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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K

Commission file number 0-8641
SELECTIVE INSURANCE GROUP, INC.
(Exact name of registrant as specified in its charter)

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]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2)
        [X]  Yes          [   ]  No

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement for the 2005 Annual Meeting of Stockholders to be held on April 27, 2005 are incorporated by reference into Part III of this report.

Portions of the registrant's 2004 Annual Report to Shareholders are incorporated by reference into Parts I and II of this Form 10-K.

FORWARD-LOOKING STATEMENTS

In this Annual Report on Form 10-K, Selective Insurance Group, Inc. (Selective) and its management discuss and make statements regarding their intentions, beliefs, and current expectations regarding Selective's future operations and performance.  Such statements, including information incorporated by reference, are "forward-looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995 (PSLRA).  The PSLRA provides a safe harbor under the Securities Act of 1933 and the Securities Exchange Act of 1934 for forward-looking statements.  These statements relate to our intentions, beliefs, projections, estimations or forecasts of future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels of activity, or performance to be materially different from those expressed or implied by the forward-looking statements.  In some cases, you can identify forward-looking statements by use of words such as "may," "will," "could," "would," "should," "expect," "plan," "anticipate," "target," "project," "intend," "believe," "estimate," "predict," "potential," "pro forma," "seek," "likely," "continue," or other comparable terminology.  These statements are only predictions, and we can give no assurance that such expectations will prove to be correct.  We undertake no obligation, other than as may be required under the federal securities laws, to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Factors that could cause Selective's actual results to differ materially from those projected, forecasted or estimated in forward-looking statements are discussed in further detail later in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the section entitled, "Risk Factors."  These risk factors may not be exhaustive.  Selective operates in a continually changing business environment and new risk factors emerge from time-to-time.  Selective can neither predict such new risk factors nor assess the impact, if any, of such new risk factors on its businesses or the extent to which any factor or combination of factors may cause actual results to differ materially from those expressed or implied in any forward-looking statements in this report.  In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report might not occur.

PART I

Item 1.    Business.

Overview
Selective offers property and casualty insurance products and diversified insurance services and products through its various subsidiaries.  Selective was incorporated in New Jersey in 1977.  Its principal property and casualty insurance subsidiary was organized in New Jersey in 1926.  Its main offices are located in Branchville, New Jersey.  Selective classifies its businesses into three operating segments:

• Insurance Operations, which write commercial lines and personal lines property and casualty insurance through independent insurance agents, mainly in 20 states in the Eastern region of the United States;

• Investments; and

• Diversified Insurance Services, which provide managed care services, human resource administration outsourcing products and services (HR outsourcing), and federal flood insurance administrative services.

Financial information about Selective's three operating segments is contained in this report in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," Item 8,  "Financial Statements and Supplementary Data," and Note 11 to the consolidated financial statements, "Segment Information." 

Description of Operating Segment Products and Markets

                Insurance Operations Segment
Selective's Insurance Operations sell property and casualty insurance policies and related services.  Insurance policies are contracts to cover losses for specified risks in exchange for premiums.  Property insurance generally covers the financial consequences of accidental loss to the insured's property.  Casualty insurance generally covers the financial consequences of bodily injury and/or property damage to a third party as a result of the insured's negligent acts, omissions, or legal liabilities.  Property claims are generally reported and settled in a relatively short period of time.  Casualty claims, on the other hand, often can take years to be reported and settled.  If a claim is disputed, litigation over the terms of the insurance policy is common.

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Selective's Insurance Operations segment sells its property and casualty insurance products and services through six insurance subsidiaries (Insurance Subsidiaries), which are listed on the following table together with their respective ratings by A.M. Best Company, Inc. (A.M. Best), and state of domicile by which they are primarily regulated:

In 2004, Selective was ranked as the 54^th largest property and casualty group in the United States based on the combined net premiums written (NPW), or premiums for all sold policies, by the Insurance Subsidiaries in 2003 by A.M. Best in its list, "Top Property/Casualty Writers."  Selective was also named in 2004 to the "Ward's 50 Benchmark Group."  In preparing this list, the Ward Group, a management consulting group specializing in the insurance industry, analyzes more than 2,900 property-casualty insurance companies and lists the top 50 companies that it believes excelled at balancing safety, consistency and performance over the previous five years.

                Insurance Operations Results
Selective's Insurance Operations segment derives substantially all of its revenues from net premiums earned, which are the premiums recognized as revenue ratably over the life of the insurance policy.  Expenses fall into two categories:  (i) losses associated with claims and various loss adjustment expenses (LAE) and (ii) expenses related to the issuance of insurance policies, such as agent commissions, premium taxes, and other underwriting expenses, including employee compensation and benefits. 

The underwriting performance of insurance companies is measured under accounting principles generally accepted in the United States of America (GAAP) by three different ratios of losses and expenses to net premiums earned:

• Loss ratio, which is determined by dividing incurred loss and LAE by net premiums earned;

• Expense ratio, which is determined by dividing all expenses related to the issuance of insurance policies by net premiums earned; and

• Combined ratio, which is the sum of the loss ratio and the expense ratio.

A combined ratio under 100% indicates that an insurance company is generating an underwriting profit and a combined ratio over 100% indicates that an insurance company is generating an underwriting loss. 

The following table shows the results of the Insurance Operations segment for the last three completed fiscal years:

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As an insurance company, Selective is regulated by each of the states where it does business.  As part of that regulation, Selective is required to file financial statements with the states prepared in accordance with Statutory Accounting Practices (SAP) promulgated by the National Association of Insurance Commissions (NAIC) and adopted by the various states.  Statutory accounting differs from GAAP accounting in many ways, but the most significant is the treatment of underwriting expenses.  Under SAP, underwriting expenses are recognized immediately, whereas, under GAAP, they are deferred and amortized over the life of the policy in correlation with the related premium revenue.  In addition, the statutory underwriting expense ratio is calculated using written premium as the denominator.  Selective's management makes extensive use of statutory financial information in the management of its operations.

                Lines of Business and Products
Selective's Insurance Operations segment consists of two separately managed lines of business:  commercial lines (Commercial Lines), which markets primarily to businesses and represents approximately 84% of Selective's NPW; and Personal Lines (Personal Lines), which markets primarily to individuals and represents approximately 16% of NPW.

                                Commercial Lines
Commercial Lines underwrites general liability, commercial automobile, workers' compensation, commercial property, business owners policy and bond risks through traditional insurance and alternative risk management products and services.  The following table shows the results of operations for Commercial Lines for the past three fiscal years ended December 31:

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                                Personal Lines
Personal Lines underwrites and issues insurance policies for personal automobile, homeowners, and other risks.  The following table shows the results of operations for Personal Lines for the past three fiscal years ended December 31:

                Regional Geographic Market Focus
Selective's Insurance Operations segment sells its products and services primarily in the Eastern region of the United States.  The Insurance Operations segment does not conduct any business outside of the United States.  The following table shows the principal states in which Selective writes insurance business and the percentage of Selective's total NPW that the state represents for the last three fiscal years.

The Insurance Subsidiaries are licensed to do business in states other than those shown on the table above and in other regions of the United States.  Selective, however, focuses its marketing efforts on the Eastern region of the United States, where it can better focus on the regional market and independent insurance agents who serve it.  Selective also believes that this regional geographic area is large enough to avoid a concentration of catastrophic risk. 

