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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Fee required)
For the fiscal year ended... December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No fee required)
For the transition period from ____________to____________.
Commission file number 0-8641
SELECTIVE INSURANCE GROUP, INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-2168890
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
40 Wantage Avenue, Branchville, New Jersey 07890
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (973) 948-3000
Securities registered pursuant to Section 12(b) of the Act:: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class:
8 3/4% Convertible Subordinated Debentures due January 1, 2008
(Title of class)
Common Stock, par value $2 per share
(Title of class)
Preferred Share Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
[ ]
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 19, 2002.
Common Stock, par value $2 per share: $569,767,372
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of February 19, 2002.
Common Stock, par value $2 per share: 25,711,524.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Selective Insurance Group, Inc. 2001 Annual Report to
Shareholders and definitive Proxy Statement for the 2002 Annual Meeting of
Stockholders are incorporated by reference to Parts I, II and III of this
report.
1
Forward-looking statements
Some of the statements in this report, including information included or
incorporated by reference, are not historical facts and therefore may be
considered "forward-looking statements" (as defined in the Private Securities
Litigation Reform Act of 1995). These statements use words such terms as
"believes" , "expects" , "may" , "will" , "should" , "anticipates" , "benefits",
the negatives thereof, and other similar words, and, among other things describe
our current strategies, opinions, expectations of future results and other
forward-looking information. We derive forward-looking information from
information we currently have and numerous assumptions which we make. We cannot
assure that results which we anticipate will be achieved, since results may
differ materially because of both known and unknown risks and uncertainties
which we face. Factors which could cause actual results to differ materially
from our expectations include but are not limited to:
- Economic, market or regulatory conditions;
- Cost and availability of reinsurance;
- Risks associated with Selective's entry into new markets;
- Selective's geographic diversification;
- Weather conditions, including severity and frequency of storms,
hurricanes, snowfalls, hail and winter conditions;
- Occurrence of significant natural or man-made disasters;
- Uncertainties related to rate increases and business retention;
- Legislative and regulatory developments, including changes in New
Jersey automobile insurance laws and regulations;
- The adequacy of loss reserves;
- Fluctuations in interest rates and performance of the financial
markets; and
- Other risks and uncertainties we identify in this report and other
filings with the Securities and Exchange Commission, although we do
not promise to update such forward-looking statements to reflect
actual results or changes in assumptions or other factors that could
affect these statements.
2
PART I
Item 1. Business.
General
Selective Insurance Group, Inc. (Parent) is a holding company that was
established in 1977. The Parent, through its subsidiaries, (collectively,
"Selective" or the "Company") offers property and casualty insurance products
and Diversified Insurance Services products.
We offer commercial and personal insurance products through Selective
Insurance Company of America (SICA), Selective Way Insurance Company (SWIC),
Selective Insurance Company of the Southeast (SISE), Selective Insurance Company
of South Carolina (SISC) and Selective Insurance Company of New York (SINY)
(collectively, the Insurance Subsidiaries). Our Diversified Insusrance Services
products are sold by: Alta Services LLC (Alta), formerly MCSI/MRSI, a managed
care company that provides medical claims handling services to Selective and
other insurers, Consumer Health Network Plus, LLC, (CHN) a New Jersey-based
preferred provider organization (PPO), Selective HR Solutions, Inc., (Selective
HR Solutions) formerly Modern Employers Inc., a Florida-based professional
employer organization (PEO) and Flood Connect, LLC, a provider of flood
insurance and claim service to homeowners and commercial customers.
Our insurance products are sold through approximately 850 independent
agents in 20 northeastern, southeastern and midwestern states. We offer a broad
range of commercial insurance and alternative risk management products, to small
and medium sized businesses and government entities. Our commercial insurance
products represent almost 80% of net premiums written. We also provide personal
insurance products to individuals and families in ten states, which represent
approximately 20% of net premiums written. We write business in the following
states: Connecticut, Delaware, Georgia, Illinois, Indiana, Iowa, Kentucky,
Maryland, Michigan, Minnesota, Missouri, New Jersey, New York, North Carolina,
Ohio, Pennsylvania, Rhode Island, South Carolina, Virginia and Wisconsin. Since
1996, we have expanded into the Midwest, Connecticut and Rhode Island in an
effort to diversify our insurance exposure to any one geographic or regulatory
environment.
In an effort to further diversify our business and develop fee-based
revenues, we also offer diversified insurance services which include: flood
business serviced by us for the National Flood Insurance Program which is 100%
ceded to the Federal Government, managed care services and PEO products and
services.
In December 2001, the Company's management adopted a plan to divest itself
of its 100% ownership interest in PDA Software Services, Inc., an insurance
industry software developer.
We classify our business into three operating segments: Insurance
Operations (Commercial Lines and Personal Lines underwriting), Investments, and
Diversified Insurance Services. For a discussion of, and information about, our
segments, see Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 15 to the Consolidated Financial
Statements, "Segment Information", on page 47, of our 2001 Annual Report to
Shareholders, which are incorporated herein by reference.
We currently employ approximately 2,480 employees of which 1,790 work in
our Insurance Operations and Investments Segment and 690 work in our Diversified
Insurance Services segment.
COMPETITION
We face significant competition in both the Insurance Operations and
Diversified Insurance Services segments.
We compete with regional and national insurance companies, including
direct writers of insurance coverage. Many of these competitors are larger than
we are and have greater financial, technical and operating resources. In
addition, we face competition within each insurance agency which sells our
insurance, because most of our agencies represent more than one insurance
company. Based on direct premiums written for 2000 (latest publicly available
information), the Company is the 61st largest property and casualty group in the
United States.
In our Diversified Insurance Services segment, CHN is the largest
PPO in New Jersey with 25,432 medical care providers. Selective HR Solutions is
the 15th largest PEO in the United States and our flood operations represents
one of the top 10 servicing carriers in the United States.
The property and casualty insurance industry is highly competitive
on the basis of both price and service. There are many companies competing for
the same insurance customers in the geographic areas in which we operate.
Please refer to the "Risk Factors" beginning on page 17 of this report on
Form 10-K, and Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
3
INSURANCE OPERATIONS SEGMENT
The Insurance Operations segment focuses on the sale and servicing of
property and casualty insurance products. Our principal strategy is to generate
profitable premium growth based on superior customer service and on strong
franchise value with our independent agents. In addition, we strive to maintain
and build on Selective's position as a market leader among regional property and
casualty insurers.
The segment is managed by type of business: commercial lines underwriting
and personal lines underwriting. The insurance coverages provided by the
commercial lines underwriting segment include: workers' compensation, commercial
automobile, liability, umbrella, property, fidelity and surety. The personal
lines underwriting insurance coverages include homeowners', personal automobile
and personal umbrella liability insurance coverages. We also analyze the results
of this segment by regional office and state.
For the ten years ended December 31, 2001, our average statutory loss and
loss expense ratio was 71.8% which outperformed the property and casualty
industry's average ratio of 80.5%, as reported by A.M. Best Company (A.M. Best).
(See glossary of terms on page 19 of our 2001 Annual Report to Shareholders,
which is incorporated herein by reference.). We attribute our performance to the
franchise value we have created with our independent agency force, expertise in
underwriting property and casualty insurance risks, and our penetration of high
quality markets in the northeastern, southeastern and midwestern states. For the
ten years ended December 31, 2001, our average statutory underwriting expense
ratio was 32.1% compared to 26.8% for the property and casualty industry. Our
historical statutory underwriting expense ratio is higher than the industry
average primarily due to the fact that: (i) the industry average expense ratio
reflects the inclusion of direct writers of insurance, companies that do not use
independent agents, which generally have lower distribution costs than we do,
and (ii) we have 80% of our premium in the more expensive commercial lines
business compared with the industry at 50%. Our average statutory combined ratio
of 104.9% for the ten year period outperformed the property and casualty
industry average statutory combined ratio of 108.5% over the period. The table
below sets forth a comparison of certain Company and industry ratios:
Simple
Average
of
All
Periods
Presented 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
CERTAIN COMPANY RATIOS: (1)
Loss 61.2% 64.1 66.4 65.0 59.9 56.8 60.6 60.4 60.6 60.3 58.2
Loss expense 10.6 10.2 9.3 9.4 10.3 11.4 10.8 10.8 11.1 11.5 11.3
Underwriting expense 32.1 31.5 31.7 30.5 32.2 31.2 30.8 29.4 31.6 35.5 37.0
Policyholders' dividends 0.9 0.9 0.9 0.8 0.7 0.7 0.7 1.0 1.0 1.2 1.3
Statutory combined ratio (2), (3) 104.9 106.7 108.2 105.7 103.2 100.1 102.9 101.6 104.3 108.5 107.9
Growth (decline) in net
premiums written 6.7 10.5 3.6 8.1 4.4 3.7 (8.6) 8.5 14.8 8.9 13.0
CERTAIN INDUSTRY RATIOS: (1) (4)
Loss 67.4 76.1 68.3 65.3 63.1 60.3 65.4 65.7 68.1 66.7 74.7
Loss expense 13.1 14.0 12.9 13.3 13.1 12.5 12.9 13.2 13.0 12.8 13.4
Underwriting expense 26.8 26.2 27.6 28.0 27.7 27.1 26.4 26.3 26.0 26.3 26.6
Policyholders' dividends 1.3 0.7 1.3 1.2 1.7 1.7 1.1 1.4 1.3 1.1 1.2
Statutory combined ratio (3) 108.5 117.0 110.1 107.8 105.6 101.6 105.8 106.4 108.5 106.9 115.7
Growth in net premiums written 3.9 8.5 4.4 1.9 1.8 2.9 3.4 3.6 3.8 6.2 2.0
COMPANY FAVORABLE
(UNFAVORABLE) TO INDUSTRY:
Combined ratio 3.6 10.3 1.9 2.1 2.4 1.5 2.9 4.8 4.2 (1.6) 7.8
Growth in net premiums
written 2.8 2.0 (0.8) 6.2 2.6 0.8 (12.0) 4.9 11.0 2.7 11.0
1. The ratios and percentages are based upon Statutory Accounting Principles
(SAP) prescribed or permitted by state insurance departments in the states
in which each company is domiciled. Effective January 1, 2001, the Company
adopted a codified set of statutory accounting principles, as required by
the National Association of Insurance Commissioners. These principles were
not retroactively applied, but would not have had a material effect on the
ratios presented above. These principles may differ from accounting
principles generally accepted in the United States of America (GAAP). For
definitions of these ratios, please refer to the section entitled
"Glossary of Terms" on page 19 of our 2001 Annual Report to Shareholders,
incorporated herein by reference.
2. In 1993, this ratio includes a one-time restructuring charge of $9
million, which increased the ratio by 1.5 points.
3. A statutory combined ratio under 100% generally indicates an underwriting
profit and a statutory 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 2001 have been estimated by
A.M. Best.
4
INSURANCE OPERATIONS RESULTS
Year Ended December 31,
(in thousands) 2001 2000 1999
- --------------------------------------------------------------------------------
TOTAL INSURANCE OPERATIONS
Net premiums written $ 925,420 843,604 811,677
========== ========== ==========
Net premiums earned 883,048 821,265 799,065
Losses and loss expenses incurred 655,884 614,066 592,215
Underwriting expenses incurred 279,527 264,651 254,315
Dividends to policyholders 8,275 7,670 6,682
---------- ---------- ----------
Underwriting loss $ (60,638) (65,122) (54,147)
========== ========== ==========
GAAP RATIOS:
Loss and loss expense ratio 74.3% 74.8% 74.1%
Underwriting expense ratio 31.7% 32.2% 31.8%
Dividends to policyholders ratio 0.9% 0.9% 0.9%
---------- ---------- ----------
Combined ratio 106.9% 107.9% 106.8%
========== ========== ==========
For the year ended December 31, 2001, we continued to outperform the industry
with a statutory combined ratio of 106.7%, compared with an A.M. Best estimate
for the industry of 117.0%, up from 110.1% one year ago. On a GAAP basis, the
combined ratio was 106.9% in 2001, compared to 107.9% in 2000 and 106.8% in
1999. The decrease for 2001 when compared to 2000 was caused predominantly by
increases in commercial lines pricing which led to a decrease in the commercial
lines combined ratio to 104.9% in 2001 from 107.3% in 2000. The personal lines
combined ratio increased 113.5% in 2001 from 109.7% in 2000. The increase for
2000 when compared to 1999 was caused by an increase in the personal lines
combined ratio to 109.7% from 103.0%, and a decrease in the commercial lines
combined ratio to 107.3% from 108.3%.
