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PAGE 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one) FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Fee required)
For the fiscal year ended.....December 31, 1997.................
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No fee required)
For the transition period from....................to...........
Commission file number 0-8641
SELECTIVE INSURANCE GROUP, INC.
(Exact name of registrant as specified in its charter)
New Jersey
------------------------------------------------------------
(State or Other Jurisdiction of Incorporation or Organization)
22-2168890
-------------------------------
(IRS Employer Identification No.)
40 Wantage Avenue, Branchville, New Jersey 07890
------------------------------------------ ------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code 973-948-3000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
-------------------
8 3/4% Convertible Subordinated Debentures due January 1, 2008
(Title of class)
Common Stock, par value $2 per share
(Title of class)
Preferred Share Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months and (2) has been subject to
such filing requirements for the past 90 days.
[X] Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant based on last sale price on the Nasdaq National Market on
February 16, 1998.
Common Stock, par value $2 per share: $758,818,852
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of February 16, 1998.
Common Stock, par value $2 per share: 29,505,318
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the Selective Insurance Group, Inc. 1997 Annual Report to
Stockholders ("1997 Annual Report") are incorporated by reference to Parts
I, II, and IV of this report.
Portions of the definitive Proxy Statement for the 1998 Annual Meeting of
Stockholders ("Proxy Statement") are incorporated by reference to Part III
of this report.
PAGE 2
Forward-looking statements
- --------------------------
This 1997 annual report on Form 10-K contains certain statements that
are not historical facts and are considered "forward-looking statements"
(as defined in the Private Securities Litigation Act of 1995), which can be
identified by terms such as "believes," "expects," "intends," "may," "will,"
"should," "anticipates," the negatives thereof, or by discussion of
strategy, goals and/or future expectations. Such forward-looking statements
involve opinions and predictions based on current information and
assumptions, and no assurance can be given that the future results will be
achieved since events or results may materially differ as a result of risks
and uncertainties facing the Company. These include, but are not limited to,
economic, market or regulatory conditions, competition, and investment
risks, as well as risks associated with the Company's entry into new
markets, diversification and catastrophic events.
PART I
Item 1. Business.
- ----------------
General
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Founded in 1925 and organized in 1977, Selective Insurance Group, Inc.
(the "Parent") is a regional insurance holding company which, through its
subsidiaries, (collectively, "Selective" or the "Company") offers a broad
range of commercial insurance products, alternative risk management
products, and managed care and related services to small- to medium-sized
service-oriented businesses, governmental entities and selected classes of
light industry. The Company's commercial insurance products represent
approximately 70% of net premiums earned. Selective also offers personal
insurance products to individuals and families, which represent
approximately 30% of net premiums earned. The Company's commercial and
personal products are distributed principally in suburban and rural areas
of New Jersey, Pennsylvania, New York, Maryland, Virginia, South Carolina,
Delaware and other Mid-Atlantic and Southeastern states. In 1996, the
Company began writing insurance in Illinois, the first state of a six-state
expansion into the Midwest, which in 1997 also included Iowa, Indiana,
Wisconsin, Michigan and Ohio.
The Company offers its insurance products through Selective Insurance
Company of America ("SICA"), Selective Way Insurance Company ("SWIC"),
Selective Insurance Company of the Southeast ("SISE"), Selective Insurance
Company of South Carolina ("SISC") and Selective Insurance Company of New
York ("SINY"), formerly Exchange Insurance Company, (collectively, the
"Insurance Subsidiaries"). In November 1997, the Company acquired the assets
of Alta Services LLC ("Alta"), formerly MCSI/MRSI, a managed care company
that provides medical claims handling services to the insurance industry.
See Item 1. "Business" -- Strategy.
The following table shows the distribution of net premiums earned by
state for the periods indicated:
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Year Ended December 31,
1995 1996 1997
- ---------------------------------------------------------------------------
Earned Premium Distribution by State
New Jersey 61.4% 60.0 58.1
Pennsylvania 10.0 10.6 11.3
New York 6.5 7.2 7.7
Maryland 4.8 4.5 4.9
Virginia 4.5 4.5 4.7
South Carolina 4.6 5.0 4.6
Delaware 3.1 3.2 2.9
North Carolina 2.4 2.7 2.5
Georgia 2.1 2.1 2.1
Other states 0.6 0.2 1.2
----- ----- -----
Total 100.0% 100.0 100.0
===== ===== =====
For the ten years ended December 31, 1997, the Company's average
statutory loss and loss expense ratio and average statutory combined ratio
were 70.2% and 104.5%, 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 10.1 points. The Company attributes its performance to
its strong relationships with its independent insurance agencies, its
expertise in underwriting property and casualty insurance risks, its
penetration of suburban and rural market areas in the Mid-Atlantic and
Southeastern states and its conservative loss and loss expense reserving
practices. For the ten years ended December 31, 1997, the Company's average
statutory underwriting expense ratio was 33.2% compared to 26.2% for the
property and casualty insurance industry. The Company's historical statutory
underwriting expense ratio is higher than the industry average, primarily
due to the impact of taxes and assessments in New Jersey from 1990 through
1996 (which accounted for approximately 1.6 points of the average ratio)
and labor costs (which accounted for approximately 8.1 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. The Company's average statutory combined ratio outperformed the
property and casualty industry average statutory combined ratio by 3.3
points for this ten-year period. The Company's statutory combined ratio is
not as favorable as the Company's loss and loss expense ratio in comparison
to the industry primarily due to the impact of the Company's underwriting
expense ratio as previously described. The table on page 3 sets forth
certain Company and industry ratios:
PAGE 3
Simple
Average of
All Periods Years Ended December 31,
Presented 1997 1996 1995 1994
- ----------------------------------------------------------------------------
Certain Company Ratios(1):
Loss 58.9% 56.8 60.6 60.4 60.6
Loss expense 11.3 11.4 10.8 10.8 11.1
Underwriting expense 33.2 31.2 30.8 29.4 31.6
Policyholders' dividends 1.2 0.7 0.7 1.0 1.0
Combined ratio(3) 104.5 100.1 102.9 101.6 104.3
Growth (decline)in net
premiums written 6.2 3.7 (8.6) 8.5 14.8
Certain Industry Ratios(1)(4):
Loss 67.5 61.2 65.4 65.7 68.1
Loss expense 12.8 12.5 12.9 13.2 13.0
Underwriting expense 26.2 26.7 26.4 26.1 26.0
Policyholders' dividends 1.3 1.4 1.1 1.4 1.3
Combined ratio(3) 107.8 101.8 105.8 106.4 108.5
Growth in net premiums written 3.7 3.2 3.4 3.6 3.8
Company Favorable
(Unfavorable) to Industry:
Combined ratio 3.3 1.7 2.9 4.8 4.2
Growth in net premiums written 2.5 0.5 (12.0) 4.9 11.0
(1) The ratios and percentages are based upon Statutory Accounting
Practices ("SAP").
(2) In 1993, this ratio includes the one-time restructuring charge of $9.0
million, which increased the ratio by 1.5 points.
(3) A combined ratio under 100% generally indicates an underwriting
profit and a combined ratio over 100% generally indicates an
underwriting loss. Because of investment income, a company may still
be profitable although its combined ratio exceeds 100%.
(4) Source: A.M. Best. The industry ratios for 1997 have been estimated
by A.M. Best.
- ----------------------------------------------------------------------------
Simple
Average of
All Periods Years Ended December 31,
Presented 1993 1992 1991 1990
- ----------------------------------------------------------------------------
Certain Company Ratios(1):
Loss 58.9% 60.3 58.2 56.6 57.9
Loss expense 11.3 11.5 11.3 11.3 12.5
Underwriting expense 33.2 35.5(2) 37.0 38.3 36.1
Policyholders' dividends 1.2 1.2 1.3 1.5 1.6
Combined ratio(3) 104.5 108.5(2) 107.9 107.6 108.0
Growth (decline)in net
premiums written 6.2 8.9 13.0 3.8 2.9
Certain Industry Ratios(1)(4):
Loss 67.5 66.7 74.7 68.5 69.4
Loss expense 12.8 12.8 13.4 12.6 12.9
Underwriting expense 26.2 26.3 26.6 26.4 26.0
Policyholders' dividends 1.3 1.1 1.2 1.3 1.2
Combined ratio(3) 107.8 106.9 115.7 108.8 109.6
Growth in net premiums written 3.7 6.2 2.0 2.4 4.5
Company Favorable
(Unfavorable) to Industry:
Combined ratio 3.3 (1.6)(2) 7.8 1.2 1.6
Growth in net premiums written 2.5 2.7 11.0 1.4 (1.6)
(1) The ratios and percentages are based upon Statutory Accounting
Practices ("SAP").
(2) In 1993, this ratio includes the one-time restructuring charge of $9.0
million, which increased the ratio by 1.5 points.
(3) A combined ratio under 100% generally indicates an underwriting profit
and a combined ratio over 100% generally indicates an underwriting loss.
Because of investment income, a company may still be profitable
although its combined ratio exceeds 100%.
(4) Source: A.M. Best. The industry ratios for 1997 have been estimated
by A.M. Best.
- ---------------------------------------------------------------------------
Simple
Average of
All Periods Years Ended December 31,
Presented 1989 1988
- ---------------------------------------------------------------------------
Certain Company Ratios(1):
Loss 58.9% 58.8 59.1
Loss expense 11.3 10.9 11.2
Underwriting expense 33.2 32.2 29.6
Policyholders' dividends 1.2 1.5 1.2
Combined ratio(3) 104.5 103.4 101.1
Growth (decline) in net
premiums written 6.2 5.1 10.0
Certain Industry Ratios(1)(4):
Loss 67.5 69.2 66.4
Loss expense 12.8 12.7 11.9
Underwriting expense 26.2 26.0 25.7
Policyholders' dividends 1.3 1.3 1.4
Combined ratio(3) 107.8 109.2 105.4
Growth in net premiums written 3.7 3.2 4.5
Company Favorable
(Unfavorable) to Industry:
Combined ratio 3.3 5.8 4.3
Growth in net premiums written 2.5 1.9 5.5
(1) The ratios and percentages are based upon Statutory Accounting
Practices ("SAP").
(2) In 1993, this ratio includes the one-time restructuring charge of $9.0
million, which increased the ratio by 1.5 points.
(3) A combined ratio under 100% generally indicates an underwriting profit
and a combined ratio over 100% generally indicates an underwriting loss.
Because of investment income, a company may still be profitable
although its combined ratio exceeds 100%.
(4) Source: A.M. Best. The industry ratios for 1997 have been estimated by
A.M. Best.
PAGE 4
Strategy
- --------
The Company's primary focus has been on improving underwriting
results, generating profitable growth and enhancing relationships with
independent agents who are aligned with the Company's strategic objectives.
The principal elements of the Company's strategies are to:
(i) generate an underwriting profit and increase premium volume;
(ii) reduce expenses and improve productivity through increased
automation and controlled expenses;
(iii)diversify geographically and develop new products and services;
and
(iv) continue to build and reward employees that are
committed to the Company and its objectives.
Generate an Underwriting Profit and Increase Premium Volume
-----------------------------------------------------------
In 1997, the Company's net premiums written increased by 4% over 1996.
The conversion of New Jersey personal automobile policies from six-month to
annual terms (the "Conversion") increased 1997 net premiums written by
approximately $36 million, while 1996 net premiums written included a
one-time adjustment of $8 million reflecting the Company's buy out of
certain reinsurance arrangements (the "Reinsurance Buy Out"). Excluding the
effects of the Conversion and the Reinsurance Buy Out, net premiums written
for 1997 decreased by about $3 million. Premium growth during the year was
impacted by a highly competitive commercial lines marketplace and a move
toward self-insurance programs, which particularly impacts the Company's
public entities business. See Item 7. "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Strategic Business Units. The Company's customer-focused Strategic
Business Units ("SBUs") define customer groups that the Company believes
offer profitable growth potential. The SBUs evaluate the marketplace and
provide products and services specifically developed to meet the needs of
agents and insureds in a particular market or territory.