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                Independent Insurance Agent Distribution Model
Selective's principal insurance subsidiary was founded in 1926 by an independent insurance agent and Selective has been and remains committed to distributing its insurance products through independent insurance agents.  According to the Independent  Insurance Agents and Brokers of America (IIAB), independent insurance agents and brokers write approximately 80% of the commercial property and casualty insurance and approximately 35% of the personal lines insurance business in the United States.  The remaining business is written by insurers that write directly with insureds or have captive non-independent insurance agencies.  Selective believes independent agents will continue to be a significant force in overall insurance industry premium production, in large part because they represent more than one insurance company and, therefore, can provide insureds with a wider choice of commercial and personal property and casualty insurance coverages and loss prevention options.

For its commitment to the independent agency system and its furtherance of the interests of professional, independent insurance agents, the Professional Insurance Agents (PIA) named Selective the PIA National "Company of Excellence" for 2004.  The selection is made by a panel of PIA judges based on nominations from PIA member agents.

Selective appoints independent insurance agents as licensed representatives of one or more of the Insurance Subsidiaries and enters into agency agreements with them pursuant to applicable state laws and regulations.  As of December 31, 2004, Selective had approximately 750 independent insurance agency appointments in-force.  Selective believes that it has strong relationships with its appointed independent agents.  Selective's primary strategy is to build relationships with well-established, independent insurance agents and carefully monitor each agent's profitability, financial stability, staff, and mix of business against plans that Selective develops annually with the agent.

Because of the high concentration of business with independent agents and Selective's commitment to independent agents as its delivery channel, Selective's management devotes a considerable amount of time meeting with its independent insurance agents to (i) advise them on company developments, (ii) get feedback on products and services, and (iii) sell them on doing more business with Selective.  Over the past several years, Selective's senior management has averaged approximately two working months meeting directly with independent agents, including the following:

• 12 annual agency road show meetings during which management travels to various cities in the regions in which it does business and presents information on Selective to appointed independent agents;

• Seven sessions a year with various Selective Producer Councils, which are groups of approximately 9 to 12 agents that are divided by geographic region;

• One annual meeting of the President's Club, an invited group of agency principals from Selective's top performing agencies;

• One annual Executive Session of the President's Club; and

• Attendance at the Big "I" (Independent Insurance Agents and Brokers of America) and Council of Insurance Agents and Brokers (CIAB) annual conferences.

Selective pays commissions to its appointed independent agents pursuant to calculations and specific percentages stated in the agency agreement.  Under the agency agreement, agents are not permitted to receive compensation for the business they place with Selective from any other source than Selective.  The agency agreement provides for commissions to be paid based on a percentage of the premium written.  Selective and its agents also negotiate other commission arrangements, including additional commissions based on the underwriting results of the business the agent writes with Selective.  Agents may also agree to put some of their commission at risk based on the underwriting results of the business the agent writes with Selective.  

In 2004, the New York Attorney General announced that he was investigating various alleged inappropriate solicitation practices between insurance companies, agents and brokers.  Regulators in various other states have also announced similar investigations into these alleged inappropriate practices.  In December 2004, Selective and the other largest insurance companies in New Jersey received a letter of inquiry from the New Jersey Department of Banking and Insurance (DOBI) requesting information about arrangements and dealings of two of the Insurance Subsidiaries with agents and brokers.  The Insurance Subsidiaries are responding to the DOBI's inquiry.  Selective believes that its arrangements and dealings with independent agents and brokers are in compliance with all applicable statutes and regulations. Selective anticipates new rules, regulations or statutes in this area but does not believe, based upon its review of various proposals being discussed by the NAIC, that they will have a material impact on its business.

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Selective also enters into loss control services agreements with agents in certain situations.  Under these agreements, agents provide Selective with certain services, including, but not limited to underwriting evaluation, underwriting audits, safety and loss control surveys, inspections and accident investigations.  For their services in these cases, agents may receive a flat annual fee or a percentage of collected premiums on a specific program of business.

On certain limited programs of business, Selective has entered into brokerage agreements with a small number of agencies to allow them to solicit, receive and transmit to Selective proposals for insurance and to receive and report claims/loss notices.  These brokerage agreements contain a schedule pursuant to which the agent is eligible to receive a commission based on certain accounts written and/or lines of business.  The brokerage agreements do not permit the agents to receive compensation for the business they place with Selective from any source other than Selective.

                Technology and Field Model Business Strategy
Selective uses the trademarks, "High Tech, High Touch"^TM and "HT²"^TM, to describe its business strategy for the Insurance Operations.  "High Tech" signifies the advanced technology that Selective uses to make it easy for (i) independent insurance agents to transact and process business and (ii) customers to obtain information regarding their accounts.  "High Touch" signifies the amount of contact that Selective has with its independent insurance agents and customers as a result of its business model that places underwriters and claims representatives in the field near its agents and customers.

                                Technology
Selective seeks to transact as much of its business as possible with technology and, in recent years, has made significant investments in state-of-the-art information technology platforms, integrated systems, and Internet-based applications to (i) provide its independent agents and customers with access to accurate business information, and (ii) transact, straight-through business transactions with its independent agents.

Selective manages its information technology projects through a project management office (PMO).  The PMO is staffed by certified individuals who apply a set of disciplines and techniques for delivering projects on time, within budget, and in line with end-user expectations.  The PMO has developed proprietary methodologies to (i) communicate project management standards and methodology, (ii) provide project management training and tools, (iii) review project status and cost, and (iv) provide non-technology project management consulting services to the rest of Selective.  The PMO meets monthly with Selective's senior management to review all major projects and report on the status of other projects.  Selective believes that the PMO is a significant factor in the success of its technology implementation and creates a competitive advantage for Selective.

Selective's main technology systems are the following:

• eSelect™, an Intranet system which provides access to Selective's rating software, agency profitability reports, and other information; 

• CLAS™, a secure Internet-based Commercial Lines automated system that is used to (i) quote business, (ii) issue policies, (iii) issue endorsements, and (iv) renew policies; 

• SelectPlus™, a secure Internet-based system used to support Personal Lines business.;

• One & Done®, an Internet-based small business templated underwriting system that allows agents to automatically quote, rate, and issue business owner policies (BOP), contractors, and builders risk insurance policies in real-time without intervention by a Selective underwriter; and

• MCS™, Selective's mobile claims system that is used in the field to adjudicate claims. 

Most of Selective's independent agents have automated agency management systems.  Selective provides integration products that allow these agency systems to interface with Selective's main technology systems.  Consequently, agent service and response times to customers are significantly reduced because billing, claims, and rating inquiries are made without duplicative data entry processes.

In addition to the advantages that Selective's technology provides independent agents, Selective believes that its use of technology has reduced its overall expenses and increased its overall employee productivity. 

Selective's technology operations are located in Branchville, New Jersey and Glastonbury, Connecticut. 

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                                Field Strategy
To support its appointed independent agents, Selective employs a field underwriting model and a field claims model that are supported by the home office in Branchville, New Jersey, and six regional branch offices (Region): 

As of December 31, 2004, Selective had approximately:

• 71 field underwriters, known as agency management specialists (AMS).  AMSs live in the geographic vicinity of Selective's appointed agents and generally work from offices in their home.  Selective believes that, because they live in proximity to agents, AMSs are able to build strong relationships with agents through direct and regular interaction and be in a position to better evaluate new business opportunities.

• 60 loss control representatives (LCR).  LCRs are located in the Regions and are responsible for surveying and assessing insured risks from a risk/safety standpoint.