The following table shows the distribution of total net premiums written,
by state, for the periods indicated:
Year Ended December 31,
NET PREMIUMS WRITTEN, BY STATE 2001 2000 1999
---------- ---------- ----------
New Jersey 40.3% 41.8 46.2
Pennsylvania 13.5 13.4 12.2
New York 11.5 11.3 10.1
Maryland 7.0 6.9 6.3
Virginia 5.1 4.8 5.0
North Carolina 3.2 2.5 2.4
Illinois 3.0 3.4 2.9
Indiana 2.6 2.2 1.7
South Carolina 2.5 3.0 4.0
Georgia 2.4 2.3 2.3
Ohio 2.1 2.2 1.9
Wisconsin 1.6 1.7 1.4
Delaware 1.6 1.6 1.8
Michigan 1.3 1.1 0.6
Other States 2.3 1.8 1.2
------- ---------- ----------
Total 100.0% 100.0 100.0
======= ========== ==========
5
AGENCY DISTRIBUTION FORCE
We sell our insurance products through independent insurance agents. Our
strong agency relationships start with providing a broad range of products, an
ease of doing business with us due to technology, superior service in both
underwriting and claims, stable markets, consistent underwriting standards, and
opportunity for growth and profitability. We have competitive commission
schedules and agents earn average commissions of approximately 15% of their
direct premiums written and can earn an additional 2% under the agency profit
sharing plan. We have six regional offices and a service center office
strategically placed throughout our geographic service area so staff can
maintain a high level of communication with agents. Senior management also
interacts frequently with agents through a variety of company sponsored events.
These include: annual agency and sales meetings in our operating territories;
annual agency incentive trips; annual agency customer service representative
meetings; annual Producer Council meetings where leading local agents discuss
with management how we can improve our product offerings, customer service and
overall efficiency; and, an annual agency strategy meeting where a group of
agents from our operating territories advise management as corporate strategies
and key initiatives are developed.
We continue to work with our independent agents to generate profitable
premium growth. At this point, while the long-term effects of ongoing agency
consolidation and bank acquisitions of agencies cannot be fully anticipated, we
are taking steps to work even more closely with our best agents including those
purchased by a bank or other entity.
FIELD STRATEGY
In 1995, we began deploying field underwriters - agency management
specialists (AMS) and in 1997 field claim adjusters - claims management
specialists (CMS) into the territories serviced by our agents. Through year-end
2001, there were approximately 70 AMSs and 145 CMSs working in our operating
territories. Working and living near agents and customers enables AMSs to work
side-by-side with agents to evaluate new business opportunities and develop
strong relationships based on technical excellence and regular, personal
interaction. The AMSs work account-by-account to ensure we make fair, accurate
underwriting decisions. CMSs also work and live close to agents and customers so
that they are able to be on site quickly after a loss occurs, as well as conduct
on-site inspections and obtain knowledge about potential exposures. We believe
that personal, early intervention by CMSs results in higher levels of customer
satisfaction; quicker, more accurate claim settlements; and better fraud
detection.
AMSs and CMSs are supported by six regional field offices located
throughout our operating territories. In addition to supporting agency service
and relationship objectives, the regional offices are responsible for handling
renewal business. The AMSs, regional office underwriting teams and agents work
together with corporate management to maintain underwriting discipline and
business quality. The account-by-account and team strategy for underwriting
supports our objective of retaining established accounts with favorable
underwriting results.
UNDERWRITING
The AMSs, regional offices and our agents all play an integral role in the
underwriting process, subject to our underwriting guidelines for particular
policies and types of customers. The regional offices work with our strategic
business units, which are organized by type of customer, to develop products and
underwriting guidelines as well as growth and profitability objectives. Our
actuarial department also works with the regions to determine pricing and to
monitor profitability. These activities are also based on AMS input regarding
agents' needs for products and pricing. As our competitors implement
across-the-board rate increases, we are able to write the type of business that
fits our profile, at a sound price, through our one risk at a time
field-underwriting model.
During 2001, we created a Service Center located in Richmond, Virginia.
The purpose of the service center is to help our independent insurance agents
serve their small to mid-size business customers throughout all of our operating
territories. Through the Service Center, insurance licensed individuals utilize
technology to respond by e-mail, phone and/or fax to customer inquiries about
insurance coverage, billing transactions and more. In return for the services
provided, the commission we pay to the independent agent is reduced by two
points upon renewal. The Service Center also creates opportunities for
additional sales and we believe positions us particularly well to compete for
business from larger agencies, including those owned by banks and agency
aggregators.
One & Done, our Internet-enabled small business system allows agents to
quote, bind and process small business policies within minutes without any
intervention by the Company. Because building valuations and our underwriting
criteria are embedded in the system, agents using these templates can quickly
provide policies to owners of small businesses. This tool has been designed to
support agents' skills at selecting good accounts and allows them to have more
time to work on larger, more complex accounts. One & Done also allows us to
produce new business at a lower underwriting expense ratio and provides us the
infrastructure to significantly grow these historically profitable business
segments. Because of these features, we believe that this system is improving
our competitive position in the small commercial lines marketplace.
We expect the service center and one & done policy writing systems to
continue to reduce our expense ratio and increase our productivity measure.
6
For certain classes of business and policy limits, 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. Our agents underwriting guidelines handbook sets forth criteria for
particular policies and insureds. When a risk falls outside of the established
guidelines, the agencies must contact their AMS to obtain authorization to bind
coverage. Accounts that exceed the AMS's authority require additional management
or home office approval. Policies that are accepted become subject to regulatory
limitations on policy cancellations and, except for nonpayment of premiums,
generally may not be canceled after the first 60 days other than at renewal upon
prescribed notice of cancellation.
Loss control representatives (LCRs) are responsible for surveying and
assessing accounts from a safety standpoint. Accounts with significant exposures
in a particular line of coverage may be placed on service by the LCR and receive
regular individualized attention.
The premium audit staff conducts audits of a commercial account's
financial records on an interim basis during the policy year, or at the end of a
policy term to adjust interim or final audit premium payments.
In an effort to facilitate analysis of our results by shareholders and
analysts, we have eliminated Strategic Business Unit reporting and have
conformed to the industry standard of line of business reporting.
COMMERCIAL LINES UNDERWRITING GAAP
HIGHLIGHTS Net Net Underwriting GAAP
Premiums Premiums Income Combined
(in thousands) Written Earned (Loss) Ratio
- ---------------------------------------------------------------------------------------------------
Total Commercial Lines 2001 $ 723,841 678,321 (32,970) 104.9%
2000 638,990 611,865 (45,186) 107.4
1999 587,521 570,650 (47,625) 108.3
Fire/Inland Marine 2001 99,501 92,489 (1,569) 101.7
2000 87,363 82,430 (13,367) 116.2
1999 80,894 77,760 (13,481) 117.3
Workers' Compensation 2001 180,322 170,129 (11,518) 106.8
2000 160,669 157,295 (13,927) 108.9
1999 152,601 150,054 (13,027) 108.7
General Liability 2001 191,885 179,287 374 99.8
2000 170,128 160,043 9,080 94.3
1999 146,441 140,048 3,527 97.5
Commercial Automobile 2001 199,016 186,674 (15,379) 108.2
2000 173,808 166,980 (23,253) 113.9
1999 161,189 156,519 (19,392) 112.4
Business Owners' Policy (BOP) 2001 36,468 34,004 (7,002) 120.6
2000 32,381 31,899 (4,783) 115.0
1999 31,700 31,803 (5,690) 117.9
Bonds 2001 15,780 14,994 1,992 86.7
2000 13,719 12,523 1,542 87.7
1999 12,795 12,919 972 92.5
Other 2001 869 744 132 82.3
2000 922 695 (478) 168.8
1999 1,901 1,547 (534) 134.5
7
PERSONAL LINES UNDERWRITING HIGHLIGHTS GAAP
Net Net Underwriting GAAP
Premiums Premiums Income Combined
(in thousands) Written Earned (Loss) Ratio
- ---------------------------------------------------------------------------------------------------
Total Personal Lines 2001 $ 201,578 204,727 (27,668) 113.5%
2000 204,613 209,400 (19,936) 109.5
1999 224,156 228,415 (6,522) 102.9
Automobile 2001 169,545 172,265 (29,705) 117.2
2000 171,405 176,558 (18,414) 110.4
1999 190,666 195,878 (9,658) 104.9
Homeowners 2001 26,118 26,414 851 96.8
2000 26,980 26,252 (2,709) 1103.3
1999 27,084 26,094 2,828 89.0
Other 2001 5,915 6,048 1,186 80.4
2000 6,228 6,590 1,187 82.0
1999 6,406 6,443 278 95.7
CLAIMS
Timely investigation and the fair settlement of meritorious claims is one
of the most important customer services we provide. In addition, we aggressively
investigate potentially suspicious or fraudulent claims so that appropriate
action can be taken before payment is authorized. Company policy emphasizes the
maintenance of timely and adequate reserves for claims, and the cost-effective
delivery of claims services by controlling loss and loss expenses.
Our CMSs are primarily responsible for investigating and settling claims
directly with claimants. By promptly and personally investigating claims, the
CMS is able to provide personal service and quickly resolve claims. In
territories where there is insufficient claim volume to justify the placement of
a CMS, or when particular claim expertise is required, we use independent
adjusters to investigate and settle claims.
During 2001, we completed the implementation of a new technology platform
designed to support our field-claims staff. The mobile claim system provides our
CMSs and agents 24-hour electronic access to claim information. We believe this
system provides improved service to our agents, insureds, claimants and
attorneys, and enables us to settle claims with efficiency and flexibility.
Claims settlement authority levels are established for each CMS and
supervisor based on their experience and expertise, up to a regional branch
office limit of $100,000. Casualty claims with an exposure potential in excess
of $100,000, significant or catastrophic injury or damage (such as, fatalities,
amputations and brain damage), property claims with an exposure greater than
$50,000, as well as claims involving suits against us and/or questions of
coverage are reported to the home office where senior claim specialists review
the claims and determine the appropriate reserve. They also provide guidance on
the handling of the claim until its final disposition. All environmental and
other latent exposure claims are referred to a centralized environmental claims
unit at the home office, which specializes in the management and consistency of
decisions regarding coverage application to these varied exposures.
For small policyholder claims, generally defined as less than $2,500, we
have implemented an "Agency Draft Program" enabling agents to pay property
damage claims on the spot without direct CMS involvement. The regional offices
review the claims paid through this program and provide guidance to the agents
on the appropriate use of the drafts. This program enables agents to provide
immediate customer service and satisfaction, while reducing our costs because
they are settled without the direct involvement of a CMS.
We have centralized, in the home office, a fraud unit to manage our field
fraud investigators and consistently adhere to uniform internal procedures to
improve detection and action on potentially fraudulent claims. Our automated
claim system tracks suspicious claims and determines the amount of loss dollars
saved when a claim is not paid because it is judged to have been fraudulent. It
is our policy to prosecute individuals who perpetrate fraud. We feel this sends
a clear message that we will not tolerate fraudulent activity committed against
our company and our customers. Also, we provide anti-fraud training for
employees who may be involved in claim matters.
8
Our newest initiative is a Claim Service Center that will be located in
our existing Richmond, Virginia location and will eventually service all of our
operating territories. The goal of this initiative is to enhance service with
immediate claim triage on a 24 hour, 7 days a week basis. We expect to have this
center operational by the second quarter of 2002 and we anticipate we will be
able to reduce the cycle time of first-party automobile claims and generate a
net annual durable savings of approximately $0.6 million in 2002 and $2 million
each year thereafter.
We also focus on, and have invested in, additional loss cost containment
initiatives. These initiatives include: (i) a comprehensive managed care
program, administered by Alta, which has reduced workers' compensation and
automobile loss costs; (ii) a voluntary automobile repair shop program which has
reduced repair costs in 2001 and 2000; and (iii) a small estimate and property
review program.
