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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/405/A
(Mark one)
[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, 1999
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 22-2168890
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
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 15, 2000.
Common Stock, par value $2 per share: $399,884,463
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of February 15, 2000.
Common Stock, par value $2 per share: 26,221,932.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Selective Insurance Group, Inc. definitive Proxy Statement for
the 2000 Annual Meeting of Stockholders ("Proxy Statement") are incorporated by
reference to Part III of this report.
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PART I
ITEM 1. BUSINESS.
EXPLANATORY NOTE - THIS INFORMATION IS BEING FILED IN FORM 10-KA SOLELY TO
DELETE THE PHRASE "$38 MILLION SHARE" IN REFERENCE TO THE COMPANY'S BUY-BACK
PROGRAM ON PAGE 18.
GENERAL
Founded in 1925 with the holding company established in 1977, Selective
Insurance Group, Inc. (the "Parent") is a regional insurance holding company
which, through its subsidiaries, (collectively, "Selective" or the "Company")
offers, through almost 900 independent agents in 20 northeast, southeastern and
midwest states, a broad range of commercial insurance and alternative risk
management products, to small to medium-sized businesses and government
entities. The Company's commercial insurance products represent 71% of net
premiums earned. Selective also provides personal insurance products to
individuals and families, which represent 29% of net premiums earned. The
Company writes business in the following states: Connecticut, Delaware, Georgia,
Illinois, Indiana, Iowa, Kentucky, Maryland, Michigan, Minnesota, Missouri, New
Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South
Carolina, Virginia and Wisconsin. Since 1996, the Company expanded into the
midwest states, Connecticut and Rhode Island in an effort to diversify our
exposure to any one geographic or regulatory environment. As part of an effort
to diversify its business and develop fee-based revenues, the Company also
offers: diversified insurance services which include: medical cost containment;
professional employer organization ("PEO") products and services, and software
administration services.
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"),
(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 Selective and
other insurers. In December 1998, the Company acquired the assets of PDA
Software Services, Inc., a software developer specializing in the insurance
industry. In July 1999, the Company acquired Selective HR Solutions, formerly
Modern Employers Inc., a Florida-based Professional Employer Organization and
Consumer Health Network, Plus, formerly ("CHN") a New Jersey-based Preferred
Provider Organization ("PPO").
The Company reorganized its internal operations during 1999 by creating an
"Insurance Operations" group and a "Diversified Insurance Services" group. The
reorganization reflects the need for distinct management focus on Selective's
core insurance businesses and on the insurance-related businesses the Company
has developed, either internally or by acquisition. Insurance Operations is
responsible for generating profitable premium growth based on superior customer
service and on strong franchise value with our agents, to maintain and build on
Selective's position as a market leader among regional property and casualty
insurers. Diversified Insurance Services is responsible for building, both
internally and through acquisition, insurance-related businesses that enhance
our core skill sets and generate strong revenue growth and profitability through
geographic expansion and inter-business marketing opportunities.
The following table shows the distribution of net premiums written, in the
Company's insurance business, by state for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
WRITTEN PREMIUM DISTRIBUTION BY STATE 1999 1998 1997
--------------------------------------------------------------------------------
<S> <C> <C> <C>
New Jersey 46.2% 51.5% 58.5%
Pennsylvania 12.2 11.2 10.9
New York 10.1 9.0 7.7
Maryland 6.3 5.6 5.0
Virginia 5.0 5.0 4.5
South Carolina 4.0 5.1 4.4
Illinois 2.9 2.1 1.1
North Carolina 2.4 2.6 2.4
Georgia 2.3 2.3 2.1
Ohio 1.9 0.8 0.1
Delaware 1.8 2.1 2.6
Indiana 1.7 1.0 0.3
Wisconsin 1.4 0.8 0.2
Other States 1.8 0.9 0.2
Total 100.0% 100.0% 100.0%
</TABLE>
For the ten years ended December 31, 1999, the Company's average statutory
loss and loss expense ratio and average statutory combined ratio were 70.6% and
105.0%, 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 9.1
points (70.6% for the Company compared with 79.7% for the industry). The Company
attributes
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its performance to the franchise value it has created with its independent
agency force, expertise in underwriting property and casualty insurance risks,
its penetration of high quality markets in the northeastern, southeastern and
midwestern states and its conservative loss and loss expense reserving
practices. For the ten years ended December 31, 1999, the Company's average
statutory underwriting expense ratio was 33.3% compared to 26.7% for the
property and casualty industry. The Company's historical statutory underwriting
expense ratio is higher than 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 cost (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 than the Company. Although the industry's 1999 expense
ratio reached a high of 28.1% at the end of 1999, the Company's ratio was 30.5%,
which reflects its ongoing expense improvement initiatives. The Company's
average statutory combined ratio outperformed the property and casualty industry
average statutory combined ratio by 2.6 points (105.0% for the Company compared
with 107.6% for the industry). The table below sets forth a comparison of
certain Company and industry ratios:
<TABLE>
<CAPTION>
Simple
Average
of All
Periods
Presented 1999 1998 1997 1996 1995 1994 1993(2) 1992 1991 1990
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CERTAIN COMPANY RATIOS (1):
Loss % 59.6% 65.0 59.9 56.8 60.6 60.4 60.6 60.3 58.2 56.6 57.9
Loss expense 11.0 9.4 10.3 11.4 10.8 10.8 11.1 11.5 11.3 11.3 12.5
Underwriting expense 33.3 30.5 32.2 31.2 30.8 29.4 31.6 35.5 37.0 38.3 36.1
Policyholders' dividends 1.1 0.8 0.7 0.7 0.7 1.0 1.0 1.2 1.3 1.5 1.6
Combined ratio (3) 105.0 105.7 103.2 100.1 102.9 101.6 104.3 108.5 107.9 107.6 108.0
Growth (decline) in net
premiums written 6.0 8.1 4.4 3.7 (8.6) 8.5 14.8 8.9 13.0 3.8 2.9
CERTAIN INDUSTRY RATIOS (1)(4):
Loss 66.7 64.8 63.3 60.3 65.4 65.7 68.1 66.7 74.7 68.5 69.4
Loss expense 13.0 13.5 12.9 12.5 12.9 13.2 13.0 12.8 13.4 12.6 12.9
Underwriting expense 26.7 28.1 27.3 27.1 26.4 26.3 26.0 26.3 26.6 26.4 26.0
Policyholders' dividends 1.3 1.1 1.5 1.7 1.1 1.4 1.3 1.1 1.2 1.3 1.2
Combined ratio (3) 107.6 107.5 105.0 101.6 105.8 106.5 108.5 106.9 115.7 108.8 109.6
Growth in net premiums written 3.3 2.3 1.7 2.8 3.4 3.6 3.8 6.2 2.0 2.4 4.5
COMPANY FAVORABLE
(UNFAVORABLE) TO INDUSTRY:
Combined ratio 2.6 1.8 1.8 1.5 2.9 4.9 4.2 (1.6) 7.8 1.2 1.6
Growth in net premiums written 2.7 5.8 2.7 0.9 (12.0) 4.9 11.0 2.7 11.0 1.4 (1.6)
</TABLE>
1. The ratios and percentages are based upon Statutory Accounting Practices
("SAP") prescribed or permitted by state insurance departments in the states
in which the Company is domiciled. These practices may differ from generally
accepted accounting principles.
2. In 1993, this ratio includes the one-time restructuring charge of $9
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 1999 have been estimated by A.M.
Best.
STRATEGY
The Company's strategy is to create flexible, comprehensive and integrated
risk and business management solutions for busy individuals and business
decision makers who want to focus on other priorities in their lives. This is
done in partnership with a group of trusted independent agents. The goal of this
strategy is to increase revenue, profitability and shareholder value over the
long-term.
The Company's principal strategies are executed in the following areas:
(1) INSURANCE OPERATIONS - generating profitable premium growth based on
superior customer service and on strong franchise value with our
agents, to maintain and build on Selective's position as a market
leader among regional property and casualty insurers.
(2) DIVERSIFIED INSURANCE SERVICES - building, both internally and
through acquisition, insurance-related businesses that enhance our
core skill sets and generate strong revenue growth and profitability
that is less subject to the property and casualty underwriting
cycle.
(3) INVESTMENT PRACTICES - maximizing after-tax yield on investments
while providing liquidity, and preserving assets and stockholders'
equity.
(4) CAPITAL MANAGEMENT - managing the Company's capital position to take
advantage of business opportunities and increase stockholder value
on an earnings per share basis.
(5) EMPLOYEES - managing and constantly upgrading programs designed to
attract, train and retain the people who will lead Selective well
into the new century.
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(6) NEW INITIATIVES - exploring and developing innovative products and
programs that capitalize on changes in our markets and that generate
synergies among our businesses.
OPERATING SEGMENTS
The Company's subsidiaries are primarily engaged in the writing of property and
casualty insurance. The Company has classified its business into three operating
segments, each of which is managed separately. The three segments are Insurance
Operations, which includes commercial and personal lines, Diversified Insurance
Services and Investments. 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 in Item 8.
Financial Statements and Supplementary Data on page 37.
INSURANCE OPERATIONS SEGMENT
<TABLE>
<CAPTION>
Unaudited twelve months ended December 31,
($ in thousands) 1999 1998 1997
------------------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL INSURANCE OPERATIONS
Net premiums written $811,677 748,873 717,618
======== ========= =========
Net premiums earned 799,065 722,992 676,268
Losses and loss expenses incurred 592,215 507,800 461,213
Net underwriting expenses incurred 254,315 234,849 213,222
Dividends to policyholders 6,682 5,329 4,855
-------- --------- ---------
Underwriting loss $(54,147) (24,986) (3,022)
-------- --------- ---------
GAAP RATIOS:
Loss and loss expense ratio 74.1% 70.2 68.2
Underwriting expense ratio 31.8% 32.5 31.5
Dividends to policyholders ratio 0.9% 0.7 0.7
-------- --------- ---------
Combined ratio 106.8% 103.5 100.3
======== ========= =========
</TABLE>
In 1999, intense competition continued to affect the financial results of the
property and casualty industry. For the year, the Company continued to
outperform the industry with a statutory combined ratio of 105.7%, compared with
an A.M. Best estimate for the industry of 107.5%, up from 103.2% one year ago.
On a GAAP basis, the combined ratio increased to 106.8% from 103.5% one year
ago. The higher combined ratio reflected a 3.9 point increase in our loss and
loss expense ratio to 74.1%. The increase was mainly due to a higher level of
large commercial property and workers' compensation claims (losses in excess of
$100,000), which added 2.9 points to the ratio and an increase in
weather-related catastrophe losses added 1.0 points to the ratio. Strong agency
relationships and underwriting capabilities enabled the Company to generate 8%
premium growth, as compared with an industry estimate of 2% for the year. In a
highly competitive commercial lines market, the Company began increasing prices
after the first quarter. For 1999, renewal pricing including exposure-based
changes for 1999 was up 4%. More importantly, our renewal pricing (including
exposure-based changes) for the month of January 2000, was up 8%, close to our
initial goal of an 8% overall 2000 price increase, which does not include any
provision for exposure-based changes. In 1999, the Company expanded personal
lines into seven new states, which generated $16 million of additional net
premiums written. As a result of our ongoing geographic expansion efforts, the
Company wrote more than half of its business outside of New Jersey, for the
first time, while maintaining open markets for its New Jersey agents.
In personal lines, the effects of a state-mandated 15% automobile rate
rollback in New Jersey began to impact the Company's results after becoming
effective in March 1999. Our New Jersey personal automobile business, which
represents $165 million of net premiums earned, generated a 1999 statutory
combined ratio of 103.5%, up 3.8 points over the same period, one year ago. The
Company expects that the effect of the rollback, coupled with growth in Urban
Enterprise Zone ("UEZ") involuntary business, will increase its 2000 New Jersey
personal automobile statutory combined ratio to the range of 105% to 109%. That
would translate into a 1 to 2 point increase in the Company's overall statutory
combined ratio during the same period.
Finally, as a result of the Company's efforts to provide excellent agency and
customer service, Selective was ranked among the top two U.S. commercial lines
insurers for the second year in a row in the 1999 Crittenden's national agency
survey. The Companys' internal annual agency surveys, from 1994 through 1996,
rated 7.3 (on a 10-point scale). From 1997 through 1999, those scores have
increased to an average of 8.4.
COMMERCIAL INSURANCE
COVERAGES
Selective's commercial insurance coverages consist of the following:
WORKERS' COMPENSATION COVERAGE insures employers against employee claims
arising from work-related injuries. Compensation is payable regardless of fault.