• 130 field claims adjusters, known as claim management specialists (CMS).  Like AMSs, CMSs live in the geographic vicinity of Selective's appointed agents and generally work from offices in their homes.  Selective believes that, because of their geographic location, CMSs are able to conduct on-site inspections of losses and obtain better knowledge about potential exposures and settle claims faster, more accurately, and with higher levels of customer satisfaction.

                                Field Underwriting
Selective seeks to price and underwrite a variety of insurance risks and focuses its efforts on four market segments:

• Small business accounts that can be written through the Internet-based One & Done® automated underwriting template;

• Middle market business accounts with annual premiums between $10,000 and $250,000, which are the primary focus of the AMSs;

• Middle market to large business accounts with annual premiums over $250,000 which often use alternative risk transfer mechanisms to self-insure portions of their risks. These risks are handled jointly by AMSs and a specialized Commercial Lines unit, Selective Risk Managers; and

• Personal Lines.

Selective believes that its underwriting process, which addresses "one risk at a time," is unique.  It requires communication and interaction among:

• The independent agents and the AMSs, who identify product and pricing needs;

• Selective's strategic business units (SBUs), which are located in the home office, are organized by customer and product type, and develop Selective's underwriting guidelines, including:

  • Line of Business, which focuses on commercial auto, general liability, workers compensation, business owners program, and commercial property;

  • Bonds, both fidelity and surety;

  • Manufacturing, which in addition to manufacturers, also includes wholesalers and distributors;

  • Mercantile & Service, which focuses on retail, office, service businesses, restaurants, and hotels;

  • Contractors, both general and subcontractors; and

  • Specialty Programs, which focuses on public entities, social services, golf courses, and religious institutions.

• The Regions, which work with the SBUs to establish annual premium goals; and

• The Actuarial Department, which is located in the home office, and determines rate level and monitors profitability.

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Selective believes that its LCRs and the wide range of loss control services that they provide to Selective's insureds to improve their risk management are an advantage of Selective's field underwriting model.  For its middle market to large business accounts, LCRs generally conduct loss control surveys before the risk is underwritten.  This survey process permits Selective to select above average risks and helps insureds better manage their exposures.  Many of the services that Selective provides are similar to those provided by national property and casualty companies to only their largest risks, including thermographic infrared surveys, hazard assessment and analysis, and OSHA construction and general industry certification training.  LCRs also conduct loss control service calls after an account is written.  This process permits Selective to reduce the risks on accounts already written by reducing loss frequency.  Through its website, Selective offers a variety of loss control education materials, including a large library of coverage-specific safety materials and videos.

Selective also has an underwriting service center (USC) located in Richmond, Virginia.  The USC assists Selective's agents by servicing small-to-mid-size business customers. In the USC, Selective employees, who are licensed agents, respond to customer inquiries about insurance coverage, billing transactions, and other matters.  The agent, as consideration for these services, receives a commission that is slightly lower than the standard.  Selective has found that the USC also provides additional opportunities to increase NPW, as larger agencies, notably those owned by agency aggregators such as large banks, seek insurance companies that have service center capabilities.  Underwriters in the USC work closely with AMSs and the Regions. 

Selective has analyzed and continues to analyze its underwriting profitability by line of business, account, and agency product type.  Selective's goal is to continue to underwrite the risks that it understands well and that, in aggregate, are profitable.

                                Field Claims Management
Effective, fair, and timely claims management is one of the most important customer services that Selective provides and one of the critical factors in achieving underwriting profitability.  Selective's claims policy emphasizes the maintenance of timely and adequate reserves for claims, and the cost-effective delivery of claims services by controlling losses and loss expenses.  CMSs are primarily responsible for investigating and settling claims directly with policyholders and claimants.  By promptly and personally investigating claims, CMSs are able to provide personal service and quickly resolve claims.  CMSs also provide guidance on the handling of the claim until its final disposition.  Selective also believes that by visiting the site of the claim, and meeting face to face with the insured or claimant, that the settlement will be more accurate.  In territories where there is insufficient claim volume to justify the placement of a CMS, or when a particular claim expertise is required, Selective uses independent adjusters to investigate and settle claims. 

Claim settlement authority levels are established for each CMS and CMS supervisor based on their experience and expertise, up to a regional branch office limit of $100,000.  Casualty claims with exposure potential generally in excess of $100,000, significant exposure to catastrophic injury or damage, property claims with an exposure greater than $50,000, and claims involving lawsuits against us and/or questions of coverage are reported to the corporate headquarters, where senior claim specialists review the claims and determine the appropriate reserve.  All environmental and other latent exposure claims are referred to a centralized environmental claims unit at the home office, which specializes in the management and consistency of decisions regarding coverage application for these types of exposures.

Selective has a centralized special investigative unit (SIU) that investigates potential insurance fraud and abuse, and supports efforts by regulatory bodies and trade associations to curtail the cost of fraud.  The SIU adheres to uniform internal procedures to improve detection and takes action on potentially fraudulent claims.  It is Selective's policy to notify the proper authorities of its findings.  Selective believes this policy sends a clear message that it will not tolerate fraudulent activity committed against itself or its customers. The SIU also supervises anti-fraud training for CMSs and other employees, including AMSs.  

Selective also has a claims service center (CSC), co-located with the USC, in Richmond, Virginia.  The CSC provides enhanced services to Selective's policyholders, including immediate claim triage 24 hours a day, seven days a week.  The CSC is designed to reduce the cycle time on first-party automobile claims and increase the usage of Selective's discounts at body shops, glass repair shops, and car rental agencies. 

Selective has also implemented additional loss and loss expense cost containment initiatives.  These initiatives include: (i) a comprehensive managed care program, which has reduced workers' compensation and automobile loss costs; (ii) voluntary automobile repair shop and rental programs; (iii) legal bill review; and (iv) salvage and subrogation review. 

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            Reinsurance
In the ordinary course of their business, the Insurance Subsidiaries reinsure a portion of the risks that they underwrite in order to control exposure to losses and protect capital resources.  Reinsurance also permits the Insurance Subsidiaries additional underwriting capacity by permitting them to accept larger risks and underwrite a greater number of risks without a corresponding increase in its capital or surplus.  For a premium paid by the Insurance Subsidiaries, reinsurers assume a portion of the risks ceded by the Insurance Subsidiaries.  Selective uses traditional forms of reinsurance and does not utilize finite risk reinsurance.  Amounts not reinsured are known as retention.  The Insurance Subsidiaries use two types of reinsurance to control exposure to losses:

• Treaty reinsurance, in which certain types of policies are automatically reinsured without the need for approval by the reinsurer of individual risks covered; and  
• Facultative reinsurance, in which an individual insurance policy or a specific risk is reinsured with the prior approval of the reinsurer.  Facultative reinsurance is primarily used for policies with limits greater than the limits available under the reinsurance treaties.

In addition to treaty and facultative reinsurance, the Insurance Subsidiaries are partially protected by the Terrorism Risk Insurance Act of 2002 (TRIA).  The act establishes a temporary federal program of shared public and private compensation for insured commercial property and casualty losses resulting from an "act of terrorism," as defined in the Act (certified loss).  The bill limits certified losses to "international terrorism" defined as an act committed on behalf of any foreign person or foreign interest where the damage from the event is in excess of $5 million and the event was not committed in the course of a war declared by the United States. Terrorism acts related to the use of nuclear, biological or chemical (NBC) weapons are covered by TRIA provided that the Secretary of the Treasury certifies the loss.  Please refer to the Insurance Regulation section of Item 1 and the Reinsurance section of Item 7. "Management Discussion and Analysis of Financial Condition and Results of Operation" for further discussion of TRIA.