REINSURANCE
The Insurance Subsidiaries follow the customary practice of ceding a
portion of their risks and paying to reinsurers a portion of the premiums
received under the policies. This reinsurance program permits greater
diversification of business and the ability to offer increased coverage while
limiting maximum net losses. The Insurance Subsidiaries are parties to
reinsurance contracts under which certain types of policies are automatically
reinsured without the need for approval by the reinsurer of individual risks
covered (treaty reinsurance), reinsurance contracts handled on an individual
policy or per-risk basis requiring the agreement of the reinsurer as to each
risk insured (facultative reinsurance) and limits (automatic facultative
reinsurance). Reinsurance does not legally discharge an insurer from its
liability for the full face amount of its policies, but does make the reinsurer
liable to the insurer to the extent of the reinsurance ceded.
We have a Reinsurance Committee that reviews and approves all reinsurers
who do business with us. The Reinsurance Committee reviews the financial
condition of the reinsurer as well as applicable company ratings from: (i) A.M.
Best; and (ii) Standard and Poor's Insurance Rating Services (Standard and
Poor's). Further information is obtained from our reinsurance brokers, direct
reinsurers and market information sources. Company guidelines require a
reinsurer to have an "A-" or better rating by A.M. Best. However, the
Reinsurance Committee may approve reinsurers who have ratings below "A-" or who
have not been assigned a rating in certain special circumstances.
We continuously monitor 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. Our
primary reinsurers are American Re-Insurance Company, Gerling Global Reinsurance
Corporation, Partner Reinsurance Company, Axa Re (Paris), Hartford Steam Boiler
Inspection and Insurance Company, Tempest Re and Renaissance Re. Our flood book
of business is ceded 100% to the National Flood Insurance Fund. In addition, we
cede no-fault claims for medical benefits in excess of $75,000 to the New Jersey
Unsatisfied Claim and Judgment Fund (UCJF).
We have both property and casualty excess of loss treaties as well as a
property catastrophe program. Effective July 1, 2001, we increased the retention
on our property treaty excess of loss program to cover each property occurrence
in excess of $2 million up to $15 million. Prior to this change each property
occurrence in excess of $1 million was covered up to $15 million. Our casualty
excess of loss treaty covers each casualty occurrence in excess of $2 million up
to $50 million in six layers, except for commercial umbrella, which is
reinsured, up to $10 million. Effective July 1, 2001 we retain 15% of the first
layer of the casualty excess of loss treaty that covers $3 million in excess of
$2 million.
The catastrophe program for 2001 covered 95% of losses in excess of a $15
million retention up to $165 million per occurrence in six layers with the $10
million in excess of $85 million layer retained in full by the Company. It
provided total coverage of $133 million. The catastrophe program was revised for
2002 treaty year. Effective January 1, 2002, we no longer retain 100% of the $10
million excess of $85 million layer of the treaty. The 2002 treaty is in five
layers and covers: (i) 95% of losses in excess of $15 million up to $25 million;
(ii) 95% of losses in excess of $25 million up to $50 million; (iii) 95% of
losses in excess of $50 million up to $85 million; (iv) 83.5% of losses in
excess of $85 million up to $120 million; (v) 83.5% of losses in excess of $120
million up to $165 million. Total coverage under the program is $133.3 million.
Due to changes in the reinsurance industry's perception of the insurable risk
after September 11 attacks, a terrorism exclusion became part of the 2002
catastrophe treaty.
In addition, we have a homeowners' quota share program that reinsures 75%
of New Jersey homeowners' property coverage up to a $1 million limit and up
until 2002 contained no per-occurrence limit. Effective January 1, 2002, a $75
million per occurrence limit was added to the treaty. We believe that the
property catastrophe program, coupled with the Homeowners Quota Share Treaty
provide adequate protection for catastrophic losses.
See the section entitled "Reinsurance Renewals" beginning on page 24 of
our 2001 Annual Report to Shareholders, which is incorporated herein by
reference, for additional discussion about our reinsurance programs.
9
POOLING ARRANGEMENTS
The Insurance Subsidiaries participate in an inter-company pooling and
expense sharing arrangement ("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 S&P.
The pool participation percentage of each Insurance Subsidiary reflects
the ratio of that subsidiary's policyholders' surplus to our aggregate
policyholders' surplus. The percentages are as follows:
Selective Insurance Company of America 55.5%
Selective Way Insurance Company 21.5%
Selective Insurance Company of South Carolina 9.0%
Selective Insurance Company of the Southeast 7.0%
Selective Insurance Company of New York 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
The table on page 12 provides information about reserves for net losses
and loss expenses. Also see Notes 14 and 17(a) to the Consolidated Financial
Statements included in the 2001 Annual Report to Shareholders for additional
information about reserves, which notes are incorporated herein by reference.
Significant periods of time can elapse between the occurrence of an
insured loss, the reporting of the loss to the insurer and the insurer's payment
of that loss. To recognize liabilities for unpaid losses and loss expenses,
insurers establish reserves as balance sheet liabilities representing estimates
of amounts needed to pay reported and unreported net losses and loss expenses.
When a claim is reported to an insurance subsidiary, its claims personnel
establish a "case reserve" for the estimated amount of the ultimate payment. The
amount of the reserve is primarily based upon a case-by-case evaluation of the
type of claim involved, the circumstances surrounding each claim and the policy
provisions relating to the type of losses. The estimate reflects the informed
judgment of such personnel based on general insurance reserving practices, as
well as the experience and knowledge of the claims person. Until the claim is
resolved, these estimates are revised as deemed necessary by the responsible
claims personnel based on subsequent developments and periodic reviews of the
cases.
In accordance with industry practice, we maintain, in addition to case
reserves, estimates of reserves for losses and loss expenses incurred but not
yet reported (IBNR). We project our estimate of ultimate losses and loss
expenses at each reporting date. The difference between; (i) projected ultimate
loss and loss expense reserves and (ii) case loss reserves and loss expense
reserves thereon is carried as the IBNR reserve. By using both estimates of
reported claims and IBNR determined using generally accepted actuarial reserving
techniques, we estimate the ultimate net liability for losses and loss expenses.
The ultimate actual liability may be higher or lower than reserves established.
We do not discount to present value that portion of our loss and loss expense
reserves expected to be paid in future periods. However, the loss reserves
include anticipated recoveries from salvage and subrogation.
Reserves are reviewed for adequacy on a periodic basis. When reviewing
reserves, we analyze historical data and estimate the impact of various factors
such as: (i) per claim information; (ii) Company and industry historical loss
experience; (iii) legislative enactments, judicial decisions, legal developments
in the imposition of damages, and changes in political attitudes; and (iv)
trends in general economic conditions, including the effects of inflation. This
process assumes that past experience, adjusted for the effects of current
developments and anticipated trends, is an appropriate basis for predicting
future events. There is no precise method, however, for subsequently evaluating
the impact of any specific factor on the adequacy of reserves because the
eventual deficiency or redundancy is affected by many factors.
10
The anticipated effect of inflation is implicitly considered when
estimating reserves for net losses and loss expenses. While anticipated
increases due to inflation are considered in estimating ultimate claim costs,
the increase in the average severity of claims is caused by a number of factors
that vary with the individual type of policy written. Future average severity is
projected based on historical and anticipated trends and also are adjusted for
anticipated changes in general economic trends.
After taking into account all relevant factors, we believe that the
reserve for net losses and loss expenses at December 31, 2001, is adequate to
provide for the ultimate net costs of claims incurred as of that date.
Establishment of appropriate reserves is an inherently uncertain process and
there can be no certainty that currently established reserves will prove
adequate in light of subsequent actual experience.
The table on page 12 represents the development of balance sheet net
reserves for 1991 through 2001. The top three lines of the table reconcile gross
reserves to net reserves for unpaid losses and loss expenses recorded at the
balance sheet date for each of the indicated years. The upper portion of the
table shows the re-estimated amount of the previously recorded net reserves
based on experience as of the end of each succeeding year. The estimate is
either increased or decreased as more information becomes known about the
frequency and severity of claims for individual years.
The "cumulative redundancy (deficiency)" represents the aggregate change
in the estimates over all prior years. For example, the 1991 reserve developed a
$22.6 million redundancy over the course of the succeeding ten years. That
amount has been included in income over the past nine years.
The lower section of the table shows the cumulative amount paid with
respect to the previously recorded reserves as of the end of each succeeding
year. For example, as of December 31, 2001, we paid $624.2 million of the
currently estimated $702.9 million of losses and loss expenses that were
incurred through the end of 1992; thus, the difference, an estimated $78.7
million of losses and loss expenses incurred through 1992, remained unpaid as of
December 31, 2001.
In evaluating this information, it should be noted that each amount
includes the total of all changes in amounts for prior periods. For example, the
amount of redundancy to losses settled in 2001, but incurred in 1998, will be
included in the cumulative redundancy (deficiency) amounts in 1998, 1999, and
2000. This table does not present accident or policy year development data,
which certain readers may be more accustomed to analyzing. Conditions and trends
that have affected development of the reserves in the past may not necessarily
occur in the future. Accordingly, it may not be appropriate to extrapolate
redundancies or deficiencies based on this table.
11
ANALYSIS OF NET LOSS AND LOSS EXPENSE DEVELOPMENT
(in millions) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Gross reserves
for unpaid
losses and
loss expenses
at December 31 $ 731.5 870.2 917.7 999.4 1,120.1 1,189.8 1,161.2 1,193.3 1,273.8 1,272.7 1,316.3
Reinsurance
recoverable on
unpaid losses
and loss
expenses at
December 31 $ (91.9) (132.6) (114.0) (111.5) (121.4) (150.2) (124.2) (140.5) (192.0) (160.9) (184.5)
Net reserves
for unpaid
losses and
loss expenses
at December 31 $ 639.6 737.6 803.7 887.9 998.7 1,039.6 1,037.0 1,052.8 1,081.8 1,111.8 1,131.8
Net reserves
estimated as of:
One year later $ 634.3 734.8 801.0 900.6 989.5 1,029.5 1,034.5 1,044.2 1,080.7 1,125.5
Two years later 626.3 732.5 790.0 899.5 977.6 1,028.1 1,024.8 1,035.9 1,088.2
Three years later 626.5 718.7 788.5 894.9 974.4 1,020.5 1,014.0 1,033.3
Four years later 626.8 716.5 782.9 894.7 965.2 1,014.4 998.1
Five years later 625.3 717.3 780.3 892.2 960.8 1,000.9
Six years later 627.1 716.4 778.9 888.9 955.2
Seven years later 626.8 714.0 772.1 890.2
Eight years later 625.9 706.0 770.1
Nine years later 621.7 702.9
Ten years later 617.0
Cumulative redundancy
(deficiency) $ 22.6 34.7 33.6 (2.3) 43.5 38.7 38.9 19.5 (6.4) (13.7)
======= ==== ==== ==== ==== ==== ==== ==== ==== =====
Cumulative
amount of net
reserves paid
through:
One year later $ 183.7 219.5 224.6 259.4 280.4 303.6 313.7 328.1 348.2 399.2
Two years later 308.8 352.3 382.3 443.4 481.6 519.6 531.1 537.5 600.3
Three years later 391.3 451.4 497.7 573.7 628.0 674.7 665.5 703.8
Four years later 447.7 517.2 567.4 661.3 722.2 760.8 760.8
Five years later 481.4 556.3 611.1 716.0 773.3 820.0
Six years later 502.6 580.6 642.8 748.4 811.9
Seven years later 516.0 600.4 662.6 774.6
Eight years later 529.7 613.6 677.5
Nine years later 538.7 624.2
Ten years later 546.9
12
RECONCILIATION OF STATUTORY TO GAAP LOSS RESERVES AND LOSS EXPENSES
(in thousands) 2001 2000
- --------------------------------------------------------------------------------
Statutory loss and loss expense reserves (1) $ 1,135,536 1,095,641
Adjustment for funds withheld (2) -- 17,375
Provision for uncollectible reinsurance 654 609
Elimination of inter-company profit in loss and
loss expense reserves (3) (4,363) (1,838)
----------- -----------
GAAP net reserve for loss and loss expenses 1,131,827 1,111,787
Reinsurance recoverable on unpaid loss and loss
expenses 184,486 160,869
=========== ===========
GAAP gross reserves for loss and loss expenses $ 1,316,313 1,272,656
=========== ===========
(1) Statutory loss and loss expense reserves, net of reinsurance recoverable
on unpaid loss and loss expenses.
(2) Represents statutory funds withheld under a reinsurance contract that was
re-classified as loss and loss expense reserves for GAAP in 2000. This
reinsurance contract was commuted during 2001.