The SBUs also provide a variety of services to the Company's branch
offices, agency management specialists ("AMSs") and agents, such as leads
for new accounts, technical training, analysis of underwriting results and
other specialized resources. Focusing on profitability is a principal
strategy for each SBU. The SBUs analyze the results by business class,
territory and agency to determine profitability, thereby allowing the
Company to be more attuned to areas of opportunity.
Alignment of Agents' Interests. Selective is working to align the
interests of the agents with the Company's strategic objectives. The Company
has reviewed the quality of business and profitability of every agent,
reinforcing strong relationships with agents who maintain the Company's
underwriting standards and commitment to profitable growth and terminating
those who do not. Selective has maintained a strong relationship with its
agency network by providing superior service and a stable marketplace as
well as applying consistent underwriting standards. One economic incentive
for the agents is profit sharing commissions, through which profitable
agents have an opportunity to earn additional commissions of up to
approximately 13% of their direct premiums written. In addition, agents can
purchase Selective common stock at a 5% discount with no brokerage fees
through the agents' stock purchase plan. During 1997, nearly 30% of
Selective's agents participated in the stock purchase plan.
Field Operations - Underwriting. Since its inception in 1995,
Selective's field underwriting program has become an integral, dynamic part
of the agent-company relationship. AMSs are experienced underwriters with
strong marketing and communication skills. Working in the field with a
specific group of agents, the AMSs can respond quickly to new commercial
business submissions and make timely decisions that can result in writing
desirable accounts. Each AMS is backed by a team of underwriters and
technical specialists in the branches.
Field Operations - Claims. The Company's strategic plan for it's
claims organization is parallel to the Company's field underwriting strategy
by creating a partnership between branch office and field operations. Claims
management specialists ("CMSs") work directly with agents, insureds, AMSs
and claimants. On-site inspections, personal interviews and face-to-face
negotiations are expected to result in more accurate loss settlements and
increased fraud detection. Working in the field, the CMSs gain knowledge
about potential exposures, and expand the role of the Company's claims staff
in the areas of loss control and risk management. Each branch office has
restructured its claim operation and 100 CMSs have been placed in the field.
Reduce Expenses and Improve Productivity
----------------------------------------
The Company's objective continues to be the reduction of expenses
through increased efficiency and automation. This objective is designed to
reduce the Company's underwriting and loss expense ratios by improving the
productivity and efficiency of internal operations. At December 31, 1997,
the Company's insurance operations work force numbered 1,580. Productivity,
as measured by net premiums written per employee, in 1997 was $454,000 up
from $433,000 in 1996. However, excluding the effects of the Conversion in
1997, the net premiums written per employee was $431,000, down slightly from
1996. The decrease was due to the lower levels of net premiums written. See
Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Controlled Expenses. The Company's loss expense ratio has
averaged 11.0% for the three-year period ended December 31, 1997. The
Company plans to reduce this ratio by reducing the legal fees incurred in
the course of the claim settlement process.
PAGE 5
In 1997, these legal expenses totaled approximately $22 million,
or 3% of net premiums earned. The litigation plan is a four-pronged approach
to achieve savings without sacrificing the quality of legal advice to, and
representation of, the Company's insureds. The program involves expansion of
the Company's staff counsel operations (attorneys employed by the Company to
represent the interests of insureds) in which the Company has an average
suit cost nearly 46% lower than outside counsel. The program also includes:
(i) fixed fee schedules for cases handled by outside counsel; (ii)
arbitration services to avoid higher costs associated with going to trial;
and (iii) legal fee audit review services to help identify billing errors.
The Company continues to focus on loss cost containment initiatives.
These initiatives include: (i) a comprehensive managed care program which
reduced 1997 workers' compensation and automobile costs by more than $16
million; (ii) a special investigative unit and claims professionals which
saved the Company approximately $10 million in 1997 by uncovering fraudulent
claims; and (iii) a voluntary automobile repair shop program which saved the
company $5 million of reduced repair costs in 1997 while maintaining a 94%
customer service satisfaction rating.
Automation. Insurance is a detailed, paper-intensive business.
Available computer technology offers significant potential for utilizing
automation to support the Company's objectives to reduce expenses.
The Commercial Lines Automated System ("CLAS"), originally introduced
in 1995 and completed in 1996, eliminates a number of manual steps, reducing
the time it takes to process commercial insurance products. With instant
access to the information, underwriters and claim adjusters are readily
able to answer questions, process changes quickly, verify coverages and
work more efficiently with agents to quote new business.
In 1998, the Company intends to add workers' compensation to CLAS and
move this system towards a "windows" environment. This project will also
involve significant enhancements which is expected to make it easier for
agents to conduct business with the Company.
Rating and product information is now available for Selective agents on
CD-Rom. Using Selective-specific software in their offices, the agents can
obtain initial pricing on accounts. That information can be transferred
electronically between the agent, the AMS and branch office, thus enabling
Selective to provide faster turnaround on policy issuance and coverage
revisions.
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 intends to expand its
"Agency Interface" capability to accept and send personal lines policy
transactions from additional agency management systems and to begin to
electronically interface with agents on commercial lines products.
Claims management specialists, equipped with laptop computers, have
electronic access to current claim information, have the ability to
authorize claim payments, and can input log notes from the field. A project
team is developing a new mobile claims system planned for implementation
during 1998, that is intended to enhance the claims adjusting process via
laptop computer by enabling complete claims entry and access to database
information from the field.
Diversification
---------------
Geographic Diversification. One of the Company's strategies is to
improve the geographic balance of its business through a long-term
diversification strategy. Geographic diversification reduces exposure to the
regulatory environment and weather-related catastrophes of any one
jurisdiction. Currently 58.1% of the Company's business is earned in New
Jersey, a decrease of approximately 2 percentage points from 1996, with most
of the remaining business earned in Pennsylvania, New York, South Carolina,
Virginia, Maryland, Delaware, North Carolina and Georgia. In 1992, the Parent
acquired Niagara Exchange Corporation ("Niagara"). Niagara's principal
insurance subsidiary, SINY, writes most of its business in New York, which
in 1997 accounted for 7.7% of the Company's overall net premiums earned.
In 1996, the Company began writing insurance in Illinois, the first state
of a six-state expansion into the Midwest, which in 1997 also included
Iowa, Indiana, Wisconsin, Michigan and Ohio. The Company believes that
these areas offer growth opportunities in the middle-market segments
targeted by the Company. This region experiences fewer natural catastrophes
than Mid-Atlantic and Southern states and offers a stable regulatory and
legal environment. In addition, population is spread outside of major
metropolitan areas, a factor that is compatible with the Company's
underwriting philosophy and operation. In 1997, the Company opened a
Midwest field and systems office in Mansfield, Ohio to support its
expansion into the Midwest. In addition to the expansion strategy, the
Company continues to focus on increasing its penetration in the other
Eastern states where it currently does business.
Fee-for-Service Operations. The business of insurance involves risk
assumption and is often subject to the uncertainties of market cycles and
weather-related catastrophes. To enhance the Company's operating income and
provide more stability, the Company's strategy is to expand its fee-based
operations through the sale of services by Selective Technical Administrative
Resources, Inc. ("SelecTech") and Alta. Fee-based businesses leverage the
Company's core skills and help to provide revenue and operating income that
is not dependent on the risk-bearing nature of traditional insurance
activities.
PAGE 6
Selective writes flood insurance (provided through the Personal Lines
SBU) under the auspices of the National Flood Insurance Program, the
premiums from which are ceded 100% to the Federal government. As a servicing
carrier, not an underwriter, Selective bears no risk of policyholder loss.
The Company receives a servicing fee from which it pays agency commissions
and other related expenses. In 1997, the Company's flood direct premiums
written increased by 22% to $19 million, and generated a net profit of $1
million. In 1998, the Company expects the flood program to be expanded into
all 50 states and to reduce processing costs through a new policy writing
system.
SelecTech generates fees by providing third party administrative
services to self-insured accounts. Insurance products have been traditionally
sold as an entire package of services which includes underwriting, policy
issuance, loss control, and claim handling. As businessowners move to
self-insurance, they also want the ability to purchase only those insurance
services that meet their specific needs. SelecTech, in conjunction with
Selected Risk Managers ("SRM"), is continuously exploring new business
opportunities that will allow the Company to offer a complete array of
services to businesses looking for risk management solutions in the
alternative markets.
In November 1997, in anticipation of the continued growth of managed
care medical cost containment and other medical claims services, the Company
acquired the assets of Alta Services LLC. Alta, the Company's newest SBU, is
a managed care company that provides a wide range of medical claims handling
services to the insurance industry. For the past several years, Alta has
provided services to Selective for the Company's managed care program.
Alta's approach to managed care is a critical part of the Company's
claim strategy. It is the Company's goal to export the products of Alta to
all of its operating territories and elsewhere since Alta also handles claims
for self-insured businesses and other insurers. Alta manages workers'
compensation and automobile medical claims on a nonrisk-bearing basis.
Priority is placed on quickly assigning an injured person to one of Alta's
network physicians and making sure they get the best medical care and, where
necessary, rehabilitation services. The goal is to return patients to their
normal routine, at work and at home, as soon as possible. In addition to
these services, Alta utilizes aggressive management and audit procedures for
hospital and medical bills to make sure Selective and Alta's other customers
are paying only what they should for a patient's treatment and care. Alta
continually monitors the performance of network physicians to ensure both
optimum patient results and ease of doing business.
Over the past several years, Alta has provided services for the
Company's managed care program. In 1997, this managed care program reduced
workers' compensation and automobile medical bill costs for the Company by
$11 million and $5 million, respectively. With the addition of Alta, the
Company is in the position of giving customers access to quality medical and
rehabilitation services, while enhancing claims management through in-house
managed care expertise.
Alternative Markets. The insurance industry broadly defines the
alternative market as any program in which clients self-insure part or all of
their insurable exposures. Historically, the practice of self-insuring was
limited to the largest corporations, who, as buyers, were more sophisticated
in insurance risk and exposure management. The Company believes that middle
market companies now have begun to utilize the alternative market with
increasing frequency. Industry statistics show that the number of companies
participating in the alternative market has expanded rapidly during the last
decade, now approaching 35% of commercial insurance premiums in the United
States. Industry experts predict that 70% of all commercial lines premium
dollars could be tied into an alternative market mechanism within ten years.
The Company's strategy is to offer the alternative market products to
meet the coverage and risk financing needs of the Company's independent
agents and their customers for large accounts, self-insured groups,
associations and fee-for-service business. As part of this strategy, the
Company formed SRM.
Employee Rewards
----------------
The Company's annual cash incentive programs are based on the
achievement of specific business objectives and on individual and team
performance measured by the achievement of business performance goals related
to increased profitability and premium growth and improving service. These
goals were developed from the Company's overall strategy for growth and
profitability. Employees set individual and team targets that go beyond their
normal responsibilities. Total incentive compensation (including payroll
taxes) amounted to $9 million, $5 million and $6 million for 1997, 1996 and
1995, respectively.
In addition to annual cash incentive programs, under the Company's stock
option plan II, the Company's Compensation Committee may grant stock options
or make restricted or unrestricted grants of common stock. The primary
purpose of stock options and restricted stock is to retain and reward
employees whose contributions and expertise are key to the success of the
business. All full-time employees whose contributions have a direct impact on
our business objectives and strategies are eligible.
PAGE 7
Industry Segments
- -----------------
The Insurance Subsidiaries are engaged in writing property and casualty
insurance products. The SBUs market and sell the insurance products to
specific customer groups. The products marketed encompass several lines of
insurance. Accordingly, the Company has classified its business into two
principal segments: commercial and personal insurance. In addition, the
Company has recognized alternative markets and new business opportunities
that exist within the insurance business. These opportunities are unlike the
traditional risk-bearing insurance markets and offer the Company a market to
generate fee income for insurance related services such as managed care,
claims handling, loss control and risk management. For Financial Information
pertaining to the Company's industry segments, see Note 20 to the Company's
Consolidated Financial Statements on page 52 of the 1997 Annual Report,
incorporated herein by reference.
