S
E
L
E
C
T
I
V
E
—
2
0
1
3
A
N
N
U
A
L
R
E
P
O
R
T
2013 AnnuAl RepoRt
2013 GAAP FinAnciAl HiGHliGHts
($ in millions, except per share data)
2 0 1 3
2 0 1 2
% or Point Change
Better (Worse)
Insurance Operations
Net premiums written
Net premiums earned
Underwriting gain (loss) before tax
Combined ratio
Statutory combined ratio
Investments
Net investment income before tax
Net realized gain (loss) before tax
Invested assets per dollar of stockholders’ equity
Summary Data
Total revenues
Net income
Net income from continuing operations
Total assets
Stockholders’ equity
Per Share Data
Diluted net income from continuing operations
Diluted net income
Dividends
Stockholders’ equity
$1,810.2
1,736.1
38.8
97.8
97.5
134.6
20.7
3.97
1,903.7
106.4
107.4
6,270.2
1,153.9
1.89
1.87
0.52
20.63
$1,666.9
1,584.1
(64.0)
104.0
103.5
131.9
9.0
3.97
1,734.1
38.0
38.0
6,794.2
1,090.6
9%
10%
161%
6.2 pts
6.0 pts
2%
131%
—
10%
180%
183%
(8)%
6%
0.68
0.68
0.52
19.77
178%
175%
—
4%
Refer to Glossary of Terms attached as Exhibit 99.1 to the Company’s Form 10-K for definitions of specific measures.
GAAP: U.S. Generally Accepted Accounting Principles
A v e r A g e A n n u A l r e t u r n Growth of a $10,000 investment (year-end 2003–2013)
Selective
S&P 500 Index
S&P Property & Casualty Index
$25,000
$20,000
$15,000
$10,000
$5,000
$0
To our ShareholderS
As the 44th largest
geographical areas – all delivered through our high-touch
property/casualty
regional field model that delivers strong returns.
insurance carrier in the
U.S., Selective has a
long history of being a
leading super regional
in the industry. In 2013,
everyone at Selective
contributed to very
Our standard commercial lines NPW grew 9% to $1.4 billion,
about twice the industry’s expected growth rate for the year.
This strong performance reflects renewal pure price increases
of 7.6% and very stable retention of 82%. Our earned rate
for 2013 exceeded loss trend and lowered the loss ratio as
the statutory combined ratio improved to 97.1%.
strong progress on our
In standard personal lines, NPW were $298 million, up 3%
three-year profitability
over 2012, driven by renewal pure price increases of 7.8%
improvement plan.
and very solid retention of 85%. The statutory combined
Through our initiatives,
ratio was a profitable 96.9%. We are driving profitability in
we achieved our major
the homeowners’ line by increasing rate and implementing
Gregory E. Murphy
Chairman and
Chief Executive Officer
objectives for the year and paved the way toward our goal of
enhanced underwriting initiatives. For automobile, we expect
a statutory combined ratio, excluding catastrophes, of 92% by
ongoing rate increases above loss trend and mix of business
year-end 2014. We generated an underwriting profit, which
improvements to achieve long-term growth and profitability.
is critical in this low interest rate environment, and cautiously
managed our investment portfolio for steady returns.
With an “A” or better rating from A.M. Best for more than
80 years, our financial strength is the result of steady
performance. In 2013, overall net premiums written (NPW)
grew 9% to $1.8 billion. Our overall statutory combined ratio
was 97.5%, including 2.7 points of catastrophe losses. The
catastrophe losses were lower than our expected 3 points
for the year due to fewer weather events. The profitable
statutory combined ratio was due, in part, to overall standard
renewal pure price increases of 7.6% and solid standard
lines retention of 83%. We continued to achieve significant
rate increases, aided by our sophisticated underwriting tools,
unique field model and the superior relationships we have
with approximately 1,100 independent agents.
Our binding authority excess and surplus (E&S) lines business
operates in all 50 states and contributed $132 million
in NPW in 2013, up 16% over 2012. E&S writes small
commercial lines policies ($2,700 average premium) through
approximately 90 wholesale general agents and increases
our product offerings and business volume with our retail
agents. In 2013, we improved our underwriting practices,
automated key systems and completed the integration of
our Pennsylvania and
Arizona offices. The E&S
statutory combined ratio
was 102.9%, down
15.9 points from 2012.
Business continues to
migrate back to this
market from standard
Our strategy is to have the capabilities of a national insurance
lines, and over time, we
company, including a robust product portfolio and appetite
expect E&S combined
and a high level of underwriting and pricing sophistication,
ratios will be better than
while realizing the benefits of being a regional carrier by
our standard commercial
pursuing low hazard, small- to mid-sized business in select
lines business.
John J. Marchioni
President and
Chief Operating Officer
2013 AnnuAl RepoRt
to ouR ShAReholdeRS (continued)
The two keys to driving underwriting improvement are rate
better retention and profitability. Our new policy guides make
increases and operations initiatives. To improve our loss and
it easier for customers to understand their policies and our
loss adjustment expense ratio, we strive to generate price
newsletters provide customers with information specific to
above estimated loss trend. In 2012, we set a three-year
their geographic region. We also provide our customers
overall renewal pure price target of between 5% - 8% and
who are “on-the-go” with mobile applications for billing and
we achieved overall price increases of 7.6% in 2013 and
payment transactions.
6.3% in 2012. Both of these increases were above our
average 3 points of loss trend. As for operations initiatives,
we implemented programs to better manage risk factors;
established special handling for claims with high exposure
levels; and fortified our sophisticated fraud and recovery
predictive models to further reduce losses. We also launched
new products; took steps to improve straight-through
processing for agents to write more business with us; and
Our agents are the best in the industry and ranked
Selective 8.6 on a scale of 1-10 (10 being excellent) in an
independently administered survey in 2013. Their feedback
demonstrates appreciation of our products, services and
unique field model. Notably, they value Selective’s unique
benefit – field teams that work right in the agent’s office,
alongside their own staff, to help customers.
expanded the services of our safety management teams.
Most importantly, our employees know how to make a
Turning to investments, for 2013, our invested assets
increased 6% over 2012 to $4.6 billion, in part, due to
strong operating cash flow. Operating cash flow as a percent
of NPW was 19%, up from 14% in 2012. Net investment
income, after tax, was $101 million and the total after-tax
yield on the portfolio was 2.3%. We maintain a conservative
portfolio with a focus on diversification, quality and liquidity
to maximize the risk adjusted yield on our fixed maturity
securities portfolio.
Early in the year, we reduced the rate on our borrowing
by issuing $185 million in senior notes and redeeming
the $100 million aggregate principal amount of our junior
subordinated notes. The remaining proceeds were used
for general corporate purposes, including a $57 million
capital contribution to our insurance subsidiaries. In addition,
we curtailed our pension plan effective as of March
2016, producing an after-tax increase to equity and a
corresponding reduction in liability of $29 million or $0.52
per share.
Every day we enhance our customers’ experience with
programs designed to promote loyalty – which results in
2013 AnnuAl RepoRt
difference in the lives of our customers and agents. We
receive many compliments on the extraordinary service our
staff provides – from our agency and safety management
specialists to our customer service and claims teams. For
86 years, employees have been the heart of Selective – and
their commitment is the key to our success.
Gregory E. Murphy
Chairman and
Chief Executive Officer
John J. Marchioni
President and
Chief Operating Officer
2013 AnnuAl RepoRt
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2013
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from_______________________to_______________________
Commission file number 001-33067
SELECTIVE INSURANCE GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
New Jersey
(State or Other Jurisdiction of Incorporation or Organization)
22-2168890
(I.R.S. Employer Identification No.)
40 Wantage Avenue, Branchville, New Jersey
(Address of Principal Executive Offices)
07890
(Zip Code)
Registrant’s telephone number, including area code:
(973) 948-3000
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $2 per share
Title of each class
Name of each exchange on which registered
NASDAQ Global Select Market
5.875% Senior Notes due February 9, 2043
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
No
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 reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files).
Yes
No
1
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes
No
The aggregate market value of the voting company common stock held by non-affiliates of the registrant, based on the closing
price on the NASDAQ Global Select Market, was $1,248,863,936 on June 30, 2013. As of February 14, 2014, the registrant
had outstanding 56,160,519 shares of common stock.
Portions of the registrant’s definitive Proxy Statement for the 2014 Annual Meeting of Stockholders to be held on April 23,
2014 are incorporated by reference into Part III of this report.
DOCUMENTS INCORPORATED BY REFERENCE
2
SELECTIVE INSURANCE GROUP, INC.
Table of Contents
Page No.
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Part IV
Item 15.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking Statements
Introduction
Critical Accounting Policies and Estimates
Financial Highlights of Results for Years Ended December 31, 2013, 2012, and 2011
Results of Operations and Related Information by Segment
Federal Income Taxes
Financial Condition, Liquidity, Short-term Borrowings, and Capital Resources
Off-Balance Sheet Arrangements
Contractual Obligations, Contingent Liabilities, and Commitments
Ratings
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Consolidated Balance Sheets as of December 31, 2013 and 2012
Consolidated Statements of Income for the Years Ended
December 31, 2013, 2012, and 2011
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 2013, 2012, and 2011
Consolidated Statements of Stockholders’ Equity for the Years Ended
December 31, 2013, 2012, and 2011
Consolidated Statements of Cash Flow for the Years Ended
December 31, 2013, 2012, and 2011
Notes to Consolidated Financial Statements
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits and Financial Statement Schedules
3
4
24
38
38
38
39
42
43
43
43
44
53
56
71
71
74
74
76
77
86
87
88
89
90
91
92
141
141
143
143
143
143
143
143
144
PART I
Item 1. Business.
Overview
Selective Insurance Group, Inc. (referred to as the “Parent”) is a New Jersey holding company that was incorporated in 1977.
The Parent has nine insurance subsidiaries that are licensed by various state departments of insurance to write specific lines of
property and casualty insurance in the standard market. Two of these subsidiaries, Selective Casualty Insurance Company
("SCIC") and Selective Fire and Casualty Insurance Company ("SFCIC"), were created in 2012 and began writing direct
premium in 2013. In addition, in December 2011 we acquired one subsidiary, Mesa Underwriters Specialty Insurance
Company ("MUSIC"), that is authorized by various state insurance departments to write property and casualty insurance in the
excess and surplus lines ("E&S") market. Our ten insurance subsidiaries are collectively referred to as the “Insurance
Subsidiaries.” The Parent and its subsidiaries are collectively referred to as "we," “us,” or “our” in this document.
Our main office is located in Branchville, New Jersey and the Parent’s common stock is publicly traded on the NASDAQ
Global Select Market under the symbol “SIGI.” In 2013, we were ranked as the 44th largest property and casualty group in the
United States based on 2012 net premium written (“NPW”) in A.M. Best and Company’s (“A.M. Best”) annual list of “Top 200
U.S. Property/Casualty Writers.” We have provided a glossary of terms as Exhibit 99.1 to this Form 10-K, which defines
certain industry-specific and other terms that are used in this Form 10-K.
We classify our business into three operating segments:
•
Standard Insurance Operations - in which we sell commercial lines ("Commercial Lines") and personal lines
("Personal Lines") insurance products and services in the standard marketplace, including flood business through
the National Flood Insurance Program ("NFIP");
• E&S Insurance Operations - in which we sell Commercial Lines insurance products and services to insureds who
•
have not obtained coverage in the standard market; and
Investments - in which we invest the premiums generated in our Standard and E&S Insurance Operations and
amounts generated through our capital management strategies, which may include the issuances of debt and equity
securities.
We derive substantially all of our income in three ways:
• Underwriting income from our insurance operations. Underwriting income is comprised of revenues, which are the
premiums earned on our insurance products and services, less expenses. The gross premiums are direct premium
written (“DPW”) plus premiums assumed from other insurers or self-insured groups. Gross premiums less premium
ceded to reinsurers, is NPW. NPW is recognized as revenue ratably over a policy’s term as net premiums earned
(“NPE”). Expenses related to our insurance operations fall into three main categories: (i) losses associated with
claims and various loss expenses incurred for adjusting claims (referred to as “loss and loss expenses”); (ii)
expenses related to insurance policy issuance, such as agent commissions, premium taxes, reinsurance, and other
expenses incurred in issuing and maintaining policies, including employee compensation and benefits (referred to as
“underwriting expenses”); and (iii) policyholder dividends.
• Net investment income from investments. We generate income from investing insurance premiums and amounts
generated through our capital management strategies. Net investment income consists primarily of interest earned
on fixed maturity investments, dividends earned on equity securities, and other income primarily generated from our
alternative investment portfolio.
• Net realized gains and losses on investment securities from the investments segment. Realized gains and losses
from the investment portfolios of the Insurance Subsidiaries and the Parent are typically the result of sales,
maturities, calls, and redemptions. They also include write downs from other-than-temporary impairments
(“OTTI”).
Our income is partially offset by general corporate expenses, including interest on our debt obligations, and tax payments.
4
We measure the performance of our insurance operations segments by the combined ratio. Under U.S. generally accepted
accounting principles (“GAAP”), the combined ratio is calculated by adding: (i) the loss and loss expense ratio, which is the
ratio of incurred loss and loss expense to NPE; (ii) the expense ratio, which is the ratio of policy acquisition and other
underwriting expenses to NPE; and (iii) the dividend ratio, which is the ratio of policyholder dividends to NPE. Statutory
accounting principles ("SAP") provides a calculation of the combined ratio that differs from GAAP in that the statutory expense
ratio is the ratio of policy acquisition and other underwriting expenses to NPW, not NPE. A combined ratio under 100%
generally indicates an underwriting profit and a combined ratio over 100% generally indicates an underwriting loss. The
combined ratio does not reflect investment income, federal income taxes, or other non-insurance related income or expense.
We measure the performance of our investments segment by after-tax investment income and the associated return on invested
assets. Our investment philosophy includes setting certain risk and return objectives for the fixed maturity, equity, and other
investment portfolios. We generally measure our performance by comparing our returns for each of these components of our
portfolio to a weighted-average benchmark of comparable indices.
Our operations are heavily regulated by the state insurance regulators in the states in which our Insurance Subsidiaries are
organized and licensed or authorized to do business. In these states, the Insurance Subsidiaries are required to file financial
statements prepared in accordance with SAP, which are promulgated by the National Association of Insurance Commissioners
(“NAIC”) and adopted by the various states. Because of these regulatory requirements, we use SAP to manage our insurance
operations. The purpose of state insurance regulation is to protect policyholders, so SAP focuses on solvency and liquidation
value unlike GAAP, which focuses on the potential for shareholder profits. Consequently, significant differences exist between
SAP and GAAP that are discussed further under “Measure of Insurance Segments Profitability.”
Insurance Segments (Standard and E&S)
Overview
We derive all of our insurance operations revenue from selling insurance products and services to businesses and individuals
for premium. The majority of our sales are annual insurance policies. Our Commercial Lines sales are to businesses, non-
profit organizations, and local government entities, and include Standard Insurance Operations and E&S Insurance Operations.
This business represents about 84% of our NPW. Commercial Lines sales are seasonally higher in January and July and lower
during the fourth quarter of the year. Our Personal Lines sales, including our flood business, are primarily to individuals and
represent about 16% of our NPW.
Insurance Segments Products and Services
The types of insurance we sell in our insurance operations fall into four broad categories:
•
•
•
Standard market property insurance, which generally covers the financial consequences of accidental loss of an
insured’s real and/or personal property. Property claims are generally reported and settled in a relatively short
period of time;
Standard market casualty insurance, which generally covers the financial consequences of employee injuries in the
course of employment and bodily injury and/or property damage to a third party as a result of an insured’s negligent
acts, omissions, or legal liabilities. Casualty claims may take several years to be reported and settled;
Flood insurance, which generally covers property losses under the Federal Government's Write Your Own ("WYO")
program of the NFIP. Flood insurance premiums and losses are 100% ceded to the NFIP; and
• E&S insurance, which generally provides property and casualty insurance coverage through established
underwriting guidelines to small commercial accounts with moderate degrees of hazard that were not obtained in the
standard markets because of their small premium size, unique/niche risk characteristics, and/or regulatory
restrictions that prevent standard markets from offering desirable underwriting terms and conditions. E&S property
claims are generally reported and settled in a relatively short period of time, whereas E&S casualty claims may take
several years to be reported and settled.
5
We underwrite and insure Commercial Lines of business primarily through traditional insurance and, to a lesser extent, through
alternative risk management products, such as retrospective rating plans, self-insured group retention programs, or individual
accounts with self-insured retentions. The following table shows the principal types of policies we write in our Standard
Commercial Insurance Operations and our E&S Insurance Operations:
Types of Policies
Commercial Property
Commercial Automobile
General Liability (including Excess
Liability/Umbrella)
Workers Compensation
Businessowners' Policy
Category of Insurance
Standard Insurance Operations
E&S Insurance Operations
Property
Property/Casualty
Casualty
Casualty
Property/Casualty
X
X
X
X
X
X
X
X
Bonds (Fidelity and Surety)
Flood1
1Flood insurance premiums and losses are 100% ceded to the federal government’s WYO program. Certain other policies contain minimal Flood or Flood
related coverages.
Casualty
Property
X
X
The main Personal Lines policies that we write are as follows:
Types of Policies
Homeowners
Personal Automobile
Category of Insurance
Standard Insurance Operations
Property/Casualty
Property/Casualty
X
X
Umbrella
Flood1
1Flood insurance premiums and losses are 100% ceded to the federal government’s WYO program. Certain other policies contain minimal Flood or Flood
related coverages.
Casualty
Property
X
X
Product Development and Pricing
Our insurance policies are contracts that specify our coverages – what we will pay to or for an insured upon specified losses.
We develop our coverages internally and by adopting and modifying forms and statistical data licensed from third party
aggregators, notably Insurance Services Office, Inc. (“ISO”) and the National Council on Compensation Insurance, Inc.
("NCCI"). Determining the price to charge for our coverages is complicated. At the time we underwrite and issue a policy, we
do not know what our actual costs for the policy will be in the future. To calculate and project future costs, we examine and
analyze historical statistical data and factor in expected changes in loss trends. Additionally, we have developed predictive
models for certain of our standard insurance lines. Predictive models analyze historical statistical data regarding our insureds
and their loss experience, rank our policies, or potential policies, based on this analysis, and apply this risk data to current and
future insureds to predict the likely profitability of an account. A model’s predictive capabilities are limited by the amount and
quality of the statistical data available. As a regional insurance group, our loss experience is not always statistically large
enough to analyze and project future costs. Consequently, we use ISO data to supplement our own.
Customers and Customer Markets
Commercial Lines customers represent 84% of our total NPW. We categorize this business as follows:
Percent of Total
Commercial
Lines
Average
Premium per
Policy
Small Business
21% $
2,791
Middle Market Business
60% $
10,257
Large Account Business
10% $
158,278
Description
Standard insurance policies generally under $25,000, with certain restrictions for hazard
grade and exposure that can be issued for new customers through our internet-based One
& Done® and Two & Done automated underwriting templates.
Standard insurance policies that cannot be issued for new customers through our
automated systems and are the focus of our field-based underwriters, known as agency
management specialists (“AMSs”).
Standard insurance policies that are larger in size or include alternative risk transfer. This
business is written by large account specialists. Approximately 25% of these accounts
include alternative risk transfer mechanisms.
E&S Business
9% $
2,741 E&S insurance policies that are generally written through contract binding authority
under established underwriting guidelines with our wholesale general agency partners.
6
We do not subdivide our Personal Lines customers by size or class. No one customer accounts for 10% or more of our
Standard or E&S Insurance Operations segments.
Geographic Markets
We principally sell our standard insurance products and services in 22 states and the District of Columbia in the Eastern and
Midwestern regions of the United States. However, we also provide Flood and E&S insurance in all 50 states and the District
of Columbia. We believe this geographic diversification lessens our exposure to regulatory, competitive, and catastrophic risk.
The following table lists the principal states in which we write business and the percentage of total NPW each represents for the
last three fiscal years:
% of NPW
New Jersey
Pennsylvania
New York
Maryland
Indiana
Virginia
Illinois
Georgia
Michigan
North Carolina
South Carolina
Ohio
Other states
Total
Year Ended December 31,
2013
2012
2011
23.1%
11.5
6.9
5.7
4.8
4.7
4.5
3.5
3.4
3.2
3.0
2.5
23.2
100.0%
23.3
12.0
7.6
5.7
5.0
4.9
4.9
3.1
3.5
3.1
3.0
2.6
21.3
100.0
25.3
13.0
8.3
6.4
4.9
5.3
5.5
3.1
3.6
3.0
2.7
2.7
16.2
100.0
Distribution and Marketing
We sell and distribute our Standard Insurance Operations products and services through independent retail insurance agents.
Our Standard Insurance Operations, excluding our flood business, had retail agency agreements with approximately 1,100
independent agencies as of December 31, 2013, many of which have multiple offices. In total, approximately 1,900
independent agency offices are selling this business for us. In addition, we have approximately 5,000 agencies selling our flood
products. We sell and distribute our E&S Insurance Operations products through approximately 90 wholesale general agencies,
to which we have given contract binding authority for the business they receive from independent retail insurance agents. We
pay our agencies commissions and other consideration for business placed with us. We seek to compensate our agencies fairly
and consistent with market practices. No one agency is responsible for 10% or more of our combined insurance operations
premium.
Independent retail insurance agents and brokers write approximately 80% of standard market commercial property and casualty
insurance and approximately a third of the standard market personal lines insurance in the United States according to a study
released in 2013 by the Independent Insurance Agents & Brokers of America. E&S business is written almost exclusively
through wholesale general agents. We believe that independent retail insurance agents will remain a significant force in overall
insurance industry premium production because they represent more than one insurance carrier and can provide a wider choice
of commercial lines and personal lines insurance products and consultation to insureds. Because our agencies generally
represent several of our competitors, we face competition within our distribution channel. As our customers rely heavily on
their independent retail insurance agent, it is sometimes difficult to develop brand recognition with our customers, who cannot
always differentiate between insurance agents and insurance carriers.
Our primary marketing strategy with agents is to:
• Use a business model that provides them resources within close geographic proximity, including: (i) field
underwriters; (ii) regional office underwriters; (iii) safety management specialists; (iv) field claims personnel; and
(v) field marketing specialists. These resources make timely underwriting and claim decisions based on established
authority parameters and provide marketing support and automation training.
7
• Develop close relationships with each agency and its principals: (i) by soliciting their feedback on products and
services; (ii) by advising them concerning product developments; and (iii) through significant interaction with them
focusing on producer recruitment, sales training, enhancing customer experience, online marketing, and agency
operations.
• Develop with each agency, and then carefully monitor, annual goals regarding: (i) types and mix of risks placed
with us; (ii) amounts of premium or numbers of policies placed with us; (iii) customer service levels; and (iv)
profitability of business placed with us.
In our most recent survey of our Standard Insurance Operations Agents', which was conducted in 2013, we received an overall
satisfaction score of 8.6 out of 10, which highlighted our agents’ satisfaction with our standard Commercial Lines products, the
ease of reporting claims, and the professionalism and effectiveness of our employees.
Field and Technology Strategies Supporting Independent Retail Agent Distribution
We use the service mark “High-tech x High-touch = HT2 SM” to describe our Standard Insurance Operations business strategy.
“High-tech” refers to our technology that we use to make it easy for our independent retail insurance agents and customers to
do standard business with us. “High-touch” refers to the close relationships that we have with our independent retail insurance
agents and customers due to our field business model that places underwriters, claims representatives, technical staff, and safety
management representatives near our agents and customers.
Employees
To support our independent retail agents, we employ a field model in both underwriting and claims. The field model places
various employees in the field, usually working from home offices near our agents. We believe that we build better and
stronger relationships with our agents because of the close proximity of our field employees to our agents and the resulting
direct and regular interaction with our agents and our customers.
At December 31, 2013, we had approximately 2,100 employees, about 340 of which worked in the field, and another 900 that
worked in one of our regional offices.
We provide support to our field model from our corporate headquarters in Branchville, New Jersey, and our six regional
branches (“Regions”). The table below lists our Regions and where they have office locations:
Region
Heartland
New Jersey
Northeast
Mid-Atlantic
Southern
E&S
Office Location
Carmel, Indiana
Hamilton, New Jersey
Branchville, New Jersey
Allentown, Pennsylvania and Hunt Valley, Maryland
Charlotte, North Carolina
Horsham, Pennsylvania and Scottsdale, Arizona
Underwriting Process Involving Agents and our Field Model
Our underwriting process requires communication and interaction among:
• Our independent retail agents, who act as front-line underwriters, our AMSs, our safety management specialists
("SMSs"), our field marketing specialists ("FMSs"), as well as our corporate and regional underwriters;
• Our wholesale general agents, who use guidelines developed by our corporate E&S underwriters to write business
that they receive from retail insurance agents under contract binding authority;
• Our flood agents who act as front-line producers for our business under the NFIP's WYO program;
• Our corporate underwriting department, which includes our strategic business units (“SBUs”), organized by product
and customer type, and our line-of-business units. These units develop our policy forms, pricing, and underwriting
guidelines in conjunction with the Regions;
• Our Regions, which establish: (i) annual premium and pricing goals in consultation with the SBUs; (ii) agency new
business targets; and (iii) agency profit improvement plans; and
• Our Actuarial Department, located primarily in our corporate headquarters, which assists in the determination of
rate and pricing levels, while also monitoring pricing and profitability.
8
We also have an underwriting service center (“USC”) located in Richmond, Virginia. The USC assists our independent retail
agents by servicing our Standard Insurance Operations with a focus on Personal Lines, as well as Small Business and Middle
Market Commercial Lines accounts. At the USC, many of our employees are licensed agents who respond to customer
inquiries about insurance coverage, billing transactions, and other matters. For the convenience of using the USC and our
handling of certain transactions, our independent retail agents agree to receive a slightly lower than standard commission for
the premium associated with the USC. As of December 31, 2013, our USC was servicing standard Commercial Lines NPW of
$48.6 million, and Personal Lines NPW of $27.5 million. The $76.1 million total serviced by the USC represents 4% of our
total NPW.
We believe that our field model has a distinct advantage in its ability to provide a wide range of front-line safety management
services focused on improving an insured’s safety and risk management programs – and we have obtained the service mark
“Safety Management: Solutions for a safer workplace.”SM Safety management services include: (i) risk evaluation and
improvement surveys intended to evaluate potential exposures and provide solutions for mitigation; (ii) Internet-based safety
management educational resources, including a large library of coverage-specific safety materials, videos and online courses,
such as defensive driving and employee educational safety courses; (iii) thermographic infrared surveys aimed at identifying
electrical hazards; and (iv) Occupational Safety and Health Administration construction and general industry certification
training. Risk improvement efforts for existing customers are designed to improve loss experience and policyholder retention
through valuable ongoing consultative service. Our safety management goal is to work with our insureds to identify and
eliminate potential loss exposures.
Claims Management and Field Claims Model
Effective, fair, and timely claims management is one of the most important services that we provide our customers and agents.
It also is one of the critical factors in achieving underwriting profitability. We have structured our claims organization to
emphasize: (i) cost-effective delivery of claims services and control of loss and loss expenses; and (ii) maintenance of timely
and adequate claims reserves. In connection with our Standard Insurance Operations, we believe that we can achieve lower
claims expenses through our field model by locating claims representatives in close proximity to our customers and
independent retail agents. For our E&S Insurance Operations, we use external adjusters who are situated close to claimants.
Claims management specialists (“CMSs”) are primarily responsible for investigating and settling the majority of our Standard
Insurance Operations' non-workers compensation claims directly with insureds and claimants. By promptly and personally
investigating claims, we believe CMSs are able to provide better customer and agent service and quickly resolve claims within
their authority. All workers compensation claims are handled in the Regional Claim Offices by workers compensation
adjusters. We have also established a workers compensation strategic case management unit, which specializes in the
investigation and medical management of lost-time claims with high exposure and/or escalation risk. Due to the special nature
of property losses with higher severity, CMSs refer those claims above certain amounts and more technically complex losses to
either the Property Flex Unit or the Large Loss unit. Both of these groups specifically handle only higher exposure property
claims. All asbestos and environmental claims are referred to our specialized corporate Environmental Unit. This structure
allows us to provide experienced adjusting to each claim category.
We also have a claims service center (“CSC”), co-located with the USC, in Richmond, Virginia. The CSC receives first notices
of loss from our insureds and claimants related to our Standard Insurance Operations. The CSC is designed to help: (i) reduce
the claims settlement time on first- and third-party automobile property damage claims; (ii) increase the use of body shops,
glass repair shops, and car rental agencies that have contracted with us at discounted rates; (iii) handle and settle small property
claims; and (iv) investigate and negotiate auto liability claims. Upon receipt of a claim, the CSC, as appropriate, will assign the
matter to the appropriate Region or specialized area at our corporate headquarters.
For our Standard and E&S Insurance Operations, we have a special investigations unit (“SIU”) that investigates potential
insurance fraud and abuse, and supports efforts by regulatory bodies and trade associations to curtail the cost of fraud. The SIU
adheres to uniform internal procedures to improve detection and take action on potentially fraudulent claims. It is our practice
to notify the proper authorities of SIU findings, which we believe sends a clear message that we will not tolerate fraud against
us or our customers. The SIU also supervises anti-fraud training for all claims adjusters and AMSs.
9
Technology
We leverage the use of technology in our business. In recent years, we have made significant investments in information
technology platforms, integrated systems, internet-based applications, and predictive modeling initiatives. We did this to
provide:
• Our independent retail agents, wholesale agents, and customers with access to accurate business information and
the ability to process certain transactions from their locations, seamlessly integrating those transactions into our
systems;
• Our SIU investigators access to our business intelligence systems to better identify claims with potential fraudulent
activities;
• Our claims recovery and subrogation departments with the ability to expand and enhance their models through the
use of our business intelligence systems; and
• Our underwriters with targeted pricing tools to enhance profitability while growing the business.
In 2013, we received the Interface Partner Award from Applied Systems, an automated solutions provider to independent retail
insurance agents, for the sixth consecutive year. The award recognizes our leadership and innovation in our interface
advancements in download and real-time rating. We also received the following two awards in 2013, from the Association of
Cooperative Operations Research and Development ("ACORD"):
• The Property & Casualty Straight-Through Processing of Data Award, which recognizes those companies that have
automated the life cycle of ACORD Standards and Forms data. This includes encouraging the agents to use current
ACORD Forms, real-time rating/submission, policy download and endorsement processing; and
• The Property & Casualty AL3 Download Award, for using current electronic data interchange standards and having
a solid history of download success using AL3 standards.
We manage our information technology projects through an Enterprise Project Management Office (“EPMO”). The EPMO is
staffed by certified individuals who apply methodologies to: (i) communicate project management standards; (ii) provide
project management training and tools; (iii) review project status and cost; and (iv) provide non-technology project
management consulting services to the rest of the organization. The EPMO, which includes senior management representatives
from all major business areas, corporate functions, and information technology, meets regularly to review all major initiatives
and receives reports on the status of other projects. We believe the EPMO is an important factor in the success of our
technology implementation. Our technology operations are located in Branchville, New Jersey and Glastonbury, Connecticut.
We also have agreements with multiple consulting, information technology, and managed services providers for supplemental
staffing services. Collectively, these providers supply approximately 21% of our skilled technology capacity. We retain
management oversight of all projects and ongoing information technology production operations. We believe we would be able
to manage an efficient transition to new vendors without significant impact to our operations if we terminated an existing
vendor.
Insurance Operations Competition
Market Competition
The commercial lines property and casualty insurance market is highly competitive and market share is fragmented among
many companies. Despite a slight economic improvement that took place in 2013, A.M. Best maintains its negative outlook for
the commercial lines segment for 2014. We compete with four types of companies, primarily on the basis of price, coverage
terms, claims service, safety management services, ease of technology, and financial ratings:
• Regional insurers, such as Cincinnati Financial Corporation, Erie Indemnity Company, The Hanover Insurance
Group, Inc., and United Fire Group, Inc., which offer commercial lines and personal lines products and services;
• National insurers, such as Liberty Mutual Group, The Travelers Companies, Inc., The Hartford Financial Services
Group, Inc., Nationwide Mutual Insurance Company; and Zurich Insurance Group which offer commercial lines and
personal lines products and services;
10
• Alternative risk insurers, which includes entities that self-insure their risks. Generally, only large entities have the
capacity to self-insure. In the public sector, some small and mid-sized public entities have the opportunity to
partially self-insure their risks through the use of risk pools or joint insurance funds that are generally created by
legislative act; and
• E&S lines insurers, such as Scottsdale, Nautilus, Colony, Markel, Western World, Century Surety, and Burlington,
which offer a variety of property and casualty insurance products on an E&S basis. In addition, we also face
competition from E&S lines insurers who work directly with retail agencies such as U.S. Liability Insurance.
We also face competition in personal lines, although the market is less fragmented than commercial lines and carriers have been
more successful at obtaining rate increases. A.M. Best has maintained their stable outlook for 2014 for personal lines,
reflecting ongoing stability of the auto line and successful carriers continuing to enhance the granularity of their home pricing
models. Our Personal Lines business faces competition primarily from the regional and national carriers noted above, as well
as direct insurers such as GEICO and The Progressive Corporation, which primarily offer personal auto coverage and market
through a direct-to-consumer model.
Some of these competitors are public companies and some are mutual companies. Some, like us, rely on independent retail and
wholesale insurance agents for distribution of their products and services and have competition within their distribution
channel. Others either employ their own agents who only represent one insurance carrier or use a combination of independent
retail and captive agents.
Financial Ratings
Our Insurance Subsidiaries’ ratings by major rating agencies, are as follows:
Rating Agency
A.M. Best
Standard & Poor’s Ratings Services (“S&P”)
Moody’s Investors Service (“Moody’s”)
Fitch Ratings (“Fitch”)
Financial Strength Rating
A
A-
A2
A+
Outlook
Stable
Stable
Negative
Negative
Because agent and customer concerns about an insurer's ability to pay claims in the future are such an important factor in our
competitiveness, our financial ratings are important. Major financial rating agencies evaluate us on our financial strength,
operating performance, strategic position, and ability to meet policyholder obligations. We believe that our ability to write
insurance business is most significantly influenced by our rating from A.M. Best. We have been rated "A" or higher by A.M.
Best for the past 83 years. In the second quarter of 2013, A.M. Best reaffirmed our rating of "A (Excellent)", their third highest
of 13 financial strength ratings, with a "Stable" outlook. The rating reflects our solid risk-adjusted capitalization, disciplined
underwriting focus, increasing use of predictive modeling technology, strong independent retail agency relationships, and
consistently stable loss reserves. A downgrade from A.M. Best to a rating below “A-” is an event of default under our line of
credit and could 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.
In the third quarter of 2013, S&P lowered our financial strength rating to "A-" from "A" under their revised rating criteria. The
rating reflects our strong business risk profile and moderately strong financial risk profile, built on a strong competitive
position in the regional small to mid-size commercial insurance markets in Mid-Atlantic states and strong capital and earnings.
The rating revision reflects S&P's view of our capital and earnings volatility relative to our peers. In the first quarter of 2013,
Moody's cited our strong regional franchise with established independent retail agency support, along with good risk adjusted
capitalization and strong invested asset quality, to reaffirm our financial strength rating of “A2” but revised our outlook to
negative, citing that our underwriting results have lagged similarly rated peers. In January 2014, Fitch reaffirmed our “A+”
rating and negative outlook, citing our improved underwriting results, strong independent agency relationships, solid loss
reserve position, and enhanced diversification through continued efforts to reduce our concentration in New Jersey.
For further discussion on our ratings, please see the “Ratings” section of Item 7. “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.” of this Form 10-K.
In addition, other factors that might impact our competitiveness are discussed in Item 1A. “Risk Factors.” of this Form 10-K.
11
Reinsurance
We use reinsurance to protect our capital resources and insure us against losses on property and casualty risks that we
underwrite. We use two main reinsurance vehicles: (i) a reinsurance pooling agreement among our Insurance Subsidiaries in
which each company agrees to share in premiums and losses based on certain specified percentages; and (ii) reinsurance
contracts and arrangements with third parties that cover various policies that our insurance operations issue to insureds.
Reinsurance Pooling Agreement
The primary purposes of the reinsurance pooling agreement among our Insurance Subsidiaries are the following:
•
Pool or share proportionately the underwriting profit and loss results of property and casualty insurance
underwriting operations through reinsurance;
•
Prevent any of our Insurance Subsidiaries from suffering undue loss;
• Reduce administration expenses; and
•
Permit all of the Insurance Subsidiaries to obtain a uniform rating from A.M. Best.
The following illustrates the pooling percentages by company as of December 31, 2013:
Insurance Subsidiary
Selective Insurance Company of America ("SICA")
Selective Way Insurance Company ("SWIC")
Selective Insurance Company of South Carolina ("SICSC")
Selective Insurance Company of the Southeast ("SICSE")
Selective Insurance Company of New York ("SICNY")
SCIC
Selective Auto Insurance Company of New Jersey ("SAICNJ")
MUSIC
Selective Insurance Company of New England ("SICNE")
SFCIC
Pooling Percentage
32.0%
21.0%
9.0%
7.0%
7.0%
7.0%
6.0%
5.0%
3.0%
3.0%
Reinsurance Treaties and Arrangements
By entering reinsurance treaties and arrangements, we are able to increase underwriting capacity and accept larger risks and a
larger number of risks without directly increasing capital or surplus. All of our reinsurance treaties are for traditional
reinsurance. We do not purchase finite reinsurance. Under our reinsurance treaties, the reinsurer generally assumes a portion
of the losses we cede to them in exchange for a portion of the premium. Amounts not reinsured are known as retention.
Reinsurance does not legally discharge us from liability under the terms and limits of our policies, but it does make our
reinsurer liable to us for the amount of liability we cede to them. Accordingly, we have counterparty credit risk to our
reinsurers. We attempt to mitigate this credit risk by: (i) pursuing relationships with reinsurers rated “A-” or higher; and (ii)
obtaining collateral to secure reinsurance obligations when possible. Some of our reinsurance contracts include provisions that
permit us to terminate or commute the reinsurance treaty if the reinsurer's financial condition or rating deteriorates. We
consistently monitor the financial condition of our reinsurers. We also continuously review the quality of reinsurance
recoverables and reserves for uncollectible reinsurance.
12
We primarily use the following three reinsurance treaty and arrangement types for property and casualty insurance:
• Treaty reinsurance, under which certain types of policies are automatically reinsured without prior approval by the
reinsurer of the underlying individual insured risks;
•
•
Facultative reinsurance, under which an individual insurance policy or a specific risk is reinsured with the prior
approval of the reinsurer. We use facultative reinsurance for policies with limits greater than those available under our
treaty reinsurance; and
Protection provided under the Terrorism Risk Insurance Act of 2002 as modified and extended through December 31,
2014 by the Terrorism Risk Insurance Program Reauthorization Act of 2007 (collectively referred to as “TRIPRA”).
TRIPRA provides a federal backstop to Commercial Lines business, but does not cover Personal Lines business.