(3) Alta Services LLC, an affiliate of the insurance companies, charges a fee
for medical managed care services which is included in loss expense.
ENVIRONMENTAL RESERVES
Reserves established for liability insurance continue to reflect exposure
to environmental claims, both asbestos and non-asbestos. These claims have
arisen primarily under older policies containing exclusions for environmental
liability which certain courts, in interpreting such exclusions, have determined
do not bar such claims. The emergence of these claims is slow and highly
unpredictable. Since 1986, policies issued by the Insurance Subsidiaries have
contained a more expansive exclusion for losses related to environmental claims.
Our asbestos and non-asbestos environmental claims have arisen primarily from
exposures in municipal government, small commercial risks and homeowners
policies.
"Asbestos claims" means those claims presented to us in which bodily
injury is alleged to have occurred as a result of exposure to asbestos and/or
asbestos-containing products. During the past two decades, the insurance
industry has experienced the emergence and development of an increasing number
of asbestos claims. At December 31, 2001, asbestos claims constituted 89% of our
2,278 outstanding environmental claims.
"Non-asbestos claims" means pollution and environmental claims alleging
bodily injury or property damage presented, or expected to be presented, to us
other than asbestos. These claims include landfills, leaking underground storage
tanks and mold. In past years, landfill claims have accounted for a significant
portion of our environmental claim unit's litigation costs.
In the year ended December 31, 2001, we reclassified several non-asbestos
categories of claims to a non-environmental status. These categories include
external insulation finishing system (EIFS) construction defect claims, oil
truck spills, indoor air pollution, and general contamination that do not meet
the standard definition of environmental claims set forth in the 2001 National
Association of Insurance Commissioners Annual Statement preparation
instructions. For comparative purposes, amounts in the prior years have been
reclassified to conform to current year presentations. The number of claims
reclassified is 397 for 2001, 329 for 2000, and 235 for 1999.
We refer all environmental claims to our centralized environmental claim
unit, which specializes in the claim management of these exposures.
Environmental reserves are evaluated on a case-by-case basis. As cases progress,
the ability to assess potential liability often improves. Reserves are then
adjusted accordingly. In addition, each case is reviewed in light of other
factors affecting liability, including judicial interpretation of coverage
issues.
13
The table below summarizes the number of asbestos and non-asbestos claims
outstanding at December 31, 2001, 2000 and 1999. For additional information
about our environmental reserves, see Note 17 to the Consolidated Financial
Statements, beginning on page 48 of our 2001 Annual Report to Shareholders,
which is incorporated herein by reference.
ENVIRONMENTAL CLAIMS ACTIVITY
2001 2000 1999
- --------------------------------------------------------------------------------
ASBESTOS RELATED CLAIMS (1)
Claims at beginning of year 1,868 1,700 1,665
Claims received during year 606 320 569
Claims closed during year (436) (152) (534)
-------- ------- ------
Claims at end of year 2,038 1,868 1,700
======== ======= ======
Average net loss settlement on
closed claims(2 $ 449 1,934 141
NON-ASBESTOS RELATED CLAIMS (1)
Claims at beginning of year 212 179 233
Claims received during year 138 134 119
Claims closed during year (110) (101) (173)
-------- ------- ------
Claims at end of year 240 212 179
======== ======= ======
Average net loss settlement on
closed claims $ 14,827 15,495 7,351
(1) The number of environmental claims presented in the tables includes all
multiple claimants who are associated with the same site or incident.
INSURANCE REGULATION
GENERAL
Insurance companies are subject to supervision and regulation in the
states in which they are domiciled and transact business. Such supervision and
regulation 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. We believe that we are
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.
On June 1, 2000, federal regulators issued final regulations implementing
the provisions of the Financial Services Modernization Act of 1999, also known
as the Gramm-Leach-Bliley Act (the "Act"), governing the privacy of consumer
financial information. The regulations became effective on November 13, 2000,
and the date for compliance with the regulations was July 1, 2001. The
regulations limit disclosure by financial institutions of "nonpublic personal
information" about individuals who obtain financial products or services for
personal, family, or household purposes. The Act and the regulations generally
apply to disclosures to nonaffiliated third parties, subject to specified
exceptions, but not to disclosures to affiliates. Many states in which we
operate have adopted laws that are at least as restrictive as the Act and the
regulations. This is an evolving area of regulation requiring our continued
monitoring.
Effective January 1, 2001, we adopted a codified set of statutory
accounting principles (Codification) as required by the National Association of
Insurance Commissioners (NAIC). The changes to the statutory accounting
principles reduce the differences within statutory accounting permitted
practices among the various states. Codification led to an increase in combined
statutory surplus of $43 million.
While we believe we are in compliance with all currently effective and
applicable laws affecting our operations, we cannot currently quantify the
financial impact we would incur to satisfy revised or additional regulatory
requirements that may be imposed in the future.
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
14
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 commercial and personal insurance
with the insurance department of each state in which they operate.
All states have enacted legislation that regulates insurance holding
company systems. Each insurance company in a holding company system is required
to register with 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
principles and reporting formats established by the NAIC. The NAIC also
promulgates model insurance laws and regulations relating to the financial and
operational regulations of insurance companies, which includes the Insurance
Regulatory Information System (IRIS). IRIS identifies eleven industry ratios and
specifies "usual values" for each ratio. Departure from the usual values on four
or more of the ratios can lead to inquiries from individual state commissioners
about certain aspects of the insurer's business. The Insurance Subsidiaries have
consistently met all of the IRIS ratio tests.
NAIC model laws and rules are not usually applicable unless enacted into
law or promulgated into regulation by the individual states. The adoption of
certain NAIC model laws and regulations is a key aspect of the NAIC Financial
Regulations Standards and Accreditation Program, which also sets forth minimum
staffing, and resource levels for all states. All of the domiciliary states of
the Insurance Subsidiaries are accredited, with the exception of New York.
Examinations conducted by accredited states can be accepted by other states. The
NAIC intends to create an eventual nationwide regulatory network of accredited
states.
The NAIC Model Act is also intended to enhance the regulation of insurer
solvency. This act contains certain risk-based capital (RBC) requirements for
property and casualty insurance companies. The requirements are designed to
assess capital adequacy and to raise the level of protection that statutory
surplus provides for policyholders. RBC measures the four major areas of risk to
which property and casualty insurers are exposed: (i) asset risk; (ii) credit
risk; (iii) underwriting risk; and (iv) off-balance sheet risk. Insurers with a
ratio below 200% of their total adjusted capital to their Authorized Control
Level, as calculated in the Model Law, are subject to different levels of
regulatory intervention and action. Based upon the 2001 statutory financial
statements for the Insurance Subsidiaries, each Insurance Subsidiary's total
adjusted capital exceeded the Authorized Control Level.
Codification had minimal impact to the Risk Based Capital ratios for the
Insurance Subsidiaries and did not significantly impact the dividend paying
capabilities of the Insurance Subsidiaries.
INVESTMENTS SEGMENT
The long-term objective of our investment policy is to maximize after-tax
yield while providing liquidity and preserving assets and stockholders' equity.
The current investment mix is 85% debt securities, 14% equity securities, and 1%
short-term investments. High credit quality has always been a cornerstone of our
investment strategy, as evidenced by the fact that 99% of the debt securities
are investment grade. The average rating of our debt securities is "AA", S&P's
second highest credit quality rating.
We emphasize liquidity requirements in response to an unpredictable
underwriting environment and the need to minimize the exposure to catastrophic
events. To provide liquidity while maintaining consistent performance,
maturities of debt securities are "laddered" so that some issues are always
approaching maturity, thereby providing a source of predictable cash flow. To
reduce sensitivity to interest rate fluctuations, we invest our debt portfolio
primarily in intermediate-term debt securities. The average life of the
portfolio at December 31, 2001 was 4.9 years.
We will continue to follow the investment philosophy that has historically
proven successful for us. The strategy is to continue to purchase debt
securities in sectors that represent the most attractive relative value and
maintain a moderate equity exposure. Managing investment risk by adhering to
these strategies is intended to protect the interests of our stockholders as
well as those of our policyholders and, at the same time, enhance our financial
strength and underwriting capacity.
For additional information about our investment policy, see section titled
"Investments" beginning on page 24 of our Annual Report to Shareholders, which
is incorporated herein by reference.
15
DIVERSIFIED INSURANCE SERVICES SEGMENT
During 2001 our Diversified Insurance Services segment strategy further
evolved, which led to a more refined focus on businesses that provide synergy
with our agency force and create new opportunities for agents to bring added
value services and products to their customers. This focus has led us to
consolidate our Diversified Insurance Services operations into three core
functions: flood insurance, managed care, and professional employer organization
(PEO) services. The businesses fit into our business model in one of two ways:
complementary (they share a common marketing or distribution system) or
vertically (one company uses the other's products or services in its own
production or supply output). The flood and PEO products are currently sold
through our independent agent distribution channel, while our managed care
businesses provide an integral service used by our claims operation, as well as
by other insurance carriers. Given the more refined focus along with the
completion of the mobile claim and flood system software products, we felt it
was time to begin pursuing the sale of our Software Development and
Administration business, PDA Software Services, Inc. (PDA), and thus have
classified this business as a discontinued operation. PDA was purchased in 1998
as part of Selective's newly forming Diversified Insurance Services operation.
At the time PDA was the outside vendor developing the aforementioned software
products making it a good fit with our insurance-related businesses. Upon sale,
we expect to realize a profit, especially as PDA will now be able to more freely
market its insurance products outside the Selective umbrella. The results for
this segment's continuing operations are as follows:
FOR THE YEAR ENDED DECEMBER 31,
(in thousands) 2001 2000 1999
- --------------------------------------------------------------------------------
FLOOD INSURANCE:
Net revenue $ 14,571 11,991 10,665
Pre-tax profit 2,093 1,609 3,297
MANAGED CARE:
Net revenue 19,088 15,014 7,837
Pre-tax profit 3,686 3,509 1,146
PROFESSIONAL EMPLOYER ORGANIZATION:
Net revenue 34,352 29,155 11,262
Pre-tax profit (loss) (6,599) 110 980
OTHER:
Net revenue 1,615 1,367 --
Pre-tax profit 395 281 --
TOTAL:
Net revenue 69,626 57,527 29,764
Pre-tax profit (loss) (427) 5,509 5,423
After tax profit (loss) (201) 3,605 3,473
After-tax return on net revenue (0.3)% 6.3% 11.7%
FLOOD INSURANCE
Selective is a servicing carrier for the National Flood Insurance Program.
We provide a market for flood insurance to our agents and also have flood-only
appointments with over 4,000 agents across the country. As a servicing carrier,
not an underwriter, Selective bears no risk of policyholder loss, since the
premiums we collect are ceded 100% to the federal government. We receive a
servicing fee from which we pay agency commissions and other related expenses.
In addition to the servicing fees, we receive fees for handling claims. During
2001, we acquired two flood books of business from other insurance carriers that
amounted to approximately 17,000 policies and $5.5 million in premium, which we
anticipate will generate approximately $2 million in servicing fees. In 2001, we
were also endorsed as the flood insurance servicing carrier for the Independent
Insurance Agents of America.
MANAGED CARE
The goal of our managed care program is to return patients to their normal
routine, at work and at home, and ensure medical costs are delivered in the most
cost effective manner possible. Our managed care companies (Alta, Selectech, &
CHN) now operate under one integrated management team and provide workers'
compensation and automobile medical claim services, third party administrative
services and discounted access to the largest medical provider network in New
Jersey,
16
while bearing no underwriting risk. Our medical claim services include first
report of injury, referrals to medical providers, comprehensive medical case
management, as well as medical bill audits and re-pricing. Our managed care
program also provides medical claim management services under New Jersey's
Automobile Insurance Cost Reduction Act. Our preferred provider organization, is
a network of physicians, hospitals and other medical providers that have agreed,
by contract, to discount their rates to members.
Network expansion has been, and will continue to be a major initiative for
our managed care program. During 2001 our medical provider network expanded from
50,000 to just under 60,000 locations in its initial three key operating
territories (New Jersey, New York, and Connecticut). This expansion included the
acquisition of a 1,200-location mental health network for $200,000. Subsequent
to year-end, we purchased all of the outstanding common stock of Northeast
Direct Health, Inc., a Connecticut based preferred provider organization for
$2.3 million. This acquisition adds 11.000 more provider locations to CHN's
existing network. In the future, our managed care medical provider network will
focus on expanding into new states where we have a presence, starting with the
Northeast area.