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The following table summarizes the significant reinsurance treaties covering the Insurance Subsidiaries:

Reinsurance does not legally discharge an insurer from its liability for the full face amount of its policies, but it does make the reinsurer liable to the insurer to the extent of the reinsurance ceded.  Accordingly, reinsurance involves credit risk and is generally subject to aggregate loss limits.  Selective monitors the financial condition of reinsurers on an ongoing basis and reviews its reinsurance arrangements periodically through a management-composed reinsurance market security committee.  Selective selects reinsurers based on their (i) financial condition, (ii) their ratings from A.M. Best and Standard and Poor's Insurance Rating Services (S&P), (iii) business practices, and (iv) the prices of their product offerings.  Selective also gathers information regarding reinsurers from its reinsurance brokers, direct reinsurers, and market sources.  In general, Selective only enters into reinsurance agreements with reinsurers that have an "A-" or better rating by A.M. Best.

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Selective's five largest reinsurers, based on 2004 ceded premiums, and their respective ratings by A.M. Best are shown on the following table:

                 Reinsurance Pooling Agreement
The Insurance Subsidiaries are parties to an inter-company reinsurance pooling agreement (Pooling Agreement).  The purpose of the Pooling Agreement is to:

• Pool or share proportionately the underwriting profit and loss results of property and casualty underwriting operations through reinsurance;

• Prevent any Insurance Subsidiary from suffering undue loss;

• Reduce administration expenses; and

• Permit all of the Insurance Subsidiaries to obtain a uniform rating from A.M. Best. 

Under the Pooling Agreement, all of the Insurance Subsidiaries mutually reinsure all insurance risks written by them and outstanding as of June 30, 1995 and thereafter written pursuant to the respective percentage set forth opposite each Insurance Subsidiary's name on the table below:

                Net Loss and Loss Expense Reserves
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, 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 claims 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 addition to case reserves, and in accordance with industry practice, Selective maintains estimates of reserves for losses and loss expenses incurred but not yet reported (IBNR).  Using generally accepted actuarial reserving techniques, Selective projects estimates 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 are carried as the IBNR reserve.  To determine the final projected ultimate loss and loss expense reserves, Selective's management performs a review. This review incorporates meetings with its Actuarial Department to review the latest loss and loss expense reserve analyses, which are performed quarterly. During these meetings, the range of reserves determined annually at the end of Selective's reporting year are also considered in addition to the most recent loss trends.  Loss trends include, but are not limited to large loss activity, environmental claim activity, large case reserve additions or reductions for prior accident years, and reinsurance recoverable issues.  Since loss trends take a longer time to manifest themselves in actuarial analyses, Selective's review also includes factors such as: (i) per claim information; (ii) Selective 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. 

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Based on its review, Selective's management determines the ultimate net liability for losses and loss expenses.  Such an assessment requires considerable judgment given that it is frequently not possible to determine whether a change in the data is an anomaly until some time after the event.  Even if a change is determined to be permanent, it is not always possible to reliably determine the extent of the change until sometime later. However, given that there is no precise method 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, Selective also began using independent actuaries in 2003 to opine on the adequacy of its reserves.  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.  Any changes in the liability estimate may be material to the results of operations in future periods.  Selective 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.

After taking into account all relevant factors, Selective believes that the reserve for net losses and loss expenses at December 31, 2004, 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.  For further discussion and information about loss and loss expense reserves, see Item 8, "Financial Statements and Supplementary Data," Note 7 to the consolidated financial statements. 

The table on page 13 provides information about reserves for net losses and loss expenses and presents the development of balance sheet net reserves for 1994 through 2004.  The top three lines of the table reconcile gross reserves to net reserves for unpaid losses and loss expenses recorded at the balance sheet date for each of the indicated years.  The upper portion of the table shows the re-estimated amount of the previously recorded gross and net reserves with related reinsurance recoverable, 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 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, 2004, Selective paid $815.9 million of the currently estimated $898.3 million of losses and loss expenses that were incurred through the end of 1994; thus, the difference, an estimated $82.4 million of losses and loss expenses incurred through 1994, remained unpaid as of December 31, 2004.

The "cumulative redundancy (deficiency)" represents the aggregate change in the estimates over all prior years.  For example, the 1994 reserve developed a $10.4 million net deficiency over the course of the succeeding ten years while, on a gross basis, the 1994 reserve developed a $112.1 million deficiency over the same period.  The net amount has been included in net income over the past ten years.  The cumulative net deficiencies in 2003, 2002, 2001 and 2000 are the result of normal reserve development inherent in the uncertainty in establishing reserves, anticipated loss trends, growth in business, as well as increased reinsurance retentions. 

In evaluating this information, each amount includes the total of all changes in amounts for prior periods. For example, the amount of deficiency to losses settled in 2004, but incurred in 2000, will be included in the cumulative net deficiency amounts in 2003, 2002, 2001 and 2000. 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. During 1999, Selective significantly increased gross and ceded reserves by $37.5 million for prior accident years related to unlimited medical claims ceded to the Unsatisfied Claim and Judgment fund in the state of New Jersey.  Approximately 40% of the cumulative gross deficiency for years 1998 and prior stems from this increase.

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                Analysis of Net Loss and Loss Expense Development

Note:  Some amounts may not foot due to rounding.

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                Reconciliation of Statutory to GAAP Losses and Loss Expense Reserves
The Insurance Subsidiaries are required in most of the domiciliary jurisdictions to report their results pursuant to statutory accounting principles and reporting formats established by the National Association of Insurance Commissioners (NAIC).  Statutory accounting principles differ from GAAP, under which Selective is required to report its financial results to the Securities and Exchange Commission (SEC).  Selective believes that providing only a GAAP presentation of financial information would make it more difficult for agents, customers, and investors to evaluate Selective's success or failure in its insurance business.  Consequently, Selective includes the use of statutory accounting principles measures in presentations of its financial information.

The statutory combined ratio is a standard measure of underwriting profitability.  This ratio is the sum of (i) the ratio of incurred losses and loss adjustment expenses to net earned premium; (ii) the ratio of expenses incurred for commissions, premium taxes, administrative and other underwriting expenses to net written premium; and (iii) the ratio of dividends to policyholders to net earned premium.  The GAAP combined ratio is calculated in the same manner, except that it is based on GAAP amounts and the denominator for each component is net earned premium. 

When the combined ratio is under 100%, underwriting results are generally considered profitable; when the combined ratio is over 100%, underwriting results are generally considered unprofitable.  The combined ratio does not reflect investment income, federal income taxes, or other non−operating income or expense.  Selective has consistently produced a lower combined ratio than the property and casualty insurance industry in general outperforming the industry for the past ten years by an average of 3 points.

The following table reconciles losses and loss expense reserves under statutory accounting principles and GAAP:

                Environmental Reserves
Reserves established for liability insurance include 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.  In addition, a portion of our environmental losses relate to homeowners claims covering the leakage of certain underground storage tanks.  Selective's asbestos and non‑asbestos environmental claims have arisen primarily from insured exposures in municipal government, small commercial risks, and homeowners policies.

