10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: March 31, 2007
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the transition period from to
Commission File Number: 0-8641
SELECTIVE
INSURANCE GROUP, INC.
(Exact name of registrant as specified in its charter)
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New Jersey
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22-2168890 |
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(State or Other Jurisdiction of Incorporation or Organization)
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(I.R.S. Employer Identification No.) |
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40 Wantage Avenue |
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Branchville, New Jersey
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07890 |
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(Address of Principal Executive Offices)
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(Zip Code) |
(973) 948-3000
(Registrants Telephone Number,
Including Area Code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such report), and (2) has been subject
to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated file
þ Accelerated file o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
As of March 31, 2007, there were 54,857,753 shares of common stock, par value $2.00, outstanding.
SELECTIVE INSURANCE GROUP, INC.
Table of Contents
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PART
I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
SELECTIVE INSURANCE GROUP, INC. (in thousands, except share
amounts) |
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Unaudited March 31, 2007 |
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December 31, 2006 |
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ASSETS |
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Investments: |
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Fixed
maturity securities, held-to-maturity - at amortized cost
(fair value of: $9,871 - 2007; $10,073 - 2006) |
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$ |
9,653 |
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9,822 |
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Fixed
maturity securities, available-for-sale - at fair value
(amortized cost of: $2,927,958 - 2007; $2,916,884 - 2006) |
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2,949,798 |
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2,937,100 |
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Equity securities, available-for-sale - at fair value
(cost of: $168,993 - 2007; $157,864 - 2006) |
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310,534 |
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307,376 |
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Short-term investments - (at cost which approximates fair value) |
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156,899 |
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197,019 |
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Other investments |
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165,131 |
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144,785 |
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Total investments |
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3,592,015 |
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3,596,102 |
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Cash and cash equivalents |
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3,877 |
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6,443 |
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Interest and dividends due or accrued |
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34,036 |
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34,846 |
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Premiums receivable, net of allowance for uncollectible
accounts of: $3,930 - 2007; $3,229 - 2006 |
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495,615 |
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458,452 |
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Other trade receivables, net of allowance for uncollectible
accounts of: $174 - 2007; $255 - 2006 |
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19,755 |
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21,388 |
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Reinsurance recoverable on paid losses and loss expenses |
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3,710 |
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4,693 |
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Reinsurance recoverable on unpaid losses and loss expenses |
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200,450 |
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199,738 |
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Prepaid reinsurance premiums (Note 5) |
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70,592 |
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69,935 |
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Current federal income tax |
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468 |
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Deferred federal income tax |
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20,798 |
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15,445 |
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Property and equipment - at cost, net of accumulated
depreciation and amortization of: $107,133- 2007; $103,660 - 2006 |
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57,663 |
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59,004 |
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Deferred policy acquisition costs |
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226,759 |
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218,103 |
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Goodwill |
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33,637 |
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33,637 |
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Other assets |
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43,558 |
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49,451 |
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Total assets |
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$ |
4,802,465 |
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4,767,705 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Liabilities: |
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Reserve for losses |
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$ |
2,013,230 |
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1,959,485 |
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Reserve for loss expenses |
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339,270 |
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329,285 |
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Unearned premiums |
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829,369 |
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791,540 |
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Senior convertible notes |
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57,413 |
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57,413 |
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Notes payable |
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304,431 |
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304,424 |
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Current federal income tax |
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12,738 |
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Commissions payable |
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30,411 |
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54,814 |
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Accrued salaries and benefits |
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74,917 |
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94,560 |
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Other liabilities |
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101,822 |
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98,957 |
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Total liabilities |
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3,763,601 |
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3,690,478 |
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Stockholders Equity: |
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Preferred stock of $0 par value per share: |
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Authorized shares: 5,000,000; no shares issued or outstanding
Common stock of $2 par value per share: |
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Authorized shares: 360,000,000 |
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Issued: 92,275,103 - 2007; 91,562,266 - 2006 |
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184,550 |
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183,124 |
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Additional paid-in capital |
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164,541 |
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153,246 |
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Retained earnings |
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1,016,427 |
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986,017 |
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Accumulated other comprehensive income |
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97,462 |
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100,601 |
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Treasury stock - at cost (shares: 37,417,350 - 2007; 34,289,974 - 2006) |
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(424,116 |
) |
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(345,761 |
) |
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Total stockholders equity (Note 9) |
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1,038,864 |
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1,077,227 |
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Commitments and contingencies (Note 10) |
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Total liabilities and stockholders equity |
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$ |
4,802,465 |
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4,767,705 |
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The accompanying notes are an integral part of these unaudited interim consolidated financial
statements.
1
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SELECTIVE
INSURANCE GROUP, INC. UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
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Quarters
ended March 31, |
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(in thousands, except per share amounts) |
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2007 |
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2006 |
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Revenues: |
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Net premiums written |
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$ |
417,185 |
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431,989 |
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Net increase in unearned premiums and prepaid reinsurance premiums |
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(37,172 |
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(61,832 |
) |
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Net premiums earned |
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380,013 |
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370,157 |
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Net investment income earned |
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39,863 |
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36,002 |
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Net realized gains |
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11,243 |
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7,367 |
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Diversified Insurance Services revenue |
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29,178 |
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27,278 |
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Other income |
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1,812 |
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1,862 |
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Total revenues |
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462,109 |
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442,666 |
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Expenses: |
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Losses incurred |
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203,310 |
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191,363 |
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Loss expenses incurred |
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42,983 |
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42,337 |
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Policy acquisition costs |
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122,918 |
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115,478 |
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Dividends to policyholders |
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1,487 |
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1,208 |
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Interest expense |
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6,331 |
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5,518 |
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Diversified Insurance Services expenses |
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24,811 |
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23,746 |
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Other expenses |
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11,070 |
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8,744 |
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Total expenses |
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412,910 |
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388,394 |
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Income before federal income tax |
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49,199 |
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54,272 |
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Federal income tax expense (benefit): |
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Current |
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15,611 |
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16,698 |
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Deferred |
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(3,664 |
) |
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(2,404 |
) |
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Total federal income tax expense |
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11,947 |
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14,294 |
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Net income |
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37,252 |
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39,978 |
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Earnings per share: |
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Basic net income |
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$ |
0.68 |
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0.75 |
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Diluted net income |
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$ |
0.62 |
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0.64 |
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Dividends to stockholders |
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$ |
0.12 |
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0.11 |
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The accompanying notes are an integral part of these unaudited interim consolidated financial
statements.
2
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SELECTIVE
INSURANCE GROUP, INC. UNAUDITED CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
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Quarters ended March 31, |
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($ in thousands, except per share amounts) |
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2007 |
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2006 |
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Common stock: |
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Beginning of year |
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$ |
183,124 |
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173,085 |
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Dividend reinvestment plan
(shares: 18,764 2007; 15,964 2006) |
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38 |
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32 |
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Convertible debentures
(shares: 107,344 2007; 2,824 2006) |
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215 |
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6 |
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Stock purchase and compensation plans
(shares: 586,729 2007; 483,956 2006) |
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1,173 |
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967 |
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End of period |
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184,550 |
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174,090 |
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Additional paid-in capital: |
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Beginning of year |
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153,246 |
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71,638 |
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Dividend reinvestment plan |
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422 |
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408 |
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Convertible debentures |
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171 |
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4 |
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Stock purchase and compensation plans |
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10,702 |
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9,985 |
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End of period |
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164,541 |
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|
82,035 |
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Retained earnings: |
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Beginning of year |
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986,017 |
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|
847,687 |
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Net income |
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37,252 |
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37,252 |
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|
|
39,978 |
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|
39,978 |
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Cash dividends to stockholders ($0.12 per share 2007;
$0.11 per share 2006) |
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(6,842 |
) |
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(6,161 |
) |
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End of period |
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|
1,016,427 |
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|
881,504 |
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Accumulated other comprehensive income: |
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Beginning of year |
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100,601 |
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|
118,121 |
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Other comprehensive (loss) income: |
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Decrease in net unrealized gains on investment securities, net of
deferred income tax effect of: $(1,740) 2007; $(6,769) 2006 |
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(3,232 |
) |
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(3,232 |
) |
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(12,571 |
) |
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(12,571 |
) |
Increase in defined benefit pension plans, net of deferred income tax
effect of $51 2007 |
|
|
93 |
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|
93 |
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End of period |
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|
97,462 |
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|
105,550 |
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Comprehensive income |
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|
|
|
|
34,113 |
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|
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|
|
|
27,407 |
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Treasury stock: |
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|
Beginning of year |
|
|
(345,761 |
) |
|
|
|
|
|
|
(229,407 |
) |
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Acquisition of treasury stock
(shares: 3,127,376 2007; 2,064,856 2006) |
|
|
(78,355 |
) |
|
|
|
|
|
|
(56,531 |
) |
|
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|
|
|
|
|
|
|
|
|
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|
|
|
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|
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|
End of period |
|
|
(424,116 |
) |
|
|
|
|
|
|
(285,938 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
$ |
1,038,864 |
|
|
|
|
|
|
|
957,241 |
|
|
|
|
|
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|
Selective Insurance Group, Inc. 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.
The accompanying notes are an integral part of these unaudited interim consolidated financial
statements.
3
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|
SELECTIVE
INSURANCE GROUP, INC. UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOW
|
|
Quarters ended March 31, |
|
(in thousands) |
|
2007 |
|
|
2006 |
|
Operating Activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
37,252 |
|
|
|
39,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
6,975 |
|
|
|
5,915 |
|
Share-based compensation expense |
|
|
8,630 |
|
|
|
6,935 |
|
Net realized gains |
|
|
(11,243 |
) |
|
|
(7,367 |
) |
Deferred tax |
|
|
(3,664 |
) |
|
|
(2,404 |
) |
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Increase in reserves for losses and loss expenses, net of reinsurance recoverable
on unpaid losses and loss expenses |
|
|
63,053 |
|
|
|
59,297 |
|
Increase in unearned premiums, net of prepaid reinsurance and advance premiums |
|
|
38,107 |
|
|
|
61,864 |
|
Increase in net federal income tax payable |
|
|
13,206 |
|
|
|
11,843 |
|
Increase in premiums receivable |
|
|
(37,163 |
) |
|
|
(11,907 |
) |
Decrease in other trade receivables |
|
|
1,633 |
|
|
|
810 |
|
Increase in deferred policy acquisition costs |
|
|
(8,656 |
) |
|
|
(15,721 |
) |
Decrease in interest and dividends due or accrued |
|
|
822 |
|
|
|
617 |
|
Decrease (increase) in reinsurance recoverable on paid losses and loss expenses |
|
|
983 |
|
|
|
(1,471 |
) |
Decrease in accrued salaries and benefits |
|
|
(20,874 |
) |
|
|
(16,120 |
) |
Decrease in accrued insurance expenses |
|
|
(24,887 |
) |
|
|
(53,902 |
) |
Other-net |
|
|
11,030 |
|
|
|
1,297 |
|
|
|
|
|
|
|
|
Net adjustments |
|
|
37,952 |
|
|
|
39,686 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
75,204 |
|
|
|
79,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
Purchase of fixed maturity securities, available-for-sale |
|
|
(89,915 |
) |
|
|
(167,352 |
) |
Purchase of equity securities, available-for-sale |
|
|
(31,550 |
) |
|
|
(17,277 |
) |
Purchase of other investments |
|
|
(20,228 |
) |
|
|
(15,091 |
) |
Purchase of short-term investments |
|
|
(285,836 |
) |
|
|
(571,473 |
) |
Net proceeds from sale of subsidiary |
|
|
|
|
|
|
376 |
|
Sale of fixed maturity securities, available-for-sale |
|
|
8,351 |
|
|
|
96,880 |
|
Sale of short-term investments |
|
|
325,948 |
|
|
|
573,336 |
|
Redemption and maturities of fixed maturity securities, held-to-maturity |
|
|
172 |
|
|
|
765 |
|
Redemption and maturities of fixed maturity securities, available-for-sale |
|
|
63,004 |
|
|
|
55,033 |
|
Sale of equity securities, available-for-sale |
|
|
32,149 |
|
|
|
21,435 |
|
Proceeds from other investments |
|
|
2,578 |
|
|
|
948 |
|
Purchase of property and equipment |
|
|
(2,292 |
) |
|
|
(3,865 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
2,381 |
|
|
|
(26,285 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
Dividends to stockholders |
|
|
(6,262 |
) |
|
|
(5,548 |
) |
Acquisition of treasury stock |
|
|
(78,355 |
) |
|
|
(56,531 |
) |
Net proceeds from stock purchase and compensation plans |
|
|
1,980 |
|
|
|
3,382 |
|
Excess tax benefits from share-based payment arrangements |
|
|
2,486 |
|
|
|
2,920 |
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(80,151 |
) |
|
|
(55,777 |
) |
|
|
|
|
|
|
|
Net decrease in short-term investments and cash |
|
|
(2,566 |
) |
|
|
(2,398 |
) |
Cash and cash equivalents, beginning of year |
|
|
6,443 |
|
|
|
2,983 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
3,877 |
|
|
|
585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information |
|
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
3,095 |
|
|
|
2,464 |
|
Federal income tax |
|
|
400 |
|
|
|
1,935 |
|
Supplemental schedule of non-cash financing activity: |
|
|
|
|
|
|
|
|
Conversion of convertible debentures |
|
|
380 |
|
|
|
10 |
|
The accompanying notes are an integral part of these unaudited interim consolidated financial
statements.