PROFESSIONAL EMPLOYER ORGANIZATION
The PEO, Selective HR Solutions, provides human resource administration,
including benefits, payroll and employee management services, and risk and
compliance management products and services, including workers' compensation. A
PEO, by the nature of its product package, provides a very high level of
day-to-day services to its customers, which we believe will be attractive to
small business owners, who can be accessed through existing relationships with
our independent agents.
We will concentrate our sales effort in 2002 in states where the PEO
product is more widely accepted and understood. We believe we can build on the
existing agent/business owner relationships as our independent agents continue
to recognize the value in this product. We currently have approximately 100
agents making PEO sales. The number of PEO worksite employees has increased to
just over 21,000 from approximately 12,000 in 1999.
RISK FACTORS
The risks described below are not the only ones we face. There may
be additional risks and uncertainties. Either by their presence or absence,
these risks could materially affect our business, financial condition or results
of operations, and the trading price of our common stock.
WE MAY BE ADVERSELY AFFECTED BY CATASTROPHES AND WEATHER-RELATED EVENTS.
Property and casualty insurance companies frequently experience
losses from catastrophes and other weather-related events. Catastrophes may have
a material adverse effect on our operations. Catastrophes are caused by various
events including windstorms, hurricanes, earthquakes, tornadoes, hail, severe
winter weather, fires and terrorism. We cannot predict how severe a particular
catastrophe may be until after it occurs. The extent of our losses from these
catastrophes is a function of:
- the total amount of losses our clients incur;
- the number of our clients affected;
- the frequency of the events;
- and the severity of the particular catastrophe.
Most catastrophes are restricted to small geographic areas. However,
hurricanes, floods, earthquakes and terrorism may produce significant damage in
large, heavily populated areas.
OUR GEOGRAPHIC CONCENTRATION TIES OUR PERFORMANCE TO THE ECONOMIC AND REGULATORY
CONDITIONS AND WEATHER-RELATED EVENTS IN THE EAST-COAST AND MIDWESTERN STATES.
Our property and casualty insurance business is concentrated
geographically. Approximately 40% of our net premiums written are for insurance
policies written in New Jersey. Other East Coast states, including Connecticut,
Delaware, Georgia, Maryland, New York, North Carolina, Pennsylvania, Rhode
Island, South Carolina, Virginia and several Midwestern states, including
Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Missouri, Ohio and
Wisconsin, account for substantially all of our other business. Consequently,
unusually severe storms or other natural or man-made disasters which destroy
property in the states in which we write insurance could adversely affect our
operations. Our revenues and profitability are also subject to prevailing
economic and regulatory conditions in those states in which we write insurance.
Because our business is concentrated in a limited number of markets, we may be
exposed to risks of adverse developments that are greater than the risks of
having business in a greater number of markets.
17
WE FACE SIGNIFICANT COMPETITION FROM OTHER REGIONAL AND NATIONAL INSURANCE
COMPANIES, AGENTS AND FROM SELF-INSURANCE.
We compete with regional and national insurance companies, including
direct writers of insurance coverage. Many of these competitors are larger than
we are and have greater financial, technical and operating resources. In
addition, we face competition within each insurance agency which sells our
insurance, because most of our agencies represent more than one insurance
company.
The property and casualty insurance industry is highly competitive
on the basis of both price and service. If our competitors price their products
more aggressively, our ability to grow our business may be adversely impacted.
There are many companies competing for the same insurance customers in the
geographic areas in which we operate. The Internet may also emerge as a
significant source of new competition, both from existing competitors using
their brand name and resources to write business through this new distribution
channel and from new competitors.
We also face competition because of entities which self-insure,
primarily in the commercial insurance market. Many of our customers and
potential customers are examining the benefits and risks of self-insuring as an
alternative to traditional insurance.
WE FACE COMPETITION FROM NEW ENTRANTS INTO THE INSURANCE UNDERWRITING MARKET.
Banks
The Financial Services Modernization Act of 1999, also known as the
Gramm-Leach-Bliley Act, permits banks to engage in non-banking, financial
services businesses including the underwriting of insurance. As a result, we may
face future competition from banks in the underwriting of insurance.
Since this Act was passed, banks have begun acquiring insurance
agencies, including agencies that we have appointed as our agents. Some banks
could have business strategies for operating their insurance agencies that
differ from strategies that we think are important for the distribution of our
insurance products through our existing independent insurance agencies. If those
banks were to acquire insurance agencies which are important to us, we might
have to try to replace those insurance agencies. Also, as a result of the Act,
banks will be able to write property and casualty insurance and could compete
directly with us by selling insurance through their own insurance agencies.
Professional Employer Organization and Payroll Processors
Some professional employer organizations and payroll processors who
compete with us in those businesses have also begun selling commercial insurance
to their customers as agents for insurers with whom we compete. This competition
could result in a loss of business for us.
WE ARE HEAVILY REGULATED IN THE STATES IN WHICH WE OPERATE.
We are subject to extensive supervision and regulation in the states
in which we transact business. The primary purpose of supervision and regulation
is to protect the individual insurance policyholders and not shareholders or
other investors. Our business can be adversely affected by private passenger
automobile insurance regulations and any other regulations affecting property
and casualty insurance companies. For example, laws and regulations can reduce
or set rates at levels which we do not believe are adequate for the risks we
insure. Other laws and regulations can limit our ability to cancel or refuse to
renew policies and require us to offer coverage to all consumers. Changes in
laws and regulations, or their interpretations, pertaining to insurance,
including workers' compensation, health care or managed care, and to preferred
provider organizations and professional employer organizations, may also have an
adverse effect on our business. Although the federal government does not
directly regulate the insurance industry, federal initiatives, from time to
time, can also impact the insurance industry.
In addition, proposals intended to control the cost and availability
of health care services have been debated in Congress and state legislatures.
Although we do not write health insurance, rules and regulations affecting
healthcare services can affect workers' compensation, commercial and personal
automobile, liability and other insurance which we do write. We cannot determine
whether or in what form health care reform legislation may be adopted by
Congress or any state legislature. We also cannot determine the nature and
effect, if any, that the adoption of health care legislation or regulations, or
changing interpretations, at the federal or state level would have on us.
18
Example of regulatory risks include:
Automobile Insurance Regulation
In March 1999, we began to implement a state-mandated 15% rate
reduction for all personal automobile policies in New Jersey. As a result of
this roll-back, our annual premiums in this line have been reduced. The effect
of this rollback continued through 2001 decreasing premium collected and
adversely impacting profitability. In addition, the New Jersey Urban Enterprise
Zone (UEZ) Program requires New Jersey auto insurers, including us, to write
involuntary urban auto insurance proportionate to our voluntary market share.
This business is and will most likely continue to be unprofitable.
South Carolina law established a joint underwriting association for
automobile insurance. We are required to be a member along with other automobile
insurers in South Carolina. As a member of this association, we have to write
automobile insurance for some involuntary risks, and we share in the profit or
loss of the association. On March 1, 2003, the association will be replaced by
an assigned risk plan. This plan will assign risks which are unable to obtain
coverage voluntarily to insurers based on their market share. We are unable at
this time to assess the impact of these changes on our results of operations.
Workers' Compensation Insurance Regulation
Because we voluntarily write workers' compensation insurance, we are
required by state law to write involuntary coverage. Insurance companies that
underwrite voluntary workers' compensation insurance can either write
involuntary coverage assigned by state regulatory authorities or participate in
a sharing arrangement. We currently write involuntary coverage assigned to us
directly from the State of New Jersey, and this business is unprofitable.
Homeowners Insurance Regulation
New Jersey regulations prohibit us from canceling or non-renewing
homeowners insurance policies for any arbitrary, capricious or unfairly
discriminatory reason or without adequate notice to the insured. We are subject
to regulatory provisions that are designed to address problems in the homeowners
property insurance marketplace. These provisions regulate matters relating to
the availability and affordability of such insurance and take two forms:
voluntary and involuntary. Involuntary provisions, such as the New Jersey Fair
Access to Insurance Requirements (FAIR), generally result in assessments to us.
The New Jersey FAIR writes fire and extended coverage on homeowners for those
individuals unable to secure insurance elsewhere. Insurance companies who
voluntarily write homeowners insurance in New Jersey are assessed a portion of
any deficit from the New Jersey FAIR based on their share of the voluntary
market. Similar involuntary plans exist in most other states where we operate.
A CHANGE IN OUR MARKET SHARE IN NEW JERSEY COULD ADVERSELY IMPACT THE RESULTS IN
OUR PRIVATE PASSENGER AUTOMOBILE BUSINESS.
New Jersey insurance regulations require New Jersey auto insurers to
involuntarily write private passenger automobile insurance for individuals who
are unable to obtain insurance in the voluntary market at the same premium rates
that are applicable to policies which the insurers voluntarily write. The amount
of involuntary insurance which an insurer must write in New Jersey depends on
the insurer's market share in New Jersey - the greater the market share the more
involuntary coverage the insurer is required to write. The underwriting of
involuntary personal automobile insurance in New Jersey is unprofitable.
In 2001, insurance companies having an aggregate share of nearly 25%
of the market for New Jersey private passenger automobile insurance publicly
announced their intentions to either withdraw from New Jersey or to reduce their
writing of private passenger automobile insurance in New Jersey. It is uncertain
whether these insurance companies will actually follow through on their
announced intentions. The impact of their actions, if any, are also uncertain.
However, the withdrawal from New Jersey of insurance companies that write a
significant amount of private passenger automobile insurance coverage or the
reduction in their writing of that coverage could result in an increase in our
market share in New Jersey if their insureds were to purchase private passenger
automobile insurance from us.
Our results of operations in this business could be materially
adversely affected if we were required to write significantly more involuntary
automobile insurance.
19
THE PROPERTY AND CASUALTY INSURANCE INDUSTRY IS CYCLICAL.
Historically, the property and casualty insurance industry has been
cyclical. For example, in 2000 and 2001, commercial pricing increased, but had
decreased for several years preceding 2000. Furthermore, the industry's
profitability is affected by unpredictable developments, including:
- natural and man-made disasters;
- fluctuations in interest rates and other changes in the investment
environment that affect returns on our investments;
- inflationary pressures that affect the size of losses; and
- judicial decisions that affect insurers' liabilities.
The demand for property and casualty insurance, particularly commercial lines,
can also vary with the overall level of economic activity.
WE MAY BE RESTRICTED IN DECLARING DIVIDENDS AND DISTRIBUTIONS.
As an insurance holding company, our principal assets consist of the
capital stock of our insurance subsidiaries and our diversified insurance
services subsidiaries. We rely on dividends from our insurance and diversified
insurance services subsidiaries to meet our cash needs, including principal and
interest payments on our debt and payments of dividends to stockholders. The
insurance subsidiaries may declare and pay dividends to us only if they are
permitted to do so under the insurance regulations of their respective
domiciliary states. All of the states in which our insurance subsidiaries are
domiciled regulate the payment of dividends.
Some states, including New Jersey and South Carolina, require that
we give notice to the relevant state insurance commissioner prior to our
insurance subsidiaries declaring any dividends and distributions payable to us.
During the notice period, the state insurance commissioner may disallow all or
part of the proposed dividend if it determines that the insurer's surplus as
regards policyholders is not reasonable in relation to the insurer's liabilities
and adequate to its financial needs, or in the case of New Jersey, if the
regulatory authority determines that the insurer is otherwise in a hazardous
financial condition.
OUR RESERVES MAY NOT BE ADEQUATE TO COVER ESTIMATED LOSSES AND EXPENSES.
We are required to maintain loss reserves for our estimated
liability for losses and loss expenses associated with reported and unreported
claims for each accounting period. From time to time we have to increase
reserves, and if our reserves are inadequate, we will be required to further
increase reserves. An increase in reserves results in an increase in losses and
a reduction in our net income and stockholders' equity for the period in which
the deficiency in reserves is identified and could have a material adverse
effect on our results of operations, liquidity and financial condition. Our
reserve amounts are estimated based on what we expect the ultimate settlement
and claim administration expenses to be. These estimates are based on facts and
circumstances of which we are aware, predictions of future events, and trends in
claims severity and frequency and other subjective factors. There is no method
for precisely estimating our ultimate liability for settlements and claims.