"Asbestos claims" are claims presented to us 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 experienced the emergence and development of an increasing number of asbestos claims. At December 31, 2004, asbestos claims constituted 91% of our 3,310 environmental claims compared with 91% of our 3,058 outstanding environmental claims at December 31, 2003.

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"Non‑asbestos claims" are pollution and environmental claims alleging bodily injury or property damage presented, or expected to be presented to us, other than asbestos claims.  These claims include landfills, leaking underground storage tanks and mold.  In past years, landfill claims have accounted for a significant portion of Selective's environmental claim unit's litigation costs. During 2004, Selective also experienced adverse development in its homeowners line of business as a result of unfavorable trends in claims for groundwater contamination caused by leakage of certain underground heating oil storage tanks in New Jersey.  Increased frequency was triggered, in part, by the state's robust real estate market, leading to an increase in home tank inspections. To address this issue, Selective began restricting writings of policies with coverage for underground heating oil storage tanks, company wide, approximately two years ago, and are reviewing possible coverage changes for existing business.

Although Selective has had limited mold claims activity in the past and does not write business in states that have historically been most exposed to these claims, in order to support and affirm the exclusion of mold claims, Selective added the Insurance Services Office (ISO) mold coverage limitation endorsement to all homeowner renewals beginning in the fourth quarter of 2002, except in New York where the exclusion has not been approved.

Selective refers all environmental claims to its 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.

IBNR reserve estimation for environmental claims 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.  However, management is not aware of any emerging trends that could result in future reserve adjustments.  Moreover, normal historically based actuarial approaches are difficult to 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. As a result, management does not calculate a specific environmental loss range, as it believes it would not be meaningful.

                Insurance 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 relates to a variety of aspects of an insurance company's business and financial condition.  The primary public purpose of such supervision and regulation is to protect insurer policyholders; not insurer shareholders.  The extent of regulation varies, and generally is derived from state statutes that delegate regulatory, supervisory, and administrative authority to state insurance departments.  Selective believes that it is in compliance in all material respects with applicable regulatory requirements as of the date of this report.

Although the United States government does not directly regulate the insurance industry, federal initiatives from time-to-time can have an impact on the industry.  For example, on November 26, 2002, TRIA legislation was signed into law and will be in effect through December 31, 2005.  TRIA requires sharing the risk of future losses from terrorism between private insurers and the federal government, and is applicable to almost all commercial lines of insurance.  Insurance companies with direct commercial insurance exposure in the United States are required to participate in this program.  TRIA rescinded all previously approved exclusions for terrorism.  Policyholders for non-workers compensation policies have the option to accept or decline the terrorism coverage Selective offers in its policies, or negotiate other terms.  The terrorism coverage is mandatory for all workers' compensation primary policies.  In addition, ten of the twenty states Selective writes commercial property coverage in mandate the coverage of fire following an act of terrorism.  These provisions apply to new policies written after enactment of TRIA.  In 2004, approximately 90% of our commercial non-workers compensation policyholders purchased terrorism coverage.  A terrorism act has to be certified by the Secretary of Treasury in order to be covered by TRIA.  TRIA limits the certified losses to "international terrorism" defined as an act committed on behalf of any foreign person or foreign interest where the damage from the event is in excess of $5 million and the event was not committed in the course of a war declared by the United States.  Terrorism acts related to the use of nuclear, biological or chemical (NBC) weapons are covered by TRIA provided that the Secretary of the Treasury certifies the loss.  Each participating insurance company will be responsible for paying out a certain amount in claims (a deductible) before federal assistance becomes available.  This deductible is based on a percentage of commercial lines direct earned premiums from the prior calendar year.  For 2004, the deductible equaled 10% of 2003 commercial lines direct earned premium.  For 2005, it will equal 15% of 2004 commercial lines direct earned premium.

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For losses above an insurer's deductible, the federal government will cover 90%, while the insurer contributes 10%.  Although the provisions of TRIA will serve to mitigate Selective's exposure in the event of a large-scale terrorist attack, Selective's deductible is substantial, approximately $97 million in 2004 and $169.0 million in 2005.  Selective, therefore, continues to monitor concentrations of risk.  Selective maintains a reinsurance treaty that covers $45 million in the aggregate in excess of a $15 million retention in the aggregate for TRIA certified losses and non-certified NBC losses.

The Financial Services Modernization Act of 1999, also known as the Gramm-Leach-Bliley Act (GLB), and related regulations govern the privacy of consumer financial information.  GLB limits disclosure by financial institutions of "nonpublic personal information" about individuals who obtain financial products or services for personal, family, or household purposes.  GLB generally applies to disclosures to non-affiliated third parties, but not to disclosures to affiliates.  Many states in which Selective operates have adopted laws that are at least as restrictive as GLB.  Privacy of consumer financial information is an evolving area of regulation requiring continued monitoring to ensure continued compliance with GLB.

Selective cannot quantify the financial impact it would incur to satisfy revised or additional regulatory requirements that may be imposed in the future.

                                State Regulation
The regulatory authority of state insurance departments extends to such matters as insurer solvency standards, insurer and agent licensing, investment restrictions, payment of dividends and distributions, provisions for current losses and future liabilities, deposit of securities for the benefit of policyholders, restrictions on policy terminations, unfair trade practices, and approval of premium rates and policy forms.  State insurance departments also conduct periodic examinations of the financial and business affairs of insurers and require insurers to file annual and other periodic reports relating to their financial condition.  Regulatory agencies require that premium rates not be excessive, inadequate, or unfairly discriminatory.  The Insurance Subsidiaries, consequently, must file all rates for commercial and personal 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 certain insurance supervisory agencies 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: (i) examine Selective and the Insurance Subsidiaries at any time; (ii) require disclosure or prior approval of material transactions of the Insurance Subsidiaries with any affiliate; and (iii) require prior approval or notice of certain transactions, such as dividends or distributions to the Parent from the Insurance Subsidiary domiciled in that state.

                                National Association of Insurance Commissioners (NAIC) Guidelines
The Insurance Subsidiaries are subject to statutory accounting principles and reporting formats established by the NAIC.  The NAIC also promulgates model insurance laws and regulations relating to the financial and operational regulations of insurance companies, which includes the Insurance Regulatory Information System (IRIS).  IRIS identifies 11 industry ratios and specifies "usual values" for each ratio.  Departure from the usual values on four or more of the ratios can lead to inquiries from individual state insurance departments about certain aspects of the insurer's business.  The Insurance Subsidiaries have consistently met all of the IRIS ratio tests.

NAIC model laws and regulations 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 Insurance Subsidiaries states of domicile, except New York, are accredited by the NAIC.  Examinations conducted by, or along with, accredited states can be accepted by other states.  The NAIC intends to create an eventual nationwide regulatory network of accredited states.

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The NAIC model laws and regulations are also intended to enhance the regulation of insurer solvency.  These model laws and regulations contain certain risk-based capital requirements for property and casualty insurance companies designed to assess capital adequacy and to raise the level of protection that statutory surplus provides for policyholders.  Risk-based capital is measured by 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 pursuant to the NAIC model laws and regulations, are subject to different levels of regulatory intervention and action.  Based upon the unaudited 2004 statutory financial statements for the Insurance Subsidiaries, each Insurance Subsidiary's total adjusted capital substantially exceeded 200% of the Authorized Control Level.

