SELECTIVE INSURANCE GROUP INC - 10-Q Quarterly Report

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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...March 31, 2003

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 offices) (Zip Code)

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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act)

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 April 30, 2003:
26,890,757

1

SELECTIVE INSURANCE GROUP, INC

Consolidated Balance Sheets

Unaudited
March 31, December 31,
(in thousands, except share amounts) 2003 2002
- ------------------------------------ ---- ----

ASSETS
Investments:
Debt securities, held-to-maturity - at amortized cost
(fair value: $97,715 - 2003; $114,785 - 2002) $ 92,730 109,318
Debt securities, available-for-sale - at fair value
(amortized cost: $1,730,925 - 2003; $1,671,347 - 2002) 1,837,089 1,772,061
Equity securities, available-for-sale - at fair value
(cost of: $133,682 - 2003; $120,036 - 2002) 203,192 196,913
Short-term investments - (at cost which approximates fair value) 22,679 24,700
Other investments 23,776 23,559
----------- ---------
Total investments 2,179,466 2,126,551
Cash 2,810 2,228
Interest and dividends due or accrued 21,333 22,689
Premiums receivables, net of allowance for uncollectible accounts of:
$2,814 - 2003 and 2002 407,271 353,935
Other trade receivables, net of allowance for uncollectible accounts of:
$1,030 - 2003; $867 - 2002 22,086 19,769
Reinsurance recoverable on paid losses and loss expenses 7,957 7,272
Reinsurance recoverable on unpaid losses and loss expenses 165,850 160,374
Prepaid reinsurance premiums 46,259 46,141
Deferred federal income tax 10,110 8,707
Real estate, furniture, equipment, and software development - at cost, net of
accumulated depreciation and amortization 52,759 52,424
Deferred policy acquisition costs 159,399 148,158
Goodwill 42,808 42,808
Other assets 34,484 38,791
----------- ---------
Total assets $ 3,152,592 3,029,847
=========== =========

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:

Reserve for losses $ 1,280,051 1,232,322
Reserve for loss expenses 173,678 171,103
Unearned premiums 613,615 557,141
Senior convertible notes 115,937 115,937
Notes payable 145,500 145,500
Current federal income tax 2,495 2,565
Other liabilities 164,428 153,177
----------- ---------
Total liabilities 2,495,704 2,377,745
----------- ---------
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: 41,142,520 - 2003; 40,780,950 - 2002 82,285 81,562
Additional paid-in capital 102,698 95,435
Retained earnings 566,581 562,553
Accumulated other comprehensive income 114,188 115,434
Treasury stock - at cost (shares: 14,246,988 - 2003; 14,185,020 - 2002) (196,737) (195,295)
Unearned stock compensation and notes receivable from stock sales (12,127) (7,587)
----------- ---------
Total stockholders' equity 656,888 652,102
----------- ---------
Total liabilities and stockholders' equity $ 3,152,592 3,029,847
=========== =========

See accompanying notes to unaudited interim consolidated financial statements.

2

SELECTIVE INSURANCE GROUP, INC.
Consolidated Statements of Income

Unaudited
Quarter ended March 31,
(in thousands, except per share amounts) 2003 2002
- ---------------------------------------- ---- ----

Revenues:
Net premiums written $ 323,403 281,445
Net (increase) in unearned premiums and prepaid reinsurance premiums (56,356) (47,150)
--------- -------
Net premiums earned 267,047 234,295
Net investment income earned 27,343 24,504
Net realized gains 3,975 109
Diversified insurance services revenue 21,338 18,833
Other income 782 799
--------- -------
Total revenues 320,485 278,540
--------- -------
Expenses:

Losses incurred 170,728 146,505
Loss expenses incurred 28,374 24,372
Policy acquisition costs 84,549 70,694
Dividends to policyholders 1,555 1,921
Interest expense 4,539 3,505
Diversified insurance services expenses 19,471 17,439
Other expenses 1,909 2,426
--------- -------
Total expenses 311,125 266,862
--------- -------
Income from continuing operations, before federal income tax 9,360 11,678
--------- -------
Federal income tax expense (benefit):

Current 1,780 5,489
Deferred (458) (4,110)
--------- -------
Total federal income tax expense 1,322 1,379
--------- -------
Discontinued operations, net of tax -- 2
--------- -------
Net income $ 8,038 10,301
========= =======
Earnings per share:

Basic net income from continuing operations $ 0.31 0.41
Basic net income from discontinued operations -- --
--------- -------
Basic net income 0.31 0.41
========= =======
Diluted net income from continuing operations $ 0.29 0.39
Diluted net income from discontinued operations -- --
--------- -------
Diluted net income 0.29 0.39
========= =======
Dividends to stockholders $ 0.15 0.15

See accompanying notes to unaudited interim consolidated financial statements.

3

SELECTIVE INSURANCE GROUP, INC.
Consolidated Statements of Stockholders' Equity

Unaudited
Quarter ended March 31,
----------------------------------------------------------

(in thousands, except per share amounts) 2003 2002
---------------------------------------- ---------------------------- ----------------------

Common stock:
Beginning of year $ 81,562 79,177
Dividend reinvestment plan
(shares: 12,251-2003; 12,687-2002) 24 25
Convertible subordinated debentures
(shares: 7,768-2003; 4,095-2002) 16 8
Stock purchase and compensation plans
(shares: 341,551-2003; 310,175-2002) 683 621
------------ -------
End of period 82,285 79,831
------------ -------
Additional paid-in capital:

Beginning of year 95,435 77,126
Dividend reinvestment plan 263 265
Convertible subordinated debentures 39 21
Stock purchase and compensation plans 6,961 6,577
------------ -------
End of period 102,698 83,989
------------ -------
Retained earnings:

Beginning of year 562,553 536,188
Net income 8,038 8,038 10,301 10,301
Cash dividends to stockholders ($0.15 per share) (4,010) (3,848)
------------ -------
End of period 566,581 542,641
------------ -------
Accumulated other comprehensive income:

Beginning of year 115,434 98,037
Other comprehensive (loss) - decrease in net
unrealized gains, on available-for-sale securities, net
of deferred income tax effect (1,246) (1,246) (6,021) (6,021)
------------ ------ ------- ------
End of period 114,188 92,016
------------ -------
Comprehensive income 6,792 4,280
===== =====

Treasury stock:

Beginning of year (195,295) (192,284)
Acquisition of treasury stock
(shares: 61,968-2003; 71,975-2002) (1,442) (1,509)
------------ -------
End of period (196,737) (193,793)
------------ -------
Unearned stock compensation and notes receivable
from stock sales:

Beginning of year (7,587) (7,084)
Unearned stock compensation (5,488) (5,175)
Amortization of deferred compensation expense and
amounts received on notes 948 1,387
------------ -------
End of period (12,127) (10,872)
------------ -------
Total stockholders' equity $ 656,888 593,812
============ =======

The Company also has authorized, but not issued, 5,000,000 shares of preferred
stock without par value of which 300,000 shares have been designated Series A
junior preferred stock without par value.