We regularly review our reserving techniques and our overall amount
of reserves. We also review:
- information regarding each claim for losses;
- our loss history and the industry's loss history;
- legislative enactments, judicial decisions and legal
developments regarding damages;
- changes in political attitudes; and
- trends in general economic conditions, including
inflation.
We cannot be certain that the reserves we establish will be adequate
in the future.
OUR ABILITY TO REDUCE OUR EXPOSURE TO RISKS DEPENDS ON THE AVAILABILITY AND COST
OF REINSURANCE.
We transfer our exposure to some risks to others through reinsurance
arrangements with other insurance and reinsurance companies. Under our
reinsurance arrangements, another insurer assumes a specified portion of our
losses and loss adjustment expenses in exchange for a specified portion of
policy premiums. The availability, amount and cost of reinsurance depend on
market conditions and may vary significantly. Any decrease in the amount of our
reinsurance will increase our risk of loss. Furthermore, we face a credit risk
with respect to reinsurance. When we obtain reinsurance, we are
20
still liable for those transferred risks if the reinsurer cannot meet those
obligations. Therefore, the inability of any of our reinsurers to meet its
financial obligations could materially affect our operations.
Reinsurers experienced significant losses related to the terrorist
events of September 11, 2001. As a result, we may incur significantly higher
reinsurance costs and more restrictive terms and conditions. Also, there may be
reduced availability of reinsurance for some types of commercial exposures. As
our primary reinsurance renewals will not occur until July 2002, we cannot
predict the actual availability and costs of reinsurance.
WE DEPEND ON OUR INVESTMENT INCOME FOR A SIGNIFICANT PORTION OF OUR REVENUES AND
EARNINGS.
We, like many other property and casualty insurance companies,
depend on income from our investment portfolio for a significant portion of our
revenues and earnings. Any significant decline in our investment income as a
result of falling interest rates or decreased dividend payment rates would have
an adverse effect on our results.
WE DEPEND ON OUR INDEPENDENT INSURANCE AGENTS.
We market and sell our insurance products through independent,
non-exclusive insurance agencies and brokers. Agencies and brokers are not
obligated to promote our insurance products, and they may also sell our
competitors' insurance products. As a result, our business depends in part on
the marketing and sales efforts of these agencies and brokers. We must offer
insurance products and services that meet the requirements of the clients and
customers of these agencies and brokers. As we diversify and expand our business
geographically, we may need to expand our network of agencies and brokers to
successfully market our products. If these agencies and brokers fail to market
our products successfully, our business may be adversely impacted. Also,
independent agents may decide to sell their businesses to banks, other insurance
agencies, or other businesses. Agents with a Selective appointment may decide to
buy other agents. Changes in ownership or control of agencies, or expansion of
agencies through acquisition could adversely affect an agency's ability to
control growth and profitability, thereby adversely affecting our business.
WE MAY BE ADVERSELY IMPACTED BY A CHANGE IN OUR RATING.
Insurance companies are subject to financial strength ratings
produced by external rating agencies. Higher ratings generally indicate
financial stability and a strong ability to pay claims. Ratings are assigned by
rating agencies to insurers based upon factors relevant to policyholders.
Ratings are not recommendations to buy, hold or sell our common stock.
The principal agencies that cover the property and casualty industry
are: A.M. Best Company (A.M. Best), Standard & Poor's Rating Services (S&P) and
Moody's Investor Service (Moody's). We believe our ability to write business is
most influenced by our rating from A.M Best. We are currently rated "A+"
(Superior) by A.M. Best, which is their second highest of fifteen ratings. A
rating below "A" from A.M. Best, could materially adversely effect the business
we write. We believe that ratings from S&P or Moody's, although important, have
less of an impact on our business. We are currently rated "A" by S&P and "A2" by
Moody's. An unfavorable change in either of these ratings could make it more
expensive for us to access capital markets and would increase the interest rate
charged to us under our current lines of credit. We cannot be sure that we will
maintain our current A.M. Best, Moody's, or Standard and Poor's ratings.
WE EMPLOY ANTI-TAKEOVER MEASURES.
We own, directly or indirectly, all of the shares of stock of our
insurance subsidiaries domiciled in the States of New Jersey, New York, North
Carolina and South Carolina. State insurance laws require prior approval by
state insurance departments of any acquisition or control of a domestic
insurance company or of any company which controls a domestic insurance company.
Any purchase of 10% or more of our outstanding common stock would require prior
action by all or some of the insurance commissioners of the above-referenced
states.
In addition, other factors may discourage, delay or prevent a change
of control of Selective. These include, among others, provisions in our
certificate of incorporation, as amended, relating to:
- supermajority voting and fair price requirements with respect
to our business combinations;
- staggered terms for our directors;
- supermajority voting requirements to amend the foregoing
provisions;
- our stockholder rights plan;
- guaranteed payments which must be made to our officers upon a
change of control;
- and the ability of our board of directors to issue "blank
check" preferred stock.
21
The New Jersey Shareholders Protection Act provides, among other
things, that a New Jersey corporation, such as Selective, may not engage in
business combinations specified in the statute with a shareholder having
indirect or direct beneficial ownership of 10% or more of the voting power of
our outstanding stock (an interested shareholder) for a period of five years
following the date on which the shareholder became an interested shareholder,
unless that business combination is approved by the board of directors of the
corporation before the date the shareholder became an interested shareholder.
These provisions also could have the effect of depriving shareholders of an
opportunity to receive a premium over the prevailing market price if a hostile
takeover were attempted.
WE DEPEND ON KEY PERSONNEL.
The success of our business is dependent, to a large extent, on our
ability to attract and retain key employees, in particular our senior officers,
key management, sales, information systems, underwriting, claims, managed care,
PEO, and corporate personnel. Competition to attract and retain key personnel is
intense. While we have employment agreements with a number of key managers, in
general, we do not have employment contracts or non-compete arrangements with
our employees.
WE FACE RISKS FROM TECHNOLOGY-RELATED FAILURES.
Increasingly, our businesses are dependent on computer and
Internet-enabled technology. Our inability to anticipate or manage problems with
technology associated with scalability, security, functionality or reliability,
could adversely impact our businesses.
WE FACE RISKS IN THE PROFESSIONAL EMPLOYMENT ORGANIZATION BUSINESS.
Regulatory
The operations of Selective HR Solutions are affected by numerous
Federal and state laws and regulations relating to employment matters, benefit
plans and taxes. In performing services for its clients, Selective HR Solutions
assumes some obligations of an employer under these laws and regulations. If
these Federal or state laws are ultimately applied in a manner unfavorable to
Selective HR Solutions, it could have a material adverse effect on our results
of operations and financial condition.
Liability for Worksite Employee Payroll
In providing its services, Selective HR Solutions assumes the
obligations to pay the salaries, wages and related benefit costs and payroll
taxes of its clients' worksite employees. Clients are required to reimburse us
for those costs. If clients failed to reimburse us, and if these liabilities
were to be significant, it could have a material adverse effect on our results
of operations or financial condition.
Liabilities for Client and Employee Actions
Selective HR Solutions establishes, by contract, division of
responsibility with the client for various personnel management matters,
including compliance with and liability under various governmental regulations.
Because of this relationship, however, Selective HR Solutions may be subject to
liability for the clients' violations of laws and regulations. Although the
agreements with clients generally obligate them to indemnify Selective HR
Solutions for any liability attributable to the conduct of the clients,
Selective HR Solutions may not be able to collect on the contractual
indemnification claim. In addition, worksite employees may be deemed to be
agents of Selective HR Solutions subjecting Selective HR Solutions to liability
for the actions of those worksite employees which could have a material adverse
effect on our results of operations or financial condition.
CLASS ACTION LITIGATION COULD AFFECT OUR BUSINESS PRACTICES AND FINANCIAL
RESULTS.
The insurance industry has been the target of class action
litigation in the following areas:
- after-market crash parts;
- urban homeowner underwriting practices;
- health maintenance organization practices;
- and personal injury protection payments.
It is possible that future class action litigation could adversely affect our
insurance and diversified insurance services businesses.
22
UNIONIZATION OF MEDICAL PROVIDERS COULD IMPACT OUR OPERATIONS.
Our subsidiary, Consumer Health Network (CHN), builds medical
provider networks and leases networks to insurers, medical management companies,
third party administrators and other medical claim payors. The lessors receive
medical fee discounts from network providers in exchange for patient volume
commitments. If medical providers (e.g., physicians) decided to unionize, that
might impair CHN's ability to maintain and grow networks, negotiate fee discount
arrangements and lease networks to their customers. These events would have an
adverse impact not only on CHN, but also on Alta Services, our managed care
subsidiary, which leases CHN networks, and Selective as a whole because we rely
in part, on provider networks and discounts to manage our claim medical
expenses.
ITEM 2. PROPERTIES.
Information required under this item is incorporated herein by
reference to the sections entitled "Subsidiaries", "Regional Offices", "Service
Center Office", "Information Technology Office", "Subsidiary Offices" and
"Properties" on page 53 of the 2001 Annual Report to Shareholders. Our
facilities are substantially fully utilized and are adequate for the conduct of
our business.
ITEM 3. LEGAL PROCEEDINGS.
Information required under this item is incorporated herein by reference
to Note 17 to the Consolidated Financial Statements beginning on page 48 of the
2001 Annual Report to Shareholders.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
23
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 our
common stock is traded and the number of holders thereof is incorporated herein
by reference to the section entitled "Common Stock Information" on page 54 of
the 2001 Annual Report to Shareholders.
Information required under this item regarding the price range of our common
stock and frequency and amount of dividends is incorporated herein by reference
to the section entitled "Quarterly Financial Information" on page 51; and the
section entitled "Financial Condition, Liquidity and Capital Resources"
beginning on page 26 up through the third full paragraph on page 28 of the 2001
Annual Report to Shareholders.
ITEM 6. SELECTED FINANCIAL DATA.
Information required under this item is incorporated herein by reference
to pages 20 and 21, including related notes on page 21 of our 2001 Annual Report
to Shareholders.
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 "Financial Review" on pages 22 through 29 inclusive, of
the 2001 Annual Report to Shareholders.
On March 22, 2002, Standard & Poor's (S&P) lowered its financial strength
rating of us from "A+" stable outlook to "A" stable outlook. We believe that
S&P's rating will not materially impact our business. This change may make it
more expensive for us to access capital markets and will increase the interest
rate charged to us under our current credit lines. We currently have no
outstanding borrowings on these lines of credit, nor did we have any as of
December 31, 2001 or 2000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required under this item is incorporated herein by
reference to the section entitled "Quantitative and Qualitative Disclosures
About Market Risk" on page 29 of the 2001 Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements and supplementary data of the
Company are incorporated herein by reference to pages 31 through 50, inclusive,
of our 2001 Annual Report to Shareholders. An index to the consolidated
financial statements is contained in item 14 (a)(1) of this Annual Report on
Form 10-K, and the Quarterly financial Information is incorporated herein by
reference to page 51 of the 2001 Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
24
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 2001 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," "Nominees" "Continuing Directors" and "Executive Officers of the
Company" in the Proxy Statement, and (ii) "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," and "Compensation Committee Interlocks and Insider
Participation" in the Proxy Statement and (ii) "Executive Compensation and Other
Information" "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) "Stock Ownership of Directors and
Officers" 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.
25
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
(1) CONSOLIDATED FINANCIAL STATEMENTS:
The consolidated financial statements of the Company with Independent
Auditors' Report thereon listed below are incorporated herein by reference to
pages 30 through 50, inclusive, of the 2001 Annual Report to Shareholders.
2001
Annual
Report
Page
Independent Auditors Report ............................................ 30
Consolidated Balance Sheets at December 31, 2001 and 2000 .............. 31
Consolidated Statements of Income for the years ended
December 31, 2001, 2000 and 1999 ..................................... 32
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2001, 2000 and 1999 ......................... 33
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999 ..................................... 34
Notes to Consolidated Financial Statements ............................. 35-50
(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
Schedule I Summary of Investments - Other than Investments in
Related Parties at December 31, 2001....................... 29
Schedule II Condensed Financial Information of Registrant at December
31, 2001 and 2000, and for the years ended December 31,
2001, 2000 and 1999........................................30-32
Schedule III Supplementary Insurance Information for the year ended
Schedule III December 31, 2001, 2000 and 1999...........................33-35
Schedule IV Reinsurance for the year ended December 31, 2001, 2000
and 1999................................................... 36
Schedule V Allowance for Uncollectible Premiums and Other
Receivables for the year ended December 31, 2001, 2000
and 1999................................................... 37
Schedule VI Supplemental Information for the year ended December 31,
2001, 2000 and 1999........................................ 38
Independent Auditors' Report............................Exhibit 23
(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 fourth quarter of the
year ended December 31, 2001.