There are four types of benefits payable under workers' compensation policies:
medical, vocational rehabilitation, disability and death benefits. Because the
Insurance Subsidiaries write voluntary workers'
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compensation, they are also required to write involuntary coverage. Such
coverage is normally written through the National Council on Compensation
Insurance, Inc. ("NCCI"). Since January 1, 1995, Selective has accepted direct
assignments of involuntary workers' compensation 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 ultimate exposure difficult. For additional information about the
Company's exposure to environmental liabilities, see the section entitled
"Environmental Reserves" on page 15 and Note 17 to the Consolidated Financial
Statements on pages 55 and 56 in Item 8. Financial Statements and Supplementary
Data.
PROPERTY COVERAGE insures policyholders against commercial property damage
caused by fire, wind, hail, water, theft and vandalism, and other perils.
UMBRELLA COVERAGE provides policyholders liability protection supplemental to
that provided under primary liability policies and insures against catastrophic
losses. Umbrella coverage is normally written in conjunction with other
commercial insurance to provide a more complete 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.
COMMERCIAL INSURANCE SUMMARY
<TABLE>
<CAPTION>
Unaudited Twelve months ended
COMMERCIAL LINES December 31,
($ in thousands) 1999 1998 1997
--------------------------------------------------------------------------------
<S> <C> <C> <C>
GAAP INSURANCE OPERATION RESULTS
Net premiums written $ 587,521 524,563 472,460
========= ========= =========
Net premiums earned 570,650 506,020 465,826
Losses and loss expenses incurred 416,559 352,863 311,301
Net underwriting expenses incurred 195,035 180,699 162,975
Dividends to policyholders 6,682 5,329 4,855
--------- --------- ---------
Underwriting loss $ (47,625) (32,871) (13,305)
--------- --------- ---------
GAAP RATIOS:
Loss and loss expense ratio 73.0% 69.7 66.8
Underwriting expense ratio 34.2% 35.7 35.0
Dividends to policyholders ratio 1.1% 1.1 1.0
--------- --------- ---------
Combined ratio 108.3% 106.5 102.8
========= ========= =========
</TABLE>
For the three-year period ended December 31, 1999, the commercial lines GAAP
combined ratio was 105.9%. The 1999 combined ratio deteriorated 1.8 points to
108.3%, compared with 1998. The higher combined ratio reflects a loss and loss
expense ratio increase of 3.3 points over 1998 of which weather-related
catastrophe losses accounted for 0.8 points of the increase. The Company's
unfavorable experience in commercial lines is attributable not only to
weather-related storm losses, but also to higher than average large losses over
$100,000, in workers' compensation and property lines of business. The Company
has implemented specific pricing, underwriting and loss control initiatives to
reduce our exposure to severe losses as well as charge a higher level of premium
for risks that have more volatility. The higher loss and loss expense ratio was
partially offset by a 1.5 point decrease in the underwriting expense ratio.
Lower expense levels were due to reduced employee cash incentive accruals and a
reduced commission ratio caused by lower profit-sensitive commissions to agents.
Net premiums written increased $63 million, or 12%, in 1999 when compared
with 1998. The increase included $154 million in voluntary net new business,
primarily due to the Company's strong agency relationships and geographic
expansion effort. The Company's ability to continue growing its book of business
going forward depends on competitive forces in the marketplace as we implement
price increases on an account-by-account basis, with larger increases targeted
at under-performing business. The commercial lines pricing environment is
changing as the market has at least stabilized, and in the last three months of
1999, the Company achieved 5.5% price increases (4.0% for the full year),
including exposure-based changes.
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<TABLE>
<CAPTION>
GAAP
COMMERCIAL STRATEGIC BUSINESS UNIT Net Net Underwriting Statutory
HIGHLIGHTS Premiums Premiums Income Combined
Written Earned (Loss) Ratio (1)
($ IN THOUSANDS)
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
All commercial SBUs 1999 $ 587,521 570,650 (47,625) 107.3%
1998 524,563 506,020 (32,871) 106.2
1997 472,460 465,826 (13,305) 103.6
Contractors 1999 227,979 216,665 (22,507) 109.3
1998 195,494 184,076 (18,997) 109.8
1997 168,161 163,404 (9,070) 105.0
Mercantile and Service 1999 156,944 154,411 (10,804) 106.0
1998 148,954 143,330 (9,685) 106.4
1997 135,235 135,163 (3,985) 102.9
Community Services and 1999 79,089 80,100 107 99.1
Organizations 1998 70,786 76,075 (1,509) 102.7
1997 74,068 79,689 (3,094) 104.5
Habitational and Recreational 1999 62,003 60,576 (9,216) 114.1
1998 56,890 54,543 (3,447) 105.7
1997 51,860 49,106 (598) 100.6
Manufacturing and Processing 1999 49,198 46,391 (5,880) 111.6
1998 39,893 36,059 (2,274) 105.3
1997 31,731 29,511 (296) 100.4
Bonds 1999 12,308 12,507 675 95.8
1998 12,546 11,937 3,041 76.1
1997 11,405 8,953 3,738 57.6
</TABLE>
(1) The ratios are based upon Statutory Accounting Practices ("SAP")
prescribed or permitted by state insurance departments in the
states in which the Company is domiciled. These practices may
differ from generally accepted accounting principles.
COMMERCIAL LINES STRATEGIC BUSINESS UNITS' RESULTS
The Company deploys commercial lines underwriting experts in six commercial
lines strategic business units ("SBUs") that identify profitable market niches
and provide a variety of services to the Company's field staff and agents aimed
at improving overall profitability. The SBUs have developed new products and
services, thereby enhancing Selective's business opportunities with business
customers that have diverse risk management needs.
Among the SBUs' services are providing leads for new accounts, technical
training, analysis of underwriting results and review of individual accounts
with our field staff and agents. Underwriting analysis, both for lines of
business and for individual accounts, is a key part of the SBUs' focus on
profitability. The SBUs' analytical responsibilities enable the Company to
respond quickly when results in a particular market segment or line of business
deteriorate.
The Company's commercial lines operations accounted for 72% of net premiums
written (71% earned), in 1999. Increased loss ratios in several of the SBUs are
partially offset by improvements in the underwriting expense ratio.
The specific commercial lines SBUs and their results are as follows:
CONTRACTORS: 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 1999, the Contractors SBU's net premium earned represented 38% of
the Company's total net premiums earned for commercial insurance. For the
three-year period ended December 31, 1999, the average statutory combined ratio
for this SBU was 108.0%. Contractors generated a 109.3% combined ratio in 1999,
down slightly from 109.8% in 1998. The continued high combined ratio in 1999,
reflected poor results in the workers' compensation line of business, in
particular large losses attributable to falls from heights, and the construction
specialty trade business classes.
MERCANTILE AND SERVICE: focuses on providing commercial insurance coverage to
retail stores, offices, wholesalers and service businesses. In 1999, the
Mercantile and Service SBU's net premiums earned represented 27% of the
Company's total net premiums earned for commercial insurance. For the three-year
period ended December 31, 1999, the average statutory combined ratio for this
SBU was 105.1%. Mercantile and Service generated a combined ratio of 106.0% in
1999, down from 106.4% in 1998. Weather-related catastrophe losses contributed
3.8 points to the combined ratio in 1999, compared with 2.3 points in 1998.
COMMUNITY SERVICES AND ORGANIZATIONS (CSO): focuses on providing commercial
insurance coverage for municipalities, school boards, volunteer fire
departments, rescue squads, social services and religious institutions. In 1999,
the CSO SBU's net premiums earned represented 14% of the Company's total net
premiums earned for commercial
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insurance. For the three-year period ended December 31, 1999, the average
statutory combined ratio for this SBU was 102.1%. CSO generated a combined ratio
of 99.1% in 1999, down from 102.7% in 1998.
HABITATIONAL AND RECREATIONAL: focuses on providing commercial insurance
coverage to hotels, motels, condominiums, property owners' associations, golf
courses, country clubs, restaurants, and other miscellaneous types of
recreational industries. In 1999, the Habitational and Recreational SBU's net
premiums earned represented 11% of the Company's total net premiums earned for
commercial insurance. For the three-year period ended December 31, 1999, the
average statutory combined ratio for this SBU was 106.8%. Habitational and
Recreational generated a combined ratio of 114.1% in 1999, up from 105.7% in
1998. The combined ratio increase was driven by a 9.2 point increase in the loss
and loss expense ratio due primarily to a surge in severe, property losses which
added 6.5 points to this SBU's combined ratio.
MANUFACTURING AND PROCESSING: focuses on providing commercial insurance
coverage for light industrial and processing businesses with low product
liability exposures. In 1999, the Manufacturing and Processing SBU's net
premiums earned represented 8% of the Company total net premiums earned for
commercial insurance. For the three-year period ended December 31, 1999, the
average statutory combined ratio for this SBU was 105.8%. Manufacturing and
Processing generated a combined ratio of 111.6% in 1999, up from 105.3% in 1998.
Severe property losses exceeded 1998 levels by $4.1 million adding 9.0 points to
this SBU's combined ratio.
BONDS: focuses on providing commercial insurance coverage for fidelity and
surety, including coverages discussed previously. In 1999, the Bond SBU's net
premium earned represented 2% of the Company's total net premium earned for
commercial insurance. For the three-year period ended December 31, 1999, the
average statutory combined ratio for this SBU was 76.5%. The 1999 combined ratio
for this SBU was 95.8%, up from 76.1% in 1998. Selective's Bond business has
achieved a profit in 23 of the last 24 years.
PERSONAL LINES INSURANCE SUMMARY
<TABLE>
<CAPTION>
Unaudited Twelve months ended
PERSONAL LINES December 31,
($ in thousands) 1999 1998 1997
--------------------------------------------------------------------------------
<S> <C> <C> <C>
GAAP INSURANCE OPERATION RESULTS
Net premiums written $ 224,156 224,310 245,178
========= ========= =========
Net premiums earned 228,415 216,972 210,442
Losses and loss expenses incurred 175,656 154,937 149,912
Net underwriting expenses incurred 59,281 54,150 50,247
Underwriting (loss) or gain (6,522) 7,885 10,283
--------- --------- ---------
GAAP RATIOS:
Loss and loss expense ratio 76.9% 71.4 71.2
Underwriting expense ratio 26.0% 25.0 23.9
Combined ratio 102.9% 96.4 95.1
========= ========= =========
</TABLE>
The Personal Lines SBU represented 29% of the total net premiums earned in
1999. For the three-year period ended December 31, 1999, the personal lines GAAP
combined ratio was 98.1%. The 1999 ratio deteriorated 6.5 points to 102.9%,
compared with 1998. The loss and loss expense ratio contributed 5.5 points to
the overall increase. The increase was due to: (i) higher catastrophe losses
which made up 1.4 points of the increase; (ii) the impact of writing business
under the New Jersey UEZ program; and (iii) the effects of the New Jersey 15%
rate rollback on personal automobile premiums. The UEZ law requires automobile
insurers in New Jersey to write the same percentage of urban business compared
with their overall statewide market share. Selective's statewide market share is
approximately 3.1%. As a result, the Company has been required to write
approximately 9,000 new policies in urban territories. While the Company will
not be required to write more UEZ business before the middle of 2001, this
business is expected to produce loss ratios much higher than the Company's
voluntary business. The poor claim experience is attributable to the frequency
coupled with inadequate liability rates.
Although the new personal automobile law in New Jersey requires a 15% rate
rollback, the Company anticipates overall savings attributable to the new law
only to be in the range of 4 to 5 points. The savings are primarily due to
medical cost controls mandated by the state and other potential savings under
the law (e.g., changes in the no-fault law, increased fraud prevention and
prosecution). Therefore, the Company expects that the rate rollback coupled with
the effects of New Jersey's UEZ business will increase its New Jersey automobile
statutory combined ratio for 2000 to the range of 105% to 109%.
Personal lines net premiums written decreased slightly in 1999, when compared
with 1998. The Company's seven-state expansion program, which generated $11
million in additional premiums was mostly offset by a $12 million decline in New
Jersey automobile primarily due to the rate rollback, a decrease of $19 million
and growth in UEZ business an increase of $8 million.