See accompanying notes to unaudited interim consolidated financial statements.

4

SELECTIVE INSURANCE GROUP, INC.
Consolidated Statements of Cash Flows

Unaudited
(in thousands) Quarter ended March 31,
2003 2002
---- ----

OPERATING ACTIVITIES
Net income $ 8,038 10,301
--------- ------
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 44,828 33,502
Increase in unearned premiums, net of prepaid reinsurance premiums 56,357 47,150
Decrease (increase) in net federal income tax recoverable (800) 1,260
Depreciation and amortization 2,236 2,341
Amortization of deferred compensation 920 1,280
Increase in premiums receivables (53,336) (46,176)
Increase in other trade receivables (2,317) (529)
Increase in deferred policy acquisition costs (11,241) (11,727)
Decrease in interest and dividends due or accrued 1,356 2,087
Decrease (increase) in reinsurance recoverable on paid losses and loss expenses (685) 3,887
Net realized (gains) (3,975) (109)
Other- net (401) (5,260)
--------- ------
Net adjustments 32,942 27,706
--------- ------
Net cash provided by operating activities 40,980 38,007
--------- ------
INVESTING ACTIVITIES

Purchase of debt securities, available-for-sale (174,666) (171,454)
Purchase of equity securities, available-for-sale (14,534) (238)
Purchase of other investments (220) (548)
Purchase and adjustments of subsidiaries acquired, (net of cash equivalents acquired of $48 -- (2,624)
in 2002)
Sale of debt securities, available-for-sale 70,037 105,729
Redemption and maturities of debt securities, held-to-maturity 16,631 16,333
Redemption and maturities of debt securities, available-for-sale 48,251 17,335
Sale of equity securities, available-for-sale 1,499 8,662
Proceeds from other investments 3 3
Increase (decrease) in net payable for security transactions 15,943 (6,862)
Net additions to real estate, furniture, equipment and software development (2,382) (4,050)
--------- ------
Net cash used in investing activities (39,438) (37,714)
--------- ------
FINANCING ACTIVITIES

Dividends to stockholders (4,010) (3,848)
Acquisition of treasury stock (1,442) (1,509)
Net proceeds from dividend reinvestment plan 287 290
Net proceeds from stock purchase and compensation plans 2,156 2,023
Proceeds received on notes receivable from stock sales 28 107
--------- ------
Net cash used in financing activities (2,981) (2,937)
--------- ------
Net decrease in short-term investments and cash (1,439) (2,644)
Short-term investments and cash at beginning of year 26,928 26,450
--------- ------
Short-term investments and cash at end of period $ 25,489 23,806
========= ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid during the period for:

Interest $ 4,832 2,534
Federal income tax 2,000 --

Supplemental schedule of non-cash financing activity:
Conversion of convertible subordinated debentures 55 29
Unearned stock compensation 5,488 5,175

See accompanying notes to unaudited interim consolidated financial statements.

5

NOTES TO UNAUDITED INTERIM 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. and its consolidated subsidiaries for the interim periods presented.
References herein to "Selective" are to Selective Insurance Group, Inc.
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 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, 2002.

2. RECLASSIFICATIONS

Certain amounts in the Company's prior year unaudited interim consolidated
financial statements have been reclassified to conform to 2003
presentation. Such reclassification had no effect on our net income or
stockholders' equity.

3. 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
$16.3 million at a net gain of $0.5 million.

UNAUDITED,
QUARTER ENDED MARCH 31,
(in thousands) 2003 2002
- -------------- ---- ----

Net revenue $-- 4,456
Pre-tax income -- 7
After-tax income $-- 2

4. SEGMENT INFORMATION

The Company is primarily engaged in writing property and casualty
insurance. The Company has classified its business into three segments,
which is at the same level of disaggregation as that reviewed by senior
management: Insurance Operations (commercial lines underwriting, personal
lines underwriting), Investments, and Diversified Insurance Services.
Insurance Operations are evaluated based on accounting principles
generally accepted in the United States of America (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. The Company does not aggregate any of its operating
segments.

The GAAP underwriting results of the Insurance Operations segment are
determined taking into account net premiums earned, incurred losses and
loss expenses, policyholders dividends, policy acquisition costs and other
underwriting expenses. Management of the Investments segment is separate
from the Insurance Operations segment and, therefore, has been classified
as a separate segment. The operating results of the Investments segment
takes into account net investment income and net realized gains and
losses. The Diversified Insurance Services segment is managed
independently from the other segments and, therefore, has been classified
separately. The Diversified Insurance Services segment consists of managed
care, flood operations and human resource administration outsourcing (HR
Outsourcing). The segment results are determined taking into account the
net revenues generated in each of the businesses, less the costs of
operations.

Selective and its subsidiaries provide services to each other in the
normal course of business. These transactions totaled $6.3 million for
First Quarter 2003, compared with $15.2 million for First Quarter 2002.
These transactions were eliminated in all consolidated 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.

6

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
(loss) for the individual segments:

UNAUDITED,
QUARTER ENDED MARCH 31,
REVENUE BY SEGMENT
2003 2002
---- ----
(in thousands)

INSURANCE OPERATIONS:
Commercial lines net premiums earned $215,625 185,038
Personal lines net premiums earned 51,422 49,257
Miscellaneous income 692 770
-------- -------
Total insurance operations revenues 267,739 235,065
-------- -------
INVESTMENTS:

Net investment income 27,343 24,504
Net realized gains on investments 3,975 109
-------- -------
Total investment revenues 31,318 24,613
-------- -------
DIVERSIFIED INSURANCE SERVICES:

Diversified insurance services revenues, from continuing operations 21,338 18,833
-------- -------
TOTAL ALL SEGMENTS 320,395 278,511
-------- -------
Other income 90 29
-------- -------
TOTAL REVENUES FROM CONTINUING OPERATIONS $320,485 278,540
======== =======