Commercial Insurance
--------------------
The Company's commercial insurance coverages consist of the following:
Workers' Compensation coverage insures employers against employee
claims resulting from work-related injuries. Compensation is payable
regardless of who was at fault. There are four types of benefits payable
under workers' compensation policies: medical benefits, vocational
rehabilitation benefits, disability benefits and death benefits. Because
the Insurance Subsidiaries write voluntary workers' compensation, they are
also required to write involuntary coverage. Involuntary workers'
compensation business is written through the National Council on
Compensation Insurance, Inc. ("NCCI"). Effective January 1, 1995, Selective
withdrew from the New Jersey NCCI and chose to accept direct assignments of
involuntary workers' compensation coverage in an effort to reduce processing
costs and improve the loss experience of this business through better loss
control, managed care and risk management.
Commercial Automobile coverage insures policyholders against losses
incurred from bodily injury, bodily injury to third parties, property damage
to an insured's vehicle (including fire and theft) and property damage to
other vehicles and property as a result of automobile accidents involving
commercial vehicles. These policies may include uninsured motorist coverage.
Because the Insurance Subsidiaries write voluntary commercial automobile
insurance, they are also required by law to write involuntary coverage
through the Commercial Automobile Insurance Plan ("CAIP").
Liability coverage insures policyholders against third party liability
for bodily injury and property damage, including liability for products sold,
and the defense of claims alleging such damages. The liability lines
continue to reflect the potential exposure to environmental claims. The
emergence of these claims is slow and highly unpredictable. Environmental
liabilities are contingent on very complex legal and coverage issues making
reliable estimation of the exposure difficult. For additional information
about the Company's exposure to environmental liabilities, see the section
entitled "Environmental reserves" on pages 31 through 32 inclusive in the
1997 Annual Report and note 15(a) to the Consolidated Financial Statements on
pages 49 and 50 of the 1997 Annual Report, all of which are incorporated
herein by reference.
Property coverage insures policyholders against commercial property
damage caused by fire, wind, hail, water, theft and vandalism, and other
perils.
Umbrella coverage affords policyholders liability protection
supplemental to that provided under primary liability policies and insures
against catastrophic losses. Umbrella coverage normally is written in
conjunction with other commercial insurance to provide a complete insurance
package for commercial accounts.
Bonds is responsible for writing fidelity and surety, including but not
limited to: bid, performance, maintenance, supply, site plan and subdivision
bonds.
PAGE 8
In 1997, Selective's commercial insurance products were developed and
marketed through six SBUs. The following table sets forth, for all commercial
SBUs; and by each commercial SBU, the Company's net premiums written, net
premiums earned, underwriting income or loss on a GAAP basis and the
statutory combined ratio for the periods indicated:
1997 Commercial SBU Highlights
(dollars in thousands)
- ----------------------------------
Net Net GAAP Statutory
Premiums Premiums Underwriting Combined
Written Earned Income (Loss) Ratio(1)
- ------------------------------------------------------------------------
All Commercial SBUs 1997 $472,460 465,846 (12,701) 103.6%
1996 475,104 477,506 (24,832) 105.3
1995 535,050 521,196 (18,475) 103.1
Contractors 1997 168,056 163,262 (8,071) 105.5
1996 157,722 158,317 (6,813) 104.5
1995 178,126 170,486 (9,531) 104.9
Mercantile and Service 1997 144,423 144,137 (3,360) 102.9
1996 148,280 148,122 (11,948) 108.3
1995 167,832 163,741 (5,576) 102.7
Public Entity 1997 64,137 69,933 (2,596) 105.3
1996 86,673 91,513 (4,508) 104.8
1995 106,802 106,702 (4,556) 103.7
Habitational and 1997 52,441 49,659 (107) 100.2
Recreational 1996 46,870 44,395 (3,188) 107.5
1995 45,547 44,832 (1,660) 103.9
Manufacturing and 1997 31,711 29,485 (116) 100.4
Processing 1996 28,006 27,638 375 98.9
1995 29,236 28,138 2,230 92.5
Bonds 1997 11,398 8,946 3,794 57.6
1996 6,965 6,815 1,142 78.7
1995 6,756 6,493 1,974 69.0
Other (2) 1997 294 424 (2,245) N/M
1996 588 706 108 N/M
1995 751 804 (1,356) N/M
(1) Industry standard not generally accepted accounting principles.
(2) The calendar year results reflect loss and loss expense savings
(development) for accident years prior to 1993 (the year in which the
SBUs were formed).
N/M Not meaningful
The commercial SBUs' net premiums earned represented approximately 70%
of the total net premiums earned in 1997. The 1996 net premiums written
included a one-time adjustment of $8 million reflecting the Reinsurance Buy
Out. Excluding the Reinsurance Buy Out, the commercial SBUs net premiums
written increased 1%, or $5 million, compared to 1996. This increase included
$132 million of net premiums written attributable to new business, after
deducting reinsurance costs of approximately $6 million, which was primarily
offset by: (i) lower premium volume of approximately $21 million due to
agency terminations; (ii) a reduction in existing business (renewal
retention) attributable to a highly competitive commercial lines marketplace
as well as nonrenewals resulting from the Company's reunderwriting
(reevaluating) of certain business classes and/or accounts; (iii) workers'
compensation rate decreases, which lowered net premiums written by
approximately $18 million; and (iv) lower net premiums written in the Public
Entity SBU, primarily due to a shift in business to the alternative markets.
The significant growth in new business resulted in the Company
generating an increase in most of the commercial SBUs' net premiums written.
However, the Public Entity SBU net premiums written were down $23 million in
1997, primarily due to the trend towards self-insurance and other alternative
risk sharing mechanisms.
For the three-year period ended December 31, 1997, the Commercial SBUs,
in total, average statutory combined ratio was 104.0%. The 1997 combined
ratio improved by 1.7 points, compared to 1996. The 1996 results reflected
numerous weather-related storm losses which increased the ratio by 3.0
points. Excluding these storm losses from the 1996 results, the 1997 combined
ratio increased 1.3 points primarily due to a rise in labor costs and other
operating expenses while net premiums written remained relatively flat. See
Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
PAGE 9
The Company's commercial SBUs consist of the following:
The Contractors SBU focuses on providing commercial insurance coverage
for key business segments in the construction industry including carpentry,
electrical, excavating, plumbing and landscaping, as well as many other
special artisan classes. In 1997, the Contractors SBU's net premiums earned
represented 35% of the Company's total net premiums earned for commercial
insurance. For the three-year period ended December 31, 1997, the Company's
average statutory combined ratio for this SBU was 105.0%. Contractors
generated a statutory combined ratio of 105.5% in 1997, up from 104.5% in
1996. This increase was primarily driven by poor results in the commercial
automobile line of insurance, particularly within the construction specialty
trade business class. The Company is taking steps to improve the results in
the commercial line of insurance, including pricing analysis, reunderwriting
and increased loss control.
The Mercantile and Service SBU focuses on providing commercial insurance
coverage to retail stores, offices, religious institutions, wholesalers and
service businesses. In 1997, the Mercantile and Service SBU's net premiums
earned represented 31% of the Company's total net premiums earned for
commercial insurance. For the three-year period ended December 31, 1997, the
Company's average statutory combined ratio for this SBU was 104.6%.
Mercantile and Service generated a statutory combined ratio of 102.9% in 1997
down from 108.3% in 1996. The decrease in the 1997 combined ratio was
primarily attributable to the absence of weather-related catastrophe claims.
In 1996, weather-related catastrophe claims increased the 1996 combined ratio
by 4.4 points. In addition to the favorable weather conditions, the decrease
in the 1997 combined ratio reflected improvements to the businessowner
program as a result of the Company's effort to improve this program.
The Public Entity SBU focuses on providing commercial insurance coverage
for public entities including: municipalities; school boards; and volunteer
fire departments and rescue squads. In 1997, the Public Entity SBU's net
premiums earned represented 15% of the Company's total net premiums earned
for commercial insurance. For the three-year period ended December 31, 1997,
the Company's average statutory combined ratio for this SBU was 104.6%.
Public Entity generated a statutory combined ratio of 105.3% in 1997, up from
104.8% in 1996 mainly due to the declining net premiums written in 1997. The
Public Entity SBU net premiums written were down $23 million in 1997,
primarily due to the trend towards self-insurance and other alternative risk
sharing mechanisms.
The Habitational and Recreational SBU focuses on providing commercial
insurance coverage to hotels and motels, condominiums, property owner
associations, golf courses, country clubs, restaurants, membership
organizations and other miscellaneous types of recreational industries. In
1997, this 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, 1997, the Company's average statutory combined ratio for this
SBU was 103.9%. Habitational and Recreational generated a statutory combined
ratio of 100.2% in 1997 down from 107.5% in 1996. The decrease in the 1997
combined ratio was primarily attributable to the absence of weather-related
catastrophe claims. In 1996, weather-related catastrophe claims increased the
1996 combined ratio by 6.5 points.
The Manufacturing and Processing SBU focuses on providing commercial
insurance coverage for light industrial and processing businesses with low
product liability exposures. In 1997, the Manufacturing and Processing SBU's
net premiums earned represented 6% of the Company's total net premiums earned
for commercial insurance. For the three-year period ended December 31, 1997,
the Company's average statutory combined ratio for this SBU was 97.3%.
Manufacturing and Processing generated a statutory combined ratio of 100.4%
in 1997 up from 98.9% in 1996. In 1996, weather-related catastrophe claims
increased the 1996 combined ratio by 5.7 points. Absent these weather-related
claims, the 1997 combined ratio increased 7.2 points, which was driven by a
small number of severe commercial automobile and property losses.
The Bonds SBU focuses on providing commercial insurance coverage for
fidelity and surety, including but not limited to: bid, performance,
maintenance, supply, site plan and subdivision bonds. In 1997, the Bonds
SBU's net premiums earned represented 2% of the Company's total net premiums
earned for commercial insurance. For the three-year period ended December
31, 1997, the Company's average statutory combined ratio for this SBU was
68.4%. An underwriting profit has been achieved in twenty-one out of the last
twenty-two years in the Company's Bond business.
PAGE 10
Personal Insurance
------------------
The following table sets forth, by personal lines coverages, the
Company's net premiums written, net premiums earned, underwriting income or
loss on a GAAP basis and the statutory combined ratio for the periods
indicated:
1997 Personal Lines SBU Highlights
(dollars in thousands)
- ----------------------------------
Net Net GAAP Statutory
Premiums Premiums Underwriting Combined
Written Earned Income (Loss) Ratio (1)
Total 1997 $245,178 210,442 11,522 93.7%
Personal 1996 217,167 217,473 4,819 97.5
Lines SBU 1995 221,935 221,587 1,762 98.2
Automobile 1997 223,047 187,656 4,044 96.9
1996 194,118 193,721 4,261 97.5
1995 197,902 197,398 5,494 96.8
Homeowners 1997 15,647 16,079 3,987 72.8
1996 15,611 16,245 (3,005) 118.9
1995 15,325 15,412 (5,993) 131.1
Flood 1997 - - 1,239 -
1996 - - 1,955 -
1995 - - 756 -
Other 1997 6,484 6,707 2,252 69.3
1996 7,438 7,507 1,608 79.2
1995 8,708 8,777 1,505 82.6
(1) Industry standard not generally accepted accounting principles.
The Personal Lines SBU represented approximately 30% of the total net
premiums earned in 1997. Personal lines SBU net premiums written increased
13% in 1997 over 1996. This includes $36 million from the Conversion which
had no impact on net premiums earned. Net premiums earned in New Jersey
represented 84% of total personal lines business. The Company intends to
diversify by expanding its personal lines program in existing and new states.
