ 563,533 573,163
=========== =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 5
SELECTIVE INSURANCE GROUP, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Unaudited
($ in thousands) Nine Months ended September 30,
2000 1999
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 19,389 43,573
--------- ---------
Adjustments to reconcile net income to net cash provided by operating
activities:
Increase in reserves for losses and loss expenses, net of
reinsurance recoverable on unpaid losses and loss expenses 18,087 35,957
Increase in unearned premiums, net of prepaid reinsurance premiums 44,065 44,805
Federal income tax (2,280) (8,216)
Depreciation and amortization 10,962 8,940
Increase in premiums receivables (44,741) (46,560)
Increase in other trade receivables (3,859) (2,711)
Increase in deferred policy acquisition costs (14,346) (9,612)
Decrease (increase) in interest and dividends due or accrued 2,109 (627)
Decrease in reinsurance recoverable on paid losses and loss expenses 142 482
Net realized gains on investments (2,648) (31,041)
Other- net 661 11,637
--------- ---------
Net adjustments 8,152 3,054
--------- ---------
Net cash provided by operating activities 27,541 46,627
--------- ---------
INVESTING ACTIVITIES
Purchase of debt securities, available-for-sale (124,563) (297,564)
Purchase of equity securities, available-for-sale (19,831) (7,119)
Purchase of other investments (2,221) (443)
Purchase and subsequent adjustments of subsidiaries acquired (5,988) (29,004)
Sale of debt securities, available-for-sale 15,912 127,901
Redemption and maturities of debt securities, held-to-maturity 37,543 65,939
Redemption and maturities of debt securities, available-for-sale 49,058 24,979
Sale of equity securities, available-for-sale 19,332 66,136
Proceeds from other investments 2,639 160
Increase (decrease) in net payable for security transactions 8,652 (14,164)
Net additions to real estate, furniture, equipment and software development (8,657) (5,182)
--------- ---------
Net cash used in investing activities (28,124) (68,361)
--------- ---------
FINANCING ACTIVITIES
Dividends to stockholders (11,602) (12,271)
Acquisition of treasury stock (36,025) (26,111)
Net proceeds from notes payable 88,440 --
Paydown of (proceeds from) short-term debt (51,302) 18,495
Net proceeds from dividend reinvestment plan 863 898
Net proceeds from stock purchase and compensation plans 5,096 7,011
Increase in deferred compensation expense and amounts received on notes
receivable from stock sales
(2,296) (3,922)
--------- ---------
Net cash provided by (used in) financing activities (6,826) (15,900)
--------- ---------
Net decrease in short-term investments and cash (7,409) (37,634)
Short-term investments and cash at beginning of year 57,395 58,836
--------- ---------
Short-term investments and cash at end of year $ 49,986 21,202
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid during the period for:
Interest $ 7,674 7,873
Federal income tax -- 17,628
Supplemental schedule of non-cash financing activity:
Conversion of convertible subordinated debentures 2,299 42
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The interim financial statements are unaudited but reflect all adjustments
which, in the opinion of management, are necessary to provide a fair
statement of the results of the Selective Insurance Group, Inc. and its
consolidated subsidiaries (collectively, the "Company") for the interim
periods presented. References herein to "Selective" are to Selective
Insurance Group, Inc. All such adjustments are of a normal recurring
nature. The results of operations for any interim period are not
necessarily indicative of results for a full year. These financial
statements should be read in conjunction with the financial statements and
notes thereto contained in the Company's Annual Report on Form 10-K for
the year ended December 31, 1999.
2. RECLASSIFICATIONS
Certain amounts in the Company's prior year consolidated financial
statements have been reclassified to conform with the 2000 presentation.
Such reclassification had no effect on the Company's net income or
stockholders' equity.
3. CURRENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FASB 133"). FASB 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, (collectively
referred to as derivatives) and for hedging activities. It requires that
an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. This statement was previously effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. Earlier application was
encouraged, but was permitted only as of the beginning of any fiscal
quarter that begins after issuance of financial statements of prior
periods. In June 1999, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 137, which defers the
effective date of FASB 133 to all fiscal quarters of fiscal years
beginning after June 15, 2000. In June 2000, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No.
138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities, which amends the accounting and reporting standards of FASB
133 for certain derivative instruments and certain hedging activities. The
Company will adopt FASB 133 and FASB 138 for the fiscal year beginning
January 1, 2001 and does not anticipate the adoption of these statements
to have a material effect on the Company's results of operations or
financial condition.
During 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition, which is
required to be adopted in the fourth quarter of 2000. The Company believes
that its accounting for revenue recognition complies with the requirements
of SAB 101 and does not anticipate the adoption to have a material effect
on the Company's result of operations or financial condition.
4. SEGMENT INFORMATION
The Company is primarily engaged in writing property and casualty
insurance. The Company has classified its business into three segments
which are Insurance Operations (commercial lines underwriting and personal
lines underwriting), Investments, and Diversified Insurance Services. The
Insurance Operations segment is evaluated based on Generally Accepted
Accounting Principles ("GAAP") underwriting results, Investments are
evaluated based on after-tax investment returns, and Diversified Insurance
Services is evaluated based on results of operations in accordance with
GAAP. The GAAP underwriting results of the Insurance Operations segment
are determined taking into account net premiums earned, incurred losses
and loss expenses, policy acquisition costs and other underwriting
expenses and policyholders dividends. Management of the investment
portfolio is separate from the insurance underwriting segment and,
therefore, has been classified as a segment. The operating results of the
Investments segment take into account net investment income and net
realized gains and losses. The Diversified Insurance Services business is
managed independently from the other segments and, therefore, has been
classified separately. The Diversified Insurance Services segment consists
of the flood business managed by the Company for the National Flood
Insurance Program, medical cost containment operations, professional
employer organization operations, software development and program
administration operations,
6
<PAGE> 7
and fee based income from alternative market affiliation programs. The
segment's 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
interest expense, net general corporate expenses or federal income tax.