Under TRIPRA, terrorism coverage is mandatory for all primary workers compensation policies. Insureds with non-
workers compensation commercial policies, however, have the option to accept or decline our terrorism coverage or
negotiate with us for other terms. Under TRIPRA, each participating insurer is responsible for paying a deductible of
specified losses based on a percentage of the prior year's applicable commercial lines direct premiums earned before
federal assistance is available. In 2014, our deductible is approximately $234 million. For losses above the
deductible, the federal government will pay 85% and the insurer retains 15%. Although TRIPRA's provisions will
mitigate our loss exposure to a large-scale terrorist attack, our deductible is substantial. TRIPRA has not yet been re-
authorized by Congress beyond the scheduled expiration at December 31, 2014. As such, policies issued after January
1, 2014 will have some portion of their coverage period extend beyond the currently scheduled TRIPRA expiration.
For additional information regarding TRIPRA, see Item 1A. "Risk Factors." of this Form 10-K.
The following is a summary of our property reinsurance treaties and arrangements covering our Insurance Subsidiaries:
PROPERTY REINSURANCE ON INSURANCE PRODUCTS
Treaty Name
Reinsurance Coverage
Terrorism Coverage
Property Excess of Loss
(covers standard lines)
Property Catastrophe
Excess of Loss
(covers both standard and
E&S lines)
$38 million above $2 million retention covering 100% in two
layers. Losses other than TRIPRA certified losses are subject
to the following reinstatements and annual aggregate limits:
- $8 million in excess of $2 million layer
provides unlimited reinstatements; and
- $30 million in excess of $10 million layer
provides three reinstatements, $120 million in
aggregate limits.
All nuclear, biological, chemical, and radioactive (“NBCR”)
losses are excluded regardless of whether or not they are
certified under TRIPRA. For non-NBCR losses, the treaty
distinguishes between acts certified under TRIPRA and those
that are not. The treaty provides annual aggregate limits for
TRIPRA certified (other than NBCR) acts of $24 million for
the first layer and $60 million for the second layer. Non-
certified terrorism losses (other than NBCR) are subject to the
normal limits under the treaty.
All NBCR losses are excluded regardless of whether or not
they are certified under TRIPRA. Non NBCR losses are
covered with certain limitations. Please see Item 1A. “Risk
Factors.” of this Form 10-K for further discussion regarding
changes in TRIPRA.
$685 million above $40 million retention in four layers:
- 91% of losses in excess of $40 million up to
$100 million;
- 95% of losses in excess of $100 million up to
$225 million;
- 95% of losses in excess of $225 million up to
$475 million; and
- 90% of losses in excess of $475 million up
to $725 million.
- The treaty provides one reinstatement per layer
for the first three layers and no reinstatements
on the fourth layer. The annual aggregate limit
is $1.05 billion, net of the Insurance
Subsidiaries' co-participation.
Flood
100% reinsurance by the federal government’s WYO
program.
None
13
The following is a summary of our casualty reinsurance treaties and arrangements covering our Insurance Subsidiaries:
CASUALTY REINSURANCE ON INSURANCE PRODUCTS
Treaty Name
Reinsurance Coverage
Terrorism Coverage
Casualty Excess of Loss
(covers standard lines)
There are six layers covering 100% of $88 million in excess
of $2 million. Losses other than terrorism losses are subject to
the following reinstatements and annual aggregate limits:
All NBCR losses are excluded. All other losses stemming
from the acts of terrorism are subject to the following
reinstatements and annual aggregate limits:
- $3 million in excess of $2 million layer
provides 23 reinstatements, $72 million net
annual aggregate limit;
- $7 million in excess of $5 million layer
provides three reinstatements, $28 million
annual aggregate limit;
- $9 million in excess of $12 million layer provides two
reinstatements, $27 million annual aggregate limit;
- $9 million in excess of $21 million layer provides one
reinstatement, $18 million annual aggregate limit;
- $20 million in excess of $30 million layer provides one
reinstatement, $40 million annual aggregate limit; and
- $40 million in excess of $50 million layer provides one
reinstatement, $80 million in net annual aggregate limit.
Montpelier Re Quota
Share and Loss
Development Cover
(covers E&S lines)
As part of the acquisition of MUSIC we entered into several
reinsurance agreements that together provide protection for
losses on policies written prior to the acquisition and any
development on reserves established by MUSIC as of the date
of acquisition. The reinsurance recoverables under these
treaties are 100% collateralized.
- $3 million in excess of $2 million layer provides
four reinstatements for terrorism losses, $15 million
net annual aggregate limit;
- $7 million in excess of $5 million layer provides two
reinstatements for terrorism losses, $21 million annual
aggregate limit;
- $9 million in excess of $12 million layer provides two
reinstatements for terrorism losses, $27 million annual
aggregate limit;
- $9 million in excess of $21 million layer provides one
reinstatement for terrorism losses, $18 million annual
aggregate limit;
- $20 million in excess of $30 million layer provides one
reinstatement for terrorism losses, $40 million annual
aggregate limit; and
- $40 million in excess of $50 million layer provides one
reinstatement for terrorism losses, $80 million in net
annual aggregate limit.
Provides full terrorism coverage including NBCR.
We also have other reinsurance treaties that we do not consider core to our reinsurance program for our standard insurance
products, such as our Surety and Fidelity Excess of Loss Reinsurance Treaty, National Workers Compensation Reinsurance
Pool, which covers business assumed from the involuntary workers compensation pool, and our Equipment Breakdown
Coverage Reinsurance Treaty. In addition, we have Property and Casualty Excess of Loss Reinsurance Treaties providing
coverage on our E&S business. For further discussion on reinsurance, see the “Reinsurance” section of Item 7. “Management's
Discussion and Analysis of Financial Condition and Results of Operations.” of this Form 10-K.
Claims Reserves
Net Loss and Loss Expense Reserves
We establish loss and loss expense reserves that are estimates of the amounts we will need to pay in the future for claims and
related expenses for insured losses that have already occurred. Estimating reserves as of any date involves a considerable
degree of judgment by management and is inherently uncertain. We regularly review our reserving techniques and our overall
amount of reserves. We also review:
•
Information regarding each claim for losses, including potential extra-contractual liabilities, or amounts paid in
excess of the policy limits, which may not be covered by our contracts with reinsurers;
• Our loss history and the industry’s loss history;
• Legislative enactments, judicial decisions, and legal developments regarding damages;
• Changes in political attitudes; and
• Trends in general economic conditions, including inflation.
14
See “Critical Accounting Policies and Estimates” in Item 7. “Management’s Discussion and Analysis of Financial Condition
and Results of Operations.” of this Form 10-K for a full discussion regarding our loss reserving process.
Our loss and loss expense reserve development over the preceding 10 years is shown on the following table, which has five
parts:
•
•
•
•
•
Section I shows the estimated liability recorded at the end of each indicated year for all current and prior accident
year’s unpaid loss and loss expenses. The liability represents the estimated amount of loss and loss expenses for
unpaid claims, including incurred but not reported (“IBNR”) reserves. In accordance with GAAP, the liability for
unpaid loss and loss expenses is recorded gross of the effects of reinsurance. An estimate of reinsurance
recoverables is reported separately as an asset. The net balance represents the estimated amount of unpaid loss and
loss expenses outstanding reduced by estimates of amounts recoverable under reinsurance contracts.
Section II shows the re-estimated amount of the previously recorded net liability as of the end of each succeeding
year. Estimates of the liability of unpaid loss and loss expenses are increased or decreased as payments are made
and more information regarding individual claims and trends, such as overall frequency and severity patterns,
becomes known.
Section III shows the cumulative amount of net loss and loss expenses paid relating to recorded liabilities as of the
end of each succeeding year.
Section IV shows the re-estimated gross liability and re-estimated reinsurance recoverables through December 31,
2013.
Section V shows the cumulative gross and net (deficiency)/redundancy representing the aggregate change in the
liability from the original balance sheet dates and the re-estimated liability through December 31, 2013.
This table does not present accident or policy year development data. Conditions and trends that have affected past reserve
development may not necessarily occur in the future. As a result, extrapolating redundancies or deficiencies based on this table
is inherently uncertain.
15
($ in millions)
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
I. Gross reserves for
unpaid losses and loss
expenses at December 31
Reinsurance recoverables
on unpaid losses and loss
expenses at December 31
Net reserves for unpaid
losses and loss expenses
at December 31
II. Net reserves estimate
as of:
One year later
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Cumulative net
redundancy (deficiency)
1,587.8
1,835.2
2,084.0
2,288.8
2,542.5
2,641.0
2,745.8
2,830.1
3,144.9
4,068.9
3,349.8
(184.6)
(218.8)
(218.2)
(199.7)
(227.8)
(224.2)
(271.6)
(313.7)
(549.5)
(1,409.7)
(540.9)
1,403.2
1,616.4
1,865.8
2,089.0
2,314.7
2,416.8
2,474.2
2,516.3
2,595.4
2,659.2
2,808.9
1,408.1
1,621.5
1,858.5
2,070.2
2,295.4
2,387.4
2,430.6
2,477.6
2,569.8
2,633.7
1,452.3
1,637.3
1,845.1
2,024.0
2,237.8
2,324.6
2,368.1
2,428.6
2,531.4
1,491.1
1,643.7
1,825.2
1,982.4
2,169.7
2,286.0
2,315.0
2,388.8
1,522.9
1,649.8
1,808.9
1,931.1
2,155.8
2,264.9
2,295.3
1,529.2
1,653.6
1,780.7
1,916.0
2,151.5
2,258.1
1,538.4
1,639.5
1,777.3
1,924.4
2,154.6
1,535.6
1,638.7
1,789.3
1,939.5
1,539.1
1,648.0
1,810.9
1,546.6
1,671.7
1,568.3
(165.1)
(55.3)
54.9
149.6
160.1
158.7
178.9
127.6
64.0
25.5
III. Cumulative amount of net reserves paid through:
One year later
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
IV. Re-estimated gross
liability
Re-estimated reinsurance
recoverables
414.5
691.4
903.7
422.4
729.5
942.4
468.6
775.0
469.4
841.3
579.4
945.5
584.5
966.8
561.3
936.7
569.9
990.8
632.7
1,003.8
572.4
1,026.9
1,080.0
1,201.6
1,238.3
1,235.8
1,248.2
1,033.5
1,101.0
1,174.2
1,235.2
1,388.7
1,439.5
1,409.5
1,128.4
1,189.2
1,267.1
1,347.0
1,513.0
1,550.3
1,184.5
1,245.4
1,341.8
1,426.8
1,587.7
1,225.3
1,294.2
1,399.6
1,481.9
1,262.5
1,333.8
1,438.2
1,291.1
1,361.7
1,312.7
1,901.5
2,011.8
2,164.6
2,244.2
2,455.1
2,576.0
2,625.1
2,744.1
3,095.3
4,223.3
(333.3)
(340.1)
(353.7)
(304.7)
(300.5)
(317.9)
(329.8)
(355.4)
(563.9)
(1,589.7)
Re-estimated net liability
1,568.3
1,671.7
1,810.9
1,939.5
2,154.6
2,258.1
2,295.3
2,388.8
2,531.4
2,633.7
V. Cumulative gross
redundancy (deficiency)
Cumulative net
redundancy (deficiency)
(313.7)
(176.6)
(80.6)
44.6
87.4
65.0
120.7
86.0
49.6
(154.4)
(165.1)
(55.3)
54.9
149.6
160.1
158.7
178.9
127.6
64.0
25.5
Note: Some amounts may not foot due to rounding.
16
In light of the many uncertainties associated with establishing the estimates and making the assumptions necessary to establish
reserve levels, we review our reserve estimates on a regular basis and make adjustments in the period for which the need for
such adjustment is determined. These reviews could result in the identification of information and trends that would require us
to increase some reserves and/or decrease other reserves for prior periods and could also lead to additional increases in loss and
loss expense reserves, which could have a material adverse effect on our results of operations, equity, insurer financial strength,
and debt ratings.
In 2013, we experienced overall favorable loss development of approximately $25.5 million, compared to $25.5 million in
2012 and $38.5 million in 2011. The following table summarizes prior year development by line of business:
Favorable/(Unfavorable) Prior Year Development
($ in millions)
General Liability
Commercial Automobile
Workers Compensation
Businessowners' Policies
Commercial Property
Homeowners
Personal Automobile
E&S
Other
Total
2013
2012
2011
$
20.0
4.5
(23.5)
9.5
7.5
2.5
3.0
2.0
—
$
25.5
(2.5)
8.5
(2.5)
9.0
3.5
9.0
(0.5)
—
1.0
25.5
11.5
13.0
(6.5)
11.0
5.5
4.5
(1.0)
—
0.5
38.5
For a qualitative discussion of our prior year development, see Note 9. "Reserves for Losses and Loss Expenses" in Item 8.
"Financial Statements and Supplementary Data." of this Form 10-K.
The following table reconciles losses and loss expense reserves under SAP and GAAP at December 31 as follows:
($ in thousands)
Statutory losses and loss expense reserves
Provision for uncollectible reinsurance
Other
GAAP losses and loss expense reserves – net
Reinsurance recoverables on unpaid losses and loss expenses
GAAP losses and loss expense reserves – gross
2013
2012
$
$
2,797,459
5,100
6,372
2,808,931
540,839
3,349,770
2,654,418
4,800
(32)
2,659,186
1,409,755
4,068,941
Asbestos and Environmental Reserves
Our general liability, excess liability, and homeowners reserves include exposure to asbestos and environmental claims. Our
exposure to environmental liability is primarily due to: (i) landfill exposures from policies written prior to the absolute
pollution endorsement in the mid 1980s; and (ii) underground storage tank leaks mainly from New Jersey homeowners policies.
These environmental claims stem primarily from insured exposures in municipal government, small non-manufacturing
commercial risks, and homeowners policies. The emergence of these claims is slow and highly unpredictable.
“Asbestos claims” are claims for bodily injury alleged to have occurred from exposure to asbestos-containing products. Our
primary exposure arises from insuring various distributors of asbestos-containing products, such as electrical and plumbing
materials. At December 31, 2013, asbestos claims constituted 30% of our $25.2 million net asbestos and environmental
reserves, compared to 28% of our $27.8 million net asbestos and environmental reserves at December 31, 2012.
17
“Environmental claims” are claims alleging bodily injury or property damage from pollution or other environmental
contaminants other than asbestos. These claims include landfills and leaking underground storage tanks. Our landfill exposure
lies largely in policies written for municipal governments, in their operation or maintenance of certain public lands. In addition
to landfill exposures, in recent years, we have experienced a relatively consistent level of reported losses in the homeowners
line of business related to claims for groundwater contamination from leaking underground heating oil storage tanks in New
Jersey. In 2007, we instituted a fuel oil system exclusion on our New Jersey homeowners policies that limits our exposure to
leaking underground storage tanks for certain customers. At that time, existing insureds were offered a one-time opportunity to
buy back oil tank liability coverage. The exclusion applies to all new homeowners policies in New Jersey. These customers
are eligible for the buy-back option only if the tank meets specific eligibility criteria.
Our asbestos and environmental claims are handled in our centralized and specialized asbestos and environmental claim unit.
Case reserves for these exposures are evaluated on a claim-by-claim basis. The ability to assess potential exposure often
improves as a claim develops, including judicial determinations of coverage issues. As a result, reserves are adjusted
accordingly.
Estimating IBNR reserves for asbestos and environmental claims is difficult because of the delayed and inconsistent reporting
patterns associated with these claims. In addition, there are significant uncertainties associated with estimating critical
assumptions, such as average clean-up costs, third-party costs, potentially responsible party shares, allocation of damages,
litigation and coverage costs, and potential state and federal legislative changes. Normal historically based actuarial
approaches cannot be applied to asbestos and environmental claims because past loss history is not indicative of future
potential loss emergence. In addition, while certain alternative models can be applied, such models can produce significantly
different results with small changes in assumptions. As a result, we do not calculate an asbestos and environmental loss range.
Historically, our asbestos and environmental claims have been significantly lower in volume, with less volatility and
uncertainty than many of our competitors in the commercial lines industry. This is due to the nature of the risks we insured,
and the fact that we are the primary insurance carrier on the majority of these exposures, which provides more certainty in our
reserve position compared to others in the insurance marketplace.
Measure of Insurance Segments Profitability
We manage and evaluate the performance and profitability of our Standard and E&S Insurance Operations segments in
accordance with SAP, which differs from GAAP. Rating agencies use SAP information to evaluate our performance, including
measuring our performance against our industry peers. We base our incentive compensation to our independent retail agents
and our wholesale general agents on the SAP results of our Standard Insurance Operations segment and our E&S Insurance
Operations segment, respectively. In addition, we use the SAP results of our combined insurance operations as a basis for
incentive compensation to employees.
We measure our statutory underwriting performance by four different ratios:
1. The loss and loss expense ratio, which is calculated by dividing incurred loss and loss expenses by NPE;
2. The underwriting expense ratio, which is calculated by dividing all expenses related to the issuance of insurance
policies by NPW;
3. The dividend ratio, which is calculated by dividing policyholder dividends by NPE; and
4. The combined ratio, which is the sum of the loss and loss expense ratio, the underwriting expense ratio, and the
dividend ratio.
SAP differs in several ways from GAAP, under which we report our financial results to shareholders and the United States
Securities Exchange Commission (“SEC”):
• With regard to the underwriting expense ratio, NPE is the denominator for GAAP; whereas NPW is the denominator for
SAP.
• With regard to certain income:
Underwriting expenses that are incremental and directly related to the successful acquisition of insurance policies are
deferred and amortized to expense over the life of an insurance policy under GAAP; whereas they are recognized
when incurred under SAP.
18
Deferred taxes are recognized in our Consolidated Statements of Income as either a deferred tax expense or a deferred
tax benefit under GAAP; whereas they are recorded directly to surplus under SAP.
Changes in the value of our alternative investments, which are part of our other investment portfolio on our
Consolidated Balance Sheets, are recognized in income under GAAP; whereas they are recorded directly to surplus
under SAP and only recognized in income when cash is received.
• With regard to equity under GAAP and statutory surplus under SAP:
The timing difference in income due to the GAAP/SAP differences in expense recognition creates a difference
between GAAP equity and SAP statutory surplus.
Regarding unrealized gains and losses on fixed maturity securities:
• Under GAAP, unrealized gains and losses on available-for-sale (“AFS”) fixed maturity securities are
recognized in equity; but they are not recognized in equity on purchased held-to-maturity (“HTM”)
securities. Unrealized gains and losses on HTM securities transferred from an AFS designation are amortized
from equity as a yield adjustment.
• Under SAP, unrealized gains and losses on fixed maturity securities assigned certain NAIC Security
Valuation Office ratings (specifically designations of one or two, which generally equate to investment grade
bonds) are not recognized in statutory surplus. However, on fixed maturity securities that have a designation
of three or higher, we must recognize unrealized losses as an adjustment to statutory surplus.
Certain assets are designated under insurance regulations as “non-admitted,” including, but not limited to, certain
deferred tax assets, overdue premium receivables, furniture and equipment, and prepaid expenses. These assets are
excluded from statutory surplus under SAP, but are recorded in the Consolidated Balance Sheets net of applicable
allowances under GAAP.
Regarding the recognition of the liability for our defined benefit plan, under both GAAP and SAP, the liability is
recognized in an amount equal to the excess of the projected benefit obligation over the fair value of the plan assets.
However, changes in this balance not recognized in income are recognized in equity as a component of other
comprehensive income (“OCI”) under GAAP and in statutory surplus under SAP.
Our combined insurance segments' statutory results for the last three completed fiscal years are shown on the following table:
($ in thousands)
Insurance Operations Results
NPW
NPE
Losses and loss expenses incurred
Net underwriting expenses incurred
Policyholder dividends
Underwriting profit (loss)
Ratios:
Loss and loss expense ratio
Underwriting expense ratio
Policyholder dividends ratio
Statutory combined ratio
GAAP combined ratio
Year Ended December 31,
2013
2012
2011
$
$
$
1,811,524
1,737,437
1,121,405
592,318
4,275
19,439
64.5%
32.8
0.2
97.5%
97.8%
1,666,633
1,583,869
1,120,185
542,335
3,449
(82,100)
70.7
32.6
0.2
103.5
104.0
1,485,349
1,439,313
1,074,446
470,892
5,284
(111,309)
74.6
31.7
0.4
106.7
107.2
19
A comparison of certain statutory ratios for our combined insurance segments and our industry are shown in the following
table:
Simple
Average of
All Periods
Presented
2013
2012
2011
2010
2009
Insurance Operations Ratios:1
Loss and loss expense
Underwriting expense
Policyholder dividends
Statutory combined ratio
Growth in NPW
Industry Ratios:1, 2
Loss and loss expense
Underwriting expense
Policyholder dividends
Statutory combined ratio
Growth in NPW
Favorable (Unfavorable) to Industry:
Statutory combined ratio
Growth in NPW
Note: Some amounts may not foot due to rounding.
69.4
32.3
0.3
102.0
4.2
72.8
28.0
0.6
101.4
2.0
(0.6)
2.2
64.5
32.8
0.2
97.5
8.7
69.4
27.6
0.6
97.6
4.8
0.1
3.9
70.7
32.6
0.2
103.5
12.2
73.3
28.2
0.6
102.2
4.4
(1.3)
7.8
74.6
31.7
0.4
106.7
7.0
78.3
27.9
0.6
106.7
3.5
—
3.5
69.3
32.0
0.3
101.6
(2.4)
72.2
28.3
0.7
101.2
1.0
(0.4)
(3.4)
67.9
32.3
0.3
100.5
(4.7)
70.8
28.1
0.6
99.5
(3.6)
(1.0)
(1.1)
1The ratios and percentages are based on SAP prescribed or permitted by state insurance departments in the states in which the Insurance Subsidiaries are
domiciled.
2Source: A.M. Best. The industry ratios for 2013 have been estimated by A.M. Best.
Insurance Regulation
Primary Oversight by the States in Which We Operate
Our insurance operations are heavily regulated. The primary public policy behind insurance regulation is the protection of
policyholders and claimants over all other constituencies, including shareholders. By virtue of the McCarran-Ferguson Act,
Congress has largely delegated insurance regulation to the various states. For our Insurance Subsidiaries, the primary
regulators of their business and financial condition are the departments of insurance in the states in which they are organized
and are licensed. For a discussion of the broad regulatory, administrative, and supervisory powers of the various departments
of insurance, refer to the risk factor that discusses regulation in Item 1A. “Risk Factors.” of this Form 10-K.
Our various state insurance regulators are members of the NAIC. The NAIC has codified SAP and other accounting reporting
formats and drafts model insurance laws and regulations governing insurance companies. An NAIC model only becomes law
when the various state legislatures enact it. The adoption of certain NAIC model laws and regulations, however, is a key aspect
of the NAIC Financial Regulations Standards and Accreditation Program, which also sets forth minimum staffing and resource
levels for state insurance departments.
NAIC Monitoring Tools
Among the various financial monitoring tools of the NAIC that are material to the regulators in states in which our Insurance
Subsidiaries are organized are the following:
• The Insurance Regulatory Information System (“IRIS”). IRIS identifies 13 industry financial ratios and specifies
“usual values” for each ratio. Departure from the usual values on four or more of the financial ratios can lead to
inquiries from individual state insurance departments about certain aspects of the insurer's business. Our Insurance
Subsidiaries have consistently met the majority of the IRIS ratio tests.
20
• Risk-Based Capital. Risk-based capital is measured by four major areas of risk to which property and casualty
insurers are exposed: (i) asset risk; (ii) credit risk; (iii) underwriting risk; and (iv) off-balance sheet risk. Insurers face
a steadily increasing amount of regulatory scrutiny and potential intervention as their total adjusted capital declines
below two times their "Authorized Control Level". Based on our 2013 statutory financial statements, which have been
prepared in accordance with NAIC statutory accounting principles, the total adjusted capital for each of our Insurance
Subsidiaries substantially exceeded two times their Authorized Control Level.
• Annual Financial Reporting Regulation (referred to as the "Model Audit Rule"). The Model Audit Rule, which is
modeled closely on the Sarbanes-Oxley Act of 2002, regulates: (i) auditor independence; (ii) corporate governance;
and (iii) internal control over financial reporting. As permitted under the Model Audit Rule, the Audit Committee of
the Board of Directors (the “Board”) of the Parent also serves as the audit committee of each of our Insurance
Subsidiaries.
• Own Risk Solvency Assessment ("ORSA") Model Law. ORSA requires insurers to maintain a framework for
identifying, assessing, monitoring, managing, and reporting on the “material and relevant risks” associated with the
insurer's (or insurance group's) current and future business plans. ORSA, which is currently being considered for
adoption by state insurance regulators, requires companies to file an internal assessment of their solvency with
insurance regulators annually beginning in 2015. Although no specific capital adequacy standard is currently
articulated in ORSA, it is possible that such standard will be developed over time and may increase insurers' minimum
capital requirements which could adversely impact our growth and return on equity.
Federal Regulation
Federal legislation and administrative policies also affect the insurance industry. Among the most notable are TRIPRA, the
Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), and various privacy laws that apply to us
because we have personal non-public information, including the Gramm-Leach-Bliley Act, the Fair Credit Reporting Act, the
Drivers Privacy Protection Act, and the Health Insurance Portability and Accountability Act. Like all businesses, we also are
required to enforce the economic and trade sanctions of the Office of Foreign Assets Control (“OFAC”).
In response to the financial markets crises in 2008 and 2009, the Dodd-Frank Act was enacted in 2010. This law provides for,
among other things, the following:
• The establishment of the Federal Insurance Office (“FIO”);
•
• Corporate governance reforms for publicly traded companies.
Federal Reserve oversight of financial services firms designated as systemically significant; and
Currently, the FIO continues to establish itself on national and international insurance issues and has recently released a report
on the modernization of insurance regulation in the United States. Given the significance of the insurance sector in the U.S.
economy, and the globally active nature of U.S. insurance firms, the report states that in some circumstances, policy goals of
uniformity, efficiency, and consumer protection make continued federal involvement necessary to improve insurance
regulation. However, the report concludes that insurance regulation in the United States is best viewed in terms of a hybrid
model, where state and federal oversight play complementary roles and where the roles are defined in terms of the strengths
and opportunities that each brings to improving solvency and market conduct regulation. For additional information on the
potential impact of the Dodd-Frank Act, refer to the risk factor related to legislation within Item 1A. “Risk Factors.” of this
Form 10-K.
Investment Segment
Like many other property and casualty insurance companies, we depend on income from our investment portfolio for a
significant portion of our revenues and earnings. We are exposed to significant financial and capital markets risks, primarily
relating to interest rates, credit spreads, equity prices, and the change in market value of our alternative investment portfolio. A
decline in investment income and/or our investment portfolio asset values could occur as a result of, among other things,
decreased dividend payment rates, negative market perception of credit risk with respect to types of securities in our portfolio,
volatile interest rates, a decrease in market liquidity, a decline in the performance of the underlying collateral of our structured
securities, reduced returns on our alternative investment portfolio, or general market conditions.
21
Our Investment segment invests the premiums collected by our Standard Insurance Operations and E&S Insurance Operations
and amounts generated through our capital management strategies, which may include the issuance of debt and equity
securities, to generate investment income and to satisfy obligations to our insureds, our shareholders, and our debt holders,
among others. At December 31, 2013, our investment portfolio consisted of the following:
Category of Investment
($ in millions)
Fixed maturity securities
Equity securities
Short-term investments
Other investments, including alternatives
Total
Carrying Value
% of Investment
Portfolio
$
$
4,108.4
192.8
174.2
107.9
4,583.3
90
4
4
2
100
Our investment strategy includes setting certain return and risk objectives for the fixed maturity, equity, and other investment
portfolios. The primary fixed maturity portfolio return objective is to maximize after-tax investment yield and income while
balancing risk. A secondary objective is to meet or exceed a weighted-average benchmark of public fixed maturity indices.
Within the equity portfolio, the high dividend yield equities strategy is designed to generate consistent dividend income while
maintaining an expected tracking error to the S&P 500 Index. Additional equity strategies are focused on meeting or exceeding
strategy specific benchmarks of public equity indices. Although yield and income generation remain the key drivers to our
investment strategy, our overall philosophy is to invest with a long-term horizon along with a predominantly “buy-and-hold”
approach. The return objective of the other investment portfolio, which includes alternative investments, is to meet or exceed
the S&P 500 Index.
For further information regarding our risks associated with the overall investment portfolio, see Item 7A. “Quantitative and
Qualitative Disclosures About Market Risk.” and Item 1A. “Risk Factors.” of this Form 10-K. For additional information
about investments, see the section entitled, “Investments,” in Item 7. “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.” and Item 8. “Financial Statements and Supplementary Data.” Note 5. of this Form 10-K.
22
Executive Officers of the Registrant
Biographical information about our Chief Executive Officer and other executive officers is as follows:
Name, Age, Title
Gregory E. Murphy, 58
Chairman and Chief Executive
Officer
John J. Marchioni, 44
President and Chief Operating
Officer
Dale A. Thatcher, 52
Executive Vice President and
Chief Financial Officer
Occupation and Background
· Present position since September 2013
· Chairman, President and Chief Executive Officer, Selective, 2000 – September 2013
· President, Chief Executive Officer, and Director, Selective, 1999 – 2000
· President, Chief Operating Officer, and Director, Selective, 1997 – 1999
· Other senior executive, management, and operational positions, Selective, since 1980
· Certified Public Accountant (New Jersey) (Inactive)
· Trustee, Newton Medical Center Foundation, since 1999
· Director, Property Casualty Insurers Association of America, since 2008
· Director, Insurance Information Institute, since 2000
· Trustee, The Institutes, since 2001 - 2013
· Graduate of Boston College (B.S. Accounting)
· Harvard University (Advanced Management Program)
· M.I.T. Sloan School of Management
· Present position since September 2013
· Executive Vice President, Insurance Operations, Selective, 2010 – September 2013
· Executive Vice President, Chief Underwriting and Field Operations Officer, Selective,
2008 – 2010
· Executive Vice President, Chief Field Operations Officer, Selective, 2007 – 2008
· Senior Vice President, Director of Personal Lines, Selective, 2005 – 2007
· Various insurance operation and government affairs positions, Selective, 1998 – 2005
· Director, Consumer Agent Portal, LLC, since September 2011
· Chartered Property Casualty Underwriter (CPCU)
· Princeton University (B.A. History)
· Harvard University (Advanced Management Program)
· Present position since April 2010
· Executive Vice President, Chief Financial Officer and Treasurer, Selective, 2003 – 2010
· Senior Vice President, Chief Financial Officer and Treasurer, Selective, 2000 – 2003
· Certified Public Accountant (Ohio) (Inactive)
· Chartered Property and Casualty Underwriter (CPCU)
· Chartered Life Underwriter (CLU)
· Member, American Institute of Certified Public Accountants
· Member, Ohio Society of Certified Public Accountants
· Member, Financial Executives Institute
· Member, Insurance Accounting and Systems Association
· Member, National Investor Relations Institute
· University of Cincinnati (B.B.A. Accounting; M.B.A. Finance)
· Harvard University (Advanced Management Program)
Ronald J. Zaleski Sr., 59
Executive Vice President and
Chief Actuary
· Present position since February 2003
· Senior Vice President and Chief Actuary, Selective, 2000 – 2003
· Vice President and Chief Actuary, Selective, 1999 – 2000
· Fellow of Casualty Actuarial Society
· Member, American Academy of Actuaries
· Loyola College (B.A. Mathematics)
Michael H. Lanza, 52
Executive Vice President,
General Counsel, and Chief
Compliance Officer
Gordon J. Gaudet, 58
Executive Vice President and
Chief Information Officer
Kimberly J. Burnett, 56
Executive Vice President and
Chief Human Resources
Officer
· Present position since October 2007
· Senior Vice President and General Counsel, Selective, 2004 – 2007
· Member, Society of Corporate Secretaries and Corporate Governance Professionals
· Member, National Investor Relations Institute
· University of Connecticut (B.A.) (Honors Scholar in Political Science)
· University of Connecticut School of Law (J.D.)
· Present position since May 2013
· Director and Co-Lead, Deloitte Consulting, Insurance Core System Transformation
October 2004 – May 2013
· Partner and CIO, The Actuarials Exchange, LLC, February 2003 – September 2004
· University of Manitoba, Winnipeg, MB, Canada
·
· Present position since February 2012
· Vice President, Human Resources Operations, Selective, 2006 – 2012
· Various human resources and other operational positions, Selective, 1989-2006
· Senior Professional in Human Resources (SPHR)
· Member, Society for Human Resource Management
· The Ohio State University (B.A.)
· Fairleigh Dickinson University, Human Resources Professional Development Certificate
23
Information about our Board is in our definitive Proxy Statement for the 2014 Annual Meeting of Stockholders to be held on
April 23, 2014, in “Information About Proposal 1, Election of Directors,” and is also incorporated by reference into Part III of
this Form 10-K.
Reports to Security Holders
We file with the SEC all required disclosures, including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, Proxy Statements, and other required information under Sections 13(a) or 15(d) of the Securities
Exchange Act of 1934 (“Exchange Act”). We also provide access to these filed materials on our Internet website,
www.selective.com.
Item 1A. Risk Factors
Any of the following risk factors could cause our actual results to differ materially from historical or anticipated results. They
also could have a significant impact on our business, liquidity, capital resources, results of operations, financial condition, and
debt ratings. These risk factors also might affect, alter, or change actions that we might take in executing our long-term capital
strategy, including but not limited to, contributing capital to any or all of the Insurance Subsidiaries, issuing additional debt
and/or equity securities, repurchasing our equity securities, redeeming our fixed income securities, or increasing or decreasing
stockholders’ dividends. The following list of risk factors is not exhaustive, and others may exist.
Risks Related to Insurance Segments
The failure of our risk management strategies could have a material adverse effect on our financial condition or results of
operations.
As an insurance provider, it is our business to take on risk of our insureds. Our long term strategy includes use of above
average operational leverage, which can be measured as the NPW to our equity or policyholders surplus. We balance
operational leverage risk with a number of risk management strategies to reduce our exposure that include, but are not limited
to, the following:
• Being disciplined in our underwriting practices;
• Being prudent in our claims management practices and establishing adequate loss and loss expense reserves;
• Continuing to develop and implement various underwriting tools and automated analytics to examine historical
statistical data regarding our insureds and their loss experience to: (i) classify such policies based on that
information; (ii) apply that information to current and prospective accounts; and (iii) better predict account
profitability; and
Purchasing reinsurance.
•
All of these strategies have inherent limitations. We cannot be certain that an unanticipated event or series of unanticipated
events will not occur and result in losses greater than we expect and have a material adverse effect on our results of operations,
liquidity, financial condition, financial strength, and debt ratings.
Our loss and loss expense reserves may not be adequate to cover actual losses and expenses.
We are required to maintain loss and loss expense reserves for our estimated liability for losses and loss expenses associated
with reported and unreported insurance claims. Our estimates of reserve amounts are based on facts and circumstances that we
know, including our expectations of the ultimate settlement and claim administration expenses, predictions of future events,
trends in claims severity and frequency, and other subjective factors relating to our insurance policies in force. There is no
method for precisely estimating the ultimate liability for settlement of claims. From time-to-time, we adjust reserves and
increase them if they are inadequate or reduce them if they are redundant. We cannot be certain that the reserves we establish
are adequate or will be adequate in the future. An increase in reserves: (i) reduces net income and stockholders’ equity for the
period in which the reserves are increased; and (ii) could have a material adverse effect on our results of operations, liquidity,
financial condition, financial strength, and debt ratings.
We are subject to losses from catastrophic events.
Our results are subject to losses from natural and man-made catastrophes, including but not limited to: hurricanes, tornadoes,
windstorms, earthquakes, hail, terrorism, explosions, severe winter weather, floods and fires, some of which may be related to
climate changes. The frequency and severity of these catastrophes are inherently unpredictable. One year may be relatively
free of such events while another may have multiple events. For further discussion regarding man-made catastrophes that
relate to terrorism, see the risk factor directly below regarding the potential for significant losses from acts of terrorism.
24
There is widespread interest among scientists, legislators, regulators, and the public regarding the effect that greenhouse gas
emissions may have on our environment, including climate change. If greenhouse gases continue to shift our climate, it is
possible that more devastating catastrophic events could occur.
The magnitude of catastrophe losses is determined by the severity of the event and the total amount of insured exposures in the
area affected by the event as determined by Property Claim Services®. Most of the risks underwritten by our insurance
operations are concentrated geographically in the Eastern and Midwestern regions of the United States, particularly in New
Jersey, which represented approximately 23% of our total NPW during the year ended December 31, 2013. Catastrophes in the
Eastern and Midwestern regions of the United States could adversely impact our financial results, as was the case in 2010,
2011, and 2012.
Although catastrophes can cause losses in a variety of property and casualty insurance lines, most of our historic catastrophe-
related claims have been from commercial property and homeowners coverages. In an effort to limit our exposure to
catastrophe losses, we purchase catastrophe reinsurance. Reinsurance could prove inadequate if: (i) the various modeling
software programs that we use to analyze the Insurance Subsidiaries’ risk result in an inadequate purchase of reinsurance by us;
(ii) a major catastrophe loss exceeds the reinsurance limit or the reinsurers’ financial capacity; or (iii) the frequency of
catastrophe losses results in our Insurance Subsidiaries exceeding the aggregate limits provided by the catastrophe treaty. Even
after considering our reinsurance protection, our exposure to catastrophe risks could have a material adverse effect on our
results of operations, liquidity, financial condition, financial strength, and debt ratings.
We are subject to potential significant losses from acts of terrorism.
As a Commercial Lines writer, we are required to participate in TRIPRA. TRIPRA requires private insurers and the United
States government to share the risk of loss on future acts of terrorism certified by the U.S. Secretary of the Treasury. A risk
exists that certain future terrorist events would not be certified by the U.S. Secretary of Treasury and TRIPRA would not cover
them and we would be required to pay in the event of a covered loss. For example, the 2013 Boston Marathon bombing was
not a certified event. Under TRIPRA, insureds with non-workers compensation commercial policies have the option to accept
or decline our terrorism coverage or negotiate with us for other terms. In 2013, 88% of our Commercial Lines non-workers
compensation policyholders purchased terrorism coverage that included NBCR events. In addition, terrorism coverage is
mandatory for all primary workers compensation policies. The TRIPRA back-stop applies to these coverages when they are
written.
Under TRIPRA, each participating insurer is responsible for paying a deductible of specified losses before federal assistance is
available. This deductible is based on a percentage of the prior year’s applicable Commercial Lines premiums. In 2014, our
deductible is approximately $234 million. For losses above the deductible, the federal government will pay 85% of losses to an
industry limit of $100 billion, and the insurer retains 15%. Although TRIPRA’s provisions will mitigate our loss exposure to a
large-scale terrorist attack, our deductible is substantial and could have a material adverse effect on our results of operations,
liquidity, financial condition, financial strength, and debt ratings.
TRIPRA rescinded all previously approved coverage exclusions for terrorism. Many of the states in which we write
commercial property insurance mandate that we cover fire following an act of terrorism regardless of whether the insured
specifically purchased terrorism coverage. Likewise, terrorism coverage cannot be excluded from workers compensation
policies in any state in which we write.
TRIPRA is scheduled to expire on December 31, 2014. Should TRIPRA not be renewed, we will no longer benefit from the
TRIPRA back-stop. Policies issued after January 1, 2014 will have some portion of their coverage period extend beyond the
currently scheduled TRIPRA expiration on December 31, 2014. Some states have approved terrorism exclusions for non-
workers compensation Commercial Lines, which could be adopted by the Company. However, there are currently no approved
terrorism exclusions for workers compensation policies that could be similarly invoked. Failure of Congress to renew TRIPRA
could leave certain of our current risks for which state law requires coverage without any recourse to reinsurance in an act of
terrorism.