The Personal Lines SBU underwriting results have improved significantly over
the past three years, resulting in underwriting gains of $12 million, $5
million and $2 million in 1997, 1996 and 1995, respectively. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." For the three-year period ended December 31, 1997, the personal
lines SBU average statutory combined ratio was 96.5%. The combined ratio for
1997 improved by 3.8 points to 93.7%, which was primarily due to improved
homeowners results, reflecting favorable weather conditions as well as
reduced catastrophic reinsurance costs and improved rate adequacy. In 1996,
weather-related catastrophe claims increased the 1996 combined ratio by 1.9
points. Personal automobile and personal catastrophic liability continued to
remain profitable throughout 1995, 1996 and 1997.
The Company's personal insurance coverages consist of the following:
Personal Automobile coverage insures individuals against losses incurred
from bodily injury, bodily injury to third parties, property damage to an
insured's vehicle (including fire and theft), property damage to other
vehicles and other property as a result of automobile accidents involving
personal vehicles. These policies may include uninsured motorist coverage. In
1997, personal automobile net premiums earned represented 89% of the
Company's total net premiums earned for personal insurance. For the
three-year period ended December 31, 1997, the Company's average statutory
combined ratio for this coverage was 97.1%. The Company has been successful
in obtaining personal automobile rate increases and surcharges in New Jersey
that increased net premiums earned by approximately $2 million, $5 million
and $8 million for 1997, 1996 and 1995, respectively. In addition to improved
automobile rate adequacy, the Company is seeing important fundamental changes
within this marketplace, including safer cars, greater fraud detection and
increased public awareness of the costs associated with reckless and drunk
driving. See Item 1. "Business" -- Regulation.
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 1997, homeowners net premiums earned represented
8% of the Company's total net premiums earned for personal insurance. For the
three-year period ended December 31, 1997, the Company's average statutory
combined ratio for this coverage was 107.6%. On a statutory basis,
PAGE 11
homeowners coverage generated a combined ratio of 72.8% in 1997, down from
118.9% in 1996. In 1996, weather-related catastrophe claims increased the
1996 combined ratio by 18.6 points. In addition to the favorable weather
conditions in 1997, improvements in this line were attributable to an
aggressive homeowners inspection program that was completed to ensure that
all property values reflect the amount necessary to replace the home in the
event of a loss, reduced catastrophe reinsurance costs, and improved rate
adequacy.
Personal Catastrophe Liability coverage, included in the "Other"
category in the personal lines table, affords policyholders liability
protection supplemental to that provided under automobile and homeowners
policies and insures against catastrophic losses. This coverage normally is
written in conjunction with other personal insurance. In 1997, net premiums
earned for personal catastrophe liability coverage represented 2% of the
Company's total net premiums earned for personal insurance. For the
three-year period ended December 31, 1997, the Company's average statutory
combined ratio for this coverage was 58.9%.
Flood coverage, which is provided through the Personal Lines SBU, is
ceded 100% to the National Flood Insurance Program. The Company is a servicer
and not an underwriter of this type of insurance and therefore bears no risk
of policyholder loss. The Company receives a servicing fee from which it pays
agency commissions and other related expenses. The flood business generated a
profit of $1 million, $2 million and $1 million in 1997, 1996 and 1995,
respectively.
Fee-For-Service Operations
--------------------------
In addition to its risk-bearing insurance activities, the Company also
engages in providing insurance-related servicing activities designed to
generate fee income. The Company believes that leveraging its insurance
knowledge to generate fee income will allow it to further diversify its
business, utilize market opportunities created by the movement of insureds to
alternative market products, to decrease its underwriting expense ratios, and
to reduce the impact on its business resulting from insurance cycles and
weather-related catastrophic losses.
In anticipation of growth in alternative market insurance solutions, the
Company formed SelecTech to generate fee income by providing third party
administration services for public entities that self-insure and use other
means of alternative insurance. The services provided include, but are not
limited to: claims administration, loss control and risk management.
The Alta Services SBU was formed when the Company purchased the assets
of Alta in November 1997, to more fully integrate its claim operation within
its medical case management program. It's array of services include
rehabilitation and occupational services, medical bill review, workers'
compensation managed care programs, and hospital bill audits. Alta also
offers the same services for a fee to self-insured businesses and other
insurance companies.
Alternative Markets
-------------------
The Selective Risk Managers SBU was formed to focus on business
opportunities in alternative insurance markets and to lead underwriting and
sales efforts for large accounts, self-insured, group and association
business. While primarily focused on developing customized primary insurance
or reinsurance products for the commercial SBUs, Selected Risk Managers also
generates fee income for the Insurance Subsidiaries by collecting ceding
commissions and placement fees. During 1997, Selective Risk Managers wrote 30
alternative market programs and accounted for a premium commitment of
approximately $20 million of commercial insurance through the various
commercial SBUs. In addition to developing and marketing alternative
insurance products, SRM promotes the services of SelecTech and Alta.
Marketing and Distribution
- --------------------------
The Company's products are developed and marketed through the Company's
nine SBUs. These customer-focused SBUs evaluate the marketplace and provide a
broad range of products and services specifically developed to meet the needs
of the Company's agents and insureds in a particular market or territory
including business opportunities in the insurance alternative markets.
The Insurance Subsidiaries sell their insurance products exclusively
through a network of approximately 850 independent insurance agencies
supported by nine full-service branch offices. The Company has maintained a
strong relationship with its agency network by providing superior service,
a stable marketplace and applying consistent underwriting standards. During
the three-year period 1994 through 1996, the Company's agency force, in
total, decreased by approximately 300 agencies. Approximately 90% of this
reduction was due to terminations, with the remaining 10% being attributed
to consolidations within the agency population. During 1997, the Company's
agency force increased by approximately 90 agencies. The majority of this
increase was due to new agency appointments in the Midwest where the Company
began writing insurance in Illinois in 1996, and in Indiana, Iowa,
Wisconsin, Michigan and Ohio in 1997.
PAGE 12
The Company's continuing focus on profitable premium growth is closely
linked to the quality of the Company's relationships with the independent
agents who sell its products and services. The Company believes that its
unique business model of SBUs, field offices, AMSs and CMSs enhances its
level of service to its independent insurance agents.
Underwriting
- ------------
Commercial insurance is underwritten by branch AMSs who apply the
Company's underwriting guidelines for particular policies and types of
customers. Each AMS is supported by an underwriting team, which is
responsible for policy renewal and processing. In addition, home office staff
specialists and the SBUs provide additional technical support and services to
the branch offices when needed. Substantially all of the personal insurance
underwriting activities are conducted at the home office under supervision of
the centralized Personal Lines SBU.
The branch offices and the SBUs work together to develop pricing, growth
and profitability objectives. The branch AMSs deal directly with the
Company's independent insurance agencies, and their regular interaction
provides the Company with information as to the agencies' needs for products
and pricing. This information is used by the branch offices and SBUs to
develop the necessary products, pricing and applicable underwriting
guidelines.
For certain classes of business and policy limits (with the exception of
umbrella policies), certain agencies have the authority to bind the Insurance
Subsidiaries. The Insurance Subsidiaries have a period, generally 60 days
after the effective date of coverage, during which they can cancel
undesirable risks. During the 60 day period, the Insurance Subsidiaries are
required to pay any claim which would be covered under such policies. The
Company's agents' handbook sets forth underwriting criteria for particular
policies and insureds. When a risk falls outside of the established
guidelines, the agencies must contact their respective branch AMS to obtain
authorization to bind coverage. Insurance accounts that exceed the branch
AMS's authority requires home office approval. Policies that are accepted
become subject to regulatory limitations on policy cancellations and, except
for nonpayment of premiums, generally may not be canceled after the first 60
days other than at renewal upon prescribed prior notice of cancellation.
Claims
- ------
Claims on policies are investigated and settled primarily by more than
100 CMSs who are in the field, and assigned to key agents. Losses are
reported directly by the agent to its CMS who investigates and resolves the
claim in person with the Company's policyholder. This enables the Company to
physically inspect and settle losses in person promptly and accurately. In
locales where there is insufficient claims volume to justify the cost of an
internal claims staff, or when a particular claims expertise is required, the
Insurance Subsidiaries use independent adjusters to investigate and resolve
claims.
The Company's claims policy emphasizes the timely investigation and
settlement of meritorious claims for appropriate amounts, maintenance of
timely and adequate reserves for claims, and the cost-effective delivery of
claims services by controlling loss and loss expenses.
Claims settlement authority levels are established for each CMS and
supervisor based on their expertise and experience. The setting of reserves
and disposition of property and liability claims in excess of $100,000 field
authority, per claim, requires home office review and approval. The Company
refers all environmental claims to a centralized environmental claims unit
which specializes in the claim management of these exposures.
While claims adjusting has been moved into the field, the Company has
centralized its recovery, subrogation, fraud and workers' compensation claims
handling, which are directed at the Corporate office. The Company has
instituted internal procedures to screen claims for potential fraud. When
fraud is suspected, the claim is reviewed by the Company or outside fraud
investigator to determine the appropriate action before payment is
authorized. The Company's automated claims system enables tracking of claims
suspected to be fraudulent to determine the savings of nonpayment of such
claims. In addition, the Company has introduced anti-fraud training and
educational programs for its employees.
Reinsurance
- -----------
The Insurance Subsidiaries follow the customary industry practice of
ceding a portion of their risks and paying to reinsurers a portion of the
premiums received under the policies. This reinsurance program permits
greater diversification of business and the ability to offer increased
coverage while limiting maximum net losses. The Insurance Subsidiaries are
parties to reinsurance contracts under which certain types of policies are
automatically reinsured without the need for approval by the reinsurer of
individual risks covered ("treaty reinsurance"), reinsurance contracts
handled on an individual policy or per-risk basis requiring the agreement of
the reinsurer as to each risk insured ("facultative reinsurance") and certain
automatic facultative arrangements that permit the Company to automatically
reinsure risks within certain specified limits ("automatic facultative
reinsurance"). Reinsurance does not legally discharge an insurer from its
liability for the full face amount of its policies, but does make the
reinsurer liable to the insurer to the extent of the reinsurance ceded.
PAGE 13
The Company has a Reinsurance Security Committee ("Reinsurance
Committee") that reviews and approves all reinsurers who do business with the
Company. The Reinsurance Committee reviews the financial condition of the
reinsurer as well as applicable company ratings from: (i) A.M. Best; (ii)
Insurance Solvency International; and (iii) Standard & Poor's Insurance
Rating Services ("Standard & Poor's"). Further information is obtained from
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 yet been assigned a
rating.
The Company continuously monitors the reinsurance program to determine
that its protection is not excessive, but adequate to ensure the availability
of funds to provide for losses while maintaining adequate funds for business
growth. The Company's primary reinsurers are American Re-Insurance Company,
Zurich Reinsurance Company of America, St. Paul Reinsurance Management
Corporation and Axa Re (Paris). In addition, the Company cedes no-fault
claims for medical benefits in excess of $75,000 to the New Jersey
Unsatisfied Claim and Judgment Fund ("UCJF").
The Company maintains treaty excess of loss programs which cover each
property occurrence in excess of $400,000 up to $10 million and each casualty
occurrence in excess of $1 million up to $50 million, except for commercial
umbrella which is reinsured up to $10 million. In certain instances where
greater capacity is needed for a larger property or casualty risk,
facultative reinsurance is purchased.
Effective January 1, 1998, the Company revised its property catastrophe
program and its New Jersey Homeowners Quota Share Program ("Homeowners Quota
Share Program"). The revised program provides protection against higher
levels of catastrophe losses at a lower cost when compared with the 1997
program. The new catastrophe program is in four layers and covers: (i) 95%
of losses in excess of $10 million up to $55 million; (ii) 50% of losses in
excess of $55 million up to $85 million; and (iii) 95% of losses in excess
of $85 million up to $150 million in two layers. In addition, the Homeowners
Quota Share Program was reduced from 85% to 75%, and all homeowners
liability premium has been removed from this program. The provisional
commission received from the reinsurers has been increased from 38.5% to
45%, and the occurrence limit has been removed completely. The Company
believes that the 1998 property catastrophe program, coupled with the
Homeowners Quota Share Program, provides adequate protection for the Company
if catastrophic losses were to occur. The Company expects its costs for both
the catastrophe and Homeowners Quota Share programs to be reduced by
approximately $2 million in 1998 compared to 1997.