The Company does not maintain separate investment portfolios for the
segments and, therefore, does not allocate assets to the segments.
The following summaries present revenues (net investment income and net
realized gains (losses) in the case of the investments segment) and
pre-tax income for the individual segments:
Revenue by segment
<TABLE>
<CAPTION>
Unaudited, Nine
($ in thousands) Unaudited, Quarter Months ended
ended September 30, September 30,
----------------------------- ---------------------------
2000 1999 2000 1999
------------------------------------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
INSURANCE OPERATIONS:
Commercial lines net premiums earned $ 153,249 142,634 $ 447,290 417,914
Personal lines net premiums earned 51,942 57,029 158,353 171,231
--------- --------- --------- ---------
Total insurance operations revenues 205,191 199,663 605,643 589,145
INVESTMENTS:
Net investment income 24,459 23,756 72,257 70,684
Net realized (losses) gains on investments (72) (1,160) 2,647 31,041
--------- --------- --------- ---------
Total investment revenues 24,388 22,596 74,904 101,725
DIVERSIFIED INSURANCE SERVICES REVENUES 20,333 14,592 56,364 31,087
--------- --------- --------- ---------
Total revenues all segments 249,911 236,851 736,911 721,957
--------- --------- --------- ---------
Other income 915 817 3,007 2,314
--------- --------- --------- ---------
TOTAL REVENUES $ 250,826 237,668 $ 739,918 724,271
========= ========= ========= =========
</TABLE>
7
<PAGE> 8
Income or (loss) before Federal income tax by segment
-----------------------------------------------------
<TABLE>
<CAPTION>
Unaudited, Nine
($ in thousands) Unaudited, Quarter Months ended
ended September 30, September 30,
--------------------------- ---------------------------
2000 1999 2000 1999
-------------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
INSURANCE OPERATIONS:
Commercial lines underwriting $(11,081) (17,429) $(30,799) (36,620)
Personal lines underwriting (6,324) (5,876) (17,488) (5,943)
-------- -------- -------- --------
Underwriting loss, before Federal income tax (17,405) (23,305) (48,287) (42,563)
INVESTMENTS:
Net investment income 24,459 23,756 72,257 70,684
Net realized gains on investments (72) (1,160) 2,647 31,041
-------- -------- -------- --------
Total investment income, before Fed. Income 24,387 22,596 74,904 101,725
tax
DIVERSIFIED INSURANCE SERVICES:
Income before federal income tax 1,640 2,544 3,900 3,573
-------- -------- -------- --------
TOTAL ALL SEGMENTS 8,622 1,835 30,517 62,735
Interest expense (3,787) (2,463) (10,029) (6,780)
General corporate expenses (709) (1,001) (3,258) (2,956)
-------- -------- -------- --------
INCOME BEFORE FEDERAL INCOME TAX $ 4,126 (1,629) $ 17,230 52,999
======== ======== ======== ========
</TABLE>
8
<PAGE> 9
5. REINSURANCE
The following is a table of assumed and ceded amounts by income statement
caption:
<TABLE>
<CAPTION>
Unaudited, Unaudited, Nine
Quarter ended Months ended
September 30, September 30,
-----------------------------------------------------------------------------------------------------
($ in thousands) 2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums written:
Assumed (1) $ 5,326 5,336 $ 11,490 15,574
Ceded (26,668) (23,596) (71,047) (61,379)
Premiums earned:
Assumed(1) 4,075 5,228 10,642 16,315
Ceded (23,399) (21,677) (69,005) (60,821)
Losses incurred:
Assumed(1) 1,925 3,849 3,146 11,129
Ceded (20,935) (71,920(2) (52,888) (105,567)(2)
Loss expenses incurred:
Assumed(1) 257 286 729 1,222
Ceded (550) (844) (1,669) (2,013)
</TABLE>
1. Assumed business has declined when compared to prior year due to a
decrease in involuntary commercial automobile plan business.
2. As a "write-your-own" carrier for the Federal government, the Company
incurred approximately 2,000 flood claims from Hurricane Floyd. These
claims generated $33 million in incurred losses ceded to the National
Flood Insurance Program (NFIP) for both the quarter and nine months ended
September 30, 1999.
The Company is reinsured for losses incurred in excess of $75,000 on all
New Jersey Personal Injury Protection (PIP) claims. During 1999, the
Company performed a comprehensive review of New Jersey PIP claims and
determined that 27 claims should be re-classified to "lifetime" benefit
status. Adjusting outstanding loss reserves to new ultimate projections
resulted in additional loss reserves of $29 million for the quarter ended
September 30, 1999 and $40 million for nine months ended September 30,
1999. Because these claims had all breached the $75,000 retention limit,
substantially all of these additional reserves were ceded to the New
Jersey Unsatisfied Claims Judgement Fund for reimbursement to the Company
in accordance with state law.