7
<PAGE> 8
<TABLE>
<CAPTION>
PERSONAL LINES HIGHLIGHTS Net Net GAAP Statutory
Premiums Premiums Underwriting Combined
($ IN THOUSANDS) Written Earned Income(Loss)(1) Ratio(1)(2)
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Personal Lines SBU 1999 $ 224,156 228,415 (6,522) 102.6%
1998 224,310 216,972 7,885 97.1
1997 245,178 210,442 10,283 94.1
Automobile 1999 190,666 195,878 (9,658) 104.7
1998 190,215 186,897 (178) 100.9
1997 223,047 187,656 4,044 96.9
Homeowners 1999 27,084 26,094 2,858 87.5
1998 27,489 23,466 5,837 76.4
1997 15,647 16,079 3,987 72.8
Other 1999 6,406 6,443 278 37.3
1998 6,606 6,609 2,226 37.4
1997 6,484 6,707 2,252 69.3
</TABLE>
(1) Flood business servicing revenues have been removed from the
personal lines underwriting income and reclassed as diversified
insurance services business.
(2) The ratios are based upon Statutory Accounting Practices ("SAP")
prescribed or permitted by state insurance departments in the
states in which the Company is domiciled. These practices may
differ from generally accepted accounting principles.
PERSONAL LINES STRATEGIC BUSINESS UNIT RESULTS
PERSONAL AUTOMOBILE coverage insures individuals against losses from bodily
injury, bodily injury to third parties, property damage to an insured's vehicle
(including theft and fire), property damage to other vehicles and other property
as a result of automobile accident involving personal vehicles. These policies
may include uninsured motorist coverage. In 1999, personal automobile premiums
earned represented 86% of the Company's total net premiums earned for personal
insurance. For the three-year period ended December 31, 1999, the average
statutory combined ratio for this coverage was 100.8%. The combined ratio for
1999 was 104.7% up from 1998 due primarily to the early impact of the rate
rollback in New Jersey and the effect of the additional UEZ business.
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 1999, Homeowners net premiums earned represented 11% of the
Company's total net premiums earned for personal insurance. For the three-year
period ended December 31, 1999, the average statutory combined ratio for this
coverage was 78.9%. The combined ratio for 1999 was 87.5%, up from 76.4% in
1998. The 11.1 point increase in the loss and loss expense ratio included a 4.2
point increase in weather-related catastrophe losses, primarily Hurricane Floyd,
compared with 1998.
PERSONAL CATASTROPHE LIABILITY coverage, included in the "Other" category in
the personal lines highlights table (above), provides policyholders liability
protection supplemental to protection provided under automobile and homeowners
policies and insures against catastrophic losses. This coverage is normally
written in conjunction with other personal insurance. In 1999, net premiums
earned for personal catastrophe liability coverage represented 1% of the
Company's total net premiums earned for personal insurance. For the three-year
period ended December 31, 1999, the Company's average statutory combined ratio
for this coverage was 61.5%.
AGENCY DISTRIBUTION FORCE
Selective continues to work with its 900 independent agents to align their
interests with the Company's strategies and, thereby, generate profitable
premium growth. At this point, while the long-term effects of ongoing agency
consolidation and bank acquisitions of agencies cannot be fully anticipated,
Selective is taking steps to work even more closely with our best agents and
those purchased by a bank or other entities, see Item 1. "Business" - "New
Initiatives".
After eliminating approximately 270 underperforming agencies between
1994-1996, the Company believes it has the premier agency distribution force and
agency relationships in the property and casualty industry. The Company's strong
agency relationships start with providing a broad range of products, superior
service, in both underwriting and claims, stable markets and consistent
underwriting standards. The Company has competitive commission schedules and
agents can earn additional commissions of up to 17% of their direct premiums
written under the Company's agency profit sharing plan. The Company's local
staff maintains a high level of communication with agents. Senior management
also interacts frequently with agents through a variety of channels. These
include annual agency meetings in the Company's operating territories; annual
Producer Council meetings where leading local agents discuss with management how
the Company can improve its product offerings, customer service and overall
efficiency; and, an annual agency strategy meeting where a group of agents from
the Company's operating territories advise management as corporate strategies
and key initiatives are developed.
8
<PAGE> 9
FIELD STRATEGY
In 1995, the Company began deploying field underwriters - agency management
specialists (AMS) - and in 1997 field claim adjusters - claims management
specialists (CMS) into the territories serviced by our agents. Through year end
1999, there were approximately 80 AMSs and 135 CMSs working in the Company's
operating territories. Working and living near agents and customers enables AMSs
to work side-by-side with agents to evaluate new business opportunities and
develop strong relationships based on technical excellence and regular, personal
interaction. The AMSs work account-by-account to ensure the Company makes fair,
accurate underwriting decisions. Agent response to the AMS program is reflected
in the $154 million of net new commercial lines business the Company wrote in
1999 and the survey results mentioned above.
CMSs also work and live close to agents and customers so that they are able
to immediately be on site when a loss occurs, as well as conduct on-site
inspections and obtain knowledge about potential exposures. The Company believes
that personal, early intervention by CMSs results in higher levels of customer
satisfaction, and quicker, more accurate claim settlements and fraud detection.
As a result, Selective's claim service scored very high marks in the 1999
Crittenden's agent survey.
AMSs and CMSs are supported by eight regional field offices located
throughout the Company's operating territories. In addition to supporting agency
service and relationship objectives, the regional offices are responsible for
handling renewal business. The AMSs, regional office underwriting teams and
agents work together with corporate management to maintain underwriting
discipline and business quality. The account-by-account and team strategy for
underwriting supports the Company's objective of retaining established accounts
with favorable underwriting results.
DIVERSIFICATION
The Company, responding to rating agency, analyst and shareholder concerns,
decided in the early 1990's that it should diversify its insurance revenue by
territory as, in 1992, 65% of its business was written in New Jersey. While
always maintaining open markets for our New Jersey agents, the Company began
writing more business in its other seven core states and expanded into nine new
states in the midwest, Connecticut, Rhode Island and New York. Expansion created
the opportunity for the Company to compete in territories with stable regulatory
environments and lower exposure to natural catastrophes. The Company has also
expanded its personal lines products to seven new states.
In 1996, the Company commenced its midwest geographic expansion strategy,
deploying an internal growth approach rather than expanding via acquisition of
other insurers. By focusing on hiring the best local underwriting and claim
people, establishing a regional underwriting office in Columbus, Ohio and
appointing the best agents in each state, the Company was able to grow rapidly
in the Midwest ($74 million of net premium written in 1999). We continue to work
to improve our underwriting performance in these new states as this business
from a loss ratio standpoint is not "seasoned" and we have not yet reached the
appropriate premium levels to adequately distribute our infrastructure costs.
As a result of these efforts, 54% of our premiums written were in states
other than New Jersey, an increase of approximately 5 points from 1998 and the
first time in Selective's history that more than half of the Company's premium
was written outside of New Jersey.
UNDERWRITING
The AMSs, regional offices, SBU personnel and our agents all play an integral
role in the underwriting process, subject to the Company's underwriting
guidelines for particular policies and types of customers. The regional offices
and the SBUs work together to develop products and underwriting guidelines as
well as pricing, growth and profitability objectives. These activities are also
based on AMS input on agents' needs for products and pricing.
For certain classes of business and policy limits, 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 agents handbook, and e-Select (see, Technology on page 11) set
forth underwriting criteria for particular policies and insureds. When a risk
falls outside of the established guidelines, the agencies must contact their AMS
to obtain authorization to bind coverage. Insurance accounts that exceed the
AMS's authority require additional management or 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 notice of
cancellation.
Loss control representatives ("LCRs") are responsible for surveying and
assessing accounts from a safety standpoint. Accounts with significant exposures
in a particular line of coverage may be placed on service by the LCR and receive
regular individualized attention. The premium audit staff conducts audits of a
commercial account's financial records on an interim basis during the policy
year, or at the end of a policy term to adjust interim or final audit premium
payments.
CLAIMS
Timely investigation and the fair settlement of meritorious claims is one of
the most important customer services the Company provides. In addition, the
Company aggressively investigates potentially suspicious or fraudulent claims so
that appropriate action can be taken before payment is authorized. Also, Company
policy emphasizes the maintenance of timely and adequate reserves for claims,
and the cost-effective delivery of claims services by controlling loss and loss
expenses.
The Company's CMSs are primarily responsible for investigating and settling
claims directly with policyholders. By promptly and personally investigating
claims, the CMS is able to provide personal service and quickly resolve claims.
In
9
<PAGE> 10
territories where there is insufficient claims volume to justify the placement
of a CMS, or when particular claim expertise is required, the Company uses
independent adjusters to investigate and settle claims.
Claims settlement authority levels are established for each CMS and
supervisor based on their experience and expertise, up to the regional branch
office's $100,000 limit. Those claims with an exposure potential in excess of
$100,000, those claims involving significant or catastrophic injury or damage
(such as, fatalities, amputations and brain damage) as well as claims involving
suits against the Company and/or questions of coverage are reported to the home
office where senior claims specialists review the claims and determine the
appropriate reserve. They also provide guidance on the handling of the claim
until it's final disposition. All environmental claims are referred to a
centralized environmental claims unit, which specializes in the management and
consistency of decisions regarding coverage application to these exposures.
For small first party claims, generally defined as less than $2,500, the
Company has implemented an "Agency Draft Program" enabling agents to pay
property damage claims on the spot without CMS involvement. In 1995, agents
handled 1,600 of these small claims. By 1999, that number increased to 17,000
and the Company's goal, over time, is for agents to handle 60% of these small
claims. Expanding this program enables agents to provide immediate customer
service and satisfaction, while saving on costs since the CMS does not have to
get involved.
The Company has centralized, in the home office, subrogation and workers'
compensation claims handling to provide for consistency in handling, timely
exposure recognition and economies of scale. Additionally, our Claims Department
and Alta Services LLC, our managed care organization, work closely together to
provide a comprehensive pro-active managed care approach to workers compensation
and automobile no-fault injury claims. This partnership enables the application
of a broad spectrum of loss cost containment services including nurse case
management, physician and hospital treatment networks, peer review, treatment
pre-certification, and medical bill pricing review.
The Company has a centralized fraud unit to best manage its 17 field fraud
investigators and consistently adhere to exacting internal procedures to improve
detection and action on potentially fraudulent claims. The Company's automated
claim system tracks suspicious claims and determines the amount of loss dollars
saved when a claim is not paid because it is adjudged to have been fraudulent.
Also, the Company provides anti-fraud training for employees who may be involved
in claim matters.
The Company also focuses on, and has invested in, loss cost containment
initiatives. These initiatives include: (i) a comprehensive managed care
program, administered by Alta Services LLC, which reduced 1999 workers'
compensation and automobile loss costs; (ii) a special investigative unit and
claims professionals who uncovered fraudulent claims; (iii) a voluntary
automobile repair shop program which reduced repair costs in 1999 while
maintaining a 96% customer service satisfaction rating; and (iv) a small
estimate and property review program.
To date, the Company has received no Year 2000 ("Y2K") related claims, and
expects few if any claims. In the event such claims are made, the Company has
secured reinsurance that will cover all Y2K claims as a single event, up to $38
million of claims in excess of $12 million. See the Year 2000 discussion in Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.
TECHNOLOGY
The Company is utilizing technology to both improve service and reduce the
costs associated with processing insurance business. The Company has a number of
automated systems designed to improve service and efficiency.
The Commercial Lines Automated System (CLAS) eliminates many manual
processes, reducing the time it takes to process commercial insurance products.
CLAS provides instant access to critical underwriting information and enables
underwriters and claim adjusters to quickly answer questions, process changes,
verify coverages and work more efficiently with agents to quote new business. In
1999, CLAS was redesigned for Windows 95 and 98 which included the addition of
workers' compensation policy processing and quick quote capability. CLAS will be
continually enhanced to meet agent's, AMS's and underwriter's needs.
The rating software, available on CD-ROM, used in conjunction with
Selective-specific software in their offices, enables agents to obtain initial
account pricing. That and information can be transferred electronically between
the agent, AMS and field office, providing fast turnaround on policy issuance
and coverage revisions. These efforts are all part of a goal to create a
seamless work environment between Selective and its agents, without duplication
and minimal exposure to error.
In 1999, the Company launched e-Select, an extranet product available to
Selective agents and employees that includes product and rating information,
forms, billing information, agency profitability, production reports and instant
e-mail access to all employees. In early 2000, e-Select will be available to
agents and employees over the Internet. The Company will continue to develop
Internet-enabled technology during 2000 and beyond to enhance agency and
customer service and to reduce the transactional costs between the Company and
its agents. This capability will improve the flow of information between and
among the Company's various constituencies.
Agents currently using Applied's agency management software 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 1998, the Company expanded "Agency Interface" to accept personal lines policy
transactions from additional agency management systems. In early 2000, the
Company began interfacing with Applied agencies on commercial lines products via
our CLAS system.
A mobile claim system, intended to support the CMSs by automating the claim
adjustment process in the field, was implemented for workers' compensation in
1999, with all lines due to be included during 2000. Currently CMSs have
10
<PAGE> 11
electronic access to current claim information, have the ability to authorize
claim payments and can input log notes from the field using their laptop
computers.
Finally, the Company completed Y2K compliance activities in 1999 and there
were no Y2K-related failures that resulted in operational delays.
PRODUCTIVITY/EXPENSES
The technology initiatives described above are intended to enable the Company
to provide better, more efficient service to agents and to make employees more
efficient and effective. Technology is a key part of the corporate-wide
objective to reduce statutory underwriting and loss expense ratios through
increased efficiency and automation. The Company's overall GAAP underwriting
expense ratio was 31.8% for the year ending 1999, as compared with 32.5% for the
prior year. The reduction in the expense ratio includes: (i) approximately a .5
point decrease due to the Company's reward program not having a payout in 1999;
(ii) approximately a .5 point decrease due to lower profit sharing commissions
to agents reflecting underwriting experience; (iii) other expenses that grew at
rates less than our 8% net premiums written growth rate.
The Company utilizes net premiums written per employee as another key measure
of productivity. At December 31, 1999, the Company's had 1,724 employees in its
insurance and corporate operations and these employees generated net premiums
written of $471,000 per employee, up from $455,000 in 1998.
The Company's loss expense ratio has averaged 10.4% for the three-year period
ended December 31, 1999 and has decreased 2.1 points from a high of 11.5% in
1993 to 9.4% in 1999. The Company has decreased this ratio through more
aggressive litigation management. Currently, most outside defense firms are on
fee arrangements. The Company's examiners, coupled with an expansion of the
Company's staff counsel (attorneys employed by the Company to represent the
insureds' interests) have helped decrease the loss expense ratio. The program to
reduce legal fees also includes increased utilization of arbitration services to
avoid the higher costs associated with taking a case to trial.
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.
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 and Poor's Insurance Rating Services
("Standard and Poor's"). Further information is obtained from the Company's
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 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 Company's primary reinsurers are Zurich Reinsurance Company of
America, American Re-Insurance Company, Axa Re (Paris) and Gerling Global
Reinsurance Corporation. 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. Within the casualty treaty is a Year 2000 provision
that covers any Year 2000 losses as a single event for losses and loss expenses.
This is a catastrophe cover within the top four layers which consists of $38
million in excess of $12 million. This cover defines 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.
The Company's catastrophe program is in six layers and covers: (i) 95% of
losses in excess of $15 million up to $85 million; (ii) 95% of losses in excess
of $95 million up to $165 million. The Company believes that the property
catastrophe program, coupled with the Homeowners Quota Share Program, (which
contains no per-occurrence limit), provides adequate protection for catastrophic
losses.
11
<PAGE> 12
POOLING ARRANGEMENTS
The Insurance Subsidiaries participate in inter-company 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 and 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:
<TABLE>
<S> <C>
SICA....................... 55.5%
SWIC....................... 21.5%
SISC....................... 9.0%
SISE....................... 7.0%
SINY....................... 7.0%
</TABLE>
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 14 provides information about reserves for net losses and
loss expenses. Also see Notes 14 and 17(a) to the Consolidated Financial
Statements in Item 8. Financial Statements and Supplementary Data.
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.
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 severity is 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, 1999, 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 table on page 14 represents the development of balance sheet net reserves
for 1989 through 1999. The top three lines of the table reconcile gross
Generally Accepted Accounting Principles ("GAAP") reserves to net GAAP reserves
for unpaid
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<PAGE> 13
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
$14 million redundancy over the course of the succeeding eight years. That
amount has been included in income over the past eight 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, 1999, the Company paid $469 million of the currently
estimated $534 million of losses and loss expenses that were incurred through
the end of 1989; thus, the difference, an estimated $65 million of losses and
loss expenses incurred through 1989, remained unpaid as of December 31, 1999.
In evaluating this information, it should be noted that each amount includes
the total of all changes in amounts for prior periods. For example, the amount
of redundancy to losses settled in 1998, but incurred in 1995, will be included
in the cumulative redundancy (deficiency) amounts in 1995, 1996, 1997 and 1998.
This table does not present accident or policy year development data, which
certain readers may be more accustomed to analyzing. Conditions and trends that
have affected development of the reserves in the past may not necessarily occur
in the future. Accordingly, it may not be appropriate to extrapolate
redundancies or deficiencies based on this table.
ANALYSIS OF NET LOSS AND LOSS EXPENSE DEVELOPMENT
<TABLE>
<CAPTION>
($ in millions) 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross reserves for
unpaid losses and
loss expenses at
December 31 $ 622.8 669.2 731.5 870.2 917.7 999.4 1,120.1 1,189.8 1,161.2 1,193.3 1,275.1
Reinsurance
recoverable on
unpaid losses and
loss expenses at
December 31 $(100.5) (87.0) (91.9) (132.6) (114.0) (111.5) (121.4) (150.2) (124.2) (140.5) (192.0)
Net reserves for
unpaid losses and
loss expenses at
December 31 $ 522.3 582.2 639.6 737.6 803.7 887.9 998.7 1,039.6 1,037.0 1,052.8 1,083.1
Net reserves
estimated as of:
One year later $ 523.8 585.7 634.3 734.8 801.0 900.6 989.5 1,029.5 1,034.5 1,044.2
Two years later 528.2 583.1 626.3 732.5 790.0 899.5 977.6 1,028.1 1,024.8
Three years later 523.8 577.0 626.5 718.7 788.5 894.9 974.4 1,020.5
Four years later 520.3 581.2 626.8 716.5 782.9 894.7 965.2
Five years later 523.7 583.6 625.3 717.3 780.3 892.2
Six years later 529.7 582.8 627.1 716.4 778.9
Seven years later 530.0 585.7 626.8 714.0
Eight years later 531.4 586.4 625.9
Nine years later 533.1 585.6
Ten years later 534.1
Cumulative
redundancy
(deficiency) $ (11.8) (3.4) 13.7 23.6 24.8 (4.3) 33.5 19.1 12.1 8.6
======= ===== ===== ===== ===== ===== ===== ======= ======= =======
Cumulative amount
of net reserves
paid through:
One year later $ 158.2 174.5 183.7 219.5 224.6 259.4 280.4 303.6 313.7 328.1
Two years later 264.5 288.1 308.8 352.3 382.3 443.4 481.6 519.6 531.1
Three years later 335.8 371.7 391.3 451.4 497.7 573.7 628.0 674.7
Four years later 385.8 422.5 447.7 517.2 567.4 661.3 722.2
Five years later 413.7 452.0 481.4 556.3 611.1 716.0
Six years later 430.0 472.8 502.6 580.6 642.8
Seven years later 443.5 487.0 516.0 600.4
Eight years later 452.6 496.3 529.7
Nine years later 460.2 506.0
Ten years later 468.8
</TABLE>
13
<PAGE> 14
The following table reconciles the difference between GAAP and statutory loss
and loss expense reserves:
<TABLE>
<CAPTION>
RECONCILIATION OF STATUTORY TO GAAP LOSS RESERVES
($ in thousands) 1999 1998 1997
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory reserves (1) $ 1,064,624 1,034,036 1,018,284
Adjustment for funds withheld (2) 17,375 17,375 17,375
Provision for uncollectible reinsurance 1,080 1,410 1,313
----------- ----------- -----------
GAAP net reserve for loss and loss adjustment 1,083,079 1,052,821 1,036,972
expenses
Reinsurance recoverable on unpaid loss and loss
adjustment expenses 192,044 140,453 124,197
=========== =========== ===========
GAAP gross reserves for loss and loss adjustment
expenses $ 1,275,123 1,193,274 1,161,169
=========== =========== ===========
</TABLE>
(1) Statutory loss and loss expense reserves, net of reinsurance
recoverable on unpaid loss and loss adjustment expenses.
(2) Represents statutory funds withheld under reinsurance contracts
that have been re-classified as loss reserves for GAAP.
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, 1999, 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 claim 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 below summarizes the number of asbestos and non-asbestos claims
outstanding at December 31, 1999. See Note 17. to the Company's Consolidated
Financial Statements in Item 8. Financial Statements and Supplementary Data for
additional information regarding environmental reserves.
ENVIRONMENTAL CLAIMS ACTIVITY
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------------------------------------------
<S> <C> <C> <C>
ASBESTOS RELATED CLAIMS (1)
Claims at beginning of year 1,665 1,723 1,715
Claims received during year 569 597 323
Claims closed during year (534) (655) (315)
------- ------ ------
Claims at end of year 1,700 1,665 1,723
======= ====== ======
Average net loss settlement on
closed claims $ 141 148 526
NON-ASBESTOS RELATED CLAIMS (1)
Claims at beginning of year 407 337 306
Claims received during year 411 291 232
Claims closed during year (404) (221) (201)
------- ------ ------
Claims at end of year 414 407 337
======= ====== ======
Average net loss settlement on closed claims $ 6,688 22,772 19,855
</TABLE>
(1) The number of environmental claims presented in the tables includes
all multiple claimants who are associated with the same site or
incident.
14
<PAGE> 15
REGULATION
GENERAL
Insurance companies are subject to supervision and regulation in the states
in which they are domiciled and 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 regulations 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 commissioners about certain aspects
of the insurer's business. The Insurance Subsidiaries have, in recent years, met
all of the IRIS ratio tests.
NAIC model laws and rules are not usually applicable unless enacted into law
or promulgated into regulation by the individual states. The adoption of certain
NAIC model laws and regulations is a key aspect of the NAIC Financial
Regulations Standards and Accreditation Program, which also sets forth minimum
staffing, and resource levels for all states. All of the domiciliary states of
the Insurance Subsidiaries are accredited, with the exception of New York. The
NAIC intends to create an eventual nationwide regulatory network of accredited
states.
The NAIC Model Act is also intended to enhance the regulation of insurer
solvency. This act contains certain risk-based capital ("RBC") requirements for
property and casualty insurance companies. The requirements are designed to
assess capital adequacy and to raise the level of protection that statutory
surplus provides for policyholders. RBC measures the four major areas of risk to
which property and casualty insurers are exposed: (i) asset risk; (ii) credit
risk; (iii) underwriting risk; and (iv) off-balance sheet risk. Insurers with a
ratio below 200% of their total adjusted capital to their Authorized Control
Level, as calculated in the Model Law, are subject to different levels of
regulatory intervention and action. Based upon the 1999 statutory financial
statements for the Insurance Subsidiaries, each Insurance Subsidiary's total
adjusted capital exceed the Authorized Control Level, and the risk based capital
ratios are as follows:
<TABLE>
<S> <C>
SICA 497%
SWIC 641%
SISE 591%
SISC 593%
SINY 581%
</TABLE>
15
<PAGE> 16
DIVERSIFIED INSURANCE SERVICES SEGMENT
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
($ in thousands) 1999 1998 1997
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
FLOOD INSURANCE
Net Revenue $ 10,665 8,004 5,802
Pre-tax Profit 3,297 1,902 1,239
MEDICAL COST CONTAINMENT
Net Revenue 5,874 6,096 2,434
Pre-tax Profit (Loss) 895 315 (474)
PROFESSIONAL EMPLOYER ORGANIZATION
Net Revenue 11,262 - -
Pre-tax Profit 980 - -
PREFERRED PROVIDER ORGANIZATION
Net Revenue 1,964 - -
Pre-tax Profit 253 - -
SOFTWARE DEVELOPMENT AND PROGRAM ADMINISTRATION
Net Revenue 16,888 - -
Pre-tax Profit (Loss) (653) - -
TOTAL
Net Revenue 46,653 14,100 8,236
Pre-tax Profit 4,772 2,217 765
After Tax Profit 2,948 1,440 495
Return on Net Revenue 6.3% 10.2 6.0
</TABLE>
Our Diversified Insurance Services businesses generated $47 million of
revenue and $3 million of after-tax profit for the year ended December 31, 1999.
The Company expects continued, strong revenue growth in this segment and
increased opportunities for these businesses working together and with the
Insurance Operations. The segment generated a return on net revenue of 6.3% for
the year ended December 31, 1999, compared to 10.2% one year ago. The decrease
in return is due to a higher percentage of the revenue being generated by the
PEO which generated a lower profit margin, the additional investments being made
to grow these businesses, and the operating loss generated by PDA. The Company
completed two key acquisitions in 1999; Selective HR Solutions (formerly Modern
Employer, Inc.) a professional employer organization (PEO) that offers human
resource administration services and risk managements products and services to
small and mid-sized businesses; and Consumer Health Network, Plus (CHN), a
preferred provider network, that offers medical services to insurance companies
and other businesses. Refer to the "Diversified Insurance Services Regulation"
in Item 7., Management's Discussion and Analysis of Financial Condition and
Results of Operations.
In the future we intend to focus our Diversified Insurance Services
businesses on revenue growth, geographic expansion and inter-business marketing
opportunities. For example, in the first quarter of 2000, the Company will begin
marketing, through independent agents a product that combines the PEO package
and commercial lines coverages. This represents a unique way to address many
risk management and human resources issues that our small to mid-sized business
customers face. These various synergistic opportunities are described below, see
"New Initiatives" on page 20.
FLOOD INSURANCE
Selective is a servicing carrier for the National Flood Insurance Program.
The Company provides a market for flood insurance to its agents and also has
flood-only appointments with about 2,600 agents across the country. The premiums
collected by the Company 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 addition to the underwriting fees, the Company
receives fees for handling claims. Together these fees generated $10.7 million
of revenue and $3 million in pre-tax profit for this unit. In 1999, the
Company's flood direct premiums written increased by 14% to $27 million which
generated $1 million in additional revenue. A significant portion of the revenue
increase is directly related to claims fees earned during Hurricane Floyd, which
added approximately $1.25 million. Flood personnel handled about 2,000 claims
related to the hurricane.
During 1999, the Company expanded its Flood operations to all states. The
Company has also established a separate entity, FloodConnect, in anticipation of
rolling out nationally an internally developed flood policy processing system in
the fourth quarter of 2000. The system will eliminate the need for the Company
to purchase policy support from an outside vendor, while it will also enable
FloodConnect to provide policy processing support for other Flood servicing
carriers, thus creating an opportunity for additional program administration
revenues.
16
<PAGE> 17
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.
The Company concluded that medical claim management was such a critical
element of claim handling that it purchased Alta -- formerly MRSI/MCSI -- in
November 1997. Alta provides a broad range of medical claims services to
Selective including first report of injury, referrals to medical providers,
comprehensive medical case management, as well as medical bill audits and
repricing. The goal of Alta's program is to return patients to their normal
routine, at work and at home, and ensure medical costs are delivered in the most
cost effective manner possible.
In addition, Alta also provides medical services to other insurers. Recently,
Alta has become a leading medical claim management vendor for medical programs
under New Jersey's Automobile Insurance Cost Reduction Act. During 2000, revenue
generated by this new business will offset revenue lost due to the loss of two
key accounts in 1999. Nevertheless, Alta generated pre-tax net income of $0.9
million in 1999.
In 1999, Selective acquired Consumer Health Network ("CHN") a preferred
provider organization ("PPO"). A PPO develops networks of medical providers and
leases these networks to insurers, large employers, third party administrators,
unions and other entities that pay medical claims. In return for bringing the
medical providers patients, the PPO negotiates discounts for their customers.
CHN expanded its network providers from 38,000 to 42,000 locations during 1999
in its initial three key operating territories (New Jersey, New York, and
Connecticut). Network expansion will continue to be a major initiative at CHN.
The costs associated with these efforts have reduced return on revenue margins
for 1999 and will continue during the first half of 2000. CHN's customers
include Alta, and both Alta and Selective benefit from having access to CHN's
networks, which are the largest in New Jersey. CHN generated $0.3 million in
pre-tax net income during the five months after being acquired by Selective in
July 1999.
Going forward, both Alta and CHN will focus on expanding their businesses by
entering into new states where Selective has a major presence, starting with
Pennsylvania. Also, as Selective HR Solutions (see below) enters New Jersey and
other key Selective territories, both Alta and CHN will have new business
opportunities to manage property and casualty medical claims, and the day-to-day
medical needs of the employees of Selective HR Solution's business customers.
This is an example of the vertical integration synergies made possible by
Selective's business model.
Alta also oversees SelecTech, LLC ("SelecTech") which generates fees by
providing third party administrative services to self-insured accounts.
Self-insured businesses often need insurance services, such as managed care and
other claim handling programs, and loss control that would otherwise be provided
by an insurer. SelecTech also works closely with Selective Risk Managers to
assist businesses and government entities looking for customized insurance
products and services.
ALTERNATIVE MARKETS -- SELECTIVE RISK MANAGERS
The Company has recognized that many businesses are exploring different
methods of meeting their risk management needs. Larger companies and government
entities have self-insured or partially self-insured themselves for many years,
and smaller companies and government bodies are exploring self-insurance and
other alternative market options. Many businesses are buying insurance through
affinity group or trade associations. Many of the Company's agents are working
with customers looking for new insurance options.
In response to the trend towards self-insurance and group/association-based
insurance, the Company formed Selective Risk Managers (SRM) in 1997. Through
December 31, 1999, SRM has written through the insurance operations over $10
million direct premiums written in group, association, and self-insurance
business. The financial results of this business are recorded in the Insurance
Operations segment. SRM is able to tailor insurance products and coverages, and
also create programs enabling agents and business owners to participate in the
profits their programs may generate. SRM also creates programs for government
entities.
In addition, SRM manages the Company's specialty lines products. The Company
is able to secure through reinsurance agreements, on behalf of its agents and
customers, newer or hard-to-place coverages, such as directors and officers,
errors and omissions, environmental liability and employment practices
liability.
PROFESSIONAL EMPLOYER ORGANIZATION - SELECTIVE HR SOLUTIONS
The Company believes that small to mid-sized businesses will begin demanding
new and better solutions to many of their operational problems. We believe that
the PEO concept provides an answer to many problems employers face from hiring
and retaining good employees, to providing competitive benefits, to eliminating
administrative and compliance burdens that keep the business owners from
focusing on their core operations. The PEO provides human resource
administration, including benefits, payroll and employee management services,
and risk and compliance management products and services, including workers'
compensation. A PEO, by the nature of its product package, provides a very high
level of day-to-day services to its customers, which the Company believes will
be attractive to small business owners.
As stated above, Selective purchased a leading PEO, Selective HR Solutions,
in 1999. This acquisition provides the Company and its distribution force access
to a product line that complements Selective's traditional commercial insurance
package. As independent agents have control of 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
17
<PAGE> 18
agents. The Company will steadily introduce the PEO product in its operating
territories throughout 2000 and 2001, building on existing agent/business owner
relationships. As stated above, introducing the PEO product in New Jersey will
also generate business opportunities for Alta and CHN. Selective HR Solutions
will also begin using an Internet-enabled payroll and benefits management system
in 2000, which will further improve efficiency and service levels. In the five
months of 1999 after being purchased by the Company, Selective HR Solutions
generated $1.0 million in pre-tax net income.
SOFTWARE DEVELOPMENT AND ADMINISTRATION -- PDA SOFTWARE SERVICES, INC.
Technology is driving efficiencies and new operational opportunities across
the world. The insurance industry can benefit enormously from technology
applications that eliminate paper, excessive processing and errors, and
transaction costs. Selective has already made a significant resource commitment
to technology, which was accentuated further by its acquisition of PDA Software
Services, Inc. ("PDA") in late 1998. PDA has assisted in the development of the
Company's automated claim and flood processing systems. In addition, PDA is also
the leading vendor of administrative services to the federal government's Women,
Infants and Children ("WIC") nutritional program administered by the states.
Currently, PDA administers the WIC program in 12 states.
PDA incurred a pre-tax loss of $0.7 million in 1999, attributable to goodwill
and retention bonuses. The retention bonuses will continue as charges against
income through 2002.
INVESTMENTS SEGMENT
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, 16%
equity securities and 3% short-term 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 99% of the debt security portfolio is of investment grade. Further
emphasizing this superior quality is the fact that 40% of the debt securities
have a Moody's rating of Aaa (or its Standard and 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
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 1999, 81% 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
1999, 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, decreased modestly in 1999 to $75
million compared to $77 million in 1998. Net investment income earned before
taxes declined in 1999 to $97 million from $99 million in 1998. The level of
investment income was negatively impacted by: (i) lower yields on the reinvested
proceeds from maturities and redemptions of $309 million during 1999 and 1998;
(ii) the use of cash to purchase common shares of the Company (totaling $46
million in 1999 and $38 million in 1998); and (iii) cash acquisitions of
diversified insurance services businesses. During 1999, the Company purchased
2.5 million shares of our stock, compared to 1.8 million in 1998, through a
buy-back program. We believe this to be an efficient use of excess capital and
an enhancement to 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.
We will continue to follow the investment philosophy that has historically
proven successful. The strategy is to continue to purchase debt securities in
sectors that represent the most attractive relative value considering the
Company's 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.
CAPITAL MANAGEMENT
The Company manages its capital position in terms of the levels of long-term
debt and equity in an effort to reduce the overall cost of capital. A key factor
in establishing the target mix for debt and equity are the requirements of the
various rating agencies. As a regional property casualty insurance carrier, it
is important for Selective to maintain its A+ rating from both A.M. Best and
Standard and Poors. The Company has been deploying its excess capital through
its stock repurchase program and acquiring companies to expand its Diversified
Insurance Services operations. From July 1996 through February 3, 2000, the
Company has acquired 5.2 million shares of its stock at a total cost of $101.8
million. Under its
18
<PAGE> 19
repurchase program, the Company has the authorization to purchase 2.8 million
additional shares. Market conditions and alternative uses for cash are evaluated
prior to making stock acquisitions.
The Company is currently exploring the possibility with its investment
bankers of raising capital through the issuance of senior unsecured notes in a
private placement transaction. The decision to issue such notes will be
dependent on the overall attractiveness of market conditions, including general
interest rate levels, credit spreads and maturities. Proceeds from such an
issuance would be used to reduce outstanding debt on lines of credit, and for
general corporate purposes. The Company is not under any current requirement to
raise capital, believes it has adequate liquidity, and is confident that its
credit lines will be renewed on their maturity. The Company entered into an
interest rate hedge on February 11, 2000, to protect against interest rate
increases in the eventuality that it issues such notes.
Dividends to stockholders are declared and paid at the discretion of the
Parent's Board of Directors based upon the Company's operating results,
financial condition, capital requirements, contractual restrictions and other
relevant factors. The Parent has paid regular quarterly cash dividends to its
stockholders for 71 consecutive years and plans to continue to pay quarterly
cash dividends. During 1999, the quarterly dividend was increased by 7% to 15
cents per share of common stock outstanding.
EMPLOYEES
The Company believes its 2,300 employees are, along with the agency force,
its most significant competitive advantage. The Company administers a number of
programs to attract, train, reward, and, as a result, retain employees.
Voluntary employee turnover for 1999 was 8.7%. The Company believes low
voluntary turnover is an outgrowth of programs specifically designed to
encourage employees to build work skills and a career with Selective.
The Company utilizes a competitive salary structure and benefits (e.g.,
health, life, 401K, disability, pension, discounted Selective stock purchase
program) to attract and retain employees. In addition, the Company has made a
major commitment to training employees. Every employee has a goal of receiving
38 hours annually of on-the-job training pertaining to their responsibilities.
Employees received an average of 23 hours of training in 1999, up from 20 hours
in 1998. Also, the Company encourages employees to attain professional
designations (e.g., Chartered Property Casualty Underwriter, Certified Insurance
Counselor) and, in 1999, 237 employees participated in professional continuing
education programs. In addition, the Company offers tuition reimbursement for
employees seeking undergraduate or graduate degrees, or who wish to complete
coursework that is relevant to their jobs.
The Company also has several award programs that permit employees to share in
Selective's financial success and that reward individual achievements. All
corporate and insurance operations employees are eligible to participate in the
Annual Cash Incentive Program (ACIP) which pays out based on the Company's
overall financial results, and individual or team performance. This program did
not pay out in 2000 - based on 1999 financial performance - but paid out $5
million for 1998 and $9 million for 1997. The Company has paid incentive awards
to over 85% of its employees in five of the past six years. The diversified
insurance services businesses have separate incentive programs. Finally, the
Company has a Gold Award program that rewards individual achievements with
on-the-spot payments ranging from $100 to $1000. This program paid out $100,000
in 1999.
In addition to annual cash incentive programs, under the Company's Stock
Option Plan II, the Company's Compensation Committee may grant to employees
stock options or make restricted or unrestricted grants of common stock. The
primary purpose of stock options and restricted stock is to recruit, retain and
reward employees whose contributions and expertise are key to the success of the
Company.
Finally, the Company administers flexible working arrangement programs to
retain good employees and maximize customer service. Many areas of the Company
have compressed workweeks (i.e., 10 days of work hours compressed into 9 working
days) and flexible working hours. The Company has many employees who work out of
their homes, or from remote work sites, so agents and customers can be serviced
locally. Finally, the Company utilizes technology so employees can be connected,
from remote locations, to company systems that support their work.
NEW INITIATIVES
SUMMARY
Successful companies must regularly review their core strategies and ensure
they are taking steps to address emerging market changes to find new ways to
create value. Also, successful companies regularly determine how they can better
serve their customers, as their customers' needs evolve either rapidly or
incrementally. Early in 2000, the Company's management, in consultation with the
Board of Directors and agents, identified six initiatives it believes will help
position the Company to leverage its strengths to meet emerging market trends.
These initiatives also accelerate the development of shared business
opportunities between the insurance and diversified services segments of the
Company.
Importantly, the new initiatives flow from a recognition that several of the
Company's historical strengths will be the basis of its future success. Despite
evident changes in the independent agency system (e.g., consolidation, bank
acquisitions of agencies) and the competitiveness of the property and casualty
business, independent agents and their companies still control 50% of the $300
billion U.S. property and casualty market. New market opportunities will
continue to exist for insurers and agents that can combine service excellence
and product/price competitiveness for their customers. Selective's new
initiatives are:
19
<PAGE> 20
INTEGRATED PRODUCT - As a natural evolution from the acquisition of Selective
HR Solutions, the Company has begun marketing a new product that integrates the
PEO and commercial insurance product. This initiative directly leverages the
strengths of the Company's insurance business, Selective HR Solutions and agency
distribution force. During 2000 and 2001, the Company will introduce the
integrated product into its operating territories, to be sold by our agents to
existing and new business customers. The integrated product provides our agents
with a competitive advantage to sell a one-stop-shopping concept for the
business owner looking to integrate the benefits of a PEO, which includes
workers' compensation insurance, with his or her insurance needs.
INTEGRATED MEDICAL COVERAGE - Currently, the Company provides managed medical
claim services to its property and casualty insurance customers and other
businesses through Alta Services and CHN. Also, Selective HR Solutions provides
medical and disability benefits to its worksite employees, and the Company
provides medical, disability and workers' compensation benefits to its
employees. The Company will determine how it can best manage these different
programs more efficiently and deliver these services more effectively. In
addition, the Company will develop a business case for possibly integrating all
medical coverages (i.e., health benefits, disability, workers' compensation).
The goal would be to create a seamless service product and administrative
program that could be sold not only to Selective's customers as part of the
insurance, PEO or integrated product sale, but also to third parties. The
feasibility study will analyze data management, regulatory environment, product,
service and other significant issues before a decision to proceed is made.
AGENCY PROGRAMS - While independent agents will remain a significant
distribution force in property and casualty and other markets, there has been
and will continue to be, significant consolidation as smaller agencies are
acquired by market consolidators or aggregators, and larger agencies combine to
create significant economies of scale. Also, several banks have begun purchasing
insurance agencies as a means of expanding revenue without necessarily assuming
insurance risk. The Company recognizes that its future success as an
agency-oriented insurer will require forging closer relationships with its best
agents, and structuring viable programs with agencies that are acquired by
banks. The Company's two agency initiatives are:
BANK-OWNED AGENCY PROGRAM: Each bank that acquires agents is likely to
develop slightly different business models and practices. Selective intends to
develop the expertise to forge mutually beneficial arrangements with bank-owned
agencies, both to ensure growth and profitability, but to also ensure the bank,
agency and company relationships evolve positively. Structured properly, the
Company believes there may be significant cross-selling, business processing and
sales lead opportunities that can be mined from these relationships. This
program commenced in the first quarter of 2000.
PREFERRED AGENCY PROGRAM: Agencies committed to independence, growth
and profitability will want to forge even closer relationships with their lead
insurers. The Company will continue to be a leader in creating agency/company
relationships that result in mutual interdependence and high levels of long term
profitability. Selective's voluntary, exclusive program for top agents will
focus not only on financial incentives, but also on a broad range of initiatives
(e.g., technology) that bind agents closer to the Company. Through this program,
the Company and its top agents will seek to create new, powerful solutions for
end-customers. Agents will play a key role in the development, management and
evolution of the program which will be implemented in the first half of 2000.
SERVICE AND EFFICIENCY INITIATIVES - Another clear trend in the Company's
markets is the constant demand for better and more efficient service. The
Company is exploring two key initiatives in this area.
E-COMMERCE - for many businesses this means direct sales. However,
Internet-enabled technology also presents enormous opportunities to improve
business processes, add services customers want and significantly upgrade
communications between business partners. Selective's e-Commerce initiatives
will focus on company to agency applications, initially, to deliver the highest
levels of service possible, including Internet-enabled self-help options, and so
that business transactions are done seamlessly in a one-and done environment.
The Company's e-Commerce initiatives will be ongoing with regular deliverables
throughout 2000 and future years.
SERVICE CENTER - Many agents are becoming increasingly comfortable with
allowing their insurers to service small commercial and personal lines business.
Many Selective agents have indicated they want Selective to service this
business. Advantages of a service center approach include offering customers 24
hour service, more frequent customer contact and efficiencies as agents are
finding it increasingly difficult to hire and retain qualified customer service
representatives. However, creating and managing a small business and personal
lines service center would require both significant expense and major changes in
operations. The Company will develop a business case for a service center during
the first-half of 2000, determining agent interest and feasibility from both an
operational and cost perspective.
RISK FACTORS
The risks described below are not the only ones the Company 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
be materially affected, and the trading price of the Company's common stock
could decline.
WE MAY BE ADVERSELY AFFECTED BY CATASTROPHES AND WEATHER-RELATED EVENTS
Property and casualty insurance companies frequently experience losses from
catastrophes and other weather-related events. Catastrophes may have a material
adverse effect on our operations. Catastrophes are caused by various events
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<PAGE> 21
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.
OUR GEOGRAPHIC CONCENTRATION TIES OUR PERFORMANCE TO THE ECONOMIC, REGULATORY
AND DEMOGRAPHIC CONDITIONS OF THE EAST-COAST AND MIDWESTERN STATES.
Our property and casualty insurance business is concentrated geographically.
Therefore, unusually severe storms or other natural disasters which destroy
property in the states in which we write insurance could adversely affect our
operations. Approximately 46% of our net premiums are earned from insurance
policies written in New Jersey. Other East Coast states, including Connecticut,
Delaware, Georgia, Maryland, New York, North Carolina, Pennsylvania, Rhode
Island, South Carolina, Virginia and several Midwestern states, including
Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Missouri, Ohio and
Wisconsin, account for substantially all of our other business. 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.
WE FACE SIGNIFICANT COMPETITION FROM OTHER REGIONAL AND NATIONAL INSURANCE
COMPANIES AND FROM SELF-INSURANCE.
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.
The Internet may also emerge as a significant source of new competition, both
from existing competitors using their brand name and resources to write business
through this new distribution channel, and from start-up companies.
The insurance industry continues to experience price competition, which has
impacted our commercial business. If our competitors price their premiums more
aggressively, they may adversely affect our ability to grow our business in the
future. In addition, we face competition within each agency which markets our
insurance, because most of our agencies represent more than one insurance
company.
We also face competition from the implementation of self-insurance, primarily
in commercial insurance. Many of our customers and potential customers are
examining the risks of self-insuring as an alternative to traditional insurance.
WE FACE COMPETITION FROM BANKS.
On November 12, 1999, the President signed into law the Financial Services
Modernization Act of 1999, also known as the Gramm-Leach-Bliley Act. The Act
permits banks to engage in non-banking, financial services businesses including
the underwriting of insurance. The Act repealed portions of federal law which
historically prohibited banks from engaging in the insurance business. The
future impact of the Act is uncertain, but we may face future competition from
banks in the underwriting of insurance as a result of the Act.
We already face competition from banks because banks have acquired insurance
agencies, including agencies that have appointments with the Company, in states
where we sell. Some banks could have business strategies for operating their
insurance agencies that differ from strategies which we think are important for
the distribution of our insurance products through independent insurance
agencies. If those banks were to acquire additional insurance agencies which are
important to us in states where we do business, we might have to try to replace
those insurance agencies. Also, as a result of the Act, banks will be able to
write property and casualty insurance and could compete directly with us by
selling insurance through their own insurance agencies.
WE ARE HEAVILY REGULATED IN THE STATES IN WHICH WE OPERATE.
We are subject to extensive supervision and regulation in the states in which
we transact business. 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. The extent of regulation varies but generally
is derived from state statutes. These statutes delegate regulatory, supervisory
and administrative authority to state insurance departments. Changes in laws and
regulations, or their interpretations, pertaining to insurance, (including
workers' compensation), health care or managed care, (including preferred
provider organizations and professional employer organizations), may also have
an adverse effect on our business. Although the federal government does not
directly regulate the insurance industry, federal initiatives, from time to
time, can
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<PAGE> 22
impact the insurance industry. The Officer of the Comptroller of the Currency
will exercise some regulatory oversight of the insurance activities of national
banks; that oversight may also affect our ability to compete with these banks.
In addition, 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.
Other regulatory risks are as follows:
AUTOMOBILE INSURANCE REGULATION
In March 1999, Selective began to implement a state-mandated 15% rate
reduction for all personal automobile policies in New Jersey. As a result, we
estimate that annual premiums in this line were be reduced by approximately $19
million in 1999. Due to provisions in the law that mandated the rate reduction,
overall loss costs are anticipated to decrease, primarily due to changes in auto
medical claim handling. Loss cost savings will partially offset the financial
impact of the rate reduction. Also, we have been required to write auto
insurance in New Jersey cities under the new Urban Enterprise Zone ("UEZ") law.
We have written 9,000 policies under the UEZ law and many which are
"liability-only" policies for which the Company's rates are inadequate. As a
result of the 15% rate reduction and UEZ business, partially offset by loss cost
savings and by our previous overall rate adequacy, we expect the statutory
combined ratio for the New Jersey automobile insurance line of business to
increase to a range of 105%-109%.
South Carolina law has established a joint underwriting association for
automobile insurance. We are required to be a member along with other automobile
insurers in South Carolina. As a member of this association, we have to write
automobile insurance for some involuntary risks, and we share in the profit or
loss of the association. On March 1, 2003, the association 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.
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 regulate problems in the availability
and affordability of such insurance and 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 homeowners 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.
THE PROPERTY AND CASUALTY INSURANCE INDUSTRY IS CYCLICAL.
Historically, the property and casualty insurance industry has been cyclical.
Over the past several years, premium rates have declined. The decline in premium
rates has adversely affected our underwriting results. Furthermore, the
industry's profitability is affected by unpredictable developments, including:
- natural disasters;
- 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.
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<PAGE> 23
WE MAY BE RESTRICTED IN DECLARING DIVIDENDS AND DISTRIBUTIONS.
As an insurance holding company, our principal assets consist of the capital
stock of the insurance subsidiaries. We cannot declare and pay dividends on the
Company's common stock unless the insurance subsidiaries can pay dividends to
the parent. The insurance subsidiaries may only declare and pay dividends to us
if they are permitted to do so under the insurance regulations of their
respective domiciled 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 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.
OUR RESERVES MAY NOT BE ADEQUATE TO COVER ESTIMATED LOSSES AND EXPENSES.
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.
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.
WE RELY ON THE AVAILABILITY OF REINSURANCE TO REDUCE OUR EXPOSURE TO RISKS.
We transfer our exposure to some 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
inability of any of our reinsurers to meet its financial obligations could
materially affect our operations.
WE DEPEND ON INVESTMENT INCOME FOR A SIGNIFICANT PORTION OF OUR REVENUES AND
EARNINGS.
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.
WE DEPEND ON 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. Also, independent agents
may decide to sell their businesses to banks, insurance agencies, or other
businesses. Agents with a Selective appointment may decide to buy other agents.
Changes in ownership or control of agencies, or expansion of agencies through
acquisition can adversely affect an agency's ability to control growth and
profitability, thereby adversely affecting Selective.
WE MAY BE ADVERSELY IMPACTED BY A CHANGE IN OUR RATING.
Insurance companies are rated by independent rating agencies. 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.
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<PAGE> 24
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 1999, A.M. Best continued our "A+" rating.
Additionally, we have a Long Term Insurance Financial Strength Rating of "A3"
(Good) from Moody's Investor Services. Moody's ratings range from a low of "c"
to a high of "Aaa".
We also have an "A+" claims-paying rating from Standard and Poor's. According
to Standard and 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
and 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 1999, Standard and
Poor's reaffirmed our "A+" rating.
We cannot be sure that we will maintain our current A.M. Best, Moody's, or
Standard and Poor's ratings. Our business could be adversely effected if we
receive a significant downgrade in these ratings.
OUR ACQUISITIONS OF OTHER COMPANIES SUBJECT US TO RISKS.
As part of our strategy to enhance the technical skills needed to support our
insurance business, we acquire or invest in other complementary companies,
products and technologies. We recently acquired PDA Software Services, Inc.,
Consumer Health Network Plus, LLC and Selective HR Solutions, Inc. (formerly
known as Modern Employers, Inc.), to further these objectives. Risks commonly
encountered in acquisitions include:
- the difficulty of assimilating the operations and personnel of the
combined companies;
- incurrence of unforeseen obligations or liabilities;
- 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 from the issuance of stock to sellers;
- the difficulty in maintaining controls, procedures and policies;
- the impairment of relationships with employees and customers as a result
of any integration of new personnel; and
- litigation or legislative and regulatory changes.
In addition, as we complete acquisitions of companies which compete in
different markets than we do, we may face risks and uncertainties associated
with entering those new markets.
WE EMPLOY ANTI-TAKEOVER MEASURES.
We own, directly or indirectly, all of the shares of stock of our insurance
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 or control of a domestic insurance company or of
any company which controls a domestic insurance company. 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, other factors may discourage, delay or prevent a change of
control of Selective. 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 stockholder 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 transactions
specified in the statute (including 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 the shareholder became an
interested shareholder, unless that transaction is approved by the board of
directors of the corporation before that 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.
WE DEPEND ON KEY PERSONNEL
The success of our business is dependent, to a large extent, on our ability
to attract and retain key employees, in particular our senior officers, key
management, sales, information systems, underwriting, claims, managed care, PEO,
and corporate personnel. Competition for key personnel is intense. In general,
our employees are not subject to employment contracts or non-compete
arrangements.
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WE FACE RISKS FROM TECHNOLOGY-RELATED FAILURES.
Increasingly, insurance and insurance-related businesses are dependent on
computer and Internet-enabled technology. Our inability to bring new technology
on-line or to market, or our inability to anticipate or manage problems with
technology associated with scalability, security, functionality or reliability,
may adversely impact our businesses.
WE FACE RISKS IN THE PROFESSIONAL EMPLOYMENT ORGANIZATION BUSINESS.
Selective intends to expand the operating territories of Selective HR
Solutions into our core operating states. The PEO business model is less
understood, accepted and regulated in these markets, compared with Selective HR
Solution's home state of Florida.
Adverse litigation or regulation, service problems related to vendor issues,
the inability to develop a competitive service and product package, the
inability of Selective to encourage its agents to sell the product and the
consuming public's lack of awareness or interest in PEOs are risks we could
encounter which could adversely affect our business.
CLASS ACTION LITIGATION COULD AFFECT OUR BUSINESS PRACTICES AND FINANCIAL
RESULTS.
The insurance industry has been the target of class action litigation in the
following areas: after-market crash parts, urban homeowner underwriting
practices, health maintenance organization practices and personal injury
protection payments. To date, this litigation has not impacted us, but it is
possible that future class action litigation could adversely affect our
insurance and managed care (including PPO) businesses.
UNIONIZATION OF MEDICAL PROVIDERS COULD IMPACT OUR OPERATIONS.
Consumer Health Networks (CHN) builds medical provider networks and leases
networks to insurers, medical management companies, third party administrators
and other medical claim payors. The lessors receive medical fee discounts from
network providers in exchange for patient volume commitments. If medical
providers (e.g., physicians) decided to unionize, that might impair CHN's
ability to maintain and grow networks, negotiate fee discount arrangements and
lease networks to their customers. These events would have an adverse impact not
only on CHN, but also on Alta Services which leases CHN networks, and on our
company as a whole because we rely in part, on provider networks and discounts
to manage our claim medical expenses.
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ITEM 11.
EXPLANATORY NOTE - THIS INFORMATION IS BEING FILED SOLELY IN FORM 10-KA TO
CORRECT FOOTNOTE NUMBER 5 TO THE SUMMARY COMPENSATION TABLE.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
SUMMARY COMPENSATION TABLE
The following table shows, for the fiscal years ending December 31, 1999, 1998,
and 1997, the compensation, paid or accrued for those years, to the Chairman,
the President and Chief Executive Officer, and each of the four most highly
compensated executive officers of the Company who served as executive officers
during fiscal year 1999. (See footnote 1.)
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation Awards
Name All Other
and Restricted Securities Compen-
Principal Stock Underlying sation(4)
Position Year Salary($)(1) Bonus($)(2) Awards($)(3) Options/ SARs(#)($)
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
James W. Entringer (5,6) 1999 309,231 -- -- -- 5,000
Chairman 1998 536,712 180,000 397,500(7) -- 5,000
1997 440,337 300,000 296,000 8,600 4,750
15,000(8)
Gregory E. Murphy (6,9) 1999 393,885 -- 164,250 12,000 11,825
President and Chief 1998 331,731 120,000 265,000 -- 10,345
Executive Officer 1997 222,385 200,000 185,000 3,200 9,582
10,000(8)
Thornton R. Land (6,9) 1999 222,938 -- 110,820(7) -- 5,000
Executive Vice President 1998 222,087 60,000 212,000(7) -- 5,000
and General Counsel 1997 199,688 100,000 166,500 4,000 4,750
5,000(8)
Jamie Ochiltree, III (6,9) 1999 215,469 -- 109,500 -- 13,346
Executive Vice President 1998 204,323 60,000 212,000 7,500 13,313
1997 176,154 100,000 185,000 3,200 13,782
7,500(8)
James W. Coleman, Jr. (6,9) 1999 185,185 -- 109,500 -- 6,791
Executive Vice President 1998 172,062 60,000 212,000 7,500 5,682
1997 147,019 100,000 185,000 2,800 3,866
7,500(8)
Robert P. Rank 1999 184,054 -- 27,375 -- 11,558
Senior Vice President and 1998 183,326 40,000 39,750 4,000 11,348
Chief Investment Officer 1997 167,154 55,500 37,000 3,200 11,524
4,000(10)
</TABLE>
FOOTNOTES TO SUMMARY COMPENSATION TABLE
1. The executive officers received cash compensation only from the Company's
subsidiary, Selective Insurance Company of America ("SICA"), which company also
provides the employee benefit plans in which such executive officers
participate.
2. Effective for the fiscal year 1994, the Company adopted a Rewards Program by
which employees may receive a stated percentage of salary as Annual Cash
Incentive Payments if they achieve specified personal goals and the Company
achieves stated corporate performance goals. The "Bonus" amounts for 1997, 1998
and 1999 indicate the amounts awarded to the
<PAGE> 27
named executive officers as Annual Cash Incentive Payments.
3. The aggregate value of restricted stock awards at the end of 1999 was
$275,000 for Mr. Entringer, $653,125 for Mr. Murphy, $309,375 for Mr. Land,
$567,188 for Mr. Ochiltree, $446,875 for Mr. Coleman and $120,313 for Mr. Rank,
excluding Phantom Stock awards granted to Mr. Entringer and Mr. Land. See
footnote 7 below. At the end of 1999, the aggregate number of restricted shares
held by Mr. Entringer was 16,000; by Mr. Murphy, 38,000; by Mr. Land 18,000; by
Mr. Ochiltree 33,000; by Mr. Coleman, 26,000 and by Mr. Rank, 7,000. The
restricted stock awards were made under the Company's Stock Option Plan II under
which such shares and accrued dividends vest after four years from the date of
grant depending upon the achievement of predetermined performance goals.
Pursuant to an award Mr. Entringer received outside of the plan on November 1,
1995, 6,932 shares vested to Mr. Entringer on each of November 1, 1995, November
1, 1996, November 1, 1997 and November 1, 1998. This grant is now fully vested.
Mr. Entringer has received dividends on all shares from this grant since
November 1, 1995. On December 16, 1999, the restricted stock award granted to
Mr. Entringer on February 9, 1996 became fully vested. See the "Report of the
Salary and Employee Benefits Committee" in this statement. The value of the
restricted stock awards shown in this footnote is based on the closing market
price per share of Common Stock on December 31, 1999 of $17.1875. The values set
forth in the table are based on the closing price on the date of each of the
grants, which was: $21.00, $26.50 and $18.25 on January 24, 1997, February 4,
1998 and February 2, 1999, respectively.
4. The amounts in "All Other Compensation" include Company contributions under
the Company's Retirement Savings Plan for the fiscal years ended December 31,
1999, December 31, 1998 and December 31, 1997. This Plan is a defined
contribution plan available to substantially all employees. Company
contributions are 30% vested after two years of service and become 100% vested
after six years of service. The Company contributions reflected in the table
above are $5,000 for Messrs. Entringer, Murphy, Land, Ochiltree, Coleman and
Rank. In addition, for Messrs. Murphy, Ochiltree, Coleman and Rank the amounts
for 1999 in the "All Other Compensation" column also include $6,825, $8,346,
$1,791 and $6,558, respectively, representing the difference between the market
rate of interest and the actual rate of interest on indebtedness of such
executive officer to the Company.
5. Mr. Entringer's compensation decreased effective July 1, 1999 due to his
decrease in duties following his stepping down as Chief Executive Officer. The
Company and Mr. Entringer agreed that for the 12 months ending in June of 1999
he would be paid his full salary and for the 12 months following June 1999 he
would receive compensation in the amount of $100,000.
6. Messrs. Entringer, Land, Murphy, Ochiltree and Coleman have termination
agreements with SICA pursuant to which payments will be made under certain
circumstances following a Change in Control of the Company, as defined in the
agreements. The agreements for Messrs. Entringer and Land are automatically
renewable for successive one-year terms each September unless prior written
notice of nonrenewal is given; the agreement for Mr. Murphy is automatically
renewable for successive one-year terms each August unless prior written notice
of nonrenewal is given; the agreement for Mr. Ochiltree is automatically
renewable for successive one-year terms each October unless prior written notice
of nonrenewal is given. Mr. Coleman's agreement is effective May 2, 1997 through
May 2, 2000 and is automatically renewable for successive one-year terms each
May 2 unless prior written notice of nonrenewal is given. Each agreement
provides that, in the event of a Change in Control of the Company, SICA shall
continue to employ the executive officer in the capacities in which he was
serving immediately prior to the Change in Control for a period of three years,
commencing on the date on which the Change in Control shall have occurred, which
term will be automatically renewed for successive one-year periods unless prior
written notice is given. Each agreement provides that if the executive officer's
employment is terminated (as defined in the agreement) after a Change in Control
occurs, other than (i) due to the executive officer's death or retirement, (ii)
by SICA for Cause or Disability, or (iii) by the executive officer other than
for Good Reason (as such foregoing capitalized terms are defined in the
agreement), the executive officer will be entitled to receive earned but unpaid
base salary through the date of termination, as well as any incentive
compensation benefits or awards that have been accrued, earned, or become
payable but which have not been paid, and as severance pay in lieu of any
further salary for periods subsequent to the date of termination, an amount in
cash equal to his "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, provided that if any of the
payments or benefits provided for in the agreement, together with any other
payments or benefits that the executive officer has the right to receive would
constitute a "parachute payment" (as defined in Section 280G(b) of the Code),
the Company shall pay to the executive officer on a net after-tax basis the
greater of (1) the payments and benefits due to the executive officer reduced in
order of priority and amount as executive officer 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 or (2) payments and benefits due to the
executive officer, plus an amount in cash equal to (x) the amount of such
"excess parachute payments" multiplied
<PAGE> 28
by (y) twenty (20%) percent. The Company has guaranteed SICA's performance of
all its obligations under the termination agreements.
7. Messrs. Entringer and Land were granted Phantom Stock units in lieu of grants
of Restricted Stock on February 4, 1998. Mr. Entringer was granted 15,000 units
of Phantom Stock and Mr. Land was granted 8,000 units of Phantom Stock. Mr. Land
was also granted 6,000 Phantom Stock Units in lieu of a grant of Restricted
Stock on February 2, 1999. The Phantom Stock Units are valued with reference to
the fair value of Selective Common Stock and will accrue amounts equivalent to
dividends which will also be converted into Phantom Stock Units based on the
fair market value of Selective Common Stock on the applicable dividend
reinvestment dates. The accumulated value of the Phantom Stock Units will be
paid to each of the officers in cash upon retirement, based on the value of
Selective's Common Stock on the last day of the officer's employment. The value
of Phantom Stock Units set forth in the table on page 9 is based on the closing
market price per share of Common Stock on February 4, 1998 and February 2, 1999,
of $26.50 and $18.47, respectively.
8. This option was granted as a qualified option under Stock Option Plan II on
December 2, 1997. The grant became fully vested on December 16, 1998. In
addition, the qualified option was amended so that a portion of the option is
now a non-qualified option.
9. Under an employment agreement with SICA effective August 1, 1995, amended May
1, 1998 and in effect through August 1, 2001, Mr. Murphy receives an annual base
salary of not less than $325,000 through August 1, 2001. Under an employment
agreement with SICA effective September 1, 1996, amended effective September 1,
1999, Mr. Land receives an annual base salary of not less than $240,000 through
September 1, 2001. Under an employment agreement with SICA effective October 31,
1995, amended October 31, 1998 and in effect through October 31, 2001, Mr.
Ochiltree receives an annual base salary of not less than $197,600 through
October 31, 2001. Under an employment agreement with SICA dated May 2, 1997
through May 2, 2000, Mr. Coleman receives an annual base salary of not less than
$135,000 through May 2, 2000.
10. This qualified option was granted under Stock Option Plan II and vests at a
rate of 25% per year each year through December 2, 2001 when it will become
fully vested.
<PAGE> 29
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
The following table contains information concerning the grant of stock options
and tandem stock appreciation rights ("SARs") under the Company's Stock Option
Plan II ("Plan") to the Chairman, the President and Chief Executive Officer, and
each of the other executive officers named in the Summary Compensation Table.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
-------------------------------------------------------------------------------------------------------
Individual Grants Grant Date
Value
-------------------------------------------------------------------------------------------------------
Number of % of
Securities Total Options/
Underlying SARs Granted Exercise Grant Date
Options/SARs to Employees or Base Present
Name Granted(1)(#) in Fiscal Year Price($/Sh)(2) Expiration Date Value($)(3)
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
James W. Entringer -- -- -- -- --
Gregory E. Murphy 12,000 50.0 18.47 02/02/09 51,173
Thornton R. Land -- -- -- -- --
Jamie Ochiltree, III -- -- -- -- --
James W. Coleman, Jr. -- -- -- -- --
Robert P. Rank -- -- -- -- --
</TABLE>
1. The Plan permits the granting of options to all employees and permits the
granting of SARs in tandem with any or all stock options. If a SAR is exercised,
the employee must surrender the related stock option or portion thereof. Upon
exercise of a SAR, payment will be made by the Company in stock, cash, or some
combination thereof, as a committee appointed by the Board of Directors shall
determine at the time of exercise. None of the options granted to the named
executive officers in 1999 has SARs attached. Under the terms of the Plan,
options or any related SARs, may be granted at no less than fair market value as
of the date of grant. They must be exercised within ten years from the date of
grant. In the event of any change in the number of outstanding shares of the
Common Stock of the Company as a result of a stock dividend, stock split, or
other readjustments, the committee appointed by the Board of Directors 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.
2. The options set forth in the table above were granted on February 2, 1999 at
an exercise price equal to the fair market value of a share of Common Stock at
such date and were immediately exercisable.
3. The Black-Scholes option pricing method has been used to calculate the
present value as of the date of grant and it is not intended to forecast
appreciation, if any, of the Company's stock price. The present value as of the
date of the grant, calculated using the Black-Scholes method, is based on
assumptions about future interest rates, expected life of the options, dividend
yield and stock price volatility. The risk free interest rate is based on a zero
coupon US Government Issue with the same terms and issue date as the specified
option grant. The volatility is based on an estimate of the future price
variability of Selective Insurance Group, Inc. (SIGI) stock for a term
commensurate with the expected life of the option. There is no assurance that
these assumptions will prove to be true in the future. Listed below are the
various assumptions that were made with regard to the grants:
<PAGE> 30
<TABLE>
<S> <C>
EXERCISE PRICE $18.4688
Risk Free Interest 4.8%
Expected Life of Option 8 Years
Dividend Yield 3.2%
Expected Volatility 22%
</TABLE>
OPTION AND SAR EXERCISES AND HOLDINGS
The following table sets forth information with respect to the Chairman, the
President and Chief Executive Officer, and each of the other executive officers
named in the Summary Compensation Table concerning the exercise of options
and/or SARs during the last fiscal year and unexercised options and SARs held as
of the end of the last fiscal year:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Securities Underlying In-the-Money
Unexercised Options/SARs
Options/SARs at at Fiscal
Fiscal Year-End (#)(1); Year-End ($)(2);
* * * * * * * * * * * * * * * * *
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value realized($) Unexercisable Unexercisable
---- --------------- ----------------- ------------- -------------
<S> <C> <C> <C> <C>
James W. Entringer -- -- 242,030/ 538,746/
0 0
Gregory E. Murphy -- -- 84,200/ 160,313/
0 0
Thornton R. Land -- -- 118,076/ 457,673/
0 0
Jamie Ochiltree, III -- -- 58,376/ 47,064/
0 0
James W. Coleman, Jr. -- -- 51,800/ 54,813/
0 0
Robert P. Rank -- -- 37,200/ 49,500/
0 0
</TABLE>
1. The number of securities underlying unexercised options at the end of 1999
included options with tandem SARs granted under the Company's former stock
option plan for employees, which plan expired November 5, 1992.
2. The value of unexercised in-the-money options is based on the closing market
price per share of Common Stock on December 31, 1999 of $17.1875, less the
option exercise price per share.
<PAGE> 31
PENSION PLANS
The following table illustrates annual pension benefits, including supplemental
benefits, at normal retirement (age 65) for various years of credited service in
the form of a single life annuity and prior to any offset for Social Security
benefits. As of December 31, 1999 the Chairman, the President and Chief
Executive Officer and the other executive officers named in the Summary
Compensation Table had the following credited years of service under the pension
plans: Mr. Entringer, 6 years; Mr. Murphy, 18 years; Mr. Land, 13 years; Mr.
Ochiltree, 4 years; Mr. Coleman, 16 years and Mr. Rank, 5 years.
<TABLE>
<CAPTION>
PENSION PLAN TABLE(1)
Years of Service
Remuneration 5 15 20 25 30 35
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
125,000 12,500 37,500 50,000 62,500 75,000 87,500
150,000 15,000 45,000 60,000 75,000 90,000 105,000
175,000 17,500 52,500 70,000 87,500 105,000 122,500
200,000 20,000 60,000 80,000 100,000 120,000 140,000
225,000 22,500 67,500 90,000 112,500 135,000 157,500
250,000 25,000 75,000 100,000 125,000 150,000 175,000
300,000 30,000 90,000 120,000 150,000 180,000 210,000
400,000 40,000 120,000 160,000 200,000 240,000 280,000
450,000 45,000 135,000 180,000 225,000 270,000 315,000
500,000 50,000 150,000 200,000 250,000 300,000 350,000
</TABLE>
1. The Company maintains a noncontributory Retirement Income Plan integrated
with Social Security benefits. This pension plan covers substantially all
employees, including officers. Compensation covered under the plan consists only
of basic wages and salaries, not including overtime and bonuses, i.e. only the
"Salary" column of the Summary Compensation Table. Monthly plan benefits are
computed at the rate of 2% of average monthly compensation for the 60 months out
of the most recent 120 months of employment for which the employee's
compensation is the highest multiplied by the number of years of credited
service, less an offset for Social Security benefits, calculated as 1 3/7% of
the participant's Social Security income in effect on January 1 of the year of
retirement multiplied by the number of years of credited service. If the
employee is married, the normal form of benefit is a joint and survivor annuity
for the employee and spouse. If the employee elects against such annuity with
the spouse's consent, a single life annuity may be paid. The Company has a
nonqualified supplemental pension plan to provide benefits that would have been
paid by the qualified plan, but for the limitations imposed by the Internal
Revenue Code on the maximum benefits payable and the compensation upon which
qualified plan benefits may be calculated.
COMPENSATION OF DIRECTORS
During 1999, nonemployee directors, consisting of all directors other than
Messrs. Entringer and Murphy, received directors' fees in shares of Common Stock
pursuant to the Stock Compensation Plan for Nonemployee Directors (the "Stock
Plan"). Under the Stock Plan, each nonemployee director receives annually Common
Stock having a fair market value equal to an amount of compensation fixed
annually by the Board of Directors. Shares are issued quarterly on January 1,
April 1, July 1 and October 1 of each year. For 1999, such annual compensation
was fixed at $35,000, and each nonemployee director who did not elect to defer
his or her compensation was issued a total of 1,841 shares of Common Stock
pursuant to the Stock Plan, except for Frederick H. Jarvis, who received 922
shares prior to his retirement as a director in May 1999. Under the Stock Plan,
each nonemployee director may elect on or before December 20 of each year to
defer the receipt of shares
<PAGE> 32
of Common Stock, and any dividends accrued with interest thereon, to a specified
future year, the attainment of age 70 or termination of services as a director.
Messrs. Bauer, Brown, Dolan, Sayles, Thebault and Ms. Lamm-Tennant elected to
defer their 1999 compensation under the Stock Plan. For 2000, such annual
compensation has been fixed at $38,000.
The compensation payable to nonemployee directors is proposed to be amended
effective January 1, 2001, subject to stockholder approval, so that: (i) the
directors are permitted to elect to receive up to 50% of his or her compensation
under the Stock Plan in cash for each calendar year; (ii) to eliminate from the
Stock Plan the requirement of stockholder approval of any change to the Stock
Plan which would modify the requirement that all participants compensation be
only in shares of Common Stock; and (iii) to extend the term of the Stock Plan
from December 31, 2007 to December 31, 2010.
The Board of Directors terminated the Directors' Plan (the retirement plan for
directors) on December 31, 1997. In connection therewith, the present value of
the future benefits of each eligible nonemployee director was determined to be
fully vested as of December 31, 1997. Such benefits were converted into units,
with each such unit having a value equal to the fair market value of a share of
Common Stock on December 31, 1997. Each unit accrues an amount equal to the
dividends on a share of Common Stock, as and when declared by the Board of
Directors and paid by the Company, which amount is deemed reinvested in
additional units in the same manner as dividends are reinvested in shares of
Common Stock under the Company's dividend reinvestment plan for stockholders.
The value of each unit fluctuates with the value of the Company's Common Stock.
Each participating director will become entitled to receive the value of his or
her units in cash, either in a lump sum or in installments over 15 years, upon
termination of his or her service as a director. In the event of a director's
termination of service as a director following a "change in control" of the
Company, (as defined in Board resolutions terminating the Directors' Plan) the
director will be immediately entitled to receive the value of his or her units
in cash, either in a lump sum or in installments over a period of five years.
Any units which are unpaid at the time of the director's death shall be payable
in cash to a surviving spouse or estate, as the case may be. Retired Directors
or their surviving spouses who were receiving benefits under the Directors' Plan
at the time of its termination will continue to receive benefits in accordance
with the terms of the Directors' Plan as in effect at the time the benefits
commenced.
The Company has a Stock Option Plan for Directors (the "Option Plan") for
nonemployee directors. Under such plan, each eligible director automatically
receives an option to purchase 3,000 shares of Common Stock on March 1 of each
year. Subject to certain adjustments, the maximum number of shares of Common
Stock that may be issued under options granted pursuant to the Option Plan is
400,000, which may be authorized but unissued shares or treasury shares. The
exercise price for each share of Common Stock subject to an option granted is
the fair market value of a share of Common Stock on the date such option is
granted and is payable in cash or in Common Stock of the Company. Any option
granted under the Plan becomes exercisable on the first anniversary of the date
it was granted. No option is exercisable after the tenth anniversary of the
grant. Options granted under the plan are nontransferable, except by will or by
laws of descent and distribution. In the event of an optionee's death or
disability, an option 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. On March 1, 1999, options to purchase 3,000 shares of
Common Stock were granted to each eligible director at an exercise price of
$18.3125 per share.
The Stock Option Plan for Directors is proposed to be amended effective January
1, 2001, subject to stockholder approval to: (i) extend the term of the Option
Plan for an additional ten years; and (ii) increase by 450,000 the number of
shares of Common Stock reserved for issuance under the Option Plan to an
aggregate of 850,000 shares.
<PAGE> 33
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/ Dale A. Thatcher June 19, 2000
-------------------------------------------------------------
Dale A. Thatcher
Senior Vice President of Finance and Chief Financial Officer