4
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Organization
Selective Insurance Group, Inc., through its subsidiaries, (collectively known as Selective)
offers property and casualty insurance products and diversified insurance services and products.
Selective Insurance Group, Inc. was incorporated in New Jersey in 1977 and its main offices are
located in Branchville, New Jersey. Selective Insurance Group, Inc.s Common Stock is publicly
traded on the NASDAQ Global Select MarketÒ under the symbol, SIGI.
Selective classifies its business into three operating segments:
|
|
|
Insurance Operations, which sells property and casualty insurance products and services
primarily in 20 states in the Eastern and Midwestern United States, and has at least one
company licensed to do business in each of the 50 states; |
|
|
|
|
Investments; and |
|
|
|
|
Diversified Insurance Services, which provides human resource administration outsourcing
products and services, and federal flood insurance administrative services. |
NOTE 2. Basis of Presentation
These interim unaudited consolidated financial statements (Financial Statements) include the
accounts of Selective Insurance Group, Inc. and its subsidiaries, and have been prepared in
conformity with (i) accounting principles generally accepted in the United States of America
(GAAP) and (ii) the rules and regulations of the United States Securities and Exchange Commission
(SEC) regarding interim financial reporting. The preparation of 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. All significant intercompany accounts and
transactions between Selective Insurance Group, Inc. and its subsidiaries are eliminated in
consolidation.
These Financial Statements reflect all adjustments that, in the opinion of management, are normal,
recurring, and necessary for a fair presentation of Selectives results of operations and financial
condition. These Financial Statements cover the first quarters ended March 31, 2007 (First
Quarter 2007) and March 31, 2006 (First Quarter 2006). These Financial Statements do not
include all of the information and disclosures required by GAAP and the SEC for audited financial
statements. Results of operations for any interim period are not necessarily indicative of results
for a full year. Consequently, these Financial Statements should be read in conjunction with the
consolidated financial statements contained in Selectives Annual Report on Form 10-K for the year
ended December 31, 2006 (2006 Annual Report).
NOTE 3. Statement of Cash Flow
At December 31, 2006, Selective changed its definition of cash equivalents for presentation in the
Statements of Cash Flow. Accordingly, the First Quarter 2006 Statement of Cash Flow has been
restated to conform with this policy change. In addition, certain
amounts in the Statement of Cash Flow for First Quarter 2006
have been reclassified to conform to reclassifications made to the
balance sheet in the prior year. These reclassifications resulted in
immaterial changes to individual line items in the operating
activities and investing activities sections of the Statements of
Cash Flow, but had no impact on total cash flows from operating
activities or investing activities. Neither the policy change nor the reclassifications had any effect on
Selectives net income or stockholders equity. For additional information, refer to Item 8.
Financial Statements and Supplementary Data, Note 2 of Selectives 2006 Annual Report.
NOTE 4. Adoption of Accounting Pronouncements
On January 1, 2007, Selective adopted Financial Accounting Standards No. 155, Accounting for
Certain Hybrid Financial Instruments an amendment of FASB Statements No. 133 and 140 (FAS
155). Under the guidance contained in FAS 155, companies are required to evaluate interests in
securitized financial assets to identify whether such interests are freestanding derivatives or
hybrid financial instruments that contain an embedded derivative. During the fourth quarter of
2006, the Financial Accounting Standards Board (FASB) recommended a narrow scope exception for
securitized interests if: (i) the securitized interest itself has no embedded derivative
(including interest rate related derivatives) that would be required to be accounted for separately
other than an embedded derivative that results solely from the embedded call options in the
underlying financial assets; and (ii) the investor does not control the right to accelerate the
settlement. The adoption of FAS 155 did not have a material impact on the results of operations or
financial condition of Selective during First Quarter 2007.
5
On January 1, 2007, Selective adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes an interpretation of FASB Statement No. 109 (FIN 48). FIN 48
calls for a two-step process to evaluate tax positions based on the recognition,
derecognition, and measurement of benefits related to income taxes. The process begins with an
initial assessment of whether a tax position, based on its technical merits and applicability to
the facts and circumstances, will more-likely-than-not be sustained upon examination, including
related appeals or litigation. The more-likely-than-not threshold is defined as having greater
than a 50% chance of being realized upon settlement. Tax positions that are more-likely-than-not
sustainable are then measured to determine how much of the benefit should be recorded in the
financial statements. This determination is made by considering the probabilities of the amounts
that could be realized upon ultimate settlement. Each tax position is evaluated individually and
must continue to meet the threshold in each subsequent reporting period or the benefit will be
derecognized. A position that initially failed to meet the more-likely-than-not threshold should
be recognized in a subsequent period if: (i) a change in facts and circumstances results in the
positions ability to meet the threshold; (ii) the issue is settled with the taxing authority; or
(iii) the statute of limitations expires. FIN 48 is effective for fiscal years beginning after
December 15, 2006. Selective has analyzed its tax positions in all federal and state jurisdictions
in which it is required to file income tax returns for all open tax years. The open tax years for
the federal returns are 2003 though 2006. The Internal Revenue Service completed a limited scope
examination of tax year 2003 and 2004 that resulted in a favorable
adjustment. Selective did not have any unrecognized tax benefits as
of January 1, 2007. Selective believes
its tax positions will be sustained on audit and does not anticipate any adjustments that will
result in a material change to its financial position. As a result, there was no material change
in Selectives liability for unrecognized tax benefits.
In February 2007, the FASB issued Financial Accounting Standards No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities Including an amendment of FASB Statement No. 115
(FAS 159), which provides companies with an option to report selected financial assets and
liabilities at fair value. FAS 159 requires companies to provide additional information that will
help investors and other users of financial statements to more easily understand the effect of the
companys choice to use fair value on its earnings. FAS 159 also requires companies to display the
fair value of those assets and liabilities for which the company has chosen to use fair value on
the face of the balance sheet. We are currently evaluating the impact
FAS 159 may have on our financial
statements.
NOTE 5. Reinsurance
The following table summarizes the direct, assumed, and ceded reinsurance amounts by income
statement caption. For more information concerning reinsurance, refer to Note 7, Reinsurance in
Item 8. Financial Statements and Supplementary Data in Selectives 2006 Annual Report.
|
|
|
|
|
|
|
|
|
|
|
Unaudited |
|
|
|
Quarter ended March 31, |
|
($ in thousands) |
|
2007 |
|
|
2006 |
|
Premiums written: |
|
|
|
|
|
|
|
|
Direct |
|
$ |
456,479 |
|
|
|
452,299 |
|
Assumed |
|
|
4,484 |
|
|
|
5,489 |
|
Ceded |
|
|
(43,778 |
) |
|
|
(25,799 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
$ |
417,185 |
|
|
|
431,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned: |
|
|
|
|
|
|
|
|
Direct |
|
$ |
414,764 |
|
|
|
396,549 |
|
Assumed |
|
|
8,370 |
|
|
|
9,718 |
|
Ceded |
|
|
(43,121 |
) |
|
|
(36,110 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
$ |
380,013 |
|
|
|
370,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss expenses incurred: |
|
|
|
|
|
|
|
|
Direct |
|
$ |
251,744 |
|
|
|
237,280 |
|
Assumed |
|
|
6,671 |
|
|
|
7,500 |
|
Ceded |
|
|
(12,122 |
) |
|
|
(11,080 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
$ |
246,293 |
|
|
|
233,700 |
|
|
|
|
|
|
|
|
6
The ceded premiums and losses related to Selectives Flood operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
Unaudited |
|
|
|
Quarter ended March 31, |
|
($ in thousands) |
|
2007 |
|
|
2006 |
|
Ceded premiums written |
|
$ |
(32,019 |
) |
|
|
(25,279 |
) |
Ceded premiums earned |
|
|
(30,881 |
) |
|
|
(23,895 |
) |
Ceded losses and loss expenses incurred |
|
|
(2,263 |
) |
|
|
(5,374 |
) |
NOTE 6. Segment Information
Selective has classified its operations into three segments, the disaggregated results of which are
reported to and used by senior management to manage Selectives operations:
|
|
|
Insurance Operations, which are evaluated based on statutory underwriting
results (net premiums earned, incurred losses and loss expenses, policyholders dividends,
policy acquisition costs, and other underwriting expenses) and statutory combined ratios; |
|
|
|
|
Investments, which are evaluated based on net investment income and net
realized gains and losses; and |
|
|
|
|
Diversified Insurance Services (federal flood insurance administrative services
and human resource administration outsourcing), which, because they are not dependent on
insurance underwriting cycles, are evaluated based on several measures including, but not
limited to, results of operations in accordance with GAAP, with a focus on our return on
revenue (net income divided by revenues). |
The Insurance Operations and Diversified Insurance Services segments share a common marketing or
distribution system and create new opportunities for independent insurance agents to bring
value-added services and products to their customers. Selectives commercial and personal lines
property and casualty insurance products, flood insurance, and human resource administration
outsourcing products are principally sold through independent insurance agents.
Selective Insurance Group, Inc. and its subsidiaries also provide services to each other in the
normal course of business. These transactions totaled $4.4 million in First Quarter 2007 and $4.8
million in First Quarter 2006. These transactions were eliminated in all consolidated statements.
In computing the results of each segment, Selective does not include interest expense, net general
corporate expenses, or federal income taxes. Selective does not maintain separate investment
portfolios for the segments and therefore, does not allocate assets to the segments.