FORWARD-LOOKING STATEMENTS
Some of the statements in this report are not historical facts and are
"forward-looking statements" (as defined in the Private Securities Litigation
Reform Act of 1995). These statements use words such as "believes," "expects,"
"intends," "may," "will," "should," "anticipates," and other similar words and,
among other things, describe our current strategies, opinions, expectations of
future results and other forward-looking information. We derive forward-looking
information from information which we currently have and numerous assumptions
which we make. We cannot assure that results which we anticipate will be
achieved, since results may differ materially because of both known and unknown
risks and uncertainties which we face. Factors which could cause actual results
to differ materially from our expectations include, but are not limited to: the
effects of economic conditions and conditions which affect the market for
property and casualty insurance; laws, rules and regulations which apply to
insurance companies, including the impact of personal automobile reform
legislation in New Jersey; the effects of competition from other insurers and
banks, and the trend toward self- insurance; risks we face in entering new
markets and diversifying the products and services we offer; weather-related
events and other catastrophes affecting our insureds, our ability to obtain rate
increases and to retain business; the performance of our independent insurance
agencies; and other risks and uncertainties we identify in filings with the
Securities and Exchange Commission, including, but not limited to the Annual
Report on Form 10-K, although we do not promise to update such forward-looking
statements to reflect actual results or changes in assumptions or other factors
that could affect these statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion relates to the Company's results of operations,
financial condition and liquidity for the interim periods indicated. References
to the "Company" and to "Selective" mean Selective Insurance Group, Inc. and its
consolidated subsidiaries, collectively.
9
<PAGE> 10
RESULTS OF OPERATIONS
The following discussion is a comparison of the third quarter ended September
30, 2000 ("Third Quarter 2000") and the nine month period ended September 30,
2000 ("Nine Months 2000") to the third quarter ended September 30, 1999 ("Third
Quarter 1999") and the nine month period ended September 30, 1999 ("Nine Months
1999").
OPERATING SEGMENTS
The Company is primarily engaged in writing property and casualty insurance. The
Company has classified its business into three segments, each of which is
managed separately. The three segments are Insurance Operations (commercial
lines underwriting and personal lines underwriting), Investments, and
Diversified Insurance Services. All segments are evaluated based on their
underwriting or operating results, which are prepared in accordance with
Generally Accepted Accounting Principles ("GAAP"). For an additional description
of these accounting policies, refer to Note 1 to the Company's Consolidated
Financial Statements on pages 41 through 43 of the Annual Report on Form 10-K
for the year ended December 31, 1999. Also, see Note 4 to the September 30, 2000
Unaudited Consolidated Financial Statements beginning on page 6 of this
Quarterly Report on Form 10-Q for revenues and related income before Federal
income taxes for each individual segment discussed below.
INSURANCE OPERATIONS SEGMENT
<TABLE>
<CAPTION>
($ in thousands)
Unaudited, Quarter ended Unaudited, Nine Months ended
September 30, September 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
TOTAL INSURANCE OPERATIONS
Net premiums written $ 218,658 211,166 649,708 633,950
========= ========= ========= =========
Net premiums earned $ 205,191 199,663 605,643 589,145
Losses and loss expenses 157,612 159,973 457,421 443,484
incurred
Net underwriting expenses 62,933 61,651 191,008 183,430
incurred
Dividends to policyholders 2,051 1,344 5,501 4,794
--------- --------- --------- ---------
Underwriting loss $ (17,405) (23,305) (48,287) (42,563)
--------- --------- --------- ---------
GAAP RATIOS:
Loss and loss expense ratio 76.8 % 80.1 75.5 % 75.3
Underwriting expense ratio 30.7 % 30.9 31.5 % 31.1
Dividends to policyholders 1.0 % 0.7 0.9 % 0.8
ratio
--------- --------- --------- ---------
Combined ratio 108.5 % 111.7 108.0 % 107.2
========= ========= ========= =========
</TABLE>
Net premiums written for Third Quarter 2000 increased approximately $ 7 million,
or 4%, to $219 million, and $15 million, or 3%, to $650 million for Nine Months
2000. Net premiums written included $43 million for Third Quarter 2000 and $130
million for Nine Months 2000 in new business net premiums written compared to
$59 million for Third Quarter 1999 and $166 million for Nine Months 1999. The
growth in net premiums written, despite lower net premiums written from new
business numbers, reflected renewal premium increases in commercial lines of 14%
for Third Quarter 2000 and 12% for Nine Months 2000.
Commercial lines net premiums written grew 6.3% for Third Quarter 2000 and 7.1%
for Nine Months 2000 compared to the comparable periods of 1999. This growth was
partially offset by a 4.3% decrease in personal lines net premiums written for
Third Quarter 2000 and a 9.6% decrease for Nine Months 2000 primarily due to a
decline in New Jersey private passenger automobile net premiums written.
Beginning in October 1999, the Company began to pay a fixed fee of 17.5% of the
New Jersey involuntary Personal Automobile Insurance Program ("PAIP") premiums
to a servicing carrier in exchange for the carrier taking on the Company's
responsibility to write a share of this business.
The combined ratio for Third Quarter 2000 decreased 3.2 points to 108.5% due to
a decrease in the ratio of losses and loss expenses incurred to net premiums
earned when compared to the Third Quarter 1999. The Third Quarter 1999 loss and
loss expense ratio of 80.1% included 7.0 points resulting from Hurricane Floyd
which occurred in September 1999, while the Third Quarter 2000 loss and loss
expense ratio of 76.8% included only 0.8 points due to weather related
catastrophes. The combined ratio for Nine Months 2000 increased 0.8 points to
108% from 107.2% in Nine Months 1999. The impact of weather related catastrophes
on the loss and loss expense ratio for Nine Months 2000 decreased 2.2 points
compared to Nine Months 1999. Offsetting the benefit of fewer catastrophes was
deterioration in Third Quarter and Nine Months 2000 loss ratios caused by: i)
the lingering effects of
10
<PAGE> 11
pricing competition on current accident year results; ii) the continuing effect
of the rate roll back and Urban Enterprise Zone ("UEZ") business on New Jersey
personal automobile insurance; and iii) and deteriorating personal automobile
loss ratios in those states which we have expanded that business.
The Company is pursuing an ongoing plan to improve performance, including the
following steps: i) improved pricing in both personal and commercial lines by
filing for base rate increases, limiting the use of pricing credits, and
limiting the amount of business placed in preferred pricing programs; ii)
managing business growth through stronger underwriting criteria to focus on
underwriting risks which support our business strategy; and iii) a pending New
Jersey rate filing for increased personal lines rates.
The underwriting expense ratio decreased 0.2 points, to 30.7%, for Third Quarter
2000 when compared to the Third Quarter 1999 and increased 0.4 points, to 31.6%,
for Nine Months 2000 when compared to Nine Months 1999. The Company is
implementing automation, service and expense control strategies to eliminate
processing duplication and reduce overhead expense. These actions include: i)
the consolidation of the two New Jersey offices and the consolidation of the
Richmond, Virginia and Chesapeake, Maryland regional offices in conjunction with
the formation of a service center that is being piloted in Richmond beginning in
December 2000; and ii) streamlined processing for small commercial lines
accounts that will improve service to our agents and reduce expenses. The office
consolidation began during Third Quarter 2000 and is expected to be completed
during the second quarter of 2001. The Company expects the savings generated by
the office consolidations will be offset by the expense incurred to start-up the
service center.
Commercial Lines Underwriting
<TABLE>
<CAPTION>
COMMERCIAL LINES Unaudited, Quarter Unaudited, Nine Months
ended September 30, ended September 30,
($ in thousands) 2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
GAAP INSURANCE OPERATION
RESULTS
Net premiums written $ 166,896 157,078 $ 492,436 459,916
========= ========= ========= =========
Net premiums earned $ 153,249 142,634 447,290 417,914
Losses and loss expenses 112,585 110,530 325,334 309,312
incurred
Net underwriting expenses 49,694 48,189 147,254 140,428
incurred
Dividends to policyholders 2,051 1,344 5,501 4,794
--------- --------- --------- ---------
Underwriting loss $ (11,081) (17,429) $ (30,799) (36,620)
--------- --------- --------- ---------
GAAP RATIOS:
Loss and loss expense ratio 73.5 % 77.5 72.7% 74.0
Underwriting expense ratio 32.4 % 33.8 32.9% 33.6
Dividends to policyholders 1.3 % 0.9 1.2% 1.1
ratio
--------- --------- --------- ---------
Combined ratio 107.2 % 112.2 106.8% 108.7
========= ========= ========= =========
</TABLE>
Commercial Lines Underwriting, which consists of six strategic business units
("SBUs"), accounted for approximately 76% of net premiums written during both
Third Quarter 2000 and Nine Months 2000. Net premiums written increased $10
million, or 6%, for Third Quarter 2000, and $ 32 million, or 7%, for Nine Months
2000 compared to the same periods in 1999. These included $33 million and $98
million in new business net premiums written for Third Quarter 2000 and Nine
Months 2000, compared to $47 million and $134 million for the same periods one
year ago. We believe that pricing in commercial lines is improving as the market
has seen price increases industry wide. In the Third Quarter 2000, the Company
increased its premium on renewal business approximately 14%, a level that has
continued into October 2000. For Nine Months 2000 our renewal premium increased
by approximately 12%.The benefit of price increases will have a more significant
impact in 2001 when price increases will be fully reflected in earned premium.
The Commercial Lines combined ratio decreased 5 points to 107.2% in Third
Quarter 2000 compared to Third Quarter 1999 and decreased 1.9 points to 106.8%
in Nine Months 2000 when compared to Nine Months 1999. The impact of
weather-related catastrophe losses decreased 6.1 points in Third Quarter 2000
compared to Third Quarter 1999 and decreased 2.5 points for Nine Months 2000
compared to Nine Months 1999.
11
<PAGE> 12
Personal Lines Underwriting
<TABLE>
<CAPTION>
Unaudited, Quarter Unaudited, Nine Months
PERSONAL LINES ended September 30, ended September 30,
($ in thousands) 2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
GAAP INSURANCE OPERATION
RESULTS
Net premiums written $ 51,762 54,088 $ 157,272 174,034
========= ========= ========= =========
Net premiums earned $ 51,942 57,029 158,353 171,231
Losses and loss expenses 45,027 49,443 132,087 134,172
incurred
Net underwriting expenses 13,239 13,462 43,754 43,002
incurred
--------- --------- --------- ---------
Underwriting (loss) or gain $ (6,324) (5,876) (17,488) (5,943)
--------- --------- --------- ---------
GAAP RATIOS:
Loss and loss expense ratio 86.7% 86.7 83.4 % 78.4
Underwriting expense ratio 25.5% 23.6 27.6 % 25.1
--------- --------- --------- ---------
Combined ratio 112.2% 110.3 111.0 % 103.5
========= ========= ========= =========
</TABLE>
Personal Lines net premiums written decreased $2 million, or 4%, to $52 million
for Third Quarter 2000 when compared to Third Quarter 1999 and included new
business net premiums written of $10 million compared to $12 million in Third
Quarter 1999. The decrease in net premiums written reflected a $3 million
decrease in New Jersey PAIP business because the Company began transferring this
business to a third party carrier in the fourth quarter of 1999. This decrease
was partially offset by growth in Third Quarter 2000 of $4 million in net
premiums written in the expansion states when compared to Third Quarter 1999.
The Nine Months 2000 decrease in Personal Lines net premiums written of $17
million, or 10%, to $157 million reflected a $27 million decrease in New Jersey
personal automobile net premiums written due to: i) a $13 million decrease due
to PAIP business transferred to a third party carrier; ii) a $2 million decrease
in involuntary UEZ business; and iii) the effects of the 15% rate rollback
mandated by the New Jersey auto reform legislation effective March 1999 on New
Jersey personal automobile premium. These decreases were partially offset by
personal lines net premium written growth of $15 million in our expansion states
when compared to Nine Months 1999. Net premiums written in Nine Months 2000
included $32 million in new business net premiums written compared to $35
million in Nine Months 1999. Due to intense price competition, the Company has
seen a decline in the retention of personal automobile policies as well as new
personal automobile policies in South Carolina because the Company is
maintaining its pricing standards. As a result, third quarter 2000 reflected a
$1 million decrease and Nine Months 2000 reflected a $5 million decrease in
personal lines premiums written in the Southern region.
The UEZ Program requires New Jersey auto insurers to write, at the Company's
voluntary rate levels, an amount of involuntary urban auto insurance
proportionate to their voluntary market share, which is currently estimated at
3.1% for the Company. As of September 2000, the Company believes it is in
compliance with the assigned number of policies required under the plan and
expects to remain in compliance for the balance of 2000. Net premiums written
under the involuntary UEZ program remained flat for Third Quarter 2000 and
decreased $2 million for Nine Months 2000 from $6 million to $4 million for the
same period in 1999. The assigned UEZ business reflects a higher concentration
of "liability only" policies which have historically been very unprofitable. As
a result, the Company is seeking to write on a voluntary basis, more adequately
priced full coverage business in these territories while managing in-force
policy counts to the state mandated quota.
The Personal Lines SBU combined ratio was 112.2% for Third Quarter 2000, up 1.9
points from the same period in 1999. The increase was partially due to an
increase in the underwriting expense ratio for personal lines of 1.9 points. The
underwriting expense ratio reflected an increase of 1.0 points due to a constant
level of underwriting expenses and decreasing premiums earned that are discussed
above. The impact of weather related catastrophes on the loss and loss expense
ratio decreased in Third Quarter 2000 by 6.4 points compared to Third
Quarter 1999. Continued poor performance of UEZ business and the continued
impact of the New Jersey rate rollback offset the benefit of decreased
catastrophes. Additionally, the expansion states have generated higher loss
ratios in personal lines. The high loss ratios
12
<PAGE> 13
were expected as a cost of expanding into new markets. The personal lines
personal automobile loss ratio for the expansion states for Third Quarter 2000
increased to 97.3% compared to 91.4% in Third Quarter 1999 . New business in our
preferred pricing tier is performing within our expectation, however business
placed in our higher priced rating tiers is performing poorly. As a result, the
Company has significantly slowed the growth of new business in these states,
reducing writing personal automobile business for insureds with at-fault
accidents until rate filings are complete and the rates have been adjusted.
The Personal Lines SBU combined ratio was 111.0% for Nine Months 2000, up 7.5
points from Nine Months 1999. This increase was primarily due to an increase in
the loss and loss expense ratio of 5.0 points for Nine Months 2000. The impact
of catastrophes on the loss and loss expense ratio decreased by 1.2 points in
Nine Months 2000 compared to Nine Months 1999. New Jersey automobile loss ratios
have increased 3.6 points primarily due to the 15% rate rollback and
unprofitable assigned UEZ business which generated a combined ratio of 233% for
Nine Months 2000 compared to a combined ratio of 215% for Nine Months 1999.
Voluntary UEZ business, which has a higher percentage of full coverage policies,
has a combined ratio approximately 70 points lower than the assigned business
for Nine Months 2000. As assigned business lapses, the Company is attempting to
replace it with voluntary full coverage UEZ business while closely managing to
our state mandated quota. In addition, the combined ratio for personal
automobile business in the expansion states increased 0.9 points when compared
to Nine Months 1999. The underwriting expense ratio increased 2.5 points, to
27.6%, for Nine Months 2000 compared to 25.1% for Nine Months 1999. One million
dollars in PAIP servicing carrier fees paid in Nine Months 2000 compared to zero
in Nine Months 1999, when the servicing contract was not in effect, increased
the ratio 0.6 points. A constant level of underwriting expenses spread over
decreasing premiums earned caused the remaining increase in the ratio.
The Company believes that its New Jersey automobile rates remain inadequate, and
in July 2000 the Company has filed for an overall 18.9% rate increase. The
filing seeks to increase the Company's liability rates which have historically
been inadequate and to reduce physical damage rates which are redundant. In
August 2000, the New Jersey Insurance Department deemed the filing complete, and
as of October 2000 the New Jersey Insurance Department completed its initial
review of the application. A hearing with an Administrative Law Judge is
tentatively scheduled for January 2001. The Company does not expect resolution
in the near term due to the long and difficult nature of the process.
Reinsurance
The Insurance Subsidiaries follow the customary 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 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.
As a result of reinsurance pricing, the Company increased the retention on its
property treaty excess of loss program to cover each property occurrence in
excess of $1 million up to $15 million effective July 1, 2000. Prior to this
change each property occurrence in excess of $750,000 was covered up to $15
million. The Company estimates that this change will result in a net additional
cost of $2 million related to both reinsurance premiums and retained loss costs
compared to the twelve month policy period ended July 1, 2000.
INVESTMENTS SEGMENT
Net investment income earned for Third Quarter 2000 remained relatively flat at
$24 million compared to Third Quarter 1999 and was $72 million for Nine Months
2000 compared to $71 million for Nine Months 1999. Net investment income earned
after tax of $19 million for Third Quarter 2000 and $55 million for Nine Months
2000 , also remained relatively flat compared to the same periods during 1999.
The Company had a 4.4% annualized after-tax investment yield for Nine Months
2000, up slightly from 4.3% in Nine Months 1999. The rates currently available
to the Company for investment are generating an after-tax return of
approximately 4.75%. Net realized losses for Third Quarter 2000 decreased $1
million to zero compared to Third Quarter 1999. Net realized gains decreased $28
million to $3 million for Nine Months 2000 compared to Nine Months 1999.