UNAUDITED,
INCOME (LOSS), BEFORE FEDERAL INCOME TAX BY SEGMENT QUARTER ENDED MARCH 31,
2003 2002
---- ----
(in thousands)

INSURANCE OPERATIONS:
Commercial lines underwriting $(14,207) (3,865)
Personal lines underwriting (3,786) (5,177)
-------- ------
Underwriting loss, before federal income tax (17,993) (9,042)
-------- ------
INVESTMENTS:

Net investment income 27,343 24,504
Net realized gains on investments 3,975 109
-------- ------
Total investment income, before federal income tax 31,318 24,613
-------- ------
DIVERSIFIED INSURANCE SERVICES:

Income from continuing operations, before federal income tax 1,867 1,394
-------- ------
TOTAL ALL SEGMENTS 15,192 16,965
-------- ------
Interest expense (4,539) (3,505)
General corporate expenses (1,293) (1,782)
-------- ------
INCOME FROM CONTINUING OPERATIONS, BEFORE FEDERAL INCOME TAX $ 9,360 11,678
======== ======

7

5. REINSURANCE

The following table is a listing of direct, assumed and ceded amounts by
income statement caption:

UNAUDITED,
QUARTER ENDED MARCH 31,
(in thousands) 2003 2002
- -------------- ---- ----

Premiums written:
Direct $ 352,823 306,633
Assumed 5,938 5,656
Ceded (35,358) (30,844)
--------- --------
Net $ 323,403 281,445
--------- --------
Premiums earned:
Direct $ 296,794 259,579
Assumed 5,493 4,664
Ceded (35,240) (29,948)
--------- --------
Net $ 267,047 234,295
--------- --------
Losses and loss expenses incurred:

Direct $ 209,418 180,870
Assumed 5,032 3,530
Ceded (15,348) (13,523)
--------- --------
Net $ 199,102 170,877
--------- --------

Flood business, which we cede 100% to the National Flood Insurance
Program, is included in the above amounts as follows:

UNAUDITED,
QUARTER ENDED MARCH 31,
(in thousands) 2003 2002

Ceded premiums written $(13,558) (11,564)
Ceded premiums earned (13,572) (10,477)
Ceded losses and loss expenses incurred (643) (1,106)

Additional increases in ceded written and earned premium is primarily
related to the increase in reinsurance rates and subject premium for our
major reinsurance treaties.

6. COMPREHENSIVE INCOME

The Company's comprehensive income for First Quarter 2003 and the
corresponding period in the prior year are:

UNAUDITED,
QUARTER ENDED MARCH 31,
(in thousands) 2003 2002
-------------- ---- ----

Net income $ 8,038 10,301
Other comprehensive (loss), decrease in net unrealized gains on
available-for-sale securities, net of deferred income tax effect (1,246) (6,021)
------- ------
Comprehensive income $ 6,792 4,280
======= =====

7. CONCENTRATION OF CREDIT RISK

Financial instruments that could potentially subject the Company to
concentration of credit risk include accounts receivable associated with
our human resource administration outsourcing subsidiary, which acts as a
co-employer with certain clients. As a co-employer, we contractually
assume substantial employer rights, responsibilities and risks of our
clients' employees, who are considered co-employees. These accounts
receivable, which are included in other trade receivables on the
consolidated balance sheets, consist of service fees to be paid by our
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 co-employer
service fees are billed. Accrued co-employer payroll and related service
fees were $14.0 million as of

8

March 31, 2003 and $15.1 million as of March 31, 2002. Certain states
limit a co-employer's liability for earned payroll to minimum wage. This
would reduce the Company's potential liability for accrued co-employer
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 co-employer contract or at its option, require letters
of credit or other collateral. The Company has generally not required such
collateral. As of March 31, 2003 the maximum exposure to any one account
for earned payroll is approximately $1.1 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
43% of co-employer 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.

8. STOCK-BASED COMPENSATION

The FASB Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (FAS 123) establishes financial accounting
and reporting standards for stock-based compensation plans. As permitted
by FAS 123, the Company uses the accounting method prescribed by
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" (APB 25) to account for its stock-based compensation plans.
Companies using APB 25 are required to make pro forma footnote disclosures
of net income and earnings per share as if the fair value method of
accounting, as defined in FAS 123, had been applied.

As of December 31, 2002, the Company adopted the FASB Statement of
Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" (FAS 148). FAS 148 amends FAS
123 to provide alternative methods of transition to FAS 123's fair value
method of accounting for stock-based compensation.

The Company has adopted the pro forma footnote disclosure-only provisions
of FAS 123. Based on the fair value method consistent with the provisions
of FAS 123, the Company's net income and earnings per share would have
been reduced to the following pro forma amounts indicated below:

UNAUDITED,
QUARTER ENDED MARCH 31,
(in thousands, except per share amounts) 2003 2002
---------------------------------------- ---- ----

Net income, as reported $ 8,038 10,301
Add: Stock-based employee compensation reported in net income,
net of related tax effect 598 832
Deduct: Total stock-based employee compensation expense determined
under fair value-based method for all awards, net of related tax effects (1,612) (1,798)
--------- -----
Pro forma net income $ 7,024 9,335
========= =====
Net income per share:
Basic - as reported $ 0.31 0.41
Basic - pro forma 0.27 0.38
Diluted - as reported 0.29 0.39
Diluted - pro forma 0.26 0.35

9. COMMITMENTS

Included in other investments is approximately $23.7 million of
investments in limited partnerships as of March 31, 2003, and $23.5
million as of December 31, 2002. At March 31, 2003 the Company has an
additional limited partnership investment commitment of up to $16.3
million. There is no certainty that any additional investment will be
required.

9

FORWARD-LOOKING STATEMENTS

Some of the statements in this report, including information incorporated by
reference contain forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. These statements relate to our intentions, beliefs, projections,
estimations or forecasts of future events or our future financial performance
and involve known and unknown risks, uncertainties and other factors that may
cause our or our industry's actual results, levels of activity, or performance
to be materially different from those expressed or implied by the
forward-looking statements. In some cases, you can identify forward-looking
statements by use of words such as "may," "will," "could," "would," "should,"
"expect," "plan," "anticipate," "target," "project," "intend," "believe,"
"estimate," "predict," "potential," "pro forma," "seek," "likely" or "continue"
or other comparable terminology. These statements represent our expectations and
we can give no assurance that such expectations will prove to be correct.

Factors that could cause our actual results to differ materially from those
projected, forecasted or estimated by us in forward-looking statements, include,
but are not limited to:

- the frequency and severity of catastrophic events, including
hurricanes, tornadoes, windstorms, earthquakes, hail, severe winter
weather, fires, explosions and terrorism;

- adverse economic, market or regulatory conditions;

- our concentration in a number of east coast and midwestern states;

- the adequacy of our loss reserves;

- the cost and availability of reinsurance;

- our ability to collect on reinsurance and the solvency of our
reinsurers;

- uncertainties related to insurance rate increases and business
retention;

- changes in insurance regulations that impact our ability to write
and/or cease writing insurance policies in one or more states
particularly changes in New Jersey automobile insurance laws and
regulations;

- our ability to maintain favorable ratings from A.M. Best, Standard &
Poor's, Moody's and Fitch;

- fluctuations in interest rates and the performance of the financial
markets;

- our entry into new markets and businesses; and

- other risks and uncertainties we identify in this report and other
filings with the Securities and Exchange Commission.

We undertake no obligation, other than as may be required under the federal
securities laws, to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. We do not
assume responsibility for the accuracy and completeness of the forward-looking
statements. All of the forward-looking statements in this report are qualified
by reference to the factors discussed under "Risk Factors" beginning on page 16
of our Annual Report on Form 10-K for the year ended December 31, 2002. These
risk factors may not be exhaustive. We operate in a continually changing
business environment, and new risk factors emerge from time to time. We cannot
predict such new risk factors, nor can we assess the impact, if any, of such new
risk factors on our businesses or the extent to which any factor or combination
of factors may cause actual results to differ materially from those expressed or
implied in any forward-looking statements in this report. In light of these
risks, uncertainties and assumptions, the forward-looking events discussed in
this report might not occur.

For these statements, we claim the protection of the safe harbor for
forward-looking statements contained in Section 27A of the Securities Act.

10

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, liquidity and capital resources, off-balance sheet arrangements,
contractual obligations and contingent liabilities and commitments and critical
accounting policies for the interim periods indicated.

RESULTS OF OPERATIONS

The following discussion is a comparison of the period ended March 31, 2003
(First Quarter 2003) to the period ended March 31, 2002 (First Quarter 2002).

Net income for First Quarter 2003 was $8.0 million, or $0.29 per diluted share,
compared with $10.3 million, or $0.39 per diluted share, for First Quarter 2002.
Operating income from continuing operations was $5.5 million, or $0.20 per
diluted share, for First Quarter 2003 compared with $10.2 million, or $0.39 per
diluted share, for First Quarter 2002. Operating income is used as an important
financial measure by management, analysts and investors, because the realization
of investment gains and losses in any given period is largely discretionary as
to timing and could distort the analysis of trends; however it is not intended
as a substitute for net income prepared in accordance with accounting principles
generally accepted in the United States of America (GAAP). The following is a
reconciliation of operating income from continuing operations to net income
determined in accordance with GAAP:

Unaudited,
Quarter ended March 31,
(in thousands) 2003 2002
- -------------- ---- ----

Operating income from continuing operations $5,454 10,228
Capital gains, after-tax 2,584 71
------ ------
Income from continuing operations, after-tax 8,038 10,299
Income from discontinued operations, after-tax -- 2
------ ------
Net income $8,038 10,301
====== ======

Net income and operating income were affected by catastrophe losses stemming
from some of the worst winter storms to hit the East Coast in a decade.
Catastrophe losses for First Quarter 2003, on an after-tax basis, were
approximately $7.7 million, or $0.28 per diluted share, compared with $1.1
million or $0.04 per diluted share in First Quarter of 2002. Further impacting
results were other non-catastrophe weather-related property losses of $1.7
million, after-tax, or $0.06 per diluted share for the quarter. Other
non-catastrophe weather-related property losses had an immaterial impact on
First Quarter 2002 results.

OPERATING SEGMENTS

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, personal lines underwriting), Investments, and
Diversified Insurance Services (managed care, flood insurance and human resource
administration outsourcing). Insurance Operations is evaluated based on
underwriting results determined in accordance with 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 determined in accordance with GAAP. For an additional
description of accounting policies, refer to Note 1 to our consolidated
financial statements on pages 43 through 47 of our 2002 Annual Report to
Shareholders (incorporated herein by reference to our Annual Report on Form 10-K
for the year ended December 31, 2002) and the discussion on page 18 of this
report on Form 10-Q.

11

See Note 4 to the March 31, 2003 unaudited interim consolidated financial
statements on page 7 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,
ALL LINES Quarter ended March 31,
(in thousands) 2003 2002

GAAP INSURANCE OPERATIONS RESULTS
Net premiums written $ 323,403 281,445
--------- ------
Net premiums earned 267,047 234,295
Losses and loss expenses incurred 199,102 170,877
Net underwriting expenses incurred 84,383 70,539
Dividends to policyholders 1,555 1,921
--------- ------
Underwriting loss $ (17,993) (9,042)
========= ======
GAAP RATIOS:
Loss and loss expense ratio 74.6% 72.9
Underwriting expense ratio 31.5% 30.2
Dividends to policyholders ratio 0.6% 0.8
--------- ------
Combined ratio 106.7% 103.9
========= ======

Net premiums written for First Quarter 2003 increased approximately $42.0
million, or 15%, to $323.4 million. Included in this increase is $62.9 million
in net new business, compared with $71.6 million in net new business for the
same period one year ago. Net premiums written for commercial lines increased
16% compared with First Quarter 2002, driven by renewal premium increases that
averaged 15% (including estimated exposure growth of five points) during First
Quarter 2003. Personal lines net premiums written were up 8% for First Quarter
2003, compared with a decrease of 2% for First Quarter 2002. As of the end of
First Quarter 2003, commercial lines net premiums written represented
approximately 83% of our total insurance underwriting business. This mix
reflects our ongoing strategy to focus on commercial lines as our core
operation, while establishing a smaller, but profitable personal lines segment.

Our overall combined ratio for First Quarter 2003 was 106.7%, compared with a
ratio of 103.9% for the same period last year. First Quarter 2003 included 3
catastrophic events, stemming from some of the worst winter storms to hit the
East Coast in a decade, exposing Selective to approximately 650 claims. For
First Quarter 2003, these storms added $11.9 million to losses incurred and 4.4
points to the combined ratio, compared with only $1.7 million and 0.7 points,
respectively, in First Quarter 2002.

Commercial Lines Underwriting

Unaudited,
COMMERCIAL LINES Quarter ended March 31,
(in thousands) 2003 2002
- -------------- ---- ----

GAAP INSURANCE OPERATION RESULTS
Net premiums written $ 269,754 231,914
========= ======
Net premiums earned 215,625 185,038
Losses and loss expenses incurred 160,193 131,697
Net underwriting expenses incurred 68,084 55,285
Dividends to policyholders 1,555 1,921
--------- ------
Underwriting loss $ (14,207) (3,865)
========= ======
GAAP RATIOS:
Loss and loss expense ratio 74.3% 71.2
Underwriting expense ratio 31.6% 29.9
Dividends to policyholders ratio 0.7% 1.0
--------- ------
Combined ratio 106.6% 102.1
========= ======

Commercial Lines net premiums written increased $37.8 million, or 16%, to $269.8
million for First Quarter 2003 compared with $231.9 million for First Quarter
2002. Net premiums written included approximately $54.8 million in net new
business for First Quarter 2003, compared with $67.0 million for the same period
one year ago. Renewal price increases continued their upward trend, reaching 15%
for First Quarter 2003. Importantly, retention at point of renewal moved higher
to 86% for First Quarter 2003, compared with 85% at First Quarter 2002.

For First Quarter 2003, the Commercial Lines combined ratio increased 4.5 points
to 106.6% when compared with 102.1% for the same period one year ago. The higher
combined ratio reflects 4.8 points of catastrophe losses compared with 0.6
points for the same period last year.

12

Also contributing to the increase is a higher underwriting expense ratio of
31.6% for First Quarter 2003, compared with 29.9% for First Quarter 2002. This
increase is attributable to a changed deferred acquisition cost amortization
estimate that management believes better matches underwriting expenses with
earned premium by quarter. The change in estimate will have no impact for the
full year. The Commercial Lines underwriting expense ratio was 31.6% for the
full year of 2002.

We experienced improvements in underwriting results, as measured by our
statutory combined ratio, in all our major casualty lines during the quarter,
particularly in our commercial automobile statutory combined ratio that was
90.2% for First Quarter 2003, compared with 99.8% at First Quarter 2002 and our
general liability statutory combined ratio that was 94.7% for the quarter,
compared with 102.2% for the same period last year. These improvements were due
to price increases and underwriting improvements.

Our workers' compensation statutory combined ratio improved to 106.7% for First
Quarter 2003, compared with 108.0% for First Quarter 2002. We believe our
account-based underwriting strategy enhances our position with this challenging
line. Workers' compensation is neither a mono-line, nor a targeted growth line
for Selective, but rather an important piece of our offering to agents and their
customers who want an entire package of protection from Selective. Less than 5%
of our workers' compensation business is unsupported. Our underwriting is
focused on low-to-medium hazards, with close to 60% of this business in the two
lowest hazard groups, as defined by the National Council of Compensation
Insurers, and less than one percent in the highest hazard group.

Clearly, one of the most challenging components of this line is price,
particularly with ongoing medical inflation, which has led to increasing loss
trends. We have focused our efforts on increasing price through managed care
credit reductions, shifting business to higher pricing tiers and limiting the
use of dividend plans. At the same time, we have taken full advantage of all
rate opportunities. As a result of these initiatives, over the last three years
our workers' compensation pricing increased about 48%, while policy count has
declined from 9% of total commercial policy count, to 8% as of First Quarter
2003. In the First Quarter 2003, we received an average price increase of 14%,
including 17% in New Jersey, our largest workers' compensation market. These
price increases exceeded loss trends by 7.0 points.

Personal Lines Underwriting

Unaudited,
PERSONAL LINES Quarter ended March 31,
(IN THOUSANDS) 2003 2002
- -------------- ---- ----

GAAP INSURANCE OPERATION RESULTS
Net premiums written $ 53,649 49,531
======== ======
Net premiums earned 51,422 49,257
Losses and loss expenses incurred 38,909 39,180
Net underwriting expenses incurred 16,299 15,254
-------- ------
Underwriting loss $ (3,786) (5,177)
======== ======
GAAP RATIOS:
Loss and loss expense ratio 75.7% 79.5
Underwriting expense ratio 31.7% 31.0
-------- ------
Combined ratio 107.4% 110.5
======== ======

Personal Lines Underwriting net premiums written, for the 10 states where we
write personal lines, increased $4.1 million, or 8%, for First Quarter 2003 when
compared with the same period in 2002. The Personal Lines combined ratio was
107.4% for First Quarter 2003, including 3.1 points of catastrophe losses, down
3.1 points from First Quarter 2002, which was 110.5% and contained 1.1 points of
catastrophe losses. Our homeowners line of business experienced a statutory
combined ratio of 122.6% for First Quarter 2003, compared with 114.8% in First
Quarter 2002. First Quarter 2003 included 20.2 points from catastrophe losses,
compared with 7.6 points for the same period last year. However, our personal
automobile line of business improved 7.2 points, to a statutory combined ratio
of 104.2% in the First Quarter 2003, compared with 111.4% in First Quarter 2002.
This line was not significantly impacted by catastrophe losses in either period.
The improvement reflects the significant price increases in all our operating
territories, along with tightened underwriting guidelines.

New Jersey personal automobile had a statutory combined ratio of 102.2% for the
quarter, down 6.5 points over the same period last year. Also during First
Quarter 2003, the average premium per vehicle in New Jersey increased 11% over
First Quarter 2002. This is largely due to the three premium increases we've
achieved in the last 15 months. In addition, the number of insured vehicles has
declined to about 110,000 for First Quarter 2003, from 118,000 at First Quarter
2002. As a result of our ongoing diversification efforts, New Jersey automobile
now represents 10% of company-wide premium volume, down from 11% in First
Quarter 2002. As we continue to earn higher premiums from price and tier
changes, we expect ongoing improvements in this line.

Although we have seen substantial improvement in our New Jersey personal
automobile results, they are still unprofitable. In addition, the political
environment surrounding New Jersey personal automobile continues to be a
challenge, with positive reform

13

efforts as well as negative resistance to the verbal threshold being discussed
in the State Assembly. At this time, it remains uncertain what, if any, changes
may occur and what impact they may have on the Company's results.

New Jersey homeowners had a statutory combined ratio of 120.6% in the First
Quarter 2003, compared with a 100.8% in First Quarter 2002. We experienced 30.5
points from catastrophe losses in the quarter, compared with 6.7 points for
First Quarter 2002. We are continuing efforts to control our exposure in New
York due to the high cost of required participation in the involuntary personal
automobile insurance market. Our personal automobile statutory combined ratio in
New York was 149.8% for First Quarter 2003, compared with 147.7% for First
Quarter 2002. At the end of the First Quarter 2003, the number of insured
vehicles in New York was approximately 10,500, a 4% drop from year-end 2002.

In our eight other personal lines states, net premiums written increased 18% for
First Quarter 2003 to $14.0 million, compared with $11.8 million for the same
period last year, reflecting price increases, tier changes and other
underwriting actions designed to improve results. For First Quarter 2003, the
personal lines statutory combined ratio for these eight states improved almost 6
points, to 106.2%, compared with 111.8% for this period last year. Two years of
price and tier changes for these eight states continue to favorably impact net
premiums earned. We expect this upward, positive trend to continue with total
increases of 7% for automobile and 10% for homeowners in 2003, as personal lines
prices continue to push upward, industry-wide.

Investments Segment

Although lower interest rates continue to put pressure on investment returns, we
still generated a 7% increase in after-tax investment income to $19.8 million
for First Quarter 2003, up from $18.5 million for First Quarter 2002. The
increase reflects an increased asset base as our overall investment portfolio
reached $2.2 billion. The after-tax portfolio yield is 3.7%, compared with 4.1%
for the same period last year, reflecting downward pressure from maturing bonds
that are being replaced by bonds with lower interest rates.

We continue to maintain a conservative, diversified investment portfolio, with
our bond holdings representing 89% of invested assets. Approximately 60% of our
debt securities portfolio is rated "AAA." Our portfolio has an average rating of
"AA," with only 1% of the portfolio rated below investment grade.

The Company regularly reviews its investment portfolio for declines in value,
focusing attention on securities whose market value is less than 85% of their
cost/amortized cost at the time of review. If we believe a decline in the value
of a particular investment is temporary, we record the decline as an unrealized
loss in accumulated other comprehensive income. If we believe the decline is
"other than temporary," we write down the carrying value of the investment and
record a realized loss in our consolidated statements of income. Our assessment
of a decline in value includes our current judgment as to the financial position
and future prospects of the entity that issued the investment security. Broad
changes in the overall market or interest rate environment, generally will not
lead to a write-down. If our judgment about an individual security changes in
the future we may ultimately record a realized loss after having originally
concluded that the decline in value was temporary, which could have a material
impact on our net income and financial position of future periods. In evaluating
potential impairment of debt securities we evaluate certain factors, including
but not limited to the following:

- Whether the decline appears to be issuer or industry specific;

- The degree to which an issuer is current or in arrears in making
principal and interest payments on the debt securities in question;

- The issuer's current financial condition and its ability to make
future scheduled principal and interest payments on a timely basis;

- Buy/hold/sell recommendations published by outside investment
advisors and analysts; and

- Relevant rating history, analysis and guidance provided by rating
agencies and analysts.

In evaluating potential impairment of equity securities, we evaluate certain
factors, including but not limited to the following:

- Whether the decline appears to be issuer or industry specific;

- The relationship of market prices per share to book value per share
at the date of acquisition and date of evaluation;

- The price-earnings ratio at the time of acquisition and date of
evaluation;

- The financial condition and near-term prospects of the issuer,
including any specific events that may influence the issuer's
operations;

- The recent income or loss of the issuer;

- The independent auditors' report on the issuer's recent financial
statements;

- The dividend policy of the issuer at the date of acquisition and the
date of evaluation;

- Any buy/hold/sell recommendations or price projections published by
outside investment advisors; and

- Any rating agency announcements.

14

Realized gains and losses are determined on the basis of the cost of specific
investments sold or written-down, and are credited or charged to income.
Realized losses include impairment charges from investment write-downs for other
than temporary declines, if any, in the period such determination is made. There
were no impairment charges recorded during First Quarter 2003, while First
Quarter 2002 had $6.5 million. These securities were written down due to
heightened credit risk that was security specific and would not impact other
securities held.

The Company realized gains and losses from the sale of available-for-sale debt
and equity securities during First Quarter 2003 and First Quarter 2002. The
following table presents the period of time that debt securities, sold at a loss
during these periods, were continuously in an unrealized loss position prior to
sale. Equity securities sold during these periods were not in a continuous
unrealized loss position prior to sale:

Unaudited,
Quarter ended March 31,
(in millions) 2003 2002
Fair Fair
Period of time in an Value on Realized Value on Realized
unrealized loss position Sale Date Loss Sale Date Loss
- ------------------------ --------- ---- --------- ----

Debt securities:
0 - 6 months $ -- -- -- --
7 - 12 months -- -- 6.7 0.3
Greater than 12 months 5.0 -- -- --
----- -- --- ---
Total debt securities $ 5.0 -- 6.7 0.3
===== == === ===

These securities were sold despite the fact that they were in a loss position
due to heightened credit risk of the individual security sold, or the need to
reduce our exposure to certain issuers, industries or sectors in light of
changing economic conditions.

UNREALIZED LOSSES

The following table summarizes, for all available-for-sale securities in an
unrealized loss position at March 31, 2003 and December 31, 2002, the aggregate
fair value and gross pre-tax unrealized loss recorded in our accumulated other
comprehensive income, by asset class and by length of time those securities have
continuously been in an unrealized loss position:

Unaudited
(in millions) March 31, 2003 December 31, 2002
- ------------- --------------------- ---------------------
Gross Gross
Period of time in unrealized Fair Unrealized Fair Unrealized
loss position Value Loss Value Loss
- ------------- ----- ---- ----- ----
Debt securities:

0 - 6 months $104.6 0.7 110.8 3.3
7 - 12 months 20.5 1.8 12.9 0.3
Greater than 12 months 13.4 3.0 19.8 3.0
------ ---- ----- ----
Total debt securities 138.5 5.5 143.5 6.6
------ ---- ----- ----

Equities:
0 - 6 months 7.7 0.3 15.6 2.3
7 - 12 months 25.4 7.3 15.9 3.2
Greater than 12 months 7.7 3.0 8.3 2.4
------ ---- ----- ----
Total equities 40.8 10.6 39.8 7.9
------ ---- ----- ----
Total $179.3 16.1 183.3 14.5
====== ==== ===== ====

The following table presents information regarding our available-for-sale debt
securities that were in an unrealized loss position at March 31, 2003 by
maturity:

Amortized Fair
(in millions) Cost Value

One year or less $ 17.3 16.5
Due after one year through five years 18.6 18.2
Due after five years through ten years 63.2 60.4
Due after ten years through fifteen years 44.9 43.4
Due after fifteen years -- --
------ -----
Total $144.0 138.5
====== =====

15

At March 31, 2003 our investment portfolio included non-investment grade
securities with an amortized cost of $21.1 million, or less than 1% of the
portfolio, and a fair value of $20.5 million. At December 31, 2002,
non-investment grade securities in our investment portfolio also represented
less than 1% of the portfolio, with an amortized cost of $14.7 million and a
fair value of $13.3 million. The unrealized loss on these securities represented
7% of our total unrealized loss at March 31, 2003, and 10% at December 31, 2002.
The fair value of these securities was determined by independent pricing
services or bid prices provided by various broker dealers. The Company did not
have a material investment in non-traded securities in First Quarter 2003 or
First Quarter 2002.

The Company regularly reviews the diversification of the investment portfolio
compared with an investment grade corporate index. At March 31, 2003, 19% of the
market value of our corporate bond and preferred stock portfolios were
represented by investments in banks, only one of which was in an unrealized loss
position, compared with 11% in the benchmark corporate index. The average
Moody's rating for the banking portfolio is "A1" with the lowest rated security
at "Baa2" and the average Standard and Poor's rating is "A", with the lowest
rated security at "BB-".

Diversified Insurance Services Segment

Unaudited,
Quarter ended March 31,
(IN THOUSANDS) 2003 2002
- -------------- ---- ----

MANAGED CARE
Net revenue $ 5,629 5,316
Pre-tax profit 950 816
FLOOD INSURANCE
Net revenue 4,604 3,961
Pre-tax profit 772 650
HUMAN RESOURCE ADMINISTRATION OUTSOURCING
Net revenue 10,651 9,104
Pre-tax profit (loss) 75 (225)
OTHER
Net revenue 454 452
Pre-tax profit 70 153
TOTAL
Net revenue 21,338 18,833
Pre-tax profit 1,867 1,394
After tax profit 1,301 943
Return on net revenue 6.1% 5.0

Revenue from continuing Diversified Insurance Services businesses for First
Quarter 2003 was $21.3 million, up 13% over First Quarter 2002, and our return
on revenue from continuing Diversified Insurance Services businesses was 6.1%
for First Quarter 2003, compared with 5.0% for First Quarter 2002. We posted net
income from continuing operations of $1.3 million for First Quarter 2003,
compared with $0.9 million for First Quarter 2002.

Managed Care

Our medical provider network has expanded to 84,122 locations as of First
Quarter 2003 from 77,675 locations as of First Quarter 2002. Network and client
expansion as well as pricing initiatives have resulted in an increase in managed
care revenues of 6% to $5.6 million for First Quarter 2003 compared with $5.3
million for First Quarter 2002. This growth, combined with pricing initiatives,
has also resulted in an increase of pre-tax profit of 16% to $1.0 million in
First Quarter 2003 compared with $0.8 million for First Quarter 2002.

Flood Insurance

First Quarter 2003 premium growth of 17%, compared with First Quarter 2002,
resulted in increased servicing fees of $4.6 million compared with $4.0 million
in First Quarter 2002. The premium growth also increased pre-tax profit 19%, to
$0.8 million, compared with $0.7 million in First Quarter 2002. Growth in new
flood business was due, in part, to enhanced marketing efforts with our personal
lines operation. We received book rollovers with approximately $0.8 million in
premium during the quarter, bringing total flood premium serviced to $55.3
million. More than 6,000 flood agents are now selling for us countrywide.

16

Human Resource Administration Outsourcing (HR outsourcing)

HR outsourcing's pricing and cost reduction initiatives that were implemented
during 2002 resulted in an increase in revenue of 17%, to $10.7 million, in
First Quarter 2003 compared with $9.1 million of revenue for First Quarter 2002.
These initiatives have also translated into pre-tax profit of $0.1 million in
First Quarter 2003 compared with a pre-tax loss of $0.2 million in First Quarter
2002.

Following significant pricing and underwriting enhancements over the last 18
months, this operation is once again profitable. For First Quarter 2003,
workers' compensation fees increased 10%, while client administration fees were
up 7%. HR outsourcing ended the quarter with 18,735 worksite lives - on track
with our tightened underwriting and pricing initiatives. About 42 agents added
2,200 worksite lives this quarter.

Federal Income Taxes

Total federal income tax expense remained constant at $1.3 million for First
Quarter 2003, when compared with First Quarter 2002. The tax benefit from larger
underwriting losses was offset by higher taxes on investment income due to a
higher proportion of taxable bonds. The overall effective tax rate for First
Quarter 2003 was 14% compared with 12% for First Quarter 2002. Our effective tax
rate differs from the federal corporate rate of 35% primarily as a result of
tax-exempt investment income.

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.

Based upon the 2002 statutory financial statements, the insurance subsidiaries
are permitted to pay the Parent in 2003 ordinary dividends in the aggregate
amount of $51.1 million. There can be no assurance that the insurance
subsidiaries will be able to pay dividends to the Parent in the future in an
amount sufficient to enable the Parent to meet its liquidity requirements. For
additional information regarding regulatory 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 pages 54 and 55 of our Annual Report on Form 10-K for the year
ended December 31, 2002. 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 74 consecutive years and currently plans to continue to pay
quarterly cash dividends.

The Parent's cash requirements include principal and interest payments on the
various senior notes and subordinated debentures, dividends to stockholders and
general operating expenses, as well as the cost of shares of common stock
repurchased under our common stock repurchase program, which commenced in 1996
and will terminate effective May 31, 2003. As of March 31, 2003, the Parent had
repurchased under the program a total of 7.3 million shares at a total cost of
approximately $140.5 million. The Parent generates cash from the sale of its
common stock under various stock plans, the dividend reinvestment program, and
from investment income. For First Quarter 2003, cash provided by operating
activities was $41.0 million compared with $38.0 million for First Quarter 2002.
The Parent also has available $50.0 million of unused credit lines.

Total assets increased 4%, or $122.7 million, at March 31, 2003 from December
31, 2002. The increase was primarily due to: (i) an increase in investments of
$52.9 million primarily due to $41.0 million of operating cash flows, and $15.0
million of bonds purchased in late March that did not settle until April and
(ii) an increase in premiums receivable of $53.3 million and an increase in
deferred policy acquisition costs of $11.2 million, both corresponding with the
net premiums written growth for the period. These increases were offset by $4.0
million in dividends paid to stockholders.

Total liabilities increased 5%, or $118.0 million, at March 31, 2003 from
December 31, 2002. Increased premium volume is primarily responsible for
increases in unearned premium reserves of $56.5 million and $50.3 million in
loss and loss expense reserves. Also affecting the increase in the loss and loss
expense reserves are the weather-related catastrophe losses stemming from the
winter storms that hit the East Coast in the First Quarter of 2003. Securities
payable, classified within other liabilities, increased $15.0 million for the
reason mentioned above.

OFF-BALANCE SHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS AND CONTINGENT
LIABILITIES AND COMMITMENTS

At March 31, 2003 and 2002, 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.

Our future cash payments associated with contractual obligations pursuant to
operating leases for office space and equipment,

17

senior convertible notes, convertible subordinated debentures and notes payable
have not materially changed since December 31, 2002. We fully expect to have the
capacity to repay and/or refinance these obligations as they come due.

We currently have available revolving lines of credit amounting to $50.0
million, under which no balances are outstanding as of either March 31, 2003 or
December 31, 2002. We have issued no guarantees on behalf of others and have no
trading activities involving non-exchange traded contracts accounted for at fair
value. We have no material transactions with related parties other than those
disclosed in Note 16 to our consolidated financial statements on page 64 of our
Annual Report on Form 10-K for the year ended December 31, 2002.

CRITICAL ACCOUNTING POLICIES

We have identified the policies described below as critical to our business
operations and the understanding of our results of operations. For a detailed
discussion on the application of these and other accounting policies, see Note 1
to our consolidated financial statements on pages 43 through 47 of our Annual
Report on Form 10-K for the year ended December 31, 2002. Note that our
preparation of the unaudited 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 unaudited interim consolidated 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

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. As
of March 31, 2003, the Company had accrued $1.5 billion of loss and loss expense
reserves compared with $1.4 billion at December 31, 2002.

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
are 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. We have
established a range of reasonably possible IBNR losses for non-environmental net
claims of approximately $523.5 million to $666.5 million at December 31, 2002. A
range has not been established at March 31, 2003 because management believes it
would not be meaningful. A low and high reasonable IBNR selection was derived
primarily by considering the range of indications calculated using standard
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. Our net carried IBNR reserves for
non-environmental claims, including loss expense reserves, were $621.8 million
at March 31, 2003 and $588.5 million at December 31, 2002. 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 by both internal and independent actuaries 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.

Included in the reserves above are amounts for 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.

18

IBNR reserve estimation for environmental claims is often difficult because, in
addition to other factors, there are significant uncertainties associated with
critical assumptions in the estimation process such as average clean-up costs,
third-party costs, potentially responsible party shares, allocation of damages,
insurer litigation costs, insurer coverage defenses and potential changes to
state and federal statutes. However, management is not aware of any emerging
trends that could result in future reserve adjustments. Moreover, normal
historically-based actuarial approaches are difficult to apply because relevant
history is not available. In addition, while models can be applied, such models
can produce significantly different results with small changes in assumptions.
As a result, management does not calculate a specific environmental loss range,
as it believes it would not be meaningful.

After taking into account all relevant factors, we believe that the reserve for
net losses and loss expenses at March 31, 2003, 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.

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 would 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
consolidated balance sheets, 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, 2002.

ITEM 4. CONTROL AND PROCEDURES

As of date within 90 days of the filing date of this report on Form 10-Q, an
evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures was performed under the supervision and with
the participation of the Company's management, including the chief executive
officer and chief financial officer. Based on that evaluation, the Company's
management, including the chief executive officer and chief financial officer,
concluded that the Company's disclosure controls and procedures were effective
as of the evaluation date. Subsequent to the evaluation date, there have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls.

19

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS - NONE

ITEM 2. CHANGES IN SECURITIES - NONE

ITEM 3. DEFAULTS UPON SENIOR SECURITIES - NONE

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Selective's Annual Meeting of Stockholders was held on May 7, 2003. At the
Annual Meeting, A. David Brown, William M. Kearns, Jr., S. Griffin McClellan
III, John F. Rockart, Ph.D., and J. Brian Thebault, were elected as directors to
serve for a term of three years, expiring at the 2006 Annual Meeting of
Shareholders and until their successors are elected and qualified. Votes cast
for and withheld on the election of directors were as follows:

Votes for Votes withheld
--------- --------------

A. David Brown 22,397,164 863,765
William M. Kearns, Jr. 22,346,481 914,448
S. Griffin McClellan III 22,389,835 871,094
John F. Rockart, Ph.D. 22,337,060 923,869
J. Brian Thebault 22,373,231 887,698

There were no broker nonvotes on the election of directors. The directors whose
terms of office continued after the Annual meeting are; Paul D. Bauer, William
A. Dolan, II, C. Edward Herder, CPCU, Joan M. Lamm-Tennant, Ph.D., Gregory E.
Murphy and William M. Rue, CPCU.

The shareholder proposal concerning recommendations to the Board of Directors as
to management compensation was not approved. Votes cast for and against the
shareholder proposal, and the number of abstentions, were as follows:

Votes for Votes against Abstentions

3,495,177 17,086,494 293,153

There were 2,386,105 broker nonvotes on the shareholder proposal.

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.

(b) Reports on Form 8-K:

There were no reports on Form 8-K filed during the period covered by this
report.

20

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 May 14, 2003
- ------------------------------------------------------------------------
Gregory E. Murphy

Chairman, President and Chief Executive Officer

By: /s/ Dale A. Thatcher May 14, 2003
- ------------------------------------------------------------------------
Dale A. Thatcher

Executive Vice President of Finance, Chief Financial Officer and Treasurer

21

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 and
material weaknesses.

Date: May 14, 2003 By: /s/ Gregory E. Murphy
----------------------------------------
Gregory E. Murphy
Chairman, President and Chief Executive Officer

22

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:

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 and
material weaknesses.

Date: May 14, 2003 By: /s/ Dale A. Thatcher
-------------------------------------
Dale A. Thatcher
Executive Vice President,
Chief Financial Officer and Treasurer

23

INDEX TO EXHIBITS

Exhibit No.

*11 Computation of Per Share Earnings, 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, 7 and 16 to consolidated financial statements of Selective
Insurance Group, Inc., December 31, 2002, 2001 and 2000 (incorporated by
reference to Selective's Annual Report on Form 10-K for the year ended
December 31, 2002, commission file no. 0-8641).

- ----------
* Filed herewith

24