Pooling Arrangements
- --------------------
The Insurance Subsidiaries participate in intercompany pooling and
expense sharing arrangements ("pool" or "pooling agreement"). The pool
permits each Insurance Subsidiary to rely on the capacity of the entire pool,
rather than only its own capital and surplus and it prevents any one
Insurance Subsidiary from suffering any undue losses, as all Insurance
Subsidiaries share underwriting profits and losses in proportion to their
pool participation percentages. The pool permits all Insurance Subsidiaries
to obtain a uniform rating from A.M. Best and Standard & Poor's.
The pool participation percentage of each Insurance Subsidiary reflects
the ratio of that subsidiary's policyholders' surplus to the Company's
aggregate policyholders' surplus. The percentages are as follows:
SICA...............55.5%
SWIC...............21.5%
SISC................9.0%
SISE................7.0%
SINY................7.0%
Through the pooling agreement, SICA assumes from the other Insurance
Subsidiaries, net of applicable reinsurance, all of their combined premiums,
losses, loss expenses and underwriting expenses and SICA cedes to the other
Insurance Subsidiaries 44.5% of the Insurance Subsidiaries' combined
premiums, losses, loss expenses and underwriting expenses. Through the pool,
the Insurance Subsidiaries also share underwriting and administration
expenses. Accounts are rendered within forty five days after the end of the
calendar quarter and are settled within sixty days after the end of the
calendar quarter. The pool may be terminated at the end of any calendar
month by any Insurance Subsidiary giving ninety days prior notice of
termination.
Reserves for Net Losses and Loss Expenses
- -----------------------------------------
For information about reserves for net losses and loss expenses, see (i)
the section entitled "Analysis of reserves for losses and loss expenses" on
pages 28 through 30, inclusive, of the 1997 Annual Report, (ii) the section
entitled "Environmental reserves" on pages 31 through 32, inclusive, of the
1997 Annual Report and (iii) notes 15(a) and 17 to the Consolidated Financial
Statements on pages 49 through 52 of the 1997 Annual Report, all of which are
incorporated herein by reference.
PAGE 14
Investments and Investment Policy
- ---------------------------------
For information about investments and investment policy, see the section
entitled "Investments" on pages 18 and 19, of the 1997 Annual Report,
incorporated herein by reference.
Year 2000 Issues
- ----------------
The Company presently expects to be Year 2000 compliant by the end of
1998. During 1996, the Company began its efforts to prepare its information
systems for Year 2000 by evaluating its computer programs and systems and
commencing revisions where necessary. Extensive testing of these revisions
will commence in 1998. The impact of Year 2000 issues is uncertain, but the
Company presently expects that Year 2000 issues will not have a material
adverse effect on the Company's financial condition or results of operations.
See Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Regulation
- ----------
General
-------
Insurance companies are subject to supervision and regulation in the
states in which they are domiciled and in which they transact business. Such
supervision and regulation relate to numerous aspects of an insurance
company's business and financial condition. The primary purpose of such
supervision and regulation is the protection of policyholders. The extent of
regulation varies but generally is derived from state statutes which delegate
regulatory, supervisory and administrative authority to state insurance
departments. The Company believes that it is in compliance with applicable
regulatory requirements in all material respects as of the date of this
report. Although the U.S. Federal government does not directly regulate the
insurance industry, Federal initiatives from time to time can have an impact
on the industry.
State Regulation
----------------
The authority of the state insurance departments extends to such matters
as the establishment of standards of solvency, which must be met and
maintained by insurers, the licensing of insurers and agents, the imposition
of restrictions on investments, premium rates for property and casualty
insurance, the payment of dividends and distributions, the provisions which
insurers must make for current losses and future liabilities, the deposit of
securities for the benefit of policyholders and the approval of policy forms.
State insurance departments also conduct periodic examinations of the
financial and business affairs of insurance companies and require the filing
of annual and other reports relating to the financial condition of insurance
companies. Regulatory agencies require that premium rates not be excessive,
inadequate or unfairly discriminatory. In general, the Insurance
Subsidiaries must file all rates for personal and commercial insurance with
the insurance department of each state in which they operate.
All states have enacted legislation that regulates insurance holding
company systems. Each insurance company in a holding company system is
required to register with the insurance supervisory agency of its state of
domicile and furnish information concerning the operations of companies
within the holding company system that may materially affect the operations,
management or financial condition of the insurers. Pursuant to these laws,
the respective departments may examine the Parent and the Insurance
Subsidiaries at any time, require disclosure or prior approval of material
transactions of the Insurance Subsidiaries with any affiliate and require
prior approval or notice of certain transactions, such as dividends or
distributions to the Parent from the Insurance Subsidiary domiciled in that
state.
NAIC Guidelines
---------------
The Insurance Subsidiaries are subject to the general statutory
accounting practices and reporting formats established by the National
Association of Insurance Commissioners ("NAIC"). The NAIC also promulgates
model insurance laws and regulations relating to the financial and
operational regulation of insurance companies, which includes the Insurance
Regulating Information System ("IRIS"). IRIS identifies eleven industry
ratios and specifies "usual values" for each ratio. Departure from the usual
values on four or more of the ratios can lead to inquiries from individual
state insurance commissioners as to certain aspects of an insurer's business.
The Insurance Subsidiaries have, in recent years, met all of the IRIS test
ratios.
NAIC rules and regulations generally are not directly applicable to an
insurance company until they are adopted by applicable state legislatures and
departments of insurance. NAIC model laws and regulations have become
increasingly important in recent years, due primarily to the NAIC's Financial
Regulations Standards and Accreditation Program. Under this program, states
which have adopted certain required model laws and regulations and meet
various staffing and other requirements are "accredited" by the NAIC. Such
accreditation reflects an eventual nationwide regulatory network of
accredited states. All of the states in which the Insurance Subsidiaries are
domiciled, with the exception of New York, are accredited.
PAGE 15
The NAIC Model Act was adopted by the NAIC to, among other things,
enhance the regulation of insurer insolvency. This act includes certain
risk-based capital ("RBC") requirements for property and casualty insurance
companies. These requirements are designed to assess capital adequacy and to
raise the level of protection that statutory surplus provides for
policyholders. The NAIC Model Act measures the major areas of risk to which
property and casualty insurers are exposed: (i) asset risk, which is the risk
of default and decline in market value of assets; (ii) credit risk, which is
the risk that ceded reinsurance and other receivables might not be collected;
(iii) underwriting risk, which is the risk that prices or reserves are
inadequate; and (iv) off balance sheet risk, which includes excessive
premium growth and contingent liabilities. Insurers having less total
adjusted capital than required by the act are subject to varying degrees of
regulatory action depending on the level of capital inadequacy.
The model law establishes four levels of regulatory action. The extent
of regulatory intervention and action increases as the ratio of an insurer's
total adjusted capital, as defined in the model law, to its Authorized
Control Level ("ACL"), as calculated under the model law, decreases. The
first action level, the Company Action Level, requires an insurer to submit a
comprehensive financial plan of corrective actions to the insurance
regulators if total adjusted capital falls below 200% of the ACL amount. The
second action level, the Regulatory Action Level, requires an insurer to
submit a plan containing corrective actions and permits the insurance
regulators to perform an examination or other analysis and issue a corrective
order if total adjusted capital falls below 150% of the ACL amount. The
Authorized Control Level, the third action level, allows the regulators to
take any action they deem necessary, including placing the insurer under
regulatory control or rehabilitate or liquidate an insurer, in addition to
the aforementioned actions if total adjusted capital falls below the ACL
amount. The fourth action level is the Mandatory Control Level which
requires the regulators to place the insurer under regulatory control if
total adjusted capital falls below 70% of the ACL amount. Based upon the 1997
statutory financial statements for the Insurance Subsidiaries, each Insurance
Subsidiary's total adjusted capital exceeded the Company Action Level, and
the risk-based capital ratios are as follows:
SICA..............528%
SWIC..............604%
SISE..............578%
SISC..............589%
SINY..............502%
Automobile Insurance Regulation
-------------------------------
During 1997, the Governor of New Jersey signed into law an insurance
reform bill, this enacted law: (i) eliminates automatic approval of annual
cost-of-living premium increases in favor of "expedited rate filings" of 3%
or less, which do not require prior approval from the insurance commissioner;
(ii) prohibits insurers from non-renewing good drivers (defined as "no more
than one at fault accident or four insurance point moving violations within a
five-year period"); and (iii) eliminates the bad driver surcharge system in
favor of a tier rating system. The Company does not presently believe these
provisions will have a material effect on the Company's financial condition
or results of operations.
New Jersey insurance regulations presently require insurers to write all
personal automobile coverage presented to them from drivers with eight points
or less on their driving record. While SICA is required to write such
coverage, the rates charged by SICA reflect the insured's motor vehicle
record and incidence of at-fault accidents. Drivers whose poor driving record
makes them ineligible to otherwise obtain insurance must purchase insurance
from the Personal Automobile Insurance Plan ("PAIP"). SICA receives its
proportionate share of PAIP business based on its voluntary personal
automobile writings. Premiums and losses under PAIP are borne by the Company.
Pennsylvania, Delaware, District of Columbia, Virginia, Georgia and New York
also maintain assigned risk plans. Each plan requires a company to accept
its proportionate share of this business based upon its share of the
voluntary market.
Because the Company writes voluntary commercial automobile insurance in
New Jersey, the Company is also required by New Jersey law to write
involuntary coverage through a CAIP for those insureds who are otherwise
unable to obtain insurance in the marketplace. Participation in the CAIP is
based on the Company's share of the voluntary commercial automobile market.
Pennsylvania, Delaware, Virginia, South Carolina, Georgia and New York also
maintain assigned risk plans. Each plan requires a company to accept its
proportionate share of this business based upon its share of the voluntary
market.
South Carolina insurance regulations currently require insurers to write
all personal and certain commercial automobile coverage presented to them by
drivers. Although the Company is required to write all new applications, the
Company is able to cede up to 35% to the South Carolina Reinsurance Facility
("SCRF"). This ceding mechanism allows the Company to cede less desirable
risks to the SCRF. The SCRF operates on a no-profit, no-loss basis through a
surcharge on all automobile policies written in South Carolina. However, as
a result of legislation enacted in July 1997, the SCRF will be abolished and
replaced by a joint underwriting association ("JUA"). Effective March 1,
1999, the JUA will issue policies through association member companies to
drivers unable to obtain coverage in the voluntary market. These member
companies will share in the association's profits and losses. Beginning
March 1, 1999, the Company may non-renew policies currently ceded to the
SCRF.
PAGE 16
The UCJF provides for an insurance fund to reimburse auto insurers
paying no fault claims for medical benefits in excess of $75,000 without
limit for claims against policies issued or renewed prior to January 1, 1991
and up to a maximum of $250,000 per claim against policies issued or renewed
thereafter. Supplementally, the UCJF compensates persons not required by law
to carry automobile insurance who are injured in accidents with uninsured or
unidentified motorists. The UCJF is funded through assessments on auto
insurers in proportion to net direct written personal and commercial auto
premiums. UCJF assessments are treated as ceded reinsurance premiums, and
recoveries are treated as reinsurance recoverables.