                Investments Segment
Selective's investment philosophy is to maximize after-tax returns over extended periods of time while providing liquidity and preserving assets and stockholders' equity.  Selective's investment portfolio consists primarily of fixed maturity investments, but it also holds short-term investments, equity securities, and other investments.  Selective believes that prudent levels of investments in equity securities and other investments within the investment portfolio are likely to enhance after-tax returns without significantly increasing the risk profile of the portfolio when considered over long periods of time and when balanced with leverage and insurance risk considerations.

At December 31, 2004, Selective's investment portfolio consisted of $2,366.9 million (83%) of fixed maturity securities, $331.9 million (12%) of equity securities, $98.7 million (4%) of short-term investments, and $44.1 million (1%) of other investments.

Selective's fixed maturity portfolio is comprised primarily of highly rated securities with almost 100% rated investment grade. The average rating of its fixed maturity securities is "AA" by S & P, their second highest credit quality rating.  Selective expects to continue to invest primarily in high quality, fixed maturity investments.

Selective's overall fixed maturity investment strategy is to make security purchases that are attractively priced in relation to perceived credit risks. Selective manages the interest rate risk associated with holding fixed maturity investments by monitoring and maintaining the average duration of the portfolio with a view toward achieving an adequate after-tax return without subjecting the portfolio to an unreasonable level of interest rate risk. The average duration of the fixed maturity portfolio, excluding short-term investments was 4.3 years at December 31, 2004 compared with 4.5 years at December 31, 2003.

Selective's Investment segment operations are based in Branchville, New Jersey. 

For additional information about investments, see the sections entitled, "Investments," in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Item 8. "Financial Statements and Supplementary Data," Note 4 to the consolidated financial statements. 

                Diversified Insurance Services Segment
Selective's Diversified Insurance Services segment provides fee-based revenues that contribute to earnings, increase operating cash flow, and help mitigate potential volatility in insurance operating results.  The Diversified Insurance Services operation has three major components:

• Human resource administration outsourcing (HR Outsourcing) products and services, which are sold by Selective HR Solutions, Inc. (SHRS), located in Sarasota, Florida;

• Managed care products and services, which are sold by Alta Services, LLC (Alta), a New Jersey-based managed care company that provides medical claims handling services to the Insurance Subsidiaries and other insurers; Consumer Health Network Plus, LLC (CHN), a New Jersey-based preferred provider organization (PPO); Northeast Health Direct, LLC (NHD), a New England-based PPO; and SelecTech, LLC, a New Jersey-based third party administrator (collectively, CHN Solutions), which are primarily located in Hamilton, New Jersey; and

• Federal flood insurance, which is sold to homeowners and commercial customers by the Insurance Subsidiaries, through over 6,000 independent agents in 48 states and the District of Columbia. 

The Diversified Insurance Services segment fits into Selective's business model in one of two ways:  (i) complementary by sharing a common marketing or distribution system and creating new opportunities for independent agents to bring value-added services and products to their customers, or (ii) vertically by one subsidiary using another's products or services in its own production or supply output or vice versa.

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                Human Resource Administration Outsourcing
Selective HR Solutions, Inc., and its subsidiaries (individually and collectively, SHRS) is a professional employer organization (PEO) that was founded by independent insurance agents.  SHRS provides HR outsourcing services, including human resources management and support, employee benefits, payroll and tax processing.  SHRS also offers risk and compliance management products and services, including workers' compensation insurance programs.  SHRS services are designed to improve the productivity and profitability of small and medium-sized businesses by relieving business owners of many employer-related administrative and regulatory burdens, permitting them to focus on their businesses.  SHRS's customers are small business owners who generally have existing relationships with independent agents.  Selective believes that SHRS is the only PEO that distributes products and services exclusively through independent insurance agents in the states where it operates.  Currently, the HR Outsourcing unit's co-employer component would be ranked the 12th largest in the nation when compared to a ranking published by Florida Trend magazine, based on employee count.

SHRS enters into agreements with clients that establish a three-party relationship under which SHRS and the client are co-employers of the employees who work at the client's location (worksite employees).  Under its agreements, SHRS assumes responsibility for personnel administration and compliance with many employment-related governmental regulations, while the client retains the employees' services for its business.  Because SHRS provides employer-related services to a much larger number of employees than any individual client, SHRS can perform these services more efficiently, provide a greater variety of employee benefits, and is able to devote more attention to human resource management than the client otherwise would.

Selective continues to focus on further educating its agents in an effort to improve upon their knowledge and effectiveness in selling HR Outsourcing services and products in order to expand SHRS's business.  Currently, 56 of the approximately 750 independent agents of the Insurance Subsidiaries actively sell the product, as well as 48 independent agents in Florida.  Since Selective acquired SHRS in 1999, the number of worksite employees has increased to approximately 23,000 from approximately 12,000.  SHRS also enters into agreements with client companies pursuant to which it provides limited services, such as payroll-only administration, which does not give rise to any co-employment relationships. 

                Managed Care
The goal of Selective's managed care program, delivered through CHN Solutions, is to return patients to their normal routine, at work and at home, and to ensure that medical costs are delivered in the most cost-effective manner possible.  CHN Solutions' managed care program provides workers' compensation and automobile medical claim services, health network services, third party administrative services, and competitive medical fee schedules to a membership-based medical provider network in New Jersey, while bearing no underwriting risk.  CHN Solutions' medical claim services include first report of injury, referrals to medical providers, comprehensive medical case management, and medical bill audits and re-pricing.  The managed care program also provides medical claim management services under New Jersey's Automobile Insurance Cost Reduction Act.

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Network expansion continues to be a major initiative for CHN Solutions' managed care program. During 2004, CHN Solutions' medical provider network expanded to approximately 95,000 locations from 88,000 locations in 2003 and was ranked as the number one PPO in New Jersey by Business News New Jersey, a source for business news and information in New Jersey.

                Flood Insurance
Selective is a servicing carrier in the "Write-Your-Own" (WYO) program of the United States government's National Flood Insurance Program (NFIP).  Selective has participated in the WYO program since the program's inception in 1983 and is currently the 8^th largest WYO servicing carrier.  The WYO program is a cooperative undertaking of the insurance industry and the Federal Insurance Administration, which is part of the Federal Emergency Management Agency.  As a servicing carrier, Selective bears no risk of loss on flood insurance policies.  All of the premiums collected on flood insurance policies are ceded to the federal government and, in exchange, Selective receives a servicing fee, from which it pays agency commissions and other related expenses, as well as claims handling fees.

Selective is ranked "one of the top" flood insurance writers for the NFIP, and has received the endorsement of the Independent Insurance Agents and Brokers of America for its WYO program.  Currently, Selective is servicing more than 188,000 flood policies under the NFIP through over 6,000 independent agents in 48 states and the District of Columbia, as compared to 162,000 policies at this time last year. Sixty-eight percent of Selective's new WYO business in 2004 was processed by agents through Flood OnLine, our web-based system.

                Diversified Insurance Services Regulation
The companies within the Diversified Insurance Services segment are subject to certain laws and regulations. In particular, as a co-employer for some of its clients, SHRS is subject to federal, state, and local laws and regulations relating to labor, tax, employment, employee benefits, and immigration matters.  By contracting with its clients and creating a co-employer relationship with the worksite employees, SHRS may be assuming certain contractual and legal obligations and responsibilities of an employer and could incur liability for violations of such laws and regulations, even if it was not actually responsible for the conduct giving rise to such liability.  Some states in which SHRS operates have already passed licensing or registration requirements for PEOs.  These laws and regulations vary from state-to-state but generally provide for the monitoring of the fiscal responsibility of PEOs.  Currently, many of these laws and regulations do not specifically address the obligations and responsibilities of co-employers.  If these laws and regulations, such as the Employee Retirement Income Security Act, are ultimately applied to a co-employer's relationship with their worksite employees, such laws and regulations could have a material adverse effect on SHRS's results of operations or financial condition.