26
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/ Gregory E. Murphy March 22, 2002
- ------------------------------------------------------------
Gregory E. Murphy
Chairman of the Board, President and Chief Executive Officer
By: /s/ Dale A. Thatcher March 22, 2002
- ------------------------------------------------------------
Dale A. Thatcher,
Senior Vice President of Finance, Chief Financial Officer and Treasurer
================================================================================
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/ Gregory E. Murphy March 22, 2002
- ------------------------------------------------------------
Gregory E. Murphy
Chairman of the Board, President and Chief Executive Officer
By: /s/ Paul D. Bauer March 22, 2002
- ------------------------------------------------------------
Paul D. Bauer
Director
By: /s/ A. David Brown March 22, 2002
- ------------------------------------------------------------
David Brown
Director
By: /s/ William A. Dolan, II March 22, 2002
- ------------------------------------------------------------
William A. Dolan, II
Director
By: /s/ William C. Gray, D.V.M. March 22, 2002
- ------------------------------------------------------------
William C. Gray, D.V.M.
Director
27
By: /s/ C. Edward Herder March 22, 2002
- ------------------------------------------------------------
C. Edward Herder
Director
By: /s/ William M. Kearns,Jr. March 22, 2002
- ------------------------------------------------------------
William M. Kearns, Jr.
Director
By: /s/ Joan M. Lamm-Tennant, Ph.D. March 22, 2002
- ------------------------------------------------------------
Joan M. Lamm-Tennant, Ph.D.
Director
By: /s/ S. Griffin McClellan, III March 22, 2002
- ------------------------------------------------------------
S. Griffin McClellan, III
Director
By: /s/ William M. Rue March 22, 2002
- ------------------------------------------------------------
William M. Rue
Director
By: /s/ Thomas D. Sayles, Jr. March 22, 2002
- ------------------------------------------------------------
Thomas D. Sayles, Jr.
Director
By: /s/ J. Brian Thebault March 22, 2002
- ------------------------------------------------------------
J. Brian Thebault
Director
28
SCHEDULE I
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUMMARY OF INVESTMENTS-OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2001
================================================================================
Type of investment AMORTIZED COST FAIR CARRYING
(in thousands) OR COST VALUE AMOUNT
- --------------------------------------------------------------------------------------------------
DEBT SECURITIES:
Held-to-maturity:
U.S. government and government agencies $ 2,120 2,193 2,120
Obligations of states and political
subdivisions 164,029 170,772 164,029
Mortgage-backed securities 9,304 9,589 9,304
------------ ------------ ------------
Total debt securities, held-to-maturity 175,453 182,554 175,453
Available-for-sale:
U.S. government and government agencies 124,046 127,559 127,559
Obligations of states and political
subdivisions 489,241 505,623 505,623
Corporate securities 576,626 586,887 586,887
Asset-backed securities 6,827 6,534 6,534
Mortgage-backed securities 138,916 143,362 143,362
------------ ------------ ------------
Total debt securities, available-for-sale 1,335,656 1,369,965 1,369,965
EQUITY SECURITIES, AVAILABLE-FOR-SALE:
Common stocks:
Public utilities 2,573 9,219 9,219
Banks, trust and insurance companies 22,929 35,102 35,102
Industrial, miscellaneous and all other 91,684 189,382 189,382
------------ ------------ ------------
Total common stocks 117,186 233,703 233,703
Total equity securities, available-for-sale 117,186 233,703 233,703
Short-term investments 19,155 19,155 19,155
Other investments 15,033 15,033 15,033
------------ ------------ ------------
Total investments $ 1,656,975 1,820,410 1,813,309
============ ============ ============
29
SCHEDULE II
SELECTIVE INSURANCE GROUP, INC
(PARENT CORPORATION)
BALANCE SHEETS
================================================================================
December 31,
(in thousands, except share amounts) 2001 2000
- -----------------------------------------------------------------------------------------
ASSETS
Equity securities, available-for-sale - at fair value
(cost: $0 - 2001; $1,000 - 2000) $ -- 1,000
Short-term investments 15,534 26,458
Cash 218 1,574
Investment in subsidiaries 734,683 724,301
Current federal income tax 2,359 --
Deferred federal income tax 3,581 5,056
Other assets 13,573 14,239
============ ============
Total assets $ 769,948 772,628
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Convertible subordinated debentures $ 3,790 3,848
Notes payable 160,350 172,117
Current federal income tax -- 58
Other liabilities 14,648 18,808
------------ ------------
Total liabilities 178,788 194,831
------------ ------------
Stockholders' equity:
Preferred stock of $0 par value per share:
Authorized shares: 5,000,000; no shares issued or
outstanding
Common stock of $2 par value per share:
Authorized shares: 180,000,000
Issued: 39,588,746-2001; 38,783,742-2000 79,177 77,568
Additional paid-in capital 77,126 63,074
Retained earnings 536,188 525,669
Accumulated other comprehensive income 98,037 99,325
Treasury stock - at cost (shares: 14,056,403-2001;
13,577,266-2000;) (192,284) (181,552)
Deferred compensation expense and notes receivable
from stock sales (7,084) (6,287)
------------ ------------
Total stockholders' equity 591,160 577,797
------------ ------------
Total liabilities and stockholders' equity $ 769,948 772,628
============ ============
Information should be read in conjunction with the Notes to Consolidated
Financial Statements of Selective Insurance Group, Inc. and its subsidiaries in
Item 8 of the 2001 Report on Form 10-K.
30
SCHEDULE II (continued)
SELECTIVE INSURANCE GROUP, INC
(PARENT CORPORATION)
STATEMENTS OF INCOME
================================================================================
(in thousands) 2001 2000 1999
- -------------------------------------------------------------------------------------------------
REVENUES:
Dividends from subsidiaries $ 29,229 38,519 47,242
Net investment income earned 240 312 603
Realized gains (losses) (1,092) 227 (339)
Other income 540 848 93
------------ ------------ ------------
Total revenues 28,917 39,906 47,599
------------ ------------ ------------
EXPENSES:
Interest expense 15,287 13,745 9,460
Other expenses 4,416 5,602 3,765
------------ ------------ ------------
Total expenses 19,703 19,347 13,225
------------ ------------ ------------
Income before federal income tax and equity in
undistributed income of subsidiaries 9,214 20,559 34,374
------------ ------------ ------------
FEDERAL INCOME TAX EXPENSE (BENEFIT):
Current (5,989) (4,552) (4,158)
Deferred 576 (1,424) (1,253)
------------ ------------ ------------
Total federal income tax (benefit) (5,413) (5,976) (5,411)
------------ ------------ ------------
Income before equity in undistributed income of
subsidiaries, net of tax 14,627 26,535 39,785
Equity in undistributed income of subsidiaries, net
of tax 11,066 -- 13,932
------------ ------------ ------------
Net income $ 25,693 26,535 53,717
============ ============ ============
Information should be read in conjunction with the Notes to Consolidated
Financial Statements of Selective Insurance Group, Inc. and its subsidiaries in
Item 8 of the 2001 Report on Form 10-K.
31
SCHEDULE II (continued)
SELECTIVE INSURANCE GROUP, INC
(PARENT CORPORATION)
STATEMENTS OF CASH FLOWS
================================================================================
(in thousands) 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 25,693 26,535 53,717
------------ ------------ ------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in undistributed income of subsidiaries, net of tax (11,066) -- (13,932)
Dividend in excess of subsidiaries' income -- 15,366 --
(Increase) in net federal income tax (940) (1,646) (4,676)
Net realized (gains) losses 1,092 (227) 339
Other, net (942) 9,812 10,451
------------ ------------ ------------
Net adjustments (11,856) 23,305 (7,818)
------------ ------------ ------------
Net cash provided by operating activities 13,837 49,840 45,899
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchase of other investments (243) (1,000) --
Purchase of subsidiaries (97) (5,999) (30,152)
Sale of equity securities, available-for-sale 95 2,201 24,879
------------ ------------ ------------
Net cash used in investing activities (245) (4,798) (5,273)
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from notes payable -- 88,440 --
Principal payment on note payable (11,767) (7,143) (7,143)
Proceeds from short-term debt -- 40,200 111,840
Paydown of short-term debt -- (91,502) (88,825)
Dividends to stockholders (15,174) (15,343) (16,358)
Acquisition of treasury stock (10,732) (37,677) (45,885)
Increase from issuance of common stock 15,604 8,962 9,066
Increase in deferred compensation expense and notes receivable from
stock sale (3,803) (3,018) (3,366)
------------ ------------ ------------
Net cash used in financing activities (25,872) (17,081) (40,671)
------------ ------------ ------------
Net increase (decrease) in cash and short-term investments (12,280) 27,961 (45)
Cash and short-term investments at beginning of year 28,032 71 116
============ ============ ============
Cash and short-term investments at end of year $ 15,752 28,032 71
============ ============ ============
Information should be read in conjunction with the Notes to Consolidated
Financial Statements of Selective Insurance Group, Inc. and its subsidiaries in
Item 8 of the 2001 Report on Form 10-K.
32
SCHEDULE III
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
YEAR ENDED DECEMBER 31, 2001
================================================================================
Amortization
of
Deferred Reserve for Losses deferred
policy losses and Net and loss policy Other Net
acquisition loss Unearned premiums expenses acquisition operating premiums
(in thousands) costs expenses premiums earned incurred costs expenses written
- ---------------------------------------------------------------------------------------------------------------------------
Commercial $103,064 902,308 341,765 678,321 480,993 201,380 28,849 723,842
Personal 28,587 229,519 104,016 204,727 174,891 55,860 1,713 201,578
Reinsurance
recoverable on
unpaid loss and
loss expenses -- 184,486 -- -- -- -- -- --
Prepaid reinsurance
premiums -- -- 39,932 -- -- -- -- --
Interest and
general corporate
expenses -- -- -- -- -- -- 18,820 --
------------------------------------------------------------------------------------------------
Total $131,651 1,316,313 485,713 883,048 655,884 257,240 49,382 925,420
================================================================================================
NOTE: A meaningful allocation of net investment income of $96,767 and net
realized gain on investments of $6,816 is considered impracticable because
the Company does not maintain distinct investment portfolios for each
segment.
(1) Other operating expenses includes $868 of underwriting charges that are
included in other income or other expense on the consolidated income
statement in Item 8 of the 2001 Report on Form 10-K.
33
SCHEDULE III (continued)
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
YEAR ENDED DECEMBER 31, 2000
================================================================================
Amortization
of
Deferred Reserve for Losses deferred
policy losses and Net and loss policy Other Net
acquisition loss Unearned premiums expenses acquisition operating premiums
(in thousands) costs expenses premiums earned incurred costs expenses written
- ---------------------------------------------------------------------------------------------------------------------------
Commercial $91,175 861,643 296,240 611,865 443,933 181,285 31,833 638,991
Personal 27,238 250,144 107,169 209,400 170,133 54,158 5,045 204,613
Reinsurance
recoverable on
unpaid loss and
loss expenses -- 160,869 -- -- -- -- -- --
Prepaid reinsurance
premiums -- -- 33,097 -- -- -- -- --
Interest and
general corporate
expenses -- -- -- -- -- -- 19,247 --
------------------------------------------------------------------------------------------------
Total $118,413 1,272,656 436,506 821,265 614,066 235,443 56,125 843,604
================================================================================================
NOTE: A meaningful allocation of net investment income of $99,495 and net
realized gain on investments of $4,191 is considered impracticable because
the Company does not maintain distinct investment portfolios for each
segment.
(1) Other operating expenses includes $3,111 of underwriting charges that
are included in other income or other expense on the consolidated income
statement in Item 8 of the 2000 Report on Form 10-K.