Realized investment gains and losses fluctuate based on investment decisions
regarding individual securities as well as tax planning considerations.
13
<PAGE> 14
DIVERSIFIED INSURANCE SERVICES SEGMENT
<TABLE>
<CAPTION>
Unaudited Unaudited,
Quarter ended Nine Months ended
September 30, September 30,
--------------------------------------------------------------------------------------------------------------
($ in thousands) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FLOOD INSURANCE
Net Revenue $ 3,460 3,729 $ 8,947 8,044
Income Before Federal Income 457 1,753 1,422 2,571
Tax
MEDICAL COST CONTAINMENT
Managed Care
Net Revenue 2,481 1,372 6,245 4,727
Income Before Federal Income 684 157 1,503 765
Tax
Preferred Provider
Organization
Net Revenue 1,737 860 4,398 860
Income Before Federal Income 447 241 739 241
Tax
PROFESSIONAL EMPLOYER
ORGANIZATION
Net Revenue 7,312 4,805 21,673 4,805
Income Before Federal Income Tax (1) 471 347 471
SOFTWARE DEVELOPMENT AND
PROGRAM ADMINISTRATION
Net Revenue 4,917 3,826 14,119 12,651
Loss Before Federal Income Tax (16) (78) (293) (475)
OTHER
Net Revenue 426 N/A 982 N/A
Income Before Federal Income Tax 69 N/A 182 N/A
TOTAL
Net Revenue 20,333 14,592 56,364 31,087
Income Before Federal Income Tax 1,640 2,544 3,900 3,573
Net Income 1,046 1,611 2,455 2,245
Return on Net Revenue 5.1% 11.0% 4.4% 7.2%
</TABLE>
Diversified Insurance Services businesses generated $20.3 million of net revenue
and $1.0 million of net income for Third Quarter 2000 compared to $14.6 million
of net revenue and $1.6 million of net income for Third Quarter 1999. The
segment generated a return on net revenue of 5.1% for the Third Quarter 2000
compared to 11.0% for Third Quarter 1999. These same businesses generated $56.4
million of net revenue and $2.5 million of net income for Nine Months 2000
compared to $31.1 million of net revenue and $2.2 million of net income for Nine
Months 1999. The segment generated a return on net revenue of 4.4% for the Nine
Months 2000 compared to 7.2% for Nine Months 1999.
The increase in quarter-to-quarter and year-to-year revenues are partially the
result of the two acquisitions in Third Quarter 1999, Selective Hr Solutions,
formerly Modern Employers Inc. and Consumer Health Network. These acquisitions
were purchased during the Third Quarter 1999 and as such Third Quarter and Nine
Months 1999 results do not include a full period's worth of activity. Further
impacting the comparison of this segment's net revenue to the same periods a
year ago, is approximately $1.25 million in additional claim fee revenues
generated by servicing flood business in Third Quarter 1999 that were directly
attributable to Hurricane Floyd. Current year results do not reflect revenues
from any event of that magnitude.
During the Third Quarter 2000, the Company continued marketing, through
independent insurance agents, the Professional Employer Organizational ("PEO")
payroll and human resource services to small and medium commercial liability
accounts. The related cost of building up the sales force staff to work with
these agents in this effort, along with the impact of Hurricane Floyd in 1999
were the primary reasons for the decline in our return on revenue compared to
the same periods a year ago. The focus of our Diversified Insurance Services
businesses continues to be revenue growth, geographic expansion and cross
marketing opportunities.
14
<PAGE> 15
Flood Insurance
Selective is a servicing carrier for the National Flood Insurance Program. The
Company provides a market for flood insurance to its agents, including
flood-only appointed agents, across the country. The premiums collected by the
Company are ceded 100% to the federal government. As a servicing carrier,
Selective bears no risk of policyholder loss. The Company receives a servicing
fee from which it pays agency commissions and other related expenses. In
addition to the underwriting fees, the Company receives fees for handling
claims. Together these fees generated $3.5 million of revenue for the Third
Quarter 2000 compared to $3.8 million for Third Quarter 1999 and $8.9 million of
revenue for Nine Months 2000 compared to $8.0 million for Nine Months 1999. The
resulting pre-tax profit for this unit was $0.5 million for Third Quarter 2000
compared to $1.8 million for Third Quarter 1999 and $1.4 million for Nine Months
2000 compared to $2.6 million for Nine Months 1999.
Selective has experienced a 17.1% increase in its policies in force offered
through the National Flood Insurance Program since the Third Quarter 1999, which
has translated into a 28.4% and 31.5% increase in premiums for the Third Quarter
and Nine Months 2000 compared to the same periods a year ago. This increase in
our premium base has positively impacted both the revenues and net income for
this line of business. The growth in our underwriting fee revenue has been
partially offset by the decrease in the claims bandling fee revenue and net
income which included $1.25 million of revenue and $0.8 million in related net
income attributable to Hurricane Floyd. Third Quarter and Nine Months 2000 net
income has been further decreased by the start-up costs associated with the
development of the new flood processing system.
Medical Cost Containment - Alta Services and Consumer Health Network
Alta Services, LLC ("Alta") manages workers' compensation and automobile medical
claims for the underwriting subsidiaries of the Company, for unrelated
companies, and for self-insured businesses and employer groups. Alta bears no
underwriting risk and offers a full array of medical cost containment services.
Alta generated revenue of $2.5 million for Third Quarter 2000 compared to $1.4
million for Third Quarter 1999 and $6.2 million for Nine Months 2000 compared to
$4.7 million in Nine Months 1999. Pre-tax net income increased in 2000 to $0.7
million for Third Quarter 2000 and $1.5 million for Nine Months 2000, from $0.2
million for Third Quarter 1999 and $0.8 million in Nine Months 1999.
Consumer Health Network ("CHN"), acquired in July 1999, is a preferred provider
organization ("PPO"), which develops networks of medical providers and leases
these networks to insurers, large employers, third party administrators (such as
Alta Services), unions and other entities that pay medical claims. In return for
bringing the medical providers patients, the PPO negotiates discounts for its
customers. CHN generated revenue of $1.7 million in Third Quarter 2000 compared
to $0.9 million in Third Quarter 1999 and $4.4 million in Nine Months 2000
compared to $0.9 million in Nine Months 2000. Pre-tax net income was $0.5
million for Third Quarter 2000 compared to $0.2 million in Third Quarter 1999
and $0.7 million Nine Months 2000 compared to $0.2 million for Nine Months 1999.
The comparisons of the period to period results are being impacted by the fact
the CHN was not acquired until July 31, 1999.
Professional Employer Organization ("PEO") - Selective HR Solutions
Selective HR Solutions ("SHRS"), acquired in July 1999, provides human resource
administration, including benefits, payroll and employee management services,
and risk and compliance management products and services, including workers'
compensation to small or mid-sized businesses.
As independent agents write insurance for about 70% of the small business (those
with 25 or less employees) insurance market, the Company believes it can
successfully market the PEO product in its operating territories through its
agents. The Company is steadily introducing the PEO product in its operating
territories throughout 2000 and 2001, building on existing agent/business owner
relationships. The marketing and selling of PEO services is expected to generate
business opportunities for Alta and CHN. SHRS will also begin using an
Internet-enabled payroll and benefits management system in 2000, which is
expected to further improve efficiency and service levels. SHRS generated $7.3
million in revenue during Third Quarter 2000 compared to $4.8 million in Third
Quarter 1999 and $0.0 million in pre-tax net income for Third Quarter 2000
compared to $0.5 million in Third Quarter 1999. For Nine Months 2000, SHRS
generated $21.7 million in revenue compared to $4.8 in Nine Months 1999 and $0.4
million in net income for Nine Months 2000 compared to $0.5 million for Nine
Months 1999. The comparisons of the period to period results are being impacted
by the fact that Selective HR Solutions was not acquired until July 21, 1999.
Investments in hiring and training additional employees has greatly reduced
pre-tax profit levels in the Third Quarter and Nine Months ended 2000. We expect
these investments to continue at the current level throughout 2000.
Software Development and Program Administration - PDA Software Services, Inc.
PDA Software Services, Inc. ("PDA") was acquired in late 1998. PDA has assisted
in the development of the Company's automated claim and flood processing
systems. In addition, PDA provides administrative services to the federal
government's Women, Infants and Children ("WIC") nutritional program
administered by the states. Currently, PDA administers the WIC
15
<PAGE> 16
program in 15 states.
PDA incurred a pre-tax loss of $16,000 and $293,000 for Third Quarter 2000 and
Nine Months 2000 compared to a pre-tax loss of $78,000 and $475,000 during the
same periods a year ago. The loss is partially attributable to the amortization
of goodwill as well as retention bonuses paid to several key employees. The
employment retention bonuses will continue as a charge against income through
2002. Revenues for Third Quarter 2000 were $4.9 million and $14.1 million for
Nine Months 2000, compared to $3.8 million and $12.7 million for the same
periods in 1999.
FEDERAL INCOME TAXES
Total Federal income tax expense remained relatively flat at a benefit of $1.6
million for Third Quarter 2000 compared to a benefit of $1.4 million for Third
Quarter 1999. It decreased $15 million to a benefit of $2 million for Nine
Months 2000 compared to an expense of $13 million for Nine Months 1999. The
decrease for Nine Months 2000 reflects lower income for the year mainly due to
decreased realized gains. The Company's effective tax rate differs from the
Federal corporate rate of 35% primarily as a result of tax-exempt investment
income.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Selective Insurance Group, Inc. ("The Parent") is an insurance holding company
whose principal assets are its investments in its insurance and diversified
insurance services subsidiaries. As an insurance holding company, The Parent
meets its cash requirements through dividends from its insurance subsidiaries,
the payments of which are subject to state regulatory requirements, and proceeds
from the sales of common stock and debt. The Parent's cash requirements include
principal payments on the senior notes, interest payments, dividends to
policyholders and stockholders as well as the cost of shares of common stock
repurchased under its common stock repurchase program, which commenced in 1996.
As of September 30, 2000, the Company had repurchased a total of 6.9 million
shares at a total cost of $131 million under the program, with 0.5 million
shares repurchased during Third Quarter 2000 at a total cost of $9 million. For
Nine Months 2000, the Company purchased 2 million shares at a total cost of $35
million. There remains Board approval to purchase an additional 1.1 million
shares.
On May 4, 2000, The Parent successfully completed a private placement bond
offering in the amount of $91.5 million. The offering consists of two tranches:
a five year average life tranche of $30 million at 8.63% and an eight year
average life tranche of $61.5 million at 8.87%. The majority of the proceeds,
$68.2 million, were used to pay off the outstanding balances on lines of credit.
In addition to the cash requirements of the parent, the overall obligations and
cash outflow of the Company also include: claim settlements; commissions; labor
costs; premium taxes; general and administrative expenses; investment purchases
and capital expenditures with respect to the Company's automation initiatives.
The insurance subsidiaries satisfy their obligations and cash outflow through
premium collections, interest and dividend income and maturities of investments.