Personal lines of business have never been covered under TRIPPA. Homeowners policies in certain states within our Standard
Insurance Operations do not exclude biological and chemical causes of loss or terrorism.
Our ability to reduce our risk exposure depends on the availability and cost of reinsurance.
We transfer a portion of our underwriting risk exposure to reinsurance companies. Through our reinsurance arrangements, a
specified portion of our losses and loss expenses are assumed by the reinsurer in exchange for a specified portion of premiums.
The availability, amount, and cost of reinsurance depend on market conditions, which may vary significantly. Most of our
reinsurance contracts renew annually and may be impacted by the market conditions at the time of the renewal that are
25
unrelated to our specific book of business or experience. Any decrease in the amount of our reinsurance will increase our risk
of loss. Any increase in the cost of reinsurance that cannot be included in renewal price increases will reduce our earnings.
Accordingly, we may be forced to incur additional expenses for reinsurance or may not be able to obtain sufficient reinsurance
on acceptable terms. Either could adversely affect our ability to write future business or result in the assumption of more risk
with respect to those policies we issue.
We are exposed to credit risk.
We are exposed to credit risk in several areas of our insurance operations segments, including from:
• Our reinsurers, who are obligated to us under our reinsurance agreements. The relatively small size of the
reinsurance market and our objective to maintain an average weighted rating of “A” by A.M. Best on our current
reinsurance programs constrains our ability to diversify this credit risk. However, some of our reinsurance credit
risk is collateralized.
• Certain life insurance companies that are obligated to our insureds, as we have purchased annuities from them under
structured settlement agreements.
•
Some of our independent retail and wholesale agents, who collect premiums from insureds and are required to remit
the collected premium to us.
•
Some of our insureds, who are responsible for payment of deductibles and/or premiums directly to us.
• The invested assets in our defined benefit plan, which partially serve to fund the insurance operations liability
associated with this plan. To the extent that credit risk adversely impacts the valuation and performance of the
invested assets within our defined benefit plan, the funded status of the defined benefit plan could be adversely
impacted and, as result, could increase the cost of the plan to us.
It is possible that current economic conditions could increase our credit risk. Our exposure to credit risk could have a material
adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings.
The property and casualty insurance industry is subject to general economic conditions and is cyclical.
The property and casualty insurance industry has experienced significant fluctuations in its historic results due to competition,
occurrence or severity of catastrophic events, levels of capacity, general economic conditions, interest rates, and other factors.
Demand for insurance is influenced by prevailing general economic conditions. The supply of insurance is related to prevailing
prices, the levels of insured losses and the levels of industry capital which, in turn, may fluctuate in response to changes in rates
of return on investments being earned in the insurance industry. In addition, pricing is influenced by the operating performance
of insurers as increased pricing may be necessary to meet return on equity objectives. As a result, the insurance industry
historically has been through cycles characterized by periods of intense price competition due to excessive underwriting
capacity and periods when shortages of capacity and poor operating performance by insurers drives favorable premium levels.
If competitors price business below technical levels, we might have to reduce our profit margin in order to retain our best
business.
Pricing and loss trends impact our profitability. For example, assuming retention and all other factors remain constant:
• A pure price decline of approximately 1% would increase our statutory combined ratio by approximately 0.65
points;
• A 3% increase in our expected claim costs for the year would cause our loss and loss expense ratio to increase by
approximately two points; and
• A combination of the two could raise the combined ratio approximately three points.
The industry’s profitability also is affected by unpredictable developments, including:
Fluctuations in interest rates and other changes in the investment environment that affect investment returns;
Inflationary pressures (medical and economic) that affect the size of losses;
Judicial, regulatory, legislative, and legal decisions that affect insurers’ liabilities;
• Natural and man-made disasters;
•
•
•
• Changes in the frequency and severity of losses;
•
Pricing and availability of reinsurance in the marketplace; and
• Weather-related impacts due to the effects of climate changes.
26
Any of these developments could cause the supply or demand for insurance to change and could have a material adverse effect
on our results of operations, liquidity, financial condition, financial strength, and debt ratings.
Difficult conditions in global capital markets and the economy may adversely affect our revenue and profitability and harm
our business, and these conditions may not improve in the near future.
General economic conditions in the United States and throughout the world and volatility in financial and insurance markets
materially affect our results of operations. Concerns over such issues as the availability and cost of credit, the stability of the
United States mortgage market, weak real estate markets, high unemployment, volatile energy and commodity prices, and
geopolitical issues, also have led to declines in business and consumer confidence. Declines in business and consumer
confidence limit economic growth, which decreases insurance purchases and limits our ability to achieve price increases.
Factors such as consumer spending, business investment, government spending, the volatility and strength of the capital
markets, and inflation all affect the business and economic environment and, indirectly, the amount and profitability of our
business. With continuing high unemployment, lower family income, lower corporate earnings, lower business investment, and
lower consumer spending, the demand for insurance products is adversely affected. In addition, we are impacted by the recent
decrease in commercial and new home construction and home ownership because 34% of direct premiums written in our
standard Commercial Lines business during 2013 were generated through insurance policies written to cover contractors. In
addition, 36% of direct premiums written in our standard Commercial Lines business during 2013 were based on payroll/sales
of our underlying insureds. An economic downturn in which our customers decline in revenue or employee count can
adversely affect our audit and endorsement premium in Commercial Lines. Unfavorable economic developments could
adversely affect our earnings if our customers have less need for insurance coverage, cancel existing insurance policies, modify
coverage, or choose not to renew with us. Challenging economic conditions also may impair the ability of our customers to
pay premiums as they come due. Although economic conditions have consistently improved over the last two years, many
fundamental concerns still exist, which may have a material effect on our results of operations, liquidity, financial condition,
financial strength, and debt ratings.
A downgrade or a potential downgrade in our financial strength or credit ratings could result in a loss of business and could
have a material adverse effect on our financial condition and results of operations.
Our financial strength ratings, as issued by the following Nationally Recognized Statistical Rating Organizations ("NRSROs"),
are as follows:
NRSRO
Financial Strength Rating
A.M. Best
Standard & Poor's
Moody’s Investor Services
Fitch Ratings
“A”
“A-”
“A2”
“A+”
Outlook
Stable
Stable
Negative
Negative
A significant rating downgrade, particularly from A.M. Best, is an event of default under our $30 million line of credit ("Line
of Credit") and would affect our ability to write new or renewal business with customers, some of whom are required under
various third party agreements to maintain insurance with a carrier that maintains a specified minimum rating. The Line of
Credit requires our Insurance Subsidiaries to maintain an A.M. Best rating of at least “A-” (one level below our current rating)
and a default could lead to acceleration of any outstanding principal. Such an event also could trigger default provisions under
certain of our other debt instruments and negatively impact our ability to borrow in the future. As a result, any significant
downgrade in our financial strength ratings could have a material adverse effect on our results of operations, liquidity, financial
condition, financial strength and debt ratings.
NRSROs also rate our long-term debt creditworthiness. Credit ratings indicate the ability of debt issuers to meet debt
obligations in a timely manner and are important factors in our overall funding profile and ability to access certain types of
liquidity. Our current senior credit ratings are as follows:
NRSRO
Credit Rating
Long Term Credit Outlook
A.M. Best
Standard & Poor's
Moody’s Investor Services
Fitch Ratings
“bbb+”
“BBB-”
“Baa2”
“BBB+”
Stable
Stable
Negative
Negative
Downgrades in our credit ratings could have a material adverse effect on our financial condition and results of operations in
many ways, including making it more expensive for us to access capital markets.
27
Because of the difficulties experienced by many financial institutions during the credit crisis, including insurance companies,
and the public criticism of NRSROs, we believe it is possible that the NRSROs may: (i) continue to heighten their level of
scrutiny of financial institutions; (ii) increase the frequency and scope of their reviews; and (iii) adjust upward the capital and
other requirements employed in their models for maintaining certain rating levels. We cannot predict possible actions NRSROs
may take regarding our ratings that could adversely affect our business or the possible actions we may take in response to any
such actions.
We have many competitors and potential competitors.
The insurance industry is highly competitive and the current economic environment has increased competition. We compete
with regional, national, and direct-writer property and casualty insurance companies for customers, agents, and employees.
Some competitors are public companies and some are mutual companies. Many competitors are larger and may have lower
operating costs or costs of capital. They also may have the ability to absorb greater risk while maintaining their financial
strength ratings. Consequently, some competitors may be able to price their products more competitively. These competitive
pressures could result in increased pricing pressures on a number of our products and services, particularly as competitors seek
to win market share, and may impair our ability to maintain or increase our profitability. We also face competition, primarily in
Commercial Lines, from entities that self-insure their own risks. Because of its relatively low cost of entry, the internet has also
emerged as a significant place of new competition, both from existing competitors and new competitors. It is also possible that
reinsurers, who have significant knowledge of the primary property and casualty insurance business because they reinsure it,
could enter the market to diversify their operations. New competition could also cause changes in the supply or demand for
insurance and adversely affect our business.
We have less loss experience data than our larger competitors.
We believe that insurance companies are competing and will continue to compete on their ability to use reliable data about their
insureds and loss experience in complex analytics and predictive models to project risk profitability and more effectively match
price to risk. With the consistent expansion of computing power and the decline in its cost, we believe that data and analytics
use will continue to increase and become more complex and accurate. As a regional insurance group, the loss experience from
our insurance operations is not large enough in all circumstances to analyze and project our future costs. In addition, we have
limited data regarding our E&S business, which we assumed in 2011 and began writing directly in 2012. We use data from ISO
and NCCI to obtain sufficient industry loss experience data. While statistically relevant, that data is not specific to the
performance of risks we have underwritten. Larger competitors, particularly national carriers, have significantly more data
regarding the performance of risks that they have underwritten. The analytics of their loss experience data may be more
predictive of profitability of their risks than our analysis using, in part, general industry loss experience. For the same reason,
should Congress repeal the McCarran-Ferguson Act, which provides an anti-trust exemption for the aggregation of loss data,
and we are unable to access data from ISO and NCCI, we will be at a competitive disadvantage to larger insurers who have
more sufficient loss experience data on their own insureds.
We depend on independent retail insurance agents and wholesale agency partners.
We market and sell our insurance products through independent retail insurance agents and wholesale agents who are not our
employees. We believe that independent retail and wholesale agents will remain a significant force in overall insurance
industry premium production because they can provide insureds with a wider choice of insurance products than if they
represented only one insurer. That, however, creates competition in our distribution channel and we must market our products
and services to our agents before they sell them to our mutual customers. Our financial condition and results of operations are
tied to the successful marketing and sales efforts of our products by our agents. In addition, under insurance laws and
regulations and common law, we potentially can be held liable for business practices or actions taken by our agents.
We face risks regarding our flood business because of uncertainties regarding the NFIP.
We are the fifth largest insurance group participating in the WYO arrangement of the NFIP, which is managed by the
Mitigation Division of Federal Emergency Management Agency in the U.S. Department of Homeland Security. For WYO
participation, we receive an expense allowance for policies written and a servicing fee for claims administered. Under the
program, all losses are 100% reinsured by the Federal Government. Currently, the expense allowance is 30.7% of premiums
written. The servicing fee is the combination of 0.9% of direct written premiums and 1.5% of incurred losses.
The NFIP is funded by Congress. In the last several years, funding of the program has continued through short extensions as
part of continuing resolutions to temporarily maintain current claims payments. At present, the program has been extended to
September 30, 2017 through the Biggert-Waters Flood Insurance Reform Act of 2012 (the "Reform Act"). While the
interpretation and the impact of some of the provisions in the Reform Act are uncertain at this time, the extension: (i) has a
significant impact on the determination of flood policy premium; (ii) allows for installment premium payments; and (iii)
increases minimum annual deductibles for properties that were built prior to the first Flood Insurance Rate Map that have not
been substantially damaged or improved ("pre-FIRM" properties). As many flood policies have begun the movement towards
28
actuarially sound rates, there has been significant backlash from consumers who are experiencing significant rate increases and
difficulty in selling properties that require flood insurance. Because of these developments, there are a variety of proposed bills
to either slow down or stop the current rate activity and propose alternative solutions. A provision was added to the Omnibus
Budget Bill in January 2014 that was passed by Congress that would delay the premium increases due to map changes. We are
unsure as to the impact of any changes to the provisions of the Reform Act, which could be either retroactive or prospective in
nature.
In addition, the Reform Act directs FEMA to develop a storm model to better define “wind” versus “water” claims and the
responsibility of payment between the NFIP and private insurers. The Reform Act also directs FEMA to re-examine the way
reimbursement rates to WYO carriers are being calculated to ensure that WYO carriers are being reimbursed based on actual
expenses. These changes, and specifically potential changes in compensation of WYO carriers, may impact the financial
viability of our participation in the program.
As a WYO carrier, we are required to follow certain NFIP procedures when administering flood policies and claims. Some of
these requirements may be different from our normal business practices and may present a reputational risk to our brand.
Insurance companies are regulated by states; however, NFIP is a federal program and there may be instances where
requirements placed on WYO carriers by NFIP are not consistent with the regulations of a particular state. Consequently, we
have the risk that our regulators' positions may conflict with NFIP’s position on the same issue. In early 2013, elected officials
in some of the Northeastern states impacted by Hurricane Sandy discussed introducing, or have introduced, legislation
attempting to set standards for NFIP claims practices. It is uncertain whether those proposals will become law or, if they do,
whether they will withstand a federal pre-emption legal challenge.
The NFIP remains under pressure by policymakers due to the ongoing funding deficit of the program, implementation
difficulties of the Biggert-Waters law regarding certain rate increases, and the general concern regarding the government's role
in the program. The uncertainty behind the public policy debate and politics of flood insurance funding and reform make it
difficult for us to predict the future of the NFIP and the continued financial viability of our participation in the program.
We are heavily regulated and changes in regulation may reduce our profitability, increase our capital requirements, and/or
limit our growth.
Our Insurance Subsidiaries are heavily regulated by extensive laws and regulations that may change on short notice. The
primary public policy behind insurance regulation is the protection of policyholders and claimants over all other constituencies,
including shareholders. Historically and by virtue of the McCarran-Ferguson Act, our Insurance Subsidiaries are primarily
regulated by the states in which they are domiciled and licensed. State insurance regulation is generally uniform throughout the
U.S. by virtue of similar laws and regulations required by the NAIC to accredit state insurance departments so their
examinations can be given full faith and credit by other state regulators. Despite their general similarity, various provisions of
these laws and regulations vary from state to state. At any given time, there may be various legislative and regulatory proposals
in each of the 50 states and District of Columbia that, if enacted, may affect our Insurance Subsidiaries.
29
The broad regulatory, administrative, and supervisory powers of the various state departments of insurance include the
following:
• Related to our financial condition, review and approval of such matters as minimum capital and surplus
requirements, standards of solvency, security deposits, methods of accounting, form and content of statutory
financial statements, reserves for unpaid loss and loss adjustment expenses, reinsurance, payment of dividends and
other distributions to shareholders, periodic financial examinations, and annual and other report filings.
• Related to our general business, review and approval of such matters as certificates of authority and other insurance
company licenses, licensing and compensation of agents, premium rates (which may not be excessive, inadequate,
or unfairly discriminatory), policy forms, policy terminations, reporting of statistical information regarding our
premiums and losses, periodic market conduct examinations, unfair trade practices, participation in mandatory
shared market mechanisms, such as assigned risk pools and reinsurance pools, participation in mandatory state
guaranty funds, and mandated continuing workers compensation coverage post-termination of employment.
• Related to our ownership of the Insurance Subsidiaries, we are required to register as an insurance holding company
system in each state where an insurance subsidiary is domiciled and report information concerning all of our
operations that may materially affect the operations, management, or financial condition of the insurers. As an
insurance holding company, the appropriate state regulatory authority may: (i) examine us or our Insurance
Subsidiaries at any time; (ii) require disclosure or prior approval of material transactions of any of the Insurance
Subsidiaries with its affiliates; and (iii) require prior approval or notice of certain transactions, such as payment of
dividends or distributions to us.
Although Congress has largely delegated insurance regulation to the various states by virtue of the McCarran-Ferguson Act, we
are also subject to federal legislation and administrative policies, such as disclosure under the securities laws, including the
Sarbanes-Oxley Act and the Dodd-Frank Act, TRIPRA, OFAC, and various privacy laws, including the Gramm-Leach-Bliley
Act, the Fair Credit Reporting Act, the Drivers Privacy Protection Act, the Health Insurance Portability and Accountability Act,
and the policies of the Federal Trade Commission. As a result of issuing workers compensation policies, we also are subject to
Mandatory Medicare Secondary Payer Reporting under the Medicare, Medicaid, and SCHIP Extension Act of 2007.
The European Union has enacted Solvency II, which sets out new requirements on capital adequacy and risk management for
insurers, which is expected to be implemented in 2016. The strengthened regime is intended to reduce the possibility of
consumer loss or market disruption in insurance. Although Solvency II does not govern domestic American insurers; its
existence in an increasingly global economy pressures domestic regulators to consider similar measures. The NAIC has
recently adopted the ORSA Model Law, which requires insurers to maintain a framework for identifying, assessing,
monitoring, managing and reporting on the “material and relevant risks” associated with the insurer's (or insurance group's)
current and future business plans. ORSA, which is currently being considered for adoption by state insurance regulators,
requires companies to file an internal assessment of their solvency with insurance regulators annually beginning in 2015.
Although no specific capital adequacy standard is currently articulated in ORSA, it is possible that such standard will be
developed over time and may increase insurers' minimum capital requirements which could adversely impact our growth and
return on equity.
We also are subject to non-governmental regulators, such as the NASDAQ Stock Market and the New York Stock Exchange,
where we list our securities. Many of these regulators, to some degree, overlap with each other on various matters. They also
have different regulations on the same legal issues that are subject to their individual interpretative discretion. Consequently,
we have the risk that one regulator’s position may conflict with another regulator’s position on the same issue. As compliance
is generally reviewed in hindsight, we also are subject to the risk that interpretations will change over time.
We believe we are in compliance with all laws and regulations that have a material effect on our results of operations, but the
cost of complying with various, potentially conflicting laws and regulations, and changes in those laws and regulations could
have a material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings.
30
We are subject to the risk that legislation will be passed significantly changing insurance regulation and adversely
impacting our business, our financial condition, and our results of operations.
In 2009, the Dodd-Frank Act was enacted to address the financial markets crises in 2008 and 2009 and the issues regarding the
American International Group, Inc. scandal. The Dodd-Frank Act created the Federal Insurance Office as part of the U.S.
Department of Treasury to advise the federal government regarding insurance issues. The Dodd-Frank Act also requires the
Federal Reserve through the Financial Services Oversight Council (“FSOC”) to supervise financial services firms designated as
systemically significant. Selective is not considered one of these firms. The Dodd-Frank Act also included a number of
corporate governance reforms for publicly traded companies, including proxy access, say-on-pay, and other compensation and
governance issues requiring shareholder action. We anticipate that there will continue to be a number of legislative proposals
discussed and introduced in Congress that could result in the federal government becoming directly involved in the regulation
of insurance:
• Repeal of the McCarran-Ferguson Act. While recent proposals for McCarran-Ferguson Act repeal have been
directed primarily at health insurers, if enacted and applicable to property and casualty insurers, such repeal would
significantly reduce our ability to compete and materially affect our results of operations because we rely on the
anti-trust exemptions the law provides to obtain loss data from third party aggregators, such as ISO and NCCI, to
predict future losses. Our inability to access data from ISO and NCCI would put us at a competitive disadvantage
compared to larger insurers who have more sufficient loss experience data with their own insureds.
• National Catastrophic Funds. Various legislative proposals have been introduced that would establish a federal
reinsurance catastrophic fund as a federal backstop for future natural disasters. These bills generally encourage
states to create catastrophe funds by creating a federal backstop for states that create the funds. If legislation of this
type is passed, states may create catastrophe funds and mandate us to write insurance in geographic areas that are
susceptible to catastrophe loss and could have a material adverse effect on our operations, liquidity, financial
condition, financial strength, and ratings.
• Healthcare reform. The enactment of the Patient Protection and Affordable Care Act of 2010 (the “Healthcare Act”)
may have an impact on various aspects of our business, including our insurance operations. The Healthcare Act
reduces the reimbursement to healthcare providers, which may result in healthcare providers charging more to
insurers not covered under the Healthcare Act. This could increase our cost to provide workers compensation,
automobile Personal Injury Protection ("PIP") and general liability coverages, among others. In addition, we will be
impacted as a business enterprise by potential tax issues and changes in employee benefits. The Healthcare Act will
be implemented over time and we continue to monitor and assess its impact.
• Changes in rules for Department of Housing and Urban Development ("HUD"). In 2013, HUD finalized a new
"Disparate Impact" regulation that may adversely impact insurers' ability to differentiate pricing for homeowners
policies using traditional risk selection analysis. It is uncertain to what extent the application of this regulation will
impact the property and casualty industry and underwriting practices, but it could increase litigation costs, force
changes in underwriting practices, and impair our ability to write homeowners business profitably. There are at
least two lawsuits challenging the regulation, the outcome of which cannot be predicted at this time.
We expect the debate about the role of the federal government in regulating insurance to continue. The continued soft economy
also has raised the possibility of future legislative and regulatory actions intended to help the economy, in addition to the
enactment of Emergency Economic Stabilization Act of 2008, which could further impact our business.
We cannot predict whether any of these or any related proposals will be adopted, or what impact, if any, such proposals or the
cost of compliance with such proposals, could have on our results of operations, liquidity, financial condition, financial
strength, and debt ratings if enacted.
31
Class action litigation could affect our business practices and financial results.
Our industry has been the target of class action litigation, including the following areas:
• After-market parts;
• Urban homeowner insurance underwriting practices, including those related to architectural or structural features
and attempts by federal regulators to expand the Federal Housing Administration's guidelines to determine unfair
discrimination;
Investment disclosure;
• Credit scoring and predictive modeling pricing;
•
• Managed care practices;
• Timing and discounting of personal injury protection claims payments;
• Direct repair shop utilization practices;
Flood insurance claim practices; and
•
Shareholder class action suits.
•
If we were to be named in such class action litigation, we could suffer reputational harm with purchasers of insurance and have
increased litigation expenses that could have a materially adverse effect on our operations or results.
Changes in accounting guidance could impact the results of our operations and financial condition.
The Financial Accounting Standards Board (“FASB”) is working with the International Accounting Standards Board (“IASB”)
on a joint project that could significantly impact today’s insurance accounting model. Potential changes include, but are not
limited to: (i) redefining the revenue recognition process for insurance companies; and (ii) requiring loss reserve discounting.
As indicated in Note 2. “Summary of Significant Accounting Policies” in Item 8. “Financial Statements and Supplementary
Data.” of this Form 10-K, our premiums are earned over the period that coverage is provided and we do not discount our loss
and loss expense reserves. Final guidance from this joint project could have a material adverse effect on our results of
operations, liquidity, financial condition, financial strength, and debt ratings.
The FASB is also currently reviewing a number of proposed changes to existing accounting guidance, several of which are the
result of joint projects with the IASB. Potential changes to accounting guidance regarding the treatment of financial
instruments, fair value measurement, and leases could have a material adverse effect on our results of operations, liquidity,
financial condition, financial strength, and debt ratings. It is uncertain as to how the NAIC will react to these potential
accounting changes.
Risks Related to Our Investment Segment
The failure of our risk management strategies could have a material adverse effect on our financial condition or results of
operations.
We employ a number of risk management strategies to reduce our exposure to risk that include, but are not limited to, the
following:
• Being prudent in establishing our investment policy and appropriately diversifying our investments;
• Using complex financial and investment models to analyze historic investment performance and predict future
investment performance under a variety of scenarios using asset concentration, asset volatility, asset correlation, and
systematic risk; and
• Closely monitoring investment performance, general economic and financial conditions, and other relevant factors.
All of these strategies have inherent limitations. We cannot be certain that an event or series of unanticipated events will not
occur and result in losses greater than we expect and have a material adverse effect on our results of operations, liquidity,
financial condition, financial strength, and debt ratings.
Difficult conditions in global capital markets and the economy may adversely affect our revenue and profitability and harm
our business, and these conditions may not improve in the near future.
Our results of operations are materially affected by conditions in the global capital markets and the economy generally, in both
the U.S. and abroad. Concerns over the availability and cost of credit, the U.S. mortgage market, a weak real estate market in
the U.S., high unemployment, volatile energy and commodity prices, and geopolitical issues, among other factors, have
contributed to increased volatility in the financial markets, increased potential for credit downgrades, and decreased liquidity in
certain investment segments. In addition, the low investment yield environment that is a result of a combination of Federal
Reserve policy and the continuing economic conditions are expected to continue for some time.
32
We are exposed to interest rate and credit risk in our investment portfolio.
We are exposed to interest rate risk primarily related to the market price, and cash flow variability, associated with changes in
interest rates. A rise in interest rates may decrease the fair value of our existing fixed maturity investments and declines in
interest rates may result in an increase in the fair value of our existing fixed maturity investments. Our fixed income
investment portfolio, which currently has a duration of 3.6 years excluding short term investments, contains interest rate
sensitive instruments that may be adversely affected by changes in interest rates resulting from governmental monetary
policies, domestic and international economic and political conditions, and other factors beyond our control. A rise in interest
rates would decrease the net unrealized gain position of the investment portfolio, partially offset by our ability to earn higher
rates of return on funds reinvested in new investments. Conversely, a decline in interest rates would increase the net unrealized
gain position of the investment portfolio, partially offset by lower rates of return on funds reinvested and new investments.
Changes in interest rates also have an effect on the calculated duration of certain securities in the portfolio. We seek to mitigate
our interest rate risk associated with holding fixed maturity investments by monitoring and maintaining the average duration of
our portfolio with a view toward achieving an adequate after-tax return without subjecting the portfolio to an unreasonable
level of interest rate risk. Although we take measures to manage the economic risks of investing in a changing interest rate
environment, we may not be able to mitigate the interest rate risk of our assets relative to our liabilities.
The value of our investment portfolio is subject to credit risk from the issuers and/or guarantors of the securities in the
portfolio, other counterparties in certain transactions and, for certain securities, insurers that guarantee specific issuer’s
obligations. Defaults by the issuer or an issuer’s guarantor, insurer, or other counterparties regarding any of our investments,
could reduce our net investment income and net realized investment gains or result in investment losses. We are also subject to
the risk that the issuers, or guarantors, of fixed maturity securities we own may default on principal and interest payments due
under the terms of the securities. At December 31, 2013, our fixed maturity securities portfolio represented approximately 90%
of our total invested assets. The occurrence of a major economic downturn, acts of corporate malfeasance, widening credit
spreads, budgetary deficits, or other events that adversely affect the issuers or guarantors of these securities could cause the
value of our fixed maturity securities portfolio and our net income to decline and the default rate of our fixed maturity
securities portfolio to increase.
With economic uncertainty, credit quality of issuers or guarantors could be adversely affected and a ratings downgrade of the
issuers or guarantors of the securities in our portfolio could also cause the value of our fixed maturity securities portfolio and
our net income to decrease. For example, rating agency downgrades of monoline insurance companies during 2009 contributed
to a decline in the carrying value and market liquidity of our municipal bond investment portfolio. A reduction in the value of
our investment portfolio could have a material adverse effect on our business, results of operations, financial condition, and
debt ratings. Levels of write downs are impacted by our assessment of the impairment, including a review of the underlying
collateral of structured securities, and our intent and ability to hold securities that have declined in value until recovery. If we
reposition or realign portions of the portfolio so that we determine not to hold certain securities in an unrealized loss position to
recovery, we will incur an OTTI charge. For further information regarding credit and interest rate risk, see Item 7A.
“Quantitative and Qualitative Disclosures About Market Risk.” of this Form 10-K.
Our statutory surplus may be materially affected by rating downgrades on investments held in our portfolio.
We are exposed to significant financial and capital markets risks, primarily relating to interest rates, credit spreads, equity
prices, and the change in market value of our alternative investment portfolio. A decline in both income and our investment
portfolio asset values could occur as a result of, among other things, a decrease in market liquidity, falling interest rates,
decreased dividend payment rates, negative market perception of credit risk with respect to types of securities in our portfolio, a
decline in the performance of the underlying collateral of our structured securities, reduced returns on our alternative
investment portfolio, or general market conditions. A global decline in asset values will be more amplified in our financial
condition, as our statutory surplus is leveraged at a 3.6:1 ratio to our investment portfolio.
With economic uncertainty, the credit quality and ratings of securities in our portfolio could be adversely affected. The NAIC
could potentially apply a more adverse class code on a security than was originally assigned, which could adversely affect
statutory surplus because securities with NAIC class codes three through six require securities to be marked-to-market for
statutory accounting purposes, as compared to securities with NAIC class codes of one or two that are carried at amortized cost.
Deterioration in the public debt and equity markets, as well as in the private investment marketplace, could lead to
investment losses, which may adversely affect our results of operations, financial condition, liquidity, and debt ratings.
Like many other property and casualty insurance companies, we depend on income from our investment portfolio for a
significant portion of our revenue and earnings. Our investment portfolio is exposed to significant financial and capital markets
risks, and volatile changes in general market conditions could lead to a decline in the market value of our portfolio as well as
the performance of the underlying collateral of our structured securities.
33
Our notes payable and Line of Credit are subject to certain debt-to-capitalization restrictions and net worth covenants, which
could be impacted by a significant decline in investment value. Further OTTI charges could be necessary if there is a future
significant decline in investment values. Depending on market conditions going forward, and in the event of extreme
prolonged market events, such as the global credit crisis, we could incur additional realized and unrealized losses in future
periods, which could have an adverse impact on our results of operations, financial condition, debt and financial strength
ratings, and our ability to access capital markets as a result of realized losses, impairments, and changes in unrealized positions.
For more information regarding market interest rate, credit, and equity price risk, see Item 7A. “Quantitative and Qualitative
Disclosures About Market Risk.” of this Form 10-K.
There can be no assurance that the actions of the U.S. Government, Federal Reserve, and other governmental and
regulatory bodies will achieve their intended effect.
Over the past few years, the Federal Reserve has taken a number of actions related to interest rates and purchasing of financial
instruments intended to spur economic recovery. The Federal Reserve has recently signaled that it will gradually taper the
magnitude of these purchases. However, economic uncertainty is still prevalent within the markets, and, economic conditions
suggest the risk of higher than expected inflation in the long term. Increased pressure on the price of our fixed income and
equity portfolios may occur if these economic stimulus actions are not as effective as originally intended. These results could
materially and adversely affect our results of operations, financial condition, liquidity and the trading price of our common
stock. In the event of future material deterioration in business conditions, we may need to raise additional capital or consider
other transactions to manage our capital position and liquidity.
A period of sustained low interest rates would have an adverse effect on investment income as higher yielding securities mature
and we reinvest the proceeds at lower yields.
In addition, our investment activities are subject to extensive laws and regulations that are administered and enforced by a
number of different governmental authorities and non-governmental self-regulatory agencies. In light of the current economic
conditions, some of these authorities have implemented, or may in the future implement, new or enhanced regulatory
requirements, such as those included in the Dodd-Frank Act, intended to restore confidence in financial institutions and reduce
the likelihood of similar economic events in the future. These authorities may also seek to exercise their supervisory and
enforcement authority in new or more robust ways. Such events could affect the way we conduct our business and manage our
capital, and may require us to satisfy increased capital requirements. These developments, if they occurred, could have a
material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings.
We are subject to the types of risks inherent in investing in private limited partnerships.
Our other investments include investments in private limited partnerships that invest in various strategies, such as secondary
private equity, private equity, energy, mezzanine debt, real estate, and distressed debt. We are subject to risks arising from the
fact that the determination of the fair value of these types of investments is inherently subjective. The general partner of each
of these partnerships generally reports the change in the fair value of the interests in the partnership on a one quarter lag
because of the nature of the underlying assets or liabilities. Since these partnerships’ underlying investments consist primarily
of assets or liabilities for which there are no quoted prices in active markets for the same or similar assets, the valuation of
interests in these partnerships is subject to a higher level of subjectivity and unobservable inputs than substantially all of our
other investments and as such, is subject to greater scrutiny and reconsideration from one reporting period to the next. These
factors may result in significant changes in the fair value of these investments between reporting periods, which could lead to
significant decreases in their fair value. Since we record our investments in these various partnerships under the equity method
of accounting, any decreases in the valuation of these investments would negatively impact our results of operations. In
addition, pursuant to the various limited partnership agreements of these partnerships, we are committed for the full life of each
fund and cannot redeem our investment in the partnership. Liquidation is only triggered by certain clauses within the limited
partnership agreements or at the funds’ stated end date, at which time we will receive our final allocation of capital and any
earned appreciation of the underlying investments. We also are subject to potential future capital calls under the partnership
agreements in the aggregate amount of approximately $57 million as of December 31, 2013.
34
We value our investments using methodologies, estimations, and assumptions that are subject to differing interpretations.
Changes in these interpretations could result in fluctuations in the valuations of our investments that may adversely affect
our results of operations or financial condition.
Fixed maturity, equity, and short-term investments, which are reported at fair value on our Consolidated Balance Sheet,
represented the majority of our total cash and invested assets as of December 31, 2013. As required under accounting rules, we
have categorized these securities into a three-level hierarchy, based on the priority of the inputs to the respective valuation
technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities
(Level 1). The next priority is to quoted prices in markets that are not active or inputs that are observable either directly or
indirectly, including quoted prices for similar assets or liabilities or in markets that are not active and other inputs that can be
derived principally from, or corroborated by, observable market data for substantially the full term of the assets or liabilities
(Level 2). The lowest priority in the fair value hierarchy is to unobservable inputs supported by little or no market activity and
that reflect the reporting entity’s own assumptions about the exit price, including assumptions that market participants would
use in pricing the asset or liability (Level 3).
An asset or liability’s classification within the fair value hierarchy is based on the lowest level of significant input to its
valuation. We generally use an independent pricing service and broker quotes to price our investment securities. At December
31, 2013, approximately 9% and 91% of these securities represented Level 1 and Level 2, respectively. However, prices
provided by an independent pricing service and independent broker quotes can vary widely even for the same security. Rapidly
changing and unprecedented credit and equity market conditions could materially impact the valuation of securities as reported
within our consolidated financial statements (“Financial Statements”) and the period-to-period changes in value could vary
significantly. Decreases in value may result in an increase in non-cash OTTI charges, which could have a material adverse
effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings.
The determination of the amount of impairments taken on our investments is highly subjective and could materially impact
our results of operations or our financial position.
The determination of the amount of impairments taken on our investments is based on our periodic evaluation and assessment
of our investments and known and inherent risks associated with the various asset classes. Such evaluations and assessments
are revised as conditions change and new information becomes available. Management updates its evaluations regularly and
reflects changes in impairments as such evaluations are revised. There can be no assurance that management has accurately
assessed the level of impairments taken as reflected in our Financial Statements. Furthermore, additional impairments may
need to be taken in the future. Historical trends may not be indicative of future impairments. For further information regarding
our evaluation and considerations for determining whether a security is other-than-temporarily impaired, please refer to
“Critical Accounting Policies and Estimates” in Item 7. “Management’s Discussion and Analysis of Financial Condition and
Results of Operations.” of this Form 10-K.
Risks Related to Our Corporate Structure and Governance
We are a holding company and our ability to declare dividends to our shareholders, pay indebtedness, and enter into
affiliate transactions may be limited because our Insurance Subsidiaries are regulated.
Restrictions on the ability of the Insurance Subsidiaries to pay dividends, make loans or advances to us, or enter into
transactions with affiliates may materially affect our ability to pay dividends on our common stock or repay our indebtedness.
As of December 31, 2013, the Parent had stand-alone retained earnings of $1.2 billion. Of this amount, $1.1 billion is related
to investments in our Insurance Subsidiaries and debt. The Insurance Subsidiaries have the ability to provide for $127 million
in annual dividends to us; however, as they are regulated entities, their ability to pay dividends or make loans or advances to us
is subject to the approval or review of the insurance regulators in the states where they are domiciled. The standards for review
of such transactions are whether: (i) the terms and charges are fair and reasonable; and (ii) after the transaction, the Insurance
Subsidiary's surplus for policyholders is reasonable in relation to its outstanding liabilities and financial needs. Although
dividends and loans to us from our Insurance Subsidiaries historically have been approved, we can make no assurance that
future dividends and loans will be approved. For additional details regarding dividend restrictions, see Note 20. “Statutory
Financial Information, Capital Requirements, and Restrictions on Dividends and Transfers of Funds” in Item 8. "Financial
Statements and Supplementary Data." of this Form 10-K.
Because we are an insurance holding company and a New Jersey corporation, we may be less attractive to potential
acquirers and the value of our common stock could be adversely affected.
Because we are an insurance holding company that owns insurance subsidiaries, anyone who seeks to acquire 10% or more of
our stock must seek prior approval from the insurance regulators in the states in which the subsidiaries are organized and file
extensive information regarding their business operations and finances.
35
Provisions in our Amended and Restated Certificate of Incorporation also may discourage, delay, or prevent us from being
acquired, including:
•
•
Supermajority shareholder voting requirements to approve certain business combinations with interested
shareholders (as defined in the Amended and Restated Certificate of Incorporation) unless certain other conditions
are satisfied;
Supermajority shareholder voting requirements to amend the foregoing provisions in our Amended and Restated
Certificate of Incorporation; and
• The ability of our Board of Directors to increase or decrease the number of Series A Preferred Stock.
In addition to the requirements in our Amended and Restated Certificate of Incorporation, the New Jersey Shareholders’
Protection Act also prohibits us from engaging in certain business combinations with interested stockholders (as defined in the
statute), in certain instances for a five year period, and in other instances indefinitely, unless certain conditions are satisfied.
These conditions may relate to, among other things, the interested stockholder’s acquisition of stock, the approval of the
business combination by disinterested members of our Board of Directors and disinterested stockholders, and the price and
payment of the consideration proposed in the business combination. Such conditions are in addition to those requirements set
forth in our Amended and Restated Certificate of Incorporation.
These provisions of our Amended and Restated Certificate of Incorporation and New Jersey law could have the effect of
depriving our stockholders of an opportunity to receive a premium over our common stock’s prevailing market price in the
event of a hostile takeover and may adversely affect the value of our common stock.
Risks Related to Our General Operations
Operational risks, including human or systems failures, are inherent in our business.
Operational risks and losses can result from, among other things, fraud, errors, failure to document transactions properly or to
obtain proper internal authorization, failure to comply with regulatory requirements, information technology failures, or
external events.
We believe that our underwriting, predictive modeling and business analytics, and information technology and application
systems are critical to our business. We expect our information technology and application systems to remain an important part
of our underwriting process and our ability to compete successfully. A major defect or failure in our internal controls or
information technology and application systems could: (i) result in management distraction; (ii) harm our reputation; or (iii)
increase our expenses. We believe appropriate controls and mitigation procedures are in place to prevent significant risk of a
defect in our internal controls around our information technology and application systems, but internal controls provide only a
reasonable, not absolute, assurance as to the absence of errors or irregularities and any ineffectiveness of such controls and
procedures could have a significant and negative effect on our business.