34
SCHEDULE III (continued)
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
YEAR ENDED DECEMBER 31, 1999
================================================================================
Amortization
of Other
Losses deferred operating
Net and loss policy expenses Net
premiums expenses acquisition (income) premiums
(in thousands) earned incurred costs (1) written
- ---------------------------------------------------------------------------------------
Commercial $ 570,650 416,559 171,771 29,945 587,521
Personal 228,415 175,656 60,154 (873) 224,156
Reinsurance
recoverable on
unpaid loss and
loss expenses -- -- -- -- --
Prepaid reinsurance
premiums -- -- -- -- --
Interest and
general corporate
expenses -- -- -- 13,130 --
----------- ------- ------- ------ -------
Total $ 799,065 592,215 231,925 42,202 811,677
=========== ======= ======= ====== =======
NOTE: A meaningful allocation of net investment income of $96,531 and net
realized loss on investments of $29,377 is considered impracticable
because the Company does not maintain distinct investment portfolios for
each segment. Certain reclassifications have been made to conform with
2000 presentation.
(1) Other operating expenses includes $429 of underwriting charges that are
included in other income or other expense on the consolidated income
statement in Item 8 of the 1999 Report on Form 10-K.
35
SCHEDULE IV
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
REINSURANCE
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
% Of
Assumed Ceded Amount
Direct From Other to Other Net Assumed
(in thousands) Amount Companies Companies Amount To Net
- -------------------------------------------------------------------------------------------------
2001
Premiums earned:
Accident and health insurance $ 198 -- -- 198 --
Property and liability insurance 964,564 20,555 102,269 882,850 2.3%
---------- ---------- ---------- ---------- ----------
Total premiums earned $ 964,762 20,555 102,269 883,048 2.3%
========== ========== ========== ========== ==========
2000
Premiums earned:
Accident and health insurance $ 365 -- -- 365 --
Property and liability insurance 900,824 14,529 94,453 820,900 1.8%
---------- ---------- ---------- ---------- ----------
Total premiums earned $ 901,189 14,529 94,453 821,265 1.8%
========== ========== ========== ========== ==========
1999
Premiums earned:
Accident and health insurance $ 258 -- -- 258 --
Property and liability insurance 856,041 20,943 78,177 798,807 2.6%
---------- ---------- ---------- ---------- ----------
Total premiums earned $ 856,299 20,943 78,177 799,065 2.6%
========== ========== ========== ========== ==========
36
SCHEDULE V
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
ALLOWANCE FOR UNCOLLECTIBLE PREMIUMS AND OTHER RECEIVABLES
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
================================================================================
(in thousands) 2001 2000 1999
- --------------------------------------------------------------------------------
Balance, January 1 $ 6,071 3,649 2,740
Additions 3,873 6,713 2,476
Deletions (5,645) (4,291) (1,567)
------- ------ ------
Balance, December 31 $ 4,299 6,071 3,649
======= ====== ======
37
SCHEDULE VI
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTAL INFORMATION
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
================================================================================
Losses and loss
expenses
incurred related to
--------------------
Affiliation with Registrant (1) (2) Paid losses
Current Prior and loss
(in thousands) year years expenses
- --------------------------------------------------------------------------------
Consolidated Property/Casualty
Subsidiaries:
Year ended December 31, 2001 $642,173 13,711 635,844
-------- ------ -------
Year ended December 31, 2000 $615,095 (1,029) 584,043
-------- ------ -------
Year ended December 31, 1999 $600,793 (8,578) 563,272
-------- ------ -------
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. Certain prior year amounts have been restated to conform to
2001 presentation.
38
EXHIBIT INDEX
* Exhibits included within this 10K filing
Exhibit
Number
- -------
3.1 Restated Certificate of Incorporation of Selective Insurance Group,
Inc., dated August 4, 1977, as amended, (incorporated herein by
reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997, File No. 0-8641).
*3.2 The Company's By-Laws, adopted on August 26, 1977, as amended, filed
herewith.
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 Amended and Restated Rights Agreement, dated February 2, 1999,
between Selective Insurance Group, Inc. and First Chicago Trust,
(incorporated herein by reference to the Company's Current Report on
Form 8-K filed February 2, 1999, File No. 0-8641.)
10.1 The Selective Insurance Retirement Savings Plan as amended through
August 15, 1996 (incorporated herein by reference to Exhibit 4 to
the Company's Registration Statement on Form S-8 No. 333-10477).
10.1a 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).
10.2 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).
10.3 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).
10.4 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. 333-37501).
10.4a The Selective Insurance Group, Inc. Stock Option Plan II, as amended
through July 28, 1998, (incorporated herein by reference to Exhibit
10.13a to the Company's Annual Report on Form 10-K for the year
ended December 31, 1993, File No. 0-8641).
10.4b The Selective Insurance Group, Inc. Stock Option Plan II, as amended
through January 31, 2000, (incorporated herein by reference to
Exhibit 10.13b to the Company's Annual Report on Form 10-K for the
year ended December 31, 1999, File No. 0-8641).
10.5 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).
10.6 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).
39
10.6a Amendment, dated May 2, 1997, to the 1987 Employee Stock Purchase
Savings Plan in Exhibit 10.6 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).
10.7 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).
10.8 The Selective Insurance Group, Inc. Stock Purchase Plan for
Independent Insurance Agents, as amended (incorporated herein by
reference to the Company's Post Effective Amendment No. 2 on Form
S-3 No. 033-30833).
10.9 The Selective Insurance Group, Inc. Stock Option Plan for Directors,
as amended (incorporated herein by reference to Exhibit 4.4 of the
Company's Registration Statement on Form S-8 No. 333-10477).
10.10 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).
10.10a The Selective Insurance Group, Inc. Stock Compensation Plan for
Nonemployee Directors, as amended (incorporated herein by reference
to Exhibit A to the Company's Definitive Proxy Statement for its
2000 Annual Meeting of Stockholders filed with the Securities and
Exchange Commission on March 31, 2000).
10.11 Employment, Termination and Severance Agreements.
10.11a 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).
10.11a1 Amendment Number 2, dated September 1, 1996, to the Employment
Agreement in Exhibit 10.11a above (incorporated herein by reference
to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996, File No. 0-8641).
10.11a2 Amendment Number 3, dated September 1, 1999 to the employment
agreement with Thornton R. Land in Exhibit 10.11a above
(incorporated herein by reference to the company's Annual Report on
Form 10K for the year ended December 31, 1999, file No. 0-8641).
10.11a3 Amendment Number 4, dated August 1, 2001 to the employment agreement
with Thornton R. Land in Exhibit 10.11a above (incorporated herein
by to Exhibit 10.16b to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2001, file No. 0-8641).
10.11b Form of Termination Agreement, between the Company and Mr. 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).
10.11b1 Amendment Number 1, dated December 16, 1998, to the Form of
Termination Agreement between Mr. Land and the Company in Exhibit
10.11b above (incorporated herein by reference to Exhibit 10.16s to
the Company's Annual Report on Form 10-K for the year ended December
31, 1998, File No. 0-8641).
10.11c 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).
10.11c1 Amendment Number 1, dated May 1, 1998, to the Employment Agreement
with Gregory E. Murphy in Exhibit 10.11c above (incorporated herein
by reference to Exhibit 10.4 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998, File No. 0-8641).
10.11c2 Amendment Number 2, dated May 5, 2000, to the Employment Agreement
with Gregory E. Murphy in Exhibit 10.11c above (incorporated herein
by reference to Exhibit 10.16a to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000, File No. 0-8641).
40
10.11c3 Amendment Number 3, dated August 1, 2001, to the Employment
Agreement with Gregory E. Murphy in Exhibit 10.11c above
(incorporated herein by reference to Exhibit 10.16a to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2001, File No. 0-8641).
10.11d 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).
10.11d1 Amendment Number 1, dated December 16, 1998, to the Termination
Agreement between Selective Insurance Company of America and Gregory
E. Murphy in Exhibit 10.11d above (incorporated herein by reference
to Exhibit 10.16t to the Company's Annual Report on Form 10-K for
the year ended December 31, 1998, File No. 0-8641).
10.11e 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).
10.11e1 Amendment Number 1, dated October 31, 1998, to the Employment
Agreement with Jamie Ochiltree, III in Exhibit 10.11e above
(incorporated herein by reference to Exhibit 10.16r to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998,
File No. 0-8641).
10.11e2 Amendment Number 2, dated May 5, 2000, to the Employment Agreement
with Jamie Ochiltree, III in Exhibit 10.11e above incorporated
herein by reference to Exhibit 10.16b to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000, File No.
0-8641).
10.11e3 Amendment Number 3, dated October 31,2001, to the Employment
Agreement with Jamie Ochiltree, III in Exhibit 10.11e above
incorporated herein by reference to Exhibit 10.16c to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2001, File No. 0-8641).
10.11f 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).
10.11f1 Amendment Number 1, dated December 16, 1998, to the Termination
Agreement between Selective Insurance Company of America and Jamie
Ochiltree in Exhibit 10.11f above. (incorporated herein by reference
to Exhibit 10.16v to the Company's Annual Report on Form 10-K for
the year ended December 31, 1998, File No. 0-8641).
10.11g 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).
10.11g1 Amendment Number 1, dated May 5, 2000, to the Employment Agreement
with James W. Coleman, Jr. in Exhibit 10.11g above (incorporated
herein by reference to Exhibit 10.16c to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000, File No.
0-8641).
10.11h 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).
10.11h1 Amendment Number 1, dated December 16, 1998, to the Termination
Agreement between Selective Insurance Company of America and James
W. Coleman, Jr. in Exhibit 10.11h above (incorporated herein by
reference to Exhibit 10.16w to the Company's Annual Report on Form
10-K for the year ended December 31, 1998, File No. 0-8641).
10.11i Termination Agreement, dated September 27, 1999, between Selective
Insurance Company of America and Ronald J. Zaleski, (incorporated
herein by reference to Exhibit 10.16z to the Company's Annual Report
on Form 10-K for the year ended December 31, 1999, File No. 0-8641).
10.11j Termination Agreement, dated March 1, 2000, between Selective
Insurance Company of America and Eduard Pulkstenis (incorporated
herein by reference to Exhibit 10.16ab to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2000, File No.
0-8641).
41
10.11k Employment Agreement with Dale A. Thatcher, dated May 5, 2000
(incorporated herein by reference to Exhibit 10.16f to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2000,
File No. 0-8641).
10.11l Termination Agreement with Dale A. Thatcher, dated May 5, 2000
(incorporated herein by reference to Exhibit 10.16g to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2000,
File No. 0-8641).
10.11m Employment Agreement with Richard F. Connell, dated August 8, 2000
(incorporated herein by reference to Exhibit 10.16a to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2000, File No. 0-8641).
10.11n Termination Agreement with Richard F. Connell, dated August 8, 2000
(incorporated herein by reference to Exhibit 10.16b to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2000, File No. 0-8641).
10.11o Termination agreement with Sharon R. Cooper, dated May 3, 2001
(incorporated herein by reference to Exhibit 10.16a to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2001,
File No. 0-8641).
10.12 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).
10.13 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).
10.14 Promissory Note of $25,000,000 Revolving Line of Credit with State
Street Bank and Trust Company (incorporated herein by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997, File No. 0-8641).
10.14a Amendment, dated June 30, 1998, to the Promissory Note of
$25,000,000 Revolving Line of Credit with State Street Bank and
Trust Company in Exhibit 10.14 above, (incorporated herein by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998, File No. 0-8641).
10.14a1 Amendment, dated November 6, 1998, to the Promissory Note of
$25,000,000 Revolving Line of Credit with State Street Bank and
Trust Company in Exhibit 10.14 above, (incorporated herein by
reference to Exhibit 10.24 to the Company's Annual Report on Form
10-K for the year ended December 31, 1998, File No. 0-8641)..
10.14a2 Amendment, dated June 30, 2000, to the Promissory Note of
$40,000,000 Revolving Line of Credit with State Street Bank and
Trust Company in Exhibit 10.14 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, 2000, File No. 0-8641).
10.14a3 Amendment, dated June 29,2001, to the Promissory Note of $25,000,000
Revolving Line of Credit with State Street Bank and Trust Company in
Exhibit 10.14 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, 2001, File No. 0-8641).
10.15 Commercial Loan Note of $10,000,000 Line of Credit with First Union
National Bank as of October 22, 1999, (incorporated herein by
reference to Exhibit 10.28 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2000, File No. 0-8641).
*11 Computation of earnings per share, filed herewith.
*13 Portions (pages 19 - 54) of the Company's 2001 Annual Report to
Shareholders incorporated by reference into this Form 10-K, filed
herewith.
*21 Subsidiaries of Selective Insurance Group, Inc., filed herewith.
*23 Consent and Opinion of Independent Auditors, filed herewith.
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