Cash provided by operating activities was $28 million for Nine Months 2000
compared to $47 million for Nine Months 1999. The $19 million decrease in cash
provided by operating activities was primarily due to a decrease in the
underwriting cash flow of $44 million. This decline is made up of the following:
An increase in catastrophe losses paid of $2 million; an increase in
underwriting expenses paid of $8 million due to increased overall compensation
and benefits as well as PAIP fees discussed earlier; increased disposal rates
for claims as a result of our efforts to close claims faster in order to
mitigate ultimate losses and a deterioration in underwriting results discusses
previously. These decreases were partially offset by increased premium
collections of $13 million as a result of higher prices. These decrease in
federal taxes paid $18 million is due to reduced capital gains.
Total assets increased 3.6%, or $90 million, from December 31, 1999 to September
30, 2000. This increase was primarily due to (i) the increase in premium
receivables of $45 million resulting from the Company's book of business which
generates higher volumes of premiums written through the first nine months of
each year compared to the fourth quarter. The seasonality in premium volume has
a corresponding impact on outstanding receivables, (ii) an increase in total
investments of $42 million due to an increase of $24 million in unrealized gains
in the held for sale debt portfolio, as well as additional purchases made due to
positive operating cash flow; and (iii) increase in deferred policy acquisition
costs of $14 million due to the increase in unearned premiums. These increases
were offset by a decrease in the deferred Federal income tax asset of $7 million
due to the increase in unrealized gains mentioned above and a decrease in
reinsurance recoverable on unpaid losses and loss expenses of $5 million.
The increase in total liabilities of 5%, or $97 million, from December 31, 1999
to September 30, 2000 was attributable to: (i) a net increase in debt of $40
million resulting from the May 4, 2000 private placement of notes in the
principal amount of $91.5 million; (ii) unearned premiums increased by $46
million due to the higher level of premiums written during the first nine months
of the year as discussed above and (iii) an increase in
16
<PAGE> 17
reserve for losses of $16 million.
YEAR 2000
Many computer systems and software products used only two digits to identify a
year in the date field with the assumption that the first two digits of the year
are always "19." Consequently, on January 1, 2000, computers that were not "Year
2000" ("Y2K") compliant may have read the year as 1900 causing malfunctions and
miscalculations. Through October 2000, the Company did not experience Y2K
related business disruptions internally or as a result of its dealings with
suppliers or service providers and The Company has not received any Y2K claims.
RECENT LEGISLATION REGARDING PRIVACY OF CONSUMER FINANCIAL INFORMATION
On June 1, 2000, federal regulators issued final regulations implementing the
provisions of the Financial Services Modernization Act of 1999, also known as
the Gramm-Leach-Bliley Act ("The Act"), governing the privacy of consumer
financial information. The regulations become effective on November 13, 2000,
and the date for compliance with the regulations is July 1, 2001. The
regulations limit disclosure by financial institutions of "nonpublic personal
information" about individuals who obtain financial products or services for
personal, family, or household purposes. The Act and the regulations generally
apply to disclosures to nonaffiliated third parties, subject to specified
exceptions, but not to disclosures to affiliates. It is anticipated that the
states or the NAIC will adopt regulations that are at least as restrictive that
will be imposed on insurance companies. This is an evolving area of regulation
requiring the Company's continued monitoring.
While the Company believes it is in compliance with all currently effective and
applicable laws effecting its operations, and the Company will before the
effective date of the federal regulations review the steps necessary to comply
with applicable privacy laws and regulations, the Company can not currently
quantify the financial impact it will incur to satisfy revised or additional
regulatory requirements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the information about market risk set
forth in the Company's Annual Report on Form 10-K.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - NONE
ITEM 2. CHANGES IN SECURITIES - NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - NONE
ITEM 5. OTHER INFORMATION
CODIFICATION OF STATUTORY ACCOUNTING PRINCIPLES
Effective January 1, 2001, the Company will adopt a codified set of statutory
accounting principles as required by the National Association of Insurance
Commissioners. The changes to the statutory accounting principles will reduce
the differences within statutory accounting permitted practices between states.
The Company has estimated that the adoption of the codified statutory accounting
principles will have a minimal impact to the Risk Based Capital ratios for the
insurance subsidiaries and will not impact the dividend paying capabilities of
the insurance subsidiaries.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The exhibits required by Item 601 of Regulation S-K are listed in the
Exhibit Index, which immediately precedes the exhibits filed with this
Form 10-Q.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the period covered by this
report.
17
<PAGE> 18
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.
REGISTRANT
By: /s/ Dale A. Thatcher November 14, 2000
-------------------------------------------------------------------------------
Dale A. Thatcher
Senior Vice President of Finance and Chief Financial Officer
By: /s/ Gregory E. Murphy November 14, 2000
-------------------------------------------------------------------------------
Gregory E. Murphy
Chairman, President and Chief Executive Officer
18
<PAGE> 19
SELECTIVE INSURANCE GROUP, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No.
--------
<S> <C>
10.1 Amendment, dated June 30, 2000, to the Promissory Note of
$40,000,000 Line of Credit with State Street Bank and Trust Company
as amended through June 29, 2001 with respect to Selective Insurance
Group, Inc. and Selective Insurance Company of America.
10.2 Amendment, dated July 31, 2000, to the Promissory Note of
$15,000,000 Line of Credit with Summit Bank as amended through July
31, 2001 with respect to Selective Insurance Company of America.
10.16a Employment Agreement, dated August 8, 2000, between Selective
Insurance Company of America and Richard F. Connell, filed herewith.
10.16b Termination Agreement, dated August 8, 2000, between Selective
Insurance Company of America and Richard F. Connell, filed herewith.
11 Computation of earnings per share, filed herewith.
27 Financial Data Schedule, filed herewith.
</TABLE>
19