CHN Solutions operates as a managed care organization and/or a preferred provider organization (PPO) and is subject to laws and/or regulations in the states in which it does business.  Some states in which CHN Solutions transacts business have licensing and other statutory or regulatory requirements applicable to CHN Solutions' business, including laws that require licensing of businesses that provide medical review services.  Some of these laws apply to medical review of care covered by workers' compensation insurance.  These laws typically establish minimum standards for qualifications of personnel, confidentiality, internal quality control and dispute resolution procedures.  In addition, some states regulate the operation of managed care provider networks.  If additional statutory or regulatory requirements are imposed, to the extent CHN Solutions is governed by these requirements, increased costs of operation for CHN Solutions may result.

Both federal and state laws regarding privacy of medical records and patient privacy may also affect CHN Solutions.  Because CHN Solutions does not provide health insurance, or health care services, it is not a "covered entity" under the federal Health Insurance Portability and Accountability Act of 1996 and related regulations.  This, however, is an evolving area of regulation that requires us to continually monitor and review our operations.

Regulation in the healthcare, automobile personal injury protection, and workers' compensation businesses is constantly evolving.  Selective is unable to predict what additional government initiatives affecting its business may be promulgated in the future, if any.  Selective's businesses may be adversely affected by failure to obtain necessary licenses and government approvals or failure to adapt to new or modified regulatory requirements.  While SHRS and CHN Solutions believe they are currently in compliance with all laws and regulations affecting their operations, there can be no assurance that, in the future, they will be able to satisfy new or revised licensing and regulatory requirements.

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Competition
Selective faces significant competition in both the Insurance Operations and Diversified Insurance Services segments.

Property and casualty insurance is highly competitive on the basis of both price and service, and is extensively regulated by state insurance departments.  In 2004, Selective was ranked as the 54^th largest property and casualty group in the United States based on the combined NPW, or premiums for all sold policies, by the Insurance Subsidiaries in 2003 by A.M. Best in its list, "Top Property/Casualty Writers."  The Insurance Operations compete with regional insurers, such as Cincinnati Financial, Ohio Casualty, and Harleysville, and national insurance companies, such as St. Paul Travelers, The Hartford, and Zurich.  Selective also competes against direct writers of insurance coverage, primarily in personal lines, such as GEICO and Progressive.  Many of these competitors have greater financial, technical and operating resources.  Purchasers of property and casualty insurance products do not always differentiate between insurance carriers and differences in coverage.  The more significant competitive factors for most of Selective's insurance products are price, coverage terms and claims service.  In addition, Selective also faces competition within each insurance agency that sells its insurance products as most of the agencies represent more than one insurance company. 

With regard to the Diversified Insurance Services segment, during 2004 CHN Solutions was ranked as the number one PPO in New Jersey by Business News New Jersey, a source for business news and information in New Jersey.  Additionally, Employee Benefits News, a publication serving employee benefits decision makers ranked CHN Solutions as the 11th largest nationwide based on membership.  In 2004, SHRS would have been ranked as the 12th largest co-employer in the nation when compared to a ranking published by Florida Trend magazine, based on employee count.  Based on information obtained from Statutory Annual Statements, Selective believes that its Flood unit is the 8th largest write-your-own carrier for the federal government's National Flood Insurance Program . 

Please refer to Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and its section entitled "Risk Factors," for the potential impact these items could have on Selective's ability to compete.

Seasonality
Selective's insurance business experiences modest seasonality with regard to premiums written.  Due to the general timing of commercial policy renewals, premiums written are usually highest in January and July and lowest during the fourth quarter of the year.  Although the writing of premiums experiences modest seasonality, premiums are earned consistently over the period of coverage.  Losses and loss expenses incurred tend to remain consistent throughout the year, unless a catastrophe occurs.  Catastrophes can occur at any time during the year from weather-related events that include, but are not limited to, hail, tornadoes, windstorms and hurricanes.

Customers
No one customer accounts for 10% or more of Selective's total revenue or the revenue of any one of its business segments.

Employees
At December 31, 2004, Selective had approximately 2,200 employees, of which approximately 1,800 worked in the Insurance Operations and Investments segment and approximately 400 worked in the Diversified Insurance Services segment.  None of Selective's employees are represented by a collective bargaining group. 

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Information regarding Selective's directors is included in the definitive Proxy Statement for the 2005 Annual Meeting of Stockholders to be held on April 27, 2005 in "Information About Proposal 1, Election of Directors," and is also incorporated by reference into Part III of this Form 10-K.

Available Information
Selective files its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and other required information with the SEC.  The public may read and copy any materials on file with the SEC at the SEC's Public Reference Room at 450 Fifth Street NW, Washington, DC 20549.  The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  The SEC also maintains an Internet site, www.sec.gov, that contains reports, proxy and information statements, and other information regarding issuers, including Selective, that file electronically with the SEC.

Selective has a website, www.selective.com, through which its SEC reports, filings, and materials under Section 13(a) of 15(d) of the Exchange Act are available free of charge as soon as reasonably practicable after they are electronically filed with, or furnished to the SEC.

Item 2.    Properties.
Selective's main office is located in Branchville, New Jersey on a site owned by a subsidiary with approximately 114 acres and 315,000 square feet of operational space.  Selective leases all of its other facilities.  The principal office locations related to Selective's three business segments are described in Item 1. "Business."  Selective believes that its facilities provide space for its present needs and that additional space, if needed, would be available on reasonable terms.

Item 3.    Legal Proceedings.
In the ordinary course of conducting business, Selective and its subsidiaries have been named as defendants in various legal proceedings.  Some of these lawsuits attempt to establish liability under insurance contracts issued by our Insurance Subsidiaries.  Plaintiffs in these lawsuits are seeking money damages that, in some cases, are extra-contractual in nature or they are seeking to have the court direct the activities of Selective's operations in certain ways.

Although the ultimate outcome of these matters is not presently determinable, Selective does not believe that the total amounts that it will ultimately have to pay in all of these lawsuits in the aggregate will have a material adverse effect on its financial condition, results of operations, or liquidity.

Selective has previously described certain legal proceedings that primarily involve claims for damages, exclusive of interest and costs, that do not exceed and have not previously exceeded ten percent (10%) of the current assets of Selective and its subsidiaries on a consolidated basis.  As such, Selective will not further describe the following legal proceedings in subsequent reports:

Three Selective subsidiaries, Consumer Health Network Plus, LLC (CHN), Alta Services, LLC (Alta) and Selective Insurance Company of America (SICA), were named as defendants, together with ten other unrelated parties, in Berlin Medical Associates PA, et al. v. CMI New Jersey Operating Corp., et al., a purported class action that was filed on May 21, 2003, in the Superior Court of New Jersey, Law Division - Camden County.  The plaintiffs are several non-hospital health care providers that have preferred provider contracts with CHN.  The complaint alleges that CHN breached the preferred provider contracts by improperly reviewing and reducing the amount of its payments for services provided to insureds of insurance carriers, including SICA, which had contracted to lease CHN's network.  The complaint, which does not quantify the amount of damages sought, further alleges that insurance carriers were unjustly enriched by CHN's actions.  The Selective subsidiaries have vigorously defended this lawsuit and, together with the other defendants, filed a motion to dismiss.  After a hearing on that motion, the court ordered the plaintiffs to amend their complaint.  The plaintiffs did so in March 2004, and did not name Alta as a defendant.  In May 2004, all remaining defendants, including CHN and SICA, moved to dismiss the amended complaint, and in July 2004, they filed a motion to dismiss the class action allegations.  Both motions to dismiss were granted by the court on January 14, 2005.  On February 28, 2005, the plaintiffs filed an appeal of the decision to grant both motions to dismiss.  If the appeal is successful, CHN and SICA will continue to vigorously defend the case.  Given the procedural history of the litigation, it is extremely difficult to provide a meaningful estimate or range of any potential loss.   At this time, however, Selective believes that an unfavorable outcome in the case would not have a material adverse effect on its financial condition, results of operations, or liquidity.