Excess Profits
--------------
There is an excess profits law in New Jersey which sets a maximum profit
level on personal automobile insurance. Under New Jersey regulations, an
insurer's excess profits earned on direct insurance written in New Jersey on
private passenger automobiles, as determined pursuant to an actuarial formula
set forth in applicable regulations ("NJ Excess Profits"), are subject to
refund or credit to policyholders. A NJ Excess Profits calculation must be
made by an insurer for this purpose and submitted to the New Jersey
Department of Banking and Insurance (the "New Jersey Department") each year
for the three-year period including the year for which the calculation is
done and the two calendar years immediately preceding such year. If the
Company's current profitability continues in its New Jersey personal
automobile business, it may be possible that the Company will incur an excess
profit premium refund obligation. The Company has considered the potential
effect of such excess profits in establishing its reserves. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Homeowners Insurance Regulation
-------------------------------
The New Jersey Department regulations prohibit the cancellation or
non-renewal of homeowners insurance policies for any underwriting reason or
guideline which is arbitrary, capricious or unfairly discriminatory or
without adequate notice to insured. Among the regulatory provisions to which
the Company is subject are those designed to address problems in the
homeowners property insurance marketplace. These mechanisms are designed to
address perceived problems in the availability and affordability of such
insurance. These mechanisms take two forms, voluntary and involuntary.
Voluntary mechanisms such as the New Jersey Windstorm Market Assistance
Program ("Program") generally do not result in assessments to the Company.
The Program is designed to assist property owners in New Jersey coastal areas
in obtaining homeowners insurance. The Company has the option to accept or
decline to write insurance offered to it through the Program. If accepted by
the Company, such business would be treated as would any other property
business written by the Company.
Involuntary mechanisms such as the New Jersey Fair Access to Insurance
Requirements ("NJFAIR") generally result in assessments to the Company.
NJFAIR writes fire and extended coverage on homeowners for those individuals
otherwise unable to secure insurance. Policies are issued by NJFAIR and the
deficit, if any, is assessed to those companies writing homeowners insurance
in the state based on the Company's share of the voluntary property market.
Similar involuntary plans exist in the District of Columbia and most other
states in which the Company operates including: Delaware, Georgia, Maryland,
New York, North Carolina, Pennsylvania and Virginia.
Workers' Compensation Insurance Regulation
------------------------------------------
Because the Insurance Subsidiaries write voluntary workers' compensation
insurance, they also are required by state law to write involuntary coverage,
which is coverage for those insureds which are otherwise unable to obtain
insurance in the marketplace. Insurance companies that underwrite voluntary
workers' compensation insurance can either write involuntary coverage
assigned by state regulatory authorities or participate in the NCCI, which is
a sharing arrangement among carriers for involuntary risks. The Company
participates in the NCCI; however, effective January 1, 1995, the Company
withdrew from the New Jersey NCCI and commenced accepting direct assignments.
Environmental Regulation
------------------------
Although the U.S. Federal government does not directly regulate the
insurance industry, Federal environmental initiatives can have an impact on
the industry. Authorization for funding for the hazardous substances
superfund under the Comprehensive Environmental Response, Compensation and
Liability Act ("Superfund") expired on December 31, 1995. Despite the
expiration of funding, currently there are still funds remaining in Superfund
from prior years. At this time, the Company is unable to predict whether, or
in what form Superfund will be reauthorized; and what the possible impact on
the Company will be.
PAGE 17
Other Assessments
-----------------
All states require insurers licensed to do business in their state to
bear a portion of the loss suffered by insureds as a result of the insolvency
of other licensed insurers. Insurers can be assessed, on the basis of a
percentage of premiums written for the relevant lines of insurance in that
state each year, to pay the claims of insureds of insolvent insurers.
Generally, most of these assessments are recoverable either in the form of
policy surcharges, premium tax reductions or, since such assessments are a
component of the rate structure, in the form of rate increases. In New
Jersey, contingent upon approval by the Commissioner of Insurance, these
assessments are recoverable through policy surcharges. Consequently, the
impact of these assessments to the Company is not significant.
Regulation of Dividends and Distributions
-----------------------------------------
The Parent is an insurance holding company whose principal assets
consist of the stock of the Insurance Subsidiaries. The Insurance
Subsidiaries are subject to supervision and regulation in the states in which
they are domiciled and in which they transact business. The Parent's ability
to declare and pay dividends on Common Stock is affected by the ability of
the Insurance Subsidiaries to declare and distribute dividends under the
regulatory limitations of such states. See Item 5. "Market For Registrant's
Common Equity and Related Stockholder Matters."
Legislative and Regulatory Proposals
------------------------------------
The Governor of New Jersey and the State legislature are working to
develop cost containment reforms to the private passenger automobile
insurance system. In January 1998, a legislative Joint Committee of the New
Jersey Senate and Assembly on Automotive Insurance Reform was empaneled to
review several issues including: (i) reduction of policy limits to reduce
premium cost; (ii) review of risk classification and rating; and (iii)
reduction in fraud. The Company cannot presently predict the form or timing
of any initiatives which will result from the committee deliberations, nor
can the Company estimate the financial impact, if any, that such initiatives
may have on the Company and its operations.
Competition
- -----------
The Company competes with other regional and national insurance
companies, self-insurers and direct writers of insurance coverages. Many of
these competitors are larger than the Company with greater economic
resources. The property and casualty insurance industry is highly
competitive on the basis of both price and service. There are numerous
companies competing for this business in the geographic areas in which the
Insurance Subsidiaries operate, particularly outside of New Jersey. The
Company's competitors could undertake actions which could adversely affect
the Company's underwriting results, such as pricing premiums more
aggressively. The insurance industry continues to experience pricing
competition, which has impacted the Company's commercial business. Selective
will not abandon its underwriting business fundamentals to compete solely on
the basis of price. In addition, because the Company's insurance products
are marketed through independent insurance agencies, most of which represent
more than one insurance company, the Company faces competition within each
agency. However, the Company believes that the loss of any particular
independent insurance agency would not have a material adverse effect on the
Company's financial position and operating results.
The Company believes that as a regional company it has certain
competitive advantages over national companies in the states in which its
insurance businesses are concentrated, including a closer relationship with
its agents and a better knowledge of its operating territories. The Company
believes that the branch offices, SBUs, AMSs and CMSs further enhance its
relationship with agents and policyholders by enabling the Company to provide
competitive service and underwriting.
The Company also faces competition from the implementation of
self-insurance, as many insureds are examining the risks of self-insuring as
an alternative to traditional insurance. Another competitive factor in the
industry involves banks stepping up efforts to break the barriers between
various segments of the financial services industry, including insurance.
These efforts pose new challenges to insurance companies and agents from
industries traditionally outside the insurance business.
Developed several years ago in anticipation of growth in alternative
market insurance solutions, the Company formed SelecTech to generate fee
income by providing third party administration services for public entities
that self-insure and use other means of alternative insurance. The services
provided include, but are not limited to: claims administration, loss
control, risk management and reinsurance.
In 1997, the Company formed Selective Risk Managers to focus on business
opportunities in alternative insurance markets and to lead underwriting and
sales efforts for large accounts, self-insured, group and association
business. While primarily focused on providing primary insurance or
reinsurance on alternative market programs, Selective Risk Managers also
generates fee income by collecting ceding commissions and placement fees.
PAGE 18
Ratings
- -------
The Company is rated "A+" (Superior) by A.M. Best. Ratings by A.M. Best
for 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 1997, A.M. Best
reaffirmed the Company's A+ rating, which A.M. Best advised "reflects the
Company's high-quality balance sheet, strong local market focus, continued
improvement in operating results and strengthened capital position."
According to A.M. Best, the objective of the rating system is to
evaluate factors affecting the overall performance of an insurance company
in order to provide an opinion of the company's financial strength, operating
performance and ability to meet its obligations to policyholders. The
procedures include quantitative and qualitative evaluations of the company's
financial condition and operating performance. The quantitative evaluation
is based on an analysis of each company's reported financial performance for
at least the previous five fiscal years. These tests measure a company's
performance in the areas of profitability, capitalization (leverage) and
liquidity. A.M. Best also reviews the following qualitative data: (i) spread
of risk; (ii) quality and appropriateness of reinsurance programs; (iii)
quality and diversification of assets; (iv) adequacy of policy or loss
reserves; (v) adequacy of surplus; (vi) capital structure; and (vii)
management's experience and objectives.
The Company also has an A+ claims-paying rating from Standard & Poor's.
According to Standard & Poor's, insurers with this rating offer good
financial security, but their capacity to meet policyholder obligations is
somewhat susceptible to adverse economic and underwriting conditions.
Claims-paying ability ratings by Standard & Poor's for the industry range
from "AAA (Superior)" to "R (Regulatory Action)," and insurers with a rating
of "BBB-" or better are considered to have a secure claims-paying ability.
According to Standard & Poor's, a claims-paying ability rating
represents its opinion of an insurance company's financial capacity to meet
the obligations of its insurance policies in accordance with their terms.
This opinion is not specific to any particular insurance policy or contract,
nor does it address the suitability of a particular insurance policy or
contract for a specific purpose or purchaser. Furthermore, the opinion does
not take into account deductibles, surrender or cancellation penalties, the
timeliness of payment, or the likelihood of the use of a defense such as
fraud to deny claims. Claims-paying ability ratings are assigned by
Standard & Poor's at the request of the insurer. Ratings are based on
current information furnished by the insurer or obtained by Standard &
Poor's from other sources it considers reliable and on extensive
uantitative and qualitative analysis. The rating process also includes
meetings with the insurer's management. Standard & Poor's does not perform
an audit in connection with any rating and may rely on unaudited financial
information.
Insurance companies are rated by rating agencies to provide both
industry participants and insurance consumers meaningful information on
specific insurance companies. Higher ratings generally indicate financial
stability and a strong ability to pay claims. Ratings are assigned by rating
agencies to insurers based upon factors relevant to policyholders and are not
directed toward protection of investors. Such ratings are neither ratings of
securities nor recommendations to buy, hold or sell any security.
Item 2 Properties.
Information required under this item is incorporated herein by reference
to the sections entitled "Subsidiaries," "Region Offices," "Field
Underwriting Office," "Information Systems Offices" and "Properties" on page
57 of the 1997 Annual Report. The Company's facilities are substantially
fully utilized and are adequate for the conduct of the Company's business.
Item 3. Legal Proceedings.
Information required under this item is incorporated herein by reference
to note 15(a) to the consolidated financial statements on pages 49 and 50 of
the 1997 Annual Report.
Item 4. Submission of Matters to a Vote of Security Holders.
None
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
Information required under this item regarding the principal market on
which the Company's common stock is traded and the number of holders thereof
is incorporated herein by reference to the section entitled "Common Stock
Information" on page 57 of the 1997 Annual Report.
Information required under this item regarding the price range of the
Company's common stock and frequency and amount of dividends is incorporated
herein by reference to the section entitled "Quarterly Financial Information"
on page 53; and the section entitled "Financial condition; liquidity and
capital resources" on page 26 up to the second full paragraph on page 27 of
the 1997 Annual Report.
PAGE 19
Item 6. Selected Financial Data.
Information required under this item is incorporated herein by reference
to page 20 and the first column and related notes on page 21 of the 1997
Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Information required under this item is incorporated herein by reference
to the section entitled "Results of operations" on pages 22 through to the
fifth full paragraph on page 26; the section entitled "Federal Income Taxes"
on page 26; the section entitled "Impact of inflation" on page 32; and the
section entitled "Financial condition; liquidity and capital resources" on
pages 26 through to the fifth full paragraph on page 28, of the 1997 Annual
Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements and supplementary data of the
Company are incorporated herein by reference to pages 33 through 52,
inclusive, of the 1997 Annual Report. An index to the consolidated financial
statements is contained in Item 14 (a)(1) of this report, and the Quarterly
Financial Information is incorporated herein by reference to page 53 of the
1997 Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
PART III
The Company will file with the Securities and Exchange Commission,
within 120 days after the end of the fiscal year covered by this report, a
definitive Proxy Statement pursuant to Regulation 14A under the Securities
Exchange Act of 1934 in connection with its 1997 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.
PAGE 20
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as a part of (or incorporated by
reference) in this report:
(1) Consolidated financial statements:
The consolidated financial statements of the Company, with Independent
Auditors' Report thereon, listed below are incorporated herein by
reference to pages 33 through 53, inclusive, of the 1997 Annual Report.
