1
EXHIBIT 13
ANNUAL REPORT PAGES 26 THROUGH 62 INCLUDING THE INSIDE BACK COVER
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ELEVEN-YEAR FINANCIAL HIGHLIGHTS
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(All presentations are in accordance with GAAP
unless noted otherwise; number of weighted average
shares and dollars in thousands, except per share amounts) 2000 1999
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Net premiums written 1 $843,604 811,677
Net premiums earned 821,265 799,066
Net investment income earned 99,495 96,531
Net realized gains (losses) 4,191 29,377
Diversified insurance services revenue 2 76,063 46,653
Total revenues 1,004,753 974,768
Underwriting loss 3 (65,122) (54,147)
Diversified insurance services net income (loss) 2 3,454 2,948
Operating income 3 23,811 34,622
Net income 4 26,535 53,717
Comprehensive income 49,166 16,088
Total assets 2,573,002 2,507,545
Notes payable and debentures 163,634 81,585
Stockholders' equity 577,797 569,964
Statutory premiums to surplus ratio 3,5 1.7:1 1.6:1
Statutory combined ratio 2,3,6 108.2% 105.7
Combined ratio 2,3,6 107.9% 106.8
Yield on investment, before-tax 5.8% 5.6
Debt to capitalization 22.1% 12.5
Return on average equity 4.6% 9.1
Per share data:
Net income:
Basic 1.07 1.98
Diluted 1.01 1.87
Dividends to stockholders .60 .59
Stockholders' equity 22.92 21.46
Price range of common stock:
High 25 7/8 22 1/2
Low 14 5/8 16 1/2
Close 24 1/4 17 3/16
Number of weighted average shares:
Basic 24,907 27,081
Diluted 26,518 28,877
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ELEVEN-YEAR FINANCIAL HIGHLIGHTS
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(All presentations are in accordance with GAAP
unless noted otherwise; number of weighted average
shares and dollars in thousands, except per share amounts) 1998 1997
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Net premiums written 1 748,873 717,618
Net premiums earned 722,992 676,268
Net investment income earned 99,196 100,530
Net realized gains (losses) (2,139) 6,021
Diversified insurance services revenue 2 14,100 8,236
Total revenues 837,329 794,183
Underwriting loss 3 (24,986) (3,022)
Diversified insurance services net income (loss) 2 1,440 495
Operating income 3 54,961 65,694
Net income 4 53,570 69,608
Comprehensive income 78,842 105,931
Total assets 2,432,168 2,306,191
Notes payable and debentures 88,791 96,559
Stockholders' equity 607,583 565,316
Statutory premiums to surplus ratio 3,5 1.5:1 1.5:1
Statutory combined ratio 2,3,6 103.2 100.1
Combined ratio 2,3,6 103.6 100.3
Yield on investment, before-tax 5.7 6.0
Debt to capitalization 13.2 14.6
Return on average equity 9.1 13.4
Per share data:
Net income:
Basic 1.88 2.41
Diluted 1.74 2.27
Dividends to stockholders .56 .56
Stockholders' equity 21.30 19.32
Price range of common stock:
High 29 1/4 283 /8
Low 161 1/16 185 /16
Close 20 1/8 27
Number of weighted average shares:
Basic 28,480 28,909
Diluted 30,412 30,925
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2
1996 1995 1994 1993
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692,239 757,021 697,941 607,462
694,947 742,817 680,270 594,919
96,952 91,640 80,657 77,326
2,786 900 4,230 4,528
6,378 4,529 3,482 2,912
804,780 843,100 771,682 682,510
(21,982) (17,468) (35,119) (54,530)
1,261 555 384 354
53,740 52,457 35,526 19,735
55,551 53,042 38,276 22,678
51,539 105,035 1,078 21,380
2,189,737 2,119,804 1,870,718 1,725,736
103,769 111,292 111,378 61,291
474,299 436,749 329,164 322,807
1.7:1 2.1:1 2.4:1 2.6:1
102.9 101.6 104.3 108.5
102.9 102.3 105.1 109.1
6.1 6.4 6.5 6.8
18.0 20.3 25.3 16.0
12.2 13.9 11.7 7.1
1.92 1.86 1.38 .83
1.83 1.81 1.29 .81
.56 .56 .56 .56
16.31 15.17 11.62 11.74
19 3/8 19 3/16 15 3/8 15 1/2
15 1/2 12 1/4 11 1/2 10 1/4
19 17 3/4 12 5/8 15 1/4
28,860 28,481 27,759 27,271
30,360 29,846 29,356 29,133
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1992 1991 1990
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560,360 500,283 482,735
539,792 503,726 470,681
73,516 68,501 64,508
3,943 3,580 9,888
2,519 2,273 2,059
622,084 580,193 549,228
(42,127) (38,310) (38,439)
294 158 (3)
24,845 24,429 24,491
53,915 27,293 32,402
53,520 33,245 22,837
1,639,033 1,321,120 1,240,916
63,681 14,470 15,173
311,705 269,998 248,274
2.5:1 2.5:1 2.7:1
107.9 107.6 108.0
107.7 107.6 108.2
7.2 7.6 7.5
17.0 5.1 5.8
18.5 10.5 13.5
2.02 1.03 1.25
1.93 1.01 1.16
.55 .52 .51
11.60 10.17 9.46
11 3/4 9 10 1/8
8 6 1/2 6 1/4
11 8 3/8 6 5/8
26,690 26,388 25,942
28,869 28,502 28,222
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3
1.Net premiums written in 1997 were increased by approximately $30 million due
to a conversion of New Jersey personal automobile policies from six-month to
annual terms. This conversion had no effect on net premiums earned.
2. Flood business is included in statutory underwriting results in accordance
with prescribed statutory accounting practices. On a GAAP basis only, flood
servicing revenue and expense has been reclassified from underwriting results to
Diversified Insurance Services. Prior years have been restated to reflect this
reclassification.
3. Refer to the Glossary of Terms on page 62 for definitions of terms and
specific measures.
4. Net income for 1992 increased by $26 million due to the adoption of two
accounting policies, Financial Accounting Standards No. 109, "Accounting for
Income Taxes" (FASB 109), and a change in the method of deferring policy
acquisition costs. FASB 109 increased net income by $20 million ($0.76 per basic
share and $0.70 per diluted share) and the change in deferred policy acquisition
costs increased net income by $6 million ($0.23 per basic share and $0.21 per
diluted share).
5. Regulatory and rating agencies use the statutory premiums to surplus ratio as
a measure of solvency, viewing an increase in the ratio as a possible increase
in solvency risk. Management and analysts also view this ratio as a measure of
the effective use of capital since, as the ratio increases, revenue per dollar
of invested capital increases, indicating the possible opportunity for an
increased return.
6. Changes in both the GAAP and statutory combined ratios are viewed by
management and analysts as indicative of changes in the profitability of
underwriting operations. A ratio over 100% is indicative of an underwriting
loss, and a ratio below 100% is indicative of an underwriting profit.
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4
ANNUAL REPORT - FINANCIAL REVIEW PAGES 28-35
Results of Operations
2000 Compared with 1999 and 1998
Financial Highlights1
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(dollars in thousands) 2000 1999 1998
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Net premiums written $843,604 811,677 748,873
Diversified insurance services revenue 76,063 46,653 14,100
Net investment income earned 99,495 96,531 99,196
Operating income 23,811 34,622 54,961
Net realized gains/(losses), after-tax 2,724 19,095 (1,391)
Net income 26,535 53,717 53,570
Statutory combined ratio 108.2% 105.7 103.2
GAAP combined ratio 107.9% 106.8 103.6
Return on average equity 4.6% 9.1 9.1
1 - Refer to the Glossary of Terms on page 62 for definitions of terms used in
this financial review.
We took a number of actions starting in 1999, and intensifying in 2000 aimed at
effectively positioning the Company to take maximum advantage of changing market
forces in the commercial lines marketplace. Although we believe that we have
made substantial progress in this regard, we still see the effects of
price-based competition in our Commercial Lines operations. We also saw the
Personal Lines combined ratio increase over the past three years primarily due
to the New Jersey state mandate to write involuntary business and the 15%
rollback of New Jersey private passenger automobile rates. Together, these items
were the principal reason for lower levels of operating income beginning in 1998
and continuing through 2000. Operating income decreased to $24 million, or $0.91
per diluted share in 2000, compared to $35 million, or $1.21 per diluted share
in 1999 and $55 million, or $1.79 per diluted share in 1998.
Realized gains, net of taxes, were $3 million, or $0.10 per diluted
share in 2000 compared to $19 million, or $0.66 per diluted share in 1999, and a
realized loss of $1 million, or $0.05 per diluted share in 1998. Realized
investment gains and losses fluctuate based on investment decisions regarding
individual securities as well as tax planning considerations. After several
years of substantial appreciation in the equity markets, we took the opportunity
in 1999 to rebalance the investment portfolio by selling $72 million in equity
securities. This generated realized gains of $37 million in 1999. The proceeds
from the sales were reinvested in debt instruments that have a higher current
yield than the equity securities they replaced. This resulted in additional
investment income in 1999 and 2000.
Net income for 2000 was $27 million, or $1.01 per diluted share, compared to $54
million, or $1.87 per diluted share in 1999 and $54 million, or $1.74 per
diluted share in 1998.
We manage our business in three operating segments: Insurance
Operations (Commercial and Personal Lines underwriting), Investments, and
Diversified Insurance Services. The Insurance Operations segment is evaluated
based on Accounting Principles Generally Accepted in the United States of
America (GAAP) underwriting results, as well as statutory and GAAP combined
ratios. Investment income is an important source of revenue and the return on
our investment portfolio has a material effect on operating income. Investments
are evaluated based on after-tax investment returns. Diversified Insurance
Services is evaluated based on revenue growth, and net income and earnings
before interest, taxes, depreciation and amortization EBITDA) returns on revenue
computed in accordance with GAAP.
Insurance Operations
Net premiums written increased over the prior year by 4% in 2000 to
$844 million, 8% in 1999 to $812 million, and 4% in 1998 to $749 million. These
increases resulted in a 3% increase over the prior year in net premiums earned
in 2000, 11% in 1999 and 7% in 1998.
BAR GRAPH: Net Premium Written (dollars in millions)
1996 $692
1997 $718
1998 $749
1999 $812
2000 $844
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(in millions) Total Commercial Personal
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2000 $844 639 205
% Change 3.9% 8.8 (8.7)
1999 812 588 224
% Change 8.4 12.0 --
1998 749 525 224
% Change 4.4 11.0 (8.5)
We actively write business in 20 states. Expansion into the Midwest and
Northeast is reflected in the increased percentage of business generated outside
of New Jersey. This amounted to 58% during 2000, compared to 54% in 1999, and
49% in 1998. Just ten years ago, business outside of New Jersey was only 35% of
our total business.
The combined ratio was 107.9% in 2000, compared to 106.8% in 1999 and
103.6% in 1998. The increase for 2000 was caused by a 6.6 point increase in the
Personal Lines combined ratio to 109.5% in 2000 from 102.9% in 1999; the
Commercial Lines combined ratio decreased 0.8 points to 107.5% in 2000 from
108.3% in 1999. The increase from 1998 to 1999 was caused by a 6.5 point
increase in the Personal Lines combined ratio to 102.9% from 96.4%, and a 1.8
point increase in the Commercial Lines combined ratio to 108.3% from 106.5%.
We have an ongoing plan to improve underwriting profitability through
the following steps: (i) improve pricing in both Personal and Commercial Lines
by filing for base rate increases, reducing the use of pricing credits, and, as
permitted by state laws, limiting the amount of business placed in preferred
pricing programs; (ii) manage business growth by focusing on appropriately
priced underwriting risks which support our business strategy; and (iii) pursue
a pending New Jersey rate filing to improve New Jersey private passenger auto
results.
We expect our underwriting improvements and price increases, measured in
terms of lower GAAP and statutory combined ratios, to become more significant in
the later quarters of 2001 and into 2002. As a result of our initiatives, we
presently expect to see a 2.5 to 3.5 point improvement in the statutory combined
ratio results in 2001 compared to 2000.
Commercial Lines Results
The Commercial Lines Strategic Business Units' (SBU) net premiums
written accounted for 76% of our total net premiums written in 2000, and
increased 9%, or $51 million, in 2000 compared to 12%, or $63 million, in 1999,
and 11%, or $52 million, in 1998. Growth in Commercial Lines net premiums
written during 2000 was primarily due to price increases on renewal premiums,
including exposure, which averaged 9% in the first quarter, and 13% to 15% for
the last three consecutive quarters, for a full year average of 13%. This trend
continued into 2001 as renewal price increases in the Commercial SBU's were up
an additional 16% for the first two months of 2001 compared to the same period
one year ago. During 1999 and 1998, prices were generally decreasing. For those
policies that we retain, this measures the increase in year-to-year premium,
including any increase in coverage purchased on those policies. Since we earn
these higher premiums over the life of the policy, generally one year, the
positive effects of Commercial Lines price increases generated in 2000 will be
more fully reflected on the combined ratio in the later quarters of 2001 and
into 2002. Our pricing strategy is implemented on an account-by-account basis to
preserve agency relationships and retain our best business. Retention during
2000 of existing business remained comparable to prior years at approximately
77%.
Net premiums written during 2000 included $134 million of new business,
compared to $154 million in 1999 and $167 million in 1998. The decrease in new
business during 2000 is attributed to our focus on price increases and
tightening underwriting criteria. The commercial lines pricing environment in
2000, which has allowed us to price our products more profitably, has also had a
positive impact on our mix of new and renewal business. In 2000, agents focused
more on selling needed price increases and less on producing new business. Also,
generally higher commercial lines prices industry-wide gave customers fewer
options and led them to stay more frequently with the carriers on their expiring
policies. Accordingly, there was less availability of new accounts in 2000.
While always necessary to grow the business, new business involves by its nature
a higher loss ratio than mature business. In 2000, new premiums made up 21% of
our commercial book, down from 26% last year. This factor, along with increased
prices on both new and renewal accounts, should have a positive impact on our
loss ratio going forward. We believe that the ability to increase renewal
pricing on a sustained basis is an important leading indicator for improving
results.
The loss and loss expense ratio was 72.6% in 2000, 73.0% in 1999 and
69.7% in 1998. This ratio has been impacted during 2000 and 1999 by unusual
large property and workers' compensation losses, as well as weather related
catastrophe losses. These increases were partially offset by decreases in the
1999 and 2000 company-wide loss expense ratio due to an increased focus on
existing loss cost initiatives including: (i) increased use of inside staff
counsel, which has a cost per closed suit approximately 60% lower than outside
staff counsel; (ii) reducing the number of outside law firms; (iii) active case
management; and (iv) more favorable fee arrangements with remaining outside law
firms. In addition to controlling loss expenses, our loss cost containment
initiatives include: (i) a comprehensive managed care program which reduced 2000
and 1999 workers' compensation and automobile losses; (ii) a special
investigative unit and
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claims professionals which uncovered fraudulent claims; (iii) a voluntary
automobile repair shop program which reduced repair costs while maintaining
customer satisfaction; and (iv) a small estimate automobile and property review
program.
Commercial Lines SBU's Results
The Commercial Lines business operates through six Commercial Lines
SBUs, each responsible for the profitability and production of their core
classes of business. The SBUs were established in 1993 to organize our insurance
segment around customers. This approach allows us to identify new business
opportunities and quickly correct under-performing business classes. This
operating structure is enhanced by line of business specialists that are
responsible for the profitability of our major lines of business. In addition to
increasing prices and implementing loss and loss expense cost savings
initiatives to improve profitability, the SBUs have strengthened the
underwriting discipline in under-performing classes of business.
Contractors' SBU
The Contractors' unit is the largest SBU with net premiums written of
$250 million in 2000 compared to $228 million in 1999 and $195 million in 1998.
The unit focuses on the building, carpentry and electrical trades, as well as
grading, excavation and other construction businesses. The combined ratio for
the Contractors SBU was 109.5% in 2000 compared to 110.4% in 1999 and 110.3% in
1998. Results in the past three years have been negatively impacted by
falls-from-heights losses. As a result, we have intensified our underwriting
training to recognize and correct or avoid these hazards.
Mercantile and Service SBU
The Mercantile and Services SBU had net premiums written of $168
million in 2000 compared to $157 million in 1999 and $149 million in 1998. The
SBU concentrates on retail stores, offices, wholesalers and service businesses.
The combined ratio for the unit was 105.5% in 2000, compared to 107.0% in 1999
and 106.8% in 1998. Over the past several years the transportation
sub-classification of this business, which amounts to approximately $18 million
in net premiums written, has performed poorly. As a result, we have implemented
stricter underwriting guidelines and price increases which have resulted in a
14% drop in policy count and a 19% increase in renewal premium in 2000.
Community Services and Organizations (CSO) SBU
The CSO SBU had net premiums written of $85 million in 2000 compared to
$79 million in 1999 and $71 million in 1998. This unit focuses its products and
marketing on municipalities, school boards, religious organizations and
volunteer fire departments. The combined ratio for the unit was 101.9% in 2000
compared to 99.9% in 1999 and 102.0% in 1998. This SBU has performed well over
the past three years. Our focus is to profitably grow this business in our
expansion regions.
Habitational and Recreational SBU
The Habitational and Recreational SBU had net premiums written of $67
million in 2000 compared to $62 million in 1999 and $57 million in 1998. This
SBU focuses on providing insurance products to hotels, motels, condominiums,
property owners associations, golf courses, country clubs, restaurants, and
other recreational industries. The combined ratio for this unit was 111.2% in
2000, compared to 115.2% in 1999 and 106.3% in 1998. Results for this SBU have
been negatively impacted by large property losses predominantly from electrical
related fire losses. We have tightened underwriting guidelines and established
training programs on effective age of buildings to mitigate these losses in the
future.