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One of Selective's subsidiaries, Selective Insurance Company of the Southeast (SISE), is one of nine property and casualty insurance company defendants named in Howell, et al. v. State Farm, et al., a purported class action filed on May 18, 2004, in the United States District Court for the District of Maryland, Baltimore Division.  The court has not yet ruled on class certification.  The plaintiffs hold Standard Flood Insurance Policies (SFIP) issued by the defendant insurers, who are participants in the WYO program of the NFIP.  The FIA is an agency within the Federal Emergency Management Administration (FEMA).  All claims under SFIPs are 100% reinsured by FEMA.  The suit alleges that the insurers underpaid flood claims arising from Hurricane Isabel in breach of their contractual obligations, fiduciary duties, and the implied covenant of good faith and fair dealing, and seeks unspecified monetary damages.  The insurers, including SISE, have denied the allegations, noting that they adjusted the claims as fiduciary agents of the U.S. Government in accordance with specific federal guidelines.  The insurers also have filed a motion to dismiss certain of the claims, which the court has not yet decided.  Given the early stages of the litigation, it is extremely difficult to provide a meaningful estimate or range of any potential loss.  FEMA's Office of the General Counsel, however, has advised the defendant carriers that, in its opinion, the claims were adjusted in accordance with the law and that FEMA will indemnify and reimburse the defense costs of the defendant insurers, including SISE.  Consequently, Selective believes that its exposure in the case is minimal and not material.

SICA was named as a defendant in two alleged class action lawsuits filed in the Third Judicial Circuit, Madison County, Illinois, on October 11, 2003 (Eavenson I) and October 27, 2003 (Eavenson II).  Both cases are captioned Mark J. Eavenson, D.C., d/b/a/ Multi-Care Specialists, P.C. v. Selective Insurance Company of America.  The first complaint (Eavenson I) was amended on June 18, 2004.  The second complaint (Eavenson II) was amended on December 3, 2004.  Neither of the amended nor original complaints quantify the money damages being sought.  In Eavenson I, the plaintiff alleges that SICA's use of non-parties' preferred provider payment schedules, which reduces the medical provider's bill and/or denies payment of part or all of it, violates the Illinois Consumer Fraud Act and results in SICA's unjust enrichment.  The plaintiff also alleges that SICA inappropriately uses these schedules when making payments for medical services, on behalf of its insureds, pursuant to its automobile, homeowners, commercial liability and workers' compensation policies.  Discovery is on-going and SICA's motion to dismiss the amended complaint is pending, but not yet scheduled for argument.  The court has not yet certified whether a class exists.  The Eavenson II amended complaint contains similar allegations to those in Eavenson I regarding SICA's use of PPO networks.  The Eavenson II complaint also alleges that SICA's use of the PPO networks represents a civil conspiracy, violates the Illinois Consumer Fraud Act, and results in SICA's unjust enrichment.  SICA has not yet responded to the amended complaint and the court has not yet certified whether a class exists.  Discovery is on-going and SICA anticipates that it will file a motion to dismiss the amended complaint shortly.  SICA is vigorously defending both Eavenson I and Eavenson II.  Given the early stages of the litigation, it is extremely difficult to provide a meaningful estimate or range of any potential loss.  At this time, Selective believes that, should the case ultimately be decided unfavorably, it would not have a material adverse effect on its financial condition, results of operations, or liquidity.

Item 4.    Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of 2004.

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PART II

Item 5.    Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities.

(a) Market Information
Selective's common shares are traded on the Nasdaq National Market under the symbol: "SIGI."  The following table sets forth the range of high and low bid information as reported on the Nasdaq National Market for Selective's common shares for each full quarterly period within the two most recent fiscal years:

On February 28, 2005, the closing price of Selective as reported on the Nasdaq National Market was $46.01.

(b) Holders
As of December 31, 2004, there were approximately 4,600 holders of record of Selective's common stock, including beneficial holders whose securities were held in the name of the registered clearing agency or its nominee.

(c) Dividends
Dividends on shares of Selective's common stock are declared and paid at the discretion of the Board of Directors based on Selective's operating results, financial condition, capital requirements, contractual restrictions and other relevant factors. The following table provides information on the dividends declared for each quarterly period within Selective's two most recent fiscal years:

Selective's ability to declare dividends is restricted by covenants contained in senior notes that it issued on May 4, 2000 (2000 Senior Notes) and August 12, 1994 (1994 Senior Notes).  See Note 8 to the consolidated financial statements entitled, "Indebtedness."  All such covenants were met during 2004 and 2003.  At December 31, 2004, the amount available for dividends to holders of Selective's common shares under such restrictions was $325.6 million for the 1994 Senior Notes and $287.9 million for the 2000 Senior Notes.

Selective's ability to receive dividends, loans, or advances from its Insurance Subsidiaries is subject to the approval and/or review of the insurance regulators in the respective domiciliary states of the Insurance Subsidiaries.  Such approval and review is made under the respective domiciliary states' insurance holding company act, which generally requires that any transaction between related companies be fair and equitable to the insurance company and its policyholders.  Selective does not believe that such restrictions limit the ability of the Insurance Subsidiaries to pay dividends to Selective now or in the foreseeable future.  Selective currently expects to continue to pay quarterly cash dividends on shares of its common stock in the future.

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 (d) Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information about Selective's common stock subject to equity compensation plans as of December 31, 2004:

(e) Recent Sales of Unregistered Securities
On November 17, 2004, Selective sold unsecured senior notes with an annual interest rate of 7.25% and a 2034 maturity date in the aggregate principal amount of $50.0 million (Senior Notes).  The Senior Notes were issued under an indenture between Selective and Wachovia Bank, National Association, as trustee, dated November 16, 2004.  Keefe, Bruyette & Woods were the underwriters of the offering and received an underwriting fee of 0.75% of the aggregate principal amount.  The notes were offered in the United States to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933 (Securities Act) and to institutional investors that are accredited investors within the meaning of the Securities Act and outside the United States pursuant to Regulation S under the Securities Act.  Selective received $49.6 million in net proceeds from the transaction, which it intends to use for general corporate purposes, including but not limited to capital contributions to the Insurance Subsidiaries, repayment of some existing outstanding debt, and share repurchases. 

(f) Purchases of Equity Securities by the Issuer and Affiliated Purchases
The following table provides information regarding Selective's purchase of its own common stock in the fourth quarter of 2004:

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Item 6.    Selected Financial Data.

Eleven-Year Financial Highlights