1997
Annual
Report
Page
Independent Auditors' Report.................................... 33
Consolidated Balance Sheets at December 31, 1997 and 1996....... 34
Consolidated Statements of Income for the years
ended December 31, 1997, 1996 and 1995.......................... 35
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1997, 1996 and 1995............ 36
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995.......................... 37
Notes to Consolidated Financial Statements......................38-52
(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.
Form
10-K
Page
Independent Auditors' Report................................. 22
Schedule I Summary of Investments - Other than
Investments in Related Parties at
December 31, 1997............................... 23
Schedule II Condensed Financial Information of
Registrant at December 31, 1997
and 1996, and for the years ended
December 31, 1997, 1996 and 1995............. 24-26
Schedule III Supplementary Insurance Information
for the years ended December 31,
1997, 1996 and 1995.......................... 27-29
Schedule IV Reinsurance for the years ended
December 31, 1997, 1996 and 1995................ 30
PAGE 21
Schedule V Allowance for Uncollectible Premiums
and Other Receivables for the years
ended December 31, 1997, 1996 and 1995.......... 31
Schedule VI Supplemental Information for the
years ended December 31, 1997, 1996
and 1995........................................ 32
(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.
There were no reports on Form 8-K filed during the last quarter of the
period covered by this report.
PAGE 22
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholders
Selective Insurance Group, Inc.
Under date of January 22, 1998, we reported on the consolidated balance
sheets of Selective Insurance Group, Inc. and subsidiaries as of December
31, 1997 and 1996, 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, 1997, as contained in the annual report
on Form 10-K for the year 1997. These consolidated financial statements and
our report thereon are incorporated by reference in the annual report on
Form 10-K for the year 1997. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the
related consolidated financial statement schedules as listed in the
accompanying index. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statement schedules based on our
audits.
In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
/s/KPMG Peat Marwick LLP
New York, New York
January 22, 1998
PAGE 23
SCHEDULE I
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1997
Type of investment Cost or Fair Carrying
(in thousands) amortized cost value amount
Debt securities:
Held-to-maturity:
U.S. government and government
agencies $ 15,569 16,135 15,569
Obligations of states and
political subdivisions 357,380 372,182 357,380
Mortgage-backed securities 37,220 37,934 37,220
Total debt securities, --------- --------- ---------
held-to-maturity 410,169 426,251 410,169
Available-for-sale:
U.S. government and government
agencies 149,038 153,736 153,736
Obligations of states and
political subdivisions 291,210 306,020 306,020
Corporate securities 489,329 503,524 503,524
Asset-backed securities 41,060 41,472 41,472
Mortgage-backed securities 38,423 39,638 39,638
Total debt securities, --------- --------- ---------
available-for-sale 1,009,060 1,044,390 1,044,390
Equity securities, available-for-sale:
Common stocks:
Public utilities 2,573 6,515 6,515
Banks, trust and insurance
companies 26,100 31,625 31,625
Industrial, miscellaneous
and all other 91,929 184,133 184,133
Total equity securities, --------- --------- ---------
available-for-sale 120,602 222,273 222,273
Short-term investments 28,781 XX,XXX 28,781
Other investments 20,077 XX,XXX 20,077
--------- --------- ---------
Total investments $1,588,689 XX,XXX 1,725,690
========= ========= =========
PAGE 24
SCHEDULE II
SELECTIVE INSURANCE GROUP, INC.
(Parent Corporation)
Balance Sheets
(dollars in thousands) December 31,
1997 1996
- ----------------------------------------------------------------------------
Assets
- ------
Equity securities, available-for-sale
- at fair value (cost: $2,471) $ 2,585 2,468
Debt securities, available-for-sale
at fair value (amortized cost: $25,215) 24,587 -
Short-term investments 347 5,287
Cash 45 27
Investment in subsidiaries 650,298 571,539
Current Federal income tax 774 -
Deferred Federal income tax 4,203 2,928
Other assets 1,676 852
------- -------
Total assets $ 684,515 583,101
======= =======
Liabilities and Stockholders' Equity
- ------------------------------------
Convertible subordinated debentures $ 6,845 6,912
Notes payable 89,714 96,857
Short-term debt 17,400 -
Current Federal income tax - 488
Other liabilities 5,240 4,545
------- -------
Total liabilities 119,199 108,802
------- -------
Stockholders' equity:
Common stock of $2 par value per share:
Authorized shares: 180,000,000
Issued: 36,363,856 1997;
35,822,174 1996 72,728 71,644
Additional paid-in capital 30,450 18,060
Net unrealized gains on securities,
available-for-sale, net of deferred
income tax effect 89,051 52,728
Retained earnings 439,811 386,601
Treasury stock at cost
(shares: 7,097,462 1997;
6,733,262 1996) (59,785) (50,680)
Deferred compensation expense and notes receivable
from stock sales (6,939) (4,054)
------- -------
Total stockholders' equity 565,316 474,299
------- -------
Total liabilities and stockholders' equity $ 684,515 583,101
======= =======
Information should be read in conjunction with the notes to consolidated
financial statements of Selective Insurance Group, Inc. and Consolidated
Subsidiaries in the 1997 Annual Report.
PAGE 25
SCHEDULE II (Cont'd)
SELECTIVE INSURANCE GROUP, INC.
(Parent Corporation)
Statements of Income
(in thousands) Year ended December 31,
1997 1996 1995
- --------------------------------------------------------------------------
Revenues:
Dividends from subsidiaries $ 35,891 28,006 13,483
Net investment income earned 1,657 548 429
Miscellaneous income 34 22 44
------ ------ ------
37,582 28,576 13,956
------ ------ ------
Expenses:
Interest 9,592 9,185 9,297
Deferred compensation expense 2,865 1,106 1,595
Other operating 1,379 301 433
------ ------ ------
13,836 10,592 11,325
------ ------ ------
Income before Federal income tax
and equity in undistributed income of
subsidiaries 23,746 17,984 2,631
------ ------ ------
Federal income tax benefit:
Current (2,660) (3,012) (3,289)
Deferred (1,096) (326) (220)
------ ------ ------
(3,756) (3,338) (3,509)
------ ------ ------
Income before equity in undistributed
income of subsidiaries, net of tax 27,502 21,322 6,140
Equity in undistributed income of
subsidiaries, net of tax 42,106 34,229 46,902
------ ------ ------
Net income $ 69,608 55,551 53,042
====== ====== ======
Information should be read in conjunction with the notes to consolidated
financial statements of Selective Insurance Group, Inc. and Consolidated
Subsidiaries in the 1997 Annual Report.
PAGE 26
SCHEDULE II (Cont'd)
SELECTIVE INSURANCE GROUP, INC.
(Parent Corporation)
Statements of Cash Flows
(in thousands) Year ended December 31,
1997 1996 1995
- --------------------------------------------------------------------------
Operating Activities:
Net income $ 69,608 55,551 53,042
------ ------ ------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in undistributed income of
subsidiaries, net of tax (42,106) (34,229) (46,902)
Increase (decrease) in net Federal
income tax (2,357) (618) 792
Other, net 2,704 389 900
------ ------ ------
Net adjustments (41,759) (34,458) (45,210)
------ ------ ------
Net cash provided by operating
activities 27,849 21,093 7,832
------ ------ ------
Investing Activities:
Purchase of equity securities,
available-for-sale - - (2,471)
Purchase of debt securities,
available-for-sale (25,182) - -
------ ------ ------
(25,182) - (2,471)
------ ------ ------
Financing Activities:
Proceeds from short-term debt 17,400 - -
Principal payment on note payable (7,143) (7,143) -
Capital contributions to subsidiaries - - (3)
Dividends to stockholders (16,398) (16,268) (15,996)
Acquisition of treasury stock (9,105) (4,251) (285)
Net proceeds from issuance of
common stock 13,407 7,959 7,104
Increase in deferred compensation
expense and notes receivable from
stock sale (5,750) (2,915) (1,686)
Net cash used in financing activities ------ ------ ------
(7,589) (22,618) (10,866)
------ ------ ------
Net decrease in cash and
short-term investments (4,922) (1,525) (5,505)
Cash and short-term investments at
beginning of year 5,314 6,839 12,344
Cash and short-term investments at ------ ------ ------
end of year $ 392 5,314 6,839
====== ====== ======
Information should be read in conjunction with the notes to consolidated
financial statements of Selective Insurance Group, Inc. and Consolidated
Subsidiaries in the 1997 Annual Report.
PAGE 27
SCHEDULE III
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
Year ended December 31, 1997
Deferred Reserve for
Segment policy losses and Net
acquisition loss Unearned premiums
(in thousands) costs expenses premiums earned
- ---------------------------------------------------------------------------
Commercial $ 73,800 784,108 233,688 465,846
Personal 24,310 247,775 108,889 210,442
Other - 5,089 - (20)
Reinsurance recoverable
on unpaid loss
and loss expenses - 124,197 - -
Prepaid reinsurance
premiums - - 31,189 -
Interest and general
corporate expenses - - - -
------ --------- ------- -------
Total $98,110 1,161,169 373,766 676,268
====== ========= ======= =======
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
Year ended December 31, 1997
Losses and Amortization
Segment loss of deferred Other Net
expenses policy Acqui- Operating premiums
(in thousands) incurred sition costs expenses written
- ---------------------------------------------------------------------------
Commercial $ 311,442 132,922 32,753 472,460
Personal 149,963 40,394 9,491 245,178
Other (23) - 607 (20)
Reinsurance recoverable
on unpaid loss
and loss expenses
- - - -
Prepaid reinsurance
premiums - - - -
Interest and general
corporate expenses - - 13,769 -
------- ------- ------ -------
Total $ 461,382 173,316 53,620 717,618
======= ======= ====== =======
NOTE: A meaningful allocation of net investment income of $100,530 and net
realized gains on investments of $6,021 is considered impracticable because
the Company does not maintain distinct investment portfolios for each
segment.
PAGE 28
SCHEDULE III (Cont'd)
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
Year ended December 31, 1996
Deferred Reserve for
Segment policy losses and Net
acquisition loss Unearned premiums
(in thousands) costs expenses premiums earned
- ---------------------------------------------------------------------------
Commercial $ 65,515 789,213 227,074 477,506
Personal 17,635 245,227 74,153 217,473
Other - 5,145 - (32)
Reinsurance recoverable
on unpaid loss
and loss expenses
- 150,208 - -
Prepaid reinsurance
premiums - - 30,813 -
Interest and general
corporate expenses - - - -
------ --------- ------- -------
Total $83,150 1,189,793 332,040 694,947
====== ========= ======= =======
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
Year ended December 31, 1996
Losses and Amortization
Segment loss of deferred Other Net
expenses policy Acqui- Operating premiums
(in thousands) incurred sition costs expenses written
- ---------------------------------------------------------------------------
Commercial $ 338,043 134,430 28,195 475,104
Personal 157,654 45,246 10,651 217,167
Other (32) - 15 (32)
Reinsurance recoverable
on unpaid loss
and loss expenses
- - - -
Prepaid reinsurance
premiums - - - -
Interest and general
corporate expenses - - 10,646 -
------- ------- ------ -------
Total $ 495,665 179,676 49,507 692,239
======= ======= ====== =======
NOTE: A meaningful allocation of net investment income of $96,952 and net
realized gains on investments of $2,786 is considered impracticable because
the Company does not maintain distinct investment portfolios for each
segment.
PAGE 29
SCHEDULE III (Cont'd)
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
Year ended December 31, 1995
Losses Amortization
Segment Net and loss of deferred Other Net
premiums expenses policy acqui- operating premiums
(in thousands) earned incurred sition costs expenses written
- -------------------------------------------------------------------------
Commercial $ 521,196 366,936 137,981 29,172 535,050
Personal 221,587 161,935 48,533 10,157 221,935
Other 34 30 -0- 17 36
Interest and
general corporate
expenses - - - 11,909 -
------- ------- ------- ------ -------
Total $ 742,817 528,901 186,514 51,255 757,021
======= ======= ======= ====== =======
NOTE: A meaningful allocation of net investment income of $91,640 and net
realized gains on investments of $900 is considered impracticable
because the Company does not maintain distinct investment portfolios for
each segment.