We are subject to attempted cyber-attacks and other cybersecurity risks.
The nature of our business requires that we store and exchange electronically with appropriate parties and systems significant
amounts of personally identifiable information that may be targeted in an attempted cybersecurity breach. In addition, our
business is heavily reliant on various information technology and application systems that may be impacted by a malicious
cyber-attack. These cyber incidents may cause lost revenues or increased expenses stemming from reputational damage and
fines related to the breach of personally identifiable information, inability to use certain systems for a period of time, loss of
financial assets, remediation and litigation costs, and increased cybersecurity protection costs. We have developed and
continue to invest in a variety of controls to prevent, detect and appropriately react to such cyber-attacks, including periodically
testing our systems' security and access controls. However, cybersecurity risks continue to become more complex and broad
ranging and our internal controls provide only a reasonable, not absolute, assurance that we will be able to protect ourselves
from significant cyber-attack incidents. By outsourcing certain business and administrative functions to third parties, we may
be exposed to enhanced risk of data security breaches. Any breach of data security could damage our reputation and/or result
in monetary damages, which, in turn, could have a material adverse effect on our results of operations, liquidity, financial
condition, financial strength, and debt ratings. Although we have not experienced a material cyber-attack, we purchase
insurance coverage to specifically address cybersecurity risks. The coverage provides protection up to $20 million above a
deductible of $250,000 for various cybersecurity risks, including privacy breach related incidents.
36
We depend on key personnel.
To a large extent, our businesses success depends on our ability to attract and retain key employees. Competition to attract and
retain key personnel is intense. While we have employment agreements with certain key managers, all of our employees are at-
will employees and we cannot ensure that we will be able to attract and retain key personnel. As of December 31, 2013, our
workforce had an average age of approximately 47 and approximately 25% of our workforce was retirement eligible under our
retirement and benefit plans.
If we experience difficulties with outsourcing relationships, our ability to conduct our business might be negatively
impacted.
We outsource certain business and administrative functions to third parties for efficiencies and cost savings, and may do so
increasingly in the future. If we fail to develop and implement our outsourcing strategies or our third-party providers fail to
perform as anticipated, we may experience operational difficulties, increased costs, and a loss of business that may have a
material adverse effect on our results of operations or financial condition.
We are subject to a variety of modeling risks, which could have a material adverse impact on our business results.
We rely on complex financial models, such as predictive modeling, a claims fraud model, third party catastrophe models, an
enterprise risk management capital model, and modeling tools used by our investment managers, which have been developed
internally or by third parties to analyze historical loss costs and pricing, trends in claims severity and frequency, the occurrence
of catastrophe losses, investment performance, and portfolio risk. Flaws in these financial models, or faulty assumptions used
by these financial models, could lead to increased losses. We believe that statistical models alone do not provide a reliable
method of monitoring and controlling risk. Therefore, such models are tools and do not substitute for the experience or
judgment of senior management.
37
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our main office is located in Branchville, New Jersey on a site owned by a subsidiary with approximately 114 acres and
315,000 square feet of operational space. We lease all of our other facilities. The principal office locations related to our
Standard and E&S Insurance Operations segments are described in the “Field and Technology Strategies Supporting
Independent Retail Agent Distribution” section of Item 1. “Business.” of this Form 10-K. We believe our facilities provide
adequate space for our present needs and that additional space, if needed, would be available on reasonable terms.
Item 3. Legal Proceedings.
In the ordinary course of conducting business, we are named as defendants in various legal proceedings. Most of these
proceedings are claims litigation involving our Insurance Subsidiaries as either: (i) liability insurers defending or providing
indemnity for third-party claims brought against insureds; or (ii) insurers defending first-party coverage claims brought against
them. We account for such activity through the establishment of unpaid loss and loss expense reserves. We expect that the
ultimate liability, if any, with respect to such ordinary course claims litigation, after consideration of provisions made for
potential losses and costs of defense, will not be material to our consolidated financial condition, results of operations, or cash
flows.
Our Insurance Subsidiaries are also from time-to-time involved in other legal actions, some of which assert claims for
substantial amounts. These actions include, among others, putative class actions seeking certification of a state or national
class. Such putative class actions have alleged, for example, improper reimbursement of medical providers paid under workers
compensation and personal and commercial automobile insurance policies. Our Insurance Subsidiaries are also involved from
time-to-time in individual actions in which extra-contractual damages, punitive damages, or penalties are sought, such as
claims alleging bad faith in the handling of insurance claims. We believe that we have valid defenses to these cases. We expect
that the ultimate liability, if any, with respect to such lawsuits, after consideration of provisions made for estimated losses, will
not be material to our consolidated financial condition. Nonetheless, given the large or indeterminate amounts sought in certain
of these actions, and the inherent unpredictability of litigation, an adverse outcome in certain matters could, from time-to-time,
have a material adverse effect on our consolidated results of operations or cash flows in particular quarterly or annual periods.
38
PART II
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
(a) Market Information
Our common stock is traded on the NASDAQ Global Select Market under the symbol “SIGI.” The following table sets forth
the high and low sales prices, as reported on the NASDAQ Global Select Market, for our common stock for each full quarterly
period within the two most recent fiscal years:
First quarter
Second quarter
Third quarter
Fourth quarter
2013
2012
High
Low
High
Low
$
24.13
24.75
25.95
28.31
19.53
19.58
22.61
23.55
19.00
17.99
19.37
20.31
16.64
16.22
16.64
17.17
On February 14, 2014, the closing price of our common stock as reported on the NASDAQ Global Select Market was $22.37.
(b) Holders
As of February 14, 2014, there were approximately 2,136 holders of record of our common stock, including beneficial holders
whose securities were held in the name of the registered clearing agency or its nominee.
(c) Dividends
Dividends on shares of our common stock are declared and paid at the discretion of the Board based on our results of
operations, financial condition, capital requirements, contractual restrictions, and other relevant factors. The following table
provides information on the dividends declared for each quarterly period within our two most recent fiscal years:
Dividend Per Share
First quarter
Second quarter
Third quarter
Fourth quarter
2013
2012
$
0.13
0.13
0.13
0.13
0.13
0.13
0.13
0.13
Our ability to receive dividends, loans, or advances from our Insurance Subsidiaries is subject to the approval or review of the
insurance regulators in the respective domiciliary states of our Insurance Subsidiaries. Such approval and review is made under
the respective domiciliary states’ insurance holding company acts, which generally require that any transaction between related
companies be fair and equitable to the insurance company and its policyholders. Although our dividends have historically been
met with regulatory approval, there is no assurance that future dividends will be approved given current market conditions. We
currently expect to continue to pay quarterly cash dividends on shares of our common stock in the future. For additional
information, see Note 20. "Statutory Financial Information, Capital Requirements, and Restrictions on Dividends and Transfers
of Funds" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K.
39
(d) Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information about our common stock authorized for issuance under equity compensation plans as
of December 31, 2013:
(a)
(b)
(c)
Plan Category
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of
securities remaining
available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
Equity compensation plans approved by security holders
903,439 1 $
19.75
6,414,613 2
1 Weighted average remaining contractual life of options is 3.92 years.
2Includes 870,930 shares available for issuance under the Employee Stock Purchase Plan; 2,098,020 shares available for issuance under the Stock Purchase
Plan for Independent Insurance Agencies; and 3,445,663 shares available for issuance under the Selective Insurance Group, Inc. 2005 Omnibus Stock Plan As
Amended and Restated Effective as of May 1, 2010 (“Stock Plan”). Future grants under the Stock Plan can be made, among other things, as stock options,
restricted stock units, or restricted stock.
(e) Performance Graph
The following chart, produced by Research Data Group, Inc., depicts our performance for the period beginning December 31,
2008 and ending December 31, 2013, as measured by total stockholder return on our common stock compared with the total
return of the NASDAQ Composite Index and a select group of peer companies comprised of NASDAQ-listed companies in
SIC Code 6330-6339, Fire, Marine, and Casualty Insurance.
This performance graph is not incorporated into any other filing we have made with the SEC and will not be incorporated into
any future filing we may make with the SEC unless we so specifically incorporate it by reference. This performance graph also
shall not be deemed to be “soliciting material” or to be “filed” with the SEC unless we specifically request so or specifically
incorporate it by reference in any filing we make with the SEC.
40
(f) Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table provides information regarding our purchases of our common stock in the fourth quarter of 2013:
Period
October 1 – 31, 2013
November 1 – 30, 2013
December 1 – 31, 2013
Total
$
$
Total Number of
Shares Purchased1
Average Price
Paid Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Programs
Maximum Number of
Shares that May Yet
Be Purchased Under the
Announced Programs
3,997
$
11,580
714
16,291
$
22.48
26.25
27.20
25.37
—
—
—
—
—
—
—
—
1During the fourth quarter of 2013, 4,071 shares were purchased from employees in connection with the vesting of restricted stock units and 12,220 shares
were purchased from employees in connection with stock option exercises. These repurchases were made to satisfy tax withholding obligations and/or option
costs with respect to those employees. These shares were not purchased as part of any publicly announced program. The shares that were purchased in
connection with the vesting of restricted stock units were purchased at fair market value as defined in the Stock Plan. The shares purchased in connection with
the option exercises were purchased at the current market prices of our common stock on the dates the options were exercised.
41
Item 6. Selected Financial Data.
Five-Year Financial Highlights1
(All presentations are in accordance with
GAAP unless noted otherwise, number of
weighted average shares and dollars in
thousands, except per share amounts)
Net premiums written
Net premiums earned
Net investment income earned
Net realized gains (losses)
Total revenues
Catastrophe losses
Underwriting profit (loss)
Net income from continuing operations2
Total discontinued operations, net of tax2
Net income
Comprehensive income
Total assets
Notes payable and debentures
Stockholders’ equity
Statutory premiums to surplus ratio
Statutory combined ratio
Impact of catastrophe losses on statutory
combined ratio3
GAAP combined ratio
Yield on investments, before tax
Debt to capitalization
Return on average equity
Non-GAAP measures4:
Operating income
Operating return on average equity
Per share data:
Net income from continuing operations2:
Basic
Diluted
Net income:
Basic
Diluted
Dividends to stockholders
Stockholders’ equity
Price range of common stock:
High
Low
Close
$
$
$
$
$
2013
1,810,159
1,736,072
134,643
20,732
1,903,741
47,415
38,766
107,415
(997)
106,418
77,229
6,270,170
392,414
1,153,928
1.4
97.5 %
2.7
pts
97.8 %
3.0
25.4
9.5
2012
1,666,883
1,584,119
131,877
8,988
1,734,102
98,608
(64,007)
37,963
—
37,963
49,709
6,794,216
307,387
1,090,592
1.6
103.5
6.2
104.0
3.1
22.0
3.5
2011
1,485,349
1,439,313
147,443
2,240
1,597,475
118,769
(103,584)
22,683
(650)
22,033
57,303
5,685,469
307,360
1,058,328
1.4
106.7
8.3
107.2
3.7
22.5
2.1
93,939
8.4 %
32,121
3.0
21,227
2.0
2010
1,390,541
1,416,598
145,708
(7,083)
1,564,621
56,465
(19,974)
70,746
(3,780)
66,966
86,450
5,178,704
262,333
1,018,041
1.3
101.6
4.0
101.4
3.8
20.5
6.8
75,350
7.7
1.33
1.30
1.26
1.23
0.52
2009
1,422,665
1,431,047
118,471
(45,970)
1,514,018
8,519
2,111
44,480
(8,260)
36,220
126,806
5,060,333
274,606
947,881
1.5
100.5
0.6
99.9
3.2
22.5
4.1
74,361
8.3
0.84
0.83
0.69
0.68
0.52
1.93
1.89
1.91
1.87
0.52
20.63
28.31
19.53
27.06
0.69
0.68
0.69
0.68
0.52
0.42
0.41
0.41
0.40
0.52
19.77
19.45
18.97
17.80
20.31
16.22
19.27
18.97
12.10
17.73
18.94
14.13
18.15
23.28
10.06
16.45
Number of weighted average shares:
Basic
Diluted
55,638
56,810
52,630
53,397
1 Data for 2009 through 2011 has been restated to reflect the implementation of ASU 2010-26, Financial Services-Insurance (Topic 944): Accounting for Costs
Associated with Acquiring or Renewing Insurance Contracts, which was adopted on January 1, 2012.
2 In 2009, we sold our Selective HR Solutions operations. See Note 7. "Fair Value Measurements" and Note 12. "Discontinued Operations" in Item 8.
"Financial Statements and Supplementary Data." of this Form 10-K for additional information.
3 The impact of catastrophe losses on the 2012 statutory combined ratio including flood claims handling fees related to Hurricane Sandy was 5.8 points.
4Operating income and operating return on average equity are non-GAAP measures. See the Glossary of Terms attached to this Form 10-K as Exhibit 99.1 for
definitions of these items and see the “Financial Highlights” section in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of
Operations.” of this Form 10-K for a reconciliation of operating income to net income.
54,095
55,221
53,359
54,504
54,880
55,933
42
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-looking Statements
Certain statements in this report, including information incorporated by reference, are “forward-looking statements” as that
term is defined in the Private Securities Litigation Reform Act of 1995 (“PSLRA”). The PSLRA provides a safe harbor under
the Securities Act of 1933 and the Exchange Act for forward-looking statements. These statements relate to our intentions,
beliefs, projections, estimations or forecasts of future events or future financial performance and involve known and unknown
risks, uncertainties and other factors that may cause us or the industry’s actual results, levels of activity, or performance to be
materially different from those expressed or implied by the forward-looking statements. In some cases, forward-looking
statements may be identified by use of the words such as “may,” “will,” “could,” “would,” “should,” “expect,” “plan,”
“anticipate,” “target,” “project,” “intend,” “believe,” “estimate,” “predict,” “potential,” “pro forma,” “seek,” “likely,” or
“continue” or other comparable terminology. These statements are only predictions, and we can give no assurance that such
expectations will prove to be correct. We undertake no obligation, other than as may be required under the federal securities
laws, to publicly update or revise any forward-looking statements, whether as a result of new information, future events or
otherwise.
Factors that could cause our actual results to differ materially from those we have projected, forecasted or estimated in forward-
looking statements are discussed in further detail in Item 1A. “Risk Factors.” of this Form 10-K. 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.
Introduction
We classify our business into three operating segments:
•
Standard Insurance Operations - comprised of both commercial lines ("Commercial Lines") and personal lines
("Personal Lines") insurance products and services that are sold in the standard marketplace;
• Excess and Surplus ("E&S") Insurance Operations - comprised of Commercial Lines insurance products and
•
services sold to insureds who have not obtained coverage in the standard market; and
Investments - invests the premiums collected by our Standard and E&S Insurance Operations, and amounts
generated through our capital management strategies, which may include the issuance of debt and equity securities.
Our Standard Insurance Operations products and services are sold through nine subsidiaries that write Commercial Lines and
Personal Lines business, some of which write flood business through the National Flood Insurance Program's ("NFIP") Write
Your Own ("WYO") program. Two of these subsidiaries, Selective Casualty Insurance Company ("SCIC") and Selective Fire
and Casualty Insurance Company ("SFCIC"), were created in 2012. These subsidiaries began writing direct premium in 2013
and have been included in our reinsurance pooling agreement as of July 1, 2012.
Our E&S Insurance Operations products and services are sold through a subsidiary that was acquired in December 2011. This
subsidiary, Mesa Underwriters Specialty Insurance Company ("MUSIC"), provides a nationally-authorized non-admitted
platform to write commercial and personal E&S lines business.
Our ten insurance subsidiaries are collectively referred to as the "Insurance Subsidiaries".
The purpose of the Management’s 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.
In the MD&A, we will discuss and analyze the following:
Financial Highlights of Results for Years Ended December 31, 2013, 2012, and 2011;
• Critical Accounting Policies and Estimates;
•
• Results of Operations and Related Information by Segment;
•
•
• Off-Balance Sheet Arrangements;
• Contractual Obligations, Contingent Liabilities, and Commitments; and
• Ratings.
Federal Income Taxes;
Financial Condition, Liquidity, Short-term Borrowings, and Capital Resources;
43
Critical Accounting Policies and Estimates
We have identified the policies and estimates described below as critical to our business operations and the understanding of
the results of our operations. Our preparation of the Financial Statements requires us to make estimates and assumptions that
affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our Financial
Statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that
actual results will not differ from those estimates. Those estimates that were most critical to the preparation of the Financial
Statements involved the following: (i) reserves for losses and loss expenses; (ii) pension and post-retirement benefit plan
actuarial assumptions; (iii) other-than-temporary-impairment ("OTTI"); and (iv) reinsurance.
Reserves for Losses and Loss Expenses
Significant periods of time can elapse between the occurrence of an insured loss, the reporting of the loss to the insurer, and the
insurer’s payment of that loss. To recognize liabilities for unpaid losses and loss expenses, insurers establish reserves as
balance sheet liabilities representing an estimate of amounts needed to pay reported and unreported net losses and loss
expenses. As of December 31, 2013, we had accrued $3.3 billion of gross loss and loss expense reserves compared to $4.1
billion at December 31, 2012, the decrease of which is largely attributable to the loss and loss expense reserves associated with
Hurricane Sandy that were 100% reinsured by the Federal government under the NFIP. The gross loss and loss expense
reserves under this program were $51.2 million as of December 31, 2013 compared to $909.9 million as of December 31, 2012.
The following tables provide case and incurred but not reported ("IBNR") reserves for losses and loss expenses, and
reinsurance recoverable on unpaid losses and loss expenses as of December 31, 2013 and 2012:
As of December 31, 2013
Losses and Loss Expense Reserves
($ in thousands)
Commercial automobile
$
Workers compensation
General liability
Commercial property
Businessowners’ policies
Bonds
Other
Total standard Commercial Lines
Personal automobile
Homeowners
Other
Total standard Personal Lines
Case
Reserves
IBNR
Reserves
Total
Reinsurance
Recoverable on
Unpaid Losses and
Loss Expenses
Net Reserves
136,543
532,087
227,307
43,831
32,225
4,885
2,095
978,973
106,377
26,201
39,155
171,733
225,387
637,738
965,095
6,143
57,636
5,054
1,061
361,930
1,169,825
1,192,402
49,974
89,861
9,939
3,156
18,847
197,934
137,854
9,702
7,915
911
2,064
343,083
971,891
1,054,548
40,272
81,946
9,028
1,092
1,898,114
2,877,087
375,227
2,501,860
89,596
27,520
23,561
140,677
195,973
53,721
62,716
312,410
62,663
7,254
52,157
122,074
133,310
46,467
10,559
190,336
E&S Insurance Operations
25,575
134,698
160,273
43,538
116,735
Total
$
1,176,281
2,173,489
3,349,770
540,839
2,808,931
44
December 31, 2012
($ in thousands)
Commercial automobile
Workers compensation
General liability
Commercial property
Businessowners’ policies
Bonds
Other
Losses and Loss Expense Reserves
Case
Reserves
IBNR
Reserves
$
127,270
494,467
214,216
71,903
44,620
2,441
1,265
221,452
586,141
902,087
12,925
66,783
6,915
1,071
Reinsurance
Recoverable on
Unpaid Losses
and Loss
Expenses
Net Reserves
15,474
158,035
116,791
35,639
20,410
425
1,200
333,248
922,573
999,512
49,189
90,993
8,931
1,136
Total
348,722
1,080,608
1,116,303
84,828
111,403
9,356
2,336
Total standard Commercial Lines
956,182
1,797,374
2,753,556
347,974
2,405,582
Personal automobile
Homeowners
Other
107,670
37,652
865,469
92,759
35,495
56,037
200,429
73,147
921,506
Total standard Personal Lines
1,010,791
184,291
1,195,082
67,615
28,950
911,928
1,008,493
132,814
44,197
9,578
186,589
E&S Insurance Operations
18,738
101,565
120,303
53,288
67,015
Total
$
1,985,711
2,083,230
4,068,941
1,409,755
2,659,186
How reserves are established
When a claim is reported to an Insurance Subsidiary, claims personnel establish a “case reserve” for the estimated amount of
the ultimate payment. The amount of the reserve is primarily based on a case-by-case evaluation of the type of claim involved,
the circumstances surrounding each claim, and the policy provisions relating to the type of losses. The estimate reflects the
informed judgment of such personnel based on their knowledge, experience, and general insurance reserving practices. Until
the claim is resolved, these estimates are revised as deemed appropriate by the responsible claims personnel based on
subsequent developments and periodic reviews of the case.
Using generally accepted actuarial reserving techniques, we project our estimate of ultimate losses and loss expenses at each
reporting date. The difference between: (i) the projected ultimate loss and loss expense reserves; and (ii) the case loss reserves
and the loss and loss expenses reserved thereon are carried as the IBNR reserve. The actuarial techniques used are part of a
comprehensive reserving process that includes two primary components. The first component is a detailed quarterly reserve
analysis performed by our internal actuarial staff. In completing this analysis, the actuaries must gather substantially similar
data in sufficient volume to ensure statistical credibility of the data, while maintaining appropriate differentiation. This process
defines the reserving segments, to which various actuarial projection methods are applied. When applying these methods, the
actuaries are required to make numerous assumptions including, for example, the selection of loss and loss expense
development factors and the weight to be applied to each individual projection method. These methods include paid and
incurred versions for the following: loss and loss expense development, Bornhuetter-Ferguson, Berquist-Sherman, and
frequency/severity modeling (chain-ladder approach). The second component of the analysis is the projection of the expected
ultimate loss and loss expense ratio for each line of business for the current accident year. This projection is part of our
planning process wherein we review and update expected loss and loss expense ratios each quarter. This review includes actual
versus expected pricing changes, loss and loss expense trend assumptions, and updated prior period loss and loss expense ratios
from the most recent quarterly reserve analysis.
45
In addition to the quarterly reserve analysis, a range of possible IBNR reserves is estimated annually and continually
considered, among other factors, in establishing IBNR for each reporting period. Loss and loss expense trends are also
considered, which include, but are not limited to, large loss activity, asbestos and environmental claim activity, large case
reserve additions or reductions for prior accident years, and reinsurance recoverable issues. We also consider factors such as:
(i) per claim information; (ii) company and industry historical loss experience; (iii) legislative enactments, judicial decisions,
legal developments in the imposition of damages, and changes in political attitudes; and (iv) trends in general economic
conditions, including the effects of inflation. Based on the consideration of the range of possible IBNR reserves, recent loss
and loss expense trends, uncertainty associated with actuarial assumptions and other factors, IBNR is established and the
ultimate net liability for losses and loss expenses is determined. Such an assessment requires considerable judgment given that
it is frequently not possible to determine whether a change in the data is an anomaly until sometime after the event. Even if a
change is determined to be permanent, it is not always possible to reliably determine the extent of the change until sometime
later. There is no precise method for subsequently evaluating the impact of any specific factor on the adequacy of reserves
because the eventual deficiency or redundancy is affected by many factors. The changes in these estimates, resulting from the
continuous review process and the differences between estimates and ultimate payments, are reflected in the Consolidated
Statements of Income for the period in which such estimates are changed. Any changes in the liability estimate may be
material to the results of operations in future periods.
Range of reasonable reserves
We have estimated a range of reasonably possible reserves for net loss and loss expense claims to be $2,574 million to $2,966
million at December 31, 2013, which compares to $2,456 million to $2,805 million at December 31, 2012. These ranges reflect
low and high reasonable reserve estimates which were selected primarily by considering the range of indications calculated
using generally accepted actuarial techniques. Such techniques assume that past experience, adjusted for the effects of current
developments and anticipated trends, are an appropriate basis for predicting future events. Although these ranges reflect likely
scenarios, it is possible that the final outcomes may fall above or below these amounts. The ranges do not include a provision
for potential increases or decreases associated with asbestos, environmental, and other continuous exposure claims, as
traditional actuarial techniques cannot be effectively applied to these exposures.
Major trends by line of business creating additional loss and loss expense reserve uncertainty
The Insurance Subsidiaries are multi-state, multi-line property and casualty insurance companies and, as such, are subject to
reserve uncertainty stemming from a variety of sources. These uncertainties are considered at each step in the process of
establishing loss and loss expense reserves. However, as market conditions change, certain trends are identified that
management believes create an additional amount of uncertainty. A discussion of recent trends, by line of business, that have
been recognized by management follows.
Standard Market General Liability Line of Business
At December 31, 2013, our general liability line of business had recorded reserves, net of reinsurance, of $1.1 billion, which
represented 38% of our total net reserves. In calendar year 2013, this line experienced favorable development of $20.0 million,
which was driven by lower severities in the 2010 and prior accident years. This favorable development was partially offset by
unfavorable development in accident years 2011 and 2012, which showed higher average severities in the premises and
operations coverage. During the 2012 calendar year, this line of business showed modestly unfavorable development due to
increased severities in the 2010 and 2011 accident years. During the 2011 calendar year, this line of business experienced
overall favorable reserve development that was largely attributable to accident years 2006 through 2009, which showed
generally lower frequencies. The broad nature of this line of business, and the longer average time for the claims settlement
process, makes it more susceptible to changes in litigation and the tort environment. This line of business also includes excess
policies that provide additional limits above underlying automobile and general liability coverages, which is subject to
catastrophic losses, and therefore influenced by the factors noted above to a greater degree.
Standard Market Workers Compensation Line of Business
At December 31, 2013, our workers compensation line of business recorded reserves, net of reinsurance, of $972 million or
35% of our total net reserves. During the past three years, this line has experienced unfavorable reserve development. The
2013 unfavorable development was $23.5 million driven by accident years 2008 and prior. This development reflects increases
in the ultimate severities for medical costs, driven largely by case reserve adjustments to long-term care claims, and our review
of medical cost development over many years. We continue our efforts to mitigate these impacts through various medical cost
containment initiatives.
46
In addition to the uncertainties associated with actuarial assumptions and methodologies described above, the workers
compensation line of business can be impacted by a variety of issues, such as the following:
Unexpected changes in medical cost inflation - Variability in our historical workers compensation medical costs, along
with uncertainty regarding future medical inflation, creates the potential for additional volatility in our reserves;
Changes in statutory workers compensation benefits - Benefit changes may be enacted such that they affect all
outstanding claims, regardless of having occurred in the past. Depending upon the social and political climate, these
changes may be such that they either increase or decrease associated claim costs;
Changes in overall economic conditions - Higher levels of unemployment could ultimately impact both the severity
and frequency of workers compensation claims. There is also potential for an increase in severity if the longevity of
workers compensation claims increases. Injured workers could have less incentive to return to work when their
company is in financial distress or injured workers could be laid off while on workers compensation. Conversely,
there is potential for a decrease in frequency if workers are reluctant to file claims or have less work and less exposure
to injury.
In addition, changes in the economy could impact reserves in other ways. For example, in 2012, audit and
endorsement activity resulted in additional premium of $14.3 million, and in 2013, audit and endorsement activity
resulted in additional premium of $7.4 million. Since premiums earned are used as a basis for setting initial reserves
on the current accident year, our reserves could be impacted. While audit and endorsement premiums are modeled
within our annual budgeting process, they remain uncertain and therefore provide additional variability to the resulting
loss and loss expense ratio estimates.
Standard Market Commercial Automobile Line of Business
At December 31, 2013, our commercial automobile line of business had recorded reserves, net of reinsurance, of $343 million,
which represented 12% of our total net reserves. During the past three years this line experienced favorable reserve
development. In 2013 the favorable development was $4.5 million, driven by accident years 2006 through 2010, which
represents a continued trend of better than expected reported emergence in these years. This favorable development was
partially offset by unfavorable development in the 2012 accident year, due to increased severity.
Standard Market Personal Automobile Line of Business
At December 31, 2013, our personal automobile line of business had recorded reserves, net of reinsurance, of $133 million,
which represented 5% of our total net reserves. In calendar year 2013, this line experienced favorable development of $3.0
million, which was driven by accident years 2010 and 2011 in states other than New Jersey. Over the past several years, the
New Jersey personal automobile marketplace has continued to be extremely competitive, while at the same time we have been
growing our market share in our other personal lines footprint states, the result of which has been a gradually changing overall
mix of business. We review the reserves for states other than New Jersey on a combined basis so that there is a sufficient
volume of data to ensure statistical credibility. However, the state mix of business changes over time may increase the
uncertainty surrounding our personal automobile reserves.
E&S Lines
At December 31, 2013, our E&S line of business had recorded reserves, net of reinsurance, of $117 million, which represented
4% of our total net reserves. In calendar year 2013 this line experienced favorable development of $2.0 million. Since we have
limited historical loss experience in these lines of business, our reserve estimates are based largely on development patterns of
companies that have similar operations. Therefore, these estimates are subject to somewhat greater uncertainty than the
comparable traditional lines of business.
Other Lines of Business
At December 31, 2013, no other individual line of business had recorded reserves of more than $82 million, net of reinsurance.
We have not identified any recent trends that would create additional significant reserve uncertainty for these other lines of
business.
47
Other impacts creating additional loss and loss expense reserve uncertainty
Claims Initiative Impacts
In addition to the line of business specific issues mentioned above, these lines of business have been impacted by a number of
initiatives undertaken by our claims department that have resulted in volatility in the average level of case reserves. Some of
these initiatives have also impacted changes in claims settlement rates. These changes impact the data upon which the ultimate
loss and loss expense projections are made. While these changes in case reserve levels and settlement rates increase the
uncertainty in the short run, we expect the longer-term benefit will be a more refined management of the claims process.
Some of the specific actions implemented are as follows:
•
Increased focus on reducing workers compensation medical costs through more favorable Preferred Provider
Organizations ("PPO") contracts and greater PPO penetration.
• The introduction of a Complex Claims Unit to which all significant and complex liability claims are assigned. This
•
unit has been staffed with personnel that have significant experience in handling and settling these types of claims.
Increased activity in the areas of fraud investigation and salvage/subrogation recoveries. These efforts have been
supported by the introduction of predictive models that allow us to better focus our efforts.
• The establishment of a workers compensation strategic case management unit, which specializes in the investigation
and medical management of lost-time claims with high exposure and/or escalation risk.
Our internal reserve analyses incorporate actuarial projection methods which make adjustments for changes in case reserve
adequacy and claims settlement rates. These methods adjust our historical loss experience to the current level of case adequacy
or settlement rate, which provides a more consistent basis for projecting future development patterns. These methods have
their own assumptions and judgments associated with them, so as with any projection method, they are not definitive in and of
themselves. Furthermore, given that the expected benefits from our claims initiatives take time to fully manifest, we do not
take full credit for the anticipated benefit in establishing our loss and loss expense reserves. Therefore, these initiatives may
prove more or less beneficial than currently reflected, which will affect development in future years. Our various projection
methods provide an indication of these potential future impacts. These impacts would be greatest within our larger reserve
lines of workers compensation, general liability, and commercial automobile liability, within the more recent accident years.
Economic Inflationary Impacts
Although inflationary volatility is expected to be low in the near term, current United States monetary policy and global
economic conditions bring additional uncertainty in the long-term given the length of time required for claim settlement in
these lines of business. Uncertainty regarding future inflation or deflation creates the potential for additional volatility in our
reserves for these lines of business.
Sensitivity analysis: Potential impact on reserve uncertainty due to changes in key assumptions
Our process to establish reserves includes a variety of key assumptions, including, but not limited to, the following:
• The selection of loss and loss expense development factors;
• The weight to be applied to each individual actuarial projection method;
•
• Expected ultimate loss and loss expense ratios for the current accident year.
Projected future loss trends; and
The importance of any single assumption depends on several considerations, such as the line of business and the accident year.
If the actual experience emerges differently than the assumptions used in the process to establish reserves, changes in our
reserve estimate are possible and may be material to the results of operations in future periods. Set forth below are sensitivity
tests which highlight potential impacts to loss and loss expense reserves under different scenarios, for the major casualty lines
of business. It is important to note that these tests consider each assumption and line of business individually, without any
consideration of correlation between lines of business and accident years, and therefore, does not constitute an actuarial range.
While the figures represent possible impacts from variations in key assumptions as identified by management, there is no
assurance that the future emergence of our loss and loss expense experience will be consistent with either our current or
alternative sets of assumptions.
48
While the sources of variability discussed above are generated by different underlying trends and operational changes, they
ultimately manifest themselves as changes in the expected loss and loss expense development patterns. These patterns are a
key assumption in the reserving process. In addition to the expected development patterns, the expected loss and loss expense
ratios are another key assumption in the reserving process. These expected ratios are developed via a rigorous process of
projecting recent accident years' experience to an ultimate settlement basis, and then adjusting it to the current accident year's
pricing and loss cost levels. Impact from changes in the underwriting portfolio and changes in claims handling practices are
also quantified and reflected, where appropriate. As is the case with all estimates, the ultimate loss and loss expense ratios may
differ from those currently estimated.
The sensitivities of loss and loss expense reserves to these key assumptions are illustrated below for the major casualty lines.
The first table shows the estimated impacts from changes in expected reported loss and loss expense development patterns. It
shows reserve impacts by line of business if the actual calendar year incurred amounts are greater or less than current
expectations by the selected percentages. The second table shows the estimated impacts from changes to the expected loss and
loss expense ratios for the current accident year. It shows reserve impacts by line of business if the expected loss and loss
expense ratios for the current accident year are greater or less than current expectations by the selected percentages. While the
selected percentages by line are judgmentally based, they reflect the relative contribution of the specific line of business to the
overall reserve range.
Reserve Impacts of Changes to Prior Years Expected Loss and Loss Expense Reporting Patterns
($ in millions)
General liability
Workers compensation
Commercial automobile liability
Personal automobile liability
E&S lines
Percentage
Decrease/
Increase
Decrease to Future
Calendar Year
Reported
Increase to Future
Calendar Year
Reported
7% $
(75) $
10%
10%
10%
10%
(60)
(30)
(10)
(10)
75
60
30
10
10
Reserve Impacts of Changes to Current Year Expected Ultimate Loss and Loss Expense Ratios
($ in millions)
General liability
Workers compensation
Commercial automobile liability
Personal automobile liability
E&S lines
Percentage
Decrease/
Increase
Decrease to Current Accident
Year Expected Loss and Loss
Expense Ratio
Increase to Current Accident
Year Expected Loss and Loss
Expense Ratio
7% $
10%
7%
7%
10%
(28) $
(26)
(17)
(7)
(9)
28
26
17
7
9
Note that there is some overlap between the impacts in the two tables. For example, increases in the calendar year development
would ultimately impact our view of the current accident year's loss and loss expense ratios. Nevertheless, these tables provide
perspective into the sensitivity of each of these key assumptions.
Asbestos and Environmental Reserves
Included in our losses and loss expense reserves are amounts for asbestos and environmental claims. The total carried net
losses and loss expense reserves for these claims were $25.2 million as of December 31, 2013 and $27.8 million as of
December 31, 2012. Our asbestos and environmental claims have arisen primarily from insured exposures in municipal
government, small commercial risks, and homeowners policies. The emergence of these claims is slow and highly
unpredictable. For example, within our standard Commercial Lines book, certain landfill sites are included on the National
Priorities List (“NPL”) by the United States Environmental Protection Agency (“USEPA”). Once on the NPL, the USEPA
determines an appropriate remediation plan for these sites. A landfill can remain on the NPL for many years until final
approval for the removal of the site is granted from the USEPA. The USEPA also has the authority to re-open previously
closed sites and return them to the NPL. We currently have reserves for eight insureds related to four sites on the NPL.
49
Estimating IBNR reserves for asbestos and environmental claims is difficult because of the delayed and inconsistent reporting
patterns associated with these claims. In addition, there are significant uncertainties associated with estimating critical
assumptions, such as average clean-up costs, third-party costs, potentially responsible party shares, allocation of damages,
litigation and coverage costs, and potential state and federal legislative changes. Normal historically based actuarial
approaches cannot be applied to asbestos and environmental claims because past loss history is not indicative of future
potential asbestos and environmental losses. In addition, while certain alternative models can be applied, such models can
produce significantly different results with small changes in assumptions. As a result, we do not calculate an asbestos and
environmental loss range.
Pension and Post-retirement Benefit Plan Actuarial Assumptions
Our pension and post-retirement benefit obligations and related costs are calculated using actuarial methods, within the
framework of U.S. GAAP. Two key assumptions, the discount rate and the expected return on plan assets, are important
elements of expense and/or liability measurement. We evaluate these key assumptions annually. Other assumptions involve
demographic factors, such as retirement age, mortality, turnover, and rate of compensation increases.
The discount rate enables us to state expected future cash flows at their present value on the measurement date. The purpose of
the discount rate is to determine the interest rates inherent in the price at which pension benefits could be effectively settled.
Our discount rate selection is based on high-quality, long-term corporate bonds. A higher discount rate reduces the present
value of benefit obligations and reduces pension expense. Conversely, a lower discount rate increases the present value of
benefit obligations and increases pension expense. We increased our discount rate for the Retirement Income Plan for Selective
Insurance Company of America and the Supplemental Excess Retirement Plan (jointly referred to as the "Retirement Income
Plan" or the "Plan") to 5.16% for 2013, from 4.42% for 2012, reflecting higher market interest rates. We also increased our
discount rate for the life insurance benefit provided to eligible SICA employees (referred to as the "Retirement Life Plan") to
4.85% for 2013 from 4.42% for 2012.
The expected long-term rate of return on the plan assets is determined by considering the current and expected asset allocation,
as well as historical and expected returns on each plan asset class. A lower expected rate of return on pension plan assets would
increase pension expense. Our long-term expected return on plan assets was lowered 48 basis points to 6.92% in 2013 as
compared to 7.40% in 2012, reflecting the lower interest rate environment, coupled with our liability driven investment
strategy, that is anticipated in the near term despite our 2013 total return of 8.75% .
At December 31, 2013, our pension and post-retirement benefit plan obligation was $262.6 million compared to $309.1 million
at December 31, 2012. In addition to the assumption changes noted above, our benefit obligation was also impacted by our
decision to curtail the accrual of additional benefits for all eligible employees participating in the Retirement Income Plan after
March 31, 2016. Volatility in the marketplace, coupled with changes in the discount rate assumption, could materially impact
our pension and post-retirement life valuation in the future. For additional information regarding our pension and post-
retirement benefit plan obligations, see Note 15. "Retirement Plans" in Item 8. “Financial Statements and Supplementary Data.”
of this Form 10-K.
Other-Than-Temporary Investment Impairments
When the fair value of any investment is lower than its cost/amortized cost, an assessment is made to determine if the decline is
other than temporary. We regularly review our entire investment portfolio for declines in fair value. If we believe that a
decline in the value of an available-for-sale ("AFS") security is temporary, we record the decline as an unrealized loss in
Accumulated Other Comprehensive Income ("AOCI"). Temporary declines in the value of a held-to-maturity ("HTM")
security are not recognized in the Financial Statements. Our assessment of a decline in fair value includes judgment as to the
financial position and future prospects of the entity that issued the investment security, as well as a review of the security’s
underlying collateral for fixed maturity investments. Broad changes in the overall market or interest rate environment
generally will not lead to a write-down.
50
Fixed Maturity Securities and Short-Term Investments
Our evaluation for OTTI of a fixed maturity security or a short-term investment may include, but is not limited to, the
evaluation of the following factors:
• Whether the decline appears to be issuer or industry specific;
• The degree to which the issuer is current or in arrears in making principal and interest payments on the fixed
maturity security;
• The issuer’s current financial condition and ability to make future scheduled principal and interest payments on a
timely basis;
• Evaluation of projected cash flows;
• Buy/hold/sell recommendations published by outside investment advisors and analysts; and
• Relevant rating history, analysis, and guidance provided by rating agencies and analysts.
OTTI charges are recognized as a realized loss to the extent that they are credit related, unless we have the intent to sell the
security or it is more likely than not that we will be required to sell the security. In those circumstances, the security is written
down to fair value with the entire amount of the writedown charged to earnings as a component of realized losses.
To determine if an impairment is other than temporary, we compare the present value of cash flows expected to be collected
with the amortized cost of fixed maturity securities meeting certain criteria. In addition, this analysis is performed on all
previously-impaired debt securities that continue to be held by us and all structured securities that were not of high-credit
quality at the date of purchase. These impairment assessments may include, but are not limited to, discounted cash flow
analyses ("DCFs").
For structured securities, including CMBS, RMBS, ABS, and CDOs, we also consider variables such as expected default,
severity, and prepayment assumptions based on security type and vintage, taking into consideration information from credit
agencies, historical performance, and other relevant economic and performance factors.
In making our assessment, we perform a DCF to determine the present value of future cash flows to be generated by the
underlying collateral of the security. Any shortfall in the expected present value of the future cash flows, based on the DCF,
from the amortized cost basis of a security is considered a “credit impairment,” with the remaining decline in fair value of a
security considered as a “non-credit impairment.” As mentioned above, credit impairments are charged to earnings as a
component of realized losses, while non-credit impairments are recorded to Other Comprehensive Income ("OCI") as a
component of unrealized losses.
Discounted Cash Flow Assumptions
The discount rate we use in a DCF is the effective interest rate implicit in the security at the date of acquisition for those
structured securities that were not of high-credit quality at acquisition. For all other securities, we use a discount rate that
equals the current yield, excluding the impact of previous OTTI charges, used to accrete the beneficial interest.
If applicable, we use a conditional default rate assumption in the DCF to estimate future defaults. The conditional default rate
is the proportion of all loans outstanding in a security at the beginning of a time period that are expected to default during that
period. Our assumption of this rate takes into consideration the uncertainty of future defaults as well as whether or not these
securities have experienced significant cumulative losses or delinquencies to date.
If applicable, conditional default rate assumptions apply at the total collateral pool level held in the securitization trust.
Generally, collateral conditional default rates will “ramp-up” over time as the collateral seasons, because the performance
begins to weaken and losses begin to surface. As time passes, depending on the collateral type and vintage, losses will peak
and performance will begin to improve as weaker borrowers are removed from the pool through delinquency resolutions. In
the later years of a collateral pool’s life, performance is generally materially better as the resulting favorable selection of the
portfolio improves the overall quality and performance.
For CMBS, we also consider the net operating income (“NOI”) generated by the underlying properties. Our assumptions of the
properties’ ultimate cash flows take into consideration both an immediate reduction to the reported NOIs and decreases to
projected NOIs.
If applicable, we also use a loan loss severity assumption in our DCF that is applied at the loan level of the collateral pool. The
loan loss severity assumptions represent the estimated percentage loss on the loan-to-value exposure for a particular security.
For CMBS, the loan loss severities applied are based on property type. Losses generated from the evaluations are then applied
to the entire underlying deal structure in accordance with the original service agreements.
51
Equity Securities
Evaluation for OTTI of an equity security, may include, but is not limited to, an evaluation of the following factors:
• Whether the decline appears to be issuer or industry specific;
• The relationship of market prices per share to book value per share at the date of acquisition and date of evaluation;
• The price-earnings ratio at the time of acquisition and date of evaluation;
• The financial condition and near-term prospects of the issuer, including any specific events that may influence the
issuer’s operations, coupled with our intention to hold the securities in the near term;
• The recent income or loss of the issuer;
• The independent auditors’ report on the issuer’s recent financial statements;
• The dividend policy of the issuer at the date of acquisition and the date of evaluation;
• Buy/hold/sell recommendations or price projections published by outside investment advisors;
• Rating agency announcements;
• The length of time and the extent to which the fair value has been, or is expected to be, less than cost in the near
term; and
• Our expectation of when the cost of the security will be recovered.
If there is a decline in the fair value on an equity security that we do not intend to hold, or if we determine the decline is other-
than-temporary, including declines driven by market volatility for which we cannot assert will recover in the near term, we will
write down the carrying value of the investment and record the charge through earnings as a component of realized losses.
Other Investments
Our evaluation for OTTI of an other investment (i.e., an alternative investment) may include, but is not limited to,
conversations with the management of the alternative investment concerning the following:
• The current investment strategy;
• Changes made or future changes to be made to the investment strategy;
• Emerging issues that may affect the success of the strategy; and
• The appropriateness of the valuation methodology used regarding the underlying investments.
If there is a decline in fair value on an other investment that we do not intend to hold, or if we determine the decline is other
than temporary, we write down the cost of the investment and record the charge through earnings as a component of realized
losses.
Reinsurance
Reinsurance recoverables on paid and unpaid losses and loss expenses represent estimates of the portion of such liabilities that
will be recovered from reinsurers. Each reinsurance contract is analyzed to ensure that the transfer of risk exists to properly
record the transactions in the Financial Statements. Amounts recovered from reinsurers are recognized as assets at the same
time and in a manner consistent with the paid and unpaid losses associated with the reinsured policies. An allowance for
estimated uncollectible reinsurance is recorded based on an evaluation of balances due from reinsurers and other available
information. This allowance totaled $5.1 million at December 31, 2013 and $4.8 million at December 31, 2012. We
continually monitor developments that may impact recoverability from our reinsurers and have available to us contractually
provided remedies if necessary. For further information regarding reinsurance, see the “Reinsurance” section below and Note
8. “Reinsurance” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K.
52
Financial Highlights of Results for Years Ended December 31, 2013, 2012, and 20111
($ in thousands, except per share amounts)
2013
2012
2013 vs.
2012
GAAP measures:
Revenues
Pre-tax net investment income
Pre-tax net income
Net income
Diluted net income per share
Diluted weighted-average outstanding
shares
GAAP combined ratio
Statutory combined ratio
Return on average equity ("ROE")
Non-GAAP measures:
Operating income
Diluted operating income per share
Operating ROE
$
1,903,741
$
1,734,102
10 %
134,643
142,267
106,418
1.87
56,810
97.8 %
97.5 %
9.5 %
131,877
37,635
37,963
0.68
55,933
104.0
103.5
3.5
$
93,939
1.65
8.4 %
$
32,121
0.58
3.0
2
278
180
175
2
(6.2) pts
(6.0)
6.0
192 %
184
5.4
pts
2011
1,597,475
147,443
10,400
22,033
0.40
55,221
107.2
106.7
2.1
21,227
0.38
2.0
2012 vs.
2011
9 %
(11)
262
72
70
1
(3.2) pts
(3.2)
1.4
51 %
53
1.0
pts
1Refer to the Glossary of Terms attached to this Form 10-K as Exhibit 99.1 for definitions of terms used in this financial review.
The following table reconciles operating income and net income for the periods presented above:
($ in thousands, except per share amounts)
Operating income
Net realized gains, net of tax
Loss on discontinued operations, net of tax
Net income
Diluted operating income per share
Diluted net realized gains per share
Diluted net loss on discontinued operations per share
Diluted net income per share
2013
2012
2011
$
$
$
$
93,939
13,476
(997)
106,418
1.65
0.24
(0.02)
1.87
32,121
5,842
—
37,963
0.58
0.10
—
0.68
21,227
1,456
(650)
22,033
0.38
0.03
(0.01)
0.40
We are currently targeting a return on average equity that is three points higher than our cost of capital, or 12%, excluding the
impact of realized gains and losses, which is referred to as operating return on equity. Improvement in our operating return on
average equity between 2013 and 2012 reflects underwriting profitability of $38.8 million in 2013 compared to an underwriting
loss of $64.0 million in 2012. The 161% improvement between years is driven primarily by: (i) higher underwriting
profitability in our Standard Insurance Operations of $87 million as a result of significantly lower catastrophe losses and
renewal pure price increases that exceeded loss costs trends; and (ii) improvement in our E&S Insurance Operations of $15.8
million. E&S operations were primarily affected by: (i) earned premiums that now reflect the full operations of this business
following its acquisition in 2011; (ii) renewal pure price increases; and (iii) a decrease in initial start up expenditures.
Operating ROE in both 2012 and 2011 reflect reduced levels of pre-tax operating income due to significant catastrophe losses
in each of those years.
Our operating ROE contribution by component is as follows:
Operating Return on Average Equity
Standard Insurance Operations
E&S Insurance Operations
Investments
Other
Total
2013
2012
2011
2.5 %
(0.2)%
9.0 %
(2.9)%
8.4 %
(2.7)%
(1.2)%
9.3 %
(2.4)%
3.0 %
(6.0)%
(0.5)%
10.7 %
(2.2)%
2.0 %
53
In all three years, pre-tax net investment income was negatively impacted by the declining interest rate environment, which has
sequentially lowered returns within our fixed maturity portfolio when comparing years. However, strong returns in our
alternative investment portfolio have partially offset the impact of the declining interest rates on the investment segments
operating ROE contribution.
The following table provides a quantitative foundation for analyzing our overall Insurance Subsidiaries underwriting results:
All Lines
($ in thousands)
GAAP Insurance Operations Results:
Net Premiums Written ("NPW")
Net Premiums Earned ("NPE")
Less:
Losses and loss expenses incurred
Net underwriting expenses incurred
Dividends to policyholders
Underwriting income (loss)
GAAP Ratios:
Loss and loss expense ratio
Underwriting expense ratio
Dividends to policyholders ratio
Combined ratio
Statutory Ratios:
Loss and loss expense ratio
Underwriting expense ratio
Dividends to policyholders ratio
Combined ratio
2013
2012
2013
vs. 2012
1,810,159
1,736,072
1,121,738
571,294
4,274
38,766
64.6 %
33.0
0.2
97.8
64.5
32.8
0.2
97.5 %
1,666,883
1,584,119
1,120,990
523,688
3,448
(64,007)
70.8
33.0
0.2
104.0
70.7
32.6
0.2
103.5
9 %
10
—
9
24
161 %
(6.2) pts
—
—
(6.2)
(6.2)
0.2
—
(6.0) pts
2011
1,485,349
1,439,313
1,074,987
462,626
5,284
(103,584)
74.7
32.1
0.4
107.2
74.6
31.7
0.4
106.7
2012
vs. 2011
12 %
10
4
13
(35)
38 %
(3.9) pts
0.9
(0.2)
(3.2)
(3.9)
0.9
(0.2)
(3.2) pts
The growth in NPW and NPE for our Insurance Subsidiaries in 2013 and 2012 reflects the following in our Standard Insurance
Operations: (i) renewal pure price increases; (ii) strong retention; and (iii) new business. In addition, incremental premiums
were generated over these years from our E&S business, which was acquired in 2011.
The combined ratios improved when comparing all three years. The main driver of this improvement is the impact of
catastrophe losses on our results. In 2011 and 2012, these losses were the highest that they have been in our history. Historical
catastrophe losses in the 10 years prior to 2011 include a high of 4.0 points, a low of 0.3 points, and a median of 1.5 points.
See the tables below for quantitative data regarding catastrophe losses over the past three years. In addition, the combined ratio
improvement was driven by renewal pure price increases that are exceeding loss trends in our Standard Insurance Operations
and the following in our E&S Insurance Operations: (i) earned premiums that now reflect the full operations of this business;
(ii) underwriting improvements, including renewal pure price increases; and (iii) a decrease in initial start-up expenditures and
acquisition costs.
Quantitative Data Regarding Catastrophe Losses
2013
2012 1
2011
Combined ratio, as reported
Catastrophe loss points
97.8 %
2.7
104.0
6.2
Combined ratio, excluding catastrophe losses
1 The impact of catastrophe losses on the 2012 statutory combined ratio including flood claims handling fees related to Hurricane Sandy was 5.8 points.
95.1 %
97.8
107.2
8.3
98.9
54
Catastrophe losses in 2012 and 2011 each contained individually significant storms. In 2012, Hurricane Sandy was the single
largest event in our history and in 2011, Hurricane Irene was the second largest event in our history.
($ in thousands)
Total Insurance Operations (Excluding Flood):
Gross losses
Reinsurance
Net losses
Reinstatement premium
Flood :
Gross losses
Reinsurance
Net losses
Flood claims handling fees
Net impact of storms
Hurricane Sandy
Hurricane Irene
2012
2011
$
136,000
(89,400)
46,600
8,577
1,039,155
(1,039,155)
—
(15,587)
$
39,590
46,509
(6,929)
39,580
596
177,008
(177,008)
—
(2,655)
37,521
Outlook
A.M. Best noted in their year-end review that a relatively subdued year for catastrophes helped clear a path for the industry to
achieve an underwriting profit for the first time in four years. Underwriting results reached their best level since 2007, with the
industry producing an expected combined ratio of 97.6% for the year. Profitability for 2013 was further bolstered by
considerable investment gains achieved in strengthened U.S. equity markets. It should also be noted that the drop in
catastrophe losses reduced the industry's 2013 expected combined ratio by 4.3 points. A significant factor that contributed to
this improvement was that, unlike the costly presence of Hurricane Sandy in 2012, not a single major storm made landfall in
the United States last year. A.M. Best is estimating a more normal level of catastrophe losses in 2014. The report also cited:
"In looking ahead to 2014, A.M. Best expects premiums to continue growing through price increases, but the pace of these rate
changes are expected to slow and temper growth in premium. Although core accident-year underwriting results should
improve slightly on the rate level achieved in recent years, less favorable development of prior years’ loss reserves is
anticipated. In addition, the industry will continue to be challenged by the relatively low investment yields that are expected to
persist through 2014, and the slow recovery from the recession of 2007 through 2009."
In line with A.M. Best's expectation of a 97.6% industry combined ratio for 2013, we achieved a statutory combined ratio of
97.5%. However, as catastrophe losses are inherently unpredictable, we believe it is best to examine progress towards targeted
combined ratio goals that exclude these losses. Our 2013 combined ratio excluding catastrophes was 94.8%. In 2012, we
established a three-year targeted statutory combined ratio excluding catastrophes of 92%, which we expect to meet in 2014.
This expectation excludes our assumption for catastrophe losses of approximately 4 points and any prior year development,
favorable or unfavorable. This expectation is based, in part, on a three-year rate plan laid out in early 2012 to achieve overall
annual renewal pure price increases of 5% to 8%. We have achieved overall renewal pure price increases of 6.3% in 2012 and
7.6% in 2013 and we expect to achieve overall renewal pure price increases between 6% to 7% in 2014. Our 2014 renewal
pure price expectation for Commercial Lines is 6% to 7%, down from the 7.6% that we achieved in 2013. In addition, we
expect to achieve renewal pure price of 6.25% for Personal Lines and 8.5% for E&S Lines in 2014. We expect our E&S
Insurance Operations segment to produce consistent profitability in line with our standard Commercial Lines business and we
anticipate after-tax investment income of approximately $100 million and weighted-average shares at year-end 2014 of
approximately 57.4 million.
A key component of meeting our combined ratio target is our ability to generate Commercial Lines renewal pure price
increases between 6% to 7%. Although A.M. Best is continuing to maintain its negative outlook for the commercial lines
market reflecting "the uncertainty around loss-reserve development and continued low profit margins driven by low investment
yields", it does anticipate modestly profitable 2014 results driven by continued but moderating rate increases, improving
macroeconomic conditions and normal catastrophe losses. A.M. Best also believes that "further improvements in 2014 also are
likely to be garnered from another year of business migrating into the excess and surplus lines sector, which is more restrictive
in coverage and priced much higher than standard market rates." For personal lines, A.M. Best maintains a stable outlook in
the coming year reflecting ongoing stability of the auto line and successful carriers continuing to enhance the granularity of
their home pricing models. Standard & Poor's, while maintaining a stable outlook on the property and casualty industry,
55
believes that "rate increases will lose steam and fail to outpace loss cost trends" in 2014. Our commercial lines renewal pure
price increase was 6.3% for January 2014.
Although interest rates on the 10-year U.S. Treasury rose by 127 basis points in 2013, they are still low by historical standards.
The continued low interest rate environment has several significant impacts on our business, some of which are beneficial and
some of which present a challenge to us. The benefits include lower inflation rates that suppress loss trends, as well as reduce
our cost of capital. However, the interest rate environment presents a significant challenge in generating after-tax return on our
investment portfolio as fixed income securities mature and money is re-invested at lower rates. Because maturing and called
bonds generally carry a higher book yield than is available in the current market, we expect the yield on the overall investment
portfolio to continue to decline, albeit at a less significant pace than we have been experiencing.
Results of Operations and Related Information by Segment
Standard Insurance Operations
Our Standard Insurance Operations segment, which represents 93% of our combined insurance operations NPW, sells insurance
products and services primarily in 22 states in the Eastern and Midwestern U.S. and the District of Columbia, through
approximately 1,100 independent retail insurance agencies. This segment consists of two components: (i) Commercial Lines,
which markets primarily to businesses and represents approximately 82% of the segment's NPW; and (ii) Personal Lines,
including our flood business, which markets primarily to individuals and represents approximately 18% of the segment's NPW.
($ in thousands)
2013
2012
GAAP Insurance Operations Results:
2013
vs. 2012
2011
2012
vs. 2011
NPW
NPE
Less:
Loss and loss expense incurred
Net underwriting expenses incurred
Dividends to policyholders
Underwriting gain (loss)
GAAP Ratios:
Loss and loss expense ratio
Underwriting expense ratio
Dividends to policyholders ratio
Combined ratio
Statutory Ratios:
Loss and loss expense ratio1
Underwriting expense ratio1
$
1,678,497
1,610,951
1,037,711
526,465
4,274
42,501
$
64.4 %
32.7
0.3
97.4
64.3
32.5
1,553,586
1,504,890
1,057,787
488,104
3,448
(44,449)
70.3
32.5
0.2
103.0
70.3
32.0
8 %
7
1,461,216
1,435,399
(2)
8
24
196 %
(5.9) pts
0.2
0.1
(5.6)
(6.0)
0.5
1,071,815
455,223
5,284
(96,923)
74.7
31.7
0.4
106.8
74.6
31.4
6 %
5
(1)
7
(35)
54 %
(4.4) pts
0.8
(0.2)
(3.8)
(4.3)
0.6
Dividends to policyholders ratio
Combined ratio1
12013 includes 0.1 points in the loss and loss expense ratio, 0.3 points in the underwriting expense ratio, and 0.4 points in the combined ratio related to the
Retirement Income Plan amendments recorded in the first quarter of 2013 that curtail the accrual of additional benefits for all eligible employees participating
in the plans after March 31, 2016.
97.1 %
(5.4) pts
(3.9) pts
102.5
106.4
(0.2)
0.1
0.3
0.4
0.2
The improvements in NPW and NPE from 2011 through 2013 are primarily the result of the following:
($ in millions)
Retention
Standard Commercial Lines renewal pure price increase
Standard Personal Lines renewal pure price increase
Direct new business premiums
Catastrophe reinstatement premiums
2013
2012
2011
83 %
84 %
83 %
7.6
7.8
317.0
—
$
6.2
6.7
285.9
(8.5)
2.8
6.3
262.3
(0.6)
56
The GAAP loss and loss expense ratio improved in each of the three years depicted in the table above. These fluctuations are
driven by the volatile nature of property losses as illustrated in the tables below. In addition, the improvement in the ratios
reflect the earning of Standard Insurance Operations renewal pure price increases that averaged 7.6% in 2013, which exceeds
our projected loss trend of approximately 3%.
Catastrophe Property Losses
($ in millions)
For the Year ended December 31,
2013
2012
2011
Non-Catastrophe Property Losses
($ in millions)
For the Year ended December 31,
2013
2012
2011
$
$
Loss and Loss
Expense Incurred
Impact on Loss and Loss
Expense Ratio
Year-Over-Year
Change
42.8
96.9
118.8
2.7 pts
6.4
8.3
(3.7)
(1.9)
N/A
Loss and Loss
Expense Incurred
Impact on Loss and Loss
Expense Ratio
Year-Over-Year
Change
214.7
217.3
226.1
13.3 pts
14.4
15.8
(1.1)
(1.4)
N/A
Prior year development also impacted the GAAP loss and loss expense ratio as follows:
Favorable/(Unfavorable) Prior Year Casualty Reserve Development
($ in millions)
General liability
Commercial automobile
Workers compensation
Businessowners' policies
Homeowners
Personal automobile
Other
Total favorable prior year casualty reserve development
2013
2012
2011
$
$
20.0
5.0
(23.5)
9.5
4.0
2.0
—
17.0
(2.5)
7.5
(2.5)
8.0
6.0
0.5
1.0
18.0
11.5
13.0
(6.5)
10.5
3.5
(3.0)
0.5
29.5
Favorable impact on loss ratio
1.0 pts
1.2 pts
2.1 pts
57
Review of Underwriting Results by Lines of Business
Standard Commercial Lines
($ in thousands)
2013
2012
GAAP Insurance Operations Results:
2013
vs. 2012
NPW
NPE
Less:
Loss and loss expense incurred
Net underwriting expenses incurred
Dividends to policyholders
Underwriting gain (loss)
GAAP Ratios:
Loss and loss expense ratio
Underwriting expense ratio
Dividends to policyholders ratio
Combined ratio
Statutory Ratios:
Loss and loss expense ratio1
Underwriting expense ratio1
$
1,380,740
1,316,619
1,263,738
1,225,335
831,261
447,228
4,274
33,856
$
63.1 %
34.0
0.3
97.4
63.1
33.7
853,143
409,679
3,448
(40,935)
69.6
33.4
0.3
103.3
69.6
33.1
2011
1,188,004
1,170,947
832,360
383,255
5,284
(49,952)
71.1
32.7
0.5
104.3
71.0
32.4
9 %
7
(3)
9
24
183 %
(6.5) pts
0.6
—
(5.9)
(6.5)
0.6
2012
vs. 2011
%
6
5
2
7
(35)
18
%
(1.5)
pts
0.7
(0.2)
(1.0)
(1.4)
0.7
Dividends to policyholders ratio
Combined ratio1
1 2013 includes 0.1 points in the loss and loss expense ratio, 0.3 points in the underwriting expense ratio, and 0.4 points in the combined ratio related to the
Retirement Income Plan amendments recorded in the first quarter of 2013 that curtail the accrual of additional benefits for all eligible employees participating
in the plans after March 31, 2016.
97.1 %
(5.9) pts
103.0
103.9
—
(0.2)
(0.9)
0.5
0.3
0.3
pts
The improvements in NPW and NPE from 2011 through 2013 is primarily the result of the following:
($ in millions)
Retention
Renewal pure price increases
Direct new business
Catastrophe reinstatement premiums
For the Year Ended December 31,
2013
2012
82 %
82 %
$
7.6
277.5
—
6.2
236.1
(4.6)
2011
80 %
2.8
212.1
(0.3)
The GAAP loss and loss expense ratio improved by 6.5 points in 2013 compared to 2012, and 1.5 points in 2012 compared to
2011. Both fluctuations were impacted by catastrophe losses, which are outlined in the table below. The ratios also reflect the
earning of standard Commercial Lines renewal pure price increases that averaged 7.6% in 2013, which exceeds our projected
loss trend of approximately 3%. In addition, the improvement in 2013 was impacted by non-catastrophe property losses, which
were 1.6 points lower than 2012.
Catastrophe Property Losses
($ in millions)
For the Year Ended December 31,
Loss and Loss
Expense Incurred
Impact on Loss and Loss
Expense Ratio
Year-Over-Year Change
2013
2012
2011
$
23.0
56.4
75.2
1.7 pts
4.6
6.4
(2.9)
(1.8)
N/A
58
Prior year development also impacted the GAAP loss and loss expense ratio as follows:
Favorable/(Unfavorable) Prior Year Casualty Reserve Development
($ in millions)
General liability
Commercial automobile
Workers compensation
Businessowners' policies
Other
Total favorable prior year casualty reserve development
2013
2012
2011
$
$
20.0
5.0
(23.5)
9.5
—
11.0
(2.5)
7.5
(2.5)
8.0
1.0
11.5
11.5
13.0
(6.5)
10.5
0.5
29.0
Favorable impact on loss ratio
0.8 pts
0.9 pts
2.5 pts
The increase in the GAAP underwriting expense ratio of 0.6 points in 2013 compared to 2012 was primarily driven by higher
profit based compensation as follows: (i) supplemental commissions to agents of 0.3 points; and (ii) annual incentive
compensation to employees of 0.4 points.
The following is a discussion of our most significant standard Commercial Lines of business:
General Liability
($ in thousands)
Statutory NPW
Direct new business
Retention
Renewal pure price increases
Statutory NPE
Statutory combined ratio
% of total statutory standard commercial NPW
2013
2012
2013
vs. 2012
$
426,244
78,294
81 %
8.9 %
405,322
96.2 %
31 %
387,888
66,826
81
6.9
373,381
102.7
31
10 %
17
— pts
2.0
2011
351,561
59,135
79
3.7
9 %
344,682
(6.5) pts
100.7
30
2012
vs. 2011
10 %
13
2
pts
3.2
8 %
2.0
pts
The growth in NPW and NPE for our general liability business in 2013 and 2012 reflect: (i) renewal pure price increases; (ii)
stronger retention; and (iii) higher new business.
The fluctuations in the statutory combined ratios were in part, due to changes in prior year development. Prior year
development can be volatile year to year and, therefore, requires a longer period of time before true trends are fully recognized.
The impact of the prior year development was as follows:
•
•
•
2013: favorable prior year development of 4.9 points driven by lower severities in 2010 and prior accident years,
partially offset by unfavorable development in accident years 2011 and 2012, which showed higher average severities
in premises and operations coverage.
2012: unfavorable by 0.8 points, driven by increased severities in the 2010 and 2011 accident years. This unfavorable
development was largely offset by continued favorable development in the premises and products coverages in
accident years 2007 and 2009, which showed lower frequencies of large losses, particularly in the umbrella coverage.
2011: favorable by 3.3 points, driven by accident years 2006 through 2009, which showed generally lower
frequencies.
59
Commercial Automobile
($ in thousands)
Statutory NPW
Direct new business
Retention
Renewal pure price increases
Statutory NPE
Statutory combined ratio
% of total statutory standard commercial NPW
2013
2012
2013
vs. 2012
$
325,895
59,110
82 %
7.3 %
310,994
96.4 %
24 %
295,651
50,084
82
5.1
288,010
97.1
23
10 %
18
— pts
2.2
8 %
(0.7) pts
2012
vs. 2011
5 %
10
1 pts
3.4
3 %
2.9 pts
2011
282,825
45,472
81
1.7
279,610
94.2
24
NPW and NPE have seen increases over the three-year time period driven by: (i) renewal pure price increases; (ii) strong
retention; and (iii) improvements in new business.
•
•
The fluctuations in the statutory combined ratio were driven by favorable prior year casualty reserve development as follows:
2013: 1.6 points driven by accident years 2006 through 2010 representing a continued trend of better than expected
reported emergence, partially offset by increased severity in accident year 2012.
2012: 2.6 points driven by the 2009 accident year, representing a continued trend driven by better than expected
reported emergence. This was partially offset by unfavorable development in the 2011 accident year, due to higher
frequency of claims.
2011: 4.6 points, driven by the 2007 through 2009 accident years, representing a continued trend driven by lower
frequencies in those years.
•
Workers Compensation
($ in thousands)
Statutory NPW
Direct new business
Retention
Renewal pure price increases
Statutory NPE
Statutory combined ratio
% of total statutory standard commercial NPW
2013
2012
2013
vs. 2012
$
277,135
55,063
82 %
7.5 %
267,612
120.6 %
20 %
263,767
44,417
81
8.0
262,108
114.5
21
5 %
24
1 pts
(0.5)
2 %
6.1 pts
2012
vs. 2011
1 %
(4)
2 pts
4.4
1 %
(1.7) pts
2011
261,348
46,104
79
3.6
259,354
116.2
22
NPW increased in 2013 compared to 2012 while it remained relatively flat in 2012 compared to 2011. The 2013 NPW growth
was primarily attributable to: (i) renewal pure price increases of 7.5%; (ii) improvements in retention; and (iii) new business.
The workers compensation book of business represents 20% of our total statutory standard Commercial Lines NPW for 2013.
We continue to carefully manage growth in this line with 2013 premiums up only 5% compared to 9% in our standard
Commercial Lines book.
Our approach to improving profitability in this line includes: (i) earning renewal pure price increases in excess of loss costs;
(ii) increased focus on reducing workers compensation medical costs through more favorable Preferred Provider Organizations
("PPO") contracts and greater PPO penetration; (iii) the introduction of a Complex Claims Unit to which all significant and
complex liability claims are assigned which has been staffed with personnel that have significant experience in handling and
settling these types of claims; (iv) increased activity in the areas of fraud investigation and salvage/subrogation recoveries
supported by the introduction of predictive models that allow us to better focus our efforts; and (v) the establishment of a
workers compensation strategic case management unit, which specializes in the investigation and medical management of lost-
time claims with high exposure and/or escalation risk.
60
The fluctuations in the statutory combined ratio were primarily attributable to the impact of prior year casualty reserve
development as follows:
• 2013: unfavorable prior year development of 8.6 points driven by 2008 and prior accident years reflecting increases in
severities for medical costs. These increases largely related to case reserve adjustments to long-term care claims, and
our review of medical cost development over many years.
• 2012: unfavorable by 1.1 points, driven by the 2011 accident year, due to an increase in the ultimate severity, partially
offset by accident years 2007 and 2008, due to a decrease in expected severity for those years.
• 2011: unfavorable by 2.7 points, driven by the 2010 accident year, representing a continued trend related to increased
severities in recent years, partially offset by various earlier accident years.
Commercial Property
($ in thousands)
Statutory NPW
Direct new business
Retention
Renewal pure price increases
Statutory NPE
Statutory combined ratio
% of total statutory standard commercial NPW
2013
2012
2013
vs. 2012
$
237,556
53,678
81 %
5.7 %
224,412
78.9 %
17 %
213,321
44,553
81
4.5
202,340
99.1
17
11 %
20
— pts
1.2
11 %
(20.2) pts
2012
vs. 2011
9 %
25
1 pts
2.8
5 %
(10.8) pts
2011
195,927
35,673
80
1.7
192,989
109.9
16
NPW increased in 2013 compared to 2012, as well as 2012 compared to 2011, primarily due to: (i) renewal pure price
increases; and (ii) growth in new business.
The fluctuations in the statutory combined ratios over the three-year period were largely due to fluctuations in catastrophe
losses, which are outlined in the table below. In addition, the improvement in 2013 was impacted by non-catastrophe property
losses, which were 9.6 points lower than in 2012.
($ in millions)
For the Year Ended
December 31,
2013
2012
2011
Catastrophe Losses
Incurred
Impact on
Loss Ratio
Year-Over-Year
Change
$
17.8
35.2
59.7
8.0
pts
17.4
30.9
(9.4)
(13.5)
N/A
61
Standard Personal Lines
($ in thousands)
2013
2012
GAAP Insurance Operations Results:
2013
vs. 2012
2011
2012
vs. 2011
NPW
NPE
Less:
Losses and loss expenses incurred
Net underwriting expenses incurred
Underwriting income (loss)
GAAP Ratios:
Loss and loss expense ratio
Underwriting expense ratio
Combined ratio
Statutory Ratios:
Loss and loss expense ratio
Underwriting expense ratio
Combined ratio
$
$
297,757
294,332
206,450
79,237
8,645
$
$
70.1 %
27.0
97.1
69.9
27.0
96.9 %
289,848
279,555
204,644
78,425
(3,514)
73.2
28.1
101.3
73.1
27.6
100.7
3 %
5
1
1
346 %
(3.1) pts
(1.1)
(4.2)
(3.2)
(0.6)
(3.8) pts
273,212
264,452
239,455
71,968
(46,971)
90.5
27.3
117.8
90.5
26.8
117.3
6 %
6
(15)
9
93 %
(17.3) pts
0.8
(16.5)
(17.4)
0.8
(16.6) pts
The growth in NPW and NPE for our Personal Lines business from 2011 through 2013 reflected renewal pure price increases and
strong retention as follows:
($ in millions)
Retention
Renewal pure price increase
Catastrophe reinstatement premiums
2013
2012
2011
85 %
86 %
86 %
7.8
—
6.7
(3.9)
6.3
(0.3)
The variances in the loss and loss expense ratio in the three-year period are primarily driven by the impact of catastrophe losses
and flood claims handling fees earned from our participation in the NFIP. These amounts are quantified in the table below:
($ in millions)
Catastrophes
Flood Claims Revenues
For the year ended
December 31,
Losses and Loss
Expense
Incurred
Impact on
Losses and Loss
Expense Ratio
Revenue
Earned
Impact on
Losses and Loss
Expense Ratio
Total Impact on
Losses and Loss
Expense Ratio
Year-Over-Year
Change
2013
2012
2011
19.8
40.5
43.6
6.7 pts
14.5
16.5
(4.6)
(18.3)
(7.1)
(1.6) pts
(6.6)
(2.7)
5.1
7.9
13.8
(2.8)
(5.9)
N/A
In addition, the ratios are being reduced by: (i) the earned rate increases on this book of business, which have been outpacing
loss costs; and (ii) non-catastrophe property losses in both 2013 and 2012 that were lower than they were in 2011.
The improvement in the underwriting expense ratio in 2013 compared to 2012, was driven by: (i) higher direct premiums
written in our flood business; and (ii) an increase in the flood expense allowance for issuing and servicing policies.
62
E&S Insurance Operations
Our E&S Insurance Operations segment, which represents 7% of our combined insurance operations NPW, sells Commercial
Lines insurance products and services in all 50 states and the District of Columbia through approximately 90 wholesale general
agents. Insurance policies in this segment typically cover business risks with unique characteristics, such as the nature of the
business or its claim history, that have not obtained coverage in the standard marketplace. E&S insurers have more flexibility
in coverage terms and rates compared to standard market insurers, generally resulting in policies with higher rates and terms
and conditions that are customized for specific risks.
($ in thousands)
GAAP Insurance Operations
Results:
NPW
NPE
Less:
Losses and loss expenses incurred
Net underwriting expenses incurred
Underwriting loss
GAAP Ratios:
Loss and loss expense ratio
Underwriting expense ratio
Combined ratio
Statutory Ratios:
Loss and loss expense ratio
Underwriting expense ratio
Combined ratio
2013
2012
2013
vs. 2012
2011
2012
vs. 2011
$
$
131,662
125,121
$
113,297
79,229
84,027
44,829
63,203
35,584
16 % $
58
33
26
24,133
3,914
3,172
7,403
(3,735)
$
(19,558)
81 % $
(6,661)
67.2 %
35.8
103.0
67.2
35.7
102.9 %
79.8
44.9
124.7
79.3
39.5
118.8
(12.6) pts
(9.1)
(21.7)
(12.1)
(3.8)
(15.9) pts
81.0
189.2
270.2
81.0
50.3
131.3
369 %
1,924
1,893
381
(194) %
(1.2) pts
(144.3)
(145.5)
(1.7)
(10.8)
(12.5) pts
Our E&S business is a growing segment that was acquired in 2011, whose combined ratios are significantly impacted by
premium growth as well as volatility in loss and loss expenses and underwriting expenses. The improvement in the combined
ratio in 2013 was driven by a reduction in acquisition and integration costs from 2012, as well as significant underwriting
actions to improve profitability. Partially offsetting these improvements were catastrophes that were worse by $2.9 million, or
1.6 points.
Although year-over-year comparisons of this business are difficult considering the volatility caused by the items discussed
above, statutory results are on track with our expectations for 2014 to achieve a level of profitability more comparable to our
Standard Insurance Operations.
63
Reinsurance: Standard and E&S Insurance Operations Segments
We have reinsurance contracts that separately cover our property and casualty insurance business. We use traditional forms of
reinsurance and do not utilize finite risk reinsurance. Available reinsurance can be segregated into the following key
categories:
• Property Reinsurance – includes our Property Excess of Loss treaties purchased for protection against large
individual property losses and our Property Catastrophe treaty purchased to provide protection for the overall
property portfolio against severe catastrophic events. Facultative reinsurance is also used for property risks that are
in excess of our treaty capacity.
• Casualty Reinsurance – purchased to provide protection for both individual large casualty losses and catastrophic
casualty losses involving multiple claimants or insureds. Facultative reinsurance is also used for casualty risks that
are in excess of our treaty capacity.
Terrorism Reinsurance – available as a federal backstop related to terrorism losses as provided under the TRIPRA.
For further information regarding this legislation, see Item 1A. “Risk Factors.” of this Form 10-K.
•
• Flood Reinsurance – as a servicing carrier in the WYO program, we receive a fee for writing flood business, for
which the related premiums and losses are 100% ceded to the federal government.
• Other Reinsurance – includes other treaties that we do not consider core to our reinsurance program, such as our
Surety and Fidelity Excess of Loss, National Workers Compensation Reinsurance Pool and our Equipment
Breakdown Coverage treaties, which do not fall within the categories above. In addition, Property and Casualty
treaties purchased specifically for our E&S business that are substantially smaller than those for standard lines are
also considered in this category.
In addition to the above categories, we have entered into several reinsurance agreements with Montpelier Re Insurance Ltd. as
part of the acquisition of MUSIC. Together, these agreements provide protection for losses on policies written prior to the
December 2011 acquisition and any development on reserves established by MUSIC as of the date of acquisition. The
reinsurance recoverables under these treaties are 100% collateralized.
Information regarding the terms and related coverage associated with each of our categories of reinsurance above can be found
in Item 1. “Business.” of this Form 10-K.
We regularly reevaluate our overall reinsurance program and try to develop effective ways to manage transfer of risk. Our
analysis is based on a comprehensive process that includes periodic analysis of modeling results, aggregation of exposures,
exposure growth, diversification of risks, limits written, projected reinsurance costs, financial strength of reinsurers, and
projected impact on earnings and statutory surplus. We strive to balance sometimes opposing considerations of reinsurer credit
quality, price, terms, and our appetite for retaining a certain level of risk.
Property Reinsurance
The Property Catastrophe treaty, which covers both our standard market and E&S business, renewed effective January 1, 2014
with an increase in placed limits. The current treaty structure in total provides coverage of $685 million in excess of $40
million and the annual aggregate limit net of our co-participation is approximately $1.0 billion for 2014. This compares to
coverage of $585.0 million in excess of $40.0 million and an annual aggregate limit net of our co-participation of $978.9
million for the expiring term. As our need for catastrophe reinsurance increases, we seek ways to minimize credit risk inherent
in a reinsurance transaction by dealing with highly rated reinsurance partners and purchasing collateralized reinsurance
products, particularly for high severity, low-probability events. The current program includes $197 million in collateralized
limit. We expect the ceded premium for 2014 to be approximately flat compared to 2013 despite the increase in coverage.
We continue to assess our property catastrophe exposure aggregations, modeled results, and effects of growth on our property
portfolio, and strive to manage our exposure to individual large events balanced against the cost of reinsurance protections.
64
Although we model various catastrophic perils, due to our geographic spread, the risk of hurricane continues to be the most
significant natural catastrophe peril to which our portfolio is exposed. Below is a summary of the largest five actual hurricane
losses that we experienced in the past 25 years:
Hurricane Name
Hurricane Sandy
Hurricane Irene
Hurricane Hugo
Hurricane Floyd
Hurricane Isabel
Actual Gross Loss
Accident
($ in millions)
136.0 1
45.0
26.4
14.5
13.4
Year
2012
2011
1989
1999
2003
1 This amount represents reported and unreported gross losses estimated as of December 31, 2013.
We use the results of the Risk Management Solutions (“RMS”) and AIR Worldwide (“AIR”) models in our review of exposure
to hurricane risk. Each of these third party vendors provide two views of the modeled results as follows: (i) a long-term view
that closely relates modeled event frequency to historical hurricane activity; and (ii) a medium-term view that adjusts historical
frequencies to reflect higher expectations of hurricane activity in the North Atlantic Basin. We believe that modeled estimates
provide a range of potential outcomes and multiple estimates, as well as changes in estimates from year-to-year. These should
all be reviewed for purposes of understanding catastrophic risk. The following table provides modeled hurricane results based
on a blended view of the four models for the Insurance Subsidiaries' combined property book as of July 2013:
Occurrence Exceedence Probability
4-Model Blend
($ in thousands)
4.0% (1 in 25 year event)
2.0% (1 in 50 year event)
1.0% (1 in 100 year event)
0.67% (1 in 150 year event)
0.5% (1 in 200 year event)
0.4% (1 in 250 year event)
1 Losses are after tax and include applicable reinstatement premium.
2 Equity as of December 31, 2013.
Gross
Losses
$113,301
213,399
370,670
503,483
630,980
724,629
Net
Losses1
26,341
28,588
31,626
38,087
41,425
47,442
Net Losses
as a Percent of
Equity2
2%
2
3
3
4
4
Our current catastrophe reinsurance program exhausts at 1 in 250 year return period, or events with 0.40% probability, based on
a multi-model view of hurricane risk.
The Property Excess of Loss treaty (“Property Treaty”), which covers our standard market business, was renewed on July 1,
2013 and is effective through June 30, 2014, with the following terms:
•
•
• The first layer continues to have unlimited reinstatements. The annual aggregate limit for the second $30.0 million in
Per risk coverage of $38.0 million in excess of a $2.0 million retention; consistent with the prior year treaty;
Per occurrence cap on the total program of $84.0 million, consistent with the prior year treaty;
excess of $10.0 million layer is consistent with the prior year treaty at $120.0 million; and
• Consistent with the prior year treaty, the Property Treaty excludes nuclear, biological, chemical, and radiological terrorism
losses.
Casualty Reinsurance
The Casualty Excess of Loss treaty (“Casualty Treaty”), which covers our standard market business, was renewed on July 1,
2013 and is effective through June 30, 2014, with substantially the same terms as the expiring treaty providing the following
per occurrence coverage:
• The first through sixth layers provide 100% coverage up to $88.0 million in excess of a $2.0 million retention, consistent
with the prior year treaty;
• Consistent with the prior year treaty, the Casualty Treaty excludes nuclear, biological, chemical, and radiological terrorism
losses; and
• Annual aggregate terrorism limits remain the same as the prior year treaty at $201.0 million.
65
Investments
Our investment philosophy includes certain return and risk objectives for the fixed maturity, equity, and other investment
portfolios. Although yield and income generation remain the key drivers to our investment strategy, our overall philosophy is
to invest with a long-term horizon with predominantly a "buy-and-hold" approach. The primary fixed maturity portfolio return
objective is to maximize after-tax investment yield and income while balancing risk. A secondary objective is to meet or
exceed a weighted-average benchmark of public fixed income indices. Within the equity portfolio, the high dividend yield
strategy is designed to generate consistent dividend income while maintaining an expected tracking error to the S&P 500 Index.
Additional equity strategies are focused on meeting or exceeding strategy specific benchmarks of public equity indices. The
return objective of the other investment portfolio, which includes alternative investments, is to meet or exceed the S&P 500
Index.
Total Invested Assets
($ in thousands)
Total invested assets
Unrealized gain – before tax
Unrealized gain – after tax
2013
2012
Change
$
4,583,312
79,236
51,504
4,330,019
188,197
122,328
6%
(58)
(58)
The increase in our investment portfolio compared to 2012 was driven primarily by: (i) strong operating cash flows of $336.1
million; and (ii) net proceeds from our debt issuance of $78.4 million in February 2013. These increases were partially offset
by a $109.0 million pre-tax decrease in unrealized gains, primarily from a decrease in the market value of our fixed maturity
securities portfolio, driven by the rise in interest rates during 2013. During 2013, interest rates, other than short-term, generally
rose. For example, the yield on the 10-year U.S. Treasury Note rose by 127 basis points. These interest rate movements have
negatively impacted our fixed maturity securities portfolio's valuation, thus increasing the number of securities in a loss
position and reducing the portfolio's overall unrealized gain. The cash generated from our insurance operations segments, as
well as net amounts generated from our capital management strategies executed in the first quarter of 2013, were used to invest
primarily in corporate bonds, structured securities, and municipal bonds within our fixed maturity securities portfolio.
We structure our portfolio conservatively with a focus on: (i) asset diversification; (ii) investment quality; (iii) liquidity,
particularly to meet the cash obligations of our insurance operations segments; (iv) consideration of taxes; and (v) preservation
of capital. We believe that we have a high quality and liquid investment portfolio. The breakdown of our investment portfolio
is as follows:
As of December 31,
U.S. government obligations
Foreign government obligations
State and municipal obligations
Corporate securities
Mortgage-backed securities (“MBS”)
Asset-backed securities ("ABS")
Total fixed maturity securities
Equity securities
Short-term investments
Other investments
Total
2013
2012
4 %
1
28
39
15
3
90
4
4
2
100 %
6
1
31
34
14
3
89
3
5
3
100
66
Fixed Maturity Securities
The average duration of the fixed maturity securities portfolio as of December 31, 2013 was 3.5 years, including short-term
investments, compared to the Insurance Subsidiaries' liability duration of approximately 3.8 years. The current duration of the
fixed maturity securities portfolio is within our historical range, and is monitored and managed to maximize yield while
managing interest rate risk at an acceptable level. We are experiencing pressure on the yields within our fixed maturity
securities portfolio, as higher yielding bonds that are either maturing or have been sold are being replaced with lower yielding
bonds that are currently available in the marketplace. We manage liquidity with a laddered maturity structure and an
appropriate level of short-term investments to avoid liquidation of AFS fixed maturities in the ordinary course of business. We
typically have a long investment time horizon, and every purchase or sale is made with the intent of maximizing risk adjusted
investment returns in the current market environment while balancing capital preservation.
Our fixed maturity securities portfolio had a weighted average credit rating of AA- as of December 31, 2013. The following
table presents the credit ratings of our fixed maturity securities portfolio:
Fixed Maturity Security Rating
December 31,
2013
December 31,
2012
Aaa/AAA
Aa/AA
A/A
Baa/BBB
Ba/BB or below
Total
15 %
45
26
13
1
100 %
16
47
25
10
2
100
For further details on how we manage overall credit quality and the various risks to which our portfolio is subject, see Item 7A.
“Quantitative and Qualitative Disclosures About Market Risk.” of this Form 10-K.
Equity Securities
Our equities portfolio was 4% of invested assets at December 31, 2013, compared to 3% at December 31, 2012. During 2013,
we rebalanced our high dividend yield strategy holdings, generating purchases of $109.7 million and sales of securities that had
an original cost of $86.2 million. Also contributing to the increase in this portfolio's value were unrealized gains, which
increased by $18.5 million in 2013.
Unrealized/Unrecognized Losses
As evidenced by the table below, our net unrealized/unrecognized loss positions increased by $49.1 million as of December 31,
2013 compared to the prior year as follows:
($ in thousands)
December 31, 2013
December 31, 2012
Number of
% of
Unrealized
Unrecognized
Issues
556
1
—
—
—
Market/Book
Loss
80% - 99%
60% - 79%
40% - 59%
20% - 39%
0% - 19%
$
$
51,835
176
—
—
—
52,011
Number of
Issues
100
1
—
—
—
% of
Market/Book
80% - 99%
60% - 79%
40% - 59%
20% - 39%
0% - 19%
$
$
Unrealized
Unrecognized
Loss
2,701
233
—
—
—
2,934
We have reviewed the securities in the tables above in accordance with our OTTI policy as discussed previously in “Critical
Accounting Policies and Estimates” of this Form 10-K. For qualitative information regarding our conclusions as to why these
impairments are deemed temporary, see Note 5. “Investments” in Item 8. “Financial Statements and Supplementary Data.” of
this Form 10-K.
67
Contractual Maturities
The following table presents information regarding our AFS fixed maturity securities that were in an unrealized loss position at
December 31, 2013 by contractual maturity:
Contractual Maturities
($ in thousands)
One year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total
Amortized
Cost
Fair
Value
$
$
6,925
473,382
1,005,889
17,089
1,503,285
6,794
466,972
961,253
16,391
1,451,410
The following table presents information regarding our HTM fixed maturity securities that were in an unrealized/unrecognized
loss position at December 31, 2013 by contractual maturity:
Contractual Maturities
($ in thousands)
One year or less
Due after one year through five years
Total
Amortized
Cost
Fair
Value
$
$
447
2,589
3,036
441
2,555
2,996
Other Investments
As of December 31, 2013, other investments represented 2% of our total invested assets. The following table outlines a
summary of our other investment portfolio by strategy and the remaining commitment amount associated with each strategy.
($ in thousands)
Alternative Investments:
Secondary private equity
Private equity
Energy/power generation
Mezzanine financing
Real estate
Distressed debt
Venture capital
Total alternative investments
Other securities
Total other investments
Carrying Value
Remaining
Commitment
December 31, 2013
December 31, 2012
2013
$
$
25,618
20,192
17,361
12,738
11,698
11,579
7,025
106,211
1,664
107,875
28,032
18,344
18,640
12,692
11,751
12,728
7,477
109,664
4,412
114,076
7,739
9,998
6,984
18,249
10,203
2,965
400
56,538
—
56,538
In addition to the capital that we have already invested to date, we are contractually obligated to invest up to an additional
$56.5 million in our other investment portfolio through commitments that currently expire at various dates through 2026.
During the second quarter of 2013, we contracted for one new alternative investment within the private equity strategy. This
investment, which has characteristics consistent with our private equity strategy investments, has a commitment of $7.0
million, of which $1.3 million has been paid as of December 31, 2013. At this time, our alternative investment strategies do not
include hedge funds. For further discussion of our seven alternative investment strategies outlined above, as well as
redemption, restrictions, and fund liquidations, see Note 5. “Investments” in Item 8. “Financial Statements and Supplementary
Data.” of this Form 10-K.
68
Net Investment Income
The components of net investment income earned were as follows:
($ in thousands)
Fixed maturity securities
Equity securities, dividend income
Short-term investments
Other investments
Miscellaneous income
Investment expenses
Net investment income earned – before tax
Net investment income tax expense
Net investment income earned – after tax
Effective tax rate
Annual after-tax yield on fixed maturity securities
Annual after-tax yield on investment portfolio
2013
2012
2011
$
121,582
6,140
117
15,208
—
(8,404)
134,643
33,233
101,410
24.7%
2.3
2.3
$
124,687
6,215
151
8,996
—
(8,172)
131,877
31,612
100,265
24.0
2.5
2.4
129,710
4,535
160
20,539
133
(7,634)
147,443
36,355
111,088
24.7
2.8
2.8
The $2.8 million increase in investment income before tax compared to prior year was primarily attributable to an increase in
income of $5.5 million from alternative investments within our other investments portfolio. This increase in alternative
investment income was primarily in the energy, distressed debt, and real estate sectors. Partially offsetting this increase was a
decrease of $3.1 million from fixed maturity securities income mainly due to lower reinvestment yields in 2013 compared to
2012. In 2013, bonds that matured or were sold, valued at $649.7 million, had yields that averaged 2.4%, after-tax, while new
purchases of $1.1 billion had an average after-tax yield of 1.4%.
The $15.6 million decrease in investment income before tax in 2012 compared to 2011 was primarily attributable to a decrease
in income of $10.3 million from alternative investments within our investments portfolio, primarily in the energy and private
equity sectors, including the secondary markets. Fixed maturity securities income also decreased by $5.0 million, mainly due
to lower reinvestment yields in 2012 compared to 2011. In 2012, bonds that matured or were sold, valued at $658.3 million,
had yields that averaged 2.5%, after-tax, while new purchases of $892.6 million had an average after-tax yield of 1.6%.
Realized Gains and Losses
Other-than-Temporary Impairments
The following table provides information regarding our OTTI charges recognized in earnings:
($ in thousands)
HTM fixed maturity securities
ABS
Total HTM securities
AFS securities
Obligations of state and political subdivisions
Corporate securities
ABS
CMBS
RMBS
Total fixed maturity AFS securities
Equity securities
Total AFS securities
Other Investments
Total OTTI charges recognized in earnings
2013
2012
2011
$
$
3
3
—
—
—
—
46
46
3,747
3,793
1,847
5,643
—
—
—
—
98
810
183
1,091
3,173
4,264
—
4,264
—
—
17
244
721
694
145
1,821
11,365
13,186
—
13,186
We regularly review our entire investment portfolio for declines in fair value. If we believe that a decline in the value of a
particular investment is other than temporary, we record it as an OTTI through realized losses in earnings for the credit-related
portion and through unrealized losses in OCI for the non-credit related portion for fixed maturity securities. If there is a decline
in fair value of an equity security that we do not intend to hold or if we determine the decline is other than temporary, we write
down the cost of the investment to fair value and record the charge through earnings as a component of realized losses.
69
For a discussion of our OTTI methodology, see Note 2. “Summary of Significant Accounting Policies” in Item 8. “Financial
Statements and Supplementary Data.” of this Form 10-K. In addition, for qualitative information regarding these charges, see
Note 5. “Investments” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K.
Realized Gains and Losses (excluding OTTI)
Realized gains and losses, by type of security, excluding OTTI charges, are determined on the basis of the cost of specific
investments sold and are credited or charged to income. The components of net realized gains (losses) were as follows:
($ in thousands)
HTM fixed maturity securities
Gains
Losses
AFS fixed maturity securities
Gains
Losses
AFS equity securities
Gains
Losses
Short-term investments
Losses
Other investments
Gains
Losses
Total net realized investment gains, excluding OTTI charges
Total OTTI charges recognized in earnings
Total net realized gains
2013
2012
2011
$
$
195
(95)
3,340
(373)
24,776
(408)
—
—
(1,060)
26,375
(5,643)
20,732
194
(217)
4,452
(472)
10,901
(1,205)
(2)
1
(400)
13,252
(4,264)
8,988
4
(564)
9,385
(70)
6,671
—
—
—
—
15,426
(13,186)
2,240
For a discussion of realized gains and losses, see Note 5. “Investments” in Item 8. “Financial Statements and Supplementary
Data.” of this Form 10-K.
The following table presents the period of time that securities sold at a loss were continuously in an unrealized loss position
prior to sale:
Period of Time in an
Unrealized Loss Position
($ in thousands)
Fixed maturities:
0 – 6 months
7 – 12 months
Greater than 12 months
Total fixed maturities
Equities:
0 – 6 months
7 – 12 months
Greater than 12 months
Total equity securities
Total
2013
2012
Fair
Value on
Sale Date
Realized
Loss
Fair
Value on
Sale Date
Realized
Loss
$
$
—
—
—
—
6,788
—
—
6,788
6,788
—
—
—
—
408
—
—
408
408
—
—
4,800
4,800
15,505
—
—
15,505
20,305
—
—
236
236
1,205
—
—
1,205
1,441
There were no significant sales of securities in an unrealized loss position in 2013 or 2012 and there were none in 2011.
Our general philosophy for sales of securities is to reduce our exposure to securities and sectors based on economic evaluations
and when the fundamentals for that security or sector have deteriorated. We typically have a long investment time horizon and
every purchase or sale is made with the intent of improving future investment returns while balancing capital preservation. For
additional discussions, see Note 5. “Investments” in Item 8. “Financial Statements and Supplementary Data.” of this
Form 10-K.
70
Federal Income Taxes
The following table provides information regarding federal income taxes from continuing operations:
($ in millions)
Federal income tax expense (benefit) from continuing operations
Effective tax rate
2013
2012
2011
36.4
25%
(0.3)
(1)
(11.3)
(99)
The fluctuations in federal income taxes and the effective tax rates in 2013 as compared to 2012 and 2011 was primarily due to
the improvement in our underwriting performance driven by lower catastrophic events and earning renewal pure price increases
in excess of loss trends.
For a reconciliation of our effective tax rate to the statutory rate of 35%, see Note 14. “Federal Income Taxes” in Item 8.
“Financial Statements and Supplementary Data.” of this Form 10-K.
Financial Condition, Liquidity, Short-term Borrowings, and Capital Resources
Capital resources and liquidity reflect 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
We manage liquidity with a focus on generating sufficient cash flows to meet the short-term and long-term cash requirements
of our business operations. Our cash and short-term investment position of $174 million at December 31, 2013 was comprised
of $16 million at Selective Insurance Group, Inc. (the “Parent”) and $158 million at the Insurance Subsidiaries. This amount
was lower than our aggregate $215 million cash and short-term investment position at December 31, 2012, as we were
previously maintaining higher liquid assets to fund claim payments related to Hurricane Sandy. As those payments have been
predominantly made, cash and short-term assets have declined. Short-term investments are generally maintained in "AAA"
rated money market funds approved by the National Association of Insurance Commissioners ("NAIC"). During 2013, the
Parent continued to build a fixed maturity security investment portfolio containing high-quality, highly-liquid government and
corporate fixed maturity investments to generate additional yield. This portfolio amounted to $56 million at December 31,
2013 compared to $41 million at December 31, 2012.
Sources of cash for the Parent have historically consisted of dividends from the Insurance Subsidiaries, borrowings under lines
of credit and loan agreements with certain Insurance Subsidiaries, and the issuance of stock and debt securities. We continue to
monitor these sources, giving consideration to our long-term liquidity and capital preservation strategies.
The following table provides quantitative data regarding all Insurance Subsidiaries' dividends paid to the Parent in 2013 for
debt service, shareholder dividends and general operating purposes:
Dividends
($ in millions)
Twelve Months ended December 31, 2013
State of Domicile
Ordinary Dividends
Paid
Extraordinary
Dividends Paid
Total Dividends
Paid
Selective Insurance Company of America ("SICA")
Selective Way Insurance Company ("SWIC")
New Jersey
New Jersey
Selective Insurance Company of South Carolina ("SISC")
Indiana
Selective Insurance Company of the Southeast ("SICSE")
Indiana
Selective Insurance Company of New York ("SINY")
New York
Selective Insurance Company of New England ("SICNE")
New Jersey
Selective Insurance Company of New Jersey (SAICNJ")
New Jersey
Total
$
$
6.0
6.4
1.0
1.4
2.4
2.0
1.9
21.1
11.0
—
—
—
—
—
—
11.0
17.0
6.4
1.0
1.4
2.4
2.0
1.9
32.1
The extraordinary dividends paid in 2013 were part of the capitalization plan for the formation of SFCIC and SCIC.
71
Based on the 2013 statutory financial statements, the maximum ordinary dividends that can be paid to the Parent by the
Insurance Subsidiaries in 2014 are as follows:
Dividends
($ in millions)
SICA
SWIC
SICSC
SICSE
SICNY
SICNE
SAICNJ
Mesa Underwriters Specialty Insurance
Company ("MUSIC")
Selective Casualty Insurance Company
("SCIC")
Selective Fire and Casualty Insurance Company
("SFCIC")
Total
New Jersey
New Jersey
Indiana
Indiana
New York
New Jersey
New Jersey
New Jersey
New Jersey
New Jersey
State of Domicile
2014
Maximum Ordinary
Dividends
$
$
46.3
25.0
11.2
8.2
7.9
3.5
6.8
6.2
8.1
3.5
126.7
Any dividends to the Parent are subject to the approval and/or review of the insurance regulators in the respective domiciliary
states and are generally payable only from earned surplus as reported in the statutory annual statements of those subsidiaries as
of the preceding December 31. Although past dividends have historically been met with regulatory approval, there is no
assurance that future dividends that may be declared will be approved. For additional information regarding dividend
restrictions, refer to Note 10. “Indebtedness” and Note 20. “Statutory Financial Information, Capital Requirements, and
Restrictions on Dividends and Transfers of Funds” in Item 8. “Financial Statements and Supplementary Data.” of this
Form 10-K.
In the first quarter of 2013, we issued $185 million of 5.875% Senior Notes due 2043. The Senior Notes pay interest on
February 15, May 15, August 15, and November 15 of each year beginning on May 15, 2013, and on the date of maturity. The
notes are callable by us on or after February 8, 2018, at a price equal to 100% of their principal amount, plus accrued and
unpaid interest. A portion of the proceeds from this debt issuance was used to fully redeem the $100 million aggregate
principal amount of our 7.5% Junior Subordinated Notes due 2066. Of the remaining net proceeds, $57.1 million was used to
make capital contributions to the Insurance Subsidiaries while the balance was used for general corporate purposes. For
additional information related to our outstanding debt, refer to Note 10. "Indebtedness" in Item 8. "Financial Statements and
Supplementary Data." of this Form 10-K.
The Parent had no private or public issuances of stock during 2013. In the third quarter of 2013, the Parent renewed its $30
million line of credit ("Line of Credit"). For additional information regarding the renewal, see the "Short-Term Borrowings"
section below and Note 10. "Indebtedness" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. The
Parent had no borrowings under this Line of Credit or the previous credit facility at December 31, 2013 or at any time during
2013.
We have two Insurance Subsidiaries domiciled in Indiana ("Indiana Subsidiaries") that are members of the Federal Home Loan
Bank of Indianapolis ("FHLBI"), SICSC and SICSE. Membership in the FHLBI provides these subsidiaries with access to
additional liquidity. The Indiana Subsidiaries' aggregate investment of $2.9 million provides them with the ability to borrow up
to 20 times the total amount of the FHLBI common stock purchased, at comparatively low borrowing rates. All borrowings
from the FHLBI are required to be secured by certain investments. For additional information regarding the required collateral,
refer to Note 5. "Investments" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K.
72
The Parent's Line of Credit agreement permits collateralized borrowings by the Indiana Subsidiaries from the FHLBI so long as
the aggregate amount borrowed does not exceed 10% of the respective Indiana Subsidiary's admitted assets from the preceding
calendar year. Admitted assets amounted to $542.4 million for SICSC and $414.9 million for SICSE as of December 31, 2013,
for a borrowing capacity of approximately $96 million. As our outstanding borrowing with the FHLBI is currently $58 million,
the Indiana Subsidiaries have the ability to borrow approximately $38 million more until the Line of Credit borrowing limit is
met, of which $30 million could be loaned to the Parent under lending agreements approved by the Indiana Department of
Insurance. Similar to the Line of Credit agreement, these lending agreements limit borrowings by the Parent from the Indiana
Subsidiaries to 10% of the admitted assets of the respective Indiana Subsidiary. For additional information regarding the
Parent's Line of Credit, refer to the section below entitled “Short-term Borrowings.”
The Insurance Subsidiaries also generate liquidity through insurance float, which is created by collecting premiums and earning
investment income before losses are paid. The period of the float can extend over many years. Our investment portfolio
consists of maturity dates that are laddered to continually provide a source of cash flows for claims payments in the ordinary
course of business. The duration of the fixed maturity securities portfolio including short-term investments was 3.5 years as of
December 31, 2013, while the liabilities of the Insurance Subsidiaries have a duration of 3.8 years. In addition, the Insurance
Subsidiaries purchase reinsurance coverage for protection against any significantly large claims or catastrophes that may occur
during the year.
The liquidity generated from the sources discussed above is used, among other things, to pay dividends to our shareholders.
Dividends on shares of the Parent's common stock are declared and paid at the discretion of the Board of Directors based on
our operating results, financial condition, capital requirements, contractual restrictions, and other relevant factors.
Our ability to meet our interest and principal repayment obligations on our debt, as well as our ability to continue to pay
dividends to our stockholders is dependent on liquidity at the Parent coupled with the ability of the Insurance Subsidiaries to
pay dividends, if necessary, and/or the availability of other sources of liquidity to the Parent. Upcoming principal payments
include $13 million in 2014 and $45 million in 2016. Subsequent to 2016, our next principal repayment is due in 2034.
Restrictions on the ability of the Insurance Subsidiaries to declare and pay dividends, without alternative liquidity options,
could materially affect our ability to service debt and pay dividends on common stock.
Short-term Borrowings
Our Line of Credit with Wells Fargo Bank, National Association, as administrative agent, and Branch Banking and Trust
Company, was renewed effective September 26, 2013 with a borrowing capacity of $30 million, which can be increased to $50
million with the approval of both lending partners.
The Line of Credit provides the Parent with an additional source of short-term liquidity. The interest rate on our Line of Credit
varies and is based on, among other factors, the Parent’s debt ratings. The Line of Credit expires on September 26, 2017.
There were no balances outstanding under this Line of Credit or the previous credit facility at December 31, 2013 or at any
time during 2013.
The Line of Credit agreement contains representations, warranties, and covenants that are customary for credit facilities of this
type, including, without limitation, financial covenants under which we are obligated to maintain a minimum consolidated net
worth, minimum combined statutory surplus, and maximum ratio of consolidated debt to total capitalization, as well as
covenants limiting our ability to: (i) merge or liquidate; (ii) incur debt or liens; (iii) dispose of assets; (iv) make certain
investments and acquisitions; and (v) engage in transactions with affiliates. The Line of Credit permits collateralized
borrowings by the Indiana Subsidiaries from the FHLBI so long as the aggregate amount borrowed does not exceed 10% of the
respective Indiana Subsidiary’s admitted assets from the preceding calendar year.
The table below outlines information regarding certain of the covenants in the Line of Credit:
Consolidated net worth
Statutory surplus
Debt-to-capitalization ratio1
A.M. Best financial strength rating
1Calculated in accordance with Line of Credit agreement.
Actual as of
December 31, 2013
$1.2 billion
$1.3 billion
25.5%
A
Required as of
December 31, 2013
$800 million
Not less than $750 million
Not to exceed 35%
Minimum of A-
73
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 December 31, 2013, we had statutory surplus of $1.3 billion,
GAAP stockholders’ equity of $1.2 billion, and total debt of $392.4 million, which equates to a debt-to-capital ratio of
approximately 25.4%.
Our cash requirements include, but are not limited to, principal and interest payments on various notes payable, dividends to
stockholders, payment of claims, payment of commitments under limited partnership agreements and capital expenditures, as
well as other operating expenses, which include agents’ commissions, labor costs, premium taxes, general and administrative
expenses, and income taxes. For further details regarding our cash requirements, refer to the section below entitled,
“Contractual Obligations, Contingent Liabilities, and Commitments.”
We continually monitor our cash requirements and 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 capital metrics, relative to the
macroeconomic environment, that support our targeted financial strength. Based on our analysis and market conditions, we
may take a variety of actions, including, but not limited to, contributing capital to the Insurance Subsidiaries in our insurance
operations, issuing additional debt and/or equity securities, repurchasing shares of the Parent’s common stock, and increasing
stockholders’ dividends.
Our capital management strategy is intended to protect the interests of the policyholders of the Insurance Subsidiaries and our
stockholders, while enhancing our financial strength and underwriting capacity.
Book value per share increased to $20.63 as of December 31, 2013, from $19.77 as of December 31, 2012, due to $1.90 in net
income coupled with a $0.74 benefit primarily related to the first quarter of 2013 pension revaluation and curtailment. These
items were partially offset by a $1.27 decrease in the unrealized losses on our investment portfolio driven by the rising interest
rate environment, and $0.52 in dividends to our shareholders.
Off-Balance Sheet Arrangements
At December 31, 2013 and December 31, 2012, we did not have any material relationships with unconsolidated entities or
financial partnerships, such 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 material financing, liquidity, market, or credit risk that could arise if we had engaged in
such relationships.
Contractual Obligations, Contingent Liabilities, and Commitments
As discussed in “Net Loss and Loss Expense Reserves” in Item 1. “Business.” of this Form 10-K, we maintain case reserves
and estimates of reserves for losses and loss expense IBNR, in accordance with industry practice. Using generally accepted
actuarial reserving techniques, we project our estimate of ultimate losses and loss expenses at each reporting date. Included
within the estimate of ultimate losses and loss expenses are case reserves, which are analyzed on a case-by-case basis by the
type of claim involved, the circumstances surrounding each claim, and the policy provisions relating to the type of losses. The
difference between: (i) projected ultimate loss and loss expense reserves; and (ii) case loss and loss expense reserves thereon
are carried as the IBNR reserve. A range of possible reserves is determined annually and considered in addition to the most
recent loss trends and other factors in establishing reserves for each reporting period. Based on the consideration of the range
of possible reserves, recent loss trends and other factors, IBNR is established and the ultimate net liability for losses and loss
expenses is determined. Such an assessment requires considerable judgment given that it is frequently not possible to
determine whether a change in the data is an anomaly until sometime after the event. Even if a change is determined to be
permanent, it is not always possible to reliably determine the extent of the change until sometime later. As a result, there is no
precise method for subsequently evaluating the impact of any specific factor on the adequacy of reserves because the eventual
deficiency or redundancy is affected by many factors.
Given that the loss and loss expense reserves are estimates, as described above and in more detail under the “Critical
Accounting Policies and Estimates” in this Form 10-K, the payment of actual losses and loss expenses is generally not fixed as
to amount or timing. Due to this uncertainty, financial accounting standards prohibit us from discounting these reserves to their
present value. Additionally, estimated losses as of the financial statement date do not consider the impact of estimated losses
from future business. Therefore, the projected settlement of the reserves for net loss and loss expenses will differ, perhaps
significantly, from actual future payments.
74
The projected paid amounts in the table below by year are estimates based on past experience, adjusted for the effects of current
developments and anticipated trends, and include considerable judgment. There is no precise method for evaluating the impact
of any specific factor on the projected timing of when loss and loss expense reserves will be paid and as a result, the timing and
amounts of the actual payments will be affected by many factors. Care must be taken to avoid misinterpretation by those
unfamiliar with this information or familiar with other data commonly reported by the insurance industry.
Our future cash payments associated with contractual obligations pursuant to operating leases for office space and equipment,
capital leases for computer hardware and software, notes payable, interest on debt obligations, and loss and loss expenses as of
December 31, 2013 are summarized below:
Contractual Obligations
Payment Due by Period
($ in millions)
Operating leases
Capital leases
Notes payable
Interest on debt obligations
Subtotal
Gross loss and loss expense payments
Ceded loss and loss expense payments
Net loss and loss expense payments
Total
$
45.5
3.5
393.0
543.3
985.3
3,349.8
540.9
2,808.9
Total
$
3,794.2
Less than
1 year
1-3
Years
3-5
years
More than
5 years
11.4
1.4
13.0
22.1
47.9
836.1
127.2
708.9
756.8
15.5
2.0
45.0
43.5
106.0
969.8
87.3
882.5
988.5
8.5
0.1
—
42.4
51.0
512.5
51.3
461.2
10.1
—
335.0
435.3
780.4
1,031.4
275.1
756.3
512.2
1,536.7
See the “Short-term Borrowings” section above for a discussion of our syndicated Line of Credit agreement.
At December 31, 2013, we also have contractual obligations that expire at various dates through 2026 that may require us to
invest up to an additional $56.5 million in alternative and other investments. 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 17. “Related Party Transactions” included in Item 8. “Financial Statements and Supplementary Data.”
of this Form 10-K.
75
Ratings
We are rated by major rating agencies that issue opinions on 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 and Company ("A.M. Best"). In the second quarter of 2013, A.M. Best reaffirmed our rating of “A
(Excellent),” their third highest of 13 financial strength ratings, with a “stable” outlook. The rating reflects our solid risk-
adjusted capitalization, disciplined underwriting focus, increasing use of predictive modeling technology, strong independent
retail agency relationships, and consistently stable loss reserves. We have been rated “A” or higher by A.M. Best for the past
83 years. A downgrade from A.M. Best to a rating below “A-” is an event of default under our Line of Credit and could 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.
Ratings by other major rating agencies are as follows:
•
•
Fitch Ratings ("Fitch") - Our “A+” rating was reaffirmed in January 2014, citing our improved underwriting results,
strong independent agency relationships, solid loss reserve position, and enhanced diversification through continued
efforts to reduce our concentration in New Jersey. Our outlook remained negative citing increased levels of statutory
and financial leverage, a moderate decline in the NAIC risk-based capital levels, and a moderate decline of our
operating earnings-based interest coverage although Fitch noted that this measure has shown improvement in 2013.
S&P Ratings Services ("S&P") - In the third quarter of 2013, S&P lowered our financial strength rating to “A-” from
“A” under their recently revised rating criteria. The rating reflects our strong business risk profile and moderately
strong financial risk profile, built on a strong competitive position in the regional small to midsize commercial
insurance markets in Mid-Atlantic states and strong capital and earnings. The rating revision reflects S&P's view of
our capital and earnings volatility relative to our peers. The outlook for the rating is stable citing the expectation that
we will sustain our strong competitive position and business risk profile while maintaining a strong capital and
earnings profile.
• Moody's Investor Service ("Moody's) - Our "A2" financial strength rating was reaffirmed in the first quarter of 2013
by Moody's, which cited our strong regional franchise with established independent agency support, along with solid
risk adjusted capitalization and strong invested asset quality. Our outlook was revised to negative, citing that our
underwriting results have lagged similarly rated peers.
Our S&P, Moody's, and Fitch financial strength and associated credit ratings affect our ability to access capital markets. The
interest rate on our Line of Credit varies and is based on, among other factors, the Parent's debt ratings. 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.
76
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Market Risk
The fair value of our assets and liabilities are subject to market risk, primarily interest rate, credit risk, and equity price risk
related to our investment portfolio as well as fluctuations in the value of our alternative investment portfolio. Our investment
portfolio is currently comprised of securities categorized as AFS and HTM. We do not hold derivative or commodity
investments. Foreign investments are made on a limited basis, and all fixed maturity transactions are denominated in U.S.
currency. We have minimal foreign currency fluctuation risk on certain equity securities.
Our investment philosophy includes certain return and risk objectives for the fixed maturity, equity, and other investment
portfolios. Although yield and income generation remain the key drivers to our investment strategy, our overall philosophy is
to invest with a long-term horizon along with predominantly a “buy-and-hold” approach. The primary fixed maturity portfolio
return objective is to maximize after-tax investment yield and income while balancing risk. A secondary objective is to meet or
exceed a weighted-average benchmark of public fixed income indices. Within the equity portfolio, the high dividend yield
strategy, which we implemented in 2011, is designed to generate consistent dividend income while maintaining an expected
tracking error to the S&P 500 Index. Additional equity strategies are focused on meeting or exceeding strategy specific
benchmarks of public equity indices. The return objective of the other investment portfolio, which includes alternative
investments, is to meet or exceed the S&P 500 Index. The allocation of our portfolio was 90% fixed maturity securities, 4%
equity securities, 4% short-term investments, and 2% other investments as of December 31, 2013.
We manage our investment portfolio to mitigate risks associated with various financial market scenarios. We will, however,
take prudent risk to enhance our overall long-term results while managing a conservative, well-diversified investment portfolio
to support our underwriting activities.
Interest Rate Risk
Investment Portfolio
We invest in interest rate-sensitive securities, mainly fixed maturity securities. Our fixed maturity securities portfolio is
comprised of primarily investment grade (investments receiving S&P or an equivalent rating of BBB- or above) corporate
securities, U.S. government and agency securities, municipal obligations, and mortgage-backed securities ("MBS"). Our
strategy to manage interest rate risk is to purchase intermediate-term fixed maturity investments that are attractively priced in
relation to perceived credit risks. Our fixed maturity securities include both AFS and HTM securities. Fixed maturity
securities that are not classified as either HTM securities or trading securities are classified as AFS securities and reported at
fair value, with unrealized gains and losses excluded from current earnings and reported as a separate component of
comprehensive income. Those fixed maturity securities that we have the ability and positive intent to hold to maturity are
classified as HTM and carried at either: (i) amortized cost; or (ii) market value at the date the security was transferred into the
HTM category, adjusted for subsequent amortization.
Our exposure to interest rate risk relates primarily to the market price and cash flow variability associated with changes in
interest rates. As our fixed maturity securities portfolio contains interest rate-sensitive instruments, it may be adversely
affected by changes in interest rates resulting from governmental monetary policies, domestic and international economic and
political conditions, and other factors beyond our control. A rise in interest rates will decrease the fair value of our existing
fixed maturity investments and a decline in interest rates will result in an increase in the fair value of our existing fixed
maturity investments. However, new and reinvested money used to purchase fixed maturity securities would benefit from
rising interest rates and would be negatively impacted by falling interest rates.
During 2013, interest rates, other than short-term, generally rose. For example, the yield on the 10-year U.S. Treasury Note
rose by 127 basis points. These interest rate movements have negatively impacted our fixed maturity securities portfolio's
valuation, thus increasing the number of securities in a loss position and reducing the portfolio's overall unrealized gain. The
reduction in the unrealized gain does not correspond to any issuer specific credit concerns; however, it does reflect an expected
reduction in market value due to higher market interest rates. If interest rates rise further, it is reasonable to expect continued
downward pressure on the fair market values within our fixed maturity securities portfolio.
77
During extended periods of low interest rates, net investment income on our fixed maturity securities portfolio is pressured as
higher-yielding securities are rolling over into lower-yielding replacements. In 2013, bonds that matured or were sold, valued
at $649.7 million, had yields that averaged 2.4%, after-tax, while new purchases of $1.1 billion had an average after-tax yield
of 1.4%. We expect this downward trend to continue into 2014, putting pressure on our ability to grow investment income. We
seek to mitigate our interest rate risk associated with holding fixed maturity investments by monitoring and maintaining the
average duration of our portfolio with a view toward achieving an adequate after-tax return without subjecting the portfolio to
an unreasonable level of interest rate risk.
The fixed maturity securities portfolio duration at December 31, 2013 remained stable at 3.6 years, excluding short-term
investments, compared to a year ago. During 2013, we increased our purchases of investment grade corporate bonds,
structured securities, and highly-rated municipal bonds due to attractive risk adjusted return opportunities in those sectors.
Despite the relative attractiveness, the prevailing low interest rate environment still caused the fixed income maturity securities
portfolio after-tax return to fall 22 basis points to 2.3%.
The Insurance Subsidiaries’ liability duration is approximately 3.8 years. We manage our asset liquidity with a laddered
maturity structure and an appropriate level of short-term investments to avoid liquidation of AFS fixed maturity securities in
the ordinary course of business.
We use interest rate sensitivity analysis to measure the potential loss or gain in future earnings, fair values, or cash flows of
market sensitive fixed maturity securities. The sensitivity analysis hypothetically assumes an instant parallel 200 basis point
shift in interest rates up and down in 100 basis point increments from the date of the Financial Statements. We use fair values
to measure the potential loss. This analysis is not intended to provide a precise forecast of the effect of changes in market
interest rates and equity prices on our income or stockholders’ equity. Further, the calculations do not take into account any
actions we may take in response to market fluctuations.
The following table presents the sensitivity analysis of interest rate risk as of December 31, 2013:
($ in thousands)
HTM fixed maturity securities
Fair value of HTM fixed maturity securities portfolio
Fair value change
Fair value change from base (%)
AFS fixed maturity securities
Fair value of AFS fixed maturity securities portfolio
Fair value change
2013
Interest Rate Shift in Basis Points
1-200
-100
0
100
200
$
$
n/m
n/m
n/m
n/m
n/m
423,152
6,171
1.48%
3,847,504
131,968
416,981
407,323
(9,658)
(2.32)%
397,933
(19,048)
(4.57)%
3,715,536
3,574,997
3,444,743
(140,539)
(270,793)
Fair value change from base (%)
1 Given the low interest rate environment, an interest rate decline of 200 basis points is deemed unreasonable for certain securities in our portfolio, as the
decline would generate a zero or negative yield, therefore this interest rate decline for purposes of the sensitivity analysis is not meaningful ("n/m").
(3.78)%
3.55%
n/m
(7.29)%
78
Pension and Post-Retirement Benefit Plan Obligation
Our pension and post-retirement benefit obligations and related costs are calculated using actuarial methods within the
framework of U.S. GAAP. The discount rate assumption is an important element of expense and/or liability measurement.
Changes in the discount rate assumption could materially impact our pension and post-retirement life valuation in the future.
The discount rate enables us to state expected future cash flows at their present value on the measurement date. The purpose of
the discount rate is to determine the interest rates inherent in the price at which pension benefits could be effectively settled.
Our discount rate selection is based on high-quality, long-term corporate bonds. A higher discount rate reduces the present
value of benefit obligations and reduces pension expense. Conversely, a lower discount rate increases the present value of
benefit obligations and increases pension expense. We increased our discount rate for the Retirement Income Plan for Selective
Insurance Company of America and the Supplemental Excess Retirement Plan (jointly referred to as the "Retirement Income
Plan" or the "Plan") to 5.16% for 2013, from 4.42% for 2012, reflecting higher market interest rates. We also increased our
discount rate for the Retirement Life Plan to 4.85% for 2013 from 4.42% for 2012.
For additional information regarding our pension and post-retirement benefit plan obligations, see Note 15. "Retirement Plans"
in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K.
Credit Risk
The financial markets saw stability and steadily rising interest rates in 2013. The overall investment portfolio grew by 6%
despite a $109.0 million decrease in unrealized gains to $79.2 million at December 31, 2013. The credit quality of our fixed
maturity securities portfolio remained stable at “AA-” as of December 31, 2013, the same as of December 31, 2012. Exposure
to non-investment grade bonds represents approximately 1% of the total fixed maturity securities portfolio.
79
The following table summarizes the fair value, net unrealized gain (loss) balances, and the weighted average credit qualities of
our AFS fixed maturity securities at December 31, 2013 and December 31, 2012:
($ in millions)
AFS Fixed Maturity Portfolio:
U.S. government obligations
Foreign government obligations
State and municipal obligations
Corporate securities
ABS
MBS
Total AFS fixed maturity portfolio
State and Municipal Obligations:
General obligations
Special revenue obligations
Total state and municipal obligations
Corporate Securities:
Financial
Industrials
Utilities
Consumer discretionary
Consumer staples
Healthcare
Materials
Energy
Information technology
Telecommunications services
Other
Total corporate securities
ABS:
ABS
Alternative-A ("Alt-A") ABS1
Sub-prime ABS1, 2
Total ABS
MBS:
CMBS
Other agency CMBS
Non-agency CMBS
RMBS
Other agency RMBS
Non-agency RMBS
Alt-A RMBS
Total MBS
December 31, 2013
December 31, 2012
Fair
Value
Unrealized
Gain
(Loss)
Average
Credit
Quality
Fair
Value
Unrealized
Gain
Average
Credit
Quality
$
$
$
$
$
$
$
$
$
173.4
30.6
951.6
1,734.9
140.9
684.1
3,715.5
472.0
479.6
951.6
534.1
135.1
146.5
190.6
171.9
168.5
101.2
93.7
121.2
64.7
7.4
1,734.9
140.4
—
0.5
140.9
30.0
9.1
132.2
55.2
411.5
41.4
4.7
$
$
$
$
$
$
$
$
$
10.1
0.8
5.2
27.0
0.5
(4.0)
39.6
2.6
2.6
5.2
11.7
3.7
(0.3)
2.7
3.0
3.1
1.4
0.9
(0.6)
1.0
0.4
27.0
0.4
—
0.1
0.5
0.9
(0.3)
(1.5)
1.4
(5.1)
0.6
—
AA+
AA-
AA
A
AAA
AA+
AA-
AA+
AA
AA
A
A-
A-
A-
A
A
A-
A-
A+
BBB+
AA+
A
AAA
—
D
AAA
AA+
AA+
AA+
AA+
AA+
A-
A
$
684.1
(4.0)
AA+
$
259.1
30.2
818.0
1,450.3
128.6
609.8
3,296.0
352.3
465.7
818.0
438.0
104.2
124.2
134.7
163.6
178.2
71.9
77.4
100.1
46.7
11.3
1,450.3
127.2
0.8
0.6
128.6
48.9
1.2
87.1
91.0
331.3
44.3
6.0
609.8
17.2
1.4
44.1
81.3
2.3
19.0
165.3
20.5
23.6
44.1
23.2
7.4
6.6
8.3
8.6
11.0
4.6
4.3
3.2
2.8
1.3
81.3
2.0
0.2
0.1
2.3
2.3
—
1.1
3.3
11.3
0.9
0.1
19.0
AA+
AA-
AA
A
AAA
AA
AA-
AA+
AA
AA
A
A-
BBB+
BBB+
A
A+
A-
A-
A
BBB+
AA+
A
AAA
D
D
AAA
AA+
AA+
AA-
AA+
AA+
A-
AA-
AA
1Alt-A ABS and subprime ABS consists of one security whose issuer is currently expected by rating agencies to default on its obligations.
2We define sub-prime exposure as exposure to direct and indirect investments in non-agency residential mortgages with average FICO® scores below 650.
2
80
The following table provides information regarding our HTM fixed maturity securities and their credit qualities at
December 31, 2013 and December 31, 2012:
December 31, 2013
($ in millions)
HTM Portfolio:
Foreign government obligations
State and municipal obligations
Corporate securities
ABS
MBS
Total HTM portfolio
State and Municipal Obligations:
General obligations
Special revenue obligations
Total state and municipal obligations
Corporate Securities:
Financial
Industrials
Utilities
Consumer discretionary
Total corporate securities
ABS:
ABS
Alt-A ABS
Total ABS
MBS:
Non-agency CMBS
Total MBS
Fair
Value
Carry
Value
Unrecognized
Holding Gain
Unrealized
Gain (Loss) in
AOCI
Total
Unrealized/
Unrecognized
Gain
Average
Credit
Quality
0.2
17.6
2.5
0.6
3.2
24.1
5.4
12.2
17.6
0.5
1.0
1.0
—
2.5
—
0.6
0.6
3.2
3.2
0.1
4.0
(0.3)
(0.6)
(0.9)
2.3
2.0
2.0
4.0
(0.1)
(0.2)
—
—
(0.3)
—
(0.6)
(0.6)
(0.9)
(0.9)
0.3
21.6
2.2
—
2.3
26.4
7.4
14.2
21.6
0.4
0.8
1.0
—
2.2
—
—
—
2.3
2.3
AA+
AA
A
AA+
AA-
AA
AA
AA
AA
BBB+
A+
A+
AA
A
A
AAA
AA+
AA-
AA-
$
$
$
$
$
$
$
$
$
$
5.6
369.8
30.3
3.4
7.9
417.0
118.5
251.3
369.8
7.3
7.8
13.2
2.0
30.3
0.9
2.5
3.4
7.9
7.9
5.4
352.2
27.8
2.8
4.7
392.9
113.1
239.1
352.2
6.8
6.8
12.2
2.0
27.8
0.9
1.9
2.8
4.7
4.7
81
December 31, 2012
($ in millions)
HTM Portfolio:
Foreign government obligations
State and municipal obligations
Corporate securities
ABS
MBS
Total HTM portfolio
State and Municipal Obligations:
General obligations
Special revenue obligations
Total state and municipal obligations
Corporate Securities:
Financial
Industrials
Utilities
Consumer discretionary
Materials
Total corporate securities
ABS:
ABS
Alt-A ABS
Total ABS
MBS:
Non-agency CMBS
Total MBS
$
$
$
$
$
$
$
$
Fair
Value
Carry
Value
Unrecognized
Holding Gain
Unrealized Gain
(Loss) in AOCI
Total
Unrealized/
Unrecognized
Gain (Loss)
Average
Credit
Quality
5.9
526.9
42.1
7.1
12.7
594.7
174.4
352.5
526.9
9.6
11.9
15.1
3.5
2.0
42.1
4.7
2.4
7.1
12.7
12.7
5.5
498.0
37.5
5.9
7.2
554.1
166.0
332.0
498.0
8.3
10.4
13.4
3.4
2.0
37.5
4.2
1.7
5.9
7.2
7.2
0.4
28.9
4.6
1.2
5.5
40.6
8.4
20.5
28.9
1.3
1.5
1.7
0.1
—
4.6
0.5
0.7
1.2
5.5
5.5
0.2
6.8
(0.8)
(1.1)
(1.2)
3.9
3.8
3.0
6.8
(0.7)
(0.2)
—
0.1
—
(0.8)
(0.3)
(0.8)
(1.1)
(1.2)
(1.2)
0.6
35.7
3.8
0.1
4.3
44.5
12.2
23.5
35.7
0.6
1.3
1.7
0.2
—
3.8
0.2
(0.1)
0.1
4.3
4.3
AA+
AA
A
A
AA-
AA
AA
AA
AA
BBB+
A+
A+
AA
BBB
A
BBB+
AAA
A
AA-
AA-
A portion of our AFS and HTM municipal bonds contain insurance enhancements. The following table provides information
regarding these insurance-enhanced securities as of December 31, 2013:
Insurers of Municipal Bond Securities
($ in thousands)
National Public Finance Guarantee Corporation, a subsidiary of MBIA, Inc.
Assured Guaranty
Ambac Financial Group, Inc.
Other
Total
Fair Value
142,121
150,800
59,602
11,786
364,309
$
$
Ratings
with
Insurance
AA
AA
AA
A+
AA
Ratings
without
Insurance
AA
AA
AA
A+
AA
To manage and mitigate exposure on our MBS portfolio, we perform analysis both at the time of purchase and as part of the
ongoing portfolio evaluation. This analysis includes review of loan-to-value ratios, geographic spread of the assets securing the
bond, delinquencies in payments for the underlying mortgages, gains/losses on sales, evaluations of projected cash flows, as
well as other information that aids in determination of the health of the underlying assets. We also consider the overall credit
environment, economic conditions, total projected return on the investment, and overall asset allocation of the portfolio in our
decisions to purchase or sell structured securities.
82
The following table details the top 10 state exposures of the municipal bond portion of our fixed maturity portfolio at
December 31, 2013:
State Exposures of Municipal Bonds
($ in thousands)
Texas
Washington
New York
Florida
Arizona
Colorado
Missouri
North Carolina
Ohio
California
Other
Advanced refunded/escrowed to maturity bonds
General Obligation
Local
State
Special
Revenue
$
65,794
35,588
9,585
—
7,809
31,657
16,255
12,990
9,367
6,190
162,537
357,772
42,727
1,068
6,684
—
15,112
—
—
10,006
8,109
11,830
—
123,076
175,885
14,074
189,959
45,318
48,823
77,926
49,485
52,892
16,661
18,720
23,189
19,613
32,701
296,169
681,497
49,425
730,922
Fair
Value
112,180
91,095
87,511
64,597
60,701
48,318
44,981
44,288
40,810
38,891
581,782
1,215,154
106,226
1,321,380
Weighted
Average
Credit
Quality
AA+
AA
AA+
AA-
AA
AA-
AA+
AA
AA
AA
AA
AA
AA+
AA
Total
$
400,499
We are comfortable with the quality, composition, and diversification of our $1.3 billion municipal bond portfolio. Our
municipal bond portfolio is very high quality with an average AA rating and is well laddered with 47% maturing within three
years, and another 12% maturing between three and five years. The weightings of the municipal bond portfolio are: (i) 55% of
high-quality revenue bonds that have dedicated revenue streams; (ii) 30% of local general obligation bonds; and (iii) 15% of
state general obligation bonds. In addition, approximately 8% of the municipal bond portfolio has been pre-refunded, meaning
assets have been placed in trust to fund the debt service and maturity of the bonds. Our largest state exposure is to Texas, at 8%
excluding the impact of pre-refunded bonds. Of the $66 million in local Texas general obligation bonds, $23 million represents
investments in Texas Permanent School Fund bonds, which are considered to have lower risk.
Special revenue fixed income securities of municipalities (referred to as “special revenue bonds”) generally do not have the
“full faith and credit” backing of the municipal or state governments, as do general obligation bonds, but special revenue bonds
have a dedicated revenue stream for repayment. As such, we believe our special revenue bond portfolio is appropriate for the
current environment.
The following table provides further quantitative details on our special revenue bonds:
December 31, 2013
($ in thousands)
Essential Services:
Transportation
Water and sewer
Electric
Total essential services
Education
Special tax
Housing
Other:
Leasing
Hospital
Other
Total other
Fair
Value
% of Special
Revenue
Bonds
Average
Rating
$
158,641
152,373
119,601
430,615
119,997
76,142
21,441
10,449
7,771
15,082
33,302
23
22
18
63
18
11
3
2
1
2
5
AA
AA
AA-
AA
AA
AA
AA+
AA-
AA-
AA
AA
AA
Total special revenue bonds
$
681,497
100
83
Essential Services
A large portion of our special revenue bond portfolio is, by design, invested in sectors that are conventionally deemed as
“essential services” and thus are not considered cyclical in nature. The essential services category (as reflected in the above
table) is comprised of transportation, water and sewer, and electric.
Education
The education portion of the portfolio includes school districts and higher education, including state-wide university systems.
Special Tax
This group includes special revenue bonds with a wide range of attributes. However, similar to other revenue bonds, these are
backed by a dedicated lien on a tax or other revenue repayment source.
Housing
Despite the turmoil in the housing sector, these bonds continue to be highly rated, many of them with the support of U.S.
government agencies. The need for affordable housing continues to grow, especially in light of current delinquencies and
defaults, and as such, political support for these programs remains high. These attributes, when combined, tend to mute this
sector’s cyclicality.
Based on the above attributes, we remain confident in the collectability of our special revenue bond portfolio and have not
acquired any bond insurance in the secondary market covering any of our special revenue bonds.
We continue to evaluate underlying credit quality within this portfolio and as long-term, income-oriented investors, we remain
comfortable with the credit risk in these securities.
Equity Price Risk
Our equity securities are classified as AFS. Our equity securities portfolio is exposed to risk arising from potential volatility in
equity market prices. We attempt to minimize the exposure to equity price risk by maintaining a diversified portfolio and
limiting concentrations in any one company or industry. The following table presents the hypothetical increases and decreases
in 10% increments in market value of the equity portfolio as of December 31, 2013:
($ in thousands)
(30)%
(20)%
(10)%
0%
10%
20%
30%
Fair value of AFS equity portfolio
$
134,940
Fair value change
(57,831)
154,217
(38,554)
173,494
(19,277)
192,771
212,048
19,277
231,325
38,554
250,602
57,831
Change in Equity Values in Percent
In addition to our equity securities, we invest in certain other investments that are also subject to price risk. Our other
investments primarily include alternative investments in private limited partnerships that invest in various strategies such as
private equity, mezzanine debt, distressed debt, and real estate. As of December 31, 2013, these types of investments
represented 2% of our total invested assets and 9% of our stockholders’ equity. These investments are subject to the risks
arising from the fact that the determination of their value is inherently subjective. The general partner of each of these
partnerships usually reports the change in the value of the interests in the partnership on a one quarter lag because of the nature
of the underlying assets or liabilities. Since these partnerships' underlying investments consist primarily of assets or liabilities
for which there are no quoted prices in active markets for the same or similar assets, the valuation of interests in these
partnerships are subject to a higher level of subjectivity and unobservable inputs than substantially all of our other investments.
Each of these general partners is required to determine fair value by the price obtainable for the sale of the interest at the time
of determination. Valuations based on unobservable inputs are subject to greater scrutiny and reconsideration from one
reporting period to the next and therefore, the changes in the fair value of these investments may be subject to significant
fluctuations, which could lead to significant decreases in their fair value from one reporting period to the next. As we record
our investments in these various partnerships under the equity method of accounting, any decreases in the valuation of these
investments would negatively impact our results of operations.
For additional information regarding these alternative investment strategies, see Note 5. “Investments” in Item 8. “Financial
Statements and Supplementary Data.” of this Form 10-K.
84
Indebtedness
(a) Long-Term Debt.
As of December 31, 2013, the Parent had outstanding long-term debt of $392.4 million that matures as shown in the following
table:
($ in thousands)
Financial liabilities
Notes payable
2.90% borrowings from FHLBI
1.25% borrowings from FHLBI
7.25% Senior Notes
6.70% Senior Notes
5.875% Senior Notes
Total notes payable
2013
Year of
Maturity
Carrying
Amount
Fair
Value
2014
2016
2034
2035
2043
$
13,000
$
45,000
49,916
99,498
185,000
$
392,414
$
13,319
45,259
50,887
98,247
146,298
354,010
The weighted average effective interest rate for the Parent's outstanding long-term debt is 5.6%. The Parent's debt is not
exposed to material changes in interest rates because the interest rates are fixed on its long-term indebtedness.
Certain of the debt instruments listed above contain debt covenant provisions as outlined in Note 10. "Indebtedness", within
Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. In addition, the 6.70% and 7.25% Senior Notes
contain standard default cross-acceleration provisions. In the event that any other debt experiences default of $10 million or
more, it would also be considered an event of default under these notes.
(b) Short-Term Debt
Our Line of Credit with Wells Fargo Bank, National Association, as administrative agent, and Branch Banking and Trust
Company (BB&T), was renewed effective September 26, 2013 with a borrowing capacity of $30 million, which can be
increased to $50 million with the approval of both lending partners.
The Line of Credit provides the Parent with an additional source of short-term liquidity. The interest rate on our Line of Credit
varies and is based on, among other factors, the Parent’s debt ratings. The Line of Credit expires on September 26, 2017.
There were no balances outstanding under this Line of Credit or the previous credit facility at December 31, 2013 or at any
time during 2013.
85
Item 8. Financial Statements and Supplementary Data.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Selective Insurance Group, Inc.:
We have audited the accompanying consolidated balance sheets of Selective Insurance Group, Inc. and its subsidiaries (the
“Company”) as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income,
stockholders’ equity, and cash flow for each of the years in the
period ended December 31, 2013. In connection with
our audits of the consolidated financial statements, we also have audited financial statement schedules I to V. These consolidated
financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of Selective Insurance Group, Inc. and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their
cash flows for each of the years in the
period ended December 31, 2013, in conformity with U.S. generally accepted
accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
Selective Insurance Group, Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established
in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated February 28, 2014 expressed an unqualified opinion of the Company’s internal controls over
financial reporting.
/s/ KPMG LLP
New York, New York
February 28, 2014
86
Consolidated Balance Sheets
December 31,
($ in thousands, except share amounts)
ASSETS
Investments:
Fixed maturity securities, held-to-maturity – at carrying value
(fair value: $416,981 – 2013; $594,661 – 2012)
Fixed maturity securities, available-for-sale – at fair value
(amortized cost: $3,675,977 – 2013; $3,130,683 – 2012)
Equity securities, available-for-sale – at fair value
(cost of: $155,350 – 2013; $132,441 – 2012)
Short-term investments (at cost which approximates fair value)
Other investments
Total investments (Note 5)
Cash
Interest and dividends due or accrued
Premiums receivable, net of allowance for uncollectible
accounts of: $4,442 – 2013; $3,906 – 2012
Reinsurance recoverable, net (Note 8)
Prepaid reinsurance premiums (Note 8)
Current federal income tax (Note 14)
Deferred federal income tax (Note 14)
Property and equipment – at cost, net of accumulated
depreciation and amortization of: $179,192 – 2013; $169,428 – 2012
Deferred policy acquisition costs (Note 3)
Goodwill (Note 11)
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Reserve for losses and loss expenses (Note 9)
Unearned premiums
Notes payable (Note 10)
Accrued salaries and benefits
Other liabilities
Total liabilities
Stockholders’ Equity:
Preferred stock of $0 par value per share:
Authorized shares 5,000,000; no shares issued or outstanding
Common stock of $2 par value per share:
Authorized shares: 360,000,000
Issued: 99,120,235 – 2013; 98,194,224 – 2012
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (Note 6)
Treasury stock – at cost (shares: 43,198,622 – 2013; 43,030,776 – 2012)
Total stockholders’ equity (Note 6)
Commitments and contingencies (Notes 18 and 19)
Total liabilities and stockholders’ equity
See accompanying Notes to Consolidated Financial Statements.
87
2013
2012
$
392,879
554,069
3,715,536
3,296,013
192,771
174,251
107,875
151,382
214,479
114,076
4,583,312
4,330,019
193
37,382
524,870
550,897
143,000
512
122,613
50,834
172,981
7,849
75,727
210
35,984
484,388
1,421,109
132,637
2,569
119,136
47,131
155,523
7,849
57,661
6,270,170
6,794,216
3,349,770
1,059,155
392,414
111,427
203,476
4,068,941
974,706
307,387
152,396
200,194
5,116,242
5,703,624
—
—
198,240
288,182
1,202,015
24,851
(559,360)
1,153,928
196,388
270,654
1,125,154
54,040
(555,644)
1,090,592
$
$
$
$
$
6,270,170
6,794,216
Consolidated Statements of Income
December 31,
($ in thousands, except per share amounts)
Revenues:
Net premiums earned
Net investment income earned
Net realized gains:
Net realized investment gains
Other-than-temporary impairments
Other-than-temporary impairments on fixed maturity securities recognized in other
comprehensive income
Total net realized gains
Other income
Total revenues
Expenses:
Losses and loss expenses incurred
Policy acquisition costs
Interest expense
Other expenses
Total expenses
2013
2012
2011
$
1,736,072
134,643
1,584,119
131,877
1,439,313
147,443
26,375
(5,566)
(77)
20,732
12,294
13,252
(1,711)
(2,553)
8,988
9,118
15,426
(11,998)
(1,188)
2,240
8,479
1,903,741
1,734,102
1,597,475
1,121,738
579,977
22,538
35,686
1,120,990
526,143
18,872
30,462
1,074,987
466,404
18,259
26,425
1,759,939
1,696,467
1,586,075
Income from continuing operations, before federal income tax
143,802
37,635
11,400
Federal income tax expense (benefit):
Current
Deferred
Total federal income tax expense (benefit)
24,147
12,240
36,387
5,647
(5,975)
(328)
(228)
(11,055)
(11,283)
Net income from continuing operations
107,415
37,963
22,683
Loss on disposal of discontinued operations, net of tax of $(538) – 2013; and $(350) –
2011
(997)
—
(650)
Net income
Earnings per share:
Basic net income from continuing operations
Basic net loss from discontinued operations
Basic net income
Diluted net income from continuing operations
Diluted net loss from discontinued operations
Diluted net income
Dividends to stockholders
See accompanying Notes to Consolidated Financial Statements.
$
$
$
$
$
$
106,418
37,963
22,033
1.93
(0.02)
1.91
1.89
(0.02)
1.87
0.52
0.69
—
0.69
0.68
—
0.68
0.52
0.42
(0.01)
0.41
0.41
(0.01)
0.40
0.52
88
Consolidated Statements of Comprehensive Income
December 31,
($ in thousands)
Net income
Other comprehensive income, net of tax:
Unrealized (losses) gains on investment securities:
Unrealized holding (losses) gains arising during period
Non-credit portion of other-than-temporary impairments recognized in other comprehensive income
Amount reclassified into net income:
Held-to-maturity securities
Non-credit other-than-temporary impairment
Realized gains on available for sale securities
Total unrealized (losses) gains on investment securities
Defined benefit pension and post-retirement plans:
Net actuarial gain (loss)
Amounts reclassified into net income:
Net actuarial loss
Prior service cost
Curtailment expense
Total defined benefit pension and post-retirement plans
Other comprehensive (loss) income
Comprehensive income
See accompanying Notes to Consolidated Financial Statements.
2013
2012
2011
$
106,418
37,963
22,033
(54,557)
50
30,937
1,660
45,592
772
(1,025)
(1,581)
(1,484)
9
(15,301)
(70,824)
182
(6,118)
25,080
321
(1,821)
43,380
38,775
(17,268)
(10,919)
2,843
3,837
2,712
6
11
41,635
(29,189)
$
77,229
97
—
(13,334)
11,746
49,709
97
—
(8,110)
35,270
57,303
89
Consolidated Statements of Stockholders’ Equity
December 31,
($ in thousands, except share amounts)
Common stock:
Beginning of year
Dividend reinvestment plan
(shares: 63,349 – 2013; 90,110 – 2012; 100,383 – 2011)
Stock purchase and compensation plans
(shares: 862,662 – 2013; 857,403 – 2012; 783,661 – 2011)
End of year
Additional paid-in capital:
Beginning of year
Dividend reinvestment plan
Stock purchase and compensation plans
End of year
Retained earnings:
Beginning of year
Net income
Dividends to stockholders ($0.52 per share – 2013, 2012, and 2011)
End of year
Accumulated other comprehensive income:
Beginning of year
Other comprehensive (loss) income
End of year
Treasury stock:
Beginning of year
Acquisition of treasury stock
(shares: 167,846 – 2013; 194,575 – 2012; 149,997 – 2011)
End of year
Total stockholders’ equity
2013
2012
2011
$
196,388
194,494
192,725
127
180
201
1,725
198,240
1,714
196,388
1,568
194,494
270,654
1,396
16,132
288,182
257,370
1,419
11,865
270,654
244,613
1,417
11,340
257,370
1,125,154
1,116,319
1,123,087
106,418
(29,557)
37,963
(29,128)
22,033
(28,801)
1,202,015
1,125,154
1,116,319
54,040
(29,189)
24,851
42,294
11,746
54,040
7,024
35,270
42,294
(555,644)
(552,149)
(549,408)
(3,716)
(3,495)
(2,741)
(559,360)
(555,644)
(552,149)
$
1,153,928
1,090,592
1,058,328
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.
See accompanying Notes to Consolidated Financial Statements.
90
Consolidated Statements of Cash Flow
December 31,
($ in thousands)
Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Loss on disposal of discontinued operations
Stock-based compensation expense
Undistributed (income) losses of equity method investments
Net realized (gains) losses
Retirement income plan curtailment expense
Changes in assets and liabilities:
Increase in reserves for losses and loss expenses, net of reinsurance recoverables
Increase in unearned premiums, net of prepaid reinsurance and advance premiums
Decrease (increase) in net federal income taxes
Increase in premiums receivable
Increase in deferred policy acquisition costs
(Increase) decrease in interest and dividends due or accrued
Increase in accrued salaries and benefits
Increase (decrease) in accrued insurance expenses
Other-net
Net adjustments
Net cash provided by operating activities
Investing Activities
Purchase of fixed maturity securities, available-for-sale
Purchase of equity securities, available-for-sale
Purchase of other investments
Purchase of short-term investments
Purchase of subsidiary, net of cash acquired
Sale of subsidiary
Sale of fixed maturity securities, available-for-sale
Sale of short-term investments
Redemption and maturities of fixed maturity securities, held-to-maturity
Redemption and maturities of fixed maturity securities, available-for-sale
Sale of equity securities, available-for-sale
Distributions from other investments
Sale of other investments
Purchase of property, equipment, and other assets
Net cash used in investing activities
Financing Activities
Dividends to stockholders
Acquisition of treasury stock
Net proceeds from stock purchase and compensation plans
Proceeds from issuance of notes payable, net of debt issuance costs
Proceeds from borrowings
Repayment of notes payable
Excess tax benefits (expense) from share-based payment arrangements
Repayment of capital lease obligations
Net cash provided by (used in) financing activities
Net (decrease) increase in cash
Cash, beginning of year
Cash, end of year
See accompanying Notes to Consolidated Financial Statements.
$
91
2013
2012
2011
$
106,418
37,963
22,033
43,461
997
8,630
202
(20,732)
16
151,037
75,246
14,834
(40,482)
(17,458)
(1,372)
18,685
14,444
(17,802)
229,706
336,124
38,693
—
6,939
1,651
(8,988)
—
64,763
82,777
(7,812)
(18,094)
(19,762)
468
6,533
8,831
32,737
188,736
226,699
34,645
650
7,422
(323)
(2,240)
—
56,905
46,334
372
(45,116)
(7,777)
633
1,521
(636)
8,534
100,924
122,957
(1,069,387)
(118,072)
(9,332)
(884,911)
(83,833)
(12,990)
(487,813)
(150,551)
(16,033)
(2,056,576)
(1,735,691)
(1,448,782)
—
1,225
20,126
2,096,805
116,584
513,804
115,782
12,039
—
(14,023)
(391,025)
(27,416)
(3,716)
7,119
178,435
—
(100,000)
1,545
(1,083)
54,884
(17)
210
193
255
751
103,572
1,738,255
118,260
439,957
101,740
24,801
1
(12,879)
(202,712)
(26,944)
(3,495)
4,840
—
—
—
1,060
—
(24,539)
(552)
762
210
(51,728)
1,152
146,435
1,433,441
177,350
162,796
60,071
25,622
16,357
(11,824)
(143,507)
(26,513)
(2,741)
5,011
—
45,000
—
(90)
—
20,667
117
645
762
Notes to Consolidated Financial Statements
December 31, 2013, 2012, and 2011
Note 1. Organization
Selective Insurance Group, Inc., through its subsidiaries, (collectively referred to as “we,” “us,” or “our”) offers standard and
excess and surplus lines (“E&S”) property and casualty insurance products. Selective Insurance Group, Inc. (referred to as the
“Parent”) was incorporated in New Jersey in 1977 and its main offices are located in Branchville, New Jersey. The Parent’s
common stock is publicly traded on the NASDAQ Global Select Market under the symbol “SIGI.” We have provided a
glossary of terms as Exhibit 99.1 to this Form 10-K, which defines certain industry-specific and other terms that are used in this
Form 10-K.
We classify our business into three operating segments:
• Our Standard Insurance Operations segment, which is comprised of both commercial lines ("Commercial Lines")
and personal lines ("Personal Lines") business, sells property and casualty insurance products and services in the
standard market, including flood insurance through the National Flood Insurance Program's ("NFIPs") write-your-
own ("WYO") program;
• Our E&S Insurance Operations segment sells Commercial Lines property and casualty insurance products and
services to insureds who have not obtained coverage in the standard market; and
• Our Investments segment, which invests the premiums collected by our Standard and E&S Insurance Operations
and amounts generated through our capital management strategies, which may include the issuance of debt and
equity securities.
Note 2. Summary of Significant Accounting Policies
(a) Principles of Consolidation
The accompanying consolidated financial statements ("Financial Statements") include the accounts of the Parent and its
subsidiaries, and have been prepared in conformity with: (i) U.S. generally accepted accounting principles ("GAAP"); and (ii)
the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). All significant intercompany accounts and
transactions are eliminated in consolidation.
(b) Use of Estimates
The preparation of our 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.
(c) Reclassifications
Certain amounts in our prior years' Financial Statements and related notes have been reclassified to conform to the 2013
presentation. Such reclassifications had no effect on our net income, stockholders' equity, or cash flows.
(d) Investments
Fixed maturity securities may include bonds, redeemable preferred stocks, mortgage-backed securities (“MBS”) and asset-
backed securities (“ABS”). Fixed maturity securities classified as available-for-sale (“AFS”) are reported at fair value. Those
fixed maturity securities that we have the ability and positive intent to hold to maturity are classified as held-to-maturity
(“HTM”) and are carried at either: (i) amortized cost; or (ii) market value at the date of transfer into the HTM category,
adjusted for subsequent amortization. The amortized cost of fixed maturity securities is adjusted for the amortization of
premiums and the accretion of discounts over the expected life of the security using the effective yield method. Premiums and
discounts arising from the purchase of MBS are amortized over the expected life of the security based on future principal
payments, and considering prepayments. These prepayments are estimated based on historical and projected cash flows.
Prepayment assumptions are reviewed quarterly and adjusted to reflect actual prepayments and changes in expectations. Future
amortization of any premium and/or discount is also adjusted to reflect the revised assumptions. Interest income, as well as
amortization and accretion, is included in "Net investment income earned" on our Consolidated Statements of Income. The
amortized cost of fixed maturity securities is written down to fair value when a decline in value is considered to be other than
temporary. See the discussion below on realized investment gains and losses for a description of the accounting for
impairments. Unrealized gains and losses on fixed maturity securities classified as AFS, net of tax, are included in
accumulated other comprehensive income (loss) ("AOCI").
92
Equity securities, which are classified as AFS, may include common stocks and non-redeemable preferred stocks, and are
carried at fair value. Dividend income on these securities is included in "Net investment income earned" on our Consolidated
Statement of Income. The associated unrealized gains and losses, net of tax, are included in AOCI. The cost of equity
securities is written down to fair value when a decline in value is considered to be other than temporary. See the discussion
below on realized investment gains and losses for a description of the accounting for impairments.
Short-term investments may include certain money market instruments, savings accounts, commercial paper, and other debt
issues purchased with a maturity of less than one year. These investments are carried at cost, which approximates fair value.
The associated income is included in "Net investment income earned" on our Consolidated Statement of Income.
Other investments may include alternative investments and other securities. Alternative investments are accounted for using
the equity method. Our share of distributed and undistributed net income from alternative investments is included in "Net
investment income earned" on our Consolidated Statement of Income. Investments in other securities are accounted for either
under the equity method or carried at amortized cost under the effective yield method of accounting. Our share of distributed
and undistributed net income is included in "Net investment income earned" on our Consolidated Statement of Income.
Realized gains and losses on the sale of investments are determined on the basis of the cost of the specific investments sold and
are credited or charged to income. Also included in realized gains and losses are the other-than-temporary impairment
("OTTI") charges recognized in earnings, which are discussed below.
When the fair value of any investment is lower than its cost/amortized cost, an assessment is made to determine if the decline is
other than temporary. We regularly review our entire investment portfolio for declines in fair value. If we believe that a
decline in the value of an AFS security is temporary, we record the decline as an unrealized loss in AOCI. Temporary declines
in the value of an HTM security are not recognized in the Financial Statements. Our assessment of a decline in fair value
includes judgment as to the financial position and future prospects of the entity that issued the investment security, as well as a
review of the security’s underlying collateral for fixed maturity investments. Broad changes in the overall market or interest
rate environment generally will not lead to a write-down.
Fixed Maturity Securities and Short-Term Investments
Our evaluation for OTTI of a fixed maturity security or a short-term investment may include, but is not limited to, the
evaluation of the following factors:
• Whether the decline appears to be issuer or industry specific;
• The degree to which the issuer is current or in arrears in making principal and interest payments on the fixed
maturity security;
• The issuer’s current financial condition and ability to make future scheduled principal and interest payments on a
timely basis;
• Evaluation of projected cash flows;
• Buy/hold/sell recommendations published by outside investment advisors and analysts; and
• Relevant rating history, analysis, and guidance provided by rating agencies and analysts.
OTTI charges are recognized as a realized loss to the extent that they are credit related, unless we have the intent to sell the
security or it is more-likely-than not that we will be required to sell the security. In those circumstances, the security is written
down to fair value with the entire amount of the writedown charged to earnings as a component of realized losses.
To determine if an impairment is other than temporary, we compare the present value of cash flows expected to be collected
with the amortized cost of fixed maturity securities meeting certain criteria. In addition, this analysis is performed on all
previously-impaired debt securities that continue to be held by us and all structured securities that were not of high-credit
quality at the date of purchase. These impairment assessments may include, but are not limited to, discounted cash flow
analyses ("DCFs").
For structured securities, including CMBS, RMBS, ABS, and CDOs, we also consider variables such as expected default,
severity, and prepayment assumptions based on security type and vintage, taking into consideration information from credit
agencies, historical performance, and other relevant economic and performance factors.
93
In making our assessment, we perform a DCF to determine the present value of future cash flows to be generated by the
underlying collateral of the security. Any shortfall in the expected present value of the future cash flows, based on the DCF,
from the amortized cost basis of a security is considered a “credit impairment,” with the remaining decline in fair value of a
security considered as a “non-credit impairment.” As mentioned above, credit impairments are charged to earnings as a
component of realized losses, while non-credit impairments are recorded to Other Comprehensive Income ("OCI") as a
component of unrealized losses.
Discounted Cash Flow Assumptions
The discount rate we use in a DCF is the effective interest rate implicit in the security at the date of acquisition for those
structured securities that were not of high-credit quality at acquisition. For all other securities, we use a discount rate that
equals the current yield, excluding the impact of previous OTTI charges, used to accrete the beneficial interest.
If applicable, we use a conditional default rate assumption in the DCF to estimate future defaults. The conditional default rate
is the proportion of all loans outstanding in a security at the beginning of a time period that are expected to default during that
period. Our assumption of this rate takes into consideration the uncertainty of future defaults as well as whether or not these
securities have experienced significant cumulative losses or delinquencies to date.
If applicable, conditional default rate assumptions apply at the total collateral pool level held in the securitization trust.
Generally, collateral conditional default rates will “ramp-up” over time as the collateral seasons, because the performance
begins to weaken and losses begin to surface. As time passes, depending on the collateral type and vintage, losses will peak
and performance will begin to improve as weaker borrowers are removed from the pool through delinquency resolutions. In
the later years of a collateral pool’s life, performance is generally materially better as the resulting favorable selection of the
portfolio improves the overall quality and performance.
For CMBS, we also consider the net operating income (“NOI”) generated by the underlying properties. Our assumptions of the
properties’ ultimate cash flows take into consideration both an immediate reduction to the reported NOIs and decreases to
projected NOIs.
If applicable, we also use a loan loss severity assumption in our DCF that is applied at the loan level of the collateral pool. The
loan loss severity assumptions represent the estimated percentage loss on the loan-to-value exposure for a particular security.
For CMBS, the loan loss severities applied are based on property type. Losses generated from the evaluations are then applied
to the entire underlying deal structure in accordance with the original service agreements.
Equity Securities
Evaluation for OTTI of an equity security may include, but is not limited to, an evaluation of the following factors:
• Whether the decline appears to be issuer or industry specific;
• The relationship of market prices per share to book value per share at the date of acquisition and date of evaluation;
• The price-earnings ratio at the time of acquisition and date of evaluation;
• The financial condition and near-term prospects of the issuer, including any specific events that may influence the
issuer's operations, coupled with our intention to hold the securities in the near-term;
• The recent income or loss of the issuer;
• The independent auditors' report on the issuer's recent financial statements;
• The dividend policy of the issuer at the date of acquisition and the date of evaluation;
• Buy/hold/sell recommendations or price projections published by outside investment advisors;
• Rating agency announcements;
• The length of time and the extent to which the fair value has been, or is expected to be, less than its cost in the near
term; and
• Our expectation of when the cost of the security will be recovered.
If there is a decline in the fair value on an equity security that we do not intend to hold, or if we determine the decline is other-
than-temporary, including declines driven by market volatility for which we cannot assert will recover in the near term, we will
write down the carrying value of the investment and record the charge through earnings as a component of realized losses.
94
Other Investments
Our evaluation for OTTI of an other investment (i.e., an alternative investment) may include, but is not limited to,
conversations with the management of the alternative investment concerning the following:
• The current investment strategy;
• Changes made or future changes to be made to the investment strategy;
• Emerging issues that may affect the success of the strategy; and
• The appropriateness of the valuation methodology used regarding the underlying investments.
If there is a decline in fair value on an other investment that we do not intend to hold, or if we determine the decline is other
than temporary, we write down the cost of the investment and record the charge through earnings as a component of realized
losses.
(e) Fair Values of Financial Instruments
Assets
The fair values of our investments are generated using various valuation techniques and are placed into the fair value hierarchy
considering the following: (i) the highest priority is given to quoted prices in active markets for identical assets (Level 1); (ii)
the next highest priority is given to quoted prices in markets that are not active or inputs that are observable either directly or
indirectly, including quoted prices for similar assets in markets that are not active and other inputs that can be derived
principally from, or corroborated by, observable market data for substantially the full term of the assets (Level 2); and (iii) the
lowest priority is given to unobservable inputs supported by little or no market activity and that reflect our assumptions about
the exit price, including assumptions that market participants would use in pricing the asset (Level 3). An asset’s classification
within the fair value hierarchy is based on the lowest level of significant input to its valuation. Transfers between levels in the
fair value hierarchy are recognized at the end of the reporting period.
The techniques used to value our financial assets are as follows:
•
•
•
For valuations of a large portion of our equity securities portfolio as well as U.S. Treasury Notes held in our fixed
maturity securities portfolio, we receive prices from an independent pricing service that are based on observable
market transactions. We validate these prices against a second external pricing service, and if established market value
comparison thresholds are breached, further analysis is performed, in conjunction with our external investment
managers, to determine the price to be used. These securities are classified as Level 1 in the fair value hierarchy.
For approximately 99% of our fixed maturity securities portfolio, we utilize a market approach, using primarily matrix
pricing models prepared by external pricing services. Matrix pricing models use mathematical techniques to value
debt securities by relying on the securities relationship to other benchmark quoted securities, and not relying
exclusively on quoted prices for specific securities, as the specific securities are not always frequently traded. As a
matter of policy, we consistently use one pricing service as our primary source and secondary pricing services if prices
are not available from the primary pricing service. In conjunction with our external investment portfolio managers,
fixed maturity securities portfolio pricing is reviewed for reasonableness in the following ways: (i) comparing
positions traded directly by the external investment portfolio managers to prices received from the third-party pricing
services; (ii) comparing the primary vendor pricing to other third-party pricing services as well as benchmark indexed
pricing; (iii) comparing market value fluctuations between months for reasonableness; and (iv) reviewing stale prices.
If further analysis is needed, a challenge is sent to the pricing service for review and confirmation of the price. In
addition to the tests described above, management performs a comparison of our prices to a secondary price source.
Historically, we have not experienced significant variances in prices, and therefore, we have consistently used our
primary pricing service. These prices are typically Level 2 in the fair value hierarchy.
For the small portion of our fixed maturity securities portfolio that we cannot price using our primary or secondary
service, we typically use non-binding broker quotes. These prices are from various broker/dealers that use bid or ask
prices, or benchmarks to indices, in measuring the fair value of a security. For the small portion of non-public equity
securities that we hold, we typically receive prices from a third party pricing service or through statements provided
by the security issuer. In conjunction with our external investment portfolio managers, these fair value measurements
are reviewed for reasonableness. This review typically includes an analysis of price fluctuations between months with
variances over established thresholds being analyzed further. These prices are generally classified as Level 3 in the
fair value hierarchy, as the inputs cannot be corroborated by observable market data.
•
Short-term investments are carried at cost, which approximates fair value. Given the liquid nature of our short-term
investments, we generally validate their fair value by way of active trades within approximately one week of the
financial statement close. These securities are classified as Level 1 in the fair value hierarchy.
95
Liabilities
The techniques used to value our notes payable are as follows:
• The fair value of the 5.875% Senior Notes due February 9, 2043, and the 7.50% Junior Subordinated Notes that
were originally due on September 27, 2066 but have been redeemed, are based on quoted market prices.
• The fair values of the 7.25% Senior Notes due November 15, 2034 and the 6.70% Senior Notes due November 1,
2035 are based on matrix pricing models prepared by external pricing services.
• The fair value of the 2.90% and 1.25% borrowings from the Federal Home Loan Bank of Indianapolis (“FHLBI”)
are estimated using a DCF based on a current borrowing rate provided by the FHLBI consistent with the remaining
term of the borrowing.
See Note 7. “Fair Value Measurements” for a summary table of the fair value and related carrying amounts of financial
instruments.
(f) Allowance for Doubtful Accounts
We estimate an allowance for doubtful accounts on our premiums receivable. This allowance is based on historical write-off
percentages adjusted for the effects of current and anticipated trends. An account is charged off when we believe it is probable
that we will not collect a receivable. In making this determination, we consider information obtained from our efforts to collect
amounts due directly and/or through collection agencies.
(g) Share-Based Compensation
Share-based compensation consists of all share-based payment transactions in which an entity acquires goods or services by
issuing (or offering to issue) its shares, share units, share options, or other equity instruments. The cost resulting from all
share-based payment transactions are recognized in the Financial Statements based on the fair value of both equity and liability
awards. The fair value is measured at grant date for equity awards, whereas the fair value for liability awards are remeasured at
each reporting period. Both the fair value of equity and liability awards is recognized over the requisite service period. The
requisite service period is typically the lesser of the vesting period or the period of time from the grant date to the date of
retirement eligibility. The expense recognized for share-based awards, which, in some cases, contain performance criteria, is
based on the number of shares or units expected to be issued at the end of the performance period.
(h) Reinsurance
Reinsurance recoverables represent estimates of amounts that will be recovered from reinsurers under our various treaties.
Generally, amounts recoverable from reinsurers are recognized as assets at the same time and in a manner consistent with the
paid and unpaid losses associated with the reinsured policies. An allowance for estimated uncollectible reinsurance is recorded
based on an evaluation of balances due from reinsurers and other available information. We charge off reinsurance
recoverables on paid losses when it becomes probable that we will not collect the balance.
(i) Property and Equipment
Property and equipment used in operations, including certain costs incurred to develop or obtain computer software for internal
use, are capitalized and carried at cost less accumulated depreciation. Depreciation is calculated using the straight-line method
over the estimated useful lives of the assets. The following estimated useful lives can be considered as general guidelines:
Asset Category
Computer hardware
Computer software
Internally developed software
Furniture and fixtures
Buildings and improvements
Years
3
3 to 5
5
10
5 to 40
(j) Deferred Policy Acquisition Costs
Deferred policy acquisition costs are limited to costs directly related to the successful acquisition of insurance contracts. Costs
meeting this definition typically include, among other things, sales commissions paid to agents, premium taxes, and the portion
of employee salaries and benefits directly related to time spent on acquired contracts. These costs are deferred and amortized
over the life of the contracts.
96
Accounting guidance requires a premium deficiency analysis to be performed at the level an entity acquires, services, and
measures the profitability of its insurance contracts. We currently perform two premium deficiency analyses, one for Standard
Insurance Operations and one for E&S Insurance Operations, considering the following:
• Our marketing efforts for all of our product lines within our Standard Insurance Operations revolve around
independent retail agencies and their touch points with our shared customers, the policyholders, while our E&S
Insurance Operations revolve around our wholesale general agents.
• We service our Standard Insurance Operations' agency distribution channel through our field model, which includes
agency management specialists ("AMSs"), safety management specialists, claims management specialists ("CMSs"),
and our Underwriting and Claims Service Centers, all of which service the entire population of insurance contracts
acquired through each agency. For our E&S Insurance Operations, we use external adjusters to service claims on
behalf of our customers.
• We measure the profitability of our business for the Standard and E&S Insurance Operations separately, which is
evident in, among other items, the structure of our incentive compensation programs. We measure the profitability
and calculate the compensation of our independent retail agents based on the results of our Standard Insurance
Operations and we measure the profitability and calculate the compensation of our wholesale general agents based on
the results of our E&S Insurance Operations Segment.
There were no premium deficiencies for any of the reported years, as the sum of the anticipated losses and loss expenses,
unamortized acquisition costs, policyholder dividends, and other expenses for our Standard Insurance Operations and E&S
Insurance Operations segments did not exceed the related unearned premium and anticipated investment income. The
investment yields assumed in the premium deficiency assessment for each reporting period, which are based on our actual
average investment yield before tax as of the September 30 calculation date were 3.0% for 2013, 3.1% for 2012, and 4.0% for
2011. Deferred policy acquisition costs amortized to expense were $331.8 million for 2013, $298.5 million for 2012, and
$266.1 million for 2011.
(k) Goodwill
Goodwill results from business acquisitions where the cost of assets and liabilities acquired exceeds the fair value of those
assets and liabilities. A quantitative goodwill impairment analysis is performed if a quarterly qualitative analysis indicates that
it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Goodwill is allocated to the
reporting units for the purposes of these analyses, if appropriate.
(l) Reserves for Losses and Loss Expenses
Reserves for losses and loss expenses are comprised of both case reserves and reserves for claims incurred but not yet reported
("IBNR"). Case reserves result from claims that have been reported to one or more of our ten insurance subsidiaries, which are
collectively referred to as the "Insurance Subsidiaries," and are estimated for the amount of ultimate payment. IBNR reserves
are established based on generally accepted actuarial techniques. Such techniques assume that past experience, adjusted for the
effects of current developments and anticipated trends, are an appropriate basis for predicting future events. In applying
generally accepted actuarial techniques, we also consider a range of possible loss and loss expense reserves in establishing
IBNR.
The internal assumptions we consider in the estimation of the IBNR amounts for both asbestos and environmental and non-
environmental reserves at our reporting dates are based on: (i) an analysis of both paid and incurred loss and loss expense
development trends; (ii) an analysis of both paid and incurred claim count development trends; (iii) the exposure estimates for
reported claims; (iv) recent development on exposure estimates with respect to individual large claims and the aggregate of all
claims; (v) the rate at which new asbestos and environmental claims are being reported; and (vi) patterns of events observed by
claims personnel or reported to them by defense counsel. External factors we monitor for the estimation of IBNR for both
asbestos and environmental and non-environmental IBNR reserves include: (i) legislative enactments; (ii) judicial decisions;
(iii) legal developments in the determination of liability and the imposition of damages; and (iv) trends in general economic
conditions, including the effects of inflation. Adjustments to IBNR are made periodically to take into account changes in the
volume of business written, claims frequency and severity, the mix of business, claims processing, and other items that
management expects to affect our reserves for losses and loss expenses over time.
By using both individual estimates of reported claims and generally accepted actuarial reserving techniques, we estimate the
ultimate net liability for losses and loss expenses. While the ultimate actual liability may be higher or lower than reserves
established, we believe the reserves make a reasonable provision, in the aggregate, for all unpaid losses and loss expenses
incurred. Any changes in the liability estimate may be material to the results of operations in future periods. We do not
discount to present value that portion of our losses and loss expense reserves expected to be paid in future periods; however,
our loss and loss expense reserves include anticipated recoveries for salvage and subrogation claims.
97
Overall reserves are reviewed for adequacy on a periodic basis. As part of the periodic review, we consider the range of
possible loss and loss expense reserves, determined at the beginning of the year. This process assumes that past experience,
adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events.
However, there is no precise method for subsequently evaluating the impact of any specific factor on the adequacy of reserves
because the eventual deficiency or redundancy is affected by many factors. Based upon such reviews, we believe that the
estimated reserves for losses and loss expenses make a reasonable provision to cover the ultimate cost of claims. However, the
ultimate actual liability may be higher or lower than the reserve established. The changes in these estimates, resulting from the
continuous review process and the differences between estimates and ultimate payments, are reflected in the consolidated
statements of income for the period in which such estimates are changed and may be material to the results of operations in
future periods.
(m) Revenue Recognition
The Insurance Subsidiaries' net premiums written include direct insurance policy writings, plus reinsurance assumed and
estimates of premiums earned but unbilled on the workers compensation and general liability lines of insurance, less
reinsurance ceded. The estimated premium on the workers compensation and general liability lines is referred to as audit
premium. We estimate this premium, as it is anticipated to be either billed or returned on policies subsequent to expiration
based on exposure levels (i.e. payroll or sales). Audit premium is based on historical trends adjusted for the uncertainty of
future economic conditions. Economic instability could ultimately impact our estimates and assumptions, and changes in our
estimate may be material to the results of operations in future periods. Premiums written are recognized as revenue over the
period that coverage is provided using the semi-monthly pro-rata method. Unearned premiums and prepaid reinsurance
premiums represent that portion of premiums written that are applicable to the unexpired terms of policies in force.
(n) Dividends to Policyholders
We establish reserves for dividends to policyholders on certain policies, most significantly workers compensation policies.
These dividends are based on the policyholders' loss experience. The dividend reserves are established based on past
experience, adjusted for the effects of current developments and anticipated trends. The expense for these dividends is
recognized over a period that begins at policy inception and ends with the payment of the dividend. We do not issue policies
that entitle the policyholder to participate in the earnings or surplus of the Insurance Subsidiaries.
(o) Federal Income Tax
We use the asset and liability method of accounting for income taxes. Current federal income taxes are recognized for the
estimated taxes payable or refundable on tax returns for the current year. Deferred federal income taxes arise from the
recognition of temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities. A
valuation allowance is established when it is more likely than not that some portion of the deferred tax asset will not be
realized. A liability for uncertain tax positions is recorded when it is more likely than not that a tax position will not be
sustained upon examination by taxing authorities. The effect of a change in tax rates is recognized in the period of enactment.
(p) Leases
We have various operating leases for office space and equipment. Rental expense for such leases is recorded on a straight-line
basis over the lease term. If a lease has a fixed and determinable escalation clause, or periods of rent holidays, the difference
between rental expense and rent paid is included in "Other liabilities" as deferred rent in the Consolidated Balance Sheets.
In addition, we have various capital leases for computer hardware and software. These leases are accounted for as an
acquisition of an asset and an incurrence of an obligation. Depreciation is calculated using the straight-line method over the
shorter of the estimated useful life of the asset or the lease term.
(q) Pension
Our pension and post-retirement life benefit obligations and related costs are calculated using actuarial methods, within the
framework of GAAP. Two key assumptions, the discount rate and the expected return on plan assets, are important elements of
expense and/or liability measurement. We evaluate these key assumptions annually unless facts indicate that a more frequent
review is required. Other assumptions involve demographic factors such as retirement age, mortality, turnover, and rate of
compensation increases. The discount rate enables us to state expected future cash flows at their present value on the
measurement date. The purpose of the discount rate is to determine the interest rates inherent in the price at which pension
benefits could be effectively settled. Our discount rate selection is based on high-quality, long-term corporate bonds. To
determine the expected long-term rate of return on the plan assets, we consider the current and expected asset allocation, as
well as historical and expected returns on each plan asset class.
98
Note 3. Adoption of Accounting Pronouncements
In October 2010, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2010-26,
Financial Services-Insurance (Topic 944): Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts
(“ASU 2010-26”). ASU 2010-26 requires that only costs that are incremental or directly related to the successful acquisition of
new or renewal insurance contracts are to be capitalized as a deferred acquisition cost. This includes, among other items, sales
commissions paid to agents, premium taxes, and the portion of employee salaries and benefits directly related to time spent on
acquired contracts. We adopted this guidance on January 1, 2012, with retrospective application and, as such, all historical data
in this Form 10-K has been restated to reflect the revised guidance.
The following tables provide select restated financial information:
Income Statement Information
Year ended December 31,
($ in thousands, except per share amounts)
Policy acquisition costs
Income from continuing operations, before federal income taxes
Net income
Net income per share:
Basic
Diluted
Other Information
Year ended December 31,
($ in thousands, except per share amounts)
Underwriting loss
Combined ratio
2011
As Originally
Reported
As
Restated
469,739
8,065
19,865
0.37
0.36
466,404
11,400
22,033
0.41
0.40
2011
As Originally
Reported
As
Restated
(106,919)
(103,584)
107.4
107.2
In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure
Requirements in U.S. GAAP and IFRS (“ASU 2011-04”). This guidance changes the wording used to describe the requirements
in U.S. GAAP for measuring fair value and disclosing information about fair value measurements to improve consistency in the
application and description of fair value between GAAP and International Financial Reporting Standards. ASU 2011-04
clarifies that the concepts of highest and best use and valuation premise in a fair value measurement are relevant only when
measuring the fair value of nonfinancial assets, and are not relevant when measuring the fair value of financial assets or
liabilities. In addition, ASU 2011-04 expands the disclosures for unobservable inputs for Level 3 fair value measurements,
requiring quantitative and qualitative information to be disclosed related to: (i) the valuation processes used; (ii) the sensitivity
of the fair value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs;
and (iii) the use of a nonfinancial asset in a way that differs from the asset’s highest and best use. ASU 2011-04 was effective
prospectively for interim and annual periods beginning after December 15, 2011. We have included the disclosures required by
this guidance in our notes to the Financial Statements, where appropriate.
In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income
(“ASU 2011-05”). ASU 2011-05 requires that all non-owner changes in stockholders’ equity be presented either in a single
continuous statement of comprehensive income or in two separate but consecutive statements. This standard eliminates the
option to report other comprehensive income and its components in the statement of stockholders’ equity. ASU 2011-05 was
effective, on a retrospective basis, for interim and annual periods beginning after December 15, 2011. Based on an amendment
issued in December 2011, companies are not required to present separate line items on the income statement for reclassification
adjustments out of accumulated other comprehensive income into net income, as would have been required under the initial
ASU. This guidance, which is ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for
Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting
Standards Update No. 2011-05, was effective concurrently with ASU 2011-05. We have retroactively restated the Financial
Statements to comply with the presentation required under this accounting guidance.
99
In September 2011, the FASB issued ASU 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for
Impairment ("ASU 2011-08"), which simplifies the requirements to test goodwill for impairment. ASU 2011-08 permits an
entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is
less than its carrying amount. If, after assessing events and circumstances, an entity determines that it is not more likely than
not that the fair value of the reporting unit is less than the carrying amount, then performing the two-step impairment test is
unnecessary. However, if the entity concludes otherwise, then it is required to perform the quantitative impairment test. ASU
2011-08 was effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December
15, 2011, and early adoption was permitted. The adoption of this guidance did not impact our financial condition or results of
operation.
In July 2012, the FASB issued ASU 2012-02, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible
Assets for Impairment ("ASU 2012-02"), which reduces the cost and complexity of performing an impairment test for
indefinite-lived intangible assets. This guidance permits an entity to first assess qualitative factors to determine whether it is
more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to
perform a quantitative impairment test. ASU 2012-02 was effective for annual and interim intangible impairment tests
performed for fiscal years beginning on, or after, September 15, 2012, and early adoption was permitted. The adoption of this
guidance did not impact our financial condition or results of operation.
In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other
Comprehensive Income ("ASU 2013-02"), which adds new disclosure requirements for items reclassified out of Accumulated
Other Comprehensive Income ("AOCI"). ASU 2013-02 requires entities to disclose additional information about
reclassification adjustments, including: (i) changes in AOCI balances by component; and (ii) significant items reclassified out
of AOCI. Prospective application of ASU 2013-02 was effective for fiscal years, and interim periods within those years,
beginning after December 15, 2012. We have included the disclosures required by ASU 2013-02 in the notes to our Financial
Statements, as required.
Pronouncements to be effective in the future
In July 2013, the FASB issued ASU 2013-11, Income Taxes, Presentation of an Unrecognized Tax Benefit When a Net
Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging
Issues Task Force) ("ASU 2013-11"). ASU 2013-11 applies to all entities with unrecognized tax benefits that also have tax loss
or tax credit carryforwards in the same tax jurisdiction as of the reporting date. An unrecognized tax benefit is the difference
between a tax position taken or expected to be taken in a tax return and the benefit that is more likely than not sustainable under
examination. Under ASU 2013-11, an entity must net an unrecognized tax benefit, or a portion of an unrecognized tax benefit,
against deferred tax assets for a net operating loss ("NOL") carryforward, a similar tax loss, or a tax credit carryforward except
when:
• An NOL carryforward, a similar tax loss, or a tax credit carryfoward is not available as of the reporting date under the
governing tax law to settle taxes that would result from the disallowance of the tax position; or
• The entity does not intend to use the deferred tax asset for this purpose.
If either of these conditions exists, an entity should present an unrecognized tax benefit in the financial statements as a liability
and should not net the unrecognized tax benefit with a deferred tax asset.
ASU 2013-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The
adoption of this guidance will not impact our financial condition or results of operation.
In January 2014, the FASB issued ASU 2014-01, Accounting for Investments in Qualified Affordable Housing Projects ("ASU
2014-01"). ASU 2014-01 applies to all reporting entities that invest in flow-through limited liability entities that manage or
invest in affordable housing projects that qualify for the low-income housing tax credit. ASU 2014-01 permits reporting
entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the
proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity
amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net
investment performance in the income statement as a component of income tax expense (benefit). For those investments in
qualified affordable housing projects not accounted for using the proportional amortization method, the investment should be
accounted for as an equity method investment or a cost method investment.
ASU 2014-01 is effective for public business entities for annual periods and interim periods within those annual periods,
beginning after December 15, 2014. The adoption of this guidance will not have a material impact on our financial condition
or results of operations.
100
Note 4. Statements of Cash Flow
Supplemental cash flow information for the years ended December 31, 2013, 2012, and 2011 is as follows:
($ in thousands)
Cash paid (received) during the period for:
Interest
Federal income tax
Non-cash items:
Tax-free exchange of fixed maturity securities, AFS
Tax-free exchange of fixed maturity securities, HTM
2013
2012
2011
$
$
21,465
20,000
37,965
15,820
18,779
6,421
18,942
25,168
18,207
(10,963)
20,643
21,870
At December 31, 2013, included in "Other assets" on the Consolidated Balance Sheet was $7.3 million of cash received from
the NFIP which is restricted to pay flood claims under the WYO program.
Note 5. Investments
(a) Net unrealized gains on investments included in OCI by asset class were as follows for the years ended December 31, 2013,
2012, and 2011:
($ in thousands)
AFS securities:
Fixed maturity securities
Equity securities
Total AFS securities
HTM securities:
Fixed maturity securities
Total HTM securities
Total net unrealized gains
Deferred income tax expense
Net unrealized gains, net of deferred income tax
2013
2012
2011
$
39,559
37,421
76,980
2,257
2,257
79,237
(27,733)
51,504
165,330
18,941
184,271
3,926
3,926
188,197
(65,869)
122,328
130,517
13,529
144,046
5,566
5,566
149,612
(52,364)
97,248
(Decrease) increase in net unrealized gains in OCI, net of deferred income tax
$
(70,824)
25,080
43,380
(b) The amortized cost, net unrealized gains and losses, carrying value, unrecognized holding gains and losses, and fair value of
HTM fixed maturity securities were as follows:
December 31, 2013
($ in thousands)
Foreign government
Obligations of state and political
subdivisions
Corporate securities
ABS
CMBS
Amortized
Cost
$
5,292
348,109
28,174
3,413
5,634
Total HTM fixed maturity securities
$
390,622
Net
Unrealized
Gains
(Losses)
Carrying
Value
Unrecognized
Holding
Gains
Unrecognized
Holding
Losses
Fair
Value
131
4,013
(346)
(655)
(886)
2,257
5,423
352,122
27,828
2,758
4,748
392,879
168
17,634
2,446
657
3,197
24,102
—
—
—
—
—
—
5,591
369,756
30,274
3,415
7,945
416,981
101
December 31, 2012
($ in thousands)
Foreign government
Obligations of state and political
subdivisions
Corporate securities
ABS
CMBS
Net
Unrealized
Gains
(Losses)
Amortized
Cost
Carrying
Value
Unrecognized
Holding
Gains
Unrecognized
Holding
Losses
Fair
Value
$
5,292
212
5,504
367
491,180
38,285
6,980
8,406
6,769
(812)
(1,052)
(1,191)
3,926
497,949
37,473
5,928
7,215
554,069
28,996
4,648
1,170
5,434
40,615
—
(23)
—
—
—
(23)
5,871
526,922
42,121
7,098
12,649
594,661
Total HTM fixed maturity securities
$
550,143
Unrecognized holding gains/losses of HTM securities are not reflected in the Financial Statements, as they represent fair value
fluctuations from the later of: (i) the date a security is designated as HTM; or (ii) the date that an OTTI charge is recognized on
an HTM security, through the date of the balance sheet. Our HTM securities had an average duration of 2.2 years as of
December 31, 2013.
During 2013, 16 securities with a carrying value of $39.6 million and a net unrecognized gain position of $1.4 million, were
reclassified from an HTM designation to an AFS designation due to credit rating downgrades by Moody’s Investors Service
(“Moody’s”) and/or Standard and Poor’s ("S&P") Financial Services. These unexpected rating downgrades indicated
significant deterioration of credit worthiness, which changed our intention to hold these securities to maturity.
(c) The cost/amortized cost, unrealized gains and losses, and fair value of AFS securities were as follows:
December 31, 2013
($ in thousands)
U.S. government and government agencies
Foreign government
Obligations of states and political subdivisions
Corporate securities
ABS
CMBS1
RMBS2
AFS fixed maturity securities
AFS equity securities
Total AFS securities
December 31, 2012
($ in thousands)
U.S. government and government agencies
Foreign government
Obligations of states and political subdivisions
Corporate securities
ABS
CMBS1
RMBS2
AFS fixed maturity securities
AFS equity securities
Total AFS securities
$
Cost/
Amortized
Cost
163,218
29,781
946,455
1,707,928
140,430
172,288
515,877
3,675,977
155,350
$
3,831,327
$
Cost/
Amortized
Cost
241,874
28,813
773,953
1,368,954
126,330
133,763
456,996
3,130,683
132,441
$
3,263,124
Unrealized
Gains
Unrealized
Losses
Fair
Value
10,661
906
25,194
44,004
934
2,462
7,273
91,434
37,517
128,951
(504)
(72)
(20,025)
(17,049)
(468)
(3,466)
(10,291)
(51,875)
(96)
173,375
30,615
951,624
1,734,883
140,896
171,284
512,859
3,715,536
192,771
(51,971)
3,908,307
Unrealized
Gains
Unrealized
Losses
Fair
Value
17,219
1,540
44,398
81,696
2,319
4,572
15,961
167,705
19,400
187,105
(1)
(124)
(327)
(402)
(9)
(1,216)
(296)
(2,375)
(459)
(2,834)
259,092
30,229
818,024
1,450,248
128,640
137,119
472,661
3,296,013
151,382
3,447,395
1 CMBS includes government guaranteed agency securities with a fair value of $30.0 million at December 31, 2013 and $48.9 million at December 31, 2012.
2 RMBS includes government guaranteed agency securities with a fair value of $55.2 million at December 31, 2013 and $91.0 million at December 31, 2012.
102
Unrealized gains and losses of AFS securities represent fair value fluctuations from the later of: (i) the date a security is
designated as AFS; or (ii) the date that an OTTI charge is recognized on an AFS security, through the date of the balance sheet.
These unrealized gains and losses are recorded in AOCI on the Consolidated Balance Sheets.
(d) The following tables summarize, for all securities in a net unrealized/unrecognized loss position at December 31, 2013 and
December 31, 2012, the fair value and gross pre-tax net unrealized/unrecognized loss by asset class and by length of time those
securities have been in a net loss position:
December 31, 2013
($ in thousands)
AFS securities:
U.S. government and government agencies
$
Foreign government
Obligations of states and political subdivisions
Corporate securities
ABS
CMBS
RMBS
Total fixed maturity securities
Equity securities
Subtotal
Less than 12 months
12 months or longer
Fair
Value
Unrealized
Losses1
Fair
Value
Unrealized
Losses1
16,955
2,029
442,531
511,100
68,725
100,396
268,943
1,410,679
1,124
$
1,411,803
(500)
(30)
(19,120)
(15,911)
(468)
(2,950)
(10,031)
(49,010)
(96)
(49,106)
507
2,955
13,530
14,771
—
6,298
2,670
40,731
—
40,731
(4)
(42)
(905)
(1,138)
—
(516)
(260)
(2,865)
—
(2,865)
($ in thousands)
HTM securities:
Obligations of states and political
subdivisions
ABS
Subtotal
Total AFS and HTM
$
$
$
Less than 12 months
12 months or longer
Fair
Value
Unrealized
Losses1
Unrecognized
Gains2
Fair
Value
Unrealized
Losses1
Unrecognized
Gains2
65
—
65
(5)
—
(5)
1,411,868
(49,111)
5
—
5
5
441
2,490
2,931
43,662
(20)
(655)
(675)
(3,540)
14
621
635
635
December 31, 2012
($ in thousands)
AFS securities:
U.S. government and government agencies
Foreign government
Obligations of states and political subdivisions
Corporate securities
ABS
CMBS
RMBS
Total fixed maturity securities
Equity securities
Subtotal
Less than 12 months
12 months or longer
Fair
Value
Unrealized
Losses1
Fair
Value
Unrealized
Losses1
(1)
—
(327)
(402)
(9)
(19)
(59)
(817)
(459)
(1,276)
—
2,871
—
—
—
11,830
5,035
19,736
—
19,736
—
(124)
—
—
—
(1,197)
(237)
(1,558)
—
(1,558)
$
$
518
—
32,383
50,880
9,137
7,637
8,710
109,265
15,901
125,166
103
($ in thousands)
HTM securities:
Obligations of states and political
subdivisions
ABS
Subtotal
Total AFS and HTM
Less than 12 months
12 months or longer
Fair
Value
Unrealized
Losses1
Unrecognized
Gains2
Fair
Value
Unrealized
Losses1
Unrecognized
Gains2
$
$
$
1,218
—
1,218
(33)
—
(33)
126,384
(1,309)
29
—
29
29
1,108
2,860
3,968
23,704
(47)
(840)
(887)
(2,445)
38
753
791
791
1 Gross unrealized losses include non-OTTI unrealized amounts and OTTI losses recognized in AOCI. In addition, this column includes remaining unrealized
gain or loss amounts on securities that were transferred to an HTM designation in the first quarter of 2009 for those securities that are in a net unrealized/
unrecognized loss position.
2 Unrecognized holding gains represent fair value fluctuations from the later of: (i) the date a security is designated as HTM; or (ii) the date that an OTTI
charge is recognized on an HTM security.
As evidenced by the table below, our net unrealized/unrecognized loss positions increased by $49.1 million as of December 31,
2013 compared to the prior year as follows:
($ in thousands)
December 31, 2013
December 31, 2012
Number of
Issues
% of
Market/Book
Unrealized/
Unrecognized
Loss
Number of
Issues
% of
Market/Book
Unrealized/
Unrecognized
Loss
556
1
—
—
—
80% - 99% $
60% - 79%
40% - 59%
20% - 39%
0% - 19%
51,835
176
—
—
—
100
1
—
—
—
80% - 99% $
60% - 79%
40% - 59%
20% - 39%
0% - 19%
2,701
233
—
—
—
$
52,011
$
2,934
We have reviewed the securities in the tables above in accordance with our OTTI policy, as described in Note 2. “Summary of
Significant Accounting Policies” of this Form 10-K.
At December 31, 2013, we had 557 securities in an aggregate unrealized/unrecognized loss position of $52.0 million, $2.9
million of which have been in a loss position for more than 12 months. At December 31, 2012, we had 101 securities in an
aggregate unrealized/unrecognized loss position of $2.9 million, $1.7 million of which have been in a loss position for more
than 12 months. During 2013, interest rates, other than short-term, generally rose. For example, the yield on the 10-year U.S.
Treasury Note rose by 127 basis points. This interest rate movement has negatively impacted our fixed maturity securities
portfolio's valuation, thus increasing the number of securities in a loss position and the corresponding dollar amount of
unrealized losses. The increase in the unrealized losses does not correspond to any issuer specific credit concerns; however, it
does reflect an expected reduction in market value due to higher market interest rates. If interest rates rise further, it is
reasonable to expect downward pressure on the fair market values within our fixed maturity securities portfolio, potentially
resulting in an increased number of securities in a loss position for an extended period of time, and a corresponding increase in
the dollar amount of unrealized losses. For a discussion regarding the sensitivity of interest rate movements and the related
impacts on the fixed maturity securities portfolio, refer to Item 7A. "Quantitative and Qualitative Disclosures About Market
Risk" of this Form 10-K.
We do not intend to sell any securities in an unrealized/unrecognized loss position nor do we believe we will be required to sell
these securities, and therefore we have concluded that they are temporarily impaired as of December 31, 2013. This conclusion
reflects our current judgment as to the financial position and future prospects of the entity that issued the investment security
and underlying collateral. If our judgment about an individual security changes in the future, we may ultimately record a credit
loss after having originally concluded that one did not exist, which could have a material impact on our net income and
financial position in future periods.
104
70,422
312,109
34,450
416,981
375,313
1,947,709
1,363,912
28,602
3,715,536
(e) Fixed-maturity securities at December 31, 2013, by contractual maturity are shown below. Mortgage-backed securities
("MBS") are included in the maturity tables using the estimated average life of each security. Expected maturities may differ
from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment
penalties.
Listed below is a summary of HTM fixed maturity securities at December 31, 2013:
($ in thousands)
Due in one year or less
Due after one year through five years
Due after five years through 10 years
Total HTM fixed maturity securities
Carrying Value
Fair Value
$
$
67,784
293,947
31,148
392,879
$
Listed below is a summary of AFS fixed maturity securities at December 31, 2013:
($ in thousands)
Due in one year or less
Due after one year through five years
Due after five years through 10 years
Due after 10 years
Total AFS fixed maturity securities
Fair Value
$
$
(f) The following table summarizes our other investment portfolio by strategy and the remaining commitment amount
associated with each strategy:
Other Investments
($ in thousands)
Alternative Investments
Secondary private equity
Private equity
Energy/power generation
Mezzanine financing
Real estate
Distressed debt
Venture capital
Total alternative investments
Other securities
Total other investments
Carrying Value
December 31,
December 31,
2013
2012
2013
Remaining
Commitment
$
$
25,618
20,192
17,361
12,738
11,698
11,579
7,025
106,211
1,664
107,875
28,032
18,344
18,640
12,692
11,751
12,728
7,477
109,664
4,412
114,076
7,739
9,998
6,984
18,249
10,203
2,965
400
56,538
—
56,538
The following is a description of our alternative investment strategies:
Secondary Private Equity
This strategy purchases seasoned private equity funds from investors desiring liquidity prior to normal fund termination.
Investments are made across all sectors of the private equity market, including leveraged buyouts, venture capital, distressed
securities, mezzanine financing, real estate, and infrastructure.
Private Equity
This strategy makes private equity investments, primarily in established large and middle market companies across diverse
industries globally.
Energy/Power Generation
This strategy invests primarily in cash flow generating assets in the coal, natural gas, power generation, and electric and gas
transmission and distribution industries.
105
Mezzanine Financing
This strategy provides privately negotiated fixed income securities, generally with an equity component, to leveraged buyout
(“LBO”) firms and private and publicly traded large, mid and small-cap companies to finance LBOs, recapitalizations, and
acquisitions.
Real Estate
This strategy invests opportunistically in real estate in North America, Europe, and Asia via direct property ownership, joint
ventures, mortgages, and investments in equity and debt instruments.
Distressed Debt
This strategy makes direct and indirect investments in debt and equity securities of companies that are experiencing financial
and/or operational distress. Investments include buying indebtedness of bankrupt or financially troubled companies, small
balance loan portfolios, special situations and capital structure arbitrage trades, commercial real estate mortgages and similar
non-U.S. securities and debt obligations. This strategy also includes a fund of funds component.
The fund of funds component of our distressed debt strategy, which makes up approximately $7.9 million of our distressed debt
strategy, encompasses a number of strategies that generally fall into one of the following broad categories:
Distressed Debt Funds – Trading-Focused
These funds focus on buying and selling debt of distressed companies (“Distressed Debt”).
Distressed Debt Funds – Restructuring-Focused
These funds focus on acquiring Distressed Debt with the intent of converting it into equity in a restructuring and taking control
of the company.
Special Situations Funds
These funds pursue strategies that seek to take advantage of dislocations or opportunities in the market that are often related to,
or are derivatives of, distressed investing. Special situations are often event-driven and characterized by complexity, market
inefficiency, and excess risk premiums.
Private Equity Funds – Turnaround-Focused
These funds are a subset of private equity funds focused on investing in under-performing or distressed companies. These
funds generally create value by acquiring the equity of these companies, in certain cases out of bankruptcy, and effecting
operational turnarounds or financial restructuring.
Venture Capital
In general, these investments are venture capital investments made principally by investing in equity securities of privately held
corporations, for long-term capital appreciation. This strategy also makes private equity investments in growth equity and
buyout partnerships.
Our seven alternative investment strategies employ low or moderate levels of leverage and generally use hedging only to
reduce foreign exchange or interest rate volatility. At this time, our alternative investment strategies do not include hedge
funds. We cannot redeem our investments with the general partners of these investments; however, occasionally these
partnerships can be traded on the secondary market. Once liquidation is triggered by clauses within the limited partnership
agreements or at the funds’ stated end date, we will receive our final allocation of capital and any earned appreciation of the
underlying investments, assuming we have not divested ourselves of our partnership interests prior to that time. We currently
receive distributions from these alternative investments through the realization of the underlying investments in the limited
partnerships. We anticipate that the general partners of these alternative investments will liquidate their underlying investment
portfolios through 2026.
106
The following tables set forth summarized financial information for our investments that are accounted for under the equity
method, which are primarily alternative investments. This information is presented in the aggregate for our other investment
portfolio. Since the majority of these investments report results to us on a quarter lag, the summarized financial statement
information is as of, and for the 12-month period ended, September 30:
Balance Sheet Information
September 30,
($ in millions)
Investments
Total assets
Total liabilities
Partners’ capital
Income Statement Information
12 months ended September 30,
($ in millions)
Net investment income
Realized gains
Net change in unrealized appreciation (depreciation)
Net income
Insurance Subsidiaries' other investments income
$
$
$
2013
2012
11,020
11,727
573
11,154
2013
2012
2011
406
913
382
1,701
15
226
1,015
(100)
1,141
9
12,214
12,912
657
12,255
564
893
1,485
2,942
21
(g) At December 31, 2013, we had fixed maturity securities, with a carrying value of $62.3 million, that were pledged as
collateral for our outstanding borrowing of $58 million with the FHLBI. This outstanding borrowing is included in “Notes
payable” on our Consolidated Balance Sheets. In accordance with the terms of our agreement with the FHLBI, we retain all
rights regarding these securities, which are included in the “U.S. government and government agencies,” “RMBS,” and
“CMBS” classifications of our AFS fixed maturity securities portfolio.
Also at December 31, 2013, we had fixed maturity securities, with a carrying value of $22.1 million, and short-term
investments with a carrying value of $0.7 million, that collateralize reinsurance obligations related to our 2011 acquisition of
our E&S book of business. Similar to the FHