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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/405
(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
Incorporation or Organization) No.)
40 Wantage Avenue, Branchville, New Jersey 07890
------------------------------------------ ----------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (973) 948-3000
Securities registered pursuant to Section 12(b) of the Act:: None
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
-------------------
8 3/4% Convertible Subordinated Debentures due January 1, 2008
(Title of class)
Common Stock, par value $2 per share
(Title of class)
Preferred Share Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
[X]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant based on last sale price on the Nasdaq National Market on
February 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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FORWARD-LOOKING STATEMENTS
Some of the statements in this report are not historical facts and are
"forward-looking statements" (as defined in the Private Securities Litigation
Reform Act of 1995). These statements use words such as "believes," "expects,"
"intends," "may," "will," "should," "anticipates," and other similar words and,
among other things, describe our current strategies, opinions, expectations of
future results and other forward-looking information. We derive forward-looking
information from information which we currently have and numerous assumptions
which we make. We cannot assure that results which we anticipate will be
achieved, since results may differ materially because of both known and unknown
risks and uncertainties which we face. Factors which could cause actual results
to differ materially from our expectations include, but are not limited to: the
effects of economic conditions and conditions which affect the market for
property and casualty insurance; laws, rules and regulations which apply to
insurance companies, including the impact of personal automobile reform
legislation in New Jersey; the effects of competition from other insurers and
our diversified insurance services and banks, and the trend toward self-
insurance; risks we face in entering new markets and diversifying the products
and services we offer; weather-related events and other catastrophes affecting
our insureds; our ability to obtain rate increases and to retain business; the
performance of our independent insurance agencies; and other risks and
uncertainties we identify in filings with the Securities and Exchange
Commission, although we do not promise to update such forward-looking statements
to reflect actual results or changes in assumptions or other factors that could
affect these statements.
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PART I
ITEM 1. BUSINESS.
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 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
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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
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<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.
(6) NEW INITIATIVES - exploring and developing innovative products
and programs that capitalize on changes in our markets and that
generate synergies among our businesses.
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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
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<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' 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
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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
$16 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 $8 million.
8
<PAGE> 9
<TABLE>
<CAPTION>
PERSONAL LINES HIGHLIGHTS Net Net GAAP Statutory
Premiums Premiums Underwriting Combined
($ 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 22% 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.
9
<PAGE> 10
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
10
<PAGE> 11
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
11
<PAGE> 12
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 ("faculative reinsurance") and limits ("automatic faculative
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.
12
<PAGE> 13
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> 14
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>
14
<PAGE> 15
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.
<TABLE>
<CAPTION>
ENVIRONMENTAL CLAIMS ACTIVITY
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 $ 141 148 526
closed claims
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 $ 6,688 22,772 19,855
closed claims
</TABLE>
(1) The number of environmental claims presented in the tables includes all
multiple claimants who are associated with the same site or incident.
15
<PAGE> 16
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>
16
<PAGE> 17
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., Managements'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.
17
<PAGE> 18
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
18
<PAGE> 19
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 $38
million share 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
19
<PAGE> 20
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:
20
<PAGE> 21
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> 22
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> 23
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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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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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.
ITEM 2. PROPERTIES.
Situated on approximately 137 acres in Branchville, NJ, is our 315,000
square foot facility owned by Wantage Avenue Holding Company, Inc. This office
complex and the informations systems office below are used by all segments of
the business. All regional, field underwriting, information systems, and
subsidiary office locations, as indicated below are leased. The regional offices
are used by the Insurance Operations segment. The subsidiary offices are used by
the Diversified Insurance Services segment.
REGIONAL OFFICES
- ----------------
CHESAPEAKE REGION
HUNT VALLEY, MARYLAND
6 North Park Drive, Suite 200
MID-AMERICA REGION
COLUMBUS, OHIO
8415 Pulsar Place, Suite 300
NORTHEAST REGION
BRANCHVILLE, NEW JERSEY
40 Wantage Avenue
NORTHERN NEW JERSEY REGION
BRANCHVILLE, NEW JERSEY
40 Wantage Avenue
PENNSYLVANIA REGION
LEHIGH VALLEY, PENNSYLVANIA
5050 Tilghman Street, Suite 250
SOUTHERN REGION
CHARLOTTE, NORTH CAROLINA
3 Coliseum Centre
2550 West Tyvola Road, Suite 400
SOUTHERN NEW JERSEY REGION
TRENTON, NEW JERSEY
One AAA Drive
VIRGINIA REGION
RICHMOND, VIRGINIA
1100 Boulders Parkway, Suite 601
INFORMATION SYSTEMS OFFICE
- --------------------------
GLASTONBURY, CONNECTICUT
500 Winding Brook Drive
MANSFIELD, OHIO
380 North Main Street, Suite 101
SUBSIDIARY OFFICES
- ------------------
ALTA SERVICES LLC
IBIS Plaza
3525 Quakerbridge Road
Hamilton, New Jersey 08619
CONSUMER HEALTH NETWORK PLUS, LLC
371 Hoes Lane, Suite 101
Piscataway, New Jersey 08854
PDA SOFTWARE SERVICES, INC.
7701 College Boulevard
Overland Park, Kansas 66210
SELECTIVE HR SOLUTIONS, INC.
6414 14th Street W
Bradenton, Florida 34207
ITEM 3. LEGAL PROCEEDINGS.
Information required under this item is incorporated in Item 8 Financial
Statements and Supplementary Data, entitled Note 19 Commitments and
Contingencies.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
STOCKHOLDER'S INFORMATION
EXECUTIVE OFFICE
40 Wantage Avenue
Branchville, New Jersey 07890-1000
Telephone (973) 948-3000
REGISTRAR AND TRANSFER AGENT
First Chicago Trust Company,of New York,
a division of EquiServe
P.O. Box 2500
Jersey City, New Jersey 07303-2500
Telephone (800) 446-2617
AUDITORS
KPMG LLP
757 Third Avenue
New York, New York 10017
COMMON STOCK INFORMATION
The Company's common stock trades on The Nasdaq National Market under the
symbol: SIGI. As of December 31, 1999, there were approximately 4,446 registered
stockholders.
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ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
TEN-YEAR FINANCIAL HIGHLIGHTS
- ----------------------------------------------------------------------------------------------------------------------------
(All presentations are in accordance with GAAP
unless noted otherwise; number of weighted average
shares and dollars in thousands, except
per share amounts) 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net premiums written (1) $ 811,677 748,873 717,618 692,239
Net premiums earned 799,066 722,992 676,268 694,947
Net investment income earned 96,531 99,196 100,530 96,952
Net realized gains (losses) 29,377 (2,139) 6,021 2,786
Diversified insurance services revenue (2) 46,653 14,100 8,236 6,378
Total revenues 974,768 837,329 794,183 804,780
Underwriting loss (3),(4),(5),(6) (54,147) (24,986) (3,022) (21,982)
Diversified insurance services net income (loss) (2) 2,948 1,440 495 1,261
Operating income (3),(4) 34,622 54,961 65,694 53,740
Net income (7) 53,717 53,570 69,608 55,551
Comprehensive income 16,088 78,842 105,931 51,539
Total assets 2,513,267 2,432,168 2,306,191 2,189,737
Notes payable and debentures 81,585 88,791 96,559 103,769
Stockholders' equity 569,964 607,583 565,316 474,299
Statutory premiums to surplus ratio (3),(8) 1.6:1 1.5:1 1.5:1 1.7:1
Statutory combined ratio (2),(3),(9) 105.7% 103.2 100.1 102.9
Combined ratio (2),(3),(9) 106.8% 103.6 100.3 102.9
Yield on investment, before-tax 5.6% 5.7 6.0 6.1
Debt to capitalization 12.5% 13.2 14.6 18.0
Return on average equity 9.1% 9.1 13.4 12.2
Per share data:
Net income:
Basic 1.98 1.88 2.41 1.92
Diluted 1.87 1.74 2.27 1.83
Dividends to stockholders .59 .56 .56 .56
Stockholders' equity 21.46 21.30 19.32 16.31
Price range of common stock:
High 22 1/2 29 1/4 28 3/8 19 3/8
Low 16 1/2 16 11/16 18 5/16 15 1/2
Close 17 3/16 20 1/8 27 19
Number of weighted average shares:
Basic 27,081 28,480 28,909 28,860
Diluted 28,877 30,412 30,925 30,360
</TABLE>
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<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
757,021 697,941 607,462 560,360 500,283 482,735
742,817 680,270 594,919 539,792 503,726 470,681
91,640 80,657 77,326 73,516 68,501 64,508
900 4,230 4,528 3,943 3,580 9,888
4,529 3,482 2,912 2,519 2,273 2,059
843,100 771,682 682,510 622,084 580,193 549,228
(17,468) (35,119) (54,530) (42,127) (38,310) (38,439)
555 384 354 294 158 (3)
52,457 35,526 19,735 24,845 24,429 24,491
53,042 38,276 22,678 53,915 27,293 32,402
105,035 1,078 21,380 53,520 33,245 22,837
2,119,804 1,870,718 1,725,736 1,639,033 1,321,120 1,240,916
111,292 111,378 61,291 63,681 14,470 15,173
436,749 329,164 322,807 311,705 269,998 248,274
2.1:1 2.4:1 2.6:1 2.5:1 2.5:1 2.7:1
101.6 104.3 108.5 107.9 107.6 108.0
102.3 105.1 109.1 107.7 107.6 108.2
6.4 6.5 6.8 7.2 7.6 7.5
20.3 25.3 16.0 17.0 5.1 5.8
13.9 11.7 7.1 18.5 10.5 13.5
1.86 1.38 .83 2.02 1.03 1.25
1.81 1.29 .81 1.93 1.01 1.16
.56 .56 .56 .55 .52 .51
15.17 11.62 11.74 11.60 10.17 9.46
19 3/16 15 3/8 15 1/2 11 3/4 9 10 1/8
12 1/4 11 1/2 10 1/4 8 6 1/2 6 1/4
17 3/4 12 5/8 15 1/4 11 8 3/8 6 5/8
28,481 27,759 27,271 26,690 26,388 25,942
29,846 29,356 29,133 28,869 28,502 28,222
</TABLE>
1. Net premiums written in 1997 were increased by approximately $30 million
due to a conversion of New Jersey personal automobile policies from
six-month to annual terms. This conversion had no effect on net premiums
earned. See Financial Review for a more detailed discussion.
2. Flood business is included in statutory underwriting results in accordance
with prescribed statutory accounting practices. On a GAAP basis only, flood
servicing revenue and expense has been reclassified from underwriting
results to Diversified Insurance Services. Prior years have been restated
to reflect this reclass.
3. Refer to the Glossary of Insurance Terms on page 60 of this report on Form
10-K for definitions of specific measures.
4. The 1993 underwriting loss included a $9 million restructuring charge for
the cost of the early retirement program, along with severance benefits
provided to terminated employees.
5. The 1996, 1995, 1994, 1993, 1992, 1991 and 1990 underwriting losses
included taxes and assessments imposed as a result of the Fair Automobile
Insurance Reform Act adopted in New Jersey in the amounts of $2 million, $7
million, $7 million, $6 million, $13 million, $12 million and $10 million,
respectively.
6. The 1993, 1992 and 1991 underwriting losses included assessments from the
Market Transition Facility of New Jersey in the amount of $12 million, $8
million and $11 million, respectively.
7. Net income for 1992 increased by $26 million due to the adoption of two
accounting policies, Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("FASB 109"), and a change in the method of deferring
policy acquisition costs. FASB 109 increased net income by $20 million
($0.76 per basic share and $0.70 per diluted share) and the change in
deferred policy acquisition costs increased net income by $6 million ($0.23
per basic share and $0.21 per diluted share).
8. Regulatory and rating agencies use the statutory premiums to surplus ratio
as a measure of solvency, viewing an increase in the ratio as a possible
increase in solvency risk. Management and analysts also view this ratio as
a measure of the effective use of capital since, as the ratio increases,
revenue per dollar of invested capital increases, indicating the possible
opportunity for an increased return.
9. Changes in both the GAAP and statutory combined ratios are viewed by
management and analysts as indicative of changes in the profitability of
underwriting operations. A ratio over 100% is indicative of an underwriting
loss, and a ratio below 100% is indicative of an underwriting profit.
29
<PAGE> 30
ITEM 7. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS.
SELECTIVE INSURANCE AND SUBSIDIARIES
FINANCIAL REVIEW
(IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
RESULTS OF OPERATIONS
1999 COMPARED WITH 1998
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Annual
Increase
(dollars in thousands) 1999 1998 (Decrease)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net premiums written $811,677 748,873 8 %
Net premiums written
per employee (1) $ 471 455 4 %
Operating income(2) $ 34,622 54,961 (37)%
Statutory combined ratio 105.7% 103.2 2.5 points
Return on average equity 9.1% 9.1 --
</TABLE>
(1) - excludes employees of Diversified Insurance Services companies
(2) - Refer to the Glossary of Insurance Terms on page 60 of this report on
Form 10-K for definitions of specific measures.
REVENUES
Net premiums written for 1999 increased by 8% to $812 million which
correspondingly resulted in an 11% increase in net premiums earned. The increase
in net premiums written occurred across all insurance Strategic Business Units
("SBUs") and generated approximately $195 million of direct premiums written
attributable to new business. This growth was primarily due to (i) the full-year
impact of increasing the number of field underwriters; (ii) the Company's
expansion into the Midwest and New England; and (iii) the increase in personal
lines new business offset by the effects of the New Jersey rate rollback. The
Company's field underwriting work force of about 80 agency management
specialists ("AMSs") drives the expansion efforts and generates new business in
existing regions. The AMS is the key contact between the independent agent and
Selective, working side-by-side with agents to evaluate new business
opportunities and develop strong relationships. As a result of our geographic
diversification efforts, we have increased the percentage of business generated
outside New Jersey to 54% by year-end 1999 and 49% at year-end 1998, up from 35%
just seven years earlier.
The commercial SBUs' net premiums written increased 13%, or $63 million
including $154 million of direct new business. This growth in net premiums
written was primarily due to the Company's Midwest and New England expansion and
the increase in AMSs. Retention of existing business remained comparable with
1998 at approximately 77%.
The personal lines SBU 1999 net premiums written remained flat compared
with 1998 and included $41 million of direct new business. Although the overall
personal lines net premiums written were flat, there were fluctuations within
lines and regions. In March 1999, the New Jersey Automobile Insurance Cost
Reduction Act ("AICRA") became effective and required a statewide average
personal automobile premium reduction of 15%. The implementation of AICRA
resulted in a $19 million reduction in voluntary New Jersey automobile premiums.
This reduction in New Jersey voluntary premiums was partially offset by an $8
million increase in Urban Enterprise Zone ("UEZ") business. The UEZ program
requires New Jersey automobile insurers to write an amount of urban automobile
insurance proportionate to their market share, which approximates 3.1% for
Selective. The loss ratio on this business tends to be higher than our other
personal automobile business. The net reduction in New Jersey automobile
premiums was offset by an $11 million increase in net written premiums in our
other states.
In addition to its core insurance activities, the Company also provides
various inter-related services, through its Diversified Insurance Services
segment. This segment is a growing percentage of the Company's revenue base,
increasing $33 million or 231% in 1999, including revenues generated by
businesses acquired. In 1999, two strategic acquisitions were made in this
segment: a professional employer organization ("PEO") and a preferred provider
organization ("PPO"). The PEO provides human resource administration, including
benefits, payroll and employee management services, and risk and compliance
management products and services, including workers' compensation insurance. The
PEO will provide a mechanism to cross-sell other products and services such as
commercial policies and personal lines policies. 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. The PPO acquisition expands medical service fees while at
the same time supports a critical part of the Company's current managed care
program. The balance of the Diversified Insurance Services segment includes
federal flood insurance services, a managed care company, and software
development and program administration services.
Net investment income earned for 1999 decreased 2%, or $2 million to $97
million. 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) 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.
30
<PAGE> 31
The Company's after-tax investment yield was 4.3% in 1999, down slightly
from 4.4% in 1998. Although there has been a recent increase in available
yields, these yields are still not at the levels of the maturing fixed income
securities so investment income will continue to be adversely affected as higher
yielding fixed income securities in the Company's portfolio are redeemed or
mature.
EXPENSES
The ratio of losses and loss expenses incurred to net premiums earned
increased by 3.9 points to 74.1%. The increase was attributable to a 5.3 point
increase in the 1999 loss ratio when compared to 1998, primarily due to large
property (1.4 points), workers' compensation (1.5 points) as well as
weather-related catastrophe claims (1 point), partially offset by a 1 point
decrease in the loss expense ratio. During 1999, the Company incurred $20
million of net losses from catastrophe claims. The most notable was Hurricane
Floyd, which resulted in net losses and loss expenses of $14 million. Our loss
ratio also reflected an increase in our New Jersey automobile loss ratio due to
increased UEZ business and the effects of the New Jersey 15% rate rollback.
The Company continues to focus on loss cost containment initiatives.
These initiatives include: (i) a comprehensive managed care program which
reduced 1999 workers' compensation and automobile losses; (ii) a special
investigative unit and claims professionals which 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 automobile and property review program. The Company has also
reduced loss expenses by: (i) using inside staff counsel, which has a
cost per closed suit of approximately 61% lower than outside staff counsel;
(ii) reducing the number of outside panel firms; (iii) active case management;
and (iv) more favorable fee arrangements.
Policy acquisition costs expressed as a percentage of net premiums earned
for 1999 decreased 0.7 points to 31.9%. The lower ratio was primarily a result
of a decrease in the commissions incurred due to lower profit sensitive
commission incentives to agents and a decrease in the annual cash incentive
award for employees. Productivity, as measured by net premiums written per
employee, in 1999 was $471,000, up 4% from $455,000 in 1998.
Total Federal income tax expense remained flat in 1999 at $10 million, an
effective tax rate of 15.3%, compared to an effective tax rate of 15.9% in
1998. The Company's effective tax rate differs from the Federal corporate rate
of 35% primarily as a result of tax-exempt investment income.
There is an excess profits law in New Jersey, which sets a maximum profit
level on personal automobile insurance. Under New Jersey regulations, an
insurer's excess profits earned on direct insurance written in New Jersey on
private passenger automobiles, as determined pursuant to an actuarial formula
set forth in applicable regulations ("NJ Excess Profits"), are subject to refund
or credit to policy holders. A NJ Excess Profits calculation must be made by an
insurer for this purpose and submitted to the New Jersey Department of Banking
and Insurance each year for the three-year period including the year for which
the calculation is done and the two calendar years immediately preceding such
year. For the period ended December 31, 1999, the Company did not incur an
obligation to make an excess profit premium refund. The premium reductions
imposed by the New Jersey Automobile Insurance Cost Reduction Act imposed in
1999, the apparent lack of equivalent cost savings in the law, and the effect of
policy assignments the Company was required to take pursuant to the state's UEZ
law, will diminish the likelihood of a future excess profits refund.
INCOME
Operating income (net income excluding net realized gains, net of tax
effect) decreased 37% to $35 million, or $1.21 per diluted share, compared to
$55 million, or $1.79 per diluted share, in 1998. Realized gains net of tax, for
1999 were $19 million compared with a $1 million realized loss for 1998. The
1999 realized gains reflect $24 million in gains from the sale of equity
securities partially offset by $5 million in losses from debt securities. The
losses in the debt securities are attributable to a bond swap involving
approximately $100 million in par value. The acquired bonds have a higher yield,
which will generate additional annual income. Net income for the year was $54
million, which equals the net income for 1998; however, the diluted earnings per
share is $1.87 per share in 1999 compared with $1.74 per share in 1998.
Operating and net income for 1999 included weather-related losses, net of tax,
of $13 million, or $0.44 per diluted share compared with $7 million, or $0.22
per diluted share for 1998.
31
<PAGE> 32
RESULTS OF OPERATIONS
1998 COMPARED WITH 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Annual
Increase
(dollars in thousands) 1998 1997 (Decrease)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net premiums written $748,873 717,618 4 %
Net premiums written
per employee(1) $ 455 454 --
Operating income $ 54,961 65,694 (16)%
Statutory combined ratio 103.2% 100.1 3.1 points
Return on average equity 9.1% 13.4 (4.3) points
</TABLE>
(1) - Excludes employees of Diversified Insurance Services companies
REVENUES
Net premiums written for 1998 increased by 4% to $749 million. The
conversion of New Jersey personal automobile policies from six-month to annual
terms (the "Conversion") increased 1997 net premiums written by approximately
$30 million for renewal business. Excluding the effects of the Conversion, and a
$4 million reinsurance premium buyout adjustment in 1998, net premiums written
for 1998 increased about 8%. The increase in net premiums written occurred
across all SBUs with the exception of the commercial lines Community Services
and Organizations SBU. The growth in net premiums written resulted in a 7%
increase in 1998 net premiums earned.
During 1998, the Company generated approximately $204 million of net
premiums written attributable to new business, after deducting reinsurance costs
of approximately $9 million, a 31% increase over 1997. The new business growth
was partially attributable to adding 23 field underwriters, called AMSs, to
bring the overall total to 83 in 1998. New business is carefully reviewed by
regional managers and the SBUs to ensure that it falls within our underwriting
standards.
The commercial SBUs' net premiums written increased 11%, or $52 million.
This increase included $167 million of net premiums written attributable to new
business, after deducting reinsurance costs of approximately $7 million,
generated principally by the increase in the number of AMSs, the Company's
Midwestern expansion, and the Company's strengthening of agency relationships.
The increases in net premiums written were partially offset by: i) a reduction
in existing business (renewal retention) attributable to a highly competitive
commercial lines marketplace, as well as non-renewals resulting from the
Company's regular review of its business (approximately $102 million); ii)
workers' compensation rate decreases and premium credits, which lowered net
premiums written by approximately $20 million; and iii) lower premium volume of
approximately $10 million due to agency terminations.
The Personal Lines SBU 1998 net premiums written, excluding the effect of
the Conversion, increased 4%, or $9 million. This increase is primarily due to a
reduction in the amount of premium ceded under the New Jersey Homeowners Quota
Share Reinsurance Program, which added $12 million in homeowners net premiums
written ($4 million of which is due to a one-time buyout of prior year ceded
reinsurance unearned premium reserves). In addition, the Personal Lines SBU
introduced enhanced products in some of the Company's territories in order to
expand its personal insurance segment.
The Diversified Insurance Services business segment generated $14 million
of net revenue, an increase of 71% over 1997. The strategy underlying this
segment is to use our core competencies to generate fee sources that do not
share the risk bearing nature of our insurance underwriting activities.
Net investment income earned for 1998 decreased 1%, or $1 million to $99
million. The level of investment income was negatively impacted by: (i) lower
yields on the reinvested proceeds from maturities and redemptions of $270
million during 1998 and 1997; and (ii) use of cash to purchase common shares of
the Company (totaling $38 million in 1998 and $8 million in 1997). The Company's
after-tax investment yield was 4.4% in 1998, down slightly from 4.6% in 1997.
EXPENSES
The ratio of losses and loss expenses incurred to net premiums earned
increased 2.1 points to 70.3%. The increase in this ratio was primarily
attributable to severe fire and weather-related catastrophe claims. During 1998,
the Company incurred $10 million of net losses from catastrophe claims, which
amounted to 1.4 points of the loss and loss expense ratio for 1998, as compared
to $2 million, or 0.3 points for 1997.
The 1998 loss and loss expense ratio for the commercial SBUs was 69.8%, an
increase of 3.0 points over 1997. The ratios for 1998 and 1997, after removing
the effect of weather-related catastrophe losses, were 68.1% and 66.5%,
respectively, a 1.6 point increase. This deterioration occurred mostly in the
property and workers' compensation lines of insurance. The workers' compensation
line of insurance loss and loss expense ratio for 1998 was 78.5%. The
deterioration of 14.1 points was due principally to continued competitive
pricing conditions.
32
<PAGE> 33
Policy acquisition costs expressed as a percentage of net premiums earned for
1998 increased 1.1 points to 32.6%. The increase reflects record profit sharing
commission and special incentives for agents, which increased the ratio by 0.6
points. The 1998 total dollar amount of labor costs (excluding employee
incentive compensation awards) and other operating costs rose moderately (0.2
points) in relation to 1998 net premiums earned.
Productivity in 1998, as measured by net premiums written per employee, was
approximately $455,000, up from $435,000 for 1997 (the average was $454,000 in
1997 before adjustment for the Conversion's $30 million renewal premium). The
increase is due primarily to growth in net premiums written in 1998.
Total Federal income tax expense in 1998 was $10 million (an effective tax
rate of 15.9%), an $11 million decrease compared to $21 million in 1997 (an
effective tax rate of 23.5%). The effective tax rate for 1998 was lower than
1997 primarily due to the tax benefits from the higher level of 1998
underwriting losses due, in part, to the weather-related catastrophe claims. The
Company's effective tax rate differs from the Federal corporate rate of 35%
primarily as a result of tax-exempt investment income.
INCOME
1998, by a slight margin, was the second strongest year in the history of the
Company. Operating income (income excluding net realized gains, net of tax
effect) reached $55 million in 1998, or $1.79 per diluted share, compared to $66
million, or $2.15 per diluted share, in 1997. Net income for 1998 was impacted
by realized investment losses (net of tax effect) for 1998 of $1 million, or
$.05 per diluted share, incurred as part of the Company's tax planning strategy.
Net income for 1998 decreased 23% to $54 million, or $1.74 per diluted share,
from $70 million, or $2.27 per diluted share, in 1997. Operating and net income
for 1998 included weather-related catastrophe losses, net of tax, of $7 million,
or $0.22 per diluted share.
FEDERAL INCOME TAXES
The Company had a total net deferred tax asset at December 31, 1999 of $16
million, compared to a $7 million net deferred tax liability at December 31,
1998. The change of $23 million in the deferred tax accounts at December 31,
1999 reflects the decrease in unrealized gains on the available-for-sale
investment portfolio. The fair value of the portfolio decreased $58 million ($38
million net of tax) resulting primarily from a decline in market value on debt
securities available-for-sale due to rising interest rates.
<TABLE>
<CAPTION>
(in millions) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current taxable income $ 40.4 27.5 51.7
Pretax financial statement income $ 63.4 63.7 91.0
- --------------------------------------------------------------------------------
</TABLE>
Based on the Company's tax loss carryback availability, and the historic
levels of current taxable income and pretax financial statement income, the
Company believes that it is more likely than not that the existing deductible
temporary differences will reverse during periods in which the Company will
generate net taxable income or have adequate carryback availability. However,
there can be no assurance that the Company will generate any earnings or any
specific level of earnings in future years.
FINANCIAL CONDITION; LIQUIDITY AND CAPITAL RESOURCES
Selective Insurance Group, Inc. ("Parent") is an insurance holding company,
the principal assets of which are investments in insurance and Diversified
Insurance Services subsidiaries. The primary means of meeting its liquidity
requirements is through dividends from these subsidiaries, the payment of which
is governed by state regulatory requirements for the insurance subsidiaries.
Dividends are generally payable only from earned surplus as reported on the
insurer's annual statement as of the preceding December 31.
The Parent's cash requirements principally include: (i) dividends to
stockholders; (ii) interest payments on its outstanding debt; (iii) annual
principal payments of $7 million on the original $50 million principal amount of
7.84% Senior Notes, due November 15, 2002 ("7.84% Senior Notes"); and (iv)
general corporate expenses. As of December 31, 1999, these cash requirements,
net of applicable income taxes, aggregated approximately $29 million annually
(assuming the current dividend level). The Parent acquired cash from the sale of
its common stock under various stock plans and the dividend reinvestment
program, and from investment income, all of which approximated $4 million and
reduced the Parent's annual cash requirements from $29 million to $25 million.
In addition to these cash flow requirements, the Parent is obligated to pay $6
million, during 2000, related to a 1999 subsidiary acquisition.
Based upon the 1999 statutory financial statements, the insurance
subsidiaries are able to pay the Parent, in 2000, ordinary dividends in the
aggregate amount of $51 million. There can be no assurance that the insurance
subsidiaries will be able to pay dividends to the Parent in the future in an
amount sufficient to enable the Parent to meet its liquidity requirements. For
additional information regarding regulatory
33
<PAGE> 34
limitations on the payment of dividends by the insurance subsidiaries to the
Parent and amounts available for the payment of such dividends, see Note 10 to
the consolidated financial statements.
Dividends to stockholders are declared and paid at the discretion of the
Parent's Board of Directors (the "Board") based upon 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. For information regarding restrictions on the Parent's ability
to pay dividends to its stockholders, see Note 5(b) to the consolidated
financial statements.
Cash provided by operating activities amounted to $64 million, $57 million
and $51 million in 1999, 1998 and 1997, respectively. The $7 million increase in
operating cash flow for 1999 compared with 1998 is primarily attributable to
higher levels of net premiums written, partially offset by an increase in paid
losses, due in part to catastrophe losses ($20 million in 1999 compared with $8
million for 1998) and a $6 million increase in Federal income taxes paid.
Since cash inflow from premiums is received in advance of required cash
outflow to settle claims, the Company accumulates funds which it invests. Total
investments at December 31, 1999 were $1.7 billion, representing 68% of total
assets. The Company's investment program is structured with staggered maturities
so that liquidation of debt securities, available-for-sale should not be
necessary in the ordinary course of business. Cash outflow requirements can be
unpredictable due to uncertainties regarding settlement dates for unpaid claims
and the potential for large and/or catastrophic losses occurring either
individually or in the aggregate. The Company maintains reinsurance programs to
ensure the availability of funds and to protect the Company against unusually
serious occurrences or catastrophes in which a number of claims could produce an
extraordinary aggregate loss.
Effective July 1, 1998, the casualty excess of loss treaty retention was
increased from $1 million to $2 million per risk, and the property excess of
loss treaty retention was increased from $400,000 to $750,000 per risk.
Effective January 1, 1999, the Company revised its property catastrophe program
to provide a higher level of protection against catastrophe losses. The new
catastrophe program is in six layers and covers: (i) 95% of losses in excess of
$15 million up to $25 million; (ii) 95% of losses in excess of $25 million up to
$50 million; (iii) 95% of losses in excess of $50 million up to $85 million;
(iv) 95% of losses in excess of $95 million up to $130 million; (v) 95% of
losses in excess of $130 million up to $165 million. The layer of $10 million in
losses in excess of $85 million has been retained in full by the Company, as has
the $15 million in losses underlying the 1st layer. The Company believes that
the property catastrophe program, coupled with the Homeowners Quota Share
Program, which reinsures 75% of New Jersey homeowners' property coverage up to a
$1 million limit and contains no per-occurrence limit, provides adequate
protection for the Company.
Total assets at December 31, 1999, were $2.5 billion, representing an
increase of $81 million, or 3%, from December 31, 1998. The growth in total
assets was primarily due to an increase in reinsurance recoverable on unpaid
losses and loss expenses of $52 million, an increase in premiums receivable of
$19 million, a $32 million increase in goodwill, and the establishment of a
deferred tax asset of $16 million. These increases were partially offset by a
$60 million reduction in invested assets resulting primarily from a decline in
market value on debt securities available-for-sale due to rising interest rates.
This change in fair value was also the principal reason for the fluctuation in
deferred taxes. The increase in reinsurance recoverable on unpaid losses and
loss expenses is primarily attributable to a $24 million increase in losses
ceded to the National Flood Insurance Program, primarily attributable to
Hurricane Floyd and a $34 million increase in personal injury protection claims
ceded to the New Jersey Unsatisfied Claim Judgement Fund ("UCJF"). During 1999,
the Company completed a comprehensive review of lifetime claim benefits and
adjusted outstanding loss projections to the new ultimate loss projections.
Since incurred losses on these claims have exceeded the retention level,
increases to reserves are 100% ceded. The 8% increase in premiums receivable,
from 1998 to 1999 corresponds to the 8% increase in net premiums written.
Goodwill increased due to the acquisition of two subsidiaries during 1999.
Total liabilities at December 31, 1999 were $1.9 billion, representing an
increase of $119 million, or 7%, from 1998. This increase was primarily due to
higher loss reserves for losses and loss expenses of $82 million. Approximately
half of this increase is attributable to the increase in the previously
mentioned lifetime claim reserves ceded to the UCJF. The balance of the increase
in reserves is reflective of increased large property and workers' compensation
losses and the overall business growth during 1999. Unearned premiums increased
by $13 million, due primarily to increased net premiums written. Short-term
borrowings on various lines of credit increased by $23 million during 1999. The
increase in short-term borrowing is the result of the Company's common stock
repurchase program. During 1999, the Company repurchased 2.5 million shares of
stock at a total cost of $46 million. On February 3, 2000, the Company's Board
of Directors authorized the Company to repurchase an additional 2 million
shares, bringing the overall repurchase authorization to 8 million shares. The
determination to make such purchases is based on market conditions, available
cost and alternative investment opportunities. The Company believes such
repurchases enhance shareholder value and are an efficient use of capital.
The Company is currently exploring the possibility with its investment
bankers of raising capital through the issuance of senior
34
<PAGE> 35
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.
INSURANCE REGULATION
The Company is subject to regulation under applicable insurance statutes,
including insurance holding company statutes, of the various states in which the
Company operates. Insurance regulation is intended to provide solvency and other
safeguards for policyholders rather than to protect stockholders of insurance
holding companies. Insurance laws of the various states provide regulatory
agencies with broad administrative powers, including the power to grant or
revoke licenses to transact insurance business, and to regulate trade practices,
investments, premium rates, the deposit of securities, the form and content of
financial statements, insurance policies, accounting practices, the maintenance
of specified reserves and capital, the payment of dividends, and establish
maximum levels of profits or returns for a line of insurance.
DIVERSIFIED INSURANCE SERVICES REGULATION
The strategic companies of our Diversified Insurance Services segment
include Selective HR Solutions, Inc. ("Selective HR"), Alta Services LLC,
("Alta") and Consumer Health Network Plus, LLC ("CHN"), which are subject to
certain regulations.
Selective HR is a professional employer organization ("PEO"). In this
capacity, it is a co-employer for its clients. As a co-employer, Selective HR is
affected by federal, state and local laws relating to labor, tax and employment
matters. By contracting with its clients and creating a co-employer relationship
with employees assigned to work at client company locations, Selective HR
assumes certain contractual obligations and assumes certain legal obligations
and responsibilities of an employer under these laws. Many of these laws do not
specifically address the obligations and responsibilities of co-employers such
as PEOs. If these laws, for example, the Employee Retirement Income Security
Act, and federal and state employment laws and tax laws, are ultimately
applied to a PEO's co-employer relationship with their work-site employees,
they could have a material adverse effect on Selective HR's results of
operations or financial condition.
Some states in which Selective HR operates have passed licensing or
registration requirements for PEOs. These regulatory laws vary from state to
state but generally provide for monitoring the fiscal responsibility of PEOs.
The Company has two subsidiaries, Alta and CHN, which operate as a managed
care organization ("MCO") and/or a preferred provider organization ("PPO").
These companies are subject to laws and/or regulations in some states in which
they do business, which require them to be licensed to operate as an MCO or a
PPO.
In New Jersey, a state from which both Alta and CHN derive substantial
revenue, proposed regulations implementing the Health Care Quality Act may deem
insured health benefit plans who contract with PPOs to be Managed Care Plans.
Managed Care Plans may be required, through PPO contracts, to provide enrollees
with information regarding the plan and the network and also to afford providers
with certain protections.
Alta and CHN are also affected by both federal and state laws regarding
privacy of medical records and patient privacy. This is an evolving area of
regulation requiring the Company to continually monitor and review, especially
in dealings with their clients.
While Selective HR, Alta and CHN are currently in compliance with all laws
affecting their operations, there can be no assurance that, in the future, they
will be able to satisfy revised licensing and regulatory requirements.
YEAR 2000
The Company's Y2K awareness initiative successfully addressed its
interaction with its independent agents, suppliers and customers. The Company's
Y2K project adequately modified and safeguarded its internal systems and the
Company has not experienced any business disruptions as a result of its dealings
with its suppliers or service providers.
The costs incurred for the Y2K project were $2.7 million as of December 31,
1999. Costs charged to earnings in 1999, 1998, 1997 and 1996 are approximately
$900,000, $500,000, $700,000, and $100,000, respectively. The remaining $500,000
expended has been capitalized.
In addition to evaluating and addressing Y2K issues relating to possible
business interruption, the Company has Y2K exposure relating to insurance
policy coverages for which reinsurance is in effect to mitigate potential
losses. As of February 29, 2000, no claims have been reported.
35
<PAGE> 36
ITEM 7A. MARKET RISK DISCLOSURE FOR FINANCIAL INSTRUMENTS.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of potential loss in fair value arising from
adverse fluctuations in interest rates, market rates and prices, foreign
currency exchange rates, and other relevant market rate or price changes. The
following is a discussion of the Company's primary market risk exposures and how
they were being managed as of December 31, 1999. The Company's market risk
sensitive instruments are for other than trading purposes.
The Company's investment policy is conservative with the long-term
objective of maximizing after-tax yield while providing liquidity and preserving
assets and stockholders' equity. The current investment mix is 81% debt
securities, 16% equity securities and 3% short-term and other investments. The
Company has no direct exposure to foreign exchange or commodity risks.
To reduce the sensitivity of interest rate fluctuations, the Company
invests its debt portfolio primarily in intermediate-term debt securities. At
December 31, 1999, 93% of the portfolio was ten years or less to maturity, and
the average life was 5.0 years.
The Company's portfolio of marketable equity securities is exposed to
equity price risk arising from potential volatility in equity market prices. The
Company attempts to minimize the exposure to equity price risk by maintaining a
diversified portfolio limiting concentrations in any one company or industry.
For the Company's investment portfolio, there were no significant changes
in the Company's primary market risk exposures or in how those exposures are
managed compared to the year ended December 31, 1998. The Company does not
currently anticipate significant changes in its primary market risk exposures or
in how those exposures are managed in future reporting periods based upon what
is known or expected to be in effect in future reporting periods.
The Company utilized sensitivity analysis to measure the potential loss in
future earnings, fair values or cash flows of market sensitive instruments. The
sensitivity analysis assumes a hypothetical: (i) increase of 100 basis points in
interest rates; (ii) a 10% decrease in equity values at December 31, 1999; and
(iii) a parallel shift in the yield curve for rate sensitive instruments. The
timing of calls and prepayments cannot be estimated with precision.
In the analysis, the Company included the following financial instruments:
investments in debt securities, investments in equity securities, convertible
debentures, and senior notes. The primary market risk to the Company's market
sensitive instruments is interest rate risk and equity price risk.
This analysis is not intended to provide a precise forecast of the effect
of changes in market interest rates and equity prices on the Company's income or
stockholders' equity. Further, the calculations do not take into account any
actions the Company may take in response to market fluctuations.
The following table presents the sensitivity analysis (adverse scenario) of
each component of market risk as of December 31, 1999 and 1998.
<TABLE>
<CAPTION>
Fair Value Estimated Fair Value Estimated
(in thousands) @12/31/99 Fair Value* @12/31/98 Fair Value*
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS:
Investments in
debt securities $1,394,390 1,336,140 $1,448,455 1,388,348
Investments in
equity securities 251,998 226,798 269,991 242,992
LIABILITIES:
Convertible
debentures 14,908 16,399 17,942 19,736
8.77% Senior notes 55,322 57,061 60,666 63,637
7.84% Senior notes 21,388 21,726 30,257 31,463
</TABLE>
*Estimated fair value after the hypothetical change in rates and equity market
conditions.
In addition to the above scheduled investments, the Company has a revolving
line of credit. An increase in interest rates of 100 basis points would result
in additional annual interest expense of $500,000.
The Company may replace the majority of short-term line of credit
borrowings with mid-term to long-term debt during the first half of
2000. The Company has entered into an interest rate hedge in anticipation of
issuing such debt to reduce exposure to rising interest rates and, to a
somewhat lesser degree, exposure to widening credit spreads during the period
prior to setting the terms of the proposed issue of the mid-term to long-term
debt. The hedge instrument, by itself, has elements of interest rate and credit
spread volatility that vary inversely when compared to the volatility of
liabilities. The following table presents the sensitivity analysis (adverse
scenario) of the hedge instrument:
<TABLE>
<CAPTION>
Fair Value
- --------------------------------------------------------------------------------
<S> <C>
At inception $ 0
After 100 basis point decline in interest rates $ (6,248,000)
- --------------------------------------------------------------------------------
</TABLE>
36
<PAGE> 37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
December 31, 1999 1998
(in thousands, except share amounts)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
INVESTMENTS:
Debt securities, held-to-maturity -- at amortized cost
(fair value: $271,604--1999; $373,179--1998) $ 271,384 358,380
Debt securities, available-for-sale at fair value
(amortized cost: $1,141,167--1999; $1,033,628--1998) 1,122,786 1,075,276
Equity securities, available-for-sale at fair value
(cost: $115,626--1999; $135,758--1998) 251,998 269,991
Short-term investments (at cost which approximates fair value) 48,807 50,905
Other investments 15,963 16,087
----------- ----------
Total investments 1,710,938 1,770,639
Cash 8,588 7,931
Interest and dividends due or accrued 23,545 22,537
Premiums receivables, net of allowance for uncollectible
accounts of: $3,009--1999; $2,408--1998 248,910 229,794
Other trade receivables, net of allowance for uncollectible
accounts of: $640--1999; $332--1998 21,210 10,331
Reinsurance recoverable on paid losses and loss expenses 9,797 11,495
Reinsurance recoverable on unpaid losses and loss expenses 192,044 140,453
Prepaid reinsurance premiums 32,531 31,685
Current Federal income tax 4,417 --
Deferred Federal income tax 16,129 --
Real estate, furniture, equipment and software development -- at cost,
net of accumulated depreciation and amortization of:
$56,631--1999; $47,527--1998 54,558 50,950
Deferred policy acquisition costs 109,095 109,774
Goodwill, net of accumulated amortization of:
$7,334--1999; $5,032--1998 52,001 20,391
Other assets 29,504 26,188
----------- ----------
Total assets $ 2,513,267 2,432,168
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Reserve for losses $ 1,092,026 1,014,386
Reserve for loss expenses 183,097 178,888
Unearned premiums 413,601 400,143
Convertible subordinated debentures 6,157 6,219
Short-term debt 51,302 28,287
Notes payable 75,428 82,572
Current Federal income tax -- 86
Deferred Federal income tax -- 7,226
Other liabilities 121,692 106,778
----------- ----------
Total liabilities 1,943,303 1,824,585
----------- ----------
STOCKHOLDERS' EQUITY:
Common stock of $2 par value per share:
Authorized shares: 180,000,000
Issued: 37,964,405--1999; 37,416,237--1998 75,929 74,833
Additional paid-in capital 53,470 45,449
Retained earnings 514,477 477,118
Accumulated other comprehensive income 76,694 114,323
Treasury stock -- at cost (shares: 11,406,722--1999;
8,892,335--1998) (143,875) (97,990)
Deferred compensation expense and notes receivable from stock sales (6,731) (6,150)
----------- ----------
Total stockholders' equity 569,964 607,583
----------- ----------
Commitments and contingencies (Notes 6 and 17)
Total liabilities and stockholders' equity $ 2,513,267 2,432,168
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE> 38
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Year ended December 31, 1999 1998 1997
(in thousands, except per share amounts)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Net premiums written $ 811,677 748,873 717,618
Net increase in unearned premiums and
prepaid reinsurance premiums (12,612) (25,881) (41,350)
--------- -------- --------
Net premiums earned 799,065 722,992 676,268
Net investment income earned 96,531 99,196 100,530
Net realized gains (losses) 29,377 (2,139) 6,021
Diversified insurance services revenue 46,653 14,100 8,236
Other income 3,142 3,180 3,128
--------- -------- --------
Total revenues 974,768 837,329 794,183
--------- -------- --------
EXPENSES:
Losses incurred 517,700 433,316 383,996
Loss expenses incurred 74,515 74,484 77,217
Policy acquisition costs 254,744 235,523 212,902
Dividends to policyholders 6,682 5,329 4,855
Interest expense 9,460 9,409 9,592
Diversified insurance services expenses 41,881 11,883 7,471
Other expenses 6,383 3,681 7,130
--------- -------- --------
Total expenses 911,365 773,625 703,163
--------- -------- --------
Income before Federal income tax 63,403 63,704 91,020
--------- -------- --------
FEDERAL INCOME TAX EXPENSE (BENEFIT):
Current 12,729 9,879 16,688
Deferred (3,043) 255 4,724
--------- -------- --------
Total Federal income tax expense 9,686 10,134 21,412
--------- -------- --------
Net income $ 53,717 53,570 69,608
========= ======== ========
EARNINGS PER SHARE:
Basic $ 1.98 1.88 2.41
Diluted $ 1.87 1.74 2.27
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE> 39
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Year ended December 31, 1999 1998 1997
(in thousands, except per share amounts)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK:
Beginning of year $ 74,833 72,728 71,644
Dividend reinvestment plan (shares: 64,952--1999;
52,183--1998; 49,206--1997) 130 104 98
Convertible subordinated debentures (shares: 8,752--1999;
88,412--1998; 9,448--1997) 17 177 19
Stock purchase and compensation plans
(shares: 474,464--1999; 600,113--1998; 483,028--1997) 949 1,201 967
Stock issued for acquisition (shares: 311,673--1998) -- 623 --
--------- -------- --------
End of year 75,929 74,833 72,728
--------- -------- --------
ADDITIONAL PAID-IN CAPITAL:
Beginning of year 45,449 30,450 18,060
Dividend reinvestment plan 1,057 1,046 1,033
Convertible subordinated debentures 35 448 48
Stock purchase and compensation plans 6,929 7,861 11,309
Stock issued for acquisition 5,644
--------- -------- --------
End of year 53,470 45,449 30,450
--------- -------- --------
RETAINED EARNINGS:
Beginning of year 477,118 439,811 386,601
Net income 53,717 53,717 53,570 53,570 69,608 69,608
Cash dividends to stockholders ($.59 per share--1999;
$.56 per share--1998; $.56 per share--1997) (16,358) (16,263) (16,398)
--------- -------- --------
End of year 514,477 477,118 439,811
--------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Beginning of year 114,323 89,051 52,728
Other comprehensive income-(decrease) increase in net
unrealized gains on available-for-sale securities,
net of deferred income tax effect (37,629)(37,629) 25,272 25,272 36,323 36,323
--------- -------- --------
End of year 76,694 114,323 89,051
--------- -------- --------
Comprehensive income 16,088 78,842 105,931
======= ====== =======
TREASURY STOCK:
Beginning of year (97,990) (59,785) (50,680)
Acquisition of treasury stock (shares: 2,514,387--1999;
1,794,873--1998; 364,200--1997) (45,885) (38,205) (9,105)
--------- -------- --------
End of year (143,875) (97,990) (59,785)
--------- -------- --------
DEFERRED COMPENSATION EXPENSE AND NOTES RECEIVABLE
FROM STOCK SALES:
Beginning of year (6,150) (6,939) (4,054)
Deferred compensation expense (3,418) (966) (6,016)
Amortization of deferred compensation expense and
amounts received on notes 2,837 1,755 3,131
--------- -------- --------
End of year (6,731) (6,150) (6,939)
--------- -------- --------
Total stockholders' equity $ 569,964 607,583 565,316
========= ======== ========
</TABLE>
The Company also has authorized, but not issued, 5,000,000 shares of preferred
stock without par value of which 300,000 shares have been designated Series A
junior preferred stock without par value.
See accompanying notes to consolidated financial statements.
40
<PAGE> 40
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Year ended December 31, 1999 1998 1997
(in thousands)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 53,717 53,570 69,608
--------- -------- --------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Increase (decrease) in reserves for losses and loss expenses, net of
reinsurance recoverable on unpaid losses and loss expenses 30,258 15,849 (2,613)
Net increase in unearned premiums and prepaid
reinsurance premiums 12,612 25,881 41,350
(Increase) decrease in net Federal income tax (7,520) (1,411) 2,743
Depreciation and amortization 13,044 9,273 8,143
Increase in premiums receivables (19,116) (35,649) (44,251)
Increase in other trade receivables (2,772) (1,858) (527)
Decrease (increase) in deferred policy acquisition costs 679 (11,664) (14,960)
(Increase) decrease in interest and dividends due or accrued (1,008) 1,065 693
Decrease (increase) in reinsurance recoverable on paid losses
and loss expenses 1,698 (407) (3,225)
Net realized (gains) losses (29,377) 2,139 (6,021)
Other -- net 11,592 (162) (9)
--------- -------- --------
Net adjustments 10,090 3,056 (18,677)
--------- -------- --------
Net cash provided by operating activities 63,807 56,626 50,931
--------- -------- --------
INVESTING ACTIVITIES
Purchase of debt securities, held-to-maturity -- (12,682) (41,409)
Purchase of debt securities, available-for-sale (314,283) (178,213) (148,492)
Purchase of equity securities, available-for-sale (14,948) (46,131) (33,275)
Purchase of other investments (111) (15,000) (9,390)
Purchase of Selective HR Solutions
(net of cash acquired of $1,127) (23,015) -- --
Purchase of Consumer Health Network Plus, LLC (6,010) -- --
Purchase of PDA Software Services, Inc.(net of cash
acquired of $356) (258) (6,030) --
Purchase of Alta Services LLC -- -- (8,291)
Sale of debt securities, available-for-sale 132,680 64,648 54,107
Redemption and maturities of debt securities, held-to-maturity 87,053 64,464 63,979
Redemption and maturities of debt securities, available-for-sale 66,787 90,392 51,768
Sale of equity securities, available-for-sale 71,615 27,891 19,734
Proceeds from other investments 235 20,690 1,205
(Decrease) increase in net payable from security transactions (13,414) 8,655 4,553
Net additions to real estate, furniture, equipment and
software development (10,908) (11,160) (4,055)
--------- -------- --------
Net cash (used in) provided by investing activities (24,577) 7,524 (49,566)
--------- -------- --------
FINANCING ACTIVITIES
Dividends to stockholders (16,358) (16,263) (16,398)
Acquisition of treasury stock (45,885) (38,205) (9,105)
Principal payment of notes payable (7,143) (10,972) (7,143)
Proceeds from short-term debt 23,015 10,762 17,400
Net proceeds from issuance of common stock 9,066 16,479 13,407
Increase in deferred compensation expense and amounts received
on notes receivable from stock sale (3,366) (913) (5,750)
--------- -------- --------
Net cash used in financing activities (40,671) (39,112) (7,589)
--------- -------- --------
Net (decrease) increase in short-term investments and cash (1,441) 25,038 (6,224)
Short-term investments and cash at beginning of year 58,836 33,798 40,022
--------- -------- --------
Short-term investments and cash at end of year $ 57,395 58,836 33,798
========= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID DURING THE YEAR FOR:
Interest $ 9,995 9,527 9,224
Federal income tax 17,229 11,554 18,669
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, 1997
Note 1 Summary of Significant Accounting Policies
(a) CONSOLIDATION POLICY
The consolidated financial statements include the accounts of Selective
Insurance Group, Inc. ("Selective") and its subsidiaries (collectively, the
"Company"). All significant intercompany accounts and transactions have been
eliminated.
(b) INVESTMENTS
Debt securities, held-to-maturity are carried at amortized cost because
management has the ability and intent to hold such securities until maturity.
Securities, available-for-sale are carried at fair value. Net unrealized gains
and losses on debt securities, held-to-maturity are not reflected in
consolidated net income or stockholders' equity. Net unrealized gains and losses
on securities, available-for-sale, net of deferred income tax effect, are not
reflected in consolidated net income, but are included in comprehensive income
as well as accumulated other comprehensive income, a separate component of
stockholders' equity. No material investments of the Company were non-income
producing for the years ended December 31, 1999 and 1998.
Realized gains and losses are determined on the basis of the cost of specific
investments sold and are credited or charged to income. In the event that a
decline in fair value of an investment is considered to be other than temporary,
such investments are written down to their net realizable value.
(c) REINSURANCE
The Company records its ceded reinsurance transactions on a gross basis on
the balance sheet which results in reinsurance recoverables on unpaid losses and
loss expenses and ceded unearned premiums (prepaid reinsurance premiums). The
Company also discloses reinsurance amounts for ceded premiums written and earned
and ceded loss and loss expenses incurred.
(d) STOCK-BASED COMPENSATION
The Financial Accounting Standards Board ("FASB") Statement of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation" ("FASB
123") establishes financial accounting and reporting standards for stock-based
compensation plans. As permitted by FASB 123, the Company will continue to use
the accounting method prescribed by Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25"). Companies using APB 25
are required to make pro forma footnote disclosures of net income and earnings
per share as if the fair value method of accounting, as defined in FASB 123, had
been applied.
(e) REAL ESTATE, FURNITURE, EQUIPMENT AND SOFTWARE DEVELOPMENT
The value of real estate, furniture and equipment is stated at cost less
accumulated depreciation. Provisions for depreciation are computed using the
straight-line method over the estimated useful lives of the assets, which range
from three to forty years for financial statement purposes and the straight-line
method and various accelerated methods for Federal income tax purposes. The
Company capitalizes the costs of computer software developed or obtained for
internal use in accordance with the American Institute of Certified Public
Accountants' Statement of Position No. 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). As a
result of SOP 98-1, the Company capitalized $5 million and $3 million, of
internal computer software development costs in 1999 and 1998, respectively,
which will be amortized using the straight-line method over estimated useful
lives of five and seven years.
(f) DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs are directly related to the writing of an insurance
policy and are deferred and amortized over the life of the policies in order to
facilitate a matching of revenues and expenses. These costs include labor costs,
commissions, premium taxes and assessments, Boards, Bureaus and Dues, travel,
and other underwriting expenses incurred in the acquisition of premium. The
deferred policy acquisition costs are limited to the sum of unearned premiums
and anticipated investment income less anticipated losses and loss adjustment
expenses, policyholder dividends and other expenses for maintenance of policies
in force. The investment yields assumed for each reporting period, which are
based upon the Company's actual average investment yield, before-tax, were 5.6%,
5.7% and 6.0% for 1999, 1998 and 1997, respectively.
(g) GOODWILL
Goodwill resulting from business acquisitions represents the excess of cost
over fair value of assets acquired and is being amortized over estimated useful
lives, which range between nine and twenty-five years, using the straight-line
method. Amortization expense, which is included in other expense, was
$2,153,000, $1,346,000 and $617,000 million for 1999, 1998 and 1997,
respectively. Periodically, the Company reviews intangible assets for
impairments where the fair value is less than the carrying value.
(h) USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported financial statement balances, as well
as the disclosure of contingent assets and liabilities. Actual results could
differ from those estimates.
42
<PAGE> 42
(i) RESERVES FOR LOSSES AND LOSS EXPENSES
In accordance with industry practice, the Company maintains reserves for
losses and loss expenses. These reserves are made up of both case reserves and
reserves for claims incurred but not yet reported ("IBNR"). Case reserves result
from a claim that has been reported to an insurance subsidiary and is estimated
at the amount of ultimate payment. Additional IBNR reserves are established
based on generally accepted actuarial techniques. Such techniques assume that
past experience, adjusted for the effects of current developments and
anticipated trends, are an appropriate basis for predicting future events.
The internal assumptions considered by the Company in the estimation of the
IBNR amounts for both environmental and non-environmental reserves at the
Company's reporting dates are based on: (i) an analysis of both paid and
incurred loss and loss expense development trends; (ii) an analysis of both paid
and incurred claim count development trends; (iii) the exposure estimates for
reported claims; (iv) recent development on exposure estimates with respect to
individual large claims and the aggregate of all claims; (v) the rate at which
new environmental claims are being reported; (vi) actuarial modeling of
environmental claims; and (vii) patterns of events observed by claims personnel
or reported to them by defense counsel. External factors identified by the
Company in the estimation of IBNR for both environmental and non-environmental
IBNR reserves include: legislative enactments, judicial decisions, legal
developments in the determination of liability and the imposition of damages;
and trends in general economic conditions, including the effects of inflation.
Adjustments to IBNR are made periodically to take into account changes in the
volume of business written, claims frequency and severity, the mix of business,
claims processing and other items as described that are expected by management
to affect the Company's reserves for losses and loss expenses over time.
By using both individual estimates of reported claims and generally accepted
actuarial reserving techniques, the Company estimates the ultimate net liability
for losses and loss expenses. While the ultimate actual liability may be higher
or lower than reserves established, the Company believes the reserves to be
adequate. The Company does not discount to present value that portion of its
loss reserves expected to be paid in future periods, however, the loss reserves
include anticipated recoveries for salvage and subrogation claims. Such salvage
and subrogation amounted to $39,702,000 and $31,344,000 in 1999 and 1998,
respectively.
Reserves are reviewed for adequacy on a periodic basis. When reviewing
reserves, the Company analyzes historical data and estimates the impact of
various factors such as: (i) per claim information; (ii) Company and industry
historical loss experience; (iii) legislative enactments, judicial decisions,
legal developments in the imposition of damages, and changes in political
attitudes; and (iv) trends in general economic conditions, including the effects
of inflation. This process assumes that past experience, adjusted for the
effects of current developments and anticipated trends, is an appropriate basis
for predicting future events. There is no precise method, however, for
subsequently evaluating the impact of any specific factor on the adequacy of
reserves because the eventual deficiency or redundancy is affected by many
factors. Based upon such reviews, the Company believes that the estimated
reserves for losses and loss expenses are adequate to cover the ultimate cost of
claims. The changes in these estimates, resulting from the continuous review
process and the differences between estimates and ultimate payments, are
reflected in the consolidated statements of income for the period in which such
estimates are changed.
(j) PREMIUM REVENUE
Premiums written include direct writings plus reinsurance assumed and
estimates of premiums earned but unbilled on the workers' compensation line of
insurance, less reinsurance ceded to other insurers. Premiums written are
recognized as revenue over the period that coverage is provided using the
semi-monthly pro rata method. Unearned premiums and prepaid reinsurance premiums
represent that portion of premiums written that are applicable to the unexpired
terms of policies in force.
(k) FEDERAL INCOME TAX
The Company uses the asset and liability method of accounting for income
taxes. Deferred Federal income taxes arise from the recognition of temporary
differences between financial statement carrying amounts and the tax basis of
the Company's assets and liabilities, as well as tax on net unrealized gains or
losses on securities, available-for-sale. A valuation allowance is established
when it is more likely than not that some portion of the deferred tax asset will
not be realized. The effect of a change in tax rates is recognized in the period
of enactment.
(l) STATEMENT OF CASH FLOWS
Short-term investments is comprised of highly liquid investments that are
readily convertible into known amounts of cash. Such investments have maturities
of 90 days or less from the date of purchase.
43
<PAGE> 43
(m) FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
(1) Investment Securities: Fair values for debt securities, held-to-maturity
are based on quoted market prices where available. For debt securities,
held-to-maturity not actively traded, fair values are estimated using values
obtained from independent pricing services. The fair values for debt securities,
available-for-sale and equity securities, available-for-sale, which also
represent the carrying amounts, are based on quoted market prices. Fair values
for other investments are not material and are carried at either cost or the
equity method, which approximates fair value.
(2) Indebtedness: The fair value of the convertible subordinated debentures
is based on quoted market prices. The fair values of the 7.84% Senior Notes due
November 15, 2002 and the 8.77% Senior Notes due August 1, 2005 were estimated
using a cash flow analysis based upon Selective's current incremental borrowing
rate for the remaining term of the loan.
(n) RECLASSIFICATIONS
Certain amounts in the Company's prior years' consolidated financial
statements and related footnotes have been reclassified to conform with the 1999
presentation. Such reclassification had no effect on the Company's net income or
stockholders' equity.
Note 2 Pending Accounting Pronouncements
In June of 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FASB 133"). FASB 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This statement was
previously effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. Earlier application was encouraged, but was permitted only as of
the beginning of any fiscal quarter that begins after issuance of financial
statements of prior periods. In June 1999, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 137, which defers
the effective date of FASB 133 to all fiscal quarters of fiscal years beginning
after June 15, 2000. The Company does not anticipate the adoption of this
statement to have a material effect on the Company's results of operations or
financial condition.
Note 3 Policy Acquisition Costs
Changes in deferred policy acquisition costs and policy acquisition costs
expensed are summarized as follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred policy acquisition costs:
Deferred, January 1 $ 109,774 98,110 83,150
--------- ------- -------
Additions:
Commissions 135,165 130,498 116,988
Labor costs 50,466 46,830 41,971
Premium taxes and assessments 17,368 17,147 14,312
Other 28,247 26,517 27,072
--------- ------- -------
Total additions 231,246 220,992 200,343
--------- ------- -------
Amortized to expense (231,925) (209,328) (185,383)
--------- ------- -------
Deferred, December 31 $ 109,095 109,774 98,110
========= ======= =======
Policy acquisition costs:
Amortized to expense $ 231,925 209,328 185,383
Period costs 22,819 26,195 27,519
--------- ------- -------
Total policy acquisition costs $ 254,744 235,523 212,902
========= ======= =======
</TABLE>
44
<PAGE> 44
Note 4 Investments
(a) The components of net investment income earned are as follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt securities $88,800 89,928 93,894
Equity securities 6,146 5,775 5,002
Short-term investments 1,624 1,705 1,266
Other 1,317 3,140 1,702
------- ------- -------
97,887 100,548 101,864
Investment expenses (1,356) (1,352) (1,334)
------- ------- -------
Net investment income earned $96,531 99,196 100,530
======= ======= =======
</TABLE>
(b) Net unrealized gains on debt securities, held-to-maturity are as follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net unrealized gains $ 220 14,799 16,082
======== ====== ======
Increase (decrease) in net unrealized gains $(14,579) (1,283) 3,601
======== ====== ======
</TABLE>
(c) Gross and net unrealized gains (losses) on securities, available-for-sale
are as follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt securities:
Gains $ 8,812 44,227 36,126
Losses (27,193) (2,579) (796)
-------- ------ ------
(18,381) 41,648 35,330
-------- ------ ------
Equity securities:
Gains 141,206 140,001 104,147
Losses (4,834) (5,768) (2,476)
-------- ------ ------
136,372 134,233 101,671
-------- ------ ------
Net unrealized gains on
available-for-sale securities 117,991 175,881 137,001
Deferred income tax expense (41,297) (61,558) (47,950)
-------- ------ ------
Net unrealized gains, net of
deferred income tax $ 76,694 114,323 89,051
======== ====== ======
Increase (decrease) in net unrealized
gains, net of deferred income tax $(37,629) 25,272 36,323
======== ====== ======
</TABLE>
(d) The amortized cost, estimated fair values and gross unrealized gains
(losses) of debt securities, held-to-maturity at December 31, 1999 and 1998,
respectively, are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(in thousands) 1999 1998 1999 1998 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government and
government agencies $ 8,415 12,649 63 463 (58) -- 8,420 13,112
Obligations of states and
political subdivisions 246,844 317,070 4,588 13,712 (4,272) (19) 247,160 330,763
Mortgage-backed securities 16,125 28,661 7 644 (108) (1) 16,024 29,304
-------- ------- ----- ------ ------ --- ------- -------
Total debt securities,
held-to-maturity $271,384 358,380 4,658 14,819 (4,438) (20) 271,604 373,179
======== ======= ===== ====== ====== === ======= =======
</TABLE>
(e) The cost/amortized cost, estimated fair values and gross unrealized gains
(losses) of securities, available-for-sale at December 31, 1999 and 1998,
respectively, are as follows:
<TABLE>
<CAPTION>
Cost/ Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(in thousands) 1999 1998 1999 1998 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government and
government agencies $ 122,263 105,141 735 4,009 (1,954) (10) 121,044 109,140
Obligations of states and
political subdivisions 439,167 397,310 5,714 19,373 (10,543) (209) 434,338 416,474
Corporate securities 493,951 460,425 2,240 18,782 (12,147) (2,177) 484,044 477,030
Asset-backed securities 19,704 34,788 10 519 (727) (183) 18,987 35,124
Mortgage-backed securities 66,082 35,964 113 1,545 (1,822) -- 64,373 37,508
---------- --------- ------- ------- ------- ------ --------- ---------
Debt securities,
available-for-sale 1,141,167 1,033,628 8,812 44,228 (27,193) (2,579) 1,122,786 1,075,276
Equity securities,
available-for-sale 115,626 135,758 141,206 140,001 (4,834) (5,768) 251,998 269,991
---------- --------- ------- ------- ------- ------ --------- ---------
Total securities,
available-for-sale $1,256,793 1,169,386 150,018 184,229 (32,027) (8,347) 1,374,784 1,345,267
========== ========= ======= ======= ======= ====== ========= =========
</TABLE>
45
<PAGE> 45
(f) Realized gains (losses) are as follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt securities, held-to-maturity
Gains $ 102 129 209
Debt securities, available-for-sale
Gains 53 1,086 272
Losses (7,312) (271) (644)
Equity securities, available-for-sale
Gains 43,295 5,513 7,878
Losses (6,761) (8,596) (199)
------- ------ -----
Net realized gains (losses) 29,377 (2,139) 7,516
Real estate loss -- -- (1,495)
------- ------ -----
Net realized gains (losses) $29,377 (2,139) 6,021
======= ====== =====
</TABLE>
(g) The amortized cost and estimated fair value of debt securities at
December 31, 1999, by contractual maturity are shown below. Mortgage-backed
securities are included in the maturity tables using the estimated average life.
Expected maturities may differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
Listed below are debt securities, held-to-maturity:
<TABLE>
<CAPTION>
Amortized Fair
(in thousands) Cost Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 41,811 41,682
Due after one year through five years 186,897 186,246
Due after five years through ten years 37,176 38,173
Due after ten years through fifteen years 5,191 5,087
Due after fifteen years 309 416
-------- -------
Total debt securities, held-to-maturity $271,384 271,604
======== =======
</TABLE>
Listed below are debt securities, available-for-sale:
<TABLE>
<CAPTION>
Amortized Fair
(in thousands) Cost Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 83,534 83,821
Due after one year through five years 468,568 467,266
Due after five years through ten years 496,468 485,043
Due after ten years through fifteen years 92,597 86,656
Due after fifteen years -- --
---------- ---------
Total debt securities, available-for-sale $1,141,167 1,122,786
========== =========
</TABLE>
(h) Certain investments were on deposit with various state regulatory
agencies to comply with insurance laws with carrying values of $12,880,000 and
$13,197,000 as of December 31, 1999 and 1998, respectively.
(i) The Company is not exposed to significant concentrations of credit risk
within the investment portfolio.
(j) The components of comprehensive income, both gross and net of tax, for
1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1999
(in thousands) GROSS TAX NET
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Income $ 63,403 9,686 53,717
Components of other comprehensive income:
Unrealized holding losses during the period (28,616) (10,016) (18,600)
Reclassification adjustment (29,275) (10,246) (19,029)
-------- ------- ------
Other comprehensive income (57,891) (20,262) (37,629)
Comprehensive income $ 5,512 (10,576) 16,088
======== ======= ======
</TABLE>
<TABLE>
<CAPTION>
1998
(in thousands) GROSS TAX NET
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Income $ 63,704 10,134 53,570
Components of other comprehensive income:
Unrealized holding gains during the period 36,612 12,814 23,798
Reclassification adjustment 2,268 794 1,474
-------- ------ ------
Other comprehensive income 38,880 13,608 25,272
Comprehensive income $102,584 23,742 78,842
======== ====== ======
</TABLE>
<TABLE>
<CAPTION>
1997
(in thousands) GROSS TAX NET
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Income $ 91,020 21,412 69,608
Components of other comprehensive income:
Unrealized holding gains during the period 63,188 22,115 41,073
Reclassification adjustment (7,307) (2,557) (4,750)
-------- ------ -------
Other comprehensive income 55,881 19,558 36,323
-------- ------ -------
Comprehensive income $146,901 40,970 105,931
======== ====== =======
</TABLE>
46
<PAGE> 46
Note 5 Indebtedness
(a) CONVERTIBLE SUBORDINATED DEBENTURES
The Debentures were issued under an Indenture dated December 29, 1982,
("Indenture") in the principal amount of $25,000,000, bearing interest at a rate
of 8.75% per annum, which is payable on the unpaid principal semiannually on
January 1 and July 1 in each year to holders of record at the close of business
on the preceding December 15 and June 15. The Debentures are convertible into
common stock at an effective conversion price of $7.08 per share. The principal
amount of the Debentures, including any accrued interest, is due on January 1,
2008.
The Indenture requires the Company to retire, through the operation of a
mandatory sinking fund, 5% of the original $25,000,000 aggregate principal
amount of the debentures on January 1 of each of the years from 1994, to and
including, 2007. Voluntary conversions have satisfied this obligation through
the year 2007.
(b) NOTES PAYABLE
(1) On August 12, 1994, the Company entered into a $54,000,000 note purchase
agreement with various lenders covering the 8.77% Senior Notes. The Company is
required to pay $18,000,000 principal amount in each year commencing on August
1, 2003 and ending on August 1, 2005, inclusive, together with accrued interest
thereon. The unpaid principal amount of the 8.77% Senior Notes accrues interest
and is payable semiannually on February 1 and August 1 of each year, until the
principal is paid in full.
(2) On November 24, 1992, the Company entered into a $50,000,000 note
purchase agreement with various lenders covering the 7.84% Senior Notes. The
Company made its fourth required principal payment of the 7.84% Senior Notes of
$7,143,000 on November 15, 1999. The Company will continue to make the required
principal payment of $7,143,000 per annum through November 15, 2001, inclusive,
together with accrued interest thereon. Any outstanding principal amount of the
7.84% Senior Notes on November 15, 2002, will be payable on that date, including
any accrued interest. The unpaid principal amount of the 7.84% Senior Notes
accrues interest and is payable semiannually on May 15 and November 15 of each
year, until the principal is paid in full.
Both note purchase agreements contain restrictive covenants that limit the
Company's ability to declare dividends or incur additional indebtedness. At
December 31, 1999, the amount available for dividends to stockholders under said
restrictions was $149,115,000.
(c) SHORT-TERM DEBT
The Company has revolving lines of credit amounting to $75,000,000 at
December 31, 1999 and $50,000,000 at December 31, 1998. At December 31, 1999 and
1998, respectively, $51,302,000 and $28,287,000 was outstanding under these
lines. Interest is determined on a LIBOR, prime rate or money market rate basis
at the Company's option. At December 31, 1999 and 1998 there was approximately
$191,870 and $215,078, in accrued interest relating to the outstanding balance
and the weighted average interest rate on these borrowings was 5.7% in both
years. The amount available under these agreements at December 31, 1999 and
1998, was $23,698,000 and $21,713,000, respectively.
Note 6 Reinsurance
In the ordinary course of business, the insurance subsidiaries assume and
cede premiums with other insurance companies and various pools and associations
of which they are members. A large portion of the reinsurance is effected under
reinsurance contracts known as treaties and, in some instances, by negotiation
on each individual risk. In addition, there are excess of loss and catastrophe
reinsurance contracts which protect against losses over stipulated amounts
arising from any one occurrence or event. The reinsurance arrangements provide
greater diversification of business and can serve to limit the maximum net loss
on catastrophes and large and unusually hazardous risks.
The insurance subsidiaries are contingently liable to the extent that any
reinsurer becomes unable to meet its contractual obligations. The Company
reviews the financial condition of its existing reinsurers for any potential
write-offs of uncollectible amounts. At December 31, 1999, the Company had
prepaid reinsurance premiums and net reinsurance recoverables with American
Re-Insurance Company (rated "A++ Superior" by A.M. Best Company, Inc.) and a
state insurance fund that amounted to $76,492,000 and $72,676,000, respectively.
The Company has a $35,000,000 trust fund agreement with American Re-Insurance
Company to secure a portion of the Company's recoverable amounts.
Under the Company's reinsurance arrangements, which are all prospective in
nature, reinsurance premiums ceded are recorded as prepaid reinsurance and
amortized over the remaining contract period in proportion to the insurance
protection provided, and recoveries are recognized as losses are recorded.
The following is a table of assumed and ceded amounts by income statement
caption:
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums written:
Assumed $ 18,774 19,583 19,195
Ceded (79,023) (79,585) (84,759)
Premiums earned:
Assumed 20,943 21,239 20,708
Ceded (78,177) (79,089) (84,384)
Losses incurred:
Assumed 14,661 16,339 10,876
Ceded (129,250) (52,067) (26,995)
Loss expenses incurred:
Assumed 1,629 2,166 2,108
Ceded (5,887) (2,349) (2,490)
</TABLE>
Losses ceded during 1999 increased substantially over 1998 due to an increase
of $47,000,000 in incurred losses ceded to the National Flood Insurance Program
primarily as a result of Hurricane Floyd and $40,000,000 New Jersey Personal
Injury Protection (PIP) claims, an increase of $36,000,000 over the prior year,
ceded to the New Jersey Unsatisfied Claims Judgement Fund for reimbursement to
the Company in accordance with state law. The Company performed a comprehensive
review of New Jersey PIP claims and determined that 27 claims should be
re-classified to "lifetime" benefit status. Adjusting outstanding loss reserves
on these 27 claims to new ultimate projections resulted in the additional loss
reserves.
47
<PAGE> 47
Note 7 Retirement Plans
(a) RETIREMENT SAVINGS PLAN
The Company offers a voluntary defined contribution retirement savings plan
with an added 401(k) feature to employees who meet eligibility requirements. The
plan allows employees to make contributions to a number of diversified
investment options including the Company's common stock, on a before and/or
after-tax basis. During 1999 and 1998, 37,963 and 35,876 shares of the Company's
common stock were issued under this plan, respectively.
The number of shares of the Company's common stock available to be purchased
under the plan was 908,875 at December 31, 1999. Employees can contribute up to
a maximum of 12% of their defined compensation and these contributions, up to a
maximum of 6%, are matched 50% by the Company. The Company's contributions to
the plan amounted to $1,840,000, $1,597,000 and $1,190,000 in 1999, 1998 and
1997, respectively.
(b) RETIREMENT INCOME PLAN
The Company has a noncontributory defined benefit retirement income plan
covering substantially all employees who meet eligibility requirements. The
Company's funding policy provides that payments to the pension trust shall be
equal to the minimum funding requirements of the Employee Retirement Income
Security Act plus additional amounts that may be approved by the Company from
time to time. The Company has made various amendments to the plan in order to
comply with certain Internal Revenue Code changes.
The plan's assets are generally invested in debt and equity securities. The
debt securities are invested 100% in investment grade quality securities. The
reconciliations of the plan are as follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, beginning of year $ 66,979 54,198
Service cost 4,364 3,340
Interest cost 4,225 3,892
Actuarial (gains) losses (10,734) 7,257
Benefits paid (1,759) (1,708)
-------- -------
Benefit obligation, end of year $ 63,075 66,979
======== =======
CHANGE IN FAIR VALUE OF ASSETS:
Fair value of assets, beginning of year $ 53,100 48,379
Actual return on plan assets (net of expenses) (1,531) 5,762
Contributions by the employer -- 650
Benefits paid (1,742) (1,691)
-------- -------
Fair value of assets, end of year $ 49,827 53,100
======== =======
RECONCILIATION OF FUNDED STATUS:
Funded status $(13,248) (13,879)
Unrecognized prior service cost 1,103 1,328
Unrecognized net loss 655 5,545
-------- -------
Net amount recognized $(11,490) (7,006)
======== =======
</TABLE>
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost $ 4,364 3,340 2,792
Interest cost 4,225 3,892 3,427
Expected return on plan assets (4,351) (4,043) (3,316)
Amortization of unrecognized prior service cost 225 237 237
Amortization of unrecognized net loss 38 15 5
------- ----- -----
Net periodic benefit cost $ 4,501 3,441 3,145
======= ===== =====
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31:
Discount rate 7.50% 6.50 7.25
Expected return on plan assets 8.50% 8.50 8.50
Rate of compensation increase 5.00% 4.50 5.00
</TABLE>
All amounts in the reconciliation of funded status were recognized in the
balance sheets for 1999 and 1998. There were no amounts to be included in other
comprehensive income for the periods shown resulting from a change in the
minimum pension liability.
(c) POSTRETIREMENT PLAN
The Company provides life insurance benefits ("postretirement benefits") for
retired employees. Substantially all the Company's employees may become eligible
for these benefits if they reach retirement age while working for the Company
and meet a minimum of ten years of eligibility service. Those who retired prior
to January 1, 1991, receive decreasing life insurance coverage that grades to an
ultimate amount after ten years. Those retiring on or after January 1, 1991,
receive life insurance coverage in an amount equal to 50% of their annual salary
amount in effect at the end of their active career. The estimated cost of these
benefits is accrued over the working lives of those employees expected to
qualify for such benefits as a level percentage of their payroll costs.
The reconciliations of the plan are presented as follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
CHANGE IN POST RETIREMENT OBLIGATION:
Benefit obligation, beginning of year $ 5,315 4,610
Service cost 253 165
Interest cost 337 340
Actuarial (gains) losses (532) 451
Benefits paid (255) (251)
------- ------
Benefit obligation, end of year $ 5,118 5,315
======= ======
RECONCILIATION OF FUNDED STATUS:
Funded status $(5,118) (5,315)
Unrecognized transition obligation 548 594
Unrecognized net (gain) loss (457) 75
------- ------
Net amount recognized $(5,027) (4,646)
======= ======
</TABLE>
48
<PAGE> 48
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
COMPONENTS OF NET POST RETIREMENT COST:
Service cost $253 165 157
Interest cost 337 340 315
Amortization of unrecognized transition obligation 46 46 46
Amortization of unrecognized net gain -- (6) (14)
---- --- ---
Net post retirement cost $636 545 504
==== === ===
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31:
Discount rate 7.50% 6.50 7.25
Rate of compensation increase 5.00% 4.50 5.00
</TABLE>
All amounts in the reconciliation of funded status were recognized in the
balance sheets for 1999 and 1998. There was no unrecognized prior service costs
for 1999 and 1998. There were no amounts to be included in other comprehensive
income for the periods shown.
(d) RETIREMENT PLAN FOR NONEMPLOYEE DIRECTORS
The Company maintained a nonqualified unfunded defined benefit retirement
income plan for nonemployee Directors. The estimated accrued costs for this plan
were not material. The plan was terminated effective December 31, 1997, and as
part of the termination, the present value of each Director's future benefits,
as of this date, was converted into units based on the fair value of Selective
common stock on that date. The cash value of these units will be distributed to
each Director upon retirement, or at each Director's election, over a period of
fifteen years after such retirement. The units will accrue amounts equivalent to
dividends which will also be converted into units based on the fair market value
of Selective common stock on the applicable dividend reinvestment dates.
Note 8 Incentive Compensation Plans
The Company has incentive compensation plans in which all employees are
eligible to participate based on corporate and individual performance goals. The
total compensation costs charged to expense in connection with the plans were
$883,000, $5,217,000 and $8,914,000 in 1999, 1998 and 1997, respectively. The
decrease in incentive compensation for 1999 reflects the absence of a payout in
the insurance companies due to the difficult market conditions experienced
during 1999.
Note 9 Stock Compensation Plans
The Company has adopted the pro forma footnote disclosure-only provisions of
FASB 123. Based on the fair value method consistent with the provisions of FASB
123, the Company's net income and earnings per share would have been reduced to
the following pro forma amounts indicated below:
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
- --------------------------------------------------------------------------------
1999 1998 1997
--------------------------------------
<S> <C> <C> <C>
Net income:
As reported $53,717 53,570 69,608
Pro forma 53,181 52,142 69,142
Basic earnings per share:
As reported 1.98 1.88 2.41
Pro forma 1.96 1.83 2.39
Diluted earnings per share:
As reported 1.87 1.74 2.27
Pro forma 1.85 1.69 2.26
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black Scholes option-pricing model with the following weighted average
assumptions for 1999, 1998 and 1997, respectively: (i) risk free interest rate
of 5.45%, 4.84% and 5.27% for the employee stock purchase plan and 5.40%, 4.76%
and 6.04% for all other option plans; (ii) expected life of six months for the
employee stock purchase plan for all years and eight, five, and five years for
all other option plans for 1999, 1998, and 1997, respectively; (iii) dividend
yield of 3.2%, 2.4% and 2.4%; and (iv) an expected volatility of 26%, 23%, and
21% for the employee stock purchase plan and 22%, 23% and 21% for all other
option plans for 1999, 1998, and 1997, respectively.
The weighted-average fair value of options and stocks granted per share,
during the year for 1999, 1998 and 1997, respectively, is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Stock option plans $ 4.52 4.00 5.15
Restricted stock 18.38 26.41 18.77
Employee stock purchase plan:
Six month option 1.31 1.36 1.29
15% of grant date market value 2.70 3.17 3.23
------ ----- -----
Total 4.01 4.53 4.52
Agents stock purchase plan:
5% of grant date market value .91 1.14 1.18
</TABLE>
49
<PAGE> 49
A summary of the option transactions under the stock option plans is as
follows:
<TABLE>
<CAPTION>
Stock Weighted
appre- average
Number ciation exercise
of shares rights price
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at December 31, 1996 1,820,048 149,768 $14.76
Granted--1997 313,400 -- 23.17
Exercised--1997 (156,636) (6,022) 13.89
Forfeited--1997 (40,122) (35,946) 15.26
--------- ------- ------
Outstanding at December 31, 1997 1,936,690 107,800 16.17
Granted--1998 240,700 -- 19.90
Exercised--1998 (253,176) (3,362) 13.14
Forfeited--1998 (34,562) (60,438) 17.10
--------- ------- ------
Outstanding at December 31, 1998 1,889,652 44,000 17.03
Granted--1999 60,000 -- 18.45
Exercised--1999 (44,660) -- 14.16
Forfeited--1999 (31,710) (8,000) 18.83
--------- ------- ------
Outstanding at December 31, 1999 1,873,282 36,000 $17.11
========= ======= ======
</TABLE>
Options exercisable and their weighted average exercise price at year end are
1,772,082 and $16.78, 1,754,448 and $16.35 and 1,663,290 and $15.05 for 1999,
1998 and 1997, respectively.
The following table summarizes information about stock options outstanding
and exercisable under the stock option plans at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------- ----------------------
Weighted
average Weighted Weighted
Range of remaining average average
exercise Number contractual exercise Number exercise
prices of shares life in years price of shares price
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 5 to 10 90,000 1.5 $ 8.62 90,000 $ 8.62
10 to 15 669,132 4.1 13.77 669,132 13.77
15 to 20 859,000 7.1 18.28 823,000 18.28
20 to 28 255,150 7.8 24.96 189,950 24.81
--------- ---------
$ 5 to 28 1,873,282 5.8 $17.11 1,772,082 $16.78
========= =========
</TABLE>
(a) STOCK OPTION PLAN
Under the Company's original stock option plan, 36,000 shares of the
Company's common stock are reserved for issuance, upon exercise of stock options
outstanding at December 31, 1999. This plan permitted the granting of qualified
and nonqualified stock options to key employees, which may or may not have SARs
attached. Options and related SARs were granted at not less than fair value on
the date of the grant, are required to be exercised within ten years from the
date of the grant and are exercisable immediately upon the grant. This plan
expired in August 1992 and was replaced with the Company's stock option plan II.
Compensation expense, based on the increase or decrease in the fair value of
the Company's common stock, is charged or (credited) to other expense in
recognition of the SARs attached to the granted options. Such amounts were
$(194,750), $(1,481,000) and $485,000 in 1999, 1998 and 1997, respectively.
(b) STOCK OPTION PLAN II
Under the Company's stock option plan II, 2,946,658 shares of the Company's
common stock are available for issuance at December 31, 1999. The plan permits
the granting of qualified and nonqualified stock options to employees, which may
or may not have SARs attached. Options and related SARs may be granted at not
less than fair value on the date of the grant and may be subject to certain
vesting periods as determined by the Company's Salary and Employee Benefits
Committee ("Committee"). Each grant must be exercised within ten years from the
date of the grant. Under this plan, the Company granted options of 24,000,
207,700 and 277,400 for 1999, 1998 and 1997, respectively.
Under the Company's stock option plan II, the Committee may, at its
discretion, make restricted or unrestricted grants of common stock, or grant
rights to receive common stock, to employees in addition to or in substitution
for options and/or SARs granted. The Company granted a total of 230,328, 157,356
and 198,550 restricted shares for 1999, 1998 and 1997, respectively, and 23,293,
27,295 and 41,400 shares were forfeited in 1999, 1998 and 1997, respectively.
Each such grant must be expressly subject to the attainment of one or more
performance-related objectives for certain executive officers, and may be
subject to the attainment of one or more performance-related objectives for
other employees, as determined by the Committee and set forth in an award
agreement. Each such grant also is subject to a vesting period or other terms,
conditions, restrictions and limitations as determined by the Committee at its
discretion and set forth in an award agreement.
During the vesting period, dividends are earned and held in escrow on the
restricted shares subject to the same vesting period and conditions as set forth
in the award agreement. Effective September 3, 1996, dividends earned on the
restricted shares are rein vested in the Company's common stock at fair value.
The Company issued through the dividend reinvestment feature (net of
forfeitures), 17,118, 12,870 and 8,825 restricted shares in 1999, 1998 and 1997,
respectively, from the dividend reinvestment plan reserves.
50
<PAGE> 50
Deferred compensation expense is recognized for the fair value of the
restricted shares when granted and is adjusted for the increases or decreases in
the fair value of the Company's common stock for share awards subject to
performance-related objectives and is amortized ratably over the vesting period.
The unamortized amount is accounted for as a reduction of stockholders' equity.
At December 31, 1999, 1998 and 1997, respectively, deferred compensation of
$6,246,000, $5,613,000 and $6,239,000 was recorded as a reduction of
stockholders' equity and the amounts amortized to expense in 1999, 1998 and
1997, respectively, were $2,785,000, $1,593,000 and $2,733,000.
(c) EMPLOYEE STOCK PURCHASE PLAN
Under the terms of the employee stock purchase plan, the number of shares of
common stock available to be purchased is 614,740. This plan is available to all
employees who meet the eligibility requirements and provides for the issuance of
options to purchase shares of common stock. The purchase price is the lower of:
(i) 85% of the closing market price at the time the option is granted or (ii)
85% of the closing price at the time the option is exercised. The Company issued
87,026 shares, 74,613 shares and 49,897 shares in 1999, 1998 and 1997,
respectively, to employees and charged to expense $235,000, $235,000 and
$365,000 in 1999, 1998 and 1997, respectively.
(d) STOCK UNIT AWARDS
Beginning in 1998, certain officers of the Company were granted phantom stock
units in lieu of grants of restricted stock. The total number of phantom stock
units awarded in 1999 and 1998 was 6,000 and 23,000, respectively. The value of
the phantom stock units is being charged to expense over the estimated remaining
employment period. The value of the phantom stock units will be paid in cash
upon retirement.
(e) STOCK OPTION PLAN FOR DIRECTORS
Under the Company's stock option plan for directors, 367,000 shares of the
Company's common stock are available for issuance. Each director who is not a
full-time employee of the Company participates in the plan and automatically
receives a nonqualified option to purchase 3,000 shares of common stock at not
less than fair value on March 1 of each year. Each option becomes exercisable
one year after the option was granted and expires no more than ten years from
the date the option is granted. Under this plan, the Company granted options of
36,000, 33,000 and 36,000 for 1999, 1998 and 1997, respectively.
(f) STOCK COMPENSATION PLAN FOR NONEMPLOYEE DIRECTORS
In May 1996, the shareholders approved the stock compensation plan for
nonemployee directors, effective January 1, 1997. The purpose of this plan is to
provide for the payment of the annual compensation for the directors' services
in shares of the Company's common stock. The amount of common shares available
for issuance under the plan is 370,769. The Company issued 10,127 shares, 7,872
shares and 11,232 shares during 1999, 1998 and 1997, respectively and charged to
expense $438,000, $243,000 and $290,000, respectively.
(g) AGENT STOCK PURCHASE PLAN
Under the terms of the agents' stock purchase plan, the number of shares of
common stock available to be purchased is 944,589. This plan provides for four
quarterly offerings in which independent insurance agents can purchase the
Company's common stock at a 5% discount. The Company issued 59,285 shares,
85,672 shares and 84,996 shares in 1999, 1998 and 1997, respectively, to agents
and charged to expense $54,000, $98,000 and $100,000 in 1999, 1998 and 1997,
respectively.
Note 10 Stockholders' Equity
The Company maintains a dividend reinvestment plan, under which 262,419
shares of common stock are available for issuance. Shares purchased under this
plan are issued at fair value.
Under a common stock repurchase program authorized by the Board of Directors
on July 29, 1996 and extended on July 28, 1998, May 7, 1999, November 2, 1999
and February 3, 2000, the Company can repurchase up to 8,000,000 shares. In
1999, 1998 and 1997, the Company acquired 2,505,000 shares, 1,774,000 shares and
336,000 shares, respectively, at a total cost of $45,716,000, $37,750,000 and
$8,498,000, respectively. The total amounts of stock repurchased under this
program since July 29, 1996 through December 31, 1999 is 4,872,000 shares at a
total cost of $96,253,000.
Shares repurchased in conjunction with restricted stock vestings and option
exercises are 9,000, 21,000 and 28,000 for 1999, 1998 and 1997, respectively at
a total cost of $169,000, $455,000 and $607,000, respectively.
Selective's ability to declare and pay dividends on common stock is affected
by the ability of its insurance subsidiaries to declare and pay dividends to
Selective under the regulatory limitations of the states in which the insurance
subsidiaries are domiciled. All of the jurisdictions in which the insurance
subsidiaries are domiciled, including New Jersey, New York, North Carolina and
South Carolina regulate the payment of dividends.
In all such jurisdictions, domestic insurers are prohibited from paying
"extraordinary dividends" without approval of the insurance commissioner of the
relevant state. In addition to the regulation of extraordinary dividends, New
Jersey and South Carolina require notice to the relevant state regulatory
authorities of the declaration of both ordinary and extraordinary dividends and
distributions. During the notice period, the relevant state regulatory authority
may disallow all or part of the proposed dividend if it determines that the
insurer's surplus, with regard to policyholders, is not reasonable in relation
to the insurer's outstanding liabilities and adequate to its financial needs or,
in the case of New Jersey, if the regulatory authority determines that the
insurer is otherwise in a hazardous financial condition.
51
<PAGE> 51
Based on the 1999 statutory financial statements, the maximum dividends that
can ultimately be paid to Selective in 2000 by Selective Insurance Company of
America, Selective Way Insurance Company, Selective Insurance Company of the
Southeast, Selective Insurance Company of South Carolina and Selective Insurance
Company of New York are $26,314,000, $12,416,000, $3,870,000, $4,810,000 and
$3,639,000, respectively. The statutory capital and surplus of the insurance
subsidiaries in excess of these ordinary dividend amounts must remain within the
insurance subsidiaries in the absence of the approval of a request for an
extraordinary dividend.
The National Association of Insurance Commissioners ("NAIC") has risk-based
capital ("RBC") requirements that require insurance companies to calculate and
report information under a risk-based formula, which measures statutory capital
and surplus needs based on a regulatory definition of risk in a company's mix
of products and its balance sheet. At December 31, 1999 and 1998, all the
Companies have an amount above the authorized control level RBC, as defined by
the NAIC.
Note 11 Preferred Share Purchase Rights Plan
On February 2, 1999, Selective's Board of Directors approved the amended and
restated stockholder rights plan. The rights to purchase one two-hundredth of a
share of Selective Series A Junior Preferred Stock at an exercise price of $80
are attached to all shares of Selective common stock and are exercisable ten
days after an announcement that a person or group has acquired 15% or more of
the common stock (Acquiring Person) or ten business days after a person
commences or announces its intent to make a tender offer which would result in
their acquiring 15% or more of the common stock (Acquiring Person). If a person
or group becomes an Acquiring Person, each right will entitle the holder, other
than the Acquiring Person, to purchase the number of Selective common shares
having a market value of two times the exercise price of $80.
If Selective is acquired in a merger, or 50% or more of its assets are sold,
each right other than the rights of an Acquiring Person, will be exercisable to
purchase shares of the acquiring company having twice the market value of the
$80 exercise price.
Before an Acquiring Person acquires 50% or more of the common shares,
Selective's Board may exchange rights, other than the rights of an Acquiring
Person, at an exchange ratio of one share of common stock per right. The rights
expire February 2, 2009, unless Selective's Board redeems them at $.01 per right
before a person or group triggers the plan or unless Selective's Board exchanges
them for common stock.
Note 12 Reconciliation of Statutory To Generally Accepted Accounting Principles
Financial Statements
(a) The following is a reconciliation of the differences between the
Statutory Financial Statements and the Generally Accepted Accounting Principles
("GAAP") Financial Statements:
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Combined insurance subsidiaries --
statutory basis net income $61,686 50,223 70,652
Deferred policy acquisition costs (679) 11,664 14,960
Deferred Federal income taxes 2,076 (422) (4,689)
Net gains (losses) of subsidiaries 2,790 (304) (1,474)
Other, net (4,390) (2,234) (1,452)
------- ------ ------
Combined subsidiaries -- GAAP basis 61,483 58,927 77,997
Selective Insurance Group, Inc., net
of intercompany equity eliminations (7,766) (5,357) (8,389)
------- ------ ------
Consolidated financial statement --
GAAP basis net income $53,717 53,570 69,608
======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
(in thousands) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Combined insurance subsidiaries --
statutory surplus $ 515,624 509,513
Deferred policy acquisition costs 109,095 109,774
Deferred Federal income taxes 13,131 (7,007)
Loss reserves (1,080) 1,426
Net unrealized (losses) gains --
debt securities, available-for-sale (18,381) 41,649
Nonadmitted assets 28,648 23,252
Net assets acquired 37,585 6,601
Other, net 15,710 (14,901)
--------- -------
Combined subsidiaries -- GAAP basis 700,332 670,307
Selective Insurance Group, Inc., net
of intercompany equity eliminations (130,368) (62,724)
--------- -------
Consolidated financial statement --
GAAP basis stockholders' equity $ 569,964 607,583
========= =======
</TABLE>
(b) The insurance subsidiaries prepare their statutory financial statements
in accordance with accounting practices prescribed or permitted by the various
states of domicile. Prescribed statutory accounting practices include state
laws, regulations and general administrative rules, as well as a variety of
publications of the NAIC. Permitted statutory accounting practices encompass all
accounting practices that are not prescribed; such practices differ from state
to state, may differ from company to company within a state and may change in
the future. The insurance subsidiaries do not utilize any permitted statutory
accounting practices that materially affect the determination of statutory
surplus or risk-based capital. Furthermore, the NAIC had a project to codify
statutory accounting practices, which becomes effective for reporting periods
beginning after January 1, 2001, and is expected to constitute the principal
source of "prescribed" statutory accounting practices.
52
<PAGE> 52
Note 13 Earnings per Share
The following table provides a reconciliation of the numerators and
denominators of the basic and diluted EPS computations of net income for the
year ended:
<TABLE>
<CAPTION>
(in thousands, Income Shares Per Share
except per share amounts) (Numerator) (Denominator) Amount
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
1999
BASIC EPS
Net Income available to common stockholders $53,717 27,081 $1.98
=====
EFFECT OF DILUTIVE SECURITIES
Restricted stock -- 683
8.75% convertible subordinated debentures 355 873
Stock options (127) 240
------- ------
DILUTED EPS
Income available to common stockholders +
assumed conversions $53,945 28,877 $1.87
======= ====== =====
- ----------------------------------------------------------------------------------------
1998
BASIC EPS
Net Income available to common stockholders $53,570 28,480 $1.88
=====
EFFECT OF DILUTIVE SECURITIES
Restricted stock -- 534
8.75% convertible subordinated debentures 375 926
Stock options (989) 472
------- ------
DILUTED EPS
Income available to common stockholders +
assumed conversions $52,956 30,412 $1.74
======= ====== =====
- ----------------------------------------------------------------------------------------
1997
BASIC EPS
Net Income available to common stockholders $69,608 28,909 $2.41
=====
EFFECT OF DILUTIVE SECURITIES
Restricted stock -- 404
8.75% convertible subordinated debentures 396 971
Stock options 263 641
------- ------
DILUTED EPS
Income available to common stockholders +
assumed conversions $70,267 30,925 $2.27
======= ====== =====
</TABLE>
Note 14 Liability For Unpaid Claims And Claim Adjustment Expenses
The table below provides a roll-forward of reserves for losses and loss
expenses for beginning and ending reserve balances:
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross reserves for losses and loss expenses
at beginning of year $ 1,193,274 1,161,169 1,189,793
Less reinsurance recoverable on unpaid losses
and loss expenses at beginning of year 140,453 124,197 150,208
----------- --------- ---------
Net reserves for losses and loss expenses at
beginning of year 1,052,821 1,036,972 1,039,585
Provision for losses and loss expenses for
claims occurring in the current year 600,793 510,319 471,337
Decrease in estimated losses and loss expenses
for claims occurring in prior years (8,578) (2,519) (10,124)
----------- --------- ---------
1,645,036 1,544,772 1,500,798
----------- --------- ---------
Net losses and loss expenses paid for claims
occurring during:
Current year 233,842 178,286 160,241
Prior years 328,115 313,665 303,585
----------- --------- ---------
561,957 491,951 463,826
----------- --------- ---------
Net reserves for losses and loss expenses
at end of year 1,083,079 1,052,821 1,036,972
Reinsurance recoverable on unpaid losses and
loss expenses at end of year 192,044 140,453 124,197
----------- --------- ---------
Gross reserves for losses and loss expenses
at end of year $ 1,275,123 1,193,274 1,161,169
=========== ========= =========
</TABLE>
53
<PAGE> 53
Note 15 Segment Information
The Company is primarily engaged in writing property and casualty insurance.
The Company has classified its business into three segments which are Insurance
Operations (commercial lines underwriting, personal lines underwriting),
Investments, and Diversified Insurance Services (formerly called Fee-For-Service
Operations). The insurance segments are evaluated based on their GAAP
underwriting results, and the diversified insurance operations are evaluated
based on results of operations in accordance with Generally Accepted Accounting
Principals ("GAAP").
The underwriting results of the Insurance Operations segment are determined
taking into account net premiums earned, incurred losses and loss expenses,
policy acquisition costs and other underwriting expenses and policyholders
dividends. Similarly, management of the investment portfolio is separate from
the insurance underwriting segment and, therefore, has been classified as a
segment. The Diversified Insurance Services business is managed independently
from the other segments and, therefore, has been classified separately. The
Diversified Insurance Services segment consists of medical managed care
operations, professional employer organizational services, preferred provider
organizational operations, software development and program administration
services and the flood business managed by the Company for the National Flood
Insurance Program. The segments' results are determined taking into account the
net revenues generated in each of the businesses, less the costs of operation.
In computing the results of each segment, no adjustment is made for interest
expense, net general corporate expenses or federal income taxes. The Company
does not maintain separate investment portfolios for the segments and,
therefore, does not allocate assets to the segments.
The following summaries present revenues (net investment income and net
realized gains (losses) in the case of the investments segment) and pre-tax
income for the individual segments:
Revenue by segment
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Insurance Operations:
Commercial lines net premiums earned $570,650 506,020 465,826
Personal lines net premiums earned 228,415 216,972 210,442
-------- ------- -------
Total insurance operations 799,065 722,992 676,268
Investments:
Net investment income 96,531 99,196 100,530
Net realized gains (losses) on investments 29,377 (2,139) 6,021
-------- ------- -------
Total investments 125,908 97,057 106,551
Diversified Insurance Services 46,653 14,100 8,236
-------- ------- -------
Total all segments $971,627 834,149 791,055
======== ======= =======
</TABLE>
Income or (loss) before Federal income tax by segment
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
<S> <C> <C> <C>
Insurance Operations:
Commercial lines underwriting $ (47,625) (32,871) (13,305)
Personal lines underwriting (6,522) 7,885 10,283
--------- ------ ------
Total insurance operations (54,147) (24,986) (3,022)
Investments:
Net investment income 96,531 99,196 100,530
Net realized gains (losses) on investments 29,377 (2,139) 6,021
--------- ------ ------
Total investments 125,908 97,057 106,551
Diversified Insurance Services 4,772 2,217 765
--------- ------ ------
Total all segments 76,533 74,288 104,294
Interest expense (9,460) (9,409) (9,592)
General corporate expenses (3,670) (1,175) (3,682)
--------- ------ ------
Income before Federal income tax $ 63,403 63,704 91,020
========= ====== ======
</TABLE>
Note 16 Related Party Transactions
Certain officers of Selective exercised stock options by giving Selective
promissory notes ($992,000) in payment for the stock purchased. The Company's
noninterest bearing notes are secured by shares of the Company's common stock.
The promissory notes are full recourse and subject to certain employment
requirements. At December 31, 1999, the outstanding principal amount was
$485,000.
In August 1998, certain officers of Selective purchased stock on the open
market with proceeds advanced by the Company. These officers gave Selective
promissory notes ($1,773,000). The notes bear interest at 2.5% and are secured
by the purchased shares of Selective's common stock. The promissory notes are
full recourse and subject to certain employment requirements. At December 31,
1999, the principal amount outstanding was $1,590,000.
54
<PAGE> 54
Note 17 Commitments and Contingencies
(a) Reserves established for liability insurance continue to reflect exposure
to environmental claims, both asbestos and non-asbestos. These claims have
arisen primarily under older policies containing exclusions for environmental
liability which certain courts, in interpreting such exclusions, have determined
do not bar such claims. The emergence of these claims is slow and highly
unpredictable. Since 1986, policies issued by the insurance subsidiaries have
contained a more expansive exclusion for losses related to environmental claims.
There are significant uncertainties in estimating the Company's exposure to
environmental claims (for both cases and IBNR reserves) resulting from lack of
historical data, long reporting delays, uncertainty as to the number and
identity of claimants and complex legal and coverage issues. Legal issues which
arise in environmental cases include the determination of whether a case is one
for a federal or state forum, choice of law, causation, admissibility of
evidence, allocation of damages and contribution among joint defendants,
successor and predecessor liability and whether direct action against insurers
can be maintained. Coverage issues which arise in environmental cases include
the interpretation and application of policy exclusions, the determination and
calculation of policy limits, the determination of the ultimate amount of a
loss, the extent to which a loss is covered by a policy, if at all, the
obligation of an insurer to defend a claim and the extent to which a party can
prove the existence of coverage. Courts have reached different and sometimes
inconsistent conclusions on these legal and coverage issues. The Company does
not discount to present value that portion of its loss reserves expected to be
paid in future periods.
At December 31, 1999, the Company established a range of reasonably possible
losses for known environmental exposures of approximately $12,000,000 to
$47,000,000 on a gross basis, and $10,000,000 to $41,000,000, on a net basis. At
December 31, 1999, the Company's reserves for environmental claims amounted to
$54,304,000 on a gross basis (including IBNR reserves of $23,663,000) and
$48,504,000 (including IBNR reserves of $21,863,000) on a net basis. The
Company's case reserves for known environmental claims, excluding IBNR, were
$30,641,000 on a gross basis and $26,641,000 on a net basis in connection with
2,114 claims, including multiple claimants who are associated with the same site
or incident. These claims involved about 1,424 lawsuits. Of the 2,114 total
environmental claims, 1,700 claims are asbestos related, of which 1,119 involve
only two insureds. One such insured manufactured asbestos-containing products,
while the other supplied asbestos-containing products. The reserve associated
with these two insureds amounted to $2,517,000 on a gross basis and $1,917,000
on a net basis. About 83 of the total environmental claims involve approximately
20 landfills. The landfill sites account for reserves of approximately
$13,664,000 on a gross basis and $13,464,000 on a net basis. The remaining
claims, which represent about $14,460,000 on a gross basis and $11,260,000 on a
net basis, involve leaking underground storage tanks, air pollution, as well as
other asbestos claims. Litigation costs associated with environmental claims
have been significant, particularly for landfill claims.
While the number of asbestos type claims has been increasing, these claims
represent only 9% of the company's total environmental exposure as of December
31, 1999. The Company has also experienced a shift in its non-asbestos
environmental exposure. The number of traditional environmental claims, such as
landfill and leaking underground storage tank claims, has remained constant or
in some cases has decreased, while the number of short-tail exposure claims such
as oil truck spills and Exterior Insulation Finishing System ("EIFS") have
increased. These claims tend to have lower litigation costs and generally can be
settled in a shorter time frame than traditional environmental claims.
IBNR reserve estimation is often difficult because, in addition to other
factors, there are significant uncertainties associated with critical
assumptions in the estimation process such as average clean-up costs,
third-party costs, potentially responsible party shares, allocation of damages,
insurer litigation costs, insurer coverage defenses and potential changes to
state and federal statutes. Moreover, normal historically-based actuarial
approaches do not apply because relevant history is not available. In addition,
while models can be applied, such models can produce significantly different
results with small changes in assumptions.
The Company has established a range of reasonably possible IBNR losses for
non-environmental net claims at December 31, 1999, of approximately $424,000,000
to $531,000,000 and at December 31, 1998, of approximately $438,000,000 to
$542,000,000. For each major product line of business, incurred and/or paid loss
and loss expense projections were calculated using standard actuarial techniques
on both an optimistic and pessimistic basis to construct an IBNR range for that
product line. The overall range for non-environmental IBNR was selected based on
statistical combinations of the ranges of the individual product lines. The
Company's net IBNR reserves for non-environmental claims were $493,000,000 and
$500,000,000 at December 31, 1999, and 1998, respectively.
Based on the Company's aggregate reserve for net losses and loss expenses at
December 31, 1999, the Company does not expect that liabilities associated with
environmental and non-environmental claims will have a materially adverse impact
on its future liquidity, financial position and results of operations. However,
given the complexity of coverage and other legal issues, and the significant
assumptions used in estimating such exposures, actual results could
significantly differ from the Company's current estimates.
The table on page 50 provides a roll-forward of the Company's gross and net
environmental incurred losses and loss expenses and related reserves thereon.
The total environmental claims net incurred losses and loss expenses for 1999
increased slightly when compared to 1998. The total environmental claims net
incurred losses and loss expenses for 1998 increased by $1 million when compared
to 1997. The increase was due to the greater number of new asbestos and
non-asbestos related claims received during 1998.
55
<PAGE> 55
The following table provides a roll-forward of the Company's gross and net
environmental incurred losses and loss expenses and related reserves thereon:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
(in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
Gross Net Gross Net Gross Net
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASBESTOS
Environmental reserves (including IBNR)
for losses and loss expenses at the
beginning of year $ 8,249 4,406 8,277 4,384 9,982 5,873
Incurred losses and loss expenses 33 33 219 269 (1,449) (1,233)
Less losses and loss expenses paid (182) (182) (247) (247) (256) (256)
------- ------ ------ ------ ------ ------
Environmental reserves (including IBNR)
for losses and loss expenses at the
end of year $ 8,100 4,257 8,249 4,406 8,277 4,384
======= ====== ====== ====== ====== ======
NON-ASBESTOS
Environmental reserves (including IBNR)
for losses and loss expenses at the
beginning of year $45,879 43,922 46,458 44,851 53,421 44,530
Incurred losses and loss expenses 5,711 5,711 5,119 4,769 (887) 5,238
Less losses and loss expenses paid (5,386) (5,386) (5,698) (5,698) (6,076) (4,917)
------- ------ ------ ------ ------ ------
Environmental reserves (including IBNR)
for losses and loss expenses at the
end of year $46,204 44,247 45,879 43,922 46,458 44,851
======= ====== ====== ====== ====== ======
TOTAL ENVIRONMENTAL CLAIMS
Environmental reserves (including IBNR)
for losses and loss expenses at the
beginning of year $54,128 48,328 54,735 49,235 63,403 50,403
Incurred losses and loss expenses 5,744 5,744 5,338 5,038 (2,336) 4,005
Less losses and loss expenses paid (5,568) (5,568) (5,945) (5,945) (6,332) (5,173)
------- ------ ------ ------ ------ ------
Environmental reserves (including IBNR)
for losses and loss expenses at the
end of year $54,304 48,504 54,128 48,328 54,735 49,235
======= ====== ====== ====== ====== ======
</TABLE>
(b) The Company purchases annuities from life insurance companies to fulfill
obligations under claim settlements which provide for periodic future payments
to claimants. As of December 31, 1999, the Company had purchased such annuities
in the amount of $10,765,000 for settlement of claims on a structured basis for
which the Company is contingently liable. To the Company's knowledge, none of
the issuers of such annuities have defaulted in its obligations thereunder.
(c) The Company has not experienced any significant year 2000 problems to
date and management does not expect any significant problems that would impair
operations. However, due to the magnitude and complexity of the year 2000 issue,
even the most conscientious efforts cannot guarantee that every problem was
found and corrected.
The Company has communicated to agents and policyholders that it will not
cover Y2K losses, with the possible exception of certain losses involving
property damage or bodily injury which cannot be quantified at this time. The
Company is using the Insurance Services Office Y2K exclusionary endorsements on
most new and renewal commercial lines policies. In addition, the Company's
casualty excess of loss treaty was amended, effective July 1, 1998, to include
as covered losses all Y2K losses aggregated as a single event, with protection
totaling $38 million in excess of a $12 million retention. The coverage protects
against any Y2K claim which is asserted in the 36 month period beginning on
July 1, 1998.
(d) The Company has various operating leases for office space and equipment.
Such lease agreements, which expire at various times, are generally renewed or
replaced by similar leases. Rental expense under these leases amounted to
$7,933,000, $5,979,000 and $4,772,000 for the years ended December 31, 1999,
1998 and 1997, respectively.
In addition, certain leases for rented premises and equipment are
noncancelable, and liability for payment will continue even though the space or
equipment may no longer be in use. At December 31, 1999, the total future
minimum rental commitments under noncancelable leases was $15,603,000 and such
yearly amounts are as follows:
<TABLE>
<CAPTION>
(in thousands)
- --------------------------------------------------------------------------------
<S> <C>
2000 $ 6,966
2001 4,671
2002 2,873
2003 737
2004 356
After 2004 --
-------
Total minimum payment required $15,603
=======
</TABLE>
56
<PAGE> 56
Note 18 Acquisition of Wholly-Owned Subsidiaries
On July 27, 1999, the Company acquired all of the net assets of Consumer
Health Network Plus, LLC (formerly Consumer Health Network, Inc.), a nationally
accredited preferred provider organization, for cash of $6,010,000 including the
related acquisition costs. The acquisition has been accounted for using the
purchase method of accounting, and included $4,633,710 of goodwill which is
being amortized on a straight-line basis over 15 years. The amount of goodwill
amortization for 1999 was $130,000.
On July 21, 1999, the Company acquired all of the outstanding shares of
Selective HR Solutions, Inc. (formerly Modern Employers, Inc.), a professional
employer organization, for cash of $29,266,000 of which $5,816,000 was payable
at December 31, 1999. The related acquisition costs associated with the
acquisition totaled $692,000. The purchase agreement provides for future
consideration up to $734,000 if certain financial criteria are met over the next
year. As this consideration is incurred, it will be recorded as an increase in
goodwill and amortized over the remaining life of the asset. The acquisition has
been accounted for using the purchase method of accounting, and included
approximately $28,693,000 of goodwill which is being amortized on a
straight-line basis over 20 years. The amount of goodwill amortization for 1999
was $476,605.
On December 8, 1998, the Company acquired all of the outstanding shares of
PDA Software Services, Inc. (formerly, PDA, Inc.), a software developer which
specializes in the insurance industry, for 311,673 shares of the Company's
common stock valued at $6,644,000 including related acquisition costs. The
acquisition has been accounted for using the purchase method of accounting and
included approximately $4,805,000 of goodwill, which is being amortized on a
straight-line basis over 24 years. The amount of goodwill amortization for 1999
was $200,000.
On November 14, 1997, the Company acquired all of the net assets of Alta
Services LLC (formerly MCSI/MRSI), a non-risk bearing managed care company, for
cash of approximately $8,291,000 including the related acquisition costs. The
purchase agreement provides for future contingent consideration of up to
$10,000,000 if certain growth and profitability objectives are achieved through
the year 2001. If these objectives are met, the additional consideration will be
recorded as an increase in goodwill and amortized over the remaining life of the
asset. The acquisition has been accounted for using the purchase method of
accounting and included approximately $8,060,000 of goodwill, which is being
amortized on a straight-line basis over nine years. The amount of goodwill
amortization for 1999, 1998, and 1997 was $878,880, $878,880 and $150,000,
respectively.
The operating results of all of the above acquisitions have been included in
the consolidated statement of income from their respective date of acquisition.
On the basis of a pro forma consolidation of the results of operations as if the
acquisitions had taken place at the beginning of 1999, 1998, or 1997 rather than
their respective acquisition dates, there would not have been a materially
different result from the reported amounts in either of the 1999, 1998 or 1997
reporting years. Additionally, such pro forma amounts would not necessarily be
indicative of what the actual consolidated results of operations might have been
if the acquisition had been effective at the beginning of 1999, 1998 or 1997.
Note 19 Federal Income Tax
(a) A reconciliation of Federal income tax on pretax earnings at the
corporate rate to the effective tax rate is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate tax rate 35.0% 35.0 35.0
Tax-exempt interest (16.5) (15.8) (10.9)
Dividends received deduction (3.4) (3.5) (1.5)
Other .2 .2 .9
---- ---- ----
Effective tax rate 15.3% 15.9 23.5
==== ==== ====
</TABLE>
(b) The tax effects of the significant temporary differences that give rise
to deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Deferred policy acquisition costs $ 38,183 38,421
Unrealized gains on securities, available-for-sale 41,297 61,558
Accelerated depreciation 4,449 3,562
Other 5,435 4,664
-------- ------
Total deferred tax liabilities 89,364 108,205
Deferred tax assets:
Net loss reserve discounting 65,220 64,956
Net unearned premiums 26,675 25,792
Self-insured employee benefit reserves 2,085 1,954
Pension 3,572 2,838
Other 7,391 5,989
-------- ------
Total deferred tax assets 104,943 101,529
Valuation allowance recognized for deferred tax assets 550 550
-------- ------
Deferred Federal Income Tax $ 16,129 (7,226)
======== ======
</TABLE>
57
<PAGE> 57
Note 20 Fair Values of Financial Instruments
The following table presents the carrying amounts which are included in the
consolidated balance sheets and estimated fair values of the Company's financial
instruments as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---------------------- ---------------------
Carrying Fair Carrying Fair
(in thousands) Amount Value amount Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Debt securities:
Held-to-maturity $ 271,384 271,604 358,380 373,179
Available-for-sale 1,122,786 1,122,786 1,075,276 1,075,276
Equity securities 251,998 251,998 269,991 269,991
Other investments 64,770 64,770 66,992 66,992
Financial liabilities:
8.77% Senior Notes 54,000 55,322 54,000 60,666
7.84% Senior Notes 21,428 21,388 28,572 30,257
---------- --------- --------- ---------
Notes payable 75,428 76,710 82,572 90,923
Debentures 6,157 14,908 6,219 17,942
</TABLE>
Note 21 Supplemental Cash Flow Information
The Company's non-cash investing and financing activities were as follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-cash investing activity:
Acquisitions:
Fair value of assets acquired 44,571 12,546 10,612
Cash paid or stock issued (30,152) (6,601) (8,291)
------- ------ ------
Liabilities assumed 14,419 5,945 2,321
Non-cash financing activity:
Conversion of convertible
subordinated debentures 62 626 67
</TABLE>
58
<PAGE> 58
QUARTERLY FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
(unaudited, in thousands, --------------------------------------------------------------------------------------------
except per share data) 1999 1998 1999 1998 1999 1998 1999 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Net premiums written $ 207,725 188,464 215,059 196,636 211,166 196,447 177,727 167,326
Net premiums earned 193,028 172,556 196,454 177,552 199,663 186,388 209,921 186,496
Net investment income earned 23,473 25,108 23,455 24,080 23,756 23,604 25,847 26,404
Net realized gains (losses) 8,597 1,081 23,604 1,798 (1,160) (91) (1,664) (4,927)
Diversified insurance services
revenue 8,882 3,010 7,613 3,271 14,592 3,967 15,566 3,852
Diversified insurance services
net income 397 157 242 528 1,611 413 706 330
Operating income (1,2,3) 8,435 15,253 12,272 12,442 2,690 12,991 11,225 14,275
Net income (2,3) 14,023 15,956 27,615 13,610 1,935 12,932 10,144 11,072
Other comprehensive income (loss) (10,592) 15,032 (22,365) (195) (12,920) (7,207) 8,248 17,642
------- ------ ------- ---- ------- ------ ----- ------
Comprehensive income (loss) 3,431 30,988 5,250 13,415 (10,985) 5,725 18,392 28,714
NET INCOME PER SHARE:
Basic (2,3) .50 .55 1.00 .47 .07 .46 .38 .40
Diluted (2,3) .48 .50 .95 .44 .07 .43 .36 .38
Dividends to stockholders (4) .14 .14 .15 .14 .15 .14 .15 .14
PRICE RANGE OF COMMON STOCK: (5)
High 21 3/4 28 5/8 21 1/2 29 1/4 22 1/2 23 15/16 19 5/8 23
Low 17 1/2 23 3/4 17 5/8 22 3/8 17 1/4 17 7/16 16 1/2 16 11/16
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1.) Refer to the Glossary of Insurance Terms on page 60 of this report on Form
10-K for definitions of specific terms.
(2.) Operating and net income for the first quarter of 1999 were reduced by $2.8
million, after reinsurance and taxes, due to higher losses incurred from
unusual property damages and numerous winter storms.
(3.) Operating and net income for the third quarter of 1999 were reduced by $9.0
million, after reinsurance and taxes, due to higher losses incurred from
weather related storms.
(4.) See note 5(b)(2) and note 10 to the consolidated financial statements and
Financial Review for a discussion of dividend restrictions.
(5.) These ranges of high and low prices of the Company's common stock, as
reported by The Nasdaq National Market, represent actual transactions. All
price quotations do not include retail markups, markdowns and commissions.
The range of high and low prices for common stock for the period beginning
January 1, 1999, and ending February 29, 2000, was $14 5/8 to $22 1/2 and
the last sale price on February 29, 2000, was $15 7/16.
59
<PAGE> 59
GLOSSARY OF INSURANCE TERMS
AGENT (INDEPENDENT INSURANCE AGENT) -- an insurance consultant who recommends
and markets insurance to individuals and businesses; usually represents several
insurance companies. Insurance companies pay agents commission.
ALTERNATIVE MARKET -- any risk transfer mechanism where the customer assumes
some or all financial responsibility for an insurable exposure.
CATASTROPHE LOSS -- a severe loss, usually involving many risks from one
occurrence such as fire, hurricane, earthquake, windstorm, explosion and other
similar events.
DIVERSIFIED INSURANCE SERVICES -- a strategic combination of various
inter-related services that are closely associated with the insurance business
and will allow for the Company as a whole to bring an integrated business
solution to our customers by offering a broader array of products and services.
DIVIDENDS TO POLICYHOLDERS RATIO -- a measurement of dividends paid to workers'
compensation policyholders to premiums earned.
GAAP COMBINED RATIO -- a measure of underwriting profitability determined by
dividing the sum of all GAAP expenses (losses, loss adjustment expenses,
underwriting expenses, and dividends to policyholders) by GAAP net premiums
earned for the period.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("GAAP") -- accounting practices set by
the Financial Accounting Standards Board. Public companies follow these
practices when preparing financial statements.
INCURRED BUT NOT REPORTED ("IBNR") RESERVES -- reserves for estimated losses
which have been incurred by insureds but not yet reported to the insurer.
INVOLUNTARY COSTS -- insurance company costs incurred as a result of
participating in state insurance pools (for example, workers' compensation).
Insurance companies must participate in these pools as a condition of doing
business in the state.
LOSS EXPENSES -- expenses incurred in the process of evaluating, defending and
paying claims.
LOSS AND LOSS EXPENSE RATIO -- the ratio of net loss and loss expenses to net
premiums earned.
LOSS AND LOSS EXPENSE RESERVES -- the amount of money an insurance company
expects to pay for claim obligations and related expenses resulting from losses
which have occurred that are covered by insurance policies it has sold.
MANAGED CARE -- a method of controlling health care costs by using a network of
medical professionals to provide care consistent with cost-efficient guidelines
and protocols.
OPERATING INCOME -- this measure of income differs from net income by the
exclusion of net realized gains or losses. This measure is used by management
and analysts to evaluate the profitability of recurring operations and is not
intended to replace GAAP net income.
PREMIUMS EARNED -- earned premiums refer to premiums an insurance company has
recorded as revenues during a specific accounting period. For example, a
one-year policy sold January 1 would produce just three months' worth of "earned
premium" in the first quarter of the year.
PREMIUMS WRITTEN -- the cost of insurance coverage, often described as
"written." Written premiums refer to premiums for all policies sold during a
specific accounting period.
REINSURANCE -- insurance coverage that insurance companies buy from reinsurance
companies to limit their potential claim losses on a particular risk or on a
group of risks. All or part of a policy can be reinsured, as can entire types of
business. Reinsurance "spreads the risk" among a number of insurance companies,
reducing the impact of losses on individual companies and thereby allowing them
to provide more insurance than they otherwise would be able to sell.
RISK -- has two distinct and frequently used meanings in insurance. First, it
can describe the chance that a claim loss will occur (similar to the commonly
understood meaning of the work "risk"). Second, it can refer to the person or
thing insured and is sometimes used as a synonym for "policyholder."
STATUTORY ACCOUNTING -- accounting practices prescribed or permitted by state
insurance departments. Insurance companies follow these practices when preparing
annual statements. Statutory accounting stresses evaluation of a company's
solvency.
STATUTORY COMBINED RATIO -- a measurement commonly used within the property and
casualty insurance industry to measure underwriting profit or loss. It is a
combination of an underwriting expense ratio, a loss and loss expense ratio and
dividends to policyholders ratio.
STATUTORY PREMIUMS TO SURPLUS RATIO -- a statutory measure of solvency risk that
is calculated by dividing the net statutory premiums written for the year by the
ending statutory surplus. For example, a ratio of 1.5:1 means that for every
dollar of surplus, the Company wrote $1.50 in premiums.
STATUTORY UNDERWRITING EXPENSE RATIO -- measures the ratio of statutory
underwriting expenses (salaries, commissions, premium taxes, etc.) to net
premiums written.
STATUTORY SURPLUS -- the amount left after an insurance company's liabilities
are subtracted from assets. Statutory surplus is not a figure based upon
"generally accepted accounting principles" (GAAP). Rather, it is based upon
"statutory" accounting practices prescribed or permitted by state and foreign
insurance regulators.
TREATY REINSURANCE -- a contract between two insurance companies for sharing the
insurance coverage for a group of risks.
UNDERWRITING -- the insurer's process of reviewing applications submitted for
insurance coverage, deciding whether to accept all or part of the coverage
requested, and determining the applicable premiums.
UNDERWRITING RESULT -- may be underwriting profit or underwriting loss and
represents premiums earned less insurance losses and loss adjustment expenses
and underwriting expenses (determined on a GAAP or statutory basis). Also
referred to as GAAP underwriting result or statutory underwriting result. This
measure of performance is used by management and analysts to evaluate the
profitability of underwriting operations and is not intended to replace GAAP net
income.
UNEARNED PREMIUMS -- the portion of a premium representing the unexpired amount
of the contract term as of a certain date. For example, a one-year policy sold
January 1 would record nine months of unearned premium after the first quarter
of the year.
60
<PAGE> 60
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
The Company will file with the Securities and Exchange Commission, within 120
days after the end of the fiscal year covered by this report, a definitive Proxy
Statement pursuant to Regulation 14A under the Securities Exchange Act of 1934
in connection with its 1999 Annual Meeting of Stockholders, which meeting
includes the election of directors. In accordance with General Instruction G(3)
of Form 10-K, the information required by Items 10, 11, 12 and 13 below is
incorporated herein by reference to the Proxy Statement.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated herein by reference to the sections entitled: (i) "Election of
Directors," "Candidates," "Continuing Directors" and "Notes to Table of
Candidates and Continuing Directors" in the Proxy Statement, (ii) "Executive
Compensation and Other Information -- Executive Officers of the Company" and
(iii) "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy
Statement.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated herein by reference to the sections entitled: (i) "Compensation
of Directors," "Compensation Committee Interlocks and Insider Participation,"
and "Report of the Selective Insurance Group, Inc. Salary and Employee Benefits
Committee" in the Proxy Statement and (ii) "Summary Compensation Table,"
"Footnotes to Summary Compensation Table," "Stock Options and Stock Appreciation
Rights," "Options and SAR Exercises and Holdings," "Pension Plans" in the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated herein by reference to the sections entitled: (i) "General
Matters" in the Proxy Statement; and (ii) "Candidates," "Continuing Directors"
and "Notes to Table of Candidates and Continuing Directors" in the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated herein by reference to the section entitled "Interest of
Management and Others in Certain Transactions" in the Proxy Statement.
61
<PAGE> 61
PART III
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
(1) CONSOLIDATED FINANCIAL STATEMENTS:
The consolidated financial statements of the Company listed below are
included in Item 8. Financial Statements and Supplementary Data.
<TABLE>
<CAPTION>
Form 10-K
Page
<S> <C>
Consolidated Balance Sheets at December 31, 1999 and 1998 .......................................... 37-38
Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997 ............. 39
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997 40
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 ......... 41
Notes to Consolidated Financial Statements ......................................................... 42-58
</TABLE>
(2) FINANCIAL STATEMENT SCHEDULES:
The financial statement schedules, with Independent Auditors' Report thereon,
required to be filed are listed below by page number as filed in this report.
All other schedules are omitted as the information required is inapplicable,
immaterial, or the information is presented in the consolidated financial
statements or related notes.
<TABLE>
<CAPTION>
Form 10-K
Page
<S> <C>
Independent Auditors' Report............................................................... 63
Schedule I Summary of Investments - Other than Investments in Related Parties at
December 31, 1999.......................................................................... 64
Schedule II Condensed Financial Information of Registrant at December 31, 1999
and 1998, and for the years ended December 31, 1999, 1998 and 1997......................... 65-67
Schedule III Supplementary Insurance Information for the year ended
December 31, 1999, 1998 and 1997........................................................... 68-70
Schedule IV Reinsurance for the year ended December 31, 1999, 1998 and 1997............................ 71
Schedule V Allowance for Uncollectible Premiums and Other Receivables for the
year ended December 31, 1999, 1998 and 1997................................................ 72
Schedule VI Supplemental Information for the year ended December 31, 1999, 1998
and 1997................................................................................... 73
</TABLE>
(3) EXHIBITS:
The exhibits required by Item 601 of Regulation SK are listed in the Exhibit
Index, which immediately precedes the exhibits filed with this Form 10-K or
incorporated in this report by reference, and is incorporated herein by this
reference.
(b) REPORTS ON FORM 8-K.
The Company filed a current report on Form 8-K on February 2, 1999. The
report included information with respect to the amended and restated rights
plan of the registrant under Item 5, "Other Events."
62
<PAGE> 62
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Selective Insurance Group, Inc.:
We have audited the consolidated financial statements of Selective Insurance
Group, Inc. and its subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedules as listed in the accompanying
index. These consolidated financial statements and financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Selective Insurance
Group, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
KPMG LLP
New York, New York
February 3, 2000
63
<PAGE> 63
SCHEDULE I
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUMMARY OF INVESTMENTS-OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1999
================================================================================
<TABLE>
<CAPTION>
Type of investment AMORTIZED COST FAIR CARRYING
($ in thousands) OR COST VALUE AMOUNT
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DEBT SECURITIES:
Held-to-maturity:
U.S. government and government $ 8,415 8,420 8,415
agencies
Obligations of states and political 246,844 247,160 246,844
subdivisions
Mortgage-backed securities 16,125 16,024 16,125
---------- --------- ---------
Total debt securities, held-to-maturity 271,384 271,604 271,384
AVAILABLE-FOR-SALE:
U.S. government and government 122,263 121,044 121,044
agencies
Obligations of states and political 439,167 434,338 434,338
subdivisions
Corporate securities 493,951 484,044 484,044
Asset-backed securities 19,704 18,987 18,987
Mortgage-backed securities 66,082 64,373 64,373
---------- --------- ---------
Total debt securities, available-for-sale 1,141,167 1,122,786 1,122,786
EQUITY SECURITIES, AVAILABLE-FOR-SALE:
Common stocks:
Public utilities 2,573 5,951 5,951
Banks, trust and insurance companies 19,175 21,365 21,365
Industrial, miscellaneous and all 93,878 224,682 224,682
other
---------- --------- ---------
Total equity securities, available-for-sale 115,626 251,998 251,998
Short-term investments 48,807 48,807 48,807
Other investments 15,963 15,963 15,963
---------- --------- ---------
Total investments $1,592,947 1,711,158 1,710,938
========== ========= =========
</TABLE>
64
<PAGE> 64
SCHEDULE II
SELECTIVE INSURANCE GROUP, INC
(PARENT CORPORATION)
BALANCE SHEETS
================================================================================
<TABLE>
<CAPTION>
December 31,
($ in thousands, except share amounts) 1999 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Equity securities, available-for-sale - at fair value
(cost: $1,974 - 1999; $1,974 - 1998) $ 2,118 2,145
Debt securities, available-for-sale - at fair value
(amortized cost: $25,216-1998) -- 24,481
Short-term investments -- 90
Cash 71 26
Investment in subsidiaries 700,332 686,595
Current Federal income tax 441 --
Deferred Federal income tax 4,983 4,245
Other assets 11,991 14,053
========= ========
Total assets $ 719,846 731,635
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Convertible subordinated debentures $ 6,157 6,219
Notes payable 75,428 82,572
Short-term debt 51,302 28,287
Current Federal income tax -- 2,981
Other liabilities 16,995 3,993
--------- --------
Total liabilities 149,882 124,052
--------- --------
Stockholders' equity
Common stock of $2 par value per share:
Authorized shares: 180,000,000
Issued: 37,964,405-1999; 37,416,237-1998 75,929 74,833
Additional paid-in capital 53,470 45,449
Retained earnings 514,477 477,118
Accumulated other comprehensive income 76,694 114,323
Treasury stock - at cost (shares: 11,406,722-1999;
8,892,335-1998) (143,875) (97,990)
Deferred compensation expense and notes receivable from
stock sales (6,731) (6,150)
--------- --------
Total stockholders' equity 569,964 607,583
--------- --------
Total liabilities and stockholders' equity $ 719,846 731,635
========= ========
</TABLE>
Information should be read in conjunction with the Notes to Consolidated
Financial Statements of Selective Insurance Group, Inc. and its subsidiaries in
Item 8. of the 1999 Form 10-K.
65
<PAGE> 65
SCHEDULE II (CONTINUED)
SELECTIVE INSURANCE GROUP, INC
(PARENT CORPORATION)
STATEMENTS OF INCOME
================================================================================
<TABLE>
<CAPTION>
($ in thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Dividends from subsidiaries $ 47,242 54,451 35,891
Net investment income earned 603 1,826 1,657
Realized (losses) gains (339) 53 --
Miscellaneous income 93 125 34
-------- ------- -------
47,599 56,455 37,582
-------- ------- -------
Expenses:
Interest 9,460 9,409 9,592
Other operating 3,716 1,151 4,244
-------- ------- -------
13,176 10,560 13,836
-------- ------- -------
Income before Federal income tax and equity in
undistributed income of subsidiaries
34,423 45,895 23,746
-------- ------- -------
FEDERAL INCOME TAX BENEFIT:
Current (4,158) (3,252) (2,660)
Deferred (895) (33) (1,096)
-------- ------- -------
(5,053) (3,285) (3,756)
-------- ------- -------
Income before equity in undistributed income of
subsidiaries, net of tax 39,476 49,180 27,502
Equity in undistributed income of subsidiaries, net
of tax 14,241 4,390 42,106
-------- ------- -------
Net income $ 53,717 53,570 69,608
======== ======= =======
</TABLE>
Information should be read in conjunction with the Notes to Consolidated
Financial Statements of Selective Insurance Group, Inc. and its subsidiaries in
Item 8. of the 1999 Form 10-K.
66
<PAGE> 66
SCHEDULE II (CONTINUED)
SELECTIVE INSURANCE GROUP, INC
(PARENT CORPORATION)
STATEMENTS OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
($ in thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 53,717 53,570 69,608
-------- ------- -------
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in undistributed income of subsidiaries, net of tax (14,241) (4,390) (42,106)
Decrease (increase) in net Federal income tax (4,318) 3,730 (2,357)
Net realized losses (gains) on investments 339 (53) --
Other net 17,835 (11,925) 2,704
-------- ------- -------
Net adjustments (385) (12,638) (41,759)
-------- ------- -------
Net cash provided by operating activities 53,332 40,932 27,849
-------- ------- -------
INVESTING ACTIVITIES:
Purchase of other investments (37,585) (6,601) --
Sale of equity securities, available-for-sale 24,879 551 (25,182)
-------- ------- -------
Net cash used in investing activities (12,706) (6,050) (25,182)
-------- ------- -------
FINANCING ACTIVITIES:
Proceeds from short-term debt 23,015 10,887 17,400
Principal payment on note payable (7,143) (7,143) (7,143)
Dividends to stockholders (16,358) (16,263) (16,398)
Acquisition of treasury stock (45,885) (38,205) (9,105)
Net proceeds from issuance of common stock 9,066 16,479 13,407
Increase in deferred compensation expense and notes receivable from
stock sale
(3,366) (913) (5,750)
-------- ------- -------
Net cash used in financing activities (40,671) (35,158) (7,589)
-------- ------- -------
Net decrease in cash and short-term investments (45) (276) (4,922)
Cash and short-term investments at beginning of year 116 392 5,314
-------- ------- -------
Cash and short-term investments at end of year $ 71 116 392
======== ======= =======
</TABLE>
Information should be read in conjunction with the Notes to Consolidated
Financial Statements of Selective Insurance Group, Inc. and its subsidiaries in
Item 8. of the 1999 Form 10-K.
67
<PAGE> 67
SCHEDULE III
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
YEAR ENDED DECEMBER 31, 1999
================================================================================
<TABLE>
<CAPTION>
Segment Amortiza-
tion
of
Deferred Reserve for Losses deferred Other
policy losses and Net and loss policy operating Net
acquisition loss Unearned premiums expenses acquisition expenses/ premiums
($ in thousands) costs expenses premiums earned incurred costs income(1) written
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 80,799 825,744 269,111 570,650 416,559 171,771 29,945 587,521
Personal 28,296 257,335 111,959 228,415 175,656 60,154 (873) 224,156
Reinsurance
recoverable on unpaid
loss and loss expenses
-- 192,044 -- -- -- -- -- --
Prepaid reinsurance
premiums -- -- 32,531 -- -- -- -- --
Interest and general
corporate expenses -- -- -- -- -- -- 13,130 --
- -------------------------------------------------------------------------------------------------------------------------
Total $109,095 1,275,123 413,601 799,065 592,215 231,925 42,202 811,677
</TABLE>
NOTE: A meaningful allocation of net investment income of $96,531 and net
realized gain on investments of $29,377 is considered impracticable
because the Company does not maintain distinct investment portfolios
for each segment.
(1) Other operating expenses includes $429 of underwriting charges that are
included in other income or other expense on the consolidated income
statement in Item 8. of the 1999 form 10-K.
68
<PAGE> 68
SCHEDULE III (CONTINUED)
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
YEAR ENDED DECEMBER 31, 1998
================================================================================
<TABLE>
<CAPTION>
Segment Amortiza-
tion
of
Deferred Reserve for Losses deferred Other
policy losses and Net and loss policy operating Net
acquisition loss Unearned premiums expenses acquisition expenses/ premiums
($ in thousands) costs expenses premiums earned incurred costs income(1) written
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 81,034 801,687 252,240 506,020 352,863 154,484 31,544 524,571
Personal 28,740 251,134 116,218 216,972 154,937 54,844 (694) 224,302
Reinsurance
recoverable on unpaid
loss and loss expenses -- 140,453 -- -- -- -- -- --
Prepaid reinsurance
premiums -- -- 31,685 -- -- -- -- --
Interest and general
corporate expenses -- -- -- -- -- -- 10,584 --
- -------------------------------------------------------------------------------------------------------------------------
Total $109,774 1,193,274 400,143 722,992 507,800 209,328 41,434 748,873
</TABLE>
NOTE: A meaningful allocation of net investment income of $99,196 and net
realized loss on investments of $2,139 is considered impracticable
because the Company does not maintain distinct investment portfolios
for each segment. Certain reclassifications have been made to conform
with 1999 presentation.
(1) Other operating expenses includes $674 of underwriting charges that are
included in other income or other expense on the consolidated income
statement in Item 8. of the 1999 form 10-K.
69
<PAGE> 69
SCHEDULE III (CONTINUED)
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
YEAR ENDED DECEMBER 31, 1997
================================================================================
<TABLE>
<CAPTION>
Segment Amortiza-
tion
of
Losses deferred Other
Net and loss policy operating Net
premiums expenses acquisition expenses/ premiums
($ in thousands) earned incurred costs income(1) written
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $ 465,826 311,419 139,448 28,382 472,440
Personal 210,442 149,794 45,935 4,312 245,178
Reinsurance
recoverable on unpaid
loss and loss expenses -- -- -- -- --
Prepaid reinsurance
premiums -- -- -- -- --
Interest and general
corporate expenses -- -- -- 13,274 --
- --------------------------------------------------------------------------------------
Total $ 676,268 461,213 185,383 45,968 717,618
</TABLE>
NOTE: A meaningful allocation of net investment income of $100,530 and net
realized gain on investments of $6,021 is considered impracticable
because the Company does not maintain distinct investment portfolios
for each segment. Certain reclassifications have been made to conform
with 1999 presentation.
(1) Other operating expenses includes ($320) of underwriting charges that
are included in other income or other expense on the consolidated
income statement in Item 8. of the 1999 form 10-K.
70
<PAGE> 70
SCHEDULE IV
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
REINSURANCE
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
($ in thousands) % of
Ceded to Assumed amount
Gross other from other Net assumed
amount companies companies amount to net
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
Premiums earned:
Accident and health insurance 258 -- -- 258 --
Property and liability insurance 856,041 78,177 20,943 798,807 2.6
---------- --------- ---------- --------- ------
Total premiums earned 856,299 78,177 20,943 799,065 2.6
========== ========= ========== ========= ======
1998
Accident and health insurance 270 -- -- 270 --
Property and liability insurance 780,572 79,089 21,239 722,722 2.9
---------- --------- ---------- --------- ------
Total premiums earned 780,842 79,089 21,239 722,992 2.9
========== ========= ========== ========= ======
1997
Premiums earned:
Accident and health insurance 297 -- -- 297 --
Property and liability insurance 739,647 84,384 20,708 675,971 3.1
---------- --------- ---------- --------- ------
Total premiums earned 739,944 84,384 20,708 676,268 3.1
========== ========= ========== ========= ======
</TABLE>
71
<PAGE> 71
SCHEDULE V
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
ALLOWANCE FOR UNCOLLECTIBLE PREMIUMS AND OTHER RECEIVABLES
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
================================================================================
<TABLE>
<CAPTION>
($ in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1 $ 2,740 3,056 3,302
Additions 2,476 1,996 2,331
Deletions (1,567) (2,312) (2,577)
------- ------ ------
Balance, December 31 $ 3,649 2,740 3,056
======= ====== ======
</TABLE>
72
<PAGE> 72
SCHEDULE VI
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTAL INFORMATION
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
================================================================================
<TABLE>
<CAPTION>
Losses and loss
expenses
incurred related to
-----------------------
Affiliation with Registrant (1) (2) Paid losses
Current Prior and loss
($ in thousands) year years expenses
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Consolidated Property/Casualty Subsidiaries:
Year ended December 31, 1999 $ 600,793 (8,578) 561,957
Year ended December 31, 1998 $ 510,319 (2,519) 491,951
Year ended December 31, 1997 $ 471,337 (10,124) 463,826
</TABLE>
NOTE: The other information required in this schedule (e.g., deferred policy
acquisition costs, reserves for losses and loss expenses, unearned
premiums, net premiums earned, net investment income, amortization of
deferred policy acquisition costs, and net premiums written) is
contained in Schedule III in this report. In addition, the Company does
not discount loss reserves.
73
<PAGE> 73
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/ David B. Merclean March 17, 2000
- -------------------------------------------------------------
David B. Merclean,
Senior Vice President of Finance and Chief Financial Officer
By: /s/ Gregory E. Murphy March 17, 2000
- -------------------------------------------------------------
Gregory E. Murphy
President and Chief Executive Officer
================================================================================
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
By: /s/ James W. Entringer March 17, 2000
- -------------------------------------------------------------
James W. Entringer
Chairman of the Board
By: /s/ Gregory E. Murphy March 17, 2000
- -------------------------------------------------------------
Gregory E. Murphy
President and Chief Executive Officer
By: /s/ David B. Merclean March 17, 2000
- -------------------------------------------------------------
David B. Merclean,
Senior Vice President of Finance and Chief Financial Officer
By: /s/ Paul D. Bauer March 17, 2000
- -------------------------------------------------------------
Paul D. Bauer
Director
By: /s/ A. David Brown March 17, 2000
- -------------------------------------------------------------
David Brown
Director
74
<PAGE> 74
By: /s/ William A. Dolan, II March 17, 2000
- -------------------------------------------------------------
William A. Dolan, II
Director
By: /s/ William C. Gray, D.V.M. March 17, 2000
- -------------------------------------------------------------
William C. Gray, D.V.M.
Director
By: /s/ C. Edward Herder March 17, 2000
- -------------------------------------------------------------
C. Edward Herder
Director
By: /s/ William M. Kearns,Jr. March 17, 2000
- -------------------------------------------------------------
William M. Kearns, Jr.
Director
By: /s/ Joan M. Lamm-Tennant, Ph.D. March 17, 2000
- -------------------------------------------------------------
Joan M. Lamm-Tennant, Ph.D.
Director
By: /s/ S. Griffin McClellan, III March 17, 2000
- -------------------------------------------------------------
S. Griffin McClellan, III
Director
By: /s/ William M. Rue March 17, 2000
- -------------------------------------------------------------
William M. Rue
Director
By: /s/ Thomas D. Sayles, Jr. March 17, 2000
- -------------------------------------------------------------
Thomas D. Sayles, Jr.
Director
By: /s/ J. Brian Thebault March 17, 2000
- -------------------------------------------------------------
J. Brian Thebault
Director
75
<PAGE> 75
EXHIBIT INDEX
* Exhibits included within this 10K filing
P Paper filing under cover of Form SE
Exhibit
Number
2 Agreement and Plan of Merger, dated as of March 27, 1992, among
Selective Insurance Group, Inc., Niagara Acquisition Co., Niagara
Exchange Corporation, Riedman Corporation, PSCO Partners Limited
Partnership, PSCO Bermuda Partners, PSCO Fund Limited and Charles J.
Clauss (incorporated herein by reference to Exhibit 1 to the Company's
Current Report on Form 8-K dated March 30, 1992, filed with the
Securities Exchange Commission on April 7, 1992, File No. 0-8641).
3.1 Restated Certificate of Incorporation of Selective Insurance Group,
Inc., dated August 4, 1977, as amended through November 6, 1997
(incorporated herein by reference to Exhibit 3.1 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997, File
No. 0-8641).
3.2 The Company's By-Laws, adopted on August 26, 1977, amended through May
1, 1992 (incorporated herein by reference to Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1994, File No. 0-8641).
4.1 The form of Indenture dated December 29, 1982, between the Selective
Insurance Group, Inc. and Midlantic National Bank, as Trustee relating
to the Company's 8 3/4% Subordinated Convertible Debentures due 2008
(incorporated herein by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-3 No. 2-80881).
4.2 Rights Agreement dated November 3, 1989 between Selective Insurance
Group, Inc. and Midlantic National Bank (incorporated herein by
reference to Exhibit 4.2 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1994, File No. 0-8641).
4.3 Amendment, dated February 2, 1999, to the Rights Agreement between
Selective Insurance Company of America and First Chicago Trust,
(incorporated herein by reference to the Company's Current Report on
Form 8-K filed February 2, 1999, File No. 0-8641.)
10.1 The Selective Insurance Retirement Savings Plan as amended through
August 15, 1996 (incorporated herein by reference to Exhibit 4 to the
Company's Registration Statement on Form S-8 No. 333-10477).
10.2 Amendment, dated May 2, 1997, to the Selective Insurance Retirement
Savings Plan in Exhibit 10.1 above (incorporated herein by reference to
Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997, File No. 0-8641).
10.3 The Retirement Income Plan for Employees of Selective Insurance Company
of America, as amended through May 6, 1994 (incorporated herein by
reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1994, File No. 0-8641).
10.4 The Company's Stock Option Plan as amended through May 6, 1988
(incorporated herein by reference to Exhibit 4 to the Company's
Registration Statement on Form S-8 No. 33-22450).
10.4a The Company's Stock Option Plan as revised on January 31, 2000,
(incorporated herein by reference to Exhibit 4 to the Company's
Registration Statement on Form S-8 No. 33-22450).
10.5 Directors' Plan. A retirement and total and permanent disability plan
for directors as amended through May 5, 1989 (incorporated herein by
reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1994, File No. 0-8641).
10.6 Resolutions adopted by the Selective Insurance Group, Inc. Board of
Directors on December 31, 1997 with respect to the Directors' Plan in
Exhibit 10.5 above (incorporated herein by reference to Exhibit 10.6 to
the Company's Annual Report on Form 10-K for the year ended December
31, 1997, File No. 0-8641).
10.7 Deferred Compensation Plan for Directors (incorporated herein by
reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1993, File No. 0-8641).
76
<PAGE> 76
10.8 The Company's 1987 Employee Stock Purchase Savings Plan (incorporated
herein by reference to Exhibit 10.6 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1993, File No. 0-8641).
10.9 Amendment, dated May 2, 1997, to the 1987 Employee Stock Purchase
Savings Plan in Exhibit 10.8 above (incorporated herein by reference to
Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997, File No. 0-8641).
10.10 The Selective Insurance Rewards Program adopted January 1, 1994, which
replaced the Annual Incentive Compensation Plan (incorporated herein by
reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1994, File No. 0-8641).
10.11 The Selective Insurance Group, Inc. Stock Purchase Plan for Independent
Insurance Agents as amended through December 1, 1995 (incorporated
herein by reference to Exhibit 10.8 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995, File No. 0-8641).
10.12 The Selective Insurance Group, Inc. Stock Option Plan for Directors as
amended through November 1, 1991 (incorporated herein by reference to
Exhibit 4.1 to the Company's Registration Statment on Form S-8 No.
33-36368).
10.12a The Selective Insurance Group, Inc. Stock Option Plan for Directors as
amended through November 1, 1998 (incorporated herein by reference to
Exhibit 10.12a to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998, File No. 0-8641).
10.13 Selective Insurance Group, Inc. Stock Option Plan II, as amended
through October 9, 1997, and related forms of option agreements
(incorporated herein by reference to Exhibits 4.1 to the Company's
Registrationn Form S-8 No. 333-37501).
10.13a The Selective Insurance Group, Inc. Stock Option Plan II, as amended
through July 28, 1998. (incorporated herein by reference to
Exhibit 10.13a to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998, File No. 0-8641)
*10.13b The Selective Insurance Group, Inc. Stock Option Plan II as amended
January 31, 2000, filed herewith.
10.14 The Selective Insurance Group, Inc. Stock Compensation Plan for
Nonemployee Directors (incorporated herein by reference to Exhibit 4 to
the Company's Registration Statement on Form S-8 No. 333-10465).
10.15 SIGI Acquisition Company LLC Limited Liability Company Agreement
(incorporated herein by reference to Exhibit 10.15 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997, File
No. 0-8641).
10.16 Employment, Termination and Severance Agreements.
10.16a Employment Agreement with James W. Entringer, dated September 1, 1993,
as amended (incorporated herein by reference to Exhibit 10.12 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1993, File No. 0-8641).
10.16b Amendment, dated September 1, 1996, to the Employment Agreement in
Exhibit 10.16(a) above (incorporated herein by reference to Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996, File No. 0-8641).
10.16c Amendment, dated May 1, 1998, to the Employment Agreement in Exhibit
10.16(a) and (b) above (incorporated herein by reference to Exhibit
10.3 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998, File No. 0-8641).
10.16d Amendment, dated September 1, 1996, to the Employment Agreement in
Exhibit 10.16(c) above (incorporated herein by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996, File No. 0-8641).
10.16e Employment Agreement with Thornton R. Land, dated September 1, 1993,
as amended (incorporated herein by reference to Exhibit 10.15 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1993, File No. 0-8641).
10.16f Amendment, dated September 1, 1996, to the Employment Agreement in
Exhibit 10.16(e) above (incorporated herein by reference to Exhibit
10.3 to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996, File No. 0-8641).
10.16g Employment Agreement with Gregory E. Murphy, dated August 1, 1995
(incorporated herein by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1995,
File No. 0-8641).
77
<PAGE> 77
10.16h Employment Agreement with Donald E. Williams, dated August 1, 1995
(incorporated herein by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1995,
File No. 0-8641).
10.16i Employment Agreement with Jamie Ochiltree, III, dated October 31, 1995
(incorporated herein by reference to Exhibit 10.11f to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995, File
No. 0-8641).
10.16j Employment Agreement, dated May 2, 1997, between Selective Insurance
Company of America and James W. Coleman, Jr. (incorporated herein by
reference to Exhibit 10.3 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997, File No. 0-8641).
10.16k Form of Termination Agreement, between the Company and each of Messrs.
Entringer, Addesso and Land, as amended (incorporated herein by
reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1993, File No. 0-8641).
10.16l Termination Agreement, dated August 1, 1995, between Selective
Insurance Company of America and Gregory E. Murphy (incorporated herein
by reference to Exhibit 10.2 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1995, File No. 0-8641).
10.16m Termination Agreement, dated August 1, 1995, between Selective
Insurance Company of America and Donald E. Williams (incorporated
herein by reference to Exhibit 10.4 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1995, File No.
0-8641).
10.16n Termination Agreement, dated August 1, 1995, between Selective
Insurance Company of America and Jamie Ochiltree (incorporated herein
by reference to Exhibit 10.11j to the Company's Annual Report on Form
10-K for the year ended December 31, 1995, File No. 0-8641).
10.16o Termination Agreement, dated May 2, 1997, between Selective Insurance
Company of America and James W. Coleman, Jr. (incorporated herein by
reference to Exhibit 10.4 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997, File No. 0-8641).
10.16p Severance agreement with Walter H. Hallowell, dated July 12, 1994
(incorporated herein by reference to Exhibit 10.15 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1994, File
No. 0-8641).
10.16q Amendment, dated May 1, 1998, to the Employment Agreement in Exhibit
10.16(g) above (incorporated herein by reference to Exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1998, File No. 0-8641).
10.16r Amendment, dated October 31, 1998, to the Employment Agreement in
Exhibit 10.16(i) above. (incorporated herein by reference to Exhibit
10.16r to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, File No. 0-8641).
10.16s Amendment, dated December 16, 1998, to the Termination Agreements
between messrs. Entringer and Land and the Company in Exhibit 10.16(k)
above. (incorporated herein by reference to Exhibit 10.16s to the
Company's Annual Report on Form 10-K for the year ended December 31,
1998, File No. 0-8641).
10.16t Amendment, dated December 16, 1998, to the Termination Agreement in
Exhibit 10.16(l) above. (incorporated herein by reference to Exhibit
10.16t to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, File No. 0-8641).
10.16u Amendment, dated December 16, 1998, to the Termination Agreement in
Exhibit 10.16(m) above. (incorporated herein by reference to Exhibit
10.16u to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, File No. 0-8641).
10.16v Amendment, dated December 16, 1998, to the Termination Agreement in
Exhibit 10.16(n) above. (incorporated herein by reference to Exhibit
10.16v to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, File No. 0-8641).
10.16w Amendment, dated December 16, 1998, to the Termination Agreement in
Exhibit 10.16(o) above. (incorporated herein by reference to Exhibit
10.16w to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, File No. 0-8641).
10.16x Form of Termination Agreement, dated December 16, 1998, between
Selective Insurance Company of America and David B. Merclean.
(incorporated herein by reference to Exhibit 10.16x to the
Company's Annual Report on Form 10-K for the year ended December 31,
1998, File No. 0-8641).
10.16y Amendment, dated December 16, 1998, to the Termination Agreement in
Exhibit 10.16(x) above. (incorporated herein by reference to Exhibit
10.16y to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, File No. 0-8641).
*10.16z Form of Termination Agreement, dated September 27, 1999, between
Selective Insurance Company of America and Ronald J. Zaleski.
10.16aa Amendment, dated September 1, 1999 to the employment agreement in
Exhibit 10.16(e) above (incorporated herein by reference to the
company's Annual Report on Form 10-K for the year ended December 31,
19993, file No. 0-8641).
10.17 Property Reinsurance Contracts.
78
<PAGE> 78
10.17a New Jersey Homeowners Quota Share Treaty between Selective Insurance
Company of America, Selective Way Insurance Company, Selective
Insurance Company of the Southeast, Selective Insurance Company of
South Carolina, and Selective Insurance Company of New York and various
insurance and/or reinsurance companies (Contract No. 3645-24),
(incorporated herein by reference to Exhibit 10.17a to the Company's
Annual Report on Form 10-K for the year ended December 31,1997, File
No. 0-8641).
10.17b Property Catastrophe Excess of Loss Reinsurance Contract between
various insurance and/or reinsurance companies and/or underwriting
members of Lloyd's and Selective Insurance Company of America,
Selective Way Insurance Company, Selective Insurance Company of the
Southeast, Selective Insurance Company of South Carolina and Selective
Insurance Company of New York. (incorporated herein by reference to
Exhibit 10.17b to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998, File No. 0-8641).
10.17c Property Per Risk Reinsurance Agreement between Selective Insurance
Company of America, Selective Way Insurance Company, Selective
Insurance Company of the Southeast, Selective Insurance Company of
South Carolina, Selective Insurance Company of New York, and American
Re-Insurance Company and/or St. Paul Reinsurance Management Corporation
(Contract No. 3525-0087), (incorporated herein by reference to Exhibit
10.14g to the Company's Annual Report on Form 10-K for the year ended
December 31,1996, File No. 0-8641).
10.18 Casualty Reinsurance Contracts.
10.18a Casualty Excess of Loss Reinsurance Agreement between Selective
Insurance Company of America, Selective Way Insurance Company,
Selective Insurance Company of the Southeast, Selective Insurance
Company of South Carolina, Selective Insurance Company of New York, and
various insurance and/or reinsurance companies (Contract No.
3525-0090), (incorporated herein by reference to Exhibit 10.15g to the
Company's Annual Report on Form 10-K for the year ended December 31,
1996, File No. 0-8641).
10.19 Form of Note Purchase Agreement dated as of November 15, 1992 with
respect to Selective Insurance Group, Inc. 7.84% Senior Notes due
November 15, 2002 (incorporated herein by reference to Exhibit 99.1 to
the Company's Post-Effective Amendment No. 1 to the Registration
Statement on Form S-3, No. 33-30833).
10.20 Form of Note Purchase Agreement dated as of August 1, 1994 with respect
to Selective Insurance Group, Inc. 8.77% Senior Notes due August 1,
2005 (incorporated herein by reference to Exhibit 99.2 to the Company's
Post-Effective Amendment No. 1 to the Registration Statement on Form
S-3, No. 33-30833).
10.21 Promissory Note of $25,000,000 Revolving Line of Credit with State
Street Bank and Trust Company (incorporated herein by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997, File No. 0-8641).
10.22 Amendment, dated June 30, 1997, to the Promissory Note of $25,000,000
Revolving Line of Credit with State Street Bank and Trust Company in
Exhibit 10.21 above, (incorporated herein by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997, File No. 0-8641).
10.23 Commercial Loan Note of $25,000,000 Line of Credit with Summit Bank as
amended through June 30, 1997, (incorporated herein by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997, File No. 0-8641).
10.24 Amendment, dated November 6, 1998, to the Promissory Note of
$25,000,000 Revolving Line of Credit with State Street Bank and Trust
Company in Exhibit 10.21 above.
10.25 Amendment, dated June 30, 1998, to the Promissory Note of $25,000,000
Revolving Line of Credit with State Street Bank and Trust Company in
Exhibit 10.21 above, (incorporated herein by reference to Exhibit 10.2
to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998, File No. 0-8641).
10.26 Amendment, dated May 31, 1998, to the Commercial Loan Note of
$25,000,000 Line of Credit with Summit Bank in Exhibit 10.23 above,
(incorporated herein by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, File
No. 0-8641).
* 11 Computation of earnings per share, filed herewith.
* 21 Subsidiaries of Selective Insurance Group, Inc., filed herewith.
* 23 Consent of the Independent Auditors, filed herewith.
* 27 Financial Data Schedule, filed herewith.
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EXHIBIT 10.13b
SELECTIVE INSURANCE STOCK OPTION PLAN II
I. PURPOSE
This Selective Insurance Stock Option Plan II (the "Plan") is intended to
encourage employees of Selective Insurance Group, Inc. (the "Company") and its
subsidiaries to own stock in the Company and to provide incentive to further the
success of the Company.
II. SHARES SUBJECT TO THE PLAN
There will be reserved for issuance upon the exercise of Options granted under
the Plan 4,200,000 shares of the Company"s Common Stock which may be unissued or
reacquired shares. If any option granted expires or terminates for any reason
without having been exercised in full, the unpurchased shares shall again become
available for the purposes of the Plan.
III. ADMINISTRATION
The Plan shall be administered by a Compensation Committee (the "Committee")
appointed by the Board of Directors of the Company. The Committee shall consist
of two (2) or more directors of the Company, all of whom shall be both
"Non-Employee Directors" within the meaning of Rule 16b-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and "Outside Directors"
as defined for the purposes of Section 162(m) of the Internal Revenue Code of
1986, as amended (the "Code"). Subject to the terms and conditions of the Plan,
the Committee shall have the exclusive authority to select the terms and
conditions of Option Agreements (as hereinafter defined) and whether an option
will be granted to an employee as a stock option which qualifies as an incentive
Stock Option under Section 422 of the Code (hereinafter referred to as a
"Qualified Option") or a Stock Option which does not qualify under the Code
(hereinafter referred to as a "Non-Qualified Option"). The Committee shall
determine the number of shares of Common Stock to be acquired by the exercise of
Qualified Options and Non-Qualified Options, the term during which the Qualified
Options and Non-Qualified Options may be exercised and the application or
withdrawal of any restrictions which may be deemed appropriate in its
discretion. (Qualified Options and Non-Qualified Options are sometimes
collectively hereinafter referred to as "Options" or "Stock Options.")
IV. ELIGIBLE PARTICIPANTS
All employees of the Company and its subsidiaries shall be eligible to
participate in the Plan. No member of the Committee shall be eligible to
participate in this Plan. The Committee shall:
(a) determine the employees of the Company and its subsidiaries to whom
Qualified Options and Non-Qualified Options may be granted; and
(b) grant Options, from time to time, to such eligible participants as
it may select.
V. TERMS AND CONDITIONS OF OPTIONS
Qualified Options and Non-Qualified Options shall be in such form and on such
terms and conditions as the Committee shall, from time to time, approve subject
to the following terms and conditions:
(a) The aggregate fair market value (determined at the time the option
is granted) of the shares with respect to which Qualified Options are
exercisable for the first time by a participant during any calendar year shall
not exceed $100,000. To the extent permitted by the Code, Qualified Options
granted in excess of such amount may be deemed or amended to be Non-Qualified
Options.
(b) The option price per share shall not be less than its fair market
value on the date of such grant.
(c) The term of the option shall not be more than ten (10) years from
the date such option is granted.
(d) Qualified Options shall not be transferable, and Non-Qualified
Options shall not be transferable unless expressly authorized by the Committee
in accordance with the provisions of Section V(e) of the Plan, except by will or
by
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the laws of descent and distribution, and during the lifetime of the person to
whom an Option is granted he/she alone may exercise it.
(e) Notwithstanding anything in the Plan to the contrary, the Committee
may, in its discretion, authorize all or any portion of Non-Qualified Options
granted or to be granted to any participant under the Plan to be on terms which
permit the transfer thereof by such participant to any (i) spouse, child,
stepchild, grandchild, parent, stepparent, grandparent, sibling, mother-in-law,
father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law,
including adoptive relationships, or any other family member of such participant
to whom the Corporation may lawfully offer and sell Common Stock from time to
time pursuant to the exercise of Non-Qualified Options by the use of a
Registration Statement on Form S-3 or Form S-8 under the Securities Act of 1933,
as amended, (collectively, "Immediate Family Members"), (ii) any trust or trusts
for the exclusive benefit of any Immediate Family Members, and/or (iii) any
entity or entities owned solely by any Immediate Family Members, provided that
(x) there may be no consideration for any such transfer, (y) the stock option
agreement or amendment to the stock option agreement pursuant to which such
transferable options are granted or are otherwise made transferable must be
approved by the Committee and provide for such transferability only in a manner
consistent with the provisions of the Plan, and (z) subsequent transfers of
transferred Non-Qualified Options shall be prohibited except in accordance with
Section V(d) of the Plan. The Committee may in its discretion, impose as a
condition of transferability of any Non-Qualified Options such additional
restrictions and limitations on such Non-Qualified Options and shares of Common
Stock acquired pursuant to the exercise thereof, including, without limitation,
restrictions or limitations on the resale of such shares of Common Stock, as the
Committee shall deem appropriate. Following the transfer of any Non-Qualified
Options, the transferred Non-Qualified Options, shall continue to be subject to
the same terms and conditions as were applicable immediately prior to such
transfer together with any such additional restrictions and limitations as shall
be imposed by the Committee, and the provisions of the Plan shall continue to
apply to such transferred Non-Qualified Options.
(f) No Qualified Option shall be granted to an employee who, at the
time the option is granted, owns stock representing more than 10 percent of the
total combined voting power of all classes of stock of the employer. This stock
ownership limitation will not apply if the option price is at least 110 percent
of the fair market value (at the time the option is granted) of the stock
subject to the option and the option by its terms is not exercisable more than
five (5) years from the date it is granted.
(g) Options to purchase no more than 40,000 shares of Common Stock may
be granted (together with related Stock Appreciation Rights under Article XIII
hereof) to any eligible participant during any twelve-month period during the
term of the Plan.
VI. GRANTS OF COMMON STOCK
The Committee may, in its discretion, at any time or from time to time, make
restricted or unrestricted grants of Common Stock, or grant rights to receive
Common Stock, to eligible participants in the Plan in addition to or in
substitution for Options and/or SARs granted hereunder. The right to receive no
more than 40,000 shares of Common Stock shall be granted to any participant in
the Plan during any twelve-month period during the term of the Plan. Each such
grant to an executive officer of the Company shall be expressly subject to the
attainment of one or more performance-related objectives based on return on
equity, per share earnings, reduction of costs, increase in premiums written or
earned, total return to stockholders, combined ratio or loss and loss expense
ratio of the Company, or a subsidiary or subsidiaries of the Company, as shall
be determined by the Committee at or prior to the date of grant and set forth in
an award agreement.
For purposes of this section, the executive officers of the Company shall
include each person who is an "executive officer" of the Company, as defined in
Rule 3b-7 under the Securities Exchange Act of 1934 and shall, in any event,
include each person who is a "Covered Employee" for the purposes of Section
162(m) under the Internal Revenue Code of 1986, as amended.
Each such grant also shall be subject to such vesting period or other terms,
conditions, restrictions and limitations as shall be determined by the Committee
in its discretion and set forth in an award agreement. The number of shares of
Common Stock available for such grants shall be included in the total number of
shares of Common Stock reserved for issuance under the Plan, and the number of
shares of Common Stock awarded pursuant to such grants shall reduce the number
of shares of Common Stock available for the purposes of the Plan as set forth in
Section II hereof, provided that any such shares of Common Stock that shall be
forfeited because of the failure of any condition or restriction of an award
shall again be available for the purposes of the Plan. Notwithstanding the terms
and conditions set forth in an award agreement, the Committee, in its
discretion, may accelerate the time at which any award may vest due to a change
in circumstances, including but not limited to death, disability, retirement,
financial hardship, or change in control of the Company. In case the number of
outstanding shares of Common Stock of the Company is changed as a result of a
stock dividend, stock split or other readjustments or if the outstanding shares
of Common Stock shall be exchanged for securities of the Company or another
Company by reason of any merger, consolidation or other similar corporate
change, the Committee shall make an appropriate adjustment in the number of
shares subject to each then outstanding grant of Common Stock. No award
agreement shall impose any obligation on the Company to continue to employ any
employee.
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VII. TERMINATION OF EMPLOYMENT
If an employee shall cease to be employed by the Company for any reason other
than disability or death, then any outstanding Qualified Option granted to such
employee shall terminate three (3) months after the date of termination of
employment, and any outstanding Non-Qualified Option granted to such employee
shall terminate twelve (12) months after the date of termination.
VIII. DISABILITY
If an employee shall cease to be employed by the Company as a result of
disability, then any Options that are exercisable by the employee at the time
employment ceases may be exercised within twelve (12) months after the date that
such employee's employment ceases.
IX. DEATH
If an employee's death occurs while employed by the Company, his/her estate,
representative or beneficiary shall have the right to exercise those Options
granted to the employee which were exercisable by him/her at the time of his/her
death at any time within twelve (12) months after the date of his/her death.
X. CHANGES IN CAPITAL STOCK
In case the number of outstanding shares of Common Stock of the Company is
changed as a result of a stock dividend, stock split or other readjustments or
if the outstanding shares of Common Stock of the Company shall be exchanged for
securities of the Company or another company by reason of any merger,
consolidation or other similar corporate change, the Committee shall make an
appropriate adjustment in the aggregate number of shares which may be subject to
Stock Options granted under the Plan and in the number of shares subject to and
the option price of each then outstanding option.
XI. EXERCISE OF OPTIONS
An employee electing to exercise an option shall give written notice to the
Company of such election and the number of shares of Common Stock that he/she
has elected to acquire. An employee will have no rights of a stockholder with
respect to shares of Common Stock to be acquired upon the exercise of an option
until the issuance to him/her of said shares.
XII. OPTION AGREEMENTS
Agreements granting Options under the Plan ("Option Agreements") shall be in
writing duly executed and delivered by or on behalf of the Company and the
optionee and shall contain such terms and conditions as the Committee deems
advisable. If there is any conflict between the terms and conditions of any
Option Agreements and of the Plan, the terms and conditions of the Plan shall
control. Option Agreements shall clearly specify whether Options granted
pursuant to the Plan are either Qualified Options or Non-Qualified Options.
XIII. PAYMENT
The option price shall be payable upon the exercise of the option and shall be
paid in cash or in shares of Common Stock of the Company. If shares of Common
Stock are tendered as payment of the option price, the value of any such stock
shall be the fair market value per share of Common Stock as of the date of
exercise.
XIV. STOCK APPRECIATION RIGHTS
A Stock Appreciation Right ("SAR") may be granted in conjunction with any
Qualified Option or any Non-Qualified Option under the Plan. If an SAR is
exercised, the employee shall surrender the related Qualified Option or
Non-Qualified Option or portion thereof.
The SAR shall be subject to the same terms and conditions as the Qualified
Option or Non-Qualified Option in connection with which the SAR was granted.
Upon exercise of the SAR, the employee will receive payment of the amount
determined by subtracting the option exercise price per share of Common Stock
from the fair market value per share of Common Stock on the exercise date and
multiplying this amount by the number of SARs being exercised. Payment of the
amount determined above shall be made in stock, cash or partly in stock and
partly in cash as the Committee shall determine in its absolute discretion at
the time of exercise. The number of SARs granted an employee will be determined
by the Committee in its sole discretion, subject to the limitations set forth in
Article V, Section (f) of the Plan.
XV. TERM OF PLAN
The Plan shall terminate ten (10) years after the effective date of the Plan,
and no option shall be granted pursuant to the Plan after termination of the
Plan.
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XVI. CONTINUANCE OF EMPLOYMENT
Neither the Plan nor any Option Agreements shall impose any obligation on the
Company to continue to employ any employee.
XVII. EFFECTIVE DATE
The Plan shall become effective as of September 1, 1992, subject to the approval
no later than September 1, 1993, by the holders of a majority of the outstanding
shares of Common Stock represented at a duly held meeting of stockholders.
XVIII. AMENDMENTS
This Plan may be amended by recommendation of the Committee and approval of the
Board of Directors to the extent permitted by law. In no event shall the
Committee amend the Plan to: (a) change the purchase price of the stock, (b)
extend any option date, or (c) extend the termination date of the Plan.
Plan as Amended January 31, 2000
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EXHIBIT 10.16z
TERMINATION AGREEMENT
TERMINATION AGREEMENT dated as of September 27, 1999, by and between
SELECTIVE INSURANCE COMPANY OF AMERICA (the "Company"), a New Jersey
corporation, having an office at 40 Wantage Avenue, Branchville, New Jersey
07826, and RONALD J. ZALESKI (the "Executive"), having an address at 1711
Mesquite Road, Southlake, Texas 76092.
W I T N E S S E T H:
WHEREAS, the Company recognizes the Executive to be a valuable
management employee of the Company; and
WHEREAS, the Company recognizes that a change in control of Selective
Insurance Group, Inc., the Company's parent corporation ("Selective"), could
occur in the future, and that it is of importance to the Company and to
Selective and its stockholders to provide for the continuity of management and
its uninterrupted attention and dedication to the business affairs of the
Company; and
WHEREAS, the Board of Directors of the Company (the "Board") has
determined that appropriate steps should be taken to encourage the continued
attention and dedication of principal members of the Company's management to
their assigned duties in circumstances arising from the possibility of a change
in control of Selective; and
WHEREAS, the Company has determined that an arrangement of the type set
forth herein will serve the purpose of attracting desirable persons for
executive positions with the Company, will induce the Executive to remain with
the Company, and will enhance the Executive's ability to assess and advise the
Board as to whether any proposal involving a change in the control would be in
the best interests of the Company, Selective and its shareholders and to take
such other action regarding such proposal without being influenced by the
prospects of his own future employment with the Company; and
WHEREAS, the Company and the Executive wish to set forth their
agreements as to the subject and procedures contemplated hereunder
acknowledging, however, that this Agreement supplements any employment agreement
that may be in effect from time to time between the Executive and the Company
and sets forth the severance benefits which the Company agrees will be provided
to the Executive in the event the Executive's employment with the Company is
terminated subsequent to a change of control of Selective under the
circumstances hereinbelow described.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the Company and the Executive hereby agree as follows:
1. TERM OF AGREEMENT.
The term of this Agreement (the "Term") shall commence on the date
hereof and shall continue in effect until September 27, 2002, provided, however,
that commencing on September 27, 2002 and each September 27 thereafter (each
such September 27 being hereinafter referred to as an "Extension Date"), the
Term shall automatically be extended for one (1) additional year, unless at
least twenty-four (24) months prior to an Extension Date, the Company or the
Executive shall have given written notice in the manner hereinafter prescribed
that the Term shall not be extended as of the next Extension Date; and, provided
further, that if a "Change in Control" of Selective, as defined in Section 2
hereof, shall have occurred during the term, as the same may be extended, this
Agreement shall terminate on the last day of the twenty-four (24) month period
commencing on the date that such Change in Control shall have occurred.
Notwithstanding anything in this Section 1 to the contrary, this Agreement shall
terminate if the Executive or the Company terminates the Executive's employment
prior to the date on which a Change in Control shall occur.
2. CHANGE IN CONTROL.
(a) For the purposes of this Agreement, a "change in control of
Selective" (a "Change in Control") shall mean the occurrence of an event of a
nature that would be required to be reported in response to Item 1(a) of a
Current Report on Form 8-K, as in effect on the date hereof, pursuant to
Sections 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") provided, however, that a Change in Control shall, in any event,
conclusively be deemed to have occurred upon the first to occur of any one of
the following events:
(i) The acquisition by any person or group,
including, without limitation, any current shareholder or
shareholders of Selective, of securities of Selective
resulting in such person's or group's owning of record or
beneficially twenty-five percent (25%) or more, of any class
of voting securities of Selective;
(ii) The acquisition by any person or group,
including, without limitation, any current shareholder or
shareholders of Selective, of securities of Selective
resulting in such person's or group's owning of record or
beneficially twenty percent (20%) or more, but less than
twenty-five percent (25%), of any class of voting securities
of Selective, if the Board adopts a resolution that such
acquisition constitutes a Change in Control;
(iii) The sale or disposition of all or substantially
all of the assets of Selective;
(iv) The reorganization, recapitalization, merger,
consolidation or other business combination involving
Selective the result of which is the ownership by the
shareholders of Selective of less than eighty percent (80%) of
those voting securities of
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the resulting or acquiring entity having the power to elect a
majority of the board of directors of such entity; or
(v) A change in the membership in the Board of
Directors of Selective (the "Selective Board") which, taken in
conjunction with any other prior or concurrent changes,
results in twenty percent (20%) or more of the Selective
Board's membership being persons not nominated by Selective's
management or Selective's Board as set forth in Selective's
then most recent proxy statement, excluding changes resulting
from substitutions by Selective's Board because of retirement
or death of a director or directors, removal of a director or
directors by Selective's Board or resignation of a director or
directors due to demonstrated disability or incapacity.
(b) Notwithstanding anything in the foregoing Section 2(a) to the
contrary, no Change in Control shall be deemed to have occurred for the purposes
of this Agreement by virtue of any transaction which results in the Executive,
or a group of persons which includes the Executive, acquiring, directly or
indirectly, voting securities of Selective.
(c) For the purpose of Section 2(a) the following definitions shall
apply:
(i) the terms "person" and "beneficial owner" shall
have the meanings set forth in Regulation 13D under the
Exchange Act, as such Regulation exists on the date hereof;
(ii) the term "voting security" shall include any
security that has, or may have upon an event of default or in
respect to any transaction, a right to vote on any matter upon
which the holder of any class of common stock of Selective
would have a right to vote;
(iii) the term "group" shall have the meaning set
forth in Section 13(d)(3) of the Exchange Act; and
(iv) the term "substantially all of the assets of
Selective" shall mean more than fifty percent (50%) of
Selective's assets on a consolidated basis, as shown in
Selective's most recent audited balance sheet.
3. CONTINUATION OF EMPLOYMENT.
Notwithstanding any termination date as may be specified in any
employment agreement in effect from time to time between the Company and the
Executive, in the event of a Change in Control, the Company agrees to continue
to employ the Executive, and, subject to the provisions of Section 4 hereof, the
Executive agrees to continue in the employ of the Company, in the capacity in
which the Executive was serving, and with the duties, responsibilities and
status of the Executive immediately prior to such Change in Control or in such
other capacity as shall be agreeable to the Executive, for a term commencing on
the date on which the Change in Control shall have occurred and ending three (3)
years after the date on which the Change in Control shall have occurred.
Commencing on the date three (3) years after the date on which the Change in
Control shall have occurred and each anniversary date of the Change in Control
thereafter (each such date being hereinafter referred to as a "Renewal Date"),
the term of the Executive's employment shall automatically be renewed for one
(1) additional year unless at least twenty-four (24) months prior to a Renewal
Date the Company or the Executive shall have given written notice in the manner
hereinafter prescribed that such employment shall not be renewed as of such
Renewal Date. The provisions of this Section 3 shall survive any termination of
this Agreement pursuant to Section 1 hereof after a Change in Control and shall
continue in full force and effect.
4. TERMINATION OF EMPLOYMENT FOLLOWING CHANGE IN CONTROL.
The Executive shall be entitled to the benefits provided in
Section 5 hereof upon the termination of his employment during the term of this
Agreement, as the same may be extended, after a Change in Control has occurred,
unless such termination is: (a) due to the Executive's death or Retirement, (b)
by the Company for Cause or Disability, or (c) by the Executive other than for
Good Reason (as such foregoing capitalized terms are hereinafter defined).
(i) Termination by the Executive or by the Company of
the Executive's employment based on "Retirement" shall mean
termination: (A) at such age as shall be established by the
Board prior to a Change in Control for mandatory or normal
retirement of Company executives in general, which shall not
be less than age 65, or (B) at any other retirement age set by
mutual agreement of the Company and the Executive and approved
by the Board.
(ii) Termination by the Company of the Executive's
employment based on "Disability" shall mean termination
because of the Executive's physical injury or physical or
mental illness which causes him to be absent from his duties
with the Company on a full-time basis for a continuous period
in excess of the greater of: (A) the period of disability
constituting permanent disability as specified under the
Company's long-term disability insurance coverage applicable
to the Executive prior to a Change in Control or (B) six (6)
calendar months, unless within thirty (30) days after Notice
of Termination (as hereinafter defined) is thereafter given
the Executive shall have returned to the full-time performance
of his duties.
(iii) Termination by the Company of the Executive's
employment based on "Cause" shall mean termination upon: (A)
the Executive's conviction of a felony (as evidenced by a
binding and final judgment, order or decree of a court of
competent jurisdiction, in effect after exhaustion or lapse of
all rights of appeal), (B) the continued
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willful failure by the Executive to perform substantially his
duties with the Company (other than any such failure resulting
from his incapacity due to physical injury or physical or
mental illness) for a period of thirty (30) days after a
demand for substantial performance is delivered to the
Executive by the Board of Directors of the Company which
specifically identifies the manner in which the Board of
Directors believes that the Executive has not substantially
performed his duties, or (C) willful misconduct in the
performance of the Executive's duties and obligations to the
Company which constitute common law fraud or other gross
malfeasance of duty; provided, however, that no termination
for Cause pursuant to clauses (B) or (C) shall occur unless
and until there shall have been delivered to the Executive a
copy of a resolution duly adopted by the affirmative vote of
not less than sixty-six and two thirds percent (66 2/3%) of
the entire membership of the Board, excluding the Executive,
at a meeting of the Board called and held for the purpose
(after reasonable notice to the Executive and an opportunity
for the Executive, together with his counsel, to be heard
before the Board), finding that in good faith opinion of the
Board the Executive was guilty of the conduct set forth in
such clause (B) or (C) and specifying the particulars thereof
in reasonable detail. For purposes of this clause (iii), no
act, or failure to act, on the part of the Executive shall be
considered "willful" unless done or omitted to be done by the
Executive in bad faith and without reasonable belief that his
action or omission was in, or not opposed to, the best
interests of the Company. Any act, or failure to act, based
upon authority given pursuant to a resolution duly adopted by
the Board or based upon the advice of counsel for the Company
shall be conclusively presumed to have been done or omitted to
have been done by the Executive in good faith and in the best
interests of the Company.
(iv) Termination by the Executive of his employment for "Good
Reason" shall mean (A) termination by the Executive based on:
(1) any reduction in his base salary below the annualized rate
in effect on the date preceding the date on which a Change in
Control shall have occurred or the Company's failure to
increase (within 12 months of the Executive's last increase in
base salary) the Executive's base salary after a Change in
Control in an amount which at least equals, on a percentage
basis, changes in the Consumer Price Index, all items, for New
Jersey in the preceding twelve (12) months; or (2) a failure
by the Company to continue in effect, or the material
reduction of any of Executive's benefits under, any Plan (as
hereinafter defined) in which the Executive was participating
on the date preceding the date on which a Change in Control
shall have occurred (or Plans providing the Executive with at
least substantially similar benefits) other than as a result
of the normal expiration of any such Plan in accordance with
its terms as in effect on the date preceding the date on which
a Change in Control shall have occurred, or the taking of any
action, or the failure to act, by the Company which would
adversely affect the Executive's continued participation in
any of such Plans on at least as favorable a basis to him as
was the case on the date preceding the date on which a Change
in Control shall have occurred or which would materially
reduce the Executive's benefits in the future under any such
Plans or deprive the Executive of any material benefit enjoyed
by him at the time of the Change in Control; or (3) without
the Executive's express prior written consent, the assignment
to the Executive of any duties inconsistent with his
positions, duties, responsibilities and status with the
Company immediately prior to a Change in Control, or any
diminution in the Executive's responsibilities as an executive
of the Company as compared with those he had as an executive
of the Company immediately prior to a Change in Control, or
any change in the Executive's titles or office as in effect
immediately prior to a Change in Control, or any removal of
the Executive from, or failure to re-elect him to, any of such
positions, except in connection with the termination of the
Executive's employment for Cause, Disability or Retirement or
as a result of the Executive's death or by his termination of
his employment other than for Good Reason; or (4) without the
Executive's express prior written consent, the imposition of a
requirement by the Company that the Executive be based
anywhere other than where the Executive's office is located on
the date preceding the date on which a Change in Control shall
have occurred; or (5) without the Executive's express prior
written consent, any reduction in the number of paid vacation
days to which the Executive was entitled as of the date
preceding the date on which a Change in Control shall have
occurred; or (6) a failure by the Company to provide the
Executive with office, secretarial, computer and other support
services and facilities consistent with his position in the
Company and substantially equivalent to those available to the
Executive on the date preceding the date on which a Change in
Control shall have occurred; or (7) the failure by the Company
to obtain from any successor to the business of the Company,
as set forth in Section 13, the assent to this Agreement, as
described in such Section 13; or (8) subsequent to a Change in
Control, any purported termination of the Executive's
employment which is not effected pursuant to a Notice of
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Termination (as hereinafter defined) satisfying the
requirements of Section 4(v) (and, if applicable, Section
4(iii)), and for purposes of this Agreement no such purported
termination shall be effective; or (9) any breach by the
Company of any of the terms and conditions of any employment
agreement between the Company and the Executive or any
agreement between the Company and the Executive providing for
incentive compensation, stock options, stock appreciation
rights, stock bonuses, pension benefits, group insurance or
any similar benefits; or (10) any requirement by the Company
that the Executive be absent from Executive's office on
business travel or otherwise more than forty-five (45) days in
any calendar year or for more than fourteen (14) consecutive
days at any time, or (B) a voluntary termination by the
Executive upon Notice of Termination given by the Executive to
the Company no later than six (6) months after the occurrence
of a Change in Control, provided that Executive shall not
thereafter violate the provisions of any agreement between the
Executive and the Company relating to nondisclosure of
confidential information or noncompetition with the Company.
For purposes of this Agreement, a "Plan" shall mean any plan,
contract, authorization or arrangement, whether or not set
forth in any formal written documents, providing for
compensation, incentive compensation, non-qualified
supplemental retirement benefits, stock options (whether or
not in tandem with stock appreciation rights), stock
appreciation rights, long-term incentives, stock bonuses or
restricted stock grants or any employee benefit plan such as a
pension, retirement, profit sharing, medical, disability,
accident, life insurance plan or a relocation plan or policy
or any other plan, program, policy or arrangement of the
Company intended to benefit the Executive or employees of the
Company generally.
(v) Any termination of the Executive's employment by
the Company or by the Executive shall be communicated by a
Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a
written notice given in the manner hereinafter prescribed
which shall indicate the specific termination provision in
this Agreement relied upon and shall set forth in reasonable
detail the facts and circumstances claimed to provide a basis
for termination of the Executive's employment under the
provision so indicated and shall specify the date of
termination in accordance with this Agreement.
(vi) "Date of Termination" following a Change in
Control shall mean: (A) if the employment is to be terminated
by the Company for Disability, thirty (30) days after Notice
of Termination is given (provided that the Executive shall not
have returned to the performance of the Executive's duties on
a full-time basis during such thirty (30) day period), or (B)
if the employment is to be terminated by either party for any
other reason, the date on which Notice of Termination is
given.
(vii) In the event of dispute as to the Executive's
termination under Section 4(iv) the matter shall be forthwith
submitted to binding arbitration as hereinafter provided.
5. PAYMENT OF BENEFITS.
(a) If an event has occurred pursuant to Section 4 hereof which
entitles the Executive to the benefits and rights set forth in this Section 5,
the Executive shall receive from the Company, or from the Escrow Agent (as
hereinafter defined), as the case may be, within five (5) days following the
Date of Termination (except as otherwise provided) all of the following
benefits, other than those benefits which he specifically elects by written
notice to the Company or to the Escrow Agent, as the case may be, not to
receive:
(i) earned but unpaid base salary through the Date of
Termination at the rate in effect immediately prior to the time a
Notice of Termination is given plus any incentive compensation,
benefits or awards (including both the cash and stock components) which
pursuant to the terms of any Plans have been accrued, earned or have
become payable, but which have not yet been paid to the Executive
(including any amounts which previously had been deferred at the
Executive's request); and
(ii) as severance pay and in lieu of any further salary for
periods subsequent to the Date of Termination (including any payments
of salary provided for by any employment agreement with the Company),
an amount in cash equal to the Executive's "annualized includible
compensation for the base period" (as defined in Section 280G(d)(1) of
the Internal Revenue Code of 1986, as amended (the "Code")), multiplied
by a factor of 2.99.
(b) If an event has occurred pursuant to Section 4 hereof which
entitles the Executive to the benefits and rights set forth in this Section 5,
the Executive shall be entitled to the benefits of any stock options, stock
appreciation rights, restricted stock grants, stock bonuses or other benefits
theretofore granted by the Company to the Executive under any Plan, whether or
not provided for in any agreement with the Company, provided, however, that,
except to the extent requiring approval of Selective's stockholders, (i) all
unvested stock options, stock appreciation rights, restricted stock grants,
stock bonuses, long-term incentives and similar benefits shall be deemed to be
vested in full on the Date of Termination, notwithstanding any provision to the
contrary or any provision requiring any act or acts by the Executive in any
agreement with the Company or Selective or any Plan, and (ii) to the extent that
any such stock options, stock appreciation rights, restricted stock grants,
stock bonuses, long-term incentives or similar benefits shall require by its
terms the exercise thereof
86
<PAGE> 5
by the Executive, the last date to exercise the same shall, notwithstanding any
provision to the contrary in any agreement or any Plan, shall be the later to
occur of (A) the last date provided for such exercise in any agreement or Plan
evidencing any such stock options, stock appreciation rights, restricted stock
grants, stock bonuses, long-term incentives or similar benefits or (B) the close
of business on the date which shall be one hundred twenty (120) days after the
Date of Termination and (iii) if the vesting pursuant hereto of any such stock
options, stock appreciation rights, restricted stock grants, stock bonuses,
long-term incentives or similar benefits shall have the effect of subjecting the
Executive to liability under Section 16(b) of the Exchange Act or any similar
provision of law, the vesting date thereof shall be deemed to be the first day
after the Termination Date on which such vesting may occur without subjecting
the Executive to such liability.
(c) If an event has occurred pursuant to Section 4 hereof which
entitles the Executive to the benefits and rights set forth in this Section 5,
the Company shall maintain in full force and effect, for the continued benefit
of the Executive and his dependents for a period terminating on the earliest of:
(i) three (3) years after the Date of Termination or (ii) the commencement date
of equivalent benefits from a new employer, all insured and self-insured
employee welfare benefit Plans in which the Executive was entitled to
participate immediately prior to the Date of Termination, provided that the
Executive's continued participation is not barred under the general terms and
provisions of such Plans. In the event that the Executive's participation in any
such Plan is barred by its terms, the Company, at its sole cost and expense,
shall arrange to have issued for the benefit of the Executive and his dependents
individual policies of insurance providing benefits substantially similar (on an
after-tax basis) to those which the Executive otherwise would have been entitled
to receive under such Plans pursuant to this Section 5(c). If, at the end of
three (3) years after the Termination Date, the Executive has not previously
received or is not receiving equivalent benefits from a new employer, or is not
otherwise receiving such benefits, the Company shall arrange, at its sole cost
and expense, to enable him to convert his and his dependents' coverage under
such Plans to individual policies or programs upon the same terms as employees
of the Company may apply for such conversions upon termination of employment.
(d) Except as specifically provided in Section 5(c) above, the amount
of any payment provided for in this Section 5 shall not be reduced, offset or
subject to recovery by the Company by reason of any compensation earned by the
Executive as the result of employment by another employer after the Date of
Termination, or otherwise. The Executive shall not be required to mitigate any
amounts payable or benefits provided under this Agreement by seeking or
accepting other employment.
(e) The rights and benefits provided herein shall be in addition to,
and not (except as provided in this Agreement) to the exclusion of, any other
rights and benefits that may be available to the Executive in regard to or
arising out of the termination of the Executive's employment, including claims
for breach of contract or for violation of relevant employment, worker's
compensation or employee benefits laws. The prosecution or enforcement of rights
granted by this Agreement or the election to take benefits under this Agreement
shall in no manner constitute an election of rights or remedies by the Executive
other than in respect of this Agreement.
(f) Notwithstanding anything in this Agreement to the contrary, if any
of the payments or benefits provided for in this Agreement, together with any
other payments or benefits which the Executive has the right to receive from the
Company (including, without limitation, any amounts payable under any employment
contract with the Company), would constitute a "parachute payment" (as defined
in Section 280G(b)(2) of the Code), the payments and benefits due to the
Executive shall be reduced, in such order of priority and amount as the
Executive shall elect, to the largest amount as will result in no portion of
such payments being subject to the excise tax imposed by Section 4999 of the
Code. Notwithstanding anything in the foregoing to the contrary, any dispute or
controversy regarding whether any payments under this Agreement must be reduced
pursuant to this Section 5(f) shall be conclusively settled by an independent
accounting firm acceptable to each of the parties hereto, or, if no firm is
acceptable to both parties hereto, each of the Executive and the Company shall
select an accounting firm acceptable to it, and such accounting firms shall
together designate an independent accounting firm to settle such dispute or
controversy, and such settlement shall be binding upon both parties, provided,
however, that any accounting firm designated to settle any dispute or
controversy hereunder shall not have been previously retained by either party
for a period of a least two (2) years subsequent to the date of this settlement
of such dispute or controversy. The Company or the Escrow Agent, as the case may
be, may withhold from any benefits payable under this Agreement all federal,
state, city or other taxes as shall be required pursuant to any law or
governmental regulation or ruling.
(g) In the event that a court of competent jurisdiction shall determine
that any portion of the payment and benefits paid to the Executive pursuant to
this Agreement shall have constituted a "parachute payment" (as defined in
Section 280G(b)(2) of the Code) and subject to an excise tax under Section
4999(a) of the Code, the Company shall pay to the Executive in cash such
additional amount as is necessary so that the total amount received by the
Executive under this Agreement, after payment of any applicable taxes on such
total amount (including, without limitation, federal, state or local income
taxes, any taxes imposed by Section 4999(a) of the Code and any taxes in respect
of any amount payable to the Executive under this Section 5(g)) shall not be
less than the net after tax amount that the Executive would have been entitled
to receive under this Agreement had such excise tax under Section 4999(a) not
been imposed. The Company shall pay such additional amount to the Executive
within thirty (30) days after the Executive gives written notice to the Company
that such determination has been made by a court of competent jurisdiction.
6. ESCROW OF BENEFITS.
(a) At any time after the occurrence of a Change in Control, the
Company shall, upon the written request of the Executive, promptly deliver to a
bank or other institution acceptable to the Executive, as escrow agent (the
"Escrow Agent"), an amount of cash or certificates of deposit, treasury bills or
irrevocable letters of credit adequate to fully fund the obligations of the
Company under this Agreement.
87
<PAGE> 6
(b) The escrow agreement or arrangement between the Company and the
Escrow Agent shall provide that amounts payable to the Executive under this
Agreement shall be paid by the Escrow Agent to the Executive five (5) days after
written demand therefore by the Executive to the Escrow Agent, with a copy to
the Company, certifying that such amounts are due and payable under this
Agreement because of the occurrence of an event specified under Section 4
hereof. Such escrow agreement or arrangements shall also provide that if the
Company shall, prior to payment by the Escrow Agent, object in writing to the
Escrow Agent, with a copy to the Executive, as to the payment of any amounts
demanded by the Executive under this Agreement, certifying that such amounts are
not due and payable to the Executive because an event specified in Section 4
hereof has not occurred, such dispute shall be resolved by binding arbitration
as hereinafter set forth.
(c) Such escrow agreement or arrangements shall further provide that
any dispute described in Section 6(b) hereof shall be forthwith submitted to
binding arbitration as hereinafter provided.
7. ARBITRATION.
Any disputes arising under Section 4(iv) or Section 6(b) hereof shall
be forthwith submitted to binding arbitration by three (3) arbitrators in
Newark, New Jersey, under the expedited rules of the American Arbitration
Association then obtaining. One such arbitrator shall be selected by each of the
Company and the Executive, and the two arbitrators so selected shall select the
third arbitrator. Selection of all three arbitrators shall be made within thirty
(30) days after the date the dispute arose. Such arbitration shall be limited
solely to a determination of whether or not an event has occurred pursuant to
Section 4 of this Agreement which entitles the Executive to the benefits and
rights set forth in Section 5 of this Agreement. The written decision of the
arbitrators shall be rendered within ninety (90) days after selection of the
third arbitrator. The decision of the arbitrators shall be final and binding on
the Company and the Executive and may be entered by either party in any court
having jurisdiction.
8. ENFORCEMENT OF RIGHTS.
The Company, and any survivor of any business combination with the
Company causing rights to accrue to the Executive under this Agreement, shall
pay all the Executive's legal, accounting and arbitration fees and expenses and
costs as they become due, which the Executive may become obligated to pay in
obtaining, enforcing, retaining or defending any right or benefit provided by
this Agreement, whether in respect of any enforcement undertaken or demand made
by the Executive that is successful or in respect of any enforcement undertaken
or demand made in good faith by the Executive that is not successful. If
judgment is rendered against any of such persons, it will pay the Executive,
unless expressly included in the judgment, prejudgment interest from the date of
the Notice of Termination at the prime rate being charged by Midlantic National
Bank on the date of the Notice of Termination.
9. EXECUTIVE'S COMMITMENT.
The Executive agrees that subsequent to his period of employment with
the Company, he will not at any time communicate or disclose to any unauthorized
person, without the written consent of the Company, any proprietary or
confidential information concerning the business affairs, products or customers
of the Company which, if disclosed, would have a material adverse effect upon
the business or operations of the Company and its subsidiaries, taken as a
whole; it being understood, however, that the obligations of this Section 9
shall not apply to the extent that the aforesaid matters: (a) are disclosed in
circumstances where the Executive is legally required to do so or (b) become
generally known to and available for use by the public otherwise than by the
Executive's wrongful act or omission.
10. SEVERABILITY.
If any one or more of the provisions (or any part thereof) of this
Agreement would be, invalid, illegal or unenforceable in any respect under
applicable law, then such provision (or any part thereof) shall be deemed
modified to the extent necessary to render it valid while most nearly preserving
its original intent; no provision (or any part thereof) of this Agreement shall
be affected by another provision (or any part thereof) of this Agreement being
held invalid.
11. NOTICE.
For the purposes of this Agreement, notices, requests, demands and all
other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given: (i) when delivered personally, or (ii)
three (3) days after having been mailed by registered or certified mail, return
receipt requested, or (iii) one (1) day after having been sent by telegraph or
mailed by express mail or other overnight courier service, postage, telegraph,
courier and registry fees, as the case may be, prepaid and addressed to the
addresses set forth in the first paragraph of this Agreement or to such other
address as either party may have furnished to the other in writing in accordance
herewith, except that notice of change of address shall be effective only upon
receipt. All notices to the Company shall be directed to the attention of the
President of the Company.
12. MERGER; AMENDMENT; WAIVER.
(a) This Agreement supersedes all other agreements, arrangements and
understandings, and merges all negotiations and discussions, with respect to the
subject matter hereof; provided, however, that this Agreement shall not, except
to the extent specifically provided herein, supersede or limit the rights,
duties or obligations that the Executive may have under any written employment
agreement with the Company.
(b) This Agreement may be amended or modified only by a writing signed
by both parties. No further agreement between the parties shall be deemed to
supersede, amend or modify this Agreement unless a statement to that effect is
made in such future agreement or the enforcement of such agreement would give
rise to conflicting obligations between the Executive on the one hand and the
Company, its successor or other bound party on the other hand; in the latter
case, however, this Agreement shall be deemed to be superseded, amended or
modified only to the extent necessary to avoid such conflict.
(c) The waiver of the non-performance of any obligation under this
Agreement shall apply to that non-performance only and shall not constitute a
waiver, modification or amendment of this provision giving rise to such
obligation.
88
<PAGE> 7
13. SUCCESSORS; BINDING AGREEMENT.
(a) The Company will require any successor (whether direct or indirect,
by merger, consolidation or other combination other than a sale of assets) to
the business of the Company, by agreement in form and substance satisfactory to
the Executive, to expressly assume and agree to perform this Agreement in the
same manner and to the same extent that the Company would be required to perform
it if no such succession had taken place. Failure of the Company to obtain such
agreement prior to the effectiveness of any such succession shall constitute
Good Reason for termination by the Executive of his employment, and, if a Change
in Control shall have occurred, the Executive shall be entitled to the benefits
set forth in Section 5 of this Agreement, except that for purposes of
implementing the foregoing, the date. On which any such succession becomes
effective shall be deemed the Date of Termination. As used in this Agreement,
the "Company" shall mean the Company as hereinbefore defined, and any successor
and assign to its business as aforesaid which executes and delivers the
agreement provided for in this Section 13 or which otherwise becomes bound by
all the terms and provisions of this Agreement by operation of law.
(b) This Agreement shall inure to the benefit of and be enforceable by
the personal or legal representatives, executors, administrators, successors,
heirs, distributees, devises and legatees of the Executive. If the Executive
should die while any amount would still be payable to him hereunder if he had
continued to live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to the Executive's devisee,
legatee or other designee or, if there be no such designee, to his estate.
14. GOVERNING LAW.
This Agreement is being made in the State of New Jersey and shall be
governed by, and interpreted and construed with reference to, the laws of New
Jersey.
15. HEADINGS.
Headings in this Agreement are for convenience of reference only and
shall not be used to construe or interpret this Agreement.
16. COUNTERPARTS.
This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
IN WITNESS WHEREOF, the parties hereunder have executed this Agreement as of the
date first above written.
SELECTIVE INSURANCE COMPANY OF AMERICA
BY:
---------------------------------
GREGORY E. MURPHY,
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
--------------------------------
RONALD J. ZALESKI
In consideration of the covenants of the Executive hereinabove set forth,
Selective hereby guarantees to the Executive the full performance by the Company
of all of its obligations under the foregoing Termination Agreement.
SELECTIVE INSURANCE GROUP, INC.
BY:
-----------------------------------
GREGORY E. MURPHY,
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
89
<PAGE> 1
EXHIBIT 10.16aa
AMENDMENT NO. 3 TO EMPLOYMENT AGREEMENT
AMENDMENT NO. 3, dated as of September 1, 1999, among
SELECTIVE INSURANCE GROUP, INC., a New Jersey corporation ("Selective"), having
an office at 40 Wantage Avenue, Branchville, New Jersey 07826, SELECTIVE
INSURANCE COMPANY OF AMERICA, a New Jersey corporation ("SICA"), having an
office at 40 Wantage Avenue, Branchville, New Jersey 07826, and THORNTON R.
LAND, having an address at 78 Onderdonk Road, Warwick, New York 10990 (the
"Executive"), to Employment Agreement dated as of September 1, 1993 among
Selective, SICA and the Executive, as heretofore amended by Amendment No. 1
thereto dated as of January 31, 1994 and Amendment No. 2 thereto dated as of
June 6, 1996 (as so amended, the "Employment Agreement").
WHEREAS, Selective, SICA and the Executive have executed and
delivered the Employment Agreement, and Selective has guaranteed all of the
obligations of SICA as the Employer under the Employment Agreement; and
WHEREAS, the parties hereto desire to further amend the
Employment Agreement to extend the term thereof and to modify the Salary (as
defined in Section 3 of the Employment Agreement) provided for therein.
THEREFORE, in consideration of the premises and the mutual
covenants hereinafter set forth, the parties hereto agree as follows:
1. The term of employment under the Employment Agreement is
hereby extended for a period of two (2) years commencing September 1, 1999 (the
"Renewal Term"), and all references in the Agreement to the term thereof or the
Executive's term of employment thereunder shall include the Renewal Term.
2. The Salary, as defined and provided for in Section 3 of the
Employment Agreement, shall be paid to the Executive at a rate of not less than
Two Hundred Forty Thousand Dollars ($240,000.00) per year during the Renewal
Term.
3. Selective reaffirms that it guarantees to the Executive the
full performance by SICA of all of its obligations under the Employment
Agreement as amended herein.
4. Except as amended herein, the Employment Agreement shall
continue in full force and effect on and after the date hereof.
IN WITNESS WHEREOF, this Amendment has been duly executed by
the Executive and on behalf of Selective and SICA by their duly authorized
officers as of the date and year first above written.
SELECTIVE INSURANCE GROUP, INC.
BY:____________________________
Name: Gregory E. Murphy
Title: President and Chief
Executive Officer
SELECTIVE INSURANCE COMPANY
OF AMERICA
BY:____________________________
Name: Gregory E. Murphy
Title: President and Chief
Executive Officer
____________________________
Executive
90
<PAGE> 1
EXHIBIT 11
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
($ in thousands, except per share amounts) Income Shares Per Share
(Numerator) (Denominator) Amount
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
1999
BASIC EPS:
Net Income available to common stockholders 53,717 27,081 1.98
====
EFFECT OF DILUTIVE SECURITIES
Restricted stock -- 683
8.75% convertible subordinated debentures 355 873
Stock options (127) 240
------ --------
DILUTED EPS
Income available to common stockholders and
assumed conversions 53,945 28,877 1.87
====== ====== ====
1998
BASIC EPS:
Net Income available to common stockholders 53,570 28,480 1.88
====
EFFECT OF DILUTIVE SECURITIES
Restricted stock -- 534
8.75% convertible subordinated debentures 375 926
Stock options (989) 472
====== ======
DILUTED EPS
Income available to common stockholders and
assumed conversions 52,956 30,412 1.74
====== ====== ====
1997
BASIC EPS:
Net Income available to common stockholders 69,608 28,909 2.41
====
EFFECT OF DILUTIVE SECURITIES
Restricted stock -- 404
8.75% convertible subordinated debentures 396 971
Stock options 263 641
------- ------
DILUTED EPS
Income available to common stockholders and
assumed conversions 70,267 30,925 2.27
====== ====== ====
</TABLE>
91
<PAGE> 1
EXHIBIT 21
SELECTIVE INSURANCE GROUP, INC., SUBSIDIARIES
<TABLE>
<CAPTION>
Percentage
Jurisdiction voting
in which securities
Name organized Parent owned
- ------------------------------------------------------ ------------------ ----------------------------------------------- ----------
<S> <C> <C> <C>
ALTA Services LLC New Jersey Selective Way Insurance Company 75%
Selective Insurance Company of the Southeast 25%
Consumer Health Network Plus, LLC New Jersey Selective Insurance Group, Inc. 100%
Niagara Exchange Corporation Delaware Selective Insurance Group, Inc. 100%
PDA Software Services Inc Kansas Selective Insurance Group, Inc. 100%
Selective HR Solutions, Inc. Florida Selective Insurance Group, Inc. 100%
Selective Insurance Company of New York New York Niagara Exchange Corp. 87%
Selective Insurance Company of America New Jersey Selective Insurance Group, Inc 100%
Selective Insurance Company of South Carolina South Carolina Selective Insurance Group, Inc. 100%
Selective Insurance Company of the Southeast North Carolina Selective Insurance Group, Inc. 100%
Selective Technical Administrative Resources, Inc. New Jersey Selective Insurance Group, Inc. 100%
Selective Way Insurance Company New Jersey Selective Insurance Group, Inc. 100%
Wantage Avenue Holding Company Inc New Jersey Selective Insurance. Company of America 100%
</TABLE>
<PAGE> 1
Consent of Independent Auditors
The Board of Directors
Selective Insurance Group, Inc.
We consent to the incorporation by reference in the registration statements
(No.'s 333-10477, 33-22450, 33-36368, 333-37501, 333-10465 and 333-31942) on
Form S-8 and the registration statements (No.'s 2-80881 and 33-30833) on Form
S-3 of Selective Insurance Group, Inc. and its subsidiaries of our reports
dated February 2, 1999, relating to the consolidated balance sheets of
Selective Insurance Group, Inc. and its subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1998, and all related schedules, which reports appear in the
December 31, 1998 annual report on Form 10-K of Selective Insurance Group, Inc.
and its subsidiaries.
/s/ KPMG LLP
March 22, 2000
New York, New York
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1999 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000230557
<NAME> SELECTIVE INSURANCE GROUP, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 1,122,786
<DEBT-CARRYING-VALUE> 271,384
<DEBT-MARKET-VALUE> 271,604
<EQUITIES> 251,998
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,710,938
<CASH> 57,395<F1>
<RECOVER-REINSURE> 9,797
<DEFERRED-ACQUISITION> 109,095
<TOTAL-ASSETS> 2,513,267
<POLICY-LOSSES> 1,275,123<F2>
<UNEARNED-PREMIUMS> 413,601
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 132,887<F3>
0
0
<COMMON> 75,929
<OTHER-SE> 494,035
<TOTAL-LIABILITY-AND-EQUITY> 2,513,267
799,064
<INVESTMENT-INCOME> 96,531
<INVESTMENT-GAINS> 29,377
<OTHER-INCOME> 49,794
<BENEFITS> 592,215<F4>
<UNDERWRITING-AMORTIZATION> 254,744
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 63,403
<INCOME-TAX> 9,686
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 53,717
<EPS-BASIC> 1.98
<EPS-DILUTED> 1.87
<RESERVE-OPEN> 1,193,244<F5>
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 1,275,123
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Equals the sum of short-term investment and cash.
<F2>Equals the sum of reserve for losses and the reserve for loss expenses.
<F3>Equals the sum of notes payable, short-term debt and convertible subordinated
debentures.
<F4>Equals the sum of losses incurred and loss expenses incurred.
<F5>Equals the sum of reserve for losses and reserve for loss expenses at the
beginning of the year.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1998 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
SATEMENTS.
</LEGEND>
<RESTATED>
<CIK> 0000230557
<NAME> SELECTIVE INSURANCE GROUP, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-31-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 1,075,276
<DEBT-CARRYING-VALUE> 358,380
<DEBT-MARKET-VALUE> 373,179
<EQUITIES> 269,991
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,770,639
<CASH> 58,836<F1>
<RECOVER-REINSURE> 11,495
<DEFERRED-ACQUISITION> 109,774
<TOTAL-ASSETS> 2,432,168
<POLICY-LOSSES> 1,193,274<F2>
<UNEARNED-PREMIUMS> 400,143
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 117,078<F3>
74,833
0
<COMMON> 0
<OTHER-SE> 532,750
<TOTAL-LIABILITY-AND-EQUITY> 2,432,168
722,992
<INVESTMENT-INCOME> 99,196
<INVESTMENT-GAINS> (2,139)
<OTHER-INCOME> 17,280
<BENEFITS> 507,800<F4>
<UNDERWRITING-AMORTIZATION> 235,523
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 63,704
<INCOME-TAX> 10,134
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 53,570
<EPS-BASIC> 1.88
<EPS-DILUTED> 1.74
<RESERVE-OPEN> 1,161,169<F5>
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 1,193,274
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Equals the sum of short-term investment and cash.
<F2>Equals the sum of reserve for losses and the reserve for loss expenses.
<F3>Equals the sum of notes payable, short-term debt and convertible subordinated
debentures.
<F4>Equals the sum of losses incurred and loss expenses incurred.
<F5>Equals the sum of reserve for losses and reserve for loss expenses at the
beginning of the year.
</FN>
</TABLE>