PAGE 30
SCHEDULE IV
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
REINSURANCE
Years ended December 31, 1997, 1996 and 1995
% of
Ceded to Assumed amount
Gross other from other Net assumed
(in thousands) amount companies companies amount to net
- -----------------------------------------------------------------------------
1997
Premiums earned:
Accident and health ins. $ 297 - - 297 -
Property and liability ins. 739,647 84,384 20,708 675,971 3.1
------- ------ ------ -------
Total premiums earned $ 739,944 84,384 20,708 676,268 3.1
======= ====== ====== =======
1996
Premiums earned:
Accident and health ins. $ 799 - - 799 -
Property and liability ins. 760,557 95,765 29,356 694,148 4.2
------- ------ ------ -------
Total premiums earned $ 761,356 95,765 29,356 694,947 4.2
======= ====== ====== =======
1995
Premiums earned:
Accident and health ins. $ 1,925 - - 1,925 -
Property and liability ins. 785,773 94,429 49,548 740,892 6.7
------- ------- ------ -------
Total premiums earned $ 787,698 94,429 49,548 742,817 6.7
======= ======= ====== =======
PAGE 31
SCHEDULE V
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
ALLOWANCE FOR UNCOLLECTIBLE PREMIUMS AND OTHER RECEIVABLES
Years ended December 31, 1997, 1996 and 1995
(in thousands)
- ----------------------------------------------------------------------------
1997 1996 1995
Balance, January 1 $ 3,302 3,450 2,501
Additions 2,331 3,502 2,847
Deletions (2,577) (3,650) (1,898)
----- ----- -----
Balance, December 31 $ 3,056 3,302 3,450
===== ===== =====
PAGE 32
SCHEDULE VI
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTAL INFORMATION
Years ended December 31, 1997, 1996 and 1995
Losses and loss expenses
incurred related to Paid
Affiliation with Registrant (1) (2) losses
current prior and loss
(in thousands) year years expenses
- ---------------------------------------------------------------------------
Consolidated Property/
Casualty Subsidiaries:
Year ended Dec. 31, 1997 $471,506 (10,124) 463,995
Year ended Dec. 31, 1996 $504,843 (9,178) 454,763
Year ended Dec. 31, 1995 $516,219 12,682 418,072
Note: The other information required in this schedule (e.g., deferred
policy acquisition costs, reserves for losses and loss expenses, unearned
premiums, net premiums earned, net investment income, amortization of
deferred policy acquisition costs, and net premiums written) is contained
in Schedule III in this report. In addition, the Company does not discount
loss reserves.
PAGE
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SELECTIVE INSURANCE GROUP, INC.
By: /s/ James W. Entringer March 27, 1998
-------------------------------
James W. Entringer, Chairman of
the Board and Chief Executive Officer
By: /s/ Gregory E. Murphy March 27, 1998
-------------------------------
Gregory E. Murphy, President and
Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
By: /s/ James W. Entringer March 27, 1998
-------------------------------
James W. Entringer, Chairman of
the Board and Chief Executive Officer
By: /s/ Gregory E. Murphy March 27, 1998
-------------------------------
Gregory E. Murphy, President and
Chief Operating Officer
By: /s/ David B. Merclean March 27, 1998
-------------------------------
David B. Merclean, Senior Vice
President and Chief Financial Officer
By: /s/ A. David Brown March 27, 1998
-------------------------------
A. David Brown, Director
By: /s/ William A. Dolan, II March 27 1998
-------------------------------
William A. Dolan, II, Director
By: /s/ William C. Gray, D.V.M. March 27, 1998
-------------------------------
William C. Gray, D.V.M., Director
By: /s/ C. Edward Herder March 27, 1998
-------------------------------
C. Edward Herder, Director
By: /s/ Frederick H. Jarvis March 27, 1998
-------------------------------
Frederick H. Jarvis, Director
By: /s/ William M. Kearns,Jr. March 27, 1998
-------------------------------
William M. Kearns, Jr., Director
By: /s/ Joan Lamm-Tennant, Ph.D. March 27, 1998
-------------------------------
Joan Lamm-Tennant, Ph.D.
Director
By: /s/ S. Griffin McClellan, III March 27, 1998
-------------------------------
S. Griffin McClellan, III
Director
By: /s/ William M. Rue March 27, 1998
-------------------------------
William M. Rue, Director
By: /s/ Thomas D. Sayles, Jr. March 27, 1998
-------------------------------
Thomas D. Sayles, Jr.
Director
By: /s/ J. Brian Thebault March 27, 1998
-------------------------------
J. Brian Thebault, Director
PAGE
EXHIBIT INDEX
* Exhibits included within this 10-K 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,
filed herewith.
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).
10.1 The Selective Insurance Retirement Savings Plan as amended through
August 15, 1996 (incorporated herein by reference by Exhibit 4 to
the Company's Registration Statement on Form S-8 No. 333-10477).
10.2 Amendment, dated May 2, 1997, to the Selective Insurance Retirement
Savings Plan in Exhibit 10.1 above (incorporated herein by
reference to Exhibit 10.6 to the Company's Quarterly Report on
Form 10Q for the quarter ended June 30, 1997, File No. 0-8641).
10.3 The Retirement Income Plan for Employees of Selective Insurance
Company of America, as 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).
10.5 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, filed herewith.
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).
PAGE
10.8 The Company's 1987 Employee Stock Purchase Savings Plan
(incorporated herein by reference to Exhibit 10.6 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1993,
File No. 0-8641).
10.9 Amendment, dated May 2, 1997, to the 1987 Employee Stock Purchase
Savings Plan in Exhibit 10.8 above (incorporated herein by
reference to Exhibit 10.5 to the Company's Quarterly Report on
Form 10Q for the quarter ended June 30, 1997, File No. 0-8641).
10.10 The Selective Insurance Rewards Program adopted January 1, 1994,
which replaced the Annual Incentive Compensation Plan
(incorporated herein by reference to Exhibit 10.7 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1994,
File No. 0-8641).
10.11 The Selective Insurance Group, Inc. Stock Purchase Plan for
Independent Insurance Agents as amended through December 1, 1995
(incorporated herein by reference to Exhibit 10.8 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995,
File No. 0-8641).
10.12 The Selective Insurance Group, Inc. Stock Option Plan for Directors
as amended through November 1, 1991 (incorporated herein by
reference to Exhibit 4.1 to the Company's Registration Statement
on Form S-8 No. 33-36368).
10.13 Selective Insurance Group, Inc. Stock Option Plan II, as amended
through October 9, 1997, and related forms of option agreements
(incorporated herein by reference to Exhibits 4.1 to the
Company's Registration Statement on Form S-8 No. 33-37501).
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,
filed herewith
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 10.16a 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 Employment Agreement with Dominic J. Addesso , dated September 1,
1993, as amended (incorporated herein by reference to Exhibit
10.14 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1993, 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, 1997, 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 10.16e 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).
PAGE
10.16g Employment Agreement with Gregory E. Murphy, dated August 1, 1995
(incorporated herein by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1995, File No. 0-8641).
10.16h Employment Agreement with Donald E. Williams, dated August 1,
1995 (incorporated herein by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995, File No. 0-8641).
10.16i Employment Agreement with Jamie Ochiltree, III, dated October 31,
1995 (incorporated herein by reference to Exhibit 10.11f to the
Company's Annual Report on Form 10-K for the year ended December
31, 1995, File No. 0-8641).
10.16j Employment Agreement, dated May 2, 1997, between Selective
Insurance Company of America and James W. Coleman, Jr.
(incorporated herein by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10Q for the quarter ended
June 30, 1997, File No. 0-8641).
10.16k Form of Termination Agreement, between the Company and each of
Messrs. Entringer, Addesso and Land, as amended (incorporated
herein by reference to Exhibit 10.16 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1993, File
No. 0-8641).
10.16l Termination Agreement, dated August 1, 1995, between Selective
Insurance Company of America and Gregory E. Murphy (incorporated
herein by reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1995, File
No. 0-8641).
10.16m Termination Agreement, dated August 1, 1995, between Selective
Insurance Company of America and Donald E. Williams (incorporated
herein by reference to Exhibit 10.4 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1995, File
No. 0-8641).
10.16n Termination Agreement, dated August 1, 1995, between Selective
Insurance Company of America and Jamie Ochiltree (incorporated
herein by reference to Exhibit 10.11j to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995, File
No. 0-8641).
10.16o Termination Agreement, dated May 2, 1997, between Selective
Insurance Company of America and James W. Coleman, Jr.
(incorporated herein by reference to Exhibit 10.4 to the
Company's Quarterly Report on Form 10Q for the quarter ended
June 30, 1997, File No. 0-8641).
10.16p Severance agreement with Walter H. Hallowell, dated July 12, 1994
(incorporated herein by reference to Exhibit 10.15 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1994,
File No. 0-8641).
10.17 Property Reinsurance Contracts.
*10.17a New Jersey Homeowners Quota Share Treaty between Selective
Insurance Company of America, Selective Way Insurance Company,
Selective Insurance Company of the Southeast, Selective Insurance
Company of South Carolina, and Selective Insurance Company
of New York and various insurance and/or reinsurance companies
(Contract No. 3645-24), filed herewith.
*10.17b Property Catastrophe Excess of Loss Reinsurance Contract between
various insurance and/or reinsurance companies and/or underwriting
members of Lloyd's and Selective Insurance Company of America,
Selective Way Insurance Company, Selective Insurance Company of
the Southeast, Selective Insurance Company of South Carolina and
Selective Insurance Company of New York, filed herewith.
PAGE
10.17c Property Per Risk Reinsurance Agreement between Selective Insurance
Company of America, Selective Way Insurance Company, Selective
Insurance Company of the Southeast, Selective Insurance Company of
South Carolina, Selective Insurance Company of New York, and
American Re-Insurance Company and/or St. Paul Reinsurance
Management Corporation (Contract No. 3525-0087), (incorporated
herein by reference to Exhibit 10.14g to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996, File
No. 0-8641).
10.18 Casualty Reinsurance Contracts.
10.18a Casualty Excess of Loss Reinsurance Agreement between Selective
Insurance Company of America, Selective Way Insurance Company,
Selective Insurance Company of the Southeast, Selective Insurance
Company of South Carolina, Selective Insurance Company of New York
and various insurance and/or reinsurance companies (Contract No.
3525-0090), (incorporated herein by reference to Exhibit 10.15g
to the Company's Annual Report on Form 10K for the year ended
December 31, 1996, File No. 0-8641).
10.19 Form of Note Purchase Agreement dated as of November 15, 1992 with
respect to Selective Insurance Group, Inc. 7.84% Senior Notes due
November 15, 2002 (incorporated herein by reference to Exhibit 99.1
to the Company's Post-Effective Amendment No. 1 to the Registration
Statement on Form S-3, No. 33-30833).
10.20 Form of Note Purchase Agreement dated as of August 1, 1994 with
respect to Selective Insurance Group, Inc. 8.77% Senior Notes due
August 1, 2005 (incorporated herein by reference to Exhibit 99.2
to the Company's Post-Effective Amendment No. 1 to the
Registration Statement on Form S-3, No. 33-30833).
10.21 Promissory Note of $25,000,000 Revolving Line of Credit with State
Street Bank and Trust Company (incorporated herein by reference to
Exhibit 10.1 to the Company's quarterly report on Form 10-Q fourth
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).
*11 Computation of earnings per share, filed herewith.
*13 Portions of the 1997 Annual Report to Stockholders incorporated by
reference into this Form 10-K, filed herewith.
*21 Subsidiaries of Selective Insurance Group, Inc., filed herewith.
*23 Consent of Independent Auditors, filed herewith.
*27 Financial Data Schedule, filed herewith.
P28 Combined 1997 statutory Schedule P for the Selective Insurance
Group (information from reports furnished to state insurance
regulatory authorities, filed concurrently herewith under cover
of Form SE).