Manufacturing and Processing SBU
The Manufacturing and Processing SBU had net premiums written of $55
million in 2000 compared to $49 million in 1999 and $40 million in 1998. This
unit concentrates on light industrial and processing businesses with low product
liability exposures. The combined ratio for this unit was 111.6% for 2000
compared to 112.7% in 1999 and 106.3% in 1998. Over the past several years, this
SBU has incurred an unusual number of large losses. We are eliminating more
difficult property risks in order to lower our overall exposure and reduce
losses.
Bonds SBU
Net premiums written for 2000 were $13 million compared to $12 million
in 1999 and $13 million in 1998. The Bonds SBU markets a full array of fidelity,
contract surety and commercial surety products. The combined ratio was 88.4% in
2000 compared to 94.6% in 1999 and 74.5% in 1998. Results in the bond line of
business tend to have large fluctuations from year to year. This is due to the
fact that when losses occur they tend to be total losses.
Personal Lines Results
The Personal Lines SBU net premiums written decreased 9%, or $20
million, in 2000 compared to remaining flat in 1999, and decreasing 9% or $19
million in 1998. The decrease resulted in an 8% decrease in net premiums earned
in 2000 compared to a 5% increase in 1999, and a 3% increase in 1998. The
decrease in personal lines net premiums written during 2000 was caused by: (i) a
$29 million decline in New Jersey private passenger automobile net premiums
written mainly due to a 9% reduction in voluntary policies (approximately $13
million) and $13 million of New Jersey Personal Automobile Insurance Plan (PAIP)
involuntary business transferred to a servicing carrier in exchange for the
premium plus a 17.5% servicing fee; and (ii) a $6 million decrease in South
Carolina net
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premiums written due to a reduction in our policies in-force as a result of a
highly competitive personal lines marketplace and our reluctance to participate
at inadequate rates. These decreases were partially offset by an $18 million
increase in expansion state business.
As part of our geographic expansion program, personal lines products
for several states were enhanced in 1998 and 1999 to grow this segment of the
business. Personal Lines net premiums written in our expansion states increased
$18 million, to $51 million in 2000, from $33 million in 1999 and $17 million in
1998. At December 31, 2000 New Jersey Personal Automobile now represents just
15% of our annual net written premium volume compared to 19% at December 31,
1999, and 22% at December 31, 1998.
In 1998, the New Jersey legislature passed the New Jersey Automobile Insurance
Cost Reduction Act or "AICRA" (The Act) which was implemented in March of 1999.
The Act required private passenger automobile insurers to reduce their rates by
15% in return for savings which were expected to be generated due to medical
cost controls mandated by the state and other potential savings (e.g., changes
in the no-fault law, increased fraud prevention and prosecution). We estimate
the actual savings attributable to the new law in 2000 were in the 3% to 4%
range. This had an adverse impact on profitability in the New Jersey personal
automobile line of business which we expect to continue in 2001 with this line
of business expected to operate in the range of 108% to 113% combined ratio.
In 1998, New Jersey also began requiring carriers to write personal automobile
business at their normal rates in areas designated as "Urban Enterprise Zones"
(UEZ) in an amount equal to their statewide personal automobile market share.
Our market share at December 31, 2000 was estimated to be 2.9% compared to 3.1%
in both 1999 and 1998. UEZ business decreased to $16 million, or 12,000 policies
written during 2000 from $19 million, or 15,000 policies, written during 1999.
During 1998, we wrote only $12 million, or 7,000 policies in UEZ business and
that business was produced by our voluntary agents.
The Personal Lines SBU results for 2000 and 1999 reflected unfavorable New
Jersey private passenger automobile results and the costs associated with
writing new business in our expansion states. The personal lines SBU ratio of
losses and loss expenses incurred to net premiums earned increased 4.3 points,
to 81.2%, in 2000, compared to 76.9% in 1999 and 71.4% in 1998. The increase in
2000 continued to reflect the effect of the New Jersey AICRA rate rollback and
New Jersey personal automobile UEZ business. The 2000 New Jersey personal
automobile loss and loss expense ratio increased 3.6 points to 81.4%, and added
3.1 points to the overall personal lines combined ratio. Total UEZ business
generated a 164% loss and loss expense ratio for 2000, up from 150% in 1999. The
portion of this business assigned to us by the state generated a loss and loss
expense ratio over 200% for both years. As we strive to write more of this
business through our voluntary agents, and lessen our exposure to business
assigned to us by the state, it continues to present problems for our
profitability. We made a filing with the insurance department in New Jersey in
August 2000 for an 18.9% rate increase. The filing was deemed complete, and the
initial hearing was held before an Administrative Law Judge in early February
2001. The judge has 60 days to provide his advisory ruling to the Commissioner
of Insurance. The Commissioner, in turn, has 60 days to affirm, deny, or modify
that ruling. The ruling could then be appealed to the State court if we feel
that is necessary. The rate process is expected to be long and difficult, and
the outcome remains uncertain at this time.
Business in our expansion states produced a statutory combined ratio of 115.5%
in 2000 compared to a combined ratio of 116.7% in 1999 and 97.9% in 1998. The
personal automobile line generated a combined ratio in these states of 119% for
the past two years and has not performed to our expectation despite the fact
that we expect new business to generate a higher loss ratio than a seasoned book
of business. New personal automobile business in our preferred pricing tier is
performing within our expectations; however, business placed in our higher
priced rating tiers is performing poorly. As a result, we have significantly
slowed the growth of new business in these states by restricting personal
automobile business for insureds with at-fault accidents until rate filings are
complete, rates have been adjusted and rating tiers have been redefined. The
Company expects these changes to be implemented throughout 2001.
Personal Lines results in 2000 also reflect a 19 point increase in the combined
ratio of the homeowners line of business of 106.3% in 2000 compared to 87.5% in
1999 and 76.2% in 1998. The increase from 1999 to 2000 added 2 points to the
total personal lines combined ratio, and was due to higher storm losses that
were not classified as catastrophes and decreased contingent commissions on
homeowners' reinsurance contracts.
Commercial Lines and Personal Lines Insurance Operations Expenses
The GAAP ratio of underwriting expenses incurred to net premiums earned
was 32.2% in 2000, 31.8% in 1999 and 32.5% in 1998. The increase in 2000 is
comprised of 0.1 points attributable to spending on strategic initiatives and
0.3 points attributable to increased premium charge-offs partially offset by
increased audit premiums. The 0.7 point decrease in 1999 from 1998 is primarily
attributable to a decrease in profit based incentive payouts to both employees
and agents. During 2000, we began implementing automation, service and expense
control initiatives to eliminate processing duplication and reduce overhead
expenses. These actions include: i) consolidation of two New Jersey offices and
consolidation of the Richmond, Virginia and Chesapeake, Maryland regional
offices in conjunction with the formation of a service center that is being
piloted in Richmond beginning in January 2001; and ii) streamlined processing
for small commercial lines accounts that will improve service to our agents and
reduce expenses.
The office consolidation began during the third quarter of 2000 and is
expected to be completed by the third quarter of 2001. The Service Center is
designed to directly service our small business customers. Currently, over 50%
of our commercial lines business would fit into the model for this program and
our agents have suggested the potential for new growth and rollover
opportunities. In exchange for two points on their commission rates, the agents
who choose to use the Service Center can eliminate the processing expense for
high volume transactions.
8
Two automation strategies that pursue straight-through processing which
we expect to increase sales and eliminate redundant processing between the
Company and the independent agencies include: (i) continued implementation and
expansion of our small business issue system, called "One and Done," for
Business Owners Policies and related lines. We have a goal to write $13 million
in premium in 2001; and to expand the types of business and types of
transactions processed throughout 2001; and (ii) the development of the "eSelect
Agency Internet Site," that provides on-line access to account and claim history
as well as key sources of Company information.
Our automation strategies, are designed to improve the ratio of
statutory net premiums written per insurance operations employee. Management
tracks this number as a measure of efficiency within the insurance operations
segment. Net premiums written per employee were $475,000 in 2000 compared to
$471,000 in 1999 and $455,000 in 1998.
Reinsurance
We maintain reinsurance programs to protect us from unusually serious
individual occurrences or catastrophes in which a number of claims could produce
an extraordinary aggregate loss. We have both property and casualty excess of
loss treaties as well as a property catastrophe program. In certain instances
where greater capacity is needed for a larger property or casualty risk, we
purchase facultative (individual risk) reinsurance.
In addition, we have a homeowners' quota share program that reinsures
75% of New Jersey homeowners' property coverage up to a $1 million limit and
contains no per-occurrence limit. Given the favorable experience in both the New
Jersey homeowner's quota share and property catastrophe treaties, the 2001
homeowner contract renewed at the expiring rate while the property catastrophe
program increase was about 5%, and in line with our expectations. Our property
catastrophe program covers losses in excess of $15 million per catastrophe up to
$165 million. Total coverage under the program is $133 million.
We increased the retention on our property treaty excess of loss
program to cover each property occurrence in excess of $1 million up to $15
million, effective July 1, 2000. Prior to this change each property occurrence
in excess of $750,000 was covered up to $15 million. This treaty is expected to
cost approximately $6 million for the one-year policy term ended June 30, 2001.
Given our unsatisfactory property results, coupled with overall reinsurance
price increases, we expect that the July 1, 2001 renewal of the property excess
of loss treaty will generate substantially higher reinsurance costs.
Our casualty excess of loss treaty covers each casualty occurrence in
excess of $2 million up to $50 million, except for commercial umbrella, which is
reinsured up to $10 million.
Investments
The long-term objective of our investment policy is to maximize
after-tax yield while providing liquidity and preserving assets and
stockholders' equity. The current investment mix is 81% debt securities, 14%
equity securities, and 5% short-term investments. High credit quality has always
been a cornerstone of our investment strategy, as evidenced by the fact that 99%
of the debt securities are investment grade. To further emphasize this superior
quality, 38% of the debt securities have a Moody's rating of Aaa (or its
Standard & Poor's equivalent), considered to be the highest credit quality.
Net investment income earned, after-tax, was $76 million in 2000, $75
million in 1999, and $77 million in 1998. Two primary factors affecting net
investment income are cash flow available from operations and reinvestment rates
available in the marketplace. Investment income earned for 2000 was positively
impacted by higher returns on our investments in limited partnerships that are
subject to market fluctuations. The fair value of these investments increased $4
million before tax during 2000 when compared to 1999, decreased $2 million in
1999 compared to 1998, and increased $1 million in 1998 compared to 1997. Our
overall after-tax investment yield was 4.4% in 2000, compared to 4.3% in 1999
and 4.4% in 1998.
We repurchased 2.1 million shares of Company stock for $37 million in
2000, 2.5 million shares for $46 million in 1999, and 1.8 million shares for $38
million in 1998. We have repurchased 7 million shares of the 8 million-share
authorization that expires on May 31, 2001. As a direct result of the share
repurchase program, after-tax net investment income per diluted share, increased
to $2.86 in 2000, from $2.60 in 1999, and $2.51 in 1998. Invested assets also
increased to $3.08 per dollar of stockholders' equity compared to $3.00 in 1999
and $2.91 in 1998.
We emphasize liquidity requirements in response to an unpredictable
underwriting environment and the need to minimize the exposure to catastrophic
events. To provide liquidity while maintaining consistent performance,
maturities of debt securities are "laddered" so that some issues are always
approaching maturity, thereby providing a source of predictable cash flow. To
reduce sensitivity to interest rate fluctuations, we invest our debt portfolio
primarily in intermediate-term debt securities. The average life of the
portfolio at year-end 2000 was 4.7 years.
We will continue to follow the investment philosophy that has
historically proven successful for us. The strategy will be to continue to
purchase debt securities in sectors that represent the most attractive relative
value and maintain a moderate equity exposure. Managing investment risk by
adhering to these strategies is intended to protect the interests of our
stockholders as well as those of our policyholders and, at the same time,
enhance our financial strength and underwriting capacity.
9
PIE CHART: Debt Securities Quality Analysis
Aaa/AAA 38%
Aa/AA 34%
A/A 21%
Baa/BBB 6%
Other 1%
Diversified Insurance Services
The Diversified Insurance Services businesses create a fee-based source
of revenue that is not dependent on insurance underwriting cycles. These
businesses are not capital intensive and strengthen our ability to develop new
revenue streams in fast-growing markets. This segment is composed of
non-risk-bearing insurance-related businesses that fit into our business model
either: vertically (one business uses another's products or services in its own
production or supply output); or complementary (one business shares a common
marketing or distribution system with another). We measure the performance of
these companies' in terms of net income and earnings before interest, taxes,
depreciation and amortization (EBITDA) returns on revenue.
Selective HR Solutions, Inc. (Selective HR), formerly Modern Employers Inc.,
utilizes our independent agency network to distribute its professional employer
organization (PEO) product. A PEO offers human resource administration services
and risk management products and services to small and mid-sized businesses.
Consumer Health Network Plus LLC (CHN), a preferred provider network, offers
access to a network of credentialed health care providers to insurance companies
and other businesses. Alta Services LLC (Alta) manages workers' compensation and
automobile medical claims for our insurance subsidiaries, for unrelated
insurance companies, and for self-insured businesses and employer groups. Alta
offers a full array of medical cost containment services and bears no
underwriting risk. FloodConnect LLC (FloodConnect) operates as a servicing
carrier for the National Flood Insurance Program. FloodConnect provides a market
for flood insurance to our agents and has a distribution force, when combined
with the insurance company's, of approximately 3,200 agents countrywide. As a
servicing carrier, not an underwriter, FloodConnect bears no risk of
policyholder loss. PDA Software Services Inc. (PDA) has assisted in the
development of the Company's automated claim and flood processing systems. In
addition, PDA provides administrative services to the federal government's
Women, Infants and Children (WIC) nutritional program administered by the
states. Currently, PDA administers the WIC program in 15 states.
Diversified Insurance Services revenue now represents 8% of our revenue
base, increasing 63% to $76 million in 2000, 231% to $47 million in 1999, and
71% to $14 million in 1998. The increase in revenues during 2000 is partially
due to the result of the acquisitions of Selective HR and CHN in July 1999. The
1999 results do not include a full year of activity of those companies. During
2000, increased infrastructure investments of approximately $1 million by
Selective HR resulted in a 51% increase in the number of worksite employees to
more than 18,000 at the end of 2000 compared to just over 12,000 one year ago.
The increase in the number of worksite employees is primarily attributable to
the ability of Selective HR to market the PEO product through our network of
independent insurance agents. Currently, there are just under 200 out of
Selective's 900 agents actively marketing the PEO product. Additionally, Alta
generated a 50% increase in revenue to $9 million in 2000 from $6 million in
1999; and PDA generated a 10% increase in revenue to $19 million in 2000 from
$17 million in 1999.
The focus of our Diversified Insurance Services businesses continues to
be revenue growth, geographic expansion and cross marketing opportunities.
EBITDA as a percentage of revenue was 14.5% in 2000, 20.6% in 1999 and 25.3% in
1998. Partially offsetting the increase due to the 1999 acquisitions was the
loss of approximately $1 million in EBITDA generated in 1999 by servicing flood
business directly attributable to Hurricane Floyd. Current year results do not
reflect revenues from any event of that magnitude.
Net income increased $1 million, or 17%, to $4 million in 2000,
compared to $3 million in 1999 and $2 million in 1998. These changes in net
income are in line with the changes in EBITDA as previously described.
Diversified Insurance Services generated a return on revenue of 4.5%
for 2000 compared to 6.3% for 1999 and 10.2% in 1998. During 2000, we continued
marketing, through our independent insurance agents, the PEO payroll and human
resource services to small and medium commercial accounts. The related cost of
establishing the sales staff to work with these agents in this effort, along
with the impact of claim servicing fees generated by Hurricane Floyd in 1999,
were the primary reasons for the decline in our return on revenue compared to
the same periods a year ago. We expect our Diversified Insurance Services
businesses to continue to grow at 20% to 25% per year and produce returns on
revenue of between 5% and 6%.
10
Federal Income Taxes
Our total federal income tax expense decreased $12 million in 2000 to a
benefit of ($2 million), an effective tax rate of (8.1%), compared to an
effective tax rate of 15.3% in 1999, which was essentially unchanged when
compared to 15.9% for 1998. During 1999, an increase in the underwriting loss
was offset by a comparable increase in realized gains keeping taxable income
unchanged. The decrease for 2000 reflects lower taxable income for the year
mainly due to decreased realized gains and an increased underwriting loss. Our
effective tax rate differs from the federal corporate rate of 35% primarily as a
result of tax-exempt investment income.
We had a total net deferred tax asset at December 31, 2000 of $9
million, compared to $16 million at December 31, 1999 and a $7 million net
deferred tax liability at December 31, 1998. Increases and decreases in the
unrealized gains on the available-for-sale investment portfolio were the primary
cause for the changes in the net deferred tax asset and liability.
(in millions) 2000 1999 1998
- ---------------------------------------------------------------------------------------
Current taxable income $ (7.8) 37.7 23.8
Pretax financial statement income 24.5 63.4 63.7
Net deferred tax asset/(liability) 9.0 16.1 (7.2)
Financial Condition, Liquidity and Capital Resources
Selective Insurance Group, Inc., ( the Parent) is a holding company,
the principal assets of which are investments in 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 on our statutory annual statements as of the preceding December 31.
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. As of December 31, 2000, the Parent had repurchased under the
program a total of 7 million shares at a total cost of $133 million. During
2000, the Parent purchased 2 million shares at a total cost of $37 million.
Through February 2001, we repurchased 228,000 shares for $5 million.
Approximately 800,000 shares remain under the current Parent's Board of
Directors (the Board) authorization, which expires May 2001. In addition to
these annual cash flow requirements, in 2000 the Parent paid $6 million in
deferred purchase price for a 1999 acquisition of a subsidiary and $4 million in
expenses related to a private placement financing.
The Parent generates cash from the sale of its common stock under
various stock plans, the dividend reinvestment program, and from investment
income, all of which approximated $3 million and reduces the Parent's annual
cash requirements from $34 million annually to $31 million. Payments totaling
$15 million will be made to Selective Way Insurance Company and Selective
Insurance Company of the Southeast for the Parent's purchase of Alta Services
LLC.
Growth in the Diversified Insurance Services segment has significantly
augmented cash flow from operations by generating $10 million in operating cash
flow in 2000, compared to $3 million in 1999 and no cash flow from operations in
the 1998 start-up year. Dividends from these companies are not subject to the
same regulatory restrictions as the insurance subsidiaries.
Based upon the 2000 statutory financial statements, the insurance
subsidiaries are permitted to pay the Parent in 2001 ordinary dividends in the
aggregate amount of $47 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, see Note 10 to the Consolidated Financial
Statements. 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 72
consecutive years and currently plans to continue to pay quarterly cash
dividends. For information regarding restrictions on the Parent's ability to pay
dividends to its stockholders, see Note 5(b) to the consolidated financial
statements.
In addition to the cash requirements of the Parent, our overall
obligations and cash outflow also include: claim settlements; commissions; labor
costs; premium taxes; general and administrative expenses; investment purchases
and capital expenditures. The insurance subsidiaries satisfy their obligations
and cash outflow through premium collections, interest and dividend income and
maturities of investments.
Cash provided by operating activities amounted to $64 million in both
2000 and 1999, and $57 million in 1998.
Underwriting cash flow decreased $26 million in 2000 compared to 1999 due to:
(i) a $25 million increase in losses and loss expenses paid partially as a
result of a deterioration in underwriting results discussed previously; and our
efforts to close claims faster in order to mitigate ultimate losses, and (ii) a
$20 million increase in underwriting expenses paid resulting from higher premium
production and increased
11
overall compensation and benefits. These decreases were partially offset by
increased premium collections of $22 million as a result of higher prices.
Offsetting the decrease in underwriting cash flow: (i) federal taxes
paid decreased $17 million in 2000 compared to 1999 partially due to reduced
capital gains; and (ii) cash flow from Diversified Insurance Services increased
$8 million in 2000 compared to 1999 due to the growth of existing businesses, as
well as, growth due to acquisitions.
Since cash inflow from premiums is received in advance of required cash outflow
to settle claims, we accumulate funds that we invest. At December 31, 2000, we
had $1.8 billion in investments compared to $1.7 billion in 1999. Our investment
program is structured with staggered maturities so that liquidation of debt
securities, available-for-sale should not be necessary in the ordinary course of
business.
Total assets increased 3%, or $65 million, from December 31, 1999 to
December 31, 2000. This increase was primarily due to (i) an increase in total
investments of $66 million resulting from an increase of $35 million in pre-tax
unrealized gains in the available for sale debt portfolio, as well as additional
purchases made due to positive operating cash flow; and (ii) a 10% increase in
premium receivables of $25 million corresponding with the net written premium
growth for fourth quarter 2000 when compared to fourth quarter 1999. These
increases were partially offset by a decrease in reinsurance recoverable on
unpaid losses and loss expenses of $31 million primarily attributable to
recoveries at December 31, 1999 related to Hurricane Floyd which occurred in the
third quarter of 1999, as well as lower reinsurance recoveries resulting from
higher retention limits on the excess of loss treaties.
The rise in total liabilities of $58 million, or 3%, from December 31,
1999, to December 31, 2000, was primarily attributable to an increase in notes
payable of $84 million. On May 4, 2000, the Parent successfully completed a
private placement of notes in the amount of $91.5 million. The offering consists
of two tranches: a five year average life tranche of $30 million at 8.63% and an
eight year average life tranche of $61.5 million at 8.87%. This increase was
partially offset by a $51 million decrease in short-term debt, as the majority
of the proceeds, $68.2 million, were used to pay off the outstanding balances on
lines of credit. The unearned premium reserve increased 6%, or $23 million due
to growth in net premiums written over the year 2000.
BAR GRAPH: Operating Cash Flow (dollars in millions)
1996 $90
1997 $51
1998 $57
1999 $64
2000 $64
Insurance Regulation
On June 1, 2000, federal regulators issued final regulations
implementing the provisions of the Financial Services Modernization Act of 1999,
also known as the Gramm-Leach-Bliley Act (the Act), governing the privacy of
consumer financial information. The regulations became effective on November 13,
2000, and compliance with the regulations is required by July 1, 2001. The
regulations limit disclosure by financial institutions of "nonpublic personal
information" about individuals who obtain financial products or services for
personal, family, or household purposes. The Act and the regulations generally
apply to disclosures to nonaffiliated third parties, subject to specified
exceptions, but not to disclosures to affiliates. It is anticipated that the
states will adopt regulations that are at least as restrictive that will be
imposed on insurance companies. This is an evolving area of regulation, which
requires us to continue to monitor developments.
Effective January 1, 2001, we adopted a codified set of statutory
accounting principles as required by the National Association of Insurance
Commissioners. The changes to the statutory accounting principles reduce the
differences within statutory accounting permitted practices between states. We
estimate that the adoption of the codified statutory accounting principles will
have a minimal impact to the Risk Based Capital ratios for the insurance
subsidiaries and will not significantly impact the dividend paying capabilities
of the insurance subsidiaries.
While we believe that we are in compliance with all currently effective
and applicable laws affecting our operations, we will review the steps necessary
to comply with applicable privacy laws and regulations under the Act prior to
the mandatory date of compliance. We can not currently quantify the financial
impact we will incur to satisfy revised or additional regulatory requirements.
Diversified Insurance Services Regulation
The strategic companies of our Diversified Insurance Services segment
include Selective HR, Alta, CHN, SRM Insurance Brokerage, LLC and SelecTech, LLC
(SelecTech)which are subject to certain regulations and two companies, PDA
Software Services, Inc., and FloodConnect, LLC, which are not heavily regulated.
Selective HR is a professional employer organization (PEO). In this
capacity, it is a co-employer for its clients. As a co-employer, Selective HR is
affected by federal, state and local laws relating to labor, tax and employment
matters. By contracting with its clients and
12
creating a co-employer relationship with employees assigned to work at client
company locations, Selective HR assumes certain contractual obligations, legal
obligations and responsibilities of an employer under these laws. Many of these
laws do not specifically address the obligations and responsibilities of
co-employers such as PEOs. If these laws, such as the Employee Retirement Income
Security Act, and federal and state employment laws and tax laws, are ultimately
applied to a PEO's co-employer relationship with their work-site employees, they
could have a material adverse effect on Selective HR's results of operations or
financial condition.
Some states in which Selective HR operates have passed licensing or
registration requirements for PEOs. These regulatory laws vary from state to
state but generally provide for monitoring the fiscal responsibility of PEOs.
Alta and CHN, operate as a managed care organization (MCO) and/or a
preferred provider organization (PPO) and are subject to laws and/or regulations
in some states where they do business, which require them to be licensed to
operate as an MCO or a PPO.
In New Jersey, a state from which both Alta and CHN derive substantial
revenue, regulations implementing the Health Care Quality Act may deem insured
health benefit plans who contract with PPOs to be Managed Care Plans. Managed
Care Plans may be required, through PPO contracts, to provide enrollees with
information regarding the plan and the network and also to afford providers with
certain protections.
Alta and CHN are also affected by both federal and state laws regarding
privacy of medical records and patient privacy. This is an evolving area of
regulation requiring us to continually monitor and review our operations.
While Selective HR, Alta and CHN believe they are currently in compliance
with all laws and regulations affecting their operations, there can be no
assurance that, in the future, they will be able to satisfy new or revised
licensing and regulatory requirements.
SRM Insurance Brokerage, LLC, is subject to the laws and/or regulations in
the states in which it does business, which require it to be licensed to operate
as an insurance agent/broker.
SelecTech, LLC is overseen by Alta and provides third party administrative
services to self-insured accounts. SelecTech also works closely with Selective
Risk Managers to assist businesses and government entities looking for
customized insurance products and services. When operating as an insurance
adjuster, SelecTech is subject to the laws and/or regulations in some of the
states in which it does business, which require it to be licensed as an
adjuster.
PDAprovides insurance software development and processing services to public
and private sector organizations. FloodConnect provides enhanced third party
administration for carriers who participate in the federal "Write Your Own"
(WYO) flood insurance program and services flood insurance policies written
through the WYOprogram countrywide.
13
Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of potential loss in fair value arising from
adverse fluctuations in interest rates, market rates and prices, foreign
currency exchange rates, and other relevant market rate or price changes. The
following is a discussion of our primary market risk exposures and how they were
being managed as of December 31, 2000. Our market risk sensitive instruments are
for other than trading purposes.
Our investment policy is conservative with the long-term objective of
maximizing after-tax yield while providing liquidity and preserving assets and
stockholders' equity. The current investment mix is 81% debt securities, 14%
equity securities and 5% short-term investments. We have no direct exposure to
foreign exchange or commodity risks.
To reduce the sensitivity of interest rate fluctuations, we invest our
debt portfolio primarily in intermediate-term debt securities. At December 31,
2000, 95% of the portfolio was ten years or less to maturity, and the average
life was 4.7 years.
Our portfolio of marketable equity securities is exposed to equity
price risk arising from potential volatility in equity market prices. We attempt
to minimize the exposure to equity price risk by maintaining a diversified
portfolio limiting concentrations in any one company or industry.
For our investment portfolio, there were no significant changes in our
primary market risk exposures or in how those exposures are managed compared to
the years ended December 31, 1999 and 1998. We do not currently anticipate
significant changes in our primary market risk exposures or in how those
exposures are managed in future reporting periods based upon what is known or
expected to be in effect in future reporting periods.
We utilize sensitivity analysis to measure the potential loss in future
earnings, fair values or cash flows of market sensitive instruments. The
sensitivity analysis assumes a hypothetical: (i) change of 100 basis points in
interest rates; (ii) a 10% change in equity values at December 31, 2000; and
(iii) a parallel shift in the yield curve for rate sensitive instruments. The
timing of calls and prepayments cannot be estimated with precision.
In the analysis, we include the following financial instruments:
investments in debt securities, investments in equity securities, convertible
debentures, and senior notes. The primary market risk to our market sensitive
instruments is interest rate risk and equity price risk.
This analysis is not intended to provide a precise forecast of the
effect of changes in market interest rates and equity prices on our income or
stockholders' equity. Further, the calculations do not take into account any
actions we may take in response to market fluctuations.
The following table presents the sensitivity analysis (adverse
scenario) of each component of market risk as of December 31, 2000 and 1999.
Fair Value Estimated Fair Value Estimated
(in thousands) @12/31/00 Fair Value* @12/31/99 Fair Value*
- -------------------------------------------------------------------------------------------------------------------
Assets:
Investments in debt securities $1,433,815 1,376,462 1,394,390 1,336,140
Investments in equity securities 239,578 215,620 251,998 226,798
Liabilities:
Convertible debentures 13,228 14,551 14,908 16,399
8.77% Senior notes 57,189 58,781 55,322 57,061
7.84% Senior notes 14,415 14,595 21,388 21,726
8.63% Senior notes
Series A 31,028 32,005 - -
8.87% Senior notes
Series B 63,247 65,756 - -
*-Estimated fair value after the hypothetical change in rates and equity market
conditions.
36
14
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Selective Insurance Group, Inc.
We have audited the accompanying consolidated balance sheets of
Selective Insurance Group, Inc. and its subsidiaries as of December 31, 2000 and
1999, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the years in the three-year period ended December 31,
2000. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Selective
Insurance Group,Inc. and its subsidiaries as of December 31, 2000 and 1999, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
New York, New York
February 6, 2001
37
15
CONSOLIDATED BALANCE SHEETS
December 31, 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
(in thousands, except share amounts)
ASSETS
Investments:
Debt securities, held-to-maturity--at amortized cost
(fair value: $231,057--2000; $271,604--1999) $ 225,177 271,384
Debt securities, available-for-sale--at fair value
(amortized cost: $1,184,698--2000; $1,141,167--1999) 1,202,758 1,122,786
Equity securities, available-for-sale--at fair value
(cost: $104,830--2000; $115,626--1999) 239,578 251,998
Short-term investments (at cost which approximates fair value) 95,908 48,807
Other investments 13,642 15,963
------ ------
Total investments (Note 4) 1,777,063 1,710,938
Cash 8,759 8,588
Interest and dividends due or accrued 22,808 23,545
Premiums receivables, net of allowance for uncollectible
accounts of: $5,204--2000; $3,009--1999 274,031 248,910
Other trade receivables, net of allowance for uncollectible
accounts of: $867--2000; $640--1999 24,915 15,488
Reinsurance recoverable on paid losses and loss expenses 9,332 9,797
Reinsurance recoverable on unpaid losses and loss expenses (Note 6) 160,869 192,044
Prepaid reinsurance premiums 33,097 32,531
Current Federal income tax 1,681 4,417
Deferred Federal income tax (Note 19) 8,971 16,129
Real estate, furniture, equipment and software development--at cost,
net of accumulated depreciation and amortization of:
$61,024--2000; $56,631--1999 57,820 54,558
Deferred policy acquisition costs (Note 3) 118,413 109,095
Goodwill, net of accumulated amortization of:
$10,655--2000; $7,334--1999 49,338 52,001
Other assets 25,905 29,504
------ ------
Total assets $ 2,573,002 2,507,545
============ =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Reserve for losses (Note 14) $ 1,099,929 1,092,026
Reserve for loss expenses 172,727 181,782
Unearned premiums 436,506 413,601
Convertible subordinated debentures 3,848 6,157
Short-term debt - 51,302
Notes payable (Note 5) 159,786 75,428
Other liabilities 122,409 117,285
------- -------
Total liabilities 1,995,205 1,937,581
--------- ---------
Stockholders' Equity:
Common stock of $2 par value per share:
Authorized shares: 180,000,000
Issued: 38,783,742--2000; 37,964,405--1999 77,568 75,929
Additional paid-in capital 63,074 53,470
Retained earnings 525,669 514,477
Accumulated other comprehensive income 99,325 76,694
Treasury stock--at cost (shares: 13,577,266--2000;
11,406,722--1999) (181,552) (143,875)
Deferred compensation expense and notes receivable from stock sales (6,287) (6,731)
------- -------
Total stockholders' equity 577,797 569,964
------- -------
Commitments and contingencies (Notes 6 and 17)
Total liabilities and stockholders' equity $ 2,573,002 2,507,545
============ =========
See accompanying notes to consolidated financial statements.
38
16
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31, 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
Revenues:
Net premiums written $ 843,604 811,677 748,873
Net increase in unearned premiums and
prepaid reinsurance premiums (22,339) (12,612) (25,881)
-------- -------- --------
Net premiums earned 821,265 799,065 722,992
Net investment income earned 99,495 96,531 99,196
Net realized gains (losses) 4,191 29,377 (2,139)
Diversified insurance services revenue 76,063 46,653 14,100
Other income 3,739 3,142 3,180
----- ----- -----
Total revenues 1,004,753 974,768 837,329
--------- ------- -------
Expenses:
Losses incurred 541,487 517,700 433,316
Loss expenses incurred 72,579 74,515 74,484
Policy acquisition costs 261,540 254,744 235,523
Dividends to policyholders 7,670 6,682 5,329
Interest expense 13,745 9,460 9,409
Diversified insurance services expenses 70,836 41,881 11,883
Other expenses 12,352 6,383 3,681
------ ----- -----
Total expenses 980,209 911,365 773,625
------- ------- -------
Income before Federal income tax 24,544 63,403 63,704
------ ------ ------
Federal income tax expense (benefit):
Current 3,038 12,729 9,879
Deferred (5,029) (3,043) 255
------- ------- ---
Total Federal income tax expense (benefit) (1,991) 9,686 10,134
------- ----- ------
Net income $26,535 53,717 53,570
====== ====== ======
Earnings per share:
Basic $ 1.07 1.98 1.88
Diluted $ 1.01 1.87 1.74
See accompanying notes to consolidated financial statements.
39
17
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Year ended December 31, 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
Common stock:
Beginning of year $ 75,929 74,833 72,728
Dividend reinvestment plan (shares: 63,928--2000;
64,952--1999; 52,183--1998) 128 130 104
Convertible subordinated debentures (shares: 326,122--2000;
8,752--1999; 88,412--1998) 652 17 177
Stock purchase and compensation plans
(shares: 429,287--2000; 474,464--1999; 600,113--1998) 859 949 1,201
Stock issued for acquisition (shares: 311,673--1998) -- -- 623
-- -- ---
End of year 77,568 75,929 74,833
------ ------ ------
Additional paid-in capital:
Beginning of year 53,470 45,449 30,450
Dividend reinvestment plan 1,017 1,057 1,046
Convertible subordinated debentures 1,629 35 448
Stock purchase and compensation plans 6,958 6,929 7,861
Stock issued for acquisition -- -- 5,644
-- -- -----
End of year 63,074 53,470 45,449
------ ------ ------
Retained earnings:
Beginning of year 514,477 477,118 439,811
Net income 26,535 26,535 53,717 53,717 53,570 53,570
Cash dividends to stockholders ($.60 per share--2000;
$.59 per share--1999; $.56 per share--1998) (15,343) (16,358) (16,263)
-------- -------- --------
End of year 525,669 514,477 477,118
------- ------- -------
Accumulated other comprehensive income:
Beginning of year 76,694 114,323 89,051
Other comprehensive income-increase (decrease) in net
unrealized gains on available-for-sale securities,
net of deferred income tax effect 22,631 22,631 (37,629) (37,629) 25,272 25,272
------ ------ -------- ------- ------ ------
End of year 99,325 76,694 114,323
------ ------ -------
Comprehensive income 49,166 16,088 78,842
====== ====== ======
Treasury stock:
Beginning of year (143,875) (97,990) (59,785)
Acquisition of treasury stock (shares: 2,170,544--2000;
2,514,387--1999; 1,794,873--1998) (37,677) (45,885) (38,205)
-------- -------- --------
End of year (181,552) (143,875) (97,990)
--------- --------- --------
Deferred compensation expense and notes receivable from stock sales:
Beginning of year (6,731) (6,150) (6,939)
Deferred compensation expense (3,156) (3,418) (966)
Amortization of deferred compensation expense and
amounts received on notes 3,600 2,837 1,755
----- ----- -----
End of year (6,287) (6,731) (6,150)
------- ------- -------
Total stockholders' equity $ 577,797 569,964 607,583
======= ======= =======
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 consolidated financial statements.
40
18
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands)
OPERATING ACTIVITIES
Net income $ 26,535 53,717 53,570
------ ------ ------
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 30,023 28,943 15,849
Net increase in unearned premiums and prepaid
reinsurance premiums 22,339 12,612 25,881
Increase in net Federal income tax (2,292) (7,520) (1,411)
Depreciation and amortization 15,247 13,044 9,273
Increase in premiums receivables (25,121) (19,116) (35,649)
(Increase) decrease in other trade receivables (9,427) 2,950 (1,858)
(Increase) decrease in deferred policy acquisition costs (9,318) 679 (11,664)
Decrease (increase) in interest and dividends due or accrued 737 (1,008) 1,065
Decrease (increase) in reinsurance recoverable on paid losses
and loss expenses 465 1,698 (407)
Net realized (gains) losses (4,191) (29,377) 2,139
Other--net 19,271 7,185 (162)
------ ----- -----
Net adjustments 37,733 10,090 3,056
------ ------ -----
Net cash provided by operating activities 64,268 63,807 56,626
------ ------ ------
INVESTING ACTIVITIES
Purchase of debt securities, held-to-maturity -- -- (12,682)
Purchase of debt securities, available-for-sale (157,685) (314,283) (178,213)
Purchase of equity securities, available-for-sale (25,384) (14,948) (46,131)
Purchase of other investments (4,406) (111) (15,000)
Purchase of Selective HR Solutions, Inc.
(net of cash acquired of $1,127) (5,994) (23,015) --
Purchase of Consumer Health Network Plus, LLC (2) (6,010) --
Purchase of PDA Software Services, Inc. (net of cash
acquired of $356) -- (258) (6,030)
Sale of debt securities, available-for-sale 21,629 132,680 64,648
Redemption and maturities of debt securities, held-to-maturity 46,183 87,053 64,464
Redemption and maturities of debt securities, available-for-sale 90,818 66,787 90,392
Sale of equity securities, available-for-sale 42,506 71,615 27,891
Proceeds from other investments 6,727 235 20,690
(Decrease) increase in net payable from security transactions (2,304) (13,414) 8,655
Net additions to real estate, furniture, equipment and
software development (12,003) (10,908) (11,160)
-------- -------- --------
Net cash provided by (used in) investing activities 85 (24,577) 7,524
-- -------- -----
FINANCING ACTIVITIES
Dividends to stockholders (15,343) (16,358) (16,263)
Acquisition of treasury stock (37,677) (45,885) (38,205)
Net proceeds from notes payable 88,440 -- --
Principal payment of notes payable (7,143) (7,143) (10,972)
Proceeds from short-term debt 40,200 111,840 102,267
Paydown of short-term debt (91,502) (88,825) (91,505)
Net proceeds from issuance of common stock 8,962 9,066 16,479
Increase in deferred compensation expense and amounts received
on notes receivable from stock sales (3,018) (3,366) (913)
------- ------- -----
Net cash used in financing activities (17,081) (40,671) (39,112)
-------- -------- --------
Net increase (decrease) in short-term investments and cash 47,272 (1,441) 25,038
Short-term investments and cash at beginning of year 57,395 58,836 33,798
------ ------ ------
Short-term investments and cash at end of year $ 104,667 57,395 58,836
=========== ====== ======
See accompanying notes to consolidated financial statements.
41
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PAGES 42-58
December 31, 2000, 1999, and 1998
Note 1 Summary of Significant Accounting Policies
(a) Consolidation Policy The consolidated financial statements include the
accounts of Selective Insurance Group, Inc. (Selective) and its subsidiaries
(collectively, the Company) and have been prepared in accordance with
accounting principles generally accepted in the United States of America
(GAAP). All significant intercompany accounts and transactions have been
eliminated.
(b) Investments Debt securities, held-to-maturity are carried at amortized
cost because management has the ability and intent to hold such securities
until maturity. Securities, available-for-sale are carried at fair value. Net
unrealized gains and losses on debt securities, held-to-maturity are not
reflected in consolidated net income or stockholders' equity. Net unrealized
gains and losses on securities, available-for-sale, net of deferred income tax
effect, are not reflected in con-solidated net income, but are included in
comprehensive income as well as accumulated other comprehensive income, a
separate component of stockholders' equity. No material investments of the
Company were non-income producing for the years ended December 31, 2000 and
1999.
Realized gains and losses are determined on the basis of the cost of
specific investments sold and are credited or charged to income. In the event
that a decline in fair value of an investment is considered to be other than
temporary, such investments are written down to their net realizable value.
(c) Reinsurance The Company records its ceded reinsurance transactions on a
gross basis on the balance sheet which results in reinsurance recoverables on
unpaid losses and loss expenses and ceded unearned premiums (prepaid
reinsurance premiums). The Company also discloses reinsurance amounts for
ceded premiums written and earned and ceded loss and loss expenses incurred.
(d) Stock-Based Compensation The Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation" (FASB 123) establishes financial accounting and
reporting standards for stock-based compensation plans. As permitted by FASB
123, the Company will continue to use the accounting method prescribed by
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" (APB 25). 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 FASB 123, had been applied.
(e) Real Estate, Furniture, Equipment and Software Development The value of
real estate, furniture and equipment is stated at cost less accumulated
depreciation. Provisions for depreciation are computed using the straight-line
method over the estimated useful lives of the assets, which range from three
to forty years for financial statement purposes and the straight-line method
and various accelerated methods for Federal income tax purposes. The Company
capitalizes the costs of computer software developed or obtained for internal
use in accordance with the American Institute of Certified Public Accountants'
Statement of Position No. 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). As a result of SOP 98-1,
the Company capitalized $5 million of internal computer software development
costs in each year, 2000 and 1999, which are amortized using the straight-line
method over estimated useful lives of the systems being developed that range
from four to ten years.
(f) Deferred Policy Acquisition Costs Policy acquisition costs are directly
related to the writing of an insurance policy and are deferred and amortized
over the life of the policies in order to facilitate a matching of revenues
and expenses. These costs include labor costs, commissions, premium taxes and
assessments, boards, bureaus and dues, travel, and other underwriting expenses
incurred in the acquisition of premium. The deferred policy acquisition costs
are limited to the sum of unearned premiums and anticipated investment income
less anticipated losses and loss adjustment expenses, policyholder dividends
and other expenses for maintenance of policies in force. The investment yields
assumed for each reporting period, which are based upon the Company's actual
average investment yield, before-tax, were 5.8%, 5.6% and 5.7% for 2000, 1999
and 1998, respectively.
(g) Goodwill Goodwill resulting from business acquisitions represents the
excess of cost over fair value of assets acquired and is being amortized over
estimated useful lives, which range between nine and twenty-five years, using
the straight-line method. Amortization expense, which is included in other
expense, was $3,320,000, $2,153,000 and $1,346,000 for 2000, 1999 and 1998,
respectively. Periodically, the Company reviews intangible assets for
impairments where the fair value is less than the carrying value.
(h) Use of Estimates The preparation of the consolidated financial statements
in conformity with GAAP requires management to make estimates and assumptions
that affect the reported financial statement balances, as well as the
disclosure of contingent assets and liabilities. Actual results could differ
from those estimates.
In accordance with industry practice, the Company maintains 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. Additional IBNR reserves are
established based on generally accepted 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.
The internal assumptions considered by the Company in the estimation of the
IBNR amounts for both environmental and non-environmental reserves at the
Company's reporting dates are based on: (i) an analysis of both paid and
incurred loss and loss expense development trends; (ii) an analysis of both
paid and incurred claim count development trends; (iii) the exposure estimates
for reported claims; (iv) recent development on exposure estimates with
respect to individual large claims and the aggregate of all claims; (v) the
rate at which new environmental claims are being reported; and (vi) patterns
of events observed by claims personnel or reported to them by defense counsel.
External factors identified by the Company in the estimation of IBNR for both
environmental and non-environmental IBNR reserves include: legislative
enactments, judicial decisions, legal developments in the determination of
liability and the imposition of damages; and trends in general economic
conditions, including the effects of inflation. Adjustments to IBNR are made
periodically to take into account changes in the volume of business written,
claims frequency and severity, the mix of business, claims processing and
other items as described that are expected by management to affect the
Company's reserves for losses and loss expenses over time.
By using both individual estimates of reported claims and generally
accepted actuarial reserving techniques, the Company estimates the ultimate
net liability for losses and loss expenses. While the ultimate actual
liability may be higher or lower than reserves established, the Company
believes the reserves to be adequate. Any changes in the liability estimate
may be material to the results of operations in future periods. The Company
does not discount to present value that portion of its loss reserves expected
to be paid in
20
future periods, however, the loss reserves include anticipated recoveries for
salvage and subrogation claims. Such salvage and subrogation amounted to
$38,123,000 and $38,702,000 in 2000 and 1999, respectively.
Reserves are reviewed for adequacy on a periodic basis. When reviewing
reserves, the Company analyzes historical data and estimates 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. Based upon such reviews, the Company believes 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.
(j) Premium Revenue Premiums written include direct writings plus reinsurance
assumed and estimates of premiums earned but unbilled on the workers'
compensation and general liability lines of insurance, less reinsurance ceded
to other insurers. Premiums written are recognized as revenue over the period
that coverage is provided using the semi-monthly pro rata method. Unearned
premiums and prepaid reinsurance premiums represent that portion of premiums
written that are applicable to the unexpired terms of policies in force.
(k) Federal Income Tax The Company uses the asset and liability method of
accounting for income taxes. Deferred Federal income taxes arise from the
recognition of temporary differences between financial statement carrying
amounts and the tax basis of the Company's assets and liabilities, as well as
tax on net unrealized gains or losses on securities, available-for-sale. A
valuation allowance is established when it is more likely than not that some
portion of the deferred tax asset will not be realized. The effect of a change
in tax rates is recognized in the period of enactment.
(l) Statement of Cash Flows Short-term investments are comprised of highly
liquid investments that are readily convertible into known amounts of cash.
Such investments have maturities of 90 days or less from the date of purchase.
(m) Fair Values of Financial Instruments The following methods and assumptions
were used by the Company in estimating its fair value disclosures for
financial instruments:
(1) Investment securities: Fair values for debt securities,
held-to-maturity are based on quoted market prices where available. For debt
securities, held-to-maturity not actively traded, fair values are estimated
using values obtained from independent pricing services. The fair values for
debt securities, available-for-sale and equity securities, available-for-sale,
which also represent the carrying amounts, are based on quoted market prices.
Fair values for other investments are not material and are carried at either
cost or the equity method, which approximates fair value.
(2) Indebtedness: The fair value of the convertible subordinated
debentures is based on quoted market prices. The fair values of the 7.84%
Senior Notes due November 15, 2002, the 8.77% Senior Notes due August 1, 2005,
the 8.63% Senior Notes due May 4, 2007, and the 8.87% Senior Notes due May 4,
2010 were estimated using a cash flow analysis based upon Selective's current
incremental borrowing rate for the remaining term of the loan.
(n) Reclassifications Certain amounts in the Company's prior years'
consolidated financial statements and related footnotes have been reclassified
to conform with the 2000 presentation. Such reclassification had no effect on
the Company's net income or stockholders' equity.
Note 2 Pending Accounting Pronouncements
In June of 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FASB 133). FASB 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This statement was
previously effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. In June 1999, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 137, which defers the
effective date of FASB 133 to all fiscal quarters of fiscal years beginning
after June 15, 2000. In June 2000, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities, which amends
the accounting and reporting standards of FASB 133 for certain derivative
instruments and certain hedging activities. The Company will adopt FASB 133
and FASB 138 for the fiscal year beginning January 1, 2001 and has determined
the adoption of these statements will not have a material effect on the
Company's results of operations or financial condition.
21
Note 3 Policy Acquisition Costs
Changes in deferred policy acquisition costs and policy acquisition costs
expensed are summarized as follows:
(in thousands) 2000 1999 1998
- -------------------------------------------------------------------------------------
Deferred policy acquisition
costs:
Deferred, January 1 $109,095 109,774 98,110
------- ------- ------
Additions:
Commissions 135,161 135,165 130,498
Labor costs 56,696 50,466 46,830
Premium taxes and
assessments 18,773 17,368 17,147
Other 34,131 28,247 26,517
------ ------ ------
Total additions 244,761 231,246 220,992
------- ------- -------
Amortized to expense (235,443) (231,925) (209,328)
--------- --------- ---------
Deferred, December 31 $118,413 109,095 109,774
======= ======= =======
Policy acquisition costs:
Amortized to expense $235,443 231,925 209,328
Period costs 26,097 22,819 26,195
------ ------ ------
Total policy
acquisition costs $261,540 254,744 235,523
======= ======= =======
Note 4 Investments
(a) The components of net investment income earned are as follows:
(in thousands) 2000 1999 1998
- -------------------------------------------------------------------------------------
Debt securities $ 88,559 88,800 89,928
Equity securities 4,979 6,146 5,775
Short-term investments 2,773 1,624 1,705
Other 4,750 1,317 3,140
----- ----- -----
101,061 97,887 100,548
Investment expenses (1,566) (1,356) (1,352)
------ ------ ------
Net investment
income earned $ 99,495 96,531 99,196
======== ====== ======
(b) Net unrealized gains on debt securities, held-to-maturity are as follows:
(in thousands) 2000 1999 1998
- -------------------------------------------------------------------------------------
Net unrealized gains $ 5,880 220 14,799
===== === ======
Increase (decrease) in net
unrealized gains $ 5,660 (14,579) (1,283)
===== ======== =======
(c) Gross and net unrealized gains (losses) on securities, available-for-sale
are as follows:
(in thousands) 2000 1999 1998
- -------------------------------------------------------------------------------------
Debt securities:
Gains $ 27,977 8,812 44,227
Losses (9,917) (27,193) (2,579)
------ ------- ------
18,060 (18,381) 41,648
------ ------- ------
Equity securities:
Gains 138,093 141,206 140,001
Losses (3,345) (4,834) (5,768)
------ ------ ------
134,748 136,372 134,233
------- ------- -------
Net unrealized gains
on available-for-sale
securities 152,808 117,991 175,881
Deferred income tax
expense (53,483) (41,297) (61,558)
------- ------- -------
Net unrealized gains,
net of deferred income tax $ 99,325 76,694 114,323
====== ====== =======
Increase (decrease) in net
unrealized gains, net
of deferred income tax $22,631 (37,629) 25,272
====== ======== ======
22
(d) The amortized cost, estimated fair values and gross unrealized gains
(losses) of debt securities, held-to-maturity at December 31, 2000 and 1999,
respectively, are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(in thousands) 2000 1999 2000 1999 2000 1999 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
U.S. government and
government agencies $ 2,136 8,415 8 63 - (58) 2,144 8,420
Obligations of states and
political subdivisions 207,415 246,844 5,758 4,588 (146) (4,272) 213,027 247,160
Mortgage-backed securities 15,626 16,125 260 7 - (108) 15,886 16,024
------ ------ --- - ---- ------ ------
Total debt securities, held-to-maturity $ 225,177 271,384 6,026 4,658 (146) (4,438) 231,057 271,604
========== ======= ===== ===== ==== ====== ======= =======
(e) The cost/amortized cost, estimated fair values and gross unrealized gains
(losses) of securities, available-for-sale at December 31, 2000 and 1999,
respectively, are as follows:
Cost/ Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(in thousands) 2000 1999 2000 1999 2000 1999 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. government and
government agencies $ 94,572 122,263 2,929 735 (48) (1,954) 97,453 121,044
Obligations of states and
political subdivisions 445,666 439,167 12,053 5,714 (775) (10,543) 456,944 434,338
Corporate securities 544,044 493,951 10,274 2,240 (8,826) (12,147) 545,492 484,044
Asset-backed securities 10,716 19,704 28 10 (258) (727) 10,486 18,987
Mortgage-backed securities 89,700 66,082 2,693 113 (10) (1,822) 92,383 64,373
------ ------ ----- --- --- ------ ------ ------
Debt securities, available-for-sale 1,184,698 1,141,167 27,977 8,812 (9,917) (27,193) 1,202,758 1,122,786
Equity securities, available-for-sale 104,830 115,626 138,093 141,206 (3,345) (4,834) 239,578 251,998
------- ------- ------- ------- ------ ------ ------- -------
Total securities, available-for-sale $ 1,289,528 1,256,793 166,070 150,018 (13,262) (32,027) 1,442,336 1,374,784
=========== ========= ======= ======= ======= ======= ========= =========
f) Realized gains (losses) are as follows:
(in thousands) 2000 1999 1998
- -------------------------------------------------------------------------------------
Debt securities,
held-to-maturity
Gains $ 8 102 129
Debt securities,
available-for-sale
Gains 197 53 1,086
Losses (2,340) (7,312) (271)
Equity securities,
available-for-sale
Gains 11,039 43,295 5,513
Losses (4,713) (6,761) (8,596)
------ ------ ------
Net realized gains (losses) $ 4,191 29,377 (2,139)
======= ====== ======
(g) The amortized cost and estimated fair value of debt securities at December
31, 2000, by contractual maturity are shown below. Mortgage-backed securities
are included in the maturity tables using the estimated average life. Expected
maturities may differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
Listed below are debt securities, held-to-maturity:
Amortized Fair
(in thousands) Cost Value
- ---------------------------------------------------------------------------
Due in one year or less $ 30,029 30,369
Due after one year through
five years 177,384 181,958
Due after five years through
ten years 17,283 18,053
Due after ten years through
fifteen years 481 677
Due after fifteen years - -
- -
Total debt securities,
held-to-maturity $225,177 231,057
======= =======
23
Listed below are debt securities, available-for-sale:
Amortized Fair
(in thousands) Cost Value
- ---------------------------------------------------------------------------
Due in one year or less $112,696 112,540
Due after one year through
five years 584,611 596,784
Due after five years through
ten years 422,389 426,190
Due after ten years through
fifteen years 53,211 53,813
Due after fifteen years 11,791 13,431
------ ------
Total debt securities,
available-for-sale $1,184,698 1,202,758
========= =========
(h) Certain investments were on deposit with various state regulatory agencies
to comply with insurance laws with carrying values of $15,755,000 and
$12,880,000 as of December 31, 2000 and 1999, respectively.
(i) The Company is not exposed to significant concentrations of credit risk
within the investment portfolio.
(j) The components of comprehensive income, both gross and net of tax, for
2000, 1999 and 1998 are as follows:
2000
(in thousands) Gross Tax Net
- --------------------------------------------------------------------------------------------------------------
Income $ 24,544 (1,991) 26,535
Components of other com- prehensive income:
-Unrealized holding gains during the period 39,000 13,650 25,350
Reclassification adjustment (4,183) (1,464) (2,719)
------ ------ ------
Other comprehensive income 34,817 12,186 22,631
Comprehensive income $59,361 10,195 49,166
====== ====== ======
1999
(in thousands) Gross Tax Net
- --------------------------------------------------------------------------------------------------------------
Income $63,403 9,686 53,717
Components of other com- prehensive income:
-Unrealized holding losses during the period (28,616) (10,016) (18,600)
Reclassification adjustment (29,275) (10,246) (19,029)
------- ------- -------
Other comprehensive income (57,891) (20,262) (37,629)
Comprehensive income $5,512 (10,576) 16,088
===== ======= ======
1998
(in thousands) Gross Tax Net
- --------------------------------------------------------------------------------------------------------------
Income $63,704 10,134 53,570
Components of other com- prehensive income:
-Unrealized holding gains during the period 36,612 12,814 23,798
Reclassification adjustment 2,268 794 1,474
Other comprehensive income 38,880 13,608 25,272
------ ------ ------
Comprehensive income $102,584 23,742 78,842
======= ====== ======
24
Note 5 Indebtedness
(a) Convertible Subordinated Debentures The Debentures were issued under an
Indenture dated December 29, 1982, (Indenture) in the principal amount of
$25,000,000, bearing interest at a rate of 8.75% per annum, which is payable
on the unpaid principal semiannually on January 1 and July 1 in each year to
holders of record at the close of business on the preceding December 15 and
June 15. The Debentures are convertible into common stock at an effective
conversion price of $7.08 per share. The principal amount of the Debentures,
including any accrued interest, is due on January 1, 2008.
The Indenture requires the Company to retire, through the operation of a
mandatory sinking fund, 5% of the original $25,000,000 aggregate principal
amount of the debentures on, or before, December 31 of each of the years from
1993, to and including, 2006. Voluntary conversions have satisfied this
obligation in its entirety.
(b) Notes Payable (1) On May 4, 2000, the Company entered into a $30,000,000 and
a $61,500,000 note purchase agreement with various lenders covering the 8.63%
and 8.87% Senior Notes, respectively.
For the 8.63% Senior Notes, the Company is required to pay $6,000,000
principal amount in each year commencing on May 4, 2003 and ending on May 4,
2007, inclusive, together with accrued interest thereon. The unpaid principal
amount of these Senior Notes accrues interest that is payable semiannually on
May 4 and November 4 of each year, until the principal is paid in full.
For the 8.87% Senior Notes, the Company is required to pay $12,300,000
principal amount in each year commencing on May 4, 2006 and ending on May 4,
2010, inclusive, together with accrued interest thereon. The unpaid principal
amount of these Senior Notes accrues interest that is payable semiannually on
May 4 and November 4 of each year, until the principal is paid in full.
(2) On August 12, 1994, the Company entered into a $54,000,000 note
purchase agreement with various lenders covering the 8.77% Senior Notes. The
Company is required to pay $18,000,000 principal amount in each year
commencing on August 1, 2003 and ending on August 1, 2005, inclusive, together
with accrued interest thereon. The unpaid principal amount of the 8.77% Senior
Notes accrues interest that is payable semiannually on February 1 and August 1
of each year, until the principal is paid in full.
(3) On November 24, 1992, the Company entered into a $50,000,000 note
purchase agreement with various lenders covering the 7.84% Senior Notes. The
Company made its fifth required principal payment of the 7.84% Senior Notes of
$7,143,000 on November 15, 2000. The Company will continue to make the
required principal payment of $7,143,000 per annum through November 15, 2002,
inclusive, together with accrued interest thereon. The unpaid principal amount
of the 7.84% Senior Notes accrues interest that is payable semiannually on May
15 and November 15 of each year, until the principal is paid in full.
Each note purchase agreement contains restrictive covenants that limit
the Company's ability to declare dividends or incur additional indebtedness.
At December 31, 2000 the amount available for dividends to stockholders under
said restrictions was $127,377,000 for the 1992 and 1994 Senior Notes and
$95,868,000 for the 2000 Senior Notes.
(c) Short-Term Debt The Company has revolving lines of credit amounting to
$50,000,000 at December 31, 2000 and $75,000,000 at December 31, 1999. At
December 31, 2000 there was no balance outstanding, and at December 31, 1999,
$51,302,000 was outstanding under these lines. Interest is determined on a
LIBOR, prime rate or money market rate basis at the Company's option. At
December 31, 1999 there was approximately $192,000, in accrued interest
relating to the outstanding balance. The weighted average interest rate on
these borrowings was 6.5% in 2000 and 5.7% in 1999. The amounts available
under these agreements at December 31, 2000 and 1999 were $50,000,000 and
$23,698,000, respectively.
Note 6 Reinsurance
In the ordinary course of business, the insurance subsidiaries assume and cede
premiums with other insurance companies and various pools and associations of
which they are members. A large portion of the reinsurance is effected under
reinsurance contracts known as treaties and, in some instances, by negotiation
on each individual risk. In addition, there are excess of loss and catastrophe
reinsurance contracts which protect against losses over stipulated amounts
arising from any one occurrence or event. The reinsurance arrangements enable
greater diversification of business and can serve to limit the maximum net
loss on catastrophes and large and unusually hazardous risks.
The insurance subsidiaries are contingently liable to the extent that
any reinsurer becomes unable to meet its contractual obligations. The Company
reviews the financial condition of its existing reinsurers for any potential
write-offs of uncollectible amounts. At December 31, 2000, the Company had
prepaid reinsurance premiums and net reinsurance recoverables with American
Re-Insurance Company (rated "A++ Superior" by A.M. Best Company, Inc.) and a
state insurance fund that amounted to $64,037,000 and $75,161,000,
respectively. The Company has a $35,000,000 trust fund agreement with American
Re-Insurance Company to secure a portion of the Company's recoverable amounts.
Under the Company's reinsurance arrangements, which are all prospective
in nature, reinsurance premiums ceded are recorded as prepaid reinsurance and
amortized over the remaining contract period in proportion to the insurance
protection provided, and recoveries are recognized as losses are recorded.
The following is a table of assumed and ceded amounts by income statement
caption:
(in thousands) 2000 1999 1998
- -------------------------------------------------------------------------------------
Premiums written:
Assumed $14,192 18,774 19,583
Ceded (95,019) (79,023) (79,585)
Premiums earned:
Assumed 14,529 20,943 21,239
Ceded (94,453) (78,177) (79,089)
Losses incurred:
Assumed 9,738 14,661 16,339
Ceded (46,258) (129,250) (52,067)
Loss expenses incurred:
Assumed 1,269 1,629 2,166
Ceded (3,543) (5,887) (2,349)
25
Assumed business has declined when compared to prior years due to a
decrease in involuntary commercial and personal automobile plan business.
Ceded premiums increased in 2000 partially due to an additional $8,000,000 in
Flood business which is 100% ceded to the National Flood Insurance Program.
The remaining increase in ceded premiums is attributable to an overall
increase in direct business written. Losses ceded decreased substantially from
1999 due to a drop in 2000 catastrophic losses. Ceded losses in 1999 included
$47,000,000 from Hurricane Floyd ceded to the National Flood Insurance
Program. In addition, a $36,000,000 adjustment was made in 1999 to New Jersey
Personal Injury Protection (PIP) claims ceded to the New Jersey Unsatisfied
Claims Judgement Fund for reimbursement to the Company in accordance with
state law. The Company performed a comprehensive review of New Jersey PIP
claims and determined that 27 claims should be re-classified to "lifetime"
benefit status. Adjusting outstanding loss reserves on these 27 claims to new
ultimate projections resulted in the additional loss reserves in 1999.
Note 7 Retirement Plans
(a) Retirement Savings Plan The Company offers a voluntary defined
contribution 401(k) retirement savings plan to employees who meet eligibility
requirements. The plan allows employees to make contributions to a number of
diversified investment options including the Company's common stock, on a
before and/or after-tax basis. During 2000 and 1999, 37,697 and 37,963 shares
of the Company's common stock were issued under this plan, respectively.
The number of shares of the Company's common stock available to be
purchased under the plan was 871,178 at December 31, 2000. Employees can
contribute up to a maximum of 12% of their defined compensation and these
contributions, up to a maximum of 6%, are matched 50% by the Company.
Two additional defined contribution plans are maintained by certain
subsidiaries of the Diversified Insurance Services segment which do not
participate in the company's defined contribution plan. One 401(k) plan allows
employees to contribute up to a maximum of 15% of annual pay and up to 3% of
contributions are matched 200% by employer, while the other plan has a maximum
contribution of 16% with employer matching 50% of contributions by associates
employed over 6 years and 25% for all other employees.
Employer contributions for all the plans amounted to $2,366,000,
$1,840,000 and $1,597,000 in 2000, 1999 and 1998 respectively. (b) Retirement
Income Plan The Company has a noncontributory defined benefit retirement
income plan covering substantially all employees who meet eligibility
requirements. The Company's funding policy provides that payments to the
pension trust shall be equal to the minimum funding requirements of the
Employee Retirement Income Security Act plus additional amounts that may be
approved by the Company from time to time. The Company has made various
amendments to the plan in order to comply with certain Internal Revenue Code
changes.
The plan's assets are generally invested in debt and equity securities.
The debt securities are invested 100% in investment grade quality securities.
The reconciliations of the plan are as follows:
(in thousands) 2000 1999
- -------------------------------------------------------------------------------------
Change in Benefit Obligation:
Benefit obligation, beginning of year $63,075 66,979
Service cost 4,047 4,364
Interest cost 4,638 4,225
Actuarial gains (329) (10,734)
Benefits paid (1,817) (1,759)
------ ------
Benefit obligation, end of year $69,614 63,075
====== ======
Change in Fair Value of Assets:
Fair value of assets, beginning of year $49,827 53,100
Actual return on plan assets (net of
expenses) 598 (1,531)
Contributions by the employer 3,220 --
Benefits paid (1,800) (1,742)
------ ------
Fair value of assets, end of year $51,845 49,827
====== ======
Reconciliation of Funded Status:
Funded status $(17,769) (13,248)
Unrecognized prior service cost 931 1,103
Unrecognized net loss 3,938 655
----- ---
Net amount recognized $(12,900) (11,490)
======= =======
26
(in thousands) 2000 1999 1998
- -------------------------------------------------------------------------------------------------
Components of Net Periodic
Benefit Cost:
Service cost $4,047 4,364 3,340
Interest cost 4,638 4,225 3,892
Expected return on plan assets (4,222) (4,351) (4,043)
Amortization of unrecognized prior
service cost 172 225 237
Amortization of unrecognized net
loss 12 38 15
-- -- --
Net periodic benefit cost $4,647 4,501 3,441
===== ===== =====
Weighted-Average Assumptions as of
December 31:
Discount rate 7.50% 7.50 6.50
Expected return on plan assets 8.50% 8.50 8.50
Rate of compensation increase 5.00% 5.00 4.50
All amounts in the reconciliation of funded status were recognized in
the balance sheets for 2000 and 1999. There were no amounts to be included in
other comprehensive income for the periods shown resulting from a change in
the minimum pension liability.
(c) Postretirement Plan The Company provides life insurance benefits
(postretirement benefits) for retired employees. Substantially all the
Company's employees may become eligible for these benefits if they reach
retirement age while working for the Company and meet a minimum of ten years
of eligibility service. Those who retired prior to January 1, 1991, receive
life insurance coverage which decreased over ten years to a current ultimate
value of $5,000 per retiree. Those retiring on or after January 1, 1991,
receive life insurance coverage in an amount equal to 50% of their annual
salary amount in effect at the end of their active career. The estimated cost
of these benefits is accrued over the working lives of those employees
expected to qualify for such benefits as a level percentage of their payroll
costs.
The reconciliations of the plan are presented as follows:
(in thousands) 2000 1999
- -------------------------------------------------------------------------------------
Change in Post Retirement Obligation:
Benefit obligation, beginning of year $5,118 5,315
Service cost 216 253
Interest cost 374 337
Actuarial gains (76) (532)
Benefits paid (226) (255)
---- ----
Benefit obligation, end of year $5,406 5,118
===== =====
Reconciliation of Funded Status:
Funded status $(5,406) (5,118)
Unrecognized transition
obligation 502 548
Unrecognized net gain (533) (457)
---- ----
Net amount recognized $(5,437) (5,027)
====== ======
(in thousands) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------
Components of Net Post Retirement Cost:
Service cost $216 253 165
Interest cost 374 337 340
Amortization of unrecognized
transition obligation 46 46 46
Amortization of unrecognized net
gain -- -- (6)
-- -- ---
Net post retirement cost $636 636 545
=== === ===
Weighted-Average Assumptions as of
December 31:
Discount rate 7.50% 7.50 6.50
Rate of compensation increase 5.00% 5.00 4.50
All amounts in the reconciliation of funded status were recognized in the
balance sheets for 2000 and 1999. There were no unrecognized prior service
costs for 2000 and 1999. There were no amounts to be included in other
comprehensive income for the periods shown.
(d) Retirement Plan for Nonemployee Directors The Company terminated,
effective December 31, 1997, a nonqualified unfunded defined benefit
retirement income plan for nonemployee Directors. The estimated accrued costs
for this plan were not material. As part of the termination, the present value
of each Director's future benefits, as of that date, was converted into units
based on the fair value of
27
(in thousands) 2000 1999 1998
- ------------------------------------------------------------------------------------
Components of Net Periodic
Benefit Cost:
Service cost $4,047 4,364 3,340
Interest cost 4,638 4,225 3,892
Expected return on plan assets (4,222) (4,351) (4,043)
Amortization of unrecognized prior
service cost 172 225 237
Amortization of unrecognized net
loss 12 38 15
-- -- --
Net periodic benefit cost $4,647 4,501 3,441
===== ===== =====
Weighted-Average Assumptions as of
December 31:
Discount rate 7.50% 7.50 6.50
Expected return on plan assets 8.50% 8.50 8.50
Rate of compensation increase 5.00% 5.00 4.50
All amounts in the reconciliation of funded status were recognized in
the balance sheets for 2000 and 1999. There were no amounts to be included in
other comprehensive income for the periods shown resulting from a change in the
minimum pension liability.
(c) Postretirement Plan The Company provides life insurance benefits
(postretirement benefits) for retired employees. Substantially all the Company's
employees may become eligible for these benefits if they reach retirement age
while working for the Company and meet a minimum of ten years of eligibility
service. Those who retired prior to January 1, 1991, receive life insurance
coverage which decreased over ten years to a current ultimate value of $5,000
per retiree. Those retiring on or after January 1, 1991, receive life insurance
coverage in an amount equal to 50% of their annual salary amount in effect at
the end of their active career. The estimated cost of these benefits is accrued
over the working lives of those employees expected to qualify for such benefits
as a level percentage of their payroll costs.
The reconciliations of the plan are presented as follows:
(in thousands) 2000 1999
- -------------------------------------------------------------------------
Change in Post Retirement Obligation:
Benefit obligation, beginning of year $5,118 5,315
Service cost 216 253
Interest cost 374 337
Actuarial gains (76) (532)
Benefits paid (226) (255)
---- ----
Benefit obligation, end of year $5,406 5,118
===== =====
Reconciliation of Funded Status:
Funded status $(5,406) (5,118)
Unrecognized transition
obligation 502 548
Unrecognized net gain (533) (457)
---- ----
Net amount recognized $(5,437) (5,027)
====== ======
(in thousands) 2000 1999 1998
- ------------------------------------------------------------------------------------------
Components of Net Post Retirement Cost:
Service cost $216 253 165
Interest cost 374 337 340
Amortization of unrecognized
transition obligation 46 46 46
Amortization of unrecognized net
gain -- -- (6)
-- -- ---
Net post retirement cost $636 636 545
=== === ===
Weighted-Average Assumptions as of
December 31:
Discount rate 7.50% 7.50 6.50
Rate of compensation increase 5.00% 5.00 4.50
All amounts in the reconciliation of funded status were recognized in the
balance sheets for 2000 and 1999. There were no unrecognized prior service costs
for 2000 and 1999. There were no amounts to be included in other comprehensive
income for the periods shown.
(d) Retirement Plan for Nonemployee Directors The Company terminated, effective
December 31, 1997, a nonqualified unfunded defined benefit retirement income
plan for nonemployee Directors. The estimated accrued costs for this plan were
not material. As part of the termination, the present value of each Director's
future benefits, as of that date, was converted into units based on the fair
value of
28
Selective common stock on that date. The cash value of these units based upon
the fair value of Selective common stock on retirement date will be distributed
to each Director upon retirement, or at each Director's election, over a period
of fifteen years after such retirement. The units will accrue amounts equivalent
to dividends which will also be converted into units based on the fair market
value of Selective common stock on the applicable dividend reinvestment dates.
The accrued liability of these units at December 31, 2000 was $1,251,000
compared with $1,301,000 at the time of conversion.
Note 8 Incentive Compensation Plans The Company has incentive compensation plans
in which employees are eligible to participate based on corporate and individual
performance goals. The total compensation costs charged to expense in connection
with the plans were $1,518,000, $883,000 and $5,217,000 in 2000, 1999 and 1998,
respectively. The decrease in incentive compensation for 2000 and 1999 reflects
the absence of a payout in the insurance companies due to insufficient
profitability experienced during both of those years.
On December 18, 1998, one of the Company's subsidiaries established an
irrevocable trust for certain key executives. The total compensation costs
charged to expense in connection with this agreement were $1,646,000 in 2000 and
$1,712,000 in 1999. The agreement ends December 2002.
Note 9 Stock Compensation Plans The Company has adopted the pro forma footnote
disclosure-only provisions of FASB 123. Based on the fair value method
consistent with the provisions of FASB 123, the Company's net income and
earnings per share would have been reduced to the following pro forma amounts
indicated below:
(in thousands, except per share amounts)
2000 1999 1998
- ------------------------------------------------------------
Net income:
As reported $26,535 53,717 53,570
Pro forma 25,939 53,181 52,142
Basic earnings per share:
As reported 1.07 1.98 1.88
Pro forma 1.04 1.96 1.83
Diluted earnings per share:
As reported 1.01 1.87 1.74
Pro forma .99 1.85 1.69
The fair value of each option grant is estimated on the date of grant
using the Black Scholes option-pricing model with the following weighted average
assumptions for 2000, 1999 and 1998, respectively: (i) risk free interest rate
of 6.00%, 5.45% and 4.84% for the employee stock purchase plan and 6.56%, 5.40%
and 4.76% for all other option plans; (ii) expected life of six months for the
employee stock purchase plan for all years and seven, eight, and five years for
all other option plans for 2000, 1999, and 1998 respectively; (iii) dividend
yield of 3.4%, 3.2% and 2.4%; and (iv) an expected volatility of 31%, 26% and
23% for the employee stock purchase plan and 23%, 22% and 23% for all other
option plans for 2000, 1999, and 1998, respectively.
The weighted-average fair value of options and stocks granted per share,
during the year for 2000, 1999 and 1998, respectively, is as follows:
2000 1999 1998
- -------------------------------------------------------------
Stock option plans $4.01 4.52 4.00
Restricted stock 15.60 18.38 26.41
Employee stock purchase plan:
Six month option 1.55 1.31 1.36
15% of grant date market value 2.67 2.70 3.17
---- ---- ----
Total 4.22 4.01 4.53
Agents stock purchase plan:
Discount of grant date market value 1.00 .91 1.14
29
A summary of the option transactions under the stock option plans is as follows:
Stock Weighted
appre- average
Number ciation exercise
of shares rights price
- --------------------------------------------------------------
Outstanding at
December 31, 1997 1,936,690 107,800 $16.17
Granted--1998 240,700 -- 19.90
Exercised--1998 (253,176) (3,362) 13.14
Forfeited--1998 (34,562) (60,438) 17.10
------- ------- -----
Outstanding at
December 31, 1998 1,889,652 44,000 17.03
Granted--1999 60,000 -- 18.45
Exercised--1999 (44,660) -- 14.16
Forfeited--1999 (31,710) (8,000) 18.83
------- ------ -----
Outstanding at
December 31, 1999 1,873,282 36,000 17.11
Granted--2000 163,950 -- 15.49
Exercised--2000 (103,430) (7,610) 13.11
Forfeited--2000 (98,210) (14,390) 18.97
------- ------- -----
Outstanding at
December 31, 2000 1,835,592 14,000 $17.12
========= ====== =====
Options exercisable and their weighted average exercise price at year
end are 1,773,915, and $17.02, 1,772,082 and $16.78, 1,754,448 and $16.35 for
2000, 1999 and 1998, respectively.
The following table summarizes information about stock options
outstanding and exercisable under the stock option plans at December 31, 2000:
Options Outstanding Options Exercisable
-------------------------------------------- ---------------------------------
Weighted
average Weighted Weighted
Range of remaining average average
exercise Number contractual exercise Number exercise
prices of shares life in years price of shares price
- -------------------------------------------------------------------------------------------------
$ 5 to 10 42,500 1.0 $ 9.13 42,500 $ 9.13
10 to 14 297,896 3.5 12.45 297,896 12.45
14 to 18 699,686 5.0 15.85 666,686 15.88
18 to 20 562,540 6.3 18.54 562,540 18.54
20 to 28 232,970 6.7 24.92 204,293 24.85
------- --- ----- ------- -----
1,835,592 5.3 $17.12 1,773,915 $ 17.02
========= === ===== ========= =====
(a) Stock Option Plan Under the Company's original stock option plan, 14,000
shares of the Company's common stock are reserved for issuance, upon exercise of
stock options outstanding at December 31, 2000. This plan permitted the granting
of qualified and nonqualified stock options to key employees, which may or may
not have stock appreciation rights (SARs) attached. Options and related SARs
were granted at not less than fair value on the date of the grant, are required
to be exercised within ten years from the date of the grant and are exercisable
immediately upon the grant. This plan expired in August 1992 and was replaced
with the Company's stock option plan II.
Compensation expense, based on the increase or decrease in the fair
value of the Company's common stock, is charged or (credited) to other expense
in recognition of the SARs attached to the granted options. Such amounts were
$(28,000), $(194,750) and $(1,481,000) in 2000, 1999 and 1998, respectively.
(b) Stock Option Plan II Under the Company's stock option plan II, 2,738,527
shares of the Company's common stock are available for issuance at December 31,
2000. The plan permits the granting of qualified and nonqualified stock options
to employees, which may or may not have SARs attached. Options and related SARs
may be granted at not less than fair value on the date of the grant and may be
subject to certain vesting periods as determined by the Company's Salary and
Employee Benefits Committee (Committee). Each grant must be exercised within ten
years from the date of the grant. Under this plan, the Company granted options
of 130,950, 24,000 and 207,700 for 2000, 1999 and 1998, respectively.
Under the Company's stock option plan II, the Committee may, at its
discretion, make restricted or unrestricted grants of common stock, or grant
rights to receive common stock, to employees in addition to or in substitution
for options and/or SARs granted. The Company granted a total of 211,309, 230,328
and 157,356 restricted shares for 2000, 1999 and 1998, respectively, and 69,718
and 23,293 and 27,295 shares were forfeited in 2000, 1999 and 1998,
respectively. Each such grant must be expressly subject to the attainment of one
or more performance-related objectives for certain executive officers, and may
be subject to the attainment of one or more performance-related objectives for
other employees, as determined by the Committee and set forth in an award
agreement. Each such grant also is
30
subject to a vesting period or other terms, conditions, restrictions and
limitations as determined by the Committee at its discretion and set forth in an
award agreement.
During the vesting period, dividends are earned and held in escrow on
the restricted shares subject to the same vesting period and conditions as set
forth in the award agreement. Effective September 3, 1996, dividends earned on
the restricted shares are reinvested in the Company's common stock at fair
value. The Company issued through the dividend reinvestment feature (net of
forfeitures), 9,908, 17,118 and 12,870 restricted shares in 2000, 1999 and 1998,
respectively, from the dividend reinvestment plan reserves.
Deferred compensation expense is recognized for the fair value of the restricted
shares when granted and is adjusted for the increases or decreases in the fair
value of the Company's common stock for share awards subject to
performance-related objectives and is amortized ratably over the vesting period.
The unamortized amount is accounted for as a reduction of stockholders' equity.
At December 31, 2000, 1999 and 1998, respectively, deferred compensation of
$5,941,000, $6,246,000 and $5,613,000 was recorded as a reduction of
stockholders' equity and the amounts amortized to expense in 2000, 1999 and
1998, respectively, were $3,462,000, $2,785,000 and $1,593,000.
(c) Employee Stock Purchase Plan Under the terms of the employee stock purchase
plan, the number of shares of common stock available to be purchased is 521,854.
This plan is available to all employees who meet the eligibility requirements
and provides for the issuance of options to purchase shares of common stock. The
purchase price is the lower of: (i) 85% of the closing market price at the time
the option is granted or (ii) 85% of the closing price at the time the option is
exercised. The Company issued 92,886, 87,026 and 74,613 shares in 2000, 1999 and
1998, respectively, to employees and charged to expense $248,000, $235,000 and
$235,000 in 2000, 1999 and 1998, respectively.
(d) Stock Unit Awards Beginning in 1998, certain officers of the Company were
granted phantom stock units in lieu of grants of restricted stock. There were no
phantom stock units awarded in 2000. The total number of phantom stock units
awarded in 1999 and 1998 was 6,000 and 23,000, respectively. The value of the
phantom stock units will be paid in cash upon retirement. The value of the
phantom stock units is being charged to expense over the estimated remaining
employment period.
(e) Stock Option Plan for Nonemployee Directors Under the Company's stock option
plan for directors, 794,500 shares of the Company's common stock are available
for issuance. Each director who is not a full-time employee of the Company
participates in the plan and automatically receives a nonqualified option to
purchase 3,000 shares of common stock at not less than fair value on March 1 of
each year. Each option becomes exercisable one year after the option was granted
and expires no more than ten years from the date the option is granted. Under
this plan, the Company granted options of 33,000, 36,000 and 33,000 for 2000,
1999 and 1998, respectively.
(f) Stock Compensation Plan for Nonemployee Directors In May 1996, the
shareholders approved the stock compensation plan for nonemployee directors,
effective January 1, 1997. The purpose of this plan is to provide for the
payment of the annual compensation for the directors' services in shares of the
Company's common stock. The amount of common shares available for issuance under
the plan is 359,334. The Company issued 11,435 shares, 10,127 shares and 7,872
shares shares during 2000, 1999 and 1998, respectively and charged to expense
$418,000, $438,000 and $243,000, respectively. The plan was amended effective
January 1, 2001 to permit the directors to elect to receive up to 50% of his or
her compensation under the plan in cash for each calendar year. Each
non-employee director must elect on or before December 20 of each year how
compensation for the following year will be paid.
(g) Agent Stock Purchase Plan Under the terms of the agents' stock purchase
plan, the number of shares of common stock available to be purchased is 911,507.
This plan provides for quarterly offerings in which independent insurance agents
can purchase the Company's common stock at a 5% discount for the purchases
through September 1, 2000. During 2000, the plan was amended so that effective
with the December 1, 2000 purchase, the discount is 10% with a one year
restricted period during which the shares purchased cannot be sold or
transferred. The Company issued 33,082 shares, 59,285 shares and 85,672 shares
in 2000, 1999 and 1998, respectively, to agents and charged to expense $33,000,
$54,000 and $98,000 in 2000, 1999 and 1998, respectively.
Note 10 Stockholders' Equity The Company maintains a dividend reinvestment plan,
under which 188,583 shares of common stock are available for issuance. Shares
purchased under this plan are issued at fair value.
Under a common stock repurchase program authorized by the Board of
Directors on July 29, 1996 and extended on July 28, 1998, May 7, 1999, November
2, 1999 and February 3, 2000, the Company can repurchase up to 8,000,000 shares.
In 2000, 1999 and 1998, the Company acquired 2,101,000, 2,505,000 and 1,774,000
shares, respectively, at a total cost of $36,536,000, $45,716,000 and
$37,750,000, respectively. The total amounts of stock repurchased under this
program since July 29, 1996 through December 31, 2000 is 6,973,000 shares at a
total cost of $132,788,000.
Shares repurchased in conjunction with restricted stock vestings and
option exercises are 69,000, 9,000 and 21,000 for 2000, 1999 and 1998,
respectively, at a total cost of $1,141,000, $169,000 and $455,000,
respectively.
Selective's ability to declare and pay dividends on common stock is
affected by the ability of its subsidiaries to declare and pay dividends to the
holding company. The dividends from the Diversified Insurance Services
subsidiaries are restricted only by the operating needs of those subsidiaries.
The dividends from insurance subsidiaries are under the regulatory limitations
of the states in which the insurance subsidiaries are domiciled: New Jersey, New
York, North Carolina and South Carolina.
In all such jurisdictions, domestic insurers are prohibited from paying
"extraordinary dividends" without approval of the insurance commissioner of the
respective state. Additionally, New Jersey and South Carolina require notice of
the declaration of any ordinary or extraordinary dividend distribution. During
the notice period, the relevant state regulatory authority may disallow all or
part of the
31
proposed dividend if it determines that the insurer's surplus, with regard to
policyholders, is not reasonable in relation to the insurer's outstanding
liabilities and adequate to its financial needs.
Based on the 2000 statutory financial statements, the maximum dividends
that can ultimately be paid to Selective in 2001 by Selective Insurance Company
of America, Selective Way Insurance Company, Selective Insurance Company of the
Southeast, Selective Insurance Company of South Carolina and Selective Insurance
Company of New York are $25,105,000, $11,690,000, $2,388,000, $4,216,000 and
$3,230,000, respectively. The statutory capital and surplus of the insurance
subsidiaries in excess of these ordinary dividend amounts must remain within the
insurance subsidiaries in the absence of the approval of a request for an
extraordinary dividend.
The National Association of Insurance Commissioners (NAIC) has
risk-based capital (RBC) requirements that require insurance companies to
calculate and report information under a risk-based formula, which measures
statutory capital and surplus needs based on a regulatory definition of risk in
a company's mix of products and its balance sheet. At December 31, 2000 and
1999, all the Companies have an amount above the authorized control level RBC,
as defined by the NAIC.
Note 11 Preferred Share Purchase Rights Plan On February 2, 1999, Selective's
Board of Directors approved the amended and restated stockholder rights plan.
The rights to purchase one two-hundredth of a share of Selective Series A Junior
Preferred Stock at an exercise price of $80 are attached to all shares of
Selective common stock and are exercisable ten days after an announcement that a
person or group has acquired 15% or more of the common stock (Acquiring Person)
or ten business days after a person commences or announces its intent to make a
tender offer which would result in their acquiring 15% or more of the common
stock (Acquiring Person). If a person or group becomes an Acquiring Person, each
right will entitle the holder, other than the Acquiring Person, to purchase the
number of Selective common shares having a market value of two times the
exercise price of $80.
If Selective is acquired in a merger, or 50% or more of its assets are
sold, each right other than the rights of an Acquiring Person, will be
exercisable to purchase shares of the acquiring company having twice the market
value of the $80 exercise price.
Before an Acquiring Person acquires 50% or more of the common shares,
Selective's Board may exchange rights, other than the rights of an Acquiring
Person, at an exchange ratio of one share of common stock per right. The rights
expire February 2, 2009, unless Selective's Board redeems them at $.01 per right
before a person or group triggers the plan or unless Selective's Board exchanges
them for common stock.
Note 12 Reconciliation of Statutory To Generally Accepted Accounting Principles
Financial Statements (a) The following is a reconciliation of the differences
between the Statutory Financial Statements and the GAAP Financial Statements:
(in thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------
Combined insurance
subsidiaries - statutory basis
net income $26,374 61,686 50,223
Deferred policy acquisition costs 9,318 (679) 11,664
Deferred Federal income taxes 3,634 2,076 (422)
Net gains (losses) of subsidiaries 4,865 2,790 (304)
Other, net (5,672) (4,390) (2,234)
------ ------ ------
Combined subsidiaries
- GAAP basis 38,519 61,483 58,927
Selective Insurance Group, Inc.,
net of intercompany equity
eliminations (11,984) (7,766) (5,357)
------- ------ ------
Consolidated financial
statement - GAAP basis
net income $26,535 53,717 53,570
====== ====== ======
(in thousands) 2000 1999
- ----------------------------------------------------------------
Combined insurance subsidiaries -
statutory surplus $484,884 515,624
Deferred policy acquisition costs 118,413 109,095
Deferred Federal income taxes 3,808 13,131
Loss reserves (609) (1,080)
Net unrealized gains (losses) - debt
securities, available-for-sale 18,060 (18,381)
Nonadmitted assets 34,025 28,648
Stockholders' equity of subsidiaries 57,440 37,585
Other, net 6,248 15,710
----- ------
Combined subsidiaries - GAAP
basis 722,269 700,332
Selective Insurance Group, Inc.,
net of intercompany equity
eliminations (144,472) (130,368)
-------- --------
Consolidated financial statement -
GAAP basis stockholders' equity $577,797 569,964
======= =======
32
(b) The insurance subsidiaries prepare their statutory financial statements in
accordance with accounting practices prescribed or permitted by the various
states of domicile. Prescribed statutory accounting practices include state
laws, regulations and general administrative rules, as well as a variety of
publications of the NAIC. Permitted statutory accounting practices encompass all
accounting practices that are not prescribed; such practices differ from state
to state, may differ from company to company within a state and may change in
the future. The insurance subsidiaries do not utilize any permitted statutory
accounting practices that materially affect the determination of statutory
surplus or risk-based capital. Furthermore, the NAIC had a project to codify
statutory accounting practices, which becomes effective for reporting periods
beginning after January 1, 2001, and is expected to constitute the principal
source of "prescribed" statutory accounting practices. Codification is not
expected to have a material impact on the Company.
Note 13 Earnings per Share The following table provides a reconciliation of the
numerators and denominators of the basic and diluted EPS computations of net
income for the year ended:
(in thousands, except per share amounts)
Income Shares Per Share
(Numerator) (Denominator) Amount
- --------------------------------------------------------------------------------
2000
- ----
Basic EPS
Net Income available
to common stockholders $26,535 24,907 $1.07
====
Effect of Dilutive Securities
Restricted stock -- 752
8.75% convertible
subordinated debentures 250 649
Stock options (18) 210
--- ---
Diluted EPS
Income available to common
stockholders + assumed
conversions $26,767 26,518 $1.01
====== ====== ====
1999
- ----
Basic EPS
Net Income available
to common stockholders $53,717 27,081 $1.98
====
Effect of Dilutive Securities
Restricted stock -- 683
8.75% convertible
subordinated debentures 355 873
Stock options (127) 240
---- ---
Diluted EPS
Income available to common
stockholders + assumed
conversions $53,945 28,877 $1.87
====== ====== ====
1998
- ----
Basic EPS
Net Income available
to common stockholders $53,570 28,480 $1.88
====
Effect of Dilutive Securities
Restricted stock -- 534
8.75% convertible
subordinated debentures 375 926
Stock options (989) 472
---- ---
Diluted EPS
Income available to common
stockholders + assumed
conversions $52,956 30,412 $1.74
====== ====== ====
33
Note 14 Liability For Unpaid Claims And Claim Adjustment Expenses The table
below provides a roll-forward of reserves for losses and loss expenses for
beginning and ending reserve balances:
(in thousands) 2000 1999 1998
- -------------------------------------------------------------------------------------------
Gross reserves for losses
and loss expenses at
beginning of year $1,273,808 1,193,274 1,161,169
Less reinsurance recoverable
on unpaid losses and loss
expenses at beginning of
year 192,044 140,453 124,197
------- ------- -------
Net reserves for losses
and loss expenses at
beginning of year 1,081,764 1,052,821 1,036,972
Provision for losses and loss
expenses for claims
occurring in the current
year 615,095 600,793 510,319
Decrease in estimated
losses and loss expenses for
claims occurring in prior
years (1,029) (8,578) (2,519)
------ ------ ------
1,695,830 1,645,036 1,544,772
--------- --------- ---------
Net losses and loss expenses
paid for claims occurring
during:
Current year 235,879 235,157 178,286
Prior years 348,164 328,115 313,665
------- ------- -------
Total paid losses 584,043 563,272 491,951
------- ------- -------
Net reserves for losses and
loss expenses at end of year 1,111,787 1,081,764 1,052,821
Reinsurance recoverable on
unpaid losses and loss
expenses at end of year 160,869 192,044 140,453
------- ------- -------
Gross reserves for losses
and loss expenses at
end of year $1,272,656 1,273,808 1,193,274
========= ========= =========
As additional information is collected in the loss settlement process reserves
are adjusted accordingly. These changes could have a material impact on the
results of operations of future periods when the adjustments are made.
Note 15 Segment Information The Company is primarily engaged in writing property
and casualty insurance. The Company has classified its business into three
segments which are Insurance Operations (commercial lines underwriting, personal
lines underwriting), Investments, and Diversified Insurance Services. The
insurance segments are evaluated based on their GAAP underwriting results,
Investments are evaluated based on after-tax investment returns, and the
Diversified Insurance Services are evaluated based on results of operations in
accordance with GAAP.
The GAAP underwriting results of the Insurance Operations segment are
determined taking into account net premiums earned, incurred losses and loss
expenses, policy acquisition costs and other underwriting expenses and
policyholders dividends. Management of the investment portfolio is separate from
the insurance underwriting segment and, therefore, has been classified as a
segment. The operating results of the Investments segment take into account net
investment income and net realized gains and losses. The Diversified Insurance
Services business is managed independently from the other segments and,
therefore, has been classified separately. The Diversified Insurance Services
segment consists of the flood business managed by the Company for the National
Flood Insurance Program, medical cost containment operations, professional
employer organization operations, software development and program
administration operations, and fee based income from alternative market
affiliation programs. The segment's results are determined taking into account
the net revenues generated in each of the businesses, less the costs of
operations.
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.
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:
34
Revenue by segment
(in thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------
Insurance Operations:
Commercial lines net
premiums earned $611,865 570,650 506,020
Personal lines net
premiums earned 209,400 228,415 216,972
------- ------- -------
Total insurance operations 821,265 799,065 722,992
Investments:
Net investment income 99,495 96,531 99,196
Net realized gains
(losses) on investments 4,191 29,377 (2,139)
----- ------ ------
Total investments 103,686 125,908 97,057
Diversified Insurance
Services 76,063 46,653 14,100
------ ------ ------
Total all segments $1,001,014 971,627 834,149
========= ======= =======
Income or (loss) before Federal income tax by segment
(in thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------------
Insurance Operations:
Commercial lines
underwriting $(45,186) (47,625) (32,871)
Personal lines
underwriting (19,936) (6,522) 7,885
------- ------ -----
Underwriting loss,
before Federal income tax (65,122) (54,147) (24,986)
Investments:
Net investment income 99,495 96,531 99,196
Net realized gains
(losses) on investments 4,191 29,377 (2,139)
----- ------ ------
Total investment income,
before Federal income tax 103,686 125,908 97,057
Diversified Insurance Services:
Income before Federal
income tax 5,227 4,772 2,217
----- ----- -----
Total all segments 43,791 76,533 74,288
Interest expense (13,745) (9,460) (9,409)
General corporate
expenses (5,502) (3,670) (1,175)
------ ------ ------
Income before
Federal income tax $ 24,544 63,403 63,704
====== ====== ======
Note 16 Related Party Transactions Certain officers of Selective exercised stock
options by giving Selective promissory notes totalling $992,000 in payment for
the stock purchased. The Company's noninterest bearing notes are secured by
shares of the Company's common stock. The promissory notes are full recourse and
subject to certain employment requirements. At December 31, 2000, the
outstanding principal amount was $347,000.
In August 1998, certain officers of Selective purchased stock on the
open market with proceeds advanced by the Company. These officers gave Selective
promissory notes totalling $1,773,000. The notes bear interest at 2.5% and are
secured by the purchased shares of Selective's common stock. The promissory
notes are full recourse and subject to certain employment requirements. At
December 31, 2000, the principal amount outstanding was $1,110,000.
The Company has utilized the services of Chas. E. Rue & Sons, Inc., a
general insurance agency, of which William M. Rue, a director of Selective
Insurance Group, Inc., is the President and owner of more than a 5% equity
interest. The Company's insurance subsidiaries purchased insurance coverages
from Chas. E. Rue & Sons, Inc. with premiums of $931,000, $689,000, and $826,000
during 2000, 1999, and 1998, respectively. Additionally, Chas. E. Rue & Sons,
Inc. received $1,192,000, $1,226,000 and $1,276,000 in commissions for
35
insurance policies placed with the Company's insurance subsidiaries during 2000,
1999, and 1998, respectively. The company believes that the related party
transactions with Chas. E. Rue & Sons, Inc. were on terms as fair to the Company
as could have been obtained from unaffiliated third parties.
Note 17 Commitments and Contingencies (a) Reserves established for liability
insurance continue to reflect exposure to environmental claims, both asbestos
and non-asbestos. These claims have arisen primarily under older policies
containing exclusions for environmental liability which certain courts, in
interpreting such exclusions, have determined do not bar such claims. The
emergence of these claims is slow and highly unpredictable. Since 1986, policies
issued by the insurance subsidiaries have contained a more expansive exclusion
for losses related to environmental claims. There are significant uncertainties
in estimating the Company's exposure to environmental claims (for both case and
IBNR reserves) resulting from lack of historical data, long reporting delays,
uncertainty as to the number and identity of claimants and complex legal and
coverage issues. Legal issues which arise in environmental cases include the
determination of whether a case is one for a federal or state forum, choice of
law, causation, admissibility of evidence, allocation of damages and
contribution among joint defendants, successor and predecessor liability and
whether direct action against insurers can be maintained. Coverage issues which
arise in environmental cases include the interpretation and application of
policy exclusions, the determination and calculation of policy limits, the
determination of the ultimate amount of a loss, the extent to which a loss is
covered by a policy, if at all, the obligation of an insurer to defend a claim
and the extent to which a party can prove the existence of coverage. Courts have
reached different and sometimes inconsistent conclusions on these legal and
coverage issues. The Company does not discount to present value that portion of
its loss reserves expected to be paid in future periods.
At December 31, 2000, the Company's reserves for environmental claims
amounted to $52,715,000 on a gross basis (including IBNR reserves of
$19,775,000) and $47,175,000 (including IBNR reserves of $18,235,000) on a net
basis. At December 31, 2000, the Company established a range of reasonably
possible losses for reported environmental exposures of approximately
$11,000,000 to $50,000,000 on a gross basis, and $10,000,000 to $44,000,000, on
a net basis.The Company's case reserves for known environmental claims,
excluding IBNR, were $32,940,000 on a gross basis and $28,940,000 on a net basis
in connection with 2,409 claims, including multiple claimants who are associated
with the same site or incident. These claims involved about 1,613 lawsuits. Of
the 2,409 total environmental claims, 1,868 claims are asbestos related, of
which 1,058 involve only two insureds. One such insured manufactured
asbestos-containing products, while the other supplied asbestos-containing
products. The reserve associated with these two insureds amounted to $2,249,000
on a gross basis and $1,649,000 on a net basis. About 80 of the total
environmental claims involve approximately 20 landfills. The landfill sites
account for reserves of approximately $14,818,000 on a gross basis and
$14,618,000 on a net basis. The remaining claims, which represent about
$15,873,000 on a gross basis and $12,673,000 on a net basis, involve leaking
underground storage tanks, air pollution, as well as other asbestos claims.
Litigation costs associated with environmental claims have been significant,
particularly for landfill claims.
While the number of asbestos type claims has been increasing, the
average estimated loss is decreasing; therefore these claims represent only 9%
of the company's total environmental exposure as of December 31, 2000. The
Company has also experienced a shift in its non-asbestos environmental exposure.
The number of traditional environmental claims, such as landfill and leaking
underground storage tank claims, has remained constant or in some cases has
decreased, while the number of short-tail exposure claims such as oil truck
spills and Exterior Insulation Finishing System (EIFS) have increased. These
claims tend to have lower litigation costs and generally can be settled in a
shorter time frame than traditional environmental claims.
IBNR reserve estimation 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. Moreover, normal historically-based actuarial
approaches do not 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.
The Company has established a range of reasonably possible IBNR losses
for non-environmental net claims at December 31, 2000, of approximately
$446,000,000 to $555,000,000 and at December 31, 1999, of approximately
$424,000,000 to $531,000,000. For each major product line of business, a
non-environmental IBNR point estimate was calculated using standard actuarial
techniques and an estimated split of loss expense reserves was then allocated to
the IBNR provision. From this point estimate, the upper end of the range was
calculated by adding 5% of the Company's aggregate reserve for net losses and
loss expenses and the lower end of the range was calculated subtracting 5%. The
Company's net IBNR loss and loss expense reserves for non-environmental claims
were $494,000,000 at December 31, 2000 and $493,000,000 at December 31, 1999.
Based on the Company's aggregate reserve for net losses and loss
expenses at December 31, 2000, the Company does not expect that liabilities
associated with environmental and non-environmental claims will have a
materially adverse impact on its future liquidity, financial position and
results of operations. However, given the complexity of coverage and other legal
issues, and the significant assumptions used in estimating such exposures,
actual results could significantly differ from the Company's current estimates.
The table on page 56 provides a roll-forward of the Company's gross and
net environmental incurred losses and loss expenses and related reserves
thereon. The total environmental claims net incurred losses and loss expenses
for 2000 decreased slightly while payments increased due to the settlement of
certain asbestos and landfill claims during the year when compared to 1999. The
total environmental claims net incurred losses and loss expenses for 1999
increase slightly when compared to 1998.
The following table provides a roll-forward of the Company's gross and
net environmental incurred losses and loss expenses and related reserves
thereon:
36
(in thousands)
2000 1999 1998
Gross Net Gross Net Gross Net
- -----------------------------------------------------------------------------------------------------------------------------
Asbestos
Environmental reserves (including IBNR)
for losses and loss expenses at the beginning of year $ 8,100 4,257 8,249 4,406 8,277 4,384
Incurred losses and loss expenses (887) 644 33 33 219 269
Less losses and loss expenses paid (563) (563) (182) (182) (247) (247)
-------- -------- -------- -------- -------- --------
Environmental reserves (including IBNR)
for losses and loss expenses at the end of year $ 6,650 4,338 8,100 4,257 8,249 4,406
======== ======== ======== ======== ======== ========
Non-Asbestos
Environmental reserves (including IBNR)
for losses and loss expenses at the beginning of year $ 46,204 44,247 45,879 43,922 46,458 44,851
Incurred losses and loss expenses 5,751 4,220 5,711 5,711 5,119 4,769
Less losses and loss expenses paid (5,890) (5,630) (5,386) (5,386) (5,698) (5,698)
-------- -------- -------- -------- -------- --------
Environmental reserves (including IBNR)
for losses and loss expenses at the end of year $ 46,065 42,837 46,204 44,247 45,879 43,922
======== ======== ======== ======== ======== ========
Total Environmental Claims
Environmental reserves (including IBNR)
for losses and loss expenses at the beginning of year $ 54,304 48,504 54,128 48,328 54,735 49,235
Incurred losses and loss expenses 4,864 4,864 5,744 5,744 5,338 5,038
Less losses and loss expenses paid (6,453) (6,193) (5,568) (5,568) (5,945) (5,945)
-------- -------- -------- -------- -------- --------
Environmental reserves (including IBNR)
for losses and loss expenses at the end of year $ 52,715 47,175 54,304 48,504 54,128 48,328
======== ======== ======== ======== ======== ========
(b) The Company purchases annuities from life insurance companies to fulfill
obligations under claim settlements which provide for periodic future payments
to claimants. As of December 31, 2000, the Company had purchased such annuities
in the amount of $10,788,000 for settlement of claims on a structured basis for
which the Company is contingently liable. To the Company's knowledge, none of
the issuers of such annuities have defaulted in its obligations thereunder.
(c) The Company has various operating leases for office space and equipment.
Such lease agreements, which expire at various times, are generally renewed or
replaced by similar leases. Rental expense under these leases amounted to
$8,438,000, $7,933,000 and $5,979,000 for the years ended December 31, 2000,
1999 and 1998, respectively.
In addition, certain leases for rented premises and equipment are
noncancelable, and liability for payment will continue even though the space or
equipment may no longer be in use. At December 31, 2000, the total future
minimum rental commitments under noncancelable leases was $25,509,000 and such
yearly amounts are as follows:
(in thousands)
2001 7,737
2002 5,232
2003 3,036
2004 2,745
2005 2,569
After 2005 4,190
-----
Total minimum payment required $25,509
======
Note 18 Acquisition of Wholly-Owned Subsidiaries
On July 27, 1999, the Company acquired all of the net assets of Consumer Health
Network Plus, LLC (formerly Consumer Health Network, Inc.), a nationally
accredited preferred provider organization, for cash of $6,010,000 including
related acquisition costs. The purchase agreement provides for additional
consideration to be paid if certain financial criteria are achieved. As a result
of this agreement provision, an additional $163,000 of consideration was
incurred during 2000 and future additional consideration of $1,837,000 may be
incurred if financial performance criteria are met over the next year. As this
consideration is incurred, it will be recorded as an increase in goodwill and
amortized over the remaining life of the asset. The acquisition has been
accounted for using the purchase method of accounting, and included $4,822,000
of goodwill, which is being amortized on a straight-line basis over 15 years.
The amount of goodwill amortization for 2000 and 1999 was $312,000 and $130,000,
respectively.
On July 21, 1999, the Company acquired all of the outstanding shares of
Selective HR Solutions, Inc. (formerly Modern Employers, Inc.), a professional
employer organization, for $29,958,000 including related acquisition costs. The
purchase agreement provides for additional consideration to be paid if certain
financial criteria are achieved. As a result of this agreement provision, an
additional $178,000 of consideration was incurred during 2000. This
consideration along with $5,816,000 accrued at December 31, 1999 was paid in
2000. A final consideration payment of $97,000 in January 2001 will also be
recorded as an increase in goodwill and amortized over the remaining life of the
asset. The acquisition has been accounted for using the purchase method of
accounting, and included $29,193,000 of goodwill, which is being amortized on a
straight-line basis over 20 years. The amount of goodwill amortization for 2000
and 1999 was $1,462,000 and $477,000, respectively.
On December 8, 1998, the Company acquired all of the outstanding shares
of PDA Software Services, Inc. (formerly, PDA, Inc.), a software developer which
specializes in the insurance industry, for 311,673 shares of the Company's
common stock valued at $6,644,000 including related acquisition costs. The
acquisition has been accounted for using the purchase method of accounting and
included $4,805,000 of goodwill, which is being amortized on a straight-line
basis over 24 years. The amount of goodwill amortization for both 2000 and 1999
was $200,000.
37
On November 14, 1997, the Company acquired all of the net assets of
Alta Services LLC (formerly MCSI/MRSI), a non-risk bearing managed care company,
for cash of approximately $8,291,000 including related acquisition costs. The
purchase agreement provides for future contingent consideration of up to
$10,000,000 if certain growth and profitability objectives are achieved through
the year 2001. If these objectives are met, the additional consideration will be
recorded as an increase in goodwill and amortized over the remaining life of the
asset. The acquisition has been accounted for using the purchase method of
accounting and included $8,060,000 of goodwill, which is being amortized on a
straight-line basis over nine years. The amount of goodwill amortization for
each year: 2000, 1999, and 1998, was $879,000 with prior accumulated
amortization of $150,000.
The operating results of all of the above acquisitions have been
included in the consolidated statement of income from their respective date of
acquisition. On the basis of a pro forma consolidation of the results of
operations as if the acquisitions had taken place at the beginning of the
respective acquisition years rather than their respective acquisition dates,
there would not have been a materially different result from the reported
amounts in any of the historical reporting years. Additionally, such pro forma
amounts would not necessarily be indicative of what the actual consolidated
results of operations might have been if the acquisition had been effective at
the beginning of those years.
Note 19 Federal Income Tax
(a) A reconciliation of federal income tax on pretax earnings at the corporate
rate to the effective tax rate is as follows:
2000 1999 1998
- -------------------------------------------------------------------------
Tax at statutory rate $8,590 22,191 22,296
Tax-exempt interest (9,495) (10,448) (10,048)
Dividends received
deduction (1,997) (2,191) (2,250)
Other 911 134 136
--- --- ---
Income tax provision (benefit) $(1,991) 9,686 10,134
======= ===== ======
(b) The tax effects of the significant temporary differences that give rise to
deferred tax liabilities and assets are as follows:
(in thousands) 2000 1999
- -------------------------------------------------------------------------
Deferred tax liabilities:
Deferred policy acquisition costs $41,445 38,183
Unrealized gains on securities,
available-for-sale 53,483 41,297
Accelerated depreciation 2,621 4,449
Other 8,014 5,435
Total deferred tax liabilities 105,563 89,364
------- ------
Deferred tax assets:
Net loss reserve discounting 65,331 65,220
Net unearned premiums 28,240 26,675
Self-insured employee benefit reserves 2,221 2,085
Pension 4,271 3,572
Other 13,921 7,391
Total deferred tax assets 113,984 104,943
------- -------
Valuation allowance recognized for
deferred tax assets 550 550
--- ---
Deferred federal Income Tax $8,971 16,129
===== ======
Based on our tax loss carry back availability, and the historic levels of
current taxable income and pretax financial statement income, we believe that
more likely than not, the existing deductible temporary differences will reverse
during periods in which we will generate net taxable income or have adequate
carry back availability. However, there can be no assurance that we will
generate any earnings or any specific level of earnings in future years.
38
Note 20 Fair Values of Financial Instruments The following table presents the
carrying amounts and estimated fair values of the Company's Financial
Instruments as of December 31, 2000 and 1999:
2000 1999
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
- --------------------------------------------------------------------------------------------
Financial assets:
Debt securities:
Held to maturity $225,177 231,057 271,384 271,604
Available-for-sale 1,202,758 1,202,758 1,122,786 1,122,786
Equity securities 239,578 239,578 251,998 251,998
Other investments 109,550 109,550 64,770 64,770
Financial liabilities:
8.77% Senior Notes 54,000 57,189 54,000 55,322
7.84% Senior Notes 14,286 14,415 21,428 21,388
8.63% Senior Notes
Series A 30,000 31,028 - -
8.87% Senior Notes Series B 61,500 63,247 - -
------ ------ --------- ---------
Notes payable 159,786 165,879 75,428 76,710
Debentures $3,848 13,228 6,157 14,908
The Company's carrying amounts shown in the table are included in the
Consolidated balance sheets.
Note 21 Supplemental Cash Flow Information The Company's cash paid during the
year for interest and federal income taxes, non-cash investing and financing
activities were as follows:
(in thousands) 2000 1999 1998
- -------------------------------------------------------------------------
Cash paid during the year for:
Interest $12,536 9,995 9,527
Federal income tax 304 17,229 11,554
Non-cash investing activity:
Acquisitions:
Fair value of assets
acquired $6,473 44,571 12,546
Cash paid or stock issued (5,996) (30,152) (6,601)
------ ------- ------
Liabilities assumed 477 14,419 5,945
Non-cash financing activity:
-Conversion of convertible
subordinated debentures $2,309 62 626
39
QUARTERLY FINANCIAL INFORMATION
First Quarter Second Quarter Third Quarter Fourth Quarter
2000 1999 2000 1999 2000 1999 2000 1999
Net premiums written $212,961 207,725 218,089 215,059 218,658 211,166 193,896 177,727
Net premiums earned 199,826 193,028 200,626 196,454 205,191 199,663 215,622 209,921
Net investment income earned 23,300 23,473 24,498 23,455 24,459 23,756 27,238 25,847
Net realized gains (losses) 2,273 8,597 446 23,604 (72) (1,160) 1,544 (1,664)
Diversified insurance services
revenue 17,668 8,882 18,364 7,613 20,333 14,592 19,699 15,566
Diversified insurance services
net income 795 396 613 238 1,046 1,611 1,000 704
Operating income (1,2,3,4) 9,433 8,435 2,816 12,272 5,419 2,690 6,143 11,225
Net income (2,3,4) 10,910 14,023 3,106 27,615 5,373 1,935 7,146 10,144
Other comprehensive income (loss) (3,267) (10,592) 648 (22,365) 16,321 (12,920) 8,929 8,248
------ ------- --- ------- ------ ------- ----- -----
Comprehensive income (loss) 7,643 3,431 3,754 5,250 21,694 (10,985) 16,075 18,392
Net income per share:
Basic (2,3,4) .43 .50 .12 1.00 .22 .07 .29 .38
Diluted (2,3,4) .40 .48 .12 .95 .21 .07 .28 .36
Dividends to stockholders (5) .15 .14 .15 .15 .15 .15 .15 .15
Price range of common stock: (6)
High 17 5/16 21 3/4 20 3/8 21 1/2 19 3/8 22 1/2 25 7/8 19 5/8
Low 14 5/8 17 1/2 16 5/8 17 5/8 17 3/16 17 1/4 15 1/4 16 1/2
1. -Refer to the Glossary of Terms on page 62 for definitions of specific terms.
2. -Operating and net income for the second quarter of 2000 were reduced by $4
million, after reinsurance and taxes, due to losses incurred from severe
catastrophe storms.
3. -Operating and net income for the first quarter of 1999 were reduced by $2.8
million, after reinsurance and taxes, due to higher losses incurred from unusual
property damages and numerous winter storms.
4. -Operating and net income for the third quarter of 1999 were reduced by $9.0
million, after reinsurance and taxes, due to higher losses incurred from weather
related storms.
5. -See Note 5(b)(3) and Note 10 to the consolidated financial statements and
Financial Review for a discussion of dividend restrictions.
6. -These ranges of high and low prices of the Company's common stock, as
reported by The Nasdaq National Market, represent actual transactions. All price
quotations do not include retail markups, markdowns and commissions. The range
of high and low prices for common stock for the period beginning January 1,
2001, and ending January 31, 2001 was $213/4 to $257/8 and the last sale price
on January 31, 2001, was $221/16.
59
40
Corporate Directory
Selective Insurance Group, Inc.
Directors
Paul D. Bauer, 1998 (2,3) Retired, formerly Executive Vice President and Chief
Financial Officer, Tops Markets, Inc.
A. David Brown, 1996 (1,4,5) Managing Director, Whitehead Mann Pendleton James
William A. Dolan, II, 1988 (3,4) Attorney, Of Counsel to Michael C. Gaus, Esq.
William C. Gray, D.V.M., 1992 (5,6) Retired, formerly President, Newton
Veterinary Hospital, Inc.
C. Edward Herder, CPCU, 1978 (1,4,6) President, Chester H. Herder & Son, Inc.,
general insurance agency
William M. Kearns, Jr., 1975 (2,5) Vice Chairman, Keefe Managers, Inc., money
management, and President, W. M. Kearns & Co., Inc., a private investment
company
Joan M. Lamm-Tennant, Ph.D., 1993 (2,3) Senior Vice President, General
Reinsurance and Thomas G. Labrecque Endowed Chair in Business and Professor of
Finance at Villanova University
S. Griffin McClellan III, 1980 (1,2,4) Consultant, formerly Chairman, Crestmont
Federal Savings and Loan Association Gregory E. Murphy, 1997 (1,2) Chairman,
Chief Executive Officer and President, Selective Insurance Group, Inc.
William M. Rue, CPCU, 1977 (1,2,5) President, Chas. E. Rue & Son, Inc., T/A Rue
Insurance, general insurance agency
Thomas D. Sayles, Jr., 1988 (1,2,3,5) Retired, formerly Chairman and Chief
Executive Officer, The Summit Bancorporation
J. Brian Thebault, 1996 (2,6) Chairman and Chief Executive Officer, L. P.
Thebault Company, graphic communications
Officers
Gregory E. Murphy Chairman, President and Chief Executive Officer
Thornton R. Land Executive Vice President Administration and General Counsel
Jamie Ochiltree, III Executive Vice President Insurance Operations
James W. Coleman, Jr. Executive Vice President Diversified Insurance Services
Group
Richard F. Connell Executive Vice President and Chief Information Officer
Dale A. Thatcher Senior Vice President Finance and Chief Financial Officer
Robert P. Rank Senior Vice President and Chief Investment Officer
Carl R. Luthman Senior Vice President Facilities
Ronald J. Zaleski, Sr. Senior Vice President and Chief Actuary
Keith T. Shoemaker Vice President and Controller
Sharon R. Cooper Vice President Director of Communications
Frances M. MacKillop Vice President Management Development
Debra P. Carter Vice President Human Resources
Kerry A. Guthrie Vice President Investments
John P. Whitehead Vice President
Cynthia J. Bresney Assistant Vice President and Director of Internal Audit and
Compliance
Malcolm G. Franklin Assistant Vice President and General Counsel Diversified
Insurance Services Group
Michele Nieroda Schumacher Assistant Vice President Corporate Secretary and
Corporate Counsel
Date after name indicates year of original election
(1) Member of the Executive Committee (4) Member of the Salary and Employee Benefits Committee
(2) Member of the Finance Committee (5) Member of the Committee on Directors
(3) Member of the Audit Committee (6) Member of the Conflict of Interest Committee
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Subsidiaries
Alta Services LLC
Consumer Health Network Plus, LLC
FloodConnect, LLC
Niagara Exchange Corporation
PDA Software Services, Inc.
SelecTech, LLC
Selective HR Solutions, Inc.
Selective Insurance Company of America
Selective Insurance Company of New York
Selective Insurance Company of South Carolina
Selective Insurance Company of the Southeast
Selective Specialty Lines Brokerage, LLC
Selective Technical Administrative Resources, Inc.
Selective Way Insurance Company
SRM Insurance Brokerage, LLC
Wantage Avenue Holding Company, Inc.
Regional Offices
Chesapeake Region Hunt Valley, Maryland 6 North Park Drive, Suite 200 Scott A.
Hewitt, Vice President
Mid-America Region Columbus, Ohio 8415 Pulsar Place, Suite 300 Timothy J.
Violand, Vice President
New Jersey Region Trenton, New Jersey One AAA Drive Edward F. Drag, II, Vice
President
Northeast Region Branchville, New Jersey 40 Wantage Avenue Gregory J. Massey,
Vice President
Pennsylvania Region Lehigh Valley, Pennsylvania 5050 Tilghman Street, Suite 250
William F. Igoe, III, Vice President
Southern Region Charlotte, North Carolina 3 Coliseum Centre 2550 West Tyvola
Road, Suite 400 Margaret C. Davis, Vice President
Service Center Office
Richmond, Virginia 1100 Boulders Parkway, Suite 601 Craig G. Borens, Vice
President
Information Technology Offices
Glastonbury, Connecticut 500 Winding Brook Drive Bradford S. Allen, Vice
President
Mansfield, Ohio 380 North Main Street, Suite 101 Roby L. Musick, Manager
Subsidiary Offices
Alta Services LLC IBIS Plaza 3525 Quakerbridge Road Hamilton, New Jersey 08619
Consumer Health Network Plus, LLC One Cragwood Road South Plainfield, New Jersey
07080
FloodConnect, LLC 4 Gail Court Sparta, New Jersey 07871
PDA Software Services, Inc. 7701 College Boulevard Overland Park, Kansas 66210
Selective HR Solutions, Inc. 6920 Professional Parkway East Sarasota, Florida
34240
Properties
Situated on approximately 137 acres in Branchville, New Jersey, is our 315,000
square foot facility owned by Wantage Avenue Holding Company, Inc. All regional,
information technology, service center, and subsidiary office locations, as
indicated above, are leased.
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Glossary of Terms
AGENT (INDEPENDENT INSURANCE AGENT) -- an insurance consultant who recommends
and markets insurance to individuals and businesses; usually represents several
insurance companies. Insurance companies pay agents commission.
ALTERNATIVE MARKET -- any risk transfer mechanism where the customer assumes
some or all financial responsibility for an insurable exposure.
CATASTROPHE LOSS -- a severe loss, usually involving many risks from one
occurrence such as fire, hurricane, earthquake, windstorm, explosion and other
similar events.
DIVERSIFIED INSURANCE SERVICES -- a strategic combination of various
inter-related services that are closely associated with the insurance business
and will allow for the Company as a whole to bring an integrated business
solution to our customers by offering a broader array of products and services.
DIVIDENDS TO POLICYHOLDERS RATIO -- a measurement of dividends paid to workers'
compensation policyholders to premiums earned.
EBITDA -- This measure of income differs from net income by the exclusion of
non-controllable expenses which include interest, taxes, depreciation and
amortization of goodwill.
GAAP COMBINED RATIO -- a measure of underwriting profitability determined by
dividing the sum of all GAAP expenses (losses, loss adjustment expenses,
underwriting expenses, and dividends to policyholders) by GAAP net premiums
earned for the period.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("GAAP") -- accounting practices set by
the Financial Accounting Standards Board. Public companies follow these
practices when preparing financial statements.
INCURRED BUT NOT REPORTED ("IBNR") RESERVES -- reserves for estimated losses
which have been incurred by insureds but not yet reported to the insurer.
LOSS EXPENSES -- expenses incurred in the process of evaluating, defending and
paying claims.
LOSS AND LOSS EXPENSE RATIO -- the ratio of net loss and loss expenses to net
premiums earned.
LOSS AND LOSS EXPENSE RESERVES -- the amount of money an insurance company
expects to pay for claim obligations and related expenses resulting from losses
which have occurred that are covered by insurance policies it has sold.
MANAGED CARE -- a method of controlling health care costs by using a network of
medical professionals to provide care consistent with cost-efficient guidelines
and protocols.
OPERATING INCOME -- this measure of income differs from net income by the
exclusion of net realized gains or losses. This measure is used by management
and analysts to evaluate the profitability of recurring operations and is not
intended to replace GAAP net income.
PREMIUMS EARNED -- earned premiums refer to premiums an insurance company has
recorded as revenues during a specific accounting period. For example, a
one-year policy sold January 1 would produce just three months' worth of "earned
premium" in the first quarter of the year.
PREMIUMS WRITTEN -- the cost of insurance coverage, often described as
"written." Written premiums refer to premiums for all policies sold during a
specific accounting period.
REINSURANCE -- insurance coverage that insurance companies buy from reinsurance
companies to limit their potential claim losses on a particular risk or on a
group of risks. All or part of a policy can be reinsured, as can entire types of
business. Reinsurance "spreads the risk" among a number of insurance companies,
reducing the impact of losses on individual companies and thereby allowing them
to provide more insurance than they otherwise would be able to sell.
RETURN ON REVENUE -- a measurement of profitability that is calculated by
dividing net income by total revenue.
RISK -- has two distinct and frequently used meanings in insurance. First, it
can describe the chance that a claim loss will occur (similar to the commonly
understood meaning of the word "risk"). Second, it can refer to the person or
thing insured and is sometimes used as a synonym for "policyholder."
STATUTORY ACCOUNTING -- accounting practices prescribed or permitted by state
insurance departments. Insurance companies follow these practices when preparing
annual statements. Statutory accounting stresses evaluation of a company's
solvency.
STATUTORY COMBINED RATIO -- a measurement commonly used within the property and
casualty insurance industry to measure underwriting profit or loss. It is a
combination of an underwriting expense ratio, a loss and loss expense ratio and
dividends to policyholders ratio.
STATUTORY PREMIUMS TO SURPLUS RATIO -- a statutory measure of solvency risk that
is calculated by dividing the net statutory premiums written for the year by the
ending statutory surplus. For example, a ratio of 1.5:1 means that for every
dollar of surplus, the Company wrote $1.50 in premiums.
STATUTORY UNDERWRITING EXPENSE RATIO -- measures the ratio of statutory
underwriting expenses (salaries, commissions, premium taxes, etc.) to net
premiums written.
STATUTORY SURPLUS -- the amount left after an insurance company's liabilities
are subtracted from assets. Statutory surplus is not a figure based upon
"generally accepted accounting principles" (GAAP). Rather, it is based upon
"statutory" accounting practices prescribed or permitted by state and foreign
insurance regulators.
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TREATY REINSURANCE -- a contract between two insurance companies for sharing the
insurance coverage for a group of risks.
UNDERWRITING -- the insurer's process of reviewing applications submitted for
insurance coverage, deciding whether to accept all or part of the coverage
requested, and determining the applicable premiums.
UNDERWRITING RESULT -- may be underwriting profit or underwriting loss and
represents premiums earned less insurance losses and loss adjustment expenses
and underwriting expenses (determined on a GAAP or statutory basis). Also
referred to as GAAP underwriting result or statutory underwriting result. This
measure of performance is used by management and analysts to evaluate the
profitability of underwriting operations and is not intended to replace GAAP net
income.
UNEARNED PREMIUMS -- the portion of a premium representing the unexpired amount
of the contract term as of a certain date. For example, a one-year policy sold
January 1 would record nine months of unearned premium after the first quarter
of the year.
WORKSITE EMPLOYEE -- the PEO contractually assumes substantial employer rights,
responsibilities and risks of its clients' employees; they are considered
co-employees.
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Investor Information
Annual Meeting
Friday, May 4, 2001 Selective Insurance Group, Inc. 40 Wantage Avenue
Branchville, New Jersey 07890
Investor Relations
Dale A. Thatcher Senior Vice President, Finance and Chief Financial Officer
(973) 948-1774 dale.thatcher@selective.com
Website
Contact us at www.selective.com for information about Selective, including our
latest financial news.
Dividend Reinvestment Plan
Selective Insurance Group, Inc. makes available to holders of its common stock
an automatic dividend reinvestment and stock purchase plan.
For Information Contact:
First Chicago Trust Company of New York, a division of EquiServe
Stockholders' Information
Executive Office 40 Wantage Avenue Branchville, New Jersey 07890-1000 Telephone
(973) 948-3000
Registrar and Transfer Agent First Chicago Trust Company of New York, a division
of EquiServe P.O. Box 2500 Jersey City, New Jersey 07303-2500 Telephone (800)
446-2617
Auditors KPMG LLP 757 Third Avenue New York, New York 10017
Common Stock Information
The Company's common stock trades on The Nasdaq National Market under the
symbol: SIGI. As of December 31, 2000, there were approximately 4,487 registered
stockholders.
Form 10-K
A copy of Form 10-K, as filed with the Securities and Exchange Commission,
excluding exhibits, will be provided without charge (exhibits will be furnished
to stockholders upon payment of reproduction and mailing expenses) upon request
to:
Dale A. Thatcher Senior Vice President, Finance and Chief Financial Officer
dale.thatcher@selective.com
Website
Contact us at www.selective.com for information about Selective, including our
latest financial news.
Inside back cover