7
The following presents revenues from continuing operations (net investment income and net realized
gains on investments in the case of the Investments segment) and pre-tax income from continuing
operations for the individual segments:
|
|
|
|
|
|
|
|
|
|
|
Unaudited |
|
|
|
Quarter ended |
|
Revenue by segment |
|
March 31, |
|
($ in thousands) |
|
2007 |
|
|
2006 |
|
Insurance Operations: |
|
|
|
|
|
|
|
|
Net premiums earned: |
|
|
|
|
|
|
|
|
Commercial automobile |
|
$ |
78,789 |
|
|
|
80,511 |
|
Workers compensation |
|
|
82,476 |
|
|
|
75,801 |
|
General liability |
|
|
103,460 |
|
|
|
99,090 |
|
Commercial property |
|
|
46,568 |
|
|
|
44,390 |
|
Business owners policy |
|
|
12,841 |
|
|
|
11,791 |
|
Bonds |
|
|
4,700 |
|
|
|
3,918 |
|
Other |
|
|
177 |
|
|
|
180 |
|
|
|
|
|
|
|
|
Total commercial lines |
|
|
329,011 |
|
|
|
315,681 |
|
|
|
|
|
|
|
|
Personal automobile |
|
|
33,936 |
|
|
|
38,076 |
|
Homeowners |
|
|
15,142 |
|
|
|
14,527 |
|
Other |
|
|
1,924 |
|
|
|
1,873 |
|
|
|
|
|
|
|
|
Total personal lines |
|
|
51,002 |
|
|
|
54,476 |
|
|
|
|
|
|
|
|
Total net premiums earned |
|
|
380,013 |
|
|
|
370,157 |
|
|
|
|
|
|
|
|
Miscellaneous income |
|
|
1,751 |
|
|
|
1,861 |
|
|
|
|
|
|
|
|
Total insurance operations revenues |
|
|
381,764 |
|
|
|
372,018 |
|
|
|
|
|
|
|
|
|
|
Investments: |
|
|
|
|
|
|
|
|
Net investment income |
|
|
39,863 |
|
|
|
36,002 |
|
Net realized gain on investments |
|
|
11,243 |
|
|
|
7,367 |
|
|
|
|
|
|
|
|
Total investment revenues |
|
|
51,106 |
|
|
|
43,369 |
|
|
|
|
|
|
|
|
|
|
Diversified Insurance Services: |
|
|
|
|
|
|
|
|
Human resource administration outsourcing |
|
|
16,795 |
|
|
|
17,150 |
|
Flood insurance |
|
|
10,410 |
|
|
|
8,921 |
|
Other |
|
|
1,973 |
|
|
|
1,207 |
|
|
|
|
|
|
|
|
Total diversified insurance services revenues |
|
|
29,178 |
|
|
|
27,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total all segments |
|
|
462,048 |
|
|
|
442,665 |
|
|
|
|
|
|
|
|
Other income |
|
|
61 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
462,109 |
|
|
|
442,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited |
|
|
|
Quarter ended |
|
Income (loss) before federal income tax |
|
March 31, |
|
($ in thousands) |
|
2007 |
|
|
2006 |
|
Insurance Operations: |
|
|
|
|
|
|
|
|
Commercial lines underwriting |
|
$ |
12,630 |
|
|
|
22,796 |
|
Personal lines underwriting |
|
|
(2,913 |
) |
|
|
(1,854 |
) |
|
|
|
|
|
|
|
Underwriting income, before federal income tax |
|
|
9,717 |
|
|
|
20,942 |
|
|
|
|
|
|
|
|
GAAP combined ratio |
|
|
97.4 |
% |
|
|
94.3 |
|
Statutory combined ratio |
|
|
95.6 |
% |
|
|
93.0 |
|
Investments: |
|
|
|
|
|
|
|
|
Net investment income |
|
|
39,863 |
|
|
|
36,002 |
|
Net realized gain on investments |
|
|
11,243 |
|
|
|
7,367 |
|
|
|
|
|
|
|
|
Total investment income, before federal income tax |
|
|
51,106 |
|
|
|
43,369 |
|
|
|
|
|
|
|
|
Diversified Insurance Services: |
|
|
|
|
|
|
|
|
Income before federal income tax |
|
|
4,367 |
|
|
|
3,532 |
|
|
|
|
|
|
|
|
Total all segments |
|
|
65,190 |
|
|
|
67,843 |
|
|
|
|
|
|
|
|
Interest expense |
|
|
(6,331 |
) |
|
|
(5,518 |
) |
General corporate expenses |
|
|
(9,660 |
) |
|
|
(8,053 |
) |
|
|
|
|
|
|
|
Income before federal income tax |
|
$ |
49,199 |
|
|
|
54,272 |
|
|
|
|
|
|
|
|
8
NOTE 7. Retirement Plans
The following tables show the costs of the Retirement Income Plan for Selective Insurance Company
of America (Retirement Income Plan) and the retirement life insurance component (Retirement Life
Plan) of the Welfare Benefits Plan for Employees of Selective Insurance Company of America. For
more information concerning these plans, refer to Note 16, Retirement Plans in Item 8. Financial
Statements and Supplementary Data in Selectives 2006 Annual Report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement Income Plan |
|
|
Retirement Life Plan |
|
|
|
Unaudited, |
|
|
Unaudited, |
|
|
|
Quarter ended March 31, |
|
|
Quarter ended March 31, |
|
($ in thousands) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Components of Net Periodic Benefit Cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
1,788 |
|
|
|
1,760 |
|
|
|
81 |
|
|
|
92 |
|
Interest cost |
|
|
2,184 |
|
|
|
2,016 |
|
|
|
125 |
|
|
|
103 |
|
Expected return on plan assets |
|
|
(2,710 |
) |
|
|
(2,406 |
) |
|
|
|
|
|
|
|
|
Amortization of unrecognized prior service cost |
|
|
38 |
|
|
|
38 |
|
|
|
(8 |
) |
|
|
(8 |
) |
Amortization of unrecognized net loss |
|
|
114 |
|
|
|
415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic cost |
|
$ |
1,414 |
|
|
|
1,823 |
|
|
|
198 |
|
|
|
187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Expense Assumptions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
5.90 |
% |
|
|
5.50 |
|
|
|
5.90 |
% |
|
|
5.50 |
|
Expected return on plan assets |
|
|
8.00 |
% |
|
|
8.00 |
|
|
|
|
% |
|
|
|
|
Rate of compensation increase |
|
|
4.00 |
% |
|
|
4.00 |
|
|
|
4.00 |
% |
|
|
4.00 |
|
Note 8. Comprehensive Income
The components of comprehensive income, both gross and net of tax, for First Quarter 2007 and First
Quarter 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter 2007 |
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Gross |
|
|
Tax |
|
|
Net |
|
Net income |
|
$ |
49,199 |
|
|
|
11,947 |
|
|
|
37,252 |
|
|
|
|
|
|
|
|
|
|
|
Components of other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains on securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains during the period |
|
|
6,271 |
|
|
|
2,195 |
|
|
|
4,076 |
|
Previous unrealized gains currently
realized in net income |
|
|
(11,243 |
) |
|
|
(3,935 |
) |
|
|
(7,308 |
) |
|
|
|
|
|
|
|
|
|
|
Net unrealized gains |
|
|
(4,972 |
) |
|
|
(1,740 |
) |
|
|
(3,232 |
) |
|
|
|
|
|
|
|
|
|
|
Net prior service cost arising during period |
|
|
30 |
|
|
|
11 |
|
|
|
19 |
|
Net loss arising during period |
|
|
114 |
|
|
|
40 |
|
|
|
74 |
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension plans, net |
|
|
144 |
|
|
|
51 |
|
|
|
93 |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
44,371 |
|
|
|
10,258 |
|
|
|
34,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter 2006 |
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Gross |
|
|
Tax |
|
|
Net |
|
Net income |
|
$ |
54,272 |
|
|
|
14,294 |
|
|
|
39,978 |
|
|
|
|
|
|
|
|
|
|
|
Components of other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains during the period |
|
|
(11,973 |
) |
|
|
(4,191 |
) |
|
|
(7,782 |
) |
Previous unrealized gains currently
realized in net income |
|
|
(7,367 |
) |
|
|
(2,578 |
) |
|
|
(4,789 |
) |
|
|
|
|
|
|
|
|
|
|
Net unrealized losses |
|
|
(19,340 |
) |
|
|
(6,769 |
) |
|
|
(12,571 |
) |
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
34,932 |
|
|
|
7,525 |
|
|
|
27,407 |
|
|
|
|
|
|
|
|
|
|
|
9
As of December 31, 2006, Selective adopted Statement of Financial Accounting Standard No. 158,
Employers Accounting for Defined Benefit Pensions and Other Postretirement Benefits (FAS 158).
Selective recorded the impact of adopting this standard in accumulated other comprehensive income
(AOCI), a separate component of stockholders equity, resulting in a decrease in equity of $13.7
million, after tax. In addition, Selective included this decrease in AOCI as a component of
comprehensive income, which is separately presented in the 2006 Consolidated Statement of
Stockholders Equity. Subsequent to the filing of our 2006 Annual Report, Selective identified
that, although the impact of adopting FAS 158 was properly included as a decrease to AOCI, it
should not have been recorded as a component of comprehensive income. The impact of appropriately
excluding the FAS 158 adjustment increases comprehensive income from $146.1 million, as presented,
to $159.8 million, as adjusted.
NOTE 9. Stockholders Equity
On January 30, 2007, the Board of Directors of Selective
Insurance Group, Inc. declared a two-for-one stock split of Selective
Insurance Group, Inc.s common stock, par value $2.00 per share (Common Stock), in the form of a
share dividend of one additional share of Common Stock for each outstanding share of Common Stock
(the Share Dividend). The Share Dividend was paid on February 20, 2007 to stockholders of record
as of the close of business on February 13, 2007. The effect of the Share Dividend has been
recognized retroactively in all share and per share data, as well as the capital stock account
balances, in the accompanying consolidated financial statements, notes to consolidated financial
statements and supplemental financial data.
On March 8, 2007, Selective Insurance Group, Inc. entered into a written trading plan under Rule
10b5-1 under the Securities Exchange Act of 1934 (Trading Plan) with a broker to facilitate the
purchase of its Common Stock. Rule 10b5-1 allows a company to purchase its shares at times when it
ordinarily would not be in the market because of self-imposed trading blackout periods, such as the
time preceding its quarterly earnings releases. During First Quarter 2007, Selective Insurance
Group, Inc. repurchased approximately 3 million shares of its Common Stock at a total cost of $74.3
million under its authorized stock repurchase program. As of March 31, 2007, there were 2.3
million shares available under the existing share repurchase plan. On April 24, 2007, the Board of
Directors extended the share repurchase plan through December 31, 2007.
NOTE 10. Commitments and Contingencies
Other investments, as shown on the consolidated balance sheet, were $165.1 million as of March 31,
2007, and $144.8 million as of December 31, 2006. At December 31, 2006, Selective had additional
other investment commitments of up to $110.5 million, of which $20.2 million were paid during First
Quarter 2007. At March 31, 2007, Selective had contractual obligations that expire at various
dates through 2022 to further invest up to $121.5 million in these other investments. There is no
certainty that any such additional investment will be required.
NOTE 11. Litigation
In the ordinary course of conducting business, Selective Insurance Group, Inc. and its subsidiaries
are named as defendants in various legal proceedings. Some of these lawsuits attempt to establish
liability under insurance contracts issued by Selectives insurance subsidiaries. Plaintiffs in
these lawsuits seek money damages that, in some cases, are extra-contractual in nature or they seek
to have the court direct the activities of Selectives operations in certain ways. Although the
ultimate outcome of these matters is not presently determinable, Selective does not believe that
the total amounts that it will ultimately have to pay, if any, in all of these lawsuits in the
aggregate will have a material adverse effect on its financial condition, results of operations, or
liquidity.
10
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
In this Quarterly Report on Form 10-Q, Selective and its management discuss and make statements
regarding their intentions, beliefs, current expectations, and projections regarding Selectives
future operations and performance. Such statements are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements
are often identified by words such as anticipates, believes, expects, will, should and
intends and their negatives. Selective and its management caution prospective investors that
such forward-looking statements are not guarantees of future performance. Risks and uncertainties
are inherent in Selectives future performance. Factors that could cause actual results to differ
materially from those indicated by such forward-looking statements include, but are not limited to,
those discussed under Item 1A. Risk Factors in Selectives 2006 Annual Report. These risk
factors may not be exhaustive. We operate in a continually changing business environment, and new
risk factors emerge from time-to-time. We can neither predict such new risk factors nor can we
assess the impact, if any, of such new risk factors on our businesses or the extent to which any
factor or combination of factors may cause actual results to differ materially from those expressed
or implied in any forward-looking statements in this report. In light of these risks,
uncertainties and assumptions, the forward-looking events discussed in this report might not occur.
Selective and its management make forward-looking statements based on currently available
information and assume no obligation to update these statements due to changes in underlying
factors, new information, future developments, or otherwise.
Introduction
Selective Insurance Group, Inc., (Selective, we, or our) offers property and casualty
insurance products and diversified insurance services through its various subsidiaries. Selective
classifies its businesses into three operating segments: (i) Insurance Operations, (ii)
Investments, and (iii) Diversified Insurance Services.
The purpose of the Managements Discussion and Analysis (MD&A) is to provide an understanding of
the consolidated results of operations and financial condition and known trends and uncertainties
that may have a material impact in future periods. Consequently, investors should read the MD&A in
conjunction with Selectives consolidated financial statements in Selectives 2006 Annual Report.
For reading ease, we have written the MD&A in the first person plural.
In the MD&A, we will discuss and analyze the following:
|
|
|
Critical Accounting Policies and Estimates; |
|
|
|
|
Highlights of First Quarter 2007 and First Quarter 2006 Results; |
|
|
|
|
Results of Operations and Related Information by Segment; |
|
|
|
|
Financial Condition, Liquidity, and Capital Resources; |
|
|
|
|
Off-Balance Sheet Arrangements; |
|
|
|
|
Contractual Obligations and Contingent Liabilities and Commitments; |
|
|
|
|
Ratings; and |
|
|
|
|
Federal Income Taxes. |
Critical Accounting Policies and Estimates
These unaudited interim consolidated financial statements include amounts based on informed
estimates and judgments of management for those transactions that are not yet complete. Such
estimates and judgments affect the reported amounts in the financial statements. Those estimates
and judgments that were most critical to the preparation of the financial statements involved the
following: (i) reserves for losses and loss expenses; (ii) deferred policy acquisition costs;
(iii) pension and postretirement benefit plan actuarial assumptions; and (iv) other-than-temporary
investment impairments. These estimates and judgments require the use of assumptions about matters
that are highly uncertain and, therefore, are subject to change as facts and circumstances develop.
If different estimates and judgments had been applied, materially different amounts might have
been reported in the financial statements. Our 2006 Annual Report, pages 33 through 40, provides a
discussion of each of these critical accounting policies.
11
Highlights of First Quarter 2007 and First Quarter 2006 Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited |
|
|
|
|
|
|
Quarter ended |
|
|
Change |
|
|
|
March 31, |
|
|
% or |
|
($ in thousands, except per share amounts) |
|
2007 |
|
|
2006 |
|
|
Points |
|
Total revenues |
|
$ |
462,109 |
|
|
|
442,666 |
|
|
|
4 |
% |
Net income |
|
|
37,252 |
|
|
|
39,978 |
|
|
|
(7 |
) |
Diluted net income per share |
|
|
0.62 |
|
|
|
0.64 |
|
|
|
(3 |
) |
Diluted weighted-average outstanding shares |
|
|
60,372 |
|
|
|
63,804 |
|
|
|
(5 |
) |
GAAP combined ratio |
|
|
97.4 |
% |
|
|
94.3 |
|
|
|
3.1 |
pts |
Statutory combined ratio |
|
|
95.6 |
|
|
|
93.0 |
|
|
|
2.6 |
|
Annualized return on average equity |
|
|
14.1 |
|
|
|
16.5 |
|
|
|
(2.4 |
) |
|
|
Revenues increased in First Quarter 2007 compared to First Quarter 2006 primarily due
to net premiums earned (NPE) growth of $9.9 million, or 3%, in First Quarter 2007 compared
to First Quarter 2006. Increases in NPE are attributed to the following: |
|
o |
|
Direct voluntary new business written, excluding flood, for the fiscal
year ending March 31, 2007 of $308.0 million as compared to $301.7 million for the
fiscal year ending March 31, 2006; |
|
|
o |
|
Commercial Lines renewal price increases, including exposure, which
averaged 2.2% for full year 2006 and 0.4% in First Quarter 2007. |
The above items were partially offset by decreases in NPE on our New Jersey personal automobile
book of business attributable to the loss of automobiles repriced at higher pricing levels
through our MATRIX pricing system. Our New Jersey personal automobile book of business
experienced a 13% reduction in the number of cars we insured during First Quarter 2007 compared
to First Quarter 2006 and NPE for our New Jersey personal automobile business was down to $22.7
million for First Quarter 2007 as compared to $26.6 million for First Quarter 2006.
|
|
Additional items contributing to the revenue increases in First Quarter 2007 compared to
First Quarter 2006 were the following: |
|
o |
|
Net investment income earned increased $3.9 million or 11%. Increased
net investment income is primarily attributable to the higher invested asset base
and strong returns from our short-term investment portfolio. The increase in the
invested asset base resulted from net investable cash flows of $326.9 million for
the year ended December 31, 2006, which included net proceeds of $96.8 million from
our $100.0 million junior subordinated notes offering in the third quarter of 2006.
These increases were partially offset by treasury stock purchases of 4.1 million
shares under our authorized program at a total cost of $110.1 million for the full
year 2006 as well as an additional 3.0 million shares at a total cost of $74.3
million in First Quarter 2007. |
|
|
o |
|
Net realized gains before tax, driven by the sale of certain equity
positions, increased $3.9 million to $11.2 million. |
|
|
o |
|
Diversified Insurance Services revenue, primarily the result of growth in
our Flood operation, increased $1.9 million, or 7%, to $29.2 million. |
|
|
Net income decreased $2.7 million, or 7%, in First Quarter 2007 compared to First Quarter 2006
reflecting: (i) increased loss and loss expenses of $12.6 million resulting from increased property
claims, including catastrophe losses, of $15.5 million partially offset by favorable prior year
development in our casualty lines of approximately $4 million; (ii) increased policy acquisition
costs of $7.4 million driven by increased labor expenses; (iii) increased other expenses of $2.3
million attributable to long-term incentive share-based compensation; and (iv) increased interest
expense of $0.8 million associated with our $100.0 million junior subordinated notes offering in
the third quarter of 2006. These increased expenses were partially offset by a $19.4 million
increase in revenue, as described above. |
12
Results of Operations and Related Information by Segment
Insurance Operations
Our Insurance Operations segment writes property and casualty insurance business through seven
insurance subsidiaries (the Insurance Subsidiaries). Our Insurance Operations segment sells
property and casualty insurance products and services primarily in 20 states in the Eastern and
Midwestern United States through approximately 800 independent insurance agencies. Selective has
at least one Insurance Subsidiary licensed to do business in each of the 50 states. Our Insurance
Operations segment consists of two components: (i) commercial lines (Commercial Lines), which
markets primarily to businesses, and represents approximately 87% of net premiums written (NPW),
and (ii) personal lines (Personal Lines), which markets primarily to individuals and represents
approximately 13% of NPW. The underwriting performance of these lines are generally measured by
four different statutory ratios: (i) loss and loss expense ratio; (ii) underwriting expense ratio;
(iii) dividend ratio; and (iv) combined ratio. For further details regarding these ratios see the
discussion in the Insurance Operations Results section of Item 1. Business of Selectives 2006
Annual Report.
Summary of Insurance Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited |
|
|
|
|
|
|
Quarter ended |
|
|
Change |
|
All Lines |
|
March 31, |
|
|
% or |
|
($ in thousands) |
|
2007 |
|
|
2006 |
|
|
Points |
|
|
GAAP Insurance Operations Results: |
|
|
|
|
|
|
|
|
|
|
|
|
NPW |
|
$ |
417,185 |
|
|
|
431,989 |
|
|
|
(3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
NPE |
|
|
380,013 |
|
|
|
370,157 |
|
|
|
3 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss expenses incurred |
|
|
246,293 |
|
|
|
233,700 |
|
|
|
5 |
|
Net underwriting expenses incurred |
|
|
122,516 |
|
|
|
114,307 |
|
|
|
7 |
|
Dividends to policyholders |
|
|
1,487 |
|
|
|
1,208 |
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting income |
|
$ |
9,717 |
|
|
|
20,942 |
|
|
|
(54 |
)% |
|
|
|
|
|
|
|
|
|
|
|
GAAP Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense ratio |
|
|
64.8 |
% |
|
|
63.1 |
|
|
|
1.7 |
pts |
Underwriting expense ratio |
|
|
32.2 |
% |
|
|
30.9 |
|
|
|
1.3 |
|
Dividends to policyholders ratio |
|
|
0.4 |
% |
|
|
0.3 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
97.4 |
% |
|
|
94.3 |
|
|
|
3.1 |
|
|
|
|
|
|
|
|
|
|
|
|
Statutory Ratios: 1 |
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense ratio |
|
|
64.5 |
% |
|
|
63.0 |
|
|
|
1.5 |
|
Underwriting expense ratio |
|
|
30.7 |
% |
|
|
29.7 |
|
|
|
1.0 |
|
Dividends to policyholders ratio |
|
|
0.4 |
% |
|
|
0.3 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
95.6 |
% |
|
|
93.0 |
|
|
|
2.6 |
pts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
The statutory ratios include the flood line of business, which is included in the
Diversified Insurance Services Segment on a GAAP basis and therefore excluded from the GAAP ratios.
The total Statutory Combined Ratio excluding flood is 96.1% for First Quarter 2007 compared to
93.5% for First Quarter 2006. |
|
|
|
NPW decreased 3% to $417.2 million in First Quarter 2007 compared to First Quarter
2006 due to: |
|
o |
|
The termination of the New Jersey Homeowners Quota Share Treaty in First
Quarter 2006, which increased First Quarter 2006 net premiums written by $11.3
million; |
|
|
o |
|
A decline in net premiums written for our New Jersey personal automobile
business by $4.7 million to $20.5 million for First Quarter 2007 compared to $25.2
million for First Quarter 2006. This decrease was driven by a reduction in the
number of New Jersey personal automobiles that we insure primarily as a result of
repricing at higher levels through our MATRIX pricing system; and |
|
|
o |
|
Increased competition in our large account business resulting in a
decrease in NPW of 7% to $40 million. |
This decrease was partially offset by the following:
|
o |
|
Commercial Lines renewal price increases, including exposure, that
averaged 0.4% in First Quarter 2007 down from 3.4% in First Quarter 2006; and |
|
|
o |
|
Direct voluntary new business written increases of 4% to $84.5 million. |
13
|
|
|
The 1.7-point increase in the GAAP loss and loss expense ratio in First Quarter 2007
compared to First Quarter 2006 was primarily attributable to increased property losses of
$15.5 million. This increase was predominantly driven by higher non-catastrophe weather
related losses, and increased catastrophe losses of $1.6 million. These increased property
losses were partially offset by improved profitability in our workers compensation line of
business and net favorable prior year loss and loss expense development across several of
our casualty lines of approximately $4 million in First Quarter 2007 compared to
approximately $1 million in First Quarter 2006. |
|
|
|
|
The increase in the GAAP underwriting expense ratio in First Quarter 2007 compared to
First Quarter 2006 was primarily attributable to an increase in underwriting expenses of
$8.2 million, or 7%, coupled with a decrease in NPW of 3%. Increased labor expenses
primarily drove the increase in expense dollars. |
Insurance Operations Outlook
Historically, the results of the property and casualty insurance industry have experienced
significant fluctuations due to high levels of competition, economic conditions, interest rates,
loss cost trends, and other factors. We expect the industry will continue to see increased pricing
pressure in the primary insurance market in 2007, which will exert pressure on the future
profitability of Selectives business. The average forecast, according to the A.M. Best
Review/Preview dated April 23, 2007, calls for commercial lines net premiums written to be
relatively flat for 2007. This represents a slowdown of 1.6% from 2006. The 2007 NPW forecast is
ranked the second slowest rate of growth for property and casualty insurers since 1998. Loss
trends, which are characterized by changes in frequency and severity, may also impact the future
profitability of our business.
When renewal pure price increases are declining and loss costs trend higher, a market cycle shift
occurs. General inflation and, notably, medical inflation, can drive loss costs up, leading to
higher industry-wide statutory combined ratios. We believe that it is critical to have a clearly
defined plan to improve risk selection and mitigate higher frequency and severity trends during
market cycles. Some of the tools we use to lower frequency and severity are safety management,
managed care, knowledge management, predictive modeling, and enhanced claims review.
Although it is uncertain at this time whether our initiatives will offset macro pricing and loss
trends, we have outperformed the industrys loss and loss adjustment expense ratio by 7.1 points,
on average, over the past 10 years.
As competition continues to intensify, managing profitability and growth will be a major focus for
us in 2007. Driving profitable organic growth has always been Selectives strategy, and this will
continue throughout 2007. Our growth drivers are:
|
|
|
Expanding our appetite for existing products and creating new products to target
opportunities identified through market planning; |
|
|
|
|
Expanding the pipeline for our One-and-Done® system to include other
successful programs such as auto services, manufacturing, and golf courses; |
|
|
|
|
Continuing new producer and sales training programs for agents; |
|
|
|
|
Adding 100 new agents throughout our footprint during 2007 based on market planning analytics; |
|
|
|
|
Enhancing and expanding use of our superior technology, such as xSELerate®; |
|
|
|
|
Growing Personal Lines with the continued rollout of our MATRIX pricing model for auto; and |
|
|
|
|
State expansion into Massachusetts for Commercial Lines. |
Other strategic initiatives we are implementing to increase the effectiveness of our field strategy
and improve risk selection include:
|
|
|
Knowledge Management. We are accumulating and organizing existing underwriting data to
enhance underwriting and pricing decisions, and have begun to implement predictive modeling
to further support the underwriting process. |
|
|
|
|
Workers Compensation. This strategy includes six key underwriting initiatives that focus
on predictive modeling, premium leakage, premium audit procedures, and other operational
improvements. In addition, multiple claims initiatives include medical bill review
services, medical and pharmacy networks, case management, and first notice of loss
services. |
14
Review of Underwriting Results by Line of Business
Commercial Lines Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited |
|
|
|
|
|
|
Quarter ended |
|
|
Change |
|
Commercial Lines |
|
March 31, |
|
|
% or |
|
($ in thousands) |
|
2007 |
|
|
2006 |
|
|
Points |
|
|
GAAP Insurance Operations Results: |
|
|
|
|
|
|
|
|
|
|
|
|
NPW |
|
$ |
370,256 |
|
|
|
370,641 |
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
NPE |
|
|
329,011 |
|
|
|
315,681 |
|
|
|
4 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss expenses incurred |
|
|
208,259 |
|
|
|
195,979 |
|
|
|
6 |
|
Net underwriting expenses incurred |
|
|
106,635 |
|
|
|
95,698 |
|
|
|
11 |
|
Dividends to policyholders |
|
|
1,487 |
|
|
|
1,208 |
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting income |
|
$ |
12,630 |
|
|
|
22,796 |
|
|
|
(45 |
)% |
|
|
|
|
|
|
|
|
|
|
|
GAAP Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense ratio |
|
|
63.3 |
% |
|
|
62.1 |
|
|
|
1.2 |
Pts |
Underwriting expense ratio |
|
|
32.4 |
% |
|
|
30.3 |
|
|
|
2.1 |
|
Dividends to policyholders ratio |
|
|
0.5 |
% |
|
|
0.4 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
96.2 |
% |
|
|
92.8 |
|
|
|
3.4 |
|
|
|
|
|
|
|
|
|
|
|
|
Statutory Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense ratio |
|
|
63.0 |
% |
|
|
62.0 |
|
|
|
1.0 |
|
Underwriting expense ratio |
|
|
30.6 |
% |
|
|
29.5 |
|
|
|
1.1 |
|
Dividends to policyholders ratio |
|
|
0.4 |
% |
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
94.0 |
% |
|
|
91.9 |
|
|
|
2.1 |
Pts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NPW remained flat in First Quarter 2007 compared to First Quarter 2006. Direct
voluntary new business written increased $4.3 million to $76.0 million, but was offset by:
(i) decreases in endorsement activity of $2.8 million resulting from a slowing economy;
(ii) competitive pressure on our renewal book of business particularly on the high end of
our middle market business and our large account business, which was reflected in our First
Quarter 2007 renewal price increases, including exposure, of only 0.4% compared to 3.4% in
the prior year; and (iii) lower retention of larger accounts due to increased market
competition. |
|
|
|
|
NPE increased reflecting increases in NPW over the last 12 months. |
|
|
|
|
The 1.2 point increase in the GAAP loss and loss expense ratio in First Quarter 2007
compared to First Quarter 2006, was primarily attributable to increased non-catastrophe
weather-related property losses. In addition, catastrophe losses increased by $1.8
million, or 0.5 points, to $4.2 million in First Quarter 2007 compared to $2.4 million in
First Quarter 2006. Increased property losses were partially offset by improved
profitability in our workers compensation line of business, as well as net favorable prior
year loss and loss expense development across several of our casualty lines of business of
approximately $2 million, or 0.8 points, in First Quarter 2007. Prior year development in
First Quarter 2006 was not significant. |
|
|
|
|
The increase in the GAAP underwriting expense ratio in First Quarter 2007 compared to
First Quarter 2006 was attributable to an increase in underwriting expenses of $10.9
million, which were driven by increased labor expenses. |
15
The following is a discussion on our most significant commercial lines of business:
General Liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited |
|
|
|
|
Quarter ended |
|
Change |
|
|
March 31, |
|
% or |
($ in thousands) |
|
2007 |
|
2006 |
|
Points |
|
Statutory NPW |
|
$ |
118,691 |
|
|
|
117,675 |
|
|
|
1 |
% |
Statutory NPE |
|
|
103,460 |
|
|
|
99,090 |
|
|
|
4 |
|
Statutory combined ratio |
|
|
95.0 |
% |
|
|
93.9 |
|
|
|
1.1 |
pts |
% of total statutory commercial NPW |
|
|
32 |
% |
|
|
32 |
|
|
|
|
|
Total policy counts in this line of business increased 7% in First Quarter 2007 compared to
First Quarter 2006; however, new business premiums in this line of business were relatively flat,
reflecting the softening market. Further evidence of softening market conditions is illustrated in
our renewal price increases, including exposure, which were only 0.1% in First Quarter 2007
compared to 2.7% in First Quarter 2006. Despite the difficult pricing environment, retention
remained stable at 77% in First Quarter 2007 compared to First Quarter 2006.
In spite of continued adverse prior year loss development, this line of business is profitable due
to our long-term improvement strategy, which focuses on: (i) contractor growth in business
segments with lower completed operations exposures; and (ii) improving
contractor/subcontractor-underwriting guidelines to minimize losses.
Workers Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited |
|
|
|
|
Quarter ended |
|
Change |
|
|
March 31, |
|
% or |
($ in thousands) |
|
2007 |
|
2006 |
|
Points |
|
Statutory NPW |
|
$ |
93,651 |
|
|
|
93,895 |
|
|
|
|
% |
Statutory NPE |
|
|
82,489 |
|
|
|
75,816 |
|
|
|
9 |
|
Statutory combined ratio |
|
|
98.2 |
% |
|
|
110.3 |
|
|
|
(12.1 |
)pts |
% of total statutory commercial NPW |
|
|
25 |
% |
|
|
25 |
|
|
|
|
|
Our multi-faceted workers compensation strategy, which incorporates our knowledge management
and predictive modeling initiatives, has enabled us to retain and write more of the best accounts,
which has led to First Quarter 2007 increases in total policy counts and direct new voluntary
policy premiums of 5% and 19%, respectively, compared to First Quarter 2006. At the same time,
these initiatives have allowed us to target price increases for our worst performing business,
which contributed to the decrease in our retention in First Quarter 2007 to 79% from 82% in First Quarter
2006 and by improved profitability in our retained business.
The improvement in the statutory combined ratio of this line of 12.1 points in First Quarter 2007
compared to First Quarter 2006 reflects not only the ongoing progress resulting from the execution
of our multi-faceted workers compensation strategy, but also favorable prior year statutory
development of approximately $2 million or 2.4 points in First Quarter 2007 compared to adverse
development in First Quarter 2006 of approximately $3 million or 3.3 points.
16
Commercial Automobile
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited |
|
|
|
|
Quarter ended |
|
Change |
|
|
March 31, |
|
% or |
($ in thousands) |
|
2007 |
|
2006 |
|
Points |
|
Statutory NPW |
|
$ |
87,747 |
|
|
|
92,044 |
|
|
|
(5 |
)% |
Statutory NPE |
|
|
78,789 |
|
|
|
80,511 |
|
|
|
(2 |
) |
Statutory combined ratio |
|
|
88.0 |
% |
|
|
82.3 |
|
|
|
5.7 |
pts |
% of total statutory commercial NPW |
|
|
24 |
% |
|
|
25 |
|
|
|
|
|
Continued strong performance in this line of business is the result of underwriting
improvements over the last several years. We have implemented granular rate decreases on accounts
to grow this profitable line of business. The total policy count on this line increased 6% in
First Quarter 2007 compared to First Quarter 2006, driven by new policy count increases of 9% in
First Quarter 2007 compared to First Quarter 2006. However, renewal prices, including exposure,
decreased 2.1% in First Quarter 2007 as compared to being flat in First Quarter 2006, which has put
pressure on the combined ratio in First Quarter 2007 compared to First Quarter 2006. Additionally,
this line of business continues to experience favorable prior year loss development, which was
approximately $3 million in First Quarter 2007 compared to approximately $6 million in First
Quarter 2006.
Commercial Property
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited |
|
|
|
|
Quarter ended |
|
Change |
|
|
March 31, |
|
% or |
($ in thousands) |
|
2007 |
|
2006 |
|
Points |
|
Statutory NPW |
|
$ |
51,067 |
|
|
|
49,218 |
|
|
|
4 |
% |
Statutory NPE |
|
|
46,568 |
|
|
|
44,390 |
|
|
|
5 |
|
Statutory combined ratio |
|
|
92.1 |
% |
|
|
79.8 |
|
|
|
12.3 |
pts |
% of total statutory commercial NPW |
|
|
14 |
% |
|
|
13 |
|
|
|
|
|
Net premiums written for this line of business increased in First Quarter 2007 compared to
2006 due to: (i) increases in direct new policy premium of 3% in First Quarter 2007 to $11.8
million; (ii) stable retention of approximately 80% over the past two years; and (iii) renewal
price increases, including exposure, of 1.6% in First Quarter 2007 compared to 3.1% in First
Quarter 2006.
The statutory combined ratio for commercial property increased in First Quarter 2007 compared to
First Quarter 2006, primarily as a result of increased property losses of $6.8 million. The
majority of the increase was the result of increased non-catastrophe weather related losses;
however, $1.0 million of the increase did reflect increased catastrophe losses. Despite the
increased losses this year, 2007 results continue to be strong as this line of business is
benefiting from underwriting improvements over the past five years, including better
insurance-to-value estimates across our book of business, a shift to risks of better construction
quality and newer buildings, and an overall focus on low to medium hazard property exposures.
17
Personal Lines Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited |
|
|
|
|
|
|
Quarter ended |
|
|
Change |
|
Personal Lines |
|
March 31, |
|
|
% or |
|
($ in thousands) |
|
2007 |
|
|
2006 |
|
|
Points |
|
|
GAAP Insurance Operations Results: |
|
|
|
|
|
|
|
|
|
|
|
|
NPW |
|
$ |
46,929 |
|
|
|
61,348 |
|
|
|
(24 |
)% |
|
|
|
|
|
|
|
|
|
|
|
NPE |
|
|
51,002 |
|
|
|
54,476 |
|
|
|
(6 |
) |
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss expenses incurred |
|
|
38,034 |
|
|
|
37,721 |
|
|
|
1 |
|
Net underwriting expenses incurred |
|
|
15,881 |
|
|
|
18,609 |
|
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
Underwriting income (loss) |
|
$ |
(2,913 |
) |
|
|
(1,854 |
) |
|
|
(57 |
)% |
|
|
|
|
|
|
|
|
|
|
|
GAAP Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense ratio |
|
|
74.6 |
% |
|
|
69.2 |
|
|
|
5.4 |
pts |
Underwriting expense ratio |
|
|
31.1 |
% |
|
|
34.2 |
|
|
|
(3.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
105.7 |
% |
|
|
103.4 |
|
|
|
2.3 |
|
|
|
|
|
|
|
|
|
|
|
|
Statutory Ratios: 1 |
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense ratio |
|
|
74.3 |
% |
|
|
69.0 |
|
|
|
5.3 |
|
Underwriting expense ratio |
|
|
31.7 |
% |
|
|
30.8 |
|
|
|
0.9 |
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
106.0 |
% |
|
|
99.8 |
|
|
|
6.2 |
pts |
|
|
|
|
|
|
|
|
|
|
|
1 The statutory ratios include the flood line of business, which is included in the
Diversified Insurance Services segment on a GAAP basis and therefore excluded from the GAAP ratios.
The total Personal Lines Statutory Combined Ratio excluding flood is 110.3% for First Quarter 2007
compared to 103.5% for First Quarter 2006.
|
|
|
NPW decreased 24% to $46.9 million in First Quarter 2007 compared to First Quarter
2006 due to: |
|
o |
|
A one-time benefit in First Quarter 2006 due to the
terminaton of the New Jersey Homeowners Quota Share Treaty,
which increased NPW by $11.3 million; and |
|
|
o |
|
A decline in net premiums written for our New Jersey personal automobile
business by $4.7 million to $20.5 million for First Quarter 2007 compared to $25.2
million for First Quarter 2006. This decrease was driven by a reduction in the
number of New Jersey personal automobiles that we insure, primarily as a result of
repricing at higher pricing levels through our MATRIX pricing system. |
|
|
|
The New Jersey personal automobile market has been influenced by the recent introduction of
new companies writing business in the state with rating plans that allowed them to price
accounts competitively. Our new Personal Lines strategy allows us to better evaluate and
price risks, which will help us to profitably compete for new business in an agents office;
however, our new rating plan was not fully implemented until December 2006. We are in the
process of moving our existing renewal inventory into our new pricing and tiering structure
in New Jersey, causing a one-time dislocation in this book of business due to the
non-renewal of certain repriced business at higher levels. Annual increases or decreases
are capped at 20% by the New Jersey Department of Banking and Insurance, so it will take
several quarters for improvements to materialize. We continue to focus on increasing new
business production within and outside of New Jersey through this advanced pricing
methodology. We expect to see positive results more quickly outside of New Jersey where the
issues affecting the renewal inventory are less significant. |
|
|
|
|
The deterioration in the GAAP loss and loss expense ratio in First Quarter 2007 compared
to First Quarter 2006 was primarily attributable to increased property losses of $3.1
million, or 6.0 points, which was partially offset by net favorable prior year loss and
loss expense development across our Personal Lines of business of approximately $2 million,
or 3.6 points, in First Quarter 2007 compared to minimal development in First Quarter 2006.
The Homeowners line of business drove the increase with increased property losses of $2.3
million, or 4.5 points, which included a decrease of $0.1 million, or 0.3 points, related
to catastrophe losses. |
|
|
|
|
The improvement in the GAAP underwriting expense ratio in First Quarter 2007 compared to
First Quarter 2006 was primarily associated with the elimination of the New Jersey
Homeowners Quota Share Treaty in the First Quarter 2006. |
18
Investments
Our investment portfolio consists primarily of fixed maturity investments (82%), but also contains
equity securities, short-term investments, and other investments. Our investment philosophy
includes certain return and risk objectives for our fixed maturity and equity portfolios. The
primary return objective of our fixed maturity portfolio is to maximize after-tax investment yield
and income while balancing certain risk objectives, with a secondary objective of meeting or
exceeding a weighted-average benchmark of public fixed income indices. The return objective of the
equity portfolio is to meet or exceed a weighted-average benchmark of public equity indices. The
risk objective for our entire portfolio is to ensure that our investments are structured
conservatively, focusing on: (i) asset diversification; (ii) investment quality; (iii) liquidity,
particularly to meet the cash obligations of the Insurance Operations segment; (iv) consideration
of taxes; and (v) preservation of capital.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited |
|
|
|
|
Quarter ended |
|
Change |
|
|
March 31, |
|
% or |
($ in thousands) |
|
2007 |
|
2006 |
|
Points |
|
Net investment income, before tax |
|
$ |
39,863 |
|
|
|
36,002 |
|
|
|
11 |
% |
Net investment income, after tax |
|
|
31,157 |
|
|
|
28,178 |
|
|
|
11 |
|
Total invested assets |
|
|
3,592,015 |
|
|
|
3,286,177 |
|
|
|
9 |
|
Effective tax rate |
|
|
21.8 |
% |
|
|
21.7 |
|
|
|
0.1 |
pts |
Annual after-tax yield on
investment portfolio |
|
|
3.5 |
|
|
|
3.5 |
|
|
|
|
pts |
Growth in net investment income, before tax, of $3.9 million for First Quarter 2007 compared
to First Quarter 2006 was primarily attributable to the increase in our investment portfolio. The
value of the investment portfolio reached $3.6 billion at March 31, 2007, an increase of 9%
compared to $3.3 billion at March 31, 2006. The increase in invested assets was due to substantial
cash flows from operations of $393.1 million in 2006. The junior subordinated notes offering in
September 2006 also added approximately $96.8 million in assets in 2006. This increase in invested
assets was primarily in fixed maturity securities, which in turn increased interest income by $3.1
million, and increased short-term investment income of $0.8 million due to higher short-term
interest rates in the First Quarter 2007 compared to First Quarter 2006. These increases were
partially offset by an increase in investment expense of $0.5 million in the First Quarter 2007
compared to the First Quarter 2006.
We continue to maintain a conservative, diversified investment portfolio, with fixed maturity
investments representing 82% of invested assets. Seventy-three percent (73%) of our fixed
maturities portfolio is rated AAA while the portfolio has an average rating of AA, Standard &
Poors (S&P) second highest credit quality rating. High credit quality continues to be a
cornerstone of our investment strategy, as evidenced by the fact that almost 100% of the fixed
maturities are investment grade. Non-investment grade securities (below BBB-) represented less
than 1%, or approximately $7 million, of our fixed maturity portfolio at March 31, 2007 and
approximately $10 million at December 31, 2006. Our mortgage backed securities portfolio totaled
$641.5 million at March 31, 2007, with an average credit rating of AAA. Selective has no sub-prime
mortgage investments.
19
The following table presents the Moodys Investor Service (Moodys) and S&Ps ratings of our
fixed maturities portfolio:
|
|
|
|
|
|
|
|
|
|
|
Unaudited |
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
Rating |
|
2007 |
|
|
2006 |
|
|
Aaa/AAA |
|
|
73 |
% |
|
|
73 |
% |
Aa/AA |
|
|
17 |
% |
|
|
17 |
% |
A/A |
|
|
7 |
% |
|
|
7 |
% |
Baa/BBB |
|
|
3 |
% |
|
|
3 |
% |
Ba/BB or below |
|
|
<1 |
% |
|
|
<1 |
% |
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
Our fixed maturity investment strategy is to make security purchases that are attractively
priced in relation to perceived credit risks. We manage the interest rate risk associated with
holding fixed maturity investments by monitoring and maintaining the average duration of the
portfolio with a view toward achieving an adequate after-tax return without subjecting the
portfolio to an unreasonable level of interest rate risk. We invest our fixed maturities portfolio
primarily in intermediate-term securities to limit overall interest rate risk of fixed maturity
investments. Generally, the Insurance Subsidiaries have a duration mismatch between assets and
liabilities. The duration of the fixed maturity portfolio, including short-term investments, is
3.9 years while the Insurance Subsidiaries liabilities have a duration of approximately 3 years.
The current duration of our fixed maturities is within our historical range and is monitored and
managed to maximize yield and limit interest rate risk. The duration mismatch is managed with a
laddered maturity structure and an appropriate level of short-term investments that avoids
liquidation of available-for-sale fixed maturities in the ordinary course of business. Liquidity
is always a consideration when buying or selling securities, but because of the high quality and
active market for the securities in our investment portfolio, the securities sold have not
diminished the overall liquidity of our portfolio. Our liquidity requirements in the past have
been met by operating cash flow from our Insurance Operations and Diversified Insurance Services
segments and the issuance of debt and equity securities. We expect our liquidity requirements in
the future to be met by these sources of funds or, if necessary, borrowings from our credit
facilities. Managing investment risk by adhering to these strategies is intended to protect the
interests of our stockholders and the policyholders of our Insurance Subsidiaries, while enhancing
our financial strength and underwriting capacity.
Realized Gains and Losses
Realized gains and losses are determined on the basis of the cost of specific investments sold or
written-down, and are credited or charged to income. Our Investments segment included net realized
gains before tax of $11.2 million in First Quarter 2007, compared to $7.4 million in First Quarter
2006. The increases in net realized gains were principally from the sale of several equity
securities, which resulted in re-weighting various sector exposures in First Quarter 2007. During
First Quarter 2007 and 2006, there were no impairment charges recorded. We maintain a high quality
and liquid investment portfolio and the sale of the securities that resulted in realized gains did
not change the overall liquidity of the investment portfolio. We generally sell securities to
reduce our exposure to securities and sectors based upon economic evaluations or if the
fundamentals for that security or sector have deteriorated and/or for tax planning purposes. We
typically have a long investment time horizon and our turnover is low, which has resulted in many
securities accumulating large unrealized gains. Every purchase or sale is made with the intent of
improving future investment returns.
20
The following table summarizes our net realized gains by investment type:
|
|
|
|
|
|
|
|
|
|
|
Unaudited |
|
|
Unaudited |
|
|
|
Quarter ended |
|
|
Quarter ended |
|
($ in thousands) |
|
March 31, 2007 |
|
|
March 31, 2006 |
|
|
Held-to-maturity fixed maturities |
|
|
|
|
|
|
|
|
Gains |
|
$ |
|
|
|
|
|
|
Losses |
|
|
|
|
|
|
|
|
Available-for-sale fixed maturities |
|
|
|
|
|
|
|
|
Gains |
|
|
216 |
|
|
|
516 |
|
Losses |
|
|
(305 |
) |
|
|
(1,757 |
) |
Available-for-sale equity securities |
|
|
|
|
|
|
|
|
Gains |
|
|
11,690 |
|
|
|
8,896 |
|
Losses |
|
|
(358 |
) |
|
|
(288 |
) |
|
|
|
|
|
|
|
Total net realized gains |
|
$ |
11,243 |
|
|
|
7,367 |
|
|
|
|
|
|
|
|
We realized gains and losses from the sale of available-for-sale fixed maturity and equity
securities during First Quarter 2007 and First Quarter 2006. The following tables present the
period of time that securities sold at a loss were continuously in an unrealized loss position
prior to sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited |
|
|
Unaudited |
|
|
|
Quarter ended |
|
|
Quarter ended |
|
|
|
March 31, 2007 |
|
|
March 31, 2006 |
|
Period of time in an |
|
Fair |
|
|
|
|
|
|
Fair |
|
|
|
|
unrealized loss position |
|
Value on |
|
|
Realized |
|
|
Value on |
|
|
Realized |
|
($ in millions) |
|
Sale Date |
|
|
Loss |
|
|
Sale Date |
|
|
Loss |
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0 6 months |
|
$ |
|
|
|
|
|
|
|
|
34.8 |
|
|
|
0.4 |
|
7 12 months |
|
|
|
|
|
|
|
|
|
|
15.3 |
|
|
|
0.4 |
|
Greater than 12 months |
|
|
|
|
|
|
|
|
|
|
13.7 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
|
|
|
|
|
|
|
|
63.8 |
|
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0 6 months |
|
|
1.2 |
|
|
|
0.2 |
|
|
|
2.6 |
|
|
|
0.2 |
|
7 12 months |
|
|
0.3 |
|
|
|
0.2 |
|
|
|
0.9 |
|
|
|
0.1 |
|
Greater than 12 months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities |
|
|
1.5 |
|
|
|
0.4 |
|
|
|
3.5 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1.5 |
|
|
|
0.4 |
|
|
|
67.3 |
|
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
These securities were sold despite the fact that they were in a loss position. The decision
to sell these securities was due to: (i) heightened credit risk during the period of the individual
security sold; (ii) the decision to reduce our exposure to certain issuers, industries, or sectors
in light of changing economic conditions; or (iii) tax purposes.
21
Unrealized Losses
As of March 31, 2007 and December 31, 2006, the following table summarizes the aggregate fair value
and gross pre-tax unrealized loss recorded in our accumulated other comprehensive income, by asset
class and by length of time, for all available-for-sale securities that have continuously been in
an unrealized loss position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited |
|
|
|
|
|
|
March 31, 2007 |
|
|
December 31, 2006 |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
Period of time in an unrealized loss position |
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
($ in millions) |
|
Value |
|
|
Loss |
|
|
Value |
|
|
Loss |
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0 6 months |
|
$ |
410.1 |
|
|
|
1.8 |
|
|
|
376.6 |
|
|
|
1.7 |
|
7 12 months |
|
|
40.4 |
|
|
|
0.4 |
|
|
|
107.6 |
|
|
|
0.7 |
|
Greater than 12 months |
|
|
771.6 |
|
|
|
9.1 |
|
|
|
705.8 |
|
|
|
10.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
1,222.1 |
|
|
|
11.3 |
|
|
|
1,190.0 |
|
|
|
12.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0 6 months |
|
|
8.7 |
|
|
|
0.1 |
|
|
|
7.8 |
|
|
|
0.2 |
|
7 12 months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than 12 months |
|
|
0.7 |
|
|
|
0.1 |
|
|
|
0.4 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities |
|
|
9.4 |
|
|
|
0.2 |
|
|
|
8.2 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0 6 months |
|
|
|
|
|
|
|
|
|
|
6.9 |
|
|
|
0.1 |
|
7 12 months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than 12 months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other securities |
|
|
|
|
|
|
|
|
|
|
6.9 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,231.5 |
|
|
|
11.5 |
|
|
|
1,205.1 |
|
|
|
13.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broad changes in the overall market or interest rate environment generally do not lead to
impairment charges. We believe the fluctuations in the fair value of fixed maturities and the
decrease in the associated gross unrealized loss since December 31, 2006 were primarily due to a
decrease in short to intermediate term interest rates during First Quarter 2007. As of March 31,
2007, there were 359 securities in an unrealized loss position.
The following table presents information regarding our available-for-sale fixed maturity securities
that were in an unrealized loss position at March 31, 2007 by contractual maturity:
|
|
|
|
|
|
|
|
|
Contractual Maturities |
|
Amortized |
|
|
Fair |
|
($ in millions) |
|
Cost |
|
|
Value |
|
|
One year or less |
|
$ |
163.7 |
|
|
|
163.0 |
|
Due after one year through five years |
|
|
615.3 |
|
|
|
608.3 |
|
Due after five years through ten years |
|
|
422.6 |
|
|
|
419.2 |
|
Due after ten years through fifteen years |
|
|
26.9 |
|
|
|
26.6 |
|
Due after fifteen years |
|
|
5.0 |
|
|
|
5.0 |
|
|
|
|
|
|
|
|
Total |
|
$ |
1,233.5 |
|
|
|
1,222.1 |
|
|
|
|
|
|
|
|
Investments Outlook
Marketplace apprehension that persisted at the end of 2006 has continued into 2007. Concerns
regarding inflation remain due to escalating raw material costs and rising energy prices, while
housing indicators remain fragile. Economic data outside the United States has been holding up
well, particularly in Europe and Japan. The slowing of the United States economy, coupled with
concerns about inflation, kept the Federal Reserve Board from changing the 5.25% Federal funds rate
during the quarter. Oil prices and political instability continue to weigh heavily in the
potential for inflation to accelerate, increasing the possibility for stagflation low or no
economic growth combined with inflation.
The primary return objective of our fixed maturity portfolio is to maximize after-tax investment
yield and income while balancing certain risk objectives, with a secondary objective of meeting or
exceeding a weighted-average benchmark of public fixed income indices; a particular challenge when
the yield curve remains very flat. Our strategy will entail maximizing yield by purchasing bonds
along the yield curve while maintaining an approximate 4-year duration target. We will also be
looking to further diversify among fixed income sectors and concentrate on sectors that represent
attractive relative values.
22
We continue to remain cautious about the equity markets in 2007 and have become more defensive in
our core equity portfolio, increasing our exposure to consumer staples and maintaining our position
in the healthcare sector. While we have substantially reduced our exposure to the energy and
materials sector, we still view these investments favorably and believe the current supply/demand
fundamentals should continue to support returns above the market average.
In our Other investments portfolio, we intend to continue to engage existing quality managers
with well-defined strategies while we look to evaluate new investment ideas that fit into our
existing portfolio. Our strategy is to find exceptional managers in alternative strategies that
are relatively uncorrelated to the public equity and debt markets.
Diversified Insurance Services Segment
The Diversified Insurance Services operations consist of two core functions: human resource
administration outsourcing (HR Outsourcing) and flood insurance. We believe these operations are
within markets that continue to offer opportunity for growth. During First Quarter 2007, these
operations provided a contribution of $0.05 per diluted share compared to $0.04 per diluted share
in First Quarter 2006. Contributions from the Diversified Insurance Services segment, particularly
the Flood business, continue to provide a level of mitigation to insurance pricing cycles and the
adverse impact that catastrophe losses have on our Insurance Operations segment. We measure the
performance of these operations based on several measures, including, but not limited to, results
of operations in accordance with GAAP, with a focus on our return on revenue (net income divided by
revenues). The results for this segments continuing operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited |
|
|
|
|
Quarter ended |
|
Change |
|
|
March 31, |
|
% or |
($ in thousands) |
|
2007 |
|
2006 |
|
Points |
|
HR Outsourcing |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
16,795 |
|
|
|
17,150 |
|
|
|
(2 |
)% |
Pre-tax profit |
|
|
1,258 |
|
|
|
792 |
|
|
|
59 |
|
Flood Insurance |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
10,410 |
|
|
|
8,921 |
|
|
|
17 |
|
Pre-tax profit |
|
|
2,002 |
|
|
|
2,220 |
|
|
|
(10 |
) |
Other |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
1,973 |
|
|
|
1,207 |
|
|
|
63 |
|
Pre-tax profit |
|
|
1,107 |
|
|
|
520 |
|
|
|
113 |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
29,178 |
|
|
|
27,278 |
|
|
|
7 |
|
Pre-tax profit |
|
|
4,367 |
|
|
|
3,532 |
|
|
|
24 |
|
After-tax profit |
|
|
2,903 |
|
|
|
2,359 |
|
|
|
23 |
|
After-tax return on
revenue |
|
|
10.0 |
% |
|
|
8.6 |
|
|
|
1.4 |
pts |
HR Outsourcing
|
|
|
HR Outsourcing revenue declined primarily as a result of pricing pressure on our
workers compensation product, driven by statutory rate changes in the State of Florida. |
|
|
|
|
Profitability improvements in our HR Outsourcing business in First Quarter 2007
compared to First Quarter 2006 are mainly due to improved margins on State Unemployment
Tax Act assessments, which reflect improved experience and pricing. |
|
|
|
|
As of March 31, 2007, our worksite lives were up 7% to 26,689 compared to 24,911 as
of March 31, 2006. Since unveiling the Employer Protection Program (EPP) during the
First Quarter 2006, the employee count within our sales pipeline has increased 56%.
The EPP is designed to assist business owners in managing the risk of employee-related
liabilities. |
Flood Insurance
|
|
|
Flood premium in force was $125.2 million on approximately 285,000 policies at March
31, 2007, compared to premium in force of $98.8 million on approximately 226,000
policies at March 31, 2006. |
|
|
|
|
Revenue increases were mainly attributable to the increase in flood premium in force
as noted above. This growth was partially offset by a decrease in the fee paid to us
by the National Flood Insurance Program (NFIP) of 0.6 points to 30.2% from 30.8%,
which was effective for the NFIPs fiscal year beginning on October 1, 2006. |
|
|
|
|
Pre-tax profit on weather-related claim fee revenue in First Quarter 2007 decreased
compared to First Quarter 2006, more than offsetting the revenue reflected in pre-tax
profit increases. |
23
Diversified Insurance Services Outlook
Our HR Outsourcing products offer an additional revenue stream for our independent agents. New
market entrants will continue to create increased competition for these products. We have
repositioned the HR Outsourcing products as the EPP, which assists business owners in managing the
risk of employer-related liabilities. Agent training regarding the EPP is ongoing, but based on
initial positive feedback we expect to continue to recognize synergies created from this product
throughout the remainder of 2007. However, the National Council on Compensation Insurance (NCCI)
passed an overall workers compensation rate level decrease of 15.7% for voluntary industrial
classes in the State of Florida. The new rates were effective on January 1, 2007 for new and
renewal business. Future reductions in this rate could adversely affect our results of operations
for our HR Outsourcing business, as workers compensation insurance is an important component of the
EPP product.
Our ability to provide flood insurance is a significant component of our Diversified Insurance
Services operations. In 2005, the destruction caused by the active hurricane season stressed the
NFIP with excessive levels of flood losses. We continue to monitor developments with the NFIP
regarding its ability to pay claims in the event of another large-scale disaster. Congress
controls the federal agencys funding authority, which topped out after Hurricane Katrina, and is
again nearing maximum capacity. At this point, it is uncertain what impact, if any, this will have
on our flood operations. As described above, the fee paid to us by the NFIP decreased 0.6 points
to 30.2% of premiums written effective October 1, 2006. Future reductions in this rate could occur
through legislative activity.
Financial Condition, Liquidity and Capital Resources
Capital resources and liquidity represent our overall financial strength and our ability to
generate cash flows from business operations, borrow funds at competitive rates, and raise new
capital to meet operating and growth needs.
Liquidity
Liquidity is a measure of our ability to generate sufficient cash flows to meet the short and
long-term cash requirements of our business operations. Our cash and short-term investments
position at March 31, 2007 was $160.8 million compared to $203.5 million at December 31, 2006, the
decrease of which is driven by the repurchase of approximately 3 million shares of our Common Stock
under our authorized share repurchase program at a cost of $74.3 million. Sources of cash consist
of dividends from our subsidiaries, the issuance of debt and equity securities, as well as the sale
of Common Stock under our employee and agent stock purchase plans. However, our ability to receive
dividends from our subsidiaries is restricted. Dividends from our Insurance Subsidiaries to
Selective Insurance Group, Inc. are subject to the approval and/or review of the insurance
regulators in the respective domiciliary states of the Insurance Subsidiaries under insurance
holding company acts, and are generally payable only from earned surplus as reported in the
statutory annual statements of those subsidiaries as of the preceding December 31. Based on the
2006 unaudited statutory financial statements, the Insurance Subsidiaries are permitted to pay to
Selective Insurance Group, Inc. ordinary dividends in the aggregate amount of approximately $141.9
million in 2007. For additional information regarding dividend restrictions, refer to Note 9,
Indebtedness and Note 10, Stockholders Equity of the Notes to Consolidated Financial
Statements, included in Item 8. Financial Statements and Supplementary Data of Selectives 2006
Annual Report.
Our Insurance Subsidiaries generate cash flows primarily from insurance float, which is created by
the investment income earned on collected premiums before losses are paid. The period of the float
can extend over many years. To provide liquidity while maintaining consistent investment
performance, we ladder our fixed maturity investments so that some issues are always approaching
maturity and provide a source of predictable cash flow for claim payments in the ordinary course of
business. The duration of the fixed maturity portfolio, including short-term investments, was 3.9
years as of March 31, 2007, while the liabilities of our Insurance Subsidiaries have a duration of
approximately 3 years. In addition, the Insurance Subsidiaries purchase reinsurance coverage for
protection against any significantly large claims or catastrophes that may occur during the year.
Our consolidated investment portfolio was $3.6 billion as of March 31, 2007 and December 31, 2006.
Selective has a syndicated line of credit agreement with Wachovia Bank, National Association as
administrative agent. Under this agreement, Selective has access to a $50 million credit facility,
which can be increased to $75 million with the consent of all lending parties. At March 31, 2007,
no balances were outstanding under this credit facility.
24
Selective HR Solutions (SHRS), our HR Outsourcing business, generates cash flows from their
operations. Dividends from SHRS to Selective Insurance Group, Inc. are restricted by the operating
needs of this entity as well as professional employer organization licensing requirements to
maintain a current ratio of at least 1:1. The current ratio, which SHRS generally maintains just
above 1:1, provides an indication of a companys ability to meet its short-term obligations and is
calculated by dividing current assets by current liabilities. SHRS provided dividends to Selective
Insurance Group, Inc. of $1.4 million in First Quarter 2007 and $0.9 million in First Quarter 2006.
Dividends on shares of our Common Stock are declared and paid at the discretion of our Board of
Directors based on our operating results, financial condition, capital requirements, contractual
restrictions, and other relevant factors. Our ability to declare dividends is restricted by
covenants contained in the notes payable that we issued on May 4, 2000 (the 2000 Senior Notes).
All such covenants were met during First Quarter 2007 and First Quarter 2006. For further
information regarding our notes payable, see Note 9, entitled, Indebtedness, included in Item 8.
Financial Statements and Supplementary Data of Selectives 2006 Annual Report. At March 31,
2007, the amount available for dividends to holders of our Common Stock, in accordance with the
restrictions of the 2000 Senior Notes, was $329.3 million. On January 30, 2007, our Board of
Directors declared a two-for-one stock split of our Common Stock, in the form of a share dividend
of one additional share of Common Stock for each outstanding share of Common Stock (the Share
Dividend). The Share Dividend was paid on February 20, 2007 to stockholders of record as of the
close of business on February 13, 2007. The effect of the Share Dividend has been recognized
retroactively in all share and per share data, as well as the capital stock account balances, in
the accompanying consolidated financial statements, notes to consolidated financial statements and
supplemental financial data. Additionally, we increased our March 1, 2007 dividend by 9% to $0.12
per share, for stockholders of record as of February 13, 2007. Book value per share increased 1%
to $18.94 as of March 31, 2007 from $18.81 as of December 31, 2006. Our ability to continue to pay
dividends to our stockholders is also dependent in large part on the ability of our Insurance
Subsidiaries and the subsidiaries in our Diversified Insurance Services segment to pay dividends to
Selective Insurance Group, Inc. Restrictions on the ability of our subsidiaries, particularly the
Insurance Subsidiaries, to declare and pay dividends to Selective Insurance Group, Inc., could
materially affect our ability to pay principal and interest on indebtedness and dividends on Common
Stock.
We have historically met our liquidity requirements through dividends from our subsidiaries and by
issuing debt and equity securities. We expect to meet our liquidity requirements by these sources
in the future. The Insurance Subsidiaries have historically met their liquidity requirements from
insurance premiums and investment income. These items have historically provided more than
sufficient funds to pay losses, operating expenses, and dividends to Selective Insurance Group,
Inc.
Capital Resources
Capital resources provide protection for policyholders, furnish the financial strength to support
the business of underwriting insurance risks, and facilitate continued business growth. At March
31, 2007, we had stockholders equity of $1,038.9 million and total debt of $362.2 million. In
addition, we have an irrevocable trust valued at $31.4 million to provide for the repayment of
notes having maturities in 2007 and 2008.
As active capital managers, we continually monitor our cash requirements as well as the amount of
capital resources that we maintain at the holding company and operating subsidiary levels. As part
of our long-term capital strategy, we strive to maintain a 25% debt-to-capital ratio and a premiums
to surplus ratio sufficient to maintain an A+ (Superior) financial strength A.M. Best rating for
our Insurance Subsidiaries. Based on our analysis and market conditions, we may take a variety of
actions including, but not limited to, contributing capital to the subsidiaries in our Insurance
Operations and Diversified Insurance Services segments, issuing additional debt and/or equity
securities, repurchasing shares of our Common Stock, or increasing stockholders dividends. The
following are a few examples of capital management actions we have taken during First Quarter 2007:
|
|
|
On March 8, 2007, Selective Insurance Group, Inc. entered into a written trading plan
under Rule 10b5-1 under the Securities Exchange Act of 1934 (Trading Plan) with a broker
to facilitate the purchase of its Common Stock. Rule 10b5-1 allows a company to purchase
its shares at times when it ordinarily would not be in the market because of self-imposed
trading blackout periods, such as the time preceding its quarterly earnings releases. |
|
|
|
|
In First Quarter 2007, we repurchased approximately 3.0 million shares of our Common
Stock under our authorized share repurchase program at a cost of
$74.3 million including shares repurchased under the Trading Plan. As of March 31, 2007, there were 2.3 million
shares remaining under the current repurchase authorization, which was extended through
December 31, 2007. |
25
Our cash requirements include principal and interest payments on senior convertible notes, various
notes payable and convertible subordinated debentures, dividends to stockholders, payment of
claims, and other operating expenses, income taxes, the purchase of investments, and other
expenses. Our operating obligations and cash outflows include: claim settlements, agents
commissions,
labor costs, premium taxes, general and administrative expenses, investment purchases, and capital
expenditures. For further details regarding our cash requirements, refer to the section below
titled Contractual Obligations and Contingent Liabilities and Commitments.
Off-Balance Sheet Arrangements
At March 31, 2007 and December 31, 2006, we did not have any relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as structured finance or
special purpose entities, which would have been established for the purpose of facilitating
off-balance sheet arrangements or for other contractually narrow or limited purposes. As such, we
are not exposed to any financing, liquidity, market or credit risk that could arise if we had
engaged in such relationships.
Contractual Obligations and Contingent Liabilities and Commitments
Our future cash payments associated with loss and loss expense reserves, and contractual
obligations pursuant to operating leases for office space and equipment, senior convertible notes,
convertible subordinated debentures and notes payable have not materially changed since December
31, 2006. We expect to have the capacity to repay and/or refinance these obligations as they come
due.
At March 31, 2007, we had additional limited partnership investment commitments within Other
investments of up to $121.5 million; but there is no certainty that any such additional investment
will be required. We have issued no material guarantees on behalf of others and have no trading
activities involving non-exchange traded contracts accounted for at fair value. We have no
material transactions with related parties other than those disclosed in Note 19 of the Notes to
Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary
Data of Selectives 2006 Annual Report.
Ratings
We are rated by major rating agencies, which provide opinions of our financial strength, operating
performance, strategic position, and ability to meet policyholder obligations. We believe that our
ability to write insurance business is most influenced by our rating from A.M. Best, which
currently rates us A+ (Superior), their second highest of fifteen ratings, and has been our
rating for 45 consecutive years. The financial strength reflected by our A.M. Best rating is a
competitive advantage in the marketplace and influences where independent insurance agents place
their business. A downgrade from A.M. Best, could: (i) affect our ability to write new business
with customers and/or agents, some of whom are required (under various third party agreements) to
maintain insurance with a carrier that maintains a specified A.M. Best minimum rating; (ii) be an
event of default under our line of credit; or (iii) make it more expensive for us to access capital
markets. On July 25, 2006, S&Ps Insurance Rating Services raised our financial strength rating to
A+ from A, citing our strong operating performance, strong operating company capitalization,
and good financial flexibility. During the third quarter of 2006, Moodys elevated their outlook
regarding Selective to positive. The financial strength of our insurance business has been
rated, A2 by Moodys since 2001 and A+ by Fitch Ratings since 2004. Our Moodys and S&P
financial strength ratings affect our ability to access capital markets, and our interest rate
under our line of credit varies based upon Selective Insurance Group Inc.s debt ratings from
Moodys and S&P. There can be no assurance that our ratings will continue for any given period of
time or that they will not be changed. It is possible that positive or negative ratings actions by
one or more of the rating agencies may occur in the future. We review our financial debt
agreements for any potential rating triggers that could dictate a material change in terms if our
credit ratings were to change.
26
Federal Income Taxes
Total federal income tax expense decreased $2.3 million for First Quarter 2007 to $11.9 million,
compared to $14.3 million for First Quarter 2006. The decrease was attributable to decreased
pre-tax income driven by our Insurance Operations segment. Our effective tax rate differs from the
federal corporate rate of 35% primarily as a result of tax-advantaged investment income. The
effective tax rate for First Quarter 2007 was 24%, compared with 26% for First Quarter 2006.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the information about market risk set forth in our 2006
Annual Report.
ITEM 4. CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer,
has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange
Act), as of the end of the period covered by this report. Based on such evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that, as of the end of such period,
our disclosure controls and procedures are: (i) effective in recording, processing, summarizing,
and reporting information on a timely basis that we are required to disclose in the reports that we
file or submit under the Exchange Act; and (ii) effective in ensuring that information that we are
required to disclose in the reports that we file or submit under the Exchange Act is accumulated
and communicated to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required disclosure. No changes in
our internal control over financial reporting (as such term is defined in Rule 13a-15(f) of the
Exchange Act) occurred during First Quarter 2007 that materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information regarding Selectives purchases of its Common Stock in
First Quarter 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Maximum Number |
|
|
|
Total Number of |
|
|
Average |
|
|
Shares Purchased |
|
|
of Shares that May Yet |
|
|
|
Shares |
|
|
Price Paid |
|
|
as Part of Publicly |
|
|
Be Purchased Under the |
|
Period |
|
Purchased1 |
|
|
per Share |
|
|
Announced Program |
|
|
Announced Program2 |
|
|
January 1-31, 2007 |
|
|
5,712 |
|
|
|
28.60 |
|
|
|
|
|
|
|
5,222,764 |
|
February 1-28, 2007 |
|
|
1,725,572 |
|
|
|
25.33 |
|
|
|
1,576,200 |
|
|
|
3,646,564 |
|
March 1-31, 2007 |
|
|
1,396,092 |
|
|
|
24.70 |
|
|
|
1,393,787 |
|
|
|
2,252,777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
3,127,376 |
|
|
|
25.05 |
|
|
|
2,969,987 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
During First Quarter 2007, 155,205 shares were purchased
from employees in connection with the vesting of
restricted stock and 2,184 shares were purchased from
stock option exercises. All of these repurchases were
made in connection with satisfying tax withholding
obligations with respect to those employees. These
shares were not purchased as part of the publicly
announced program. The shares were purchased at the
current market prices of Selectives Common Stock on the
dates of the purchases. |
|
2 |
|
On April 26, 2005, the Board of Directors authorized a
stock repurchase program of up to 10.0 million shares,
which was extended by the Board of Directors through
December 31, 2007. |
27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Selective Insurance Group Inc.s 2007 Annual Meeting of Stockholders was held on April 24, 2007.
Voting was conducted in person and by proxy as follows:
(a) Stockholders voted to elect the following three (3) Class I directors, each to serve until the
2010 annual meeting of stockholders or when a successor has been duly elected and qualified, as
follows:
|
|
|
|
|
|
|
|
|
|
|
For |
|
Withheld |
|
|
|
W. Marston Becker |
|
|
46,977,335 |
|
|
|
1,967,503 |
|
Gregory E. Murphy |
|
|
46,953,766 |
|
|
|
1,991,062 |
|
William M. Rue |
|
|
46,044,200 |
|
|
|
2,900,638 |
|
|
Continuing directors whose terms do not expire until the 2008 annual meeting of stockholders
are: Paul D. Bauer, John C. Burville, Joan M. Lamm-Tennant, Ronald L. OKelley, and John F.
Rockart. Continuing directors whose terms do not expire until the 2009 annual meeting of
stockholders are A. David Brown, William M. Kearns, Jr., S. Griffin McClellan III, and J. Brian
Thebault.
(b) Stockholders voted to ratify the appointment of KPMG LLP as independent public accountants for
the fiscal year ending December 31, 2007 as follows: 47,829,816 shares voted for this proposal;
225,287 shares voted against it, and 889,734 shares abstained.
ITEM 6. EXHIBITS
(a) Exhibits:
|
|
|
Exhibit No. |
|
|
* 11
|
|
Statement Re: Computation of Per Share Earnings. |
|
|
|
* 31.1
|
|
Rule 13a-14(a) Certification
of the Chief Executive Officer of Selective Insurance Group, Inc. (Section 302 of the Sarbanes-Oxley
Act of 2002). |
|
|
|
* 31.2
|
|
Rule 13a-14(a) Certification of the Chief Financial Officer of Selective Insurance Group, Inc. (Section 302 of the Sarbanes-Oxley
Act of 2002). |
|
|
|
* 32.1
|
|
Certification of Chief Executive Officer of Selective Insurance Group, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
* 32.2
|
|
Certification of Chief Financial Officer of Selective Insurance Group, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. |
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
SELECTIVE INSURANCE GROUP, INC.
Registrant
|
|
|
By: /s/ Gregory E. Murphy
|
|
May 2, 2007 |
|
|
|
Chairman of the Board, President and Chief Executive Officer |
|
|
|
|
|
By: /s/ Dale A. Thatcher
|
|
May 2, 2007 |
|
|
|
Executive Vice President, Chief Financial Officer and Treasurer |
|
|
29