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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended...September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 (I.R.S. Employer Identification No.)
incorporation or organization)
40 Wantage Avenue
Branchville, New Jersey 07890
_____________________________________ _____________________________________
(Address of principal executive (Zip Code)
offices)
(973) 948-3000
_____________________________________
(Registrant's telephone number,
including area code)
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 (or for such shorter period that the
registrant was required to file such report), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Common stock, par value $2 per share, outstanding as of October 31, 2002:
26,427,028
1
SELECTIVE INSURANCE GROUP, INC
Consolidated Balance Sheets
- -----------------------------------------------------------------------------------------------------------------
Unaudited
September 30, December 31,
(in thousands, except par value per share) 2002 2001
- -----------------------------------------------------------------------------------------------------------------
ASSETS
INVESTMENTS:
Debt securities, held-to-maturity - at amortized cost
(fair value: $134,602-2002; $182,554-2001) $ 127,685 175,453
Debt securities, available-for-sale - at fair value
(amortized cost: $1,597,842-2002; $1,335,656-2001) 1,710,030 1,369,965
Equity securities, available-for-sale - at fair value
(cost of: $116,243-2002; $117,186-2001) 182,170 233,703
Short-term investments - (at cost which approximates fair value) 85,008 19,155
Other investments 21,336 15,033
---------- ----------
Total investments 2,126,229 1,813,309
Cash 6,638 7,295
Interest and dividends due or accrued 20,876 23,073
Premiums receivables 385,806 338,037
Other trade receivables 26,033 29,491
Reinsurance recoverable on paid losses and loss expenses 7,628 14,405
Reinsurance recoverable on unpaid losses and loss expenses 161,337 166,511
Prepaid reinsurance premiums 49,070 39,932
Current federal income tax 4,119 5,945
Deferred federal income tax 2,969 9,416
Real estate, furniture, equipment, and software development 50,739 55,363
Deferred policy acquisition costs 154,050 131,651
Goodwill 42,808 46,495
Other assets 25,559 20,717
---------- ----------
Total assets $3,063,861 2,701,640
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Reserve for losses $1,211,720 1,133,673
Reserve for loss expenses 166,553 164,665
Unearned premiums 581,238 485,713
Senior convertible notes 100,732 -
Notes payable 152,643 152,643
Other liabilities 211,649 173,786
---------- ----------
Total liabilities 2,424,535 2,110,480
---------- ----------
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: 40,583,975-2002; 39,588,746-2001 81,168 79,177
Additional paid-in capital 91,030 77,126
Retained earnings 554,196 536,188
Accumulated other comprehensive income 115,775 98,037
Treasury stock - at cost (shares: 14,161,434-2002; 14,056,403-2001) (194,720) (192,284)
Deferred compensation expense and notes receivable from stock sales (8,123) (7,084)
---------- ----------
Total stockholders' equity 639,326 591,160
---------- ----------
Total liabilities and stockholders' equity $3,063,861 2,701,640
========== ==========
See accompanying notes to unaudited interim consolidated financial statements.
2
SELECTIVE INSURANCE GROUP, INC.
Consolidated Statements of Income
- -----------------------------------------------------------------------------------------------------------
Unaudited Unaudited
Quarter ended Nine Months ended
September 30, September 30,
(in thousands, except per share amounts) 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------
Revenues:
Net premiums written $267,439 235,956 $817,171 711,569
Net increase in unearned premiums and prepaid
reinsurance premiums (15,448) (13,709) (86,387) (60,039)
-------- -------- -------- --------
Net premiums earned 251,991 222,247 730,784 651,530
Net investment income earned 24,493 23,655 74,097 71,383
Net realized gains 1,521 2,829 1,219 5,233
Diversified insurance services revenue 21,321 18,287 60,873 52,493
Other income 1,134 600 2,874 2,062
-------- -------- -------- --------
Total revenues 300,460 267,618 869,847 782,701
-------- -------- -------- --------
Expenses:
Losses incurred 157,342 147,608 457,136 421,002
Loss expenses incurred 25,632 25,159 75,815 67,338
Policy acquisition costs 79,071 66,534 224,499 198,308
Dividends to policyholders 1,358 2,292 4,685 6,092
Interest expense 3,452 3,645 10,457 10,938
Diversified insurance services expenses 19,416 21,425 55,975 52,777
Other expenses 350 1,663 5,684 7,475
-------- -------- -------- --------
Total expenses 286,621 268,326 834,251 763,930
-------- -------- -------- --------
Income (loss) from continuing operations,
before federal income tax 13,839 (708) 35,596 18,771
-------- -------- -------- --------
Federal income tax expense(benefit) :
Current 3,904 (4,496) 9,067 (2669)
Deferred (1,177) 1,513 (3,250) 1,925
-------- -------- -------- --------
Total federal income tax (benefit) 2,727 (2,983) 5,817 (744)
-------- -------- -------- --------
Loss from discontinued operations, net of tax - (209) (708) (258)
Gain on disposition of discontinued operations, - - 586 -
net of tax
-------- -------- -------- --------
Total discontinued operations, net of tax - (209) (122) (258)
-------- -------- -------- --------
Net income $ 11,112 2,066 $ 29,657 19,257
======== ======== ======== ========
Earnings per share:
Basic net income from continuing operations $ 0.43 0.09 $ 1.18 0.79
Basic net (loss) from discontinued operations - (0.01) - (0.01)
-------- -------- -------- --------
Basic net income 0.43 0.08 1.18 0.78
Diluted net income from continuing operations $ 0.41 0.09 $ 1.11 0.74
Diluted net (loss) from discontinued operations - (0.01) - (0.01)
-------- -------- -------- --------
Diluted net income 0.41 0.08 1.11 0.73
-
Dividends to stockholders $ 0.15 0.15 $ 0.45 0.45
See accompanying notes to unaudited interim consolidated financial statements.
3
SELECTIVE INSURANCE GROUP, INC.
Consolidated Statements of Stockholders' Equity
- ----------------------------------------------------------------------------------------------------------------------
Unaudited
Nine Months ended
September 30,
(in thousands, except per share amounts) 2002 2001
- ----------------------------------------------------------------------------------------------------------------------
Common stock:
Beginning of year $ 79,177 77,568
Dividend reinvestment plan
(shares: 35,294-2002; 24,806-2001) 71 71
Convertible subordinated debentures
(shares: 347,312-2002; 1,835-2001) 695 9
Stock purchase and compensation plans
(shares: 612,623-2002; 512,749-2001) 1,225 1,158
--------- --------
End of period 81,168 78,806
--------- --------
Additional paid-in capital:
Beginning of year 77,126 63,074
Dividend reinvestment plan 790 786
Convertible subordinated debentures 1,764 24
Stock purchase and compensation plans 11,350 10,565
--------- --------
End of period 91,030 74,449
--------- --------
Retained earnings:
Beginning of year 536,188 525,669
Net income 29,657 29,657 19,257 19,257
Cash dividends to stockholders ($0.45 per share) (11,649) (11,381)
--------- --------
End of period 554,196 533,545
--------- --------
Accumulated other comprehensive income:
Beginning of year 98,037 99,325
Other comprehensive income(loss), increase (decrease) in net
unrealized gains on available-for-sale securities,
net of deferred income tax effect 17,738 17,738 (1,432) (1,432)
--------- ------ -------- ------
End of period 115,775 97,893
--------- --------
Comprehensive income 47,395 17,825
====== ======
Treasury stock:
Beginning of year (192,284) (181,552)
Acquisition of treasury stock
(shares: 105,031-2002; 346,125-2001) (2,436) (7,998)
--------- --------
End of period (194,720) (189,550)
--------- --------
Deferred compensation expense and notes receivable from stock sales:
Beginning of year (7,084) (6,287)
Deferred compensation expense (3,784) (4,486)
Amortization of deferred compensation expense and
amounts received on notes 2,745 2,411
--------- --------
End of period (8,123) (8,362)
--------- --------
Total stockholders' equity $ 639,326 586,781
========= ========
See accompanying notes to unaudited interim consolidated financial statements.
4
SELECTIVE INSURANCE GROUP, INC.
Consolidated Statements of Cash Flows
- ----------------------------------------------------------------------------------------------------------------------------
Unaudited
Nine Months ended
September,
(in thousands) 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 29,657 19,257
---------- -------
Adjustments to reconcile net income to net cash provided by operating activities:
Increase in reserves for losses and loss expenses, net of
reinsurance recoverable on unpaid losses and loss expenses 75,812 13,406
Increase in unearned premiums, net of prepaid reinsurance premiums 86,387 60,039
Federal income tax (1,419) (1,699)
Depreciation and amortization 9,357 11,378
Increase in premiums receivables (47,769) (54,514)
Increase in other trade receivables (394) (4,564)
Increase in deferred policy acquisition costs (22,399) (17,694)
Decrease in interest and dividends due or accrued 2,197 1,843
Decrease (increase) in reinsurance recoverable on paid losses and loss expenses 6,777 (1,689)
Net realized (gains) on investments (1,219) (5,233)
Net realized (gain) on sale of subsidiary (901) -
Other-net (5,733) 15,365
---------- -------
Net adjustments 100,696 16,638
---------- -------
Net cash provided by operating activities 130,353 35,895
---------- -------
INVESTING ACTIVITIES
Purchase of debt securities, available-for-sale (582,691) (205,616)
Purchase of equity securities, available-for-sale (7,769) (59,771)
Purchase of other investments (6,312) (830)
Purchase and adjustments of subsidiaries acquired (net of cash equivalents acquired of $1,127) (3,139) (97)
Sale of subsidiary (net of cash of $385) 15,421 -
Sale of debt securities, available-for-sale 181,085 24,007
Redemption and maturities of debt securities, held-to-maturity 47,940 41,188
Redemption and maturities of debt securities, available-for-sale 133,632 75,545
Sale of equity securities, available-for-sale 15,940 54,968
Proceeds from other investments 9 8
Increase in net payable for security transactions 55,672 1,630
Net additions to real estate, furniture, equipment and software development (8,833) (4,911)
---------- -------
Net cash (used in) investing activities (159,045) (73,879)
---------- -------
FINANCING ACTIVITIES
Dividends to stockholders (11,649) (11,381)
Acquisition of treasury stock (2,436) (7,998)
Net proceeds from issuance of senior convertible notes 98,214 -
Net proceeds from dividend reinvestment plan 861 857
Net proceeds from stock purchase and compensation plans 12,575 11,723
Increase in deferred compensation expense and amounts received on notes
receivable from stock sales
(3,677) (4,448)
---------- -------
Net cash provided by (used in) financing activities 93,888 (11,247)
---------- -------
Net increase (decrease) in short-term investments and cash 65,196 (49,231)
Short-term investments and cash at beginning of year 26,450 104,667
---------- -------
Short-term investments and cash at end of period $ 91,646 55,436
========== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid during the period for:
Interest $ 9,364 9,654
Federal income tax 6,600 -
Supplemental schedule of non-cash financing activity:
Conversion of convertible subordinated debentures 2,459 33
See accompanying notes to unaudited interim consolidated financial statements.
5
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The interim consolidated financial statements are unaudited, but
reflect all adjustments which, in the opinion of management, are
necessary to provide a fair statement of the results of the Selective
Insurance Group, Inc. (Selective) and its consolidated subsidiaries
(Company) for the interim periods presented. All such adjustments are
of a normal recurring nature. The results of operations for any interim
period are not necessarily indicative of results for a full year. These
interim consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto contained
in our Annual Report on Form 10-K for the year ended December 31, 2001.
2. RECLASSIFICATIONS
Certain amounts in the Company's prior year interim consolidated
financial statements have been reclassified to conform to the 2002
presentation. Such reclassification had no effect on the Company's net
income or stockholders' equity.
3. ADOPTION OF ACCOUNTING PRONOUNCEMENTS
As of January 1, 2002 we adopted Financial Accounting Standards Board
(FASB) Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" (FAS 142). FAS 142 addresses the initial
recognition and measurement of goodwill and other intangible assets.
FAS 142 changes the accounting for goodwill and intangible assets that
have indefinite useful lives from an amortization approach to an
impairment-only approach that requires those assets to be tested at
least annually for impairment. The statement is applied to all goodwill
and other intangible assets recognized in an entity's financial
statements at that date. Impairment losses that arise due to the
initial application of FAS 142 (resulting from an impairment test) are
to be reported as a change in accounting principle. No such impairments
were recorded during the three months ended September 30, 2002 (Third
Quarter 2002) or the nine months ended September 30, 2002 (Nine Months
2002). Goodwill amortization expense is included in other expenses on
the Consolidated Statements of Income and mainly in the Diversified
Insurance Services segment. The following table shows net income and
earnings per share as if FAS 142 had been adopted during those periods
presented:
UNAUDITED, UNAUDITED,
QUARTER ENDED NINE MONTHS
SEPTEMBER 30, ENDED SEPTEMBER 30,
($ in thousands) 2002 2001 2002 2001
-------------------------------------------------------------------------------------------------------
Reported net income $ 11,112 2,066 $ 29,657 19,257
Add back: Goodwill amortization, net of tax - 564 - 1,683
--------- ------- --------- --------
Adjusted net income $ 11,112 2,630 $ 29,657 20,940
========= ======= ========= ========
Adjusted basic earnings per share $ 0.43 0.11 $ 1.18 0.85
Adjusted diluted earnings per share $ 0.41 0.10 $ 1.11 0.79
4. PENDING ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued Statement of Financial Accounting
Standards No.143, "Accounting for Asset Retirement Obligations" (FAS
143). FAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement
requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. The provisions of this Statement are effective for
financial statements issued for fiscal years beginning after June 15,
2002, with early application encouraged. We do not anticipate the
adoption of this statement to have a material effect on the Company's
results of operations or financial condition.
In July 2002, the FASB issued Statement of Financial Accounting
Standards No 146, "Obligations Associated with Disposal Activities"
(FAS 146). FAS 146 addresses financial accounting and reporting for
costs associated with a disposal activity. This statement requires a
liability for a disposal obligation be recognized and measured at its
fair value when it is incurred and that the guidance of FASB Statement
No. 5, "Accounting for Contingencies", and FASB Interpretation No. 14,
"Reasonable Estimation of the Amount of a Loss", do not apply to the
recognition and measurement of the liability. The provisions of this
Statement are effective for disposal activities initiated after
December 31, 2002, with early
6
application encouraged. We do not anticipate the adoption of this
statement to have a material effect on the Company's results of
operations or financial condition.
5. DISCONTINUED OPERATIONS
In December 2001, the Company's management adopted a plan to divest
itself of its 100% ownership interest in PDA Software Services, Inc.
(PDA). During May 2002, the Company sold all of the issued and
outstanding shares of capital stock and certain software applications
of PDA for proceeds of $16.5 million at a net gain of $0.6 million.
This gain is included in the (loss) from discontinued operations, on
the Consolidated Statements of Income. The tax (benefit) included in
the (loss) from discontinued operations was $(0.4) million for Nine
Months 2002. The comparable amounts in 2001 are $(0.1) million for the
Third Quarter 2001 and $(0.1) million for Nine Months 2002. The amount
of tax expense for the Nine Months 2002 for the gain on disposition of
discontinued operations is $0.4 million. We have reclassified our
September 30, 2001 interim consolidated financial statements to present
the operating results of PDA as a discontinued operation.
Operating results from discontinued operations are as follows:
UNAUDITED, UNAUDITED,
QUARTER ENDED NINE MONTHS
SEPTEMBER 30, ENDED SEPTEMBER 30,
(in thousands) 2002 2001 2002 2001
----------------------------------------------------------------------------------------------------------
Net revenue $ - 4,338 $ 8,186 13,857
Pre-tax loss - (293) (1,085) (325)
Net loss - (209) (708) (258)
Gain on disposition, net of tax $ - - $ 586 -
6. SEGMENT INFORMATION
The Company is primarily engaged in writing property and casualty
insurance. The Company has classified its business into three segments:
Insurance Operations (commercial lines underwriting and personal lines
underwriting), Investments, and Diversified Insurance Services (managed
care, flood insurance and human resource administration outsourcing).
Insurance Operations is evaluated based on its underwriting results
prepared in accordance with accounting principles generally accepted in
the United States of America (GAAP); Investments are evaluated based on
after-tax investment returns; and the Diversified Insurance Services
are evaluated based on several measures including, but not limited to,
results of operations in accordance with GAAP. Our Diversified
Insurance Services segment consists of managed care, flood insurance
and human resource administration outsourcing (HR outsourcing)
operations. The segment results are determined taking into account the
net revenues generated in each of the businesses, less the costs of
operations. Prior year software development and program administration
amounts have been reclassified as discontinued operations. See Note 5
of this report on Form 10-Q for further discussion of discontinued
operations.
Selective and its subsidiaries provide services to each other in the
normal course of business. These transactions totaled $6 million for
the Third Quarter 2002 and $26 million for Nine Months 2002, compared
to $4 million for Third Quarter 2001 and $11 million for Nine Months
2001. These transactions were eliminated in all consolidated financial
statements.
In computing the results of each segment, no adjustment is made for
interest expense, net general corporate expenses or federal income
taxes. The Company does not maintain separate investment portfolios
for the segments and, therefore, does not allocate assets to the
segments.
7
The following summaries present revenues (net investment income and net
realized gains or losses in the case of the investments segment) and
pre-tax income for the individual segments:
REVENUE FROM CONTINUING OPERATIONS BY SEGMENT
Unaudited, Unaudited,
Quarter ended Nine Months ended
September 30, September 30,
------------------------ -----------------------
(in thousands) 2002 2001 2002 2001
- ------------------------------------------------- ---------- ---------- ---------- ----------
INSURANCE OPERATIONS:
Commercial lines net premiums earned $ 201,819 171,306 $ 582,049 499,107
Personal lines net premiums earned 50,172 50,941 148,735 152,423
---------- ------- ---------- -------
Total insurance operations revenues 251,991 222,247 730,784 651,530
INVESTMENTS:
Net investment income 24,493 23,655 74,097 71,383
Net realized gain on investments 1,521 2,829 1,219 5,233
---------- ------- ---------- -------
Total investment revenues 26,014 26,484 75,316 76,616
DIVERSIFIED INSURANCE SERVICES:
Managed care 5,845 5,126 17,243 14,371
Flood insurance 5,268 4,376 14,036 10,888
Human resource administration outsourcing 9,753 8,372 28,229 26,048
Other 455 413 1,365 1,186
---------- ------- ---------- -------
Total Diversified Insurance Services revenues 21,321 18,287 60,873 52,493
Other income 1,134 600 2,874 2,062
========== ======= ========== =======
TOTAL REVENUES FROM CONTINUING OPERATIONS $ 300,460 267,618 $ 869,847 782,701
========== ======= ========== =======
INCOME OR (LOSS) FROM CONTINUING OPERATIONS BEFORE FEDERAL INCOME TAX BY SEGMENT
Unaudited, Unaudited,
Quarter ended Nine Months ended
September 30, September 30,
----------------------- ------------------------
(in thousands) 2002 2001 2002 2001
- -------------------------------------------------- ---------- --------- ---------- -----------
INSURANCE OPERATIONS:
Commercial lines underwriting $ (5,818) (6,881) $ (15,785) (23,928)
Personal lines underwriting (4,302) (12,667) (14,694) (19,363)
---------- ------- ---------- -------
Underwriting loss, before federal income tax (10,120) (19,548) (30,479) (43,291)
INVESTMENTS:
Net investment income 24,493 23,655 74,097 71,383
Net realized gain on investments 1,521 2,829 1,219 5,233
---------- ------- ---------- -------
Total investment income, before federal income tax 26,014 26,484 75,316 76,616
DIVERSIFIED INSURANCE SERVICES:
Managed care 549 1,023 2,464 3,044
Flood insurance 1,374 838 3,028 1,589
Human resource administration outsourcing (37) (5,053) (885) (5,178)
Other 19 55 291 261
---------- ------- ---------- -------
Total Diversified Insurance Services, income
(loss) before federal income tax 1,905 (3,137) 4,898 (284)
---------- ------- ---------- -------
TOTAL ALL SEGMENTS 17,799 3,799 49,735 33,041
Interest expense (3,452) (3,645) (10,457) (10,938)
General corporate expenses (508) (862) (3,682) (3,332)
---------- ------- ---------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS,
BEFORE FEDERAL INCOME TAX $ 13,839 (708) $ 35,596 18,771
========== ======= ========== =======
8
7. REINSURANCE
The following is a table of assumed and ceded amounts by income
statement caption:
Unaudited, Unaudited,
Quarter ended Nine Months ended
September 30, September 30,
- -------------------------------------------------------------------------------------------------------------
(in thousands) 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------
Premiums written:
Assumed $ 9,531 6,537 $ 18,946 14,052
Ceded (1) (40,165) (32,253) (103,546) (83,378)
Premiums earned:
Assumed 6,276 4,179 15,849 11,432
Ceded (1) (33,270) (24,797) (94,408) (75,268)
Losses incurred:
Assumed 5,508 3,772 14,425 12,616
Ceded (2) (6,897) (19,678) (28,622) (58,804)
Loss expenses incurred:
Assumed 424 204 1,043 598
Ceded (637) (124) (1,984) (1,213)
(1) Ceded premiums written and earned increased for Third Quarter
2002 and Nine Months 2002 when compared to the same periods in the
prior year due to: i) increased Flood business ceded 100% to the National
Flood Insurance Program; ii) overall direct premiums written increases;
and iii) increased reinsurance rates. Flood business is included in the
above amounts as follows:
Unaudited, Unaudited,
Quarter ended Nine Months ended
September 30, September 30,
-------------------------------------------------------------------------------------------------
(in thousands) 2002 2001 2002 2001
-------------------------------------------------------------------------------------------------
Ceded premiums written $ (15,314) (12,675) (40,736) (31,762)
Ceded premiums earned (12,590) (8,581) (35,061) (26,352)
Ceded losses incurred (2,422) (5,472) (4,203) (9,882)
Ceded loss expenses incurred (102) (172) (298) (421)
Additionally, increases in direct premiums written and reinsurance
rates produced an increase in ceded premiums written of
approximately $4.5 million for Third Quarter 2002 and 11.6 million
for Nine Months 2002, when compared to the same periods last year.
(2) Ceded losses decreased for Third Quarter 2002 and the Nine
Months 2002 compared to the corresponding periods in the prior year
due to: i) a decrease in casualty losses of $5 million for the
Third Quarter 2002 and $9 million for the Nine Months 2002, and a
decrease in property losses of $14 million for the Nine Months
2002; and ii) decrease in direct flood losses that we 100% ceded to
National Flood Insurance Program (see table above).
Our property and casualty excess of loss treaties were renewed
effective July 1, 2002. Under our casualty treaty, the Company retains
the first $2 million of any casualty loss as well as 25% of the next $3
million in losses in excess of the $2 million retention. In 2001, the
Company retained 15% of this layer. The casualty program provides
coverage of $48 million in excess of the Company's $2 million
retention. The casualty contract includes one annual aggregate limit by
coverage layer for a terrorism loss. Nuclear, biological and chemical
losses are excluded, but there is no exclusion for mold losses or cyber
risks. The underlying policies exclude nuclear losses, however,
biological and chemical losses are covered to some extent on most
policies.
The property excess of loss structure remained unchanged with coverage
of up to $13 million per risk in excess of the Company's retention of
$2 million. This treaty includes terrorism coverage for all risks that
are under $50 million in total insured value, with annual aggregate
limits of $9 million for the first layer, $15 million for the second
layer and $10 million for the third layer. Nuclear, biological and
chemical losses are excluded, but there is no exclusion for mold losses
or cyber risks. The underlying policies exclude nuclear losses,
however, biological and chemical losses are covered to some extent on
most policies.
The estimated reinsurance cost for the property and casualty excess of
loss treaties is projected to be approximately $8 million higher for
the contract year ending June 2003, compared to the contract year
ending June 2002.
9
8. COMPREHENSIVE INCOME
The Company's comprehensive income for Third Quarter 2002, Nine Months
2002, and the corresponding periods in the prior year are:
UNAUDITED, UNAUDITED,
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(in thousands) 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------
Net income $ 11,112 2,066 $ 29,657 19,257
Other comprehensive income(loss),
increase(decrease) in net unrealized gains
on available-for-sale securities, net of
deferred income tax effect 15,315 (604) 17,738 (1,432)
--------- ----- --------- ------
Comprehensive income $ 26,427 1,462 $ 47,395 17,825
========= ===== ========= ======
9. CONCENTRATION OF CREDIT RISK
Financial instruments that could potentially subject the Company to
concentration of credit risk include accounts receivable associated
with our professional employer organization (PEO), a component of our
HR outsourcing operation. A PEO contractually assumes substantial
employer rights, responsibilities and risks of its clients' employees,
who are considered co-employees. The PEO's accounts receivable, which
are included in other trade receivables on the consolidated balance
sheets, consist of service fees to be paid by its clients. Under the
accrual method, earned but unpaid wages at the end of each period
related to the Company's worksite employees are recognized as an
accrued payroll liability as well as an account receivable during the
period in which wages are earned by the worksite employee. Subsequent
to the end of each period, such wages are paid and the related PEO
service fees are billed. Accrued PEO payroll and related service fees
were $17.0 million as of September 30, 2002 and $16.3 million as of
September 30, 2001. Certain states limit a PEO's liability for earned
payroll to minimum wage. This would reduce the Company's potential
liability for accrued PEO payroll.
In the event that a client does not pay their related payroll and
service fees prior to the applicable payroll date, the Company has the
right to cancel the PEO contract or at its option, require letters of
credit or other collateral. The Company has generally not required such
collateral. As of September 30, 2002 the maximum exposure to any one
account for earned payroll is approximately $0.9 million. If the
financial condition of a client were to deteriorate rapidly, resulting
in nonpayment, the Company's accounts receivable balances could grow
and the Company could be required to provide for allowances, which
would decrease net income in the period that such determination was
made.
HR outsourcing is also subject to geographic concentration.
Approximately 40% of PEO client payroll is within the state of Florida.
Other east coast states, including Georgia, Maryland, New Jersey,
Virginia, North Carolina, South Carolina, Pennsylvania, New York, and
Delaware account for substantially all of our other business.
Consequently, changes to economic or regulatory conditions in these
states could adversely affect the HR outsourcing operations.
10. DEBT
On September 24, 2002 the Company issued $265,000,000 aggregate
principal amount of 1.6155% senior convertible notes (Convertible
Notes) due September 24, 2032 at a discount of 61.988% resulting in an
effective yield of 4.25%. The Company recorded gross proceeds of $100.7
million along with $2.5 million of deferred charges, which are
amortized over the life of the note, in connection with debt issuance
costs. $72 million of the net proceeds have been used to fund an
irrevocable trust to provide for certain payment obligations in respect
of the Company's outstanding debt obligations. The Company paid as a
capital contribution $30 million to the Company's insurance operating
subsidiaries. Interest on the Convertible Notes is payable
semi-annually at a rate of 1.6155% beginning March 24, 2003 until
September 24, 2009. After that date, cash interest will not be paid on
the Convertible Notes prior to maturity unless contingent cash interest
becomes payable. Contingent cash interest becomes payable if the
average market price of a Convertible Note for the applicable five
trading day period equals 120% or more of the sum of the Convertible
Note's issue price, accrued original issue discount and accrued cash
interest, if any, for a Convertible Note to the day immediately
preceding the relevant six-month period. The contingent cash interest
payable per Convertible Note in respect of any quarterly period within
any six-month period will equal the greater of (a) any regular cash
dividends per share paid by the Company on our common stock during that
quarterly period multiplied by the then applicable conversion rate or
(b) $0.15 multiplied by 12.9783. The Convertible Notes will be
convertible at the option of the holders, if the conditions for
conversion are satisfied, into shares of the Company's common stock at
a conversion price of $29.29. Holders may also surrender Convertible
Notes for conversion only during any period in which the credit rating
assigned to the Convertible Notes is Ba2 or lower by Moody's
10
Investors Service, Inc. (Moody's) or BB+ or lower by Standard and
Poor's Credit Market Services (S&P), the Convertible Notes are no
longer rated by either Moody's or S&P, or the credit rating assigned
to the Convertible Notes has been suspended or withdrawn by either
Moody's or S&P. The Convertible Notes will cease to be convertible
pursuant to this credit rating criteria during any period or periods
in which all of the credit ratings are increased above such levels.
The Convertible Notes are redeemable by the Company in whole or in
part, at any time on or after September 24, 2007, at a price equal to
the sum of the issue price, plus the call premium, if any, plus
accrued original issue discount and accrued and unpaid cash interest,
if any, or such Convertible Notes to the applicable redemption date.
The holders of the Convertible Notes may require the Company to
purchase all or a portion of their Convertible Notes on either
September 24, 2009, 2012, 2017, 2022, or 2027 at stated prices plus
accrued cash interest, if any, to the purchase date. The Company may
pay the purchase price in cash or shares of Company common stock or
in a combination of cash and shares of Company common stock. The
Convertible Notes were privately offered only to qualified
institutional buyers under Rule 144A under the Securities Act of 1933
and outside the United States of America ("U.S.") to non-U.S. persons
under Regulation S under the Securities Act of 1933, and may not be
offered or sold in the U.S. absent registration or an applicable
exemption from registration requirements.
On October 22, 2002, the initial purchasers of the Convertible Notes
exercised their overallotment option in full. This exercise generated
additional net proceeds of $14.9 million. All terms and conditions of
the overallotment are consistent with the original offering.
11. COMMITMENTS
Included in other investments is approximately $21 million of
investments in limited partnerships as of September 30, 2002, and $15
million as of December 31, 2001. At September 30, 2002 the Company has
an additional investment commitment of up to $18 million. There is no
certainty that any additional investment will be required.
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.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion relates to our results of operations, financial
condition and liquidity for the interim periods indicated.
RESULTS OF OPERATIONS
The following discussion is a comparison of the three months ended September
30, 2002 (Third Quarter 2002) and the nine months ended September 30, 2002
(Nine Months 2002) to the three months ended September 30, 2001 (Third Quarter
2001) and the nine months ended September 30, 2001 (Nine Months 2001).
Our net income was $11.1 million, or $0.41 per diluted share, for Third Quarter
2002 compared to $2.1 million, or $0.08 per diluted share, for Third Quarter
2001. Net income was $29.7 million, or $1.11 per diluted share, for Nine Months
2002 compared to $19.3 million, or $0.73 per diluted share, for Nine Months
2001. Operating income was $10.1 million, or $0.38 per diluted share, for Third
Quarter 2002 compared to $0.4 million, or $0.02 per diluted share, for Third
Quarter 2001. Operating income was $29.0 million, or $1.08 per diluted share,
for Nine Months 2002 compared to $16.1 million, or $0.61 per diluted share, for
Nine Months 2001. Operating income, which differs from net income by the
exclusion of realized gains or losses on investment sales, is used as an
important financial measure by management, analysts and investors, but is not
intended as a substitute for net income prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP).
OPERATING SEGMENTS
The Company is primarily engaged in writing property and casualty insurance.
The Company has classified its businesses into three segments: Insurance
Operations (commercial lines underwriting, personal lines underwriting),
Investments, and Diversified Insurance Services (managed care, flood insurance
and human resource administration outsourcing). Insurance Operations are
evaluated by the Company based on their GAAP underwriting results; Investments
are evaluated based on after-tax investment returns; and the Diversified
Insurance Services are evaluated based on several measures including, but not
limited to, results of operations in accordance with GAAP. For an additional
description of accounting policies, refer to Note 1 to our Consolidated
Financial Statements on pages 35 through 37 of our 2001 Annual Report to
Shareholders (incorporated herein by reference to Exhibit 13 to our Annual
Report on Form 10-K for the year ended December 31, 2001) and the section
entitled "Critical Accounting Policies" beginning on page 18 of this report on
Form 10-Q. See Note 6 to the September 30, 2002 unaudited interim consolidated
financial statements on pages 7 and 8 of this report on Form 10-Q for revenues
and related income before federal income tax for each individual segment
discussed below.
INSURANCE OPERATIONS SEGMENT
Unaudited, Unaudited,
Quarter ended Nine Months ended
September 30, September 30,
($ in thousands) 2002 2001 2002 2001
-------- ------- -------- -------
GAAP INSURANCE OPERATIONS RESULTS
Net premiums written $267,439 235,956 $817,171 711,569
======== ======= ======== =======
Net premiums earned $251,991 222,247 $730,784 651,530
Losses and loss expenses incurred 182,974 172,767 532,951 488,340
Net underwriting expenses incurred 77,779 66,736 223,627 200,389
Dividends to policyholders 1,358 2,292 4,685 6,092
-------- -------- -------- -------
Underwriting loss $(10,120) (19,548) $(30,479) (43,291)
-------- -------- -------- -------
GAAP RATIOS:
Loss and loss expense ratio 72.6% 77.7 72.9% 75.0
Underwriting expense ratio 30.9% 30.0 30.6% 30.8
Dividends to policyholders ratio 0.5% 1.0 0.7% 0.9
-------- -------- -------- --------
Combined ratio 104.0% 108.7 104.2% 106.7
======== ======== ======== ========
Net premiums written for Third Quarter 2002 increased approximately $31
million, or 13%, to $267 million, and $106 million, or 15%, to $817 million for
Nine Months 2002 when compared to the corresponding period in the prior year.
Net premiums written include new business of $53 million for Third Quarter 2002
and $180 million for Nine Months 2002 compared to $45 million for Third Quarter
2001 and $142 million for Nine Months 2001. The growth in net premiums written
reflects renewal premium increases in commercial lines of 20% for Third Quarter
2002 and 19% for Nine Months 2002.
The overall combined ratio for Third Quarter 2002 decreased 4.7 points to 104.0%
due to a decrease in the ratio of losses and loss expenses incurred to net
premiums earned when compared to the Third Quarter 2001. The Third Quarter 2001
loss and loss expense ratio of 77.7% included 3.6 points resulting from an $8
million pre-tax charge taken to increase loss reserves for the New Jersey
personal automobile line of business.
12
The overall combined ratio for Nine Months 2002 decreased 2.5 points to 104.2%
from 106.7% in Nine Months 2001. The improvement primarily reflects: (i) the
ongoing impact of price increases in our commercial lines business which
comprises over 80% of our insurance operations; and (ii) the impact of the $8
million reserve increase taken in 2001. Overall, earned premium increases are
exceeding loss trends by over 7 points.
The underwriting expense ratio increased to 30.9%, for Third Quarter 2002
compared to 30.0% for Third Quarter 2001. This is in line with our
expectations, as is the run rate of 30.6% for the Nine Months 2002 compared to
30.8% for Nine Months 2001. Certain costs that vary with premium volume
declined, mainly direct commission expense due to lower commissions paid to
independent insurance agents. Because expenses are recognized in relation to
earned premium, these savings do not immediately impact our results, but will
have an impact in future periods.
Our strategic initiatives which are designed to reduce costs and/or increase
business include: i) One & Done - streamlined processing for small commercial
lines accounts, and Two & Done - a hybrid program that combines some of the
straight-through processing advantages of One & Done, with some limited
in-house underwriting; ii) the Mobile Claim System; and iii) CLAS - Commercial
Lines Automated Underwriting system. CLAS provides agents with direct web
access to our commercial lines underwriting system. As a result of these
pricing and expense initiatives, productivity, as measured by fiscal year net
premiums written per Insurance Operations employee, was approximately $580,000
for the twelve-month period ended September 30, 2002, up from $504,000 for the
same period last year. These initiatives are expected to continue to reduce our
expense ratio and increase our productivity measure.
Commercial Lines Underwriting
Unaudited, Unaudited,
COMMERCIAL LINES Quarter ended Nine Months ended
September 30, September 30,
($ in thousands) 2002 2001 2002 2001
-------- ------- -------- -------
GAAP INSURANCE OPERATION RESULTS
Net premiums written $215,265 186,573 $662,026 558,137
======== ======= ======== =======
Net premiums earned $201,819 171,306 $582,049 499,107
Losses and loss expenses incurred 142,099 122,564 412,001 357,944
Net underwriting expenses incurred 64,180 53,331 181,148 158,999
Dividends to policyholders 1,358 2,292 4,685 6,092
-------- ------- -------- -------
Underwriting loss $ (5,818) (6,881) $(15,785) (23,928)
-------- ------- -------- -------
GAAP RATIOS:
Loss and loss expense ratio 70.4% 71.5 70.8% 71.7
Underwriting expense ratio 31.8% 31.1 31.1% 31.9
Dividends to policyholders ratio 0.7% 1.3 0.8% 1.2
-------- ------- -------- -------
Combined ratio 102.9% 103.9 102.7% 104.8
======== ======= ======== =======
Commercial Lines Underwriting accounted for over 80% of net premiums written
during Third Quarter 2002 and Nine Months 2002. Net premiums written increased
$29 million, or 15%, for Third Quarter 2002, and $104 million, or 19%, for Nine
Months 2002 when compared to the same periods in 2001.
Net premiums written included $45 million in net new business written for Third
Quarter 2002, an increase of 13% compared to $40 million in Third Quarter 2001.
Nine Months 2002 included $155 million in net new business written, a 27%
increase over $122 million for Nine Months 2001.
We are taking advantage of the positive pricing trends in the marketplace and
the continued price increases are expected to favorably impact our overall
results. For Third Quarter 2002 and for Nine Months 2002, we increased average
renewal premium year over year by approximately 19%.
For Third Quarter 2002, the Commercial Lines combined ratio decreased 1.0 points
to 102.9% compared to Third Quarter 2001. The ratio decreased 2.1 points to
102.7% for Nine Months 2002 when compared to Nine Months 2001. These ratio's
declined despite 1.1 points of additional catastrophe losses in Third Quarter
2002 and 0.9 points in Nine Months 2002. The lower combined ratio for 2002
reflects the ongoing impact of price increases and our various underwriting
initiatives. Our commercial lines earned premium increases outpaced loss trends
by 7 points.
13
Personal Lines Underwriting
Unaudited, Unaudited,
Quarter ended Nine Months ended
PERSONAL LINES September 30, September 30,
($ in thousands) 2002 2001 2002 2001
-------- ------- -------- -------
GAAP INSURANCE OPERATION RESULTS
Net premiums written $52,174 49,383 $155,145 153,432
======= ======= ======== =======
Net premiums earned $50,172 50,941 $148,735 152,423
Losses and loss expenses incurred 40,875 50,203 120,950 130,396
Net underwriting expenses incurred 13,599 13,405 42,479 41,390
------- ------- -------- -------
Underwriting loss $(4,302) (12,667) $(14,694) (19,363)
------- ------- -------- -------
GAAP RATIOS:
Loss and loss expense ratio 81.5% 98.6 81.3% 85.5
Underwriting expense ratio 27.1% 26.3 28.6% 27.2
------- ------- -------- -------
Combined ratio 108.6% 124.9 109.9% 112.7
======= ======= ======== =======
Personal Lines Underwriting accounted for approximately 20% of net premiums
written for Third Quarter 2002 and 19% for Nine Months 2002 compared to 21% for
Third Quarter 2001 and 22% for Nine Months 2001. Personal Lines net premiums
written increased $3 million, or 6%, to $52 million for Third Quarter 2002 when
compared to Third Quarter 2001 and included net new business written of $8
million compared to $5 million in Third Quarter 2001. Personal Lines net
premiums written increased $2 million, or 1%, to $155 million for Nine Months
2002 when compared to Nine Months 2001. Both periods included net new business
written of $20 million.
The Personal Lines combined ratio was 108.6% for Third Quarter 2002, down 16.3
points from the same period in 2001. The decrease reflects 15.7 points from the
$8 million reserve increase to New Jersey Personal Automobile loss reserves
taken in Third Quarter 2001 discussed earlier and improved results in our
homeowners line of business in our nine other personal lines states due to
stricter underwriting.
The Personal Lines combined ratio was 109.9% for Nine Months 2002, down 2.8
points from the same period in 2001. The decrease includes 5.3 points
attributable to the Third Quarter 2001 reserve increase noted above, partially
offset by an increase of 1.5 points due to increased weather-related
catastrophes in Nine Months 2002 compared to the same period last year.
Our New Jersey Private Passenger Automobile combined ratio decreased to 106.9%
for Third Quarter 2002, compared to a 143.8% for Third Quarter 2001. For Nine
Months 2002 this combined ratio decreased to 108.0% compared to 121.9% for Nine
Months 2001. The decreases reflect the impact of the loss reserve increase
taken in Third Quarter 2001, discussed earlier, and the positive impact of rate
and tier changes implemented over the last 12 months. Our average premium per
vehicle was up more than 10% for the quarter, reflecting the price initiatives
over the last year. Our commissions paid decreased $0.8 million for the Third
Quarter 2002 when compared to Third Quarter 2001 and $3.5 million for Nine
Months 2002, compared to Nine Months 2001. Our number of insured vehicles
declined 6.4% from December 31, 2001, due to declining new business
submissions, bringing our market share down to about 2.3%, from a high of 4.1%
in 1997 and 2.5% as of Nine Months 2001.
In our nine other personal lines states, net premiums written were up 9% for
Third Quarter 2002, when compared to Third Quarter 2001. We continue to
implement price increases, tier changes and other underwriting actions to
improve these results. Efforts to control our exposure in our New York personal
lines due to the challenging state regulatory environment are underway. For
Nine Months 2002, we decreased the number of personal lines vehicles written by
12% when compared to the same period last year, while average premium per
vehicle increased 11%. New York personal auto represents only 1% of our overall
net premiums written.
In these nine states, 2001 price and tier changes of 15% for auto and 8% for
homeowners are continuing to impact net premiums earned. Automobile rate
increases totaling almost 7% have already been approved in 2002. In our
homeowners' line, rate increases totaling more than 9% have been approved so
far this year, with an additional 4% pending with various insurance
departments. We are aggressively pursuing additional rate increases and tier
changes in 2003, as personal lines prices push upward industry-wide. Although
we have experienced limited claims due to mold and do not write business in the
most exposed states, we will be adding the Insurance Services Office mold
exclusion endorsement to all homeowner renewals starting in the fourth quarter.
We will take this action in all states where the endorsement was approved,
which currently includes New Jersey and seven of our other personal lines
states.
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
14
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.
Our property and casualty excess of loss treaties were renewed effective July
1, 2002, with significant, although expected, increases in premium rates and
changes in the structure. The reinsurance market continues to be constrained
following the heavy losses sustained by the industry from the September 11th
attacks, as well as concerns about industrywide asbestos and environmental
claims. Given the location and size of our insured risks, we tend to have less
exposure to these claims, but they still impact us. Under our casualty treaty,
the Company retains the first $2 million of any casualty loss as well as 25% of
the next $3 million in losses in excess of the $2 million retention. In 2001,
the Company retained 15% of this layer. The casualty program provides coverage
of $48 million in excess of the Company's $2 million retention. Nuclear,
biological and chemical losses are excluded, but there is no exclusion for mold
or cyber risk. The property excess of loss structure remained unchanged with
coverage excess of up to $13 million per risk in excess of the Company's
retention of $2 million. This treaty includes terrorism coverage for all risks
that are under $50 million in total insurable value, with annual aggregate
limits of $9 million for the first layer, $15 million for the second layer and
$10 million for the third layer. Nuclear, biological and chemical losses are
excluded, but there is no exclusion for mold or cyber risks in this contract.
The underlying policies for both of these treaties exclude nuclear losses,
however, biological and chemical losses are covered to some extent on most
policies.
The estimated reinsurance cost for the property and casualty excess of loss
treaties is projected to be approximately $8 million higher for the contract
year ending June 2003, compared to the contract year ending June 2002.
INVESTMENTS SEGMENT
Net investment income earned was $24 million for both Third Quarter 2002 and
Third Quarter 2001, and $74 million for Nine Months 2002 compared to $71
million for Nine Months 2001. Net investment income earned after-tax was $18
million for both Third Quarter 2002 and Third Quarter 2001 and $55 million for
both Nine Months 2002 and Nine Months 2001. We had a 3.9% annualized after-tax
investment yield for Nine Months 2002, down slightly from 4.1% in 2001
reflecting the lower yields currently available for investment. These lower
rates will cause additional downward pressure on investment income over the
remainder of the year; however, the higher level of invested assets, from our
senior convertible note issuance, will more than offset this, yielding modest
growth in investment income.
The Company realized after-tax investment gains of $1.0 million in Third
Quarter 2002 and $0.8 million in Nine Months 2002, compared to realized
after-tax investment gains of $1.8 million and $3.4 million for the same
periods in 2001. Realized investment gains and losses fluctuate based on
investment decisions regarding individual securities as well as tax planning
considerations. The Company reviews its investment portfolio quarterly for
other than temporary declines in market value. When the decline in the fair
market value of an individual security is deemed to be other than temporary,
the difference between cost and fair market value is charged to income as a
realized investment loss. The Company recorded $6.5 million, before tax, for
the Nine Months 2002, $1.2 million, before tax for the Third Quarter 2001, and
$1.4 million, before tax, for Nine Months 2001, of realized losses from
investments whose market value decline was deemed to be other than temporary.
There were no such losses recorded during the Third Quarter 2002.
We continue to follow a conservative, diversified investment strategy. 57% of
our debt securities portfolio is rated "AAA." Our portfolio has an average
rating of "AA," with only 1% rated as below investment grade.
15
DIVERSIFIED INSURANCE SERVICES SEGMENT
Unaudited, Unaudited,
Quarter ended Nine Months ended
September 30, September 30,
($ IN THOUSANDS) 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------
MANAGED CARE
Net revenue $ 5,845 5,126 $ 17,243 14,371
Pre-tax profit 549 1,023 2,464 3,044
FLOOD INSURANCE
Net revenue 5,268 4,376 14,036 10,888
Pre-tax profit 1,374 838 3,028 1,589
HUMAN RESOURCE ADMINISTRATION OUTSOURCING
Net revenue 9,753 8,372 28,229 26,048
Pre-tax (loss) (37) (5,053) (885) (5,178)
OTHER
Net revenue 455 413 1,365 1,186
Pre-tax profit 19 55 291 261
TOTAL
Net revenue 21,321 18,287 60,873 52,493
Pre-tax profit (loss) 1,905 (3,137) 4,898 (284)
After tax profit (loss) 1,256 (2,060) 3,266 (237)
Return on net revenue 5.9% (11.3) 5.4% (0.5)
The Diversified Insurance Services segment's continuing operations generated
$21 million of revenue and $1.3 million of net income for Third Quarter 2002
compared to $18 million of revenue and $(2.1) million of net loss for the Third
Quarter 2001. Continuing operations from these same businesses generated $61
million of revenue and $3.3 million of net income for Nine Months 2002 compared
to $52 million of revenue and $(0.2) million of net loss for the same period in
2001. The segment generated a return on net revenue of 5.9% for the Third
Quarter 2002 and 5.4% for the Nine Months 2002, which was significantly higher
when compared to (11.3)% and (0.5)% for the same periods in prior year. This
improvement in results relates directly to the impact of the $4.0 million
professional employer organization (PEO), a component of our human resource
administration outsourcing operation, workers compensation reserve charge that
was taken during Third Quarter 2001.
Managed Care
Network expansion is a goal for our managed care program. During the Nine Months
2002, our medical provider network expanded from 59,596 to 81,454. This
expansion was primarily the result of the acquisition of Northeast Health
Direct, LLC (NHD) a 16,000-location network that operates in Connecticut and
certain regions within the states of Massachusetts, Vermont, and New Hampshire.
Consumer Health Network Plus, LLC (CHN) acquired NHD for $3.2 million including
certain acquisition and financial performance related costs during 2002. CHN may
be further required to pay additional consideration over the next two years
based on certain criteria related to future financial performance. The
acquisition was accounted for in accordance with Statement of Financial
Accounting Standards No. 141, "Business Combinations."
Network and client expansion resulted in increased managed care revenues of
14.0% to $6 million for Third Quarter 2002 compared to $5 million for Third
Quarter 2001 and increased managed care revenues of 20.0% to $17 million for
Nine Months 2002 compared to $14 million for Nine Months 2001. More than
offsetting the revenue increases were higher labor costs and legal fees, which
resulted in decreased pre-tax income of 46.3% to $0.5 million for Third Quarter
2002 compared to $1.0 million for Third Quarter 2001 and decreased pre-tax
income of 19.1% to $2.5 million for Nine Months 2002 compared to $3.0 million
for Nine Months 2001. In an effort to reduce expenses, initiatives are currently
underway to consolidate offices and reduce staff counts as duplicate functions
are eliminated.
Flood Insurance
Flood experienced growth for Third Quarter 2002 and Nine Months 2002 as compared
to the same periods a year ago due to marketing initiatives and the acquisitions
of two-flood books of business, both in the second half of 2001. This growth
translated into servicing fees for Third Quarter 2002 of $5 million, an increase
of 20.4% compared to Third Quarter 2001 and $14 million for Nine Months 2002, an
increase of 28.9% compared to Nine Months 2001. Included in these amounts
are $0.5 million for Third Quarter 2002, and $1.2 million for Nine Months 2002
from the acquisition of the two flood books of business. We currently service
more than 133,000 flood insurance policies representing approximately $51
million of premiums in force. This is a 18% increase when compared to the
113,000 policies in force at September 30, 2001.
16
Human Resource Administration Outsourcing (HR outsourcing)
HR outsourcing generated $10 million of revenue while pre-tax income was
break-even for Third Quarter 2002 compared to $8 million of revenue and $(5.1)
million of pre-tax loss for the Third Quarter 2001. HR outsourcing also
generated $28 million of revenue and $(0.9) million of pre-tax loss for Nine
Months 2002 compared to $26 million of revenue and $(5.2) million of pre-tax
loss for the same period in 2001.
Due to market pricing pressures, revenue increases have not kept pace with
increasing product costs; although we continue to implement new pricing and
cost reduction initiatives at the PEO. At the end of the third quarter labor
related expenses were down about 20% over this period last year. As of
September 30, our price increases since year end 2001 reached 8.2% for workers'
compensation and 6.4% for client administration fees. Total worksite lives
stand at 21,592 year-to-date, compared to 21,322 for the same period last year,
with about 110 Selective agents currently selling the product. We expect to see
a drop in worksite lives in January as price increases are implemented and as
the PEO continues to apply Selective's underwriting guidelines and
re-underwrites its client base.
Federal Income Taxes
Total federal income tax expense increased by $5.7 million to $2.7 million for
Third Quarter 2002 and by $6.6 million to $5.8 million for Nine Months 2002
when compared to the same periods in 2001. The increases reflect higher income
for the year primarily attributable to a reduction in underwriting losses and
improved Diversified Insurance Services results. Our effective tax rate differs
from the federal corporate rate of 35% primarily as a result of tax-advantaged
investment income. The effective tax rate for the Nine Months 2002, was 16.3%,
compared to a benefit of 4.0% for the same period last year. The increase is
attributable to improved underwriting results and re-balancing our debt
securities portfolio to minimize our alternative minimum tax (AMT). This
re-balancing has increased our allocation to taxable bonds. AMT is a timing
difference on tax paid to the Internal Revenue Service. When taxable income is
low, certain tax preference items give rise to AMT payments.
Financial Condition, Liquidity and Capital Resources
Selective Insurance Group, Inc. (Parent) is an insurance holding company whose
principal assets are investments in its insurance and Diversified Insurance
Services subsidiaries. The Parent's primary means of meeting its liquidity
requirements is through dividends from these subsidiaries. The payment of
dividends from the insurance subsidiaries is governed by state regulatory
requirements, and these dividends are generally payable only from earned
surplus as reported in our statutory Annual Statements as of the preceding
December 31. Dividends from Diversified Insurance Services subsidiaries are
restricted only by the operating needs of those subsidiaries.
The Parent's cash requirements include principal and interest payments on the
senior convertible notes, convertible subordinated debentures and various
senior notes as well as dividends to stockholders, general operating expenses,
and the cost of shares of common stock repurchased under our common stock
repurchase program. As of September 30, 2002, the Parent had repurchased under
the stock repurchase program a total of 7.3 million shares of its common stock
at a total cost of approximately $140 million. At the May 7, 2002 Board of
Directors' Meeting the expiration date of the stock repurchase program was
extended to May 31, 2003. There are approximately 700,000 shares remaining
under the current 8 million shares repurchase authorization. As indicated on
page 27 in our Annual Report to shareholders for the year ended December 31,
2001, the Company has contractual obligations pursuant to notes payable of $24
million in 2003. As part of our senior convertible note issuance, the Company
has established an irrevocable trust to provide for notes payable that mature
over the next three years.
The Parent generates cash from the sale of its common stock under various stock
plans, the dividend reinvestment program, and from investment income. The Parent
also has available $50.0 million of unused credit lines. As discussed in Note 5
to the interim consolidated financial statements in this report on Form 10-Q,
the Parent sold its software development and program administration operation,
PDA, resulting in $15.4 million of cash flow. This amount was paid as a capital
contribution to the insurance subsidiaries.
On September 24, 2002 the Company issued $265,000,000 aggregate principal amount
of 1.6155% senior convertible notes (Convertible Notes) due September 24, 2032
at a discount of 61.988% resulting in an effective yield of 4.25%. The Company
recorded gross proceeds of $100.7 million along with $2.5 million of deferred
charges in connection with debt issue costs. The net proceeds have been used in
part for an irrevocable trust to provide for certain payment obligations in
respect of the Company's outstanding debt obligations. As a result of providing
for these debt obligations, the Company's dividend demands from its insurance
subsidiaries is likely to be less than would otherwise be required over the next
3 year period. The Company paid as a capital contribution the remainder of the
net proceeds, $30.0 million, to the Company's insurance operating subsidiaries.
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On October 22, 2002, the initial purchasers of the Convertible Notes exercised
their overallotment option in full. This exercise generated additional net
proceeds of $14.9 million. All terms and conditions of the overallotment are
consistent with the original offering.
Based upon the 2001 statutory financial statements, the insurance subsidiaries
are permitted to pay the Parent in 2002 ordinary dividends in the aggregate
amount of $52 million. However, effective May 1, 2002, the South Carolina
Department of Insurance changed their calculation of ordinary dividends they
permit companies to pay. As a result, Selective Insurance Company of South
Carolina's ordinary dividend capacity for 2002 was reduced to $1.5 million from
$4.6 million. This change decreases the permitted aggregate amount of the
ordinary dividend the insurance subsidiaries can pay to Parent in 2002, to $49
million. There can be no assurance that the insurance subsidiaries will be able
to pay dividends to the Parent in the future in an amount sufficient to enable
the Parent to meet its liquidity requirements. However, due to the irrevocable
trust established in connection with the issuance of the senior convertible
notes, the dividend demand to the Parent from the insurance subsidiaries is
likely to be less than would otherwise be required over the next 3 year period.
For additional information regarding regulatory limitations on the payment of
dividends by the insurance subsidiaries to the Parent and amounts available for
the payment of such dividends, refer to Note 7 to our Consolidated Financial
Statements on page 41 of the Annual Report to shareholders for the year ended
December 31, 2001. Dividends to stockholders are declared and paid at the
discretion of the Board based upon the Company's operating results, financial
condition, capital requirements, contractual restrictions and other relevant
factors. The Parent has paid regular quarterly cash dividends to its
stockholders for 73 consecutive years and currently plans to continue to pay
quarterly cash dividends.
For Nine Months 2002, cash provided by operating activities was $130 million
compared to $36 million for Nine Months 2001. The improvement is a result of
insurance price trends, which have lead to better margins.
Total assets increased 13%, or $362 million, from December 31, 2001 to
September 30, 2002. Increased premium volume drove increases in premium
receivables of $48 million and deferred policy acquisition costs of $22
million. Invested assets increased $313 million driven by the $130 million of
operating cash flow, the issuance of the senior convertible notes, $27 million
of unrealized gains on our investment portfolio and $56 million of investment
purchases made at the end of the quarter which had not settled. Total
liabilities increased 15%, or $314 million, from December 31, 2001 to September
30, 2002. The issuance of the senior convertible notes accounted for $101
million. Increased premium volume is primarily responsible for increases in
unearned premium reserves of $95 million. Loss and loss expense reserves
increased by $80 million due to growth in insured exposures as well as modest
increases in loss trends. Securities payable, classified within other
liabilities, increased $56 million due to bonds purchased in late September
that did not settle until October 2002.
At September 30, 2002 and 2001, the Company did not have any relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance sheet arrangements
or for other contractually narrow or limited purposes. As such, the Company is
not exposed to any financing, liquidity, market or credit risk that could arise
if the Company had engaged in such relationships.
The Company receives financial stability ratings from A.M. Best Company (A.M.
Best), Standard and Poor's Credit Market Services (S&P) and Moody's Investors
Service, Inc. (Moody's). These ratings are derived from financial information
and meetings between Company senior management and the rating agencies. The
Company continually reviews its financial agreements for any potential rating
triggers that could dictate a significant change in terms of the agreements if
the Company's credit rating were to suddenly and drastically change. A rating
downgrade to below A- in its AM Best or S&P rating would be considered an event
of default under the terms of the Company's line of credit agreements. The
Company had no outstanding borrowings on these lines during the Nine Months
2002 or full year 2001. A note rating downgrade for the senior convertible
notes due 2032 to Ba2 or lower by Moody's or BB or lower by S&P would remove
the contingent conversion feature of these notes. While these triggers would
not materially affect our results of operations or financial condition, they may
impact certain financial ratios.
Critical Accounting Policies
We have identified the policies below as critical to our business operations and
the understanding of our results of operations. For a detailed discussion of the
application of these and other accounting policies, see Note 1 to our
Consolidated Financial Statements on page 35 of the Annual Report to
shareholders for the year ended December 31, 2001. Note that our preparation of
the interim consolidated financial statements requires us to make estimates and
assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of our financial
statements, and the reported amounts of revenue and expenses during the
reporting period. There can be no assurance that actual results will not differ
from those estimates.
Reserves for Losses and Loss Expenses
In accordance with industry practice, we maintain reserves for losses and loss
expenses. These reserves are made up of both case reserves and reserves for
claims incurred but not yet reported (IBNR). Case reserves result from a claim
that has been reported to an insurance subsidiary and is estimated at the amount
of ultimate payment. IBNR reserves are established based on generally accepted
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actuarial techniques. Such techniques assume that past experience, adjusted for
the effects of current developments and anticipated trends, are an appropriate
basis for predicting future events.
Reserves are reviewed for adequacy on a periodic basis. Based upon such
reviews, we believe that the estimated reserves for losses and loss expenses
are adequate to cover the ultimate cost of claims. The changes in these
estimates, resulting from the continuous review process and the differences
between estimates and ultimate payments, are reflected in the consolidated
statements of income for the period in which such estimates are changed. We do
not discount to present value that portion of our loss reserves expected to be
paid in future periods.
Premium Revenue
Net premiums written equal direct premiums written, plus assumed premiums less
ceded premiums. All three components of net premiums written are recognized in
revenue over the period that coverage is provided. The vast majority of our net
premiums written have a coverage period of twelve months. This means we record
1/12 of the net premiums written as earned premium each month, until the full
amount is recognized. It should be noted that when premium rates increase, the
effect of those increases will not immediately affect earned premium. Rather,
those increases will be recognized ratably over the period of coverage.
Unearned premiums and prepaid reinsurance premiums, which are recorded on the
balance sheet, represent that portion of premiums written that are applicable
to the unexpired terms of policies in force.
Deferred Policy Acquisition Costs
Policy acquisition costs, which include commissions, premium taxes, fees, and
certain other costs of underwriting policies, are deferred and amortized over
the same period in which the related premiums are earned. Deferred policy
acquisition costs are limited to the estimated amounts recoverable after
providing for losses and loss expenses that are expected to be incurred, based
upon historical and current experience. Anticipated investment income is
considered in determining whether a premium deficiency exists. The methods of
making such estimates and establishing the deferred costs are continually
reviewed by the Company, and any adjustments therefrom are made in the
accounting period in which the adjustment arose.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the information about market risk set
forth in our Annual Report on Form 10-K for the year-ended December 31, 2001.
ITEM 4. CONTROLS AND PROCEDURES
We have established a Disclosure Committee which is made up of several key
management employees who report directly to the Chief Financial Officer and
Chief Executive Officer, to monitor and evaluate the Company's disclosure
controls and procedures. The Company's Chief Executive Officer and Chief
Financial Officer have concluded that the Company's disclosure controls and
procedures are effective, based on their evaluation of these controls and
procedures within 90 days of the date of this report. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - NONE
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On September 24, 2002 the Company issued $265,000,000 aggregate principal amount
at maturity of 1.6155% senior convertible notes (Convertible Notes) due
September 24, 2032 at a discount of 61.988% resulting in an effective yield to
maturity of 4.25% per year through principal underwriters Merrill Lynch & Co.,
Credit Suisse First Boston, Ferris, Baker Watts, Inc and Sandler O'Neil &
Partners, L.P. The Company recorded gross proceeds of $100.7 million along with
$2.5 million of deferred charges in connection with debt issue costs.
On October 22, 2002, the initial purchasers of the Convertible Notes exercised
their overallotment option in full. This exercise generated additional net
proceeds of $14.9 million. All terms and conditions of the overallotment are
consistent with the original offering.
$72 million of the net proceeds have been used to fund an irrevocable trust to
provide for certain payment obligations in respect of the Company's outstanding
debt obligations. The Company paid as a capital contribution $30 million to the
Company's insurance operating subsidiaries.
Interest on the Convertible Notes is payable semi-annually in arrears in cash at
a rate of 1.6155% beginning March 24, 2003 until September 24, 2009. After that
date, cash interest will not be paid on the Convertible Notes prior to maturity
unless contingent cash interest becomes payable. Contingent cash interest
becomes payable if the average market price of a Convertible Note for the
applicable five trading day period equals 120% or more of the sum of the
Convertible Note's issue price, accrued original issue discount and accrued cash
interest, if any, for a Convertible Note to the day immediately preceding the
relevant six-month period.
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The contingent cash interest payable per Convertible Note in respect of any
quarterly period within any six-month period will equal the greater of (a) any
regular cash dividends per share paid by the Company on our common stock during
that quarterly period multiplied by the then applicable conversion rate or (b)
$0.15 multiplied by 12.9783.
The Convertible Notes will be convertible at the option of the holders, if the
conditions for conversion are satisfied. A holder may convert a note, in
integral multiples of $1,000 principal amount at maturity, into common stock
only if the conditions for conversion are satisfied. For each $1,000 principal
amount of notes surrendered for conversion, a holder will receive 12.9783
shares of our common stock. Holders may also surrender Convertible Notes for
conversion only during any period in which the credit rating assigned to the
Convertible Notes is Ba2 or lower by Moody's Investors Service, Inc. (Moody's)
or BB+ or lower by Standard and Poor's Credit Market Services (S&P), the
Convertible Notes are no longer rated by either Moody's or S&P, or the credit
rating assigned to the Convertible Notes has been suspended or withdrawn by
either Moody's or S&P. The Convertible Notes will cease to be convertible
pursuant to this credit rating criteria during any period or periods in which
all of the credit ratings are increased above such levels. The Convertible
Notes are redeemable by the Company in whole or in part, at any time on or
after September 24, 2007, at a price equal to the sum of the issue price, plus
the call premium, if any, plus accrued original issue discount and accrued and
unpaid cash interest, if any, or such Convertible Notes to the applicable
redemption date. The holders of the Convertible Notes may require the Company
to purchase all or a portion of their Convertible Notes on either September 24,
2009, 2012, 2017, 2022, or 2027 at stated prices plus accrued cash interest, if
any, to the purchase date. The Company may pay the purchase price in cash or
shares of Company common stock or in a combination of cash and shares of
Company common stock.
The Convertible Notes were privately offered only to qualified institutional
buyers under Rule 144A under the Securities Act of 1933 and outside the United
States of America ("U.S.") to non-U.S. persons under Regulation S under the
Securities Act of 1933, and may not be offered or sold in the U.S. absent
registration or an applicable exemption from registration requirements.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - NONE
ITEM 5. OTHER INFORMATION - NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The exhibits required by Item 601 of Regulation S-K are listed in
the Exhibit Index, which immediately precedes the exhibits filed
with this Form 10-Q.
(b) Reports on Form 8-K:
On September 17, 2002, the Company filed a report on Form 8-K
announcing its intention to raise $100 million through a private
offering of convertible notes. The Company's press release dated
September 16, 2002 was attached as Exhibit 99.1.
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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.
REGISTRANT
By: /s/ Gregory E. Murphy November 13, 2002
- --------------------------------------------------------------
Gregory E. Murphy
Chairman, President and Chief Executive Officer
By: /s/ Dale A. Thatcher November 13, 2002
- --------------------------------------------------------------
Dale A. Thatcher
Senior Vice President of Finance, Chief Financial Officer and Treasurer
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CERTIFICATIONS
I, Gregory E. Murphy, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Selective Insurance Group, Inc.
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in
light of the circumstances under which such statements were
made, not misleading with respect to the period covered by
this quarterly report.
3. Based on my knowledge, the financial statements and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date.
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any
material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a
significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies
any material weaknesses.
Date: November 13, 2002 By: /s/ Gregory E. Murphy
---------------------------------------
Gregory E. Murphy
Chairman, President and Chief Executive
Officer
I, Dale A. Thatcher, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Selective Insurance Group, Inc.
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in
light of the circumstances under which such statements were
made, not misleading with respect to the period covered by
this quarterly report.
3. Based on my knowledge, the financial statements and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
22
a. designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date.
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any
material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have
indicated in this quarterly report whether or not there
were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies any material weaknesses.
Date: November 13, 2002 By: /s/ Dale A. Thatcher
-------------------------------------
Dale A. Thatcher
Senior Vice President,
Chief Financial Officer and Treasurer
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SELECTIVE INSURANCE GROUP, INC.
INDEX TO EXHIBITS
Exhibit No.
*10.1 Amendment, dated September 13, 2002, to the Promissory Note of
$25,000,000 Line of Credit with State Street Bank and Trust Company
with respect to Selective Insurance Company of America and Selective
Insurance Group, Inc.
*10.2 Amendment, dated September 13, 2002, to the Promissory Note of
$25,000,000 Line of Credit with Wachovia Bank, National Association
(formerly known as First Union Bank) with respect to Selective
Insurance Company of America and Selective Insurance Group, Inc.
*10.3 Amendment, dated September 30, 2002, to the Promissory Note of
$25,000,000 Line of Credit with State Street Bank and Trust Company
with respect to Selective Insurance Company of America and Selective
Insurance Group, Inc.
*11 Computation of earnings per share, filed herewith.
*99.1 Certification of Chief Executive Officer in accordance with Section
906 of the Sarbanes-Oxley Act of 2002.
*99.2 Certification of Chief Financial Officer in accordance with Section
906 of the Sarbanes-Oxley Act of 2002.
99.3 Note 1, Note 3 and Note 7 to Consolidated Financial Statement of
Selective Insurance Group, Inc., December 31, 2001, 2000 and 1999
(incorporated by reference to Exhibit No. 13 to Selective's Annual
Report on Form 10-K for the year ended December 31, 2001, Commission
File No. 0-8641).
- ---------------------
* Filed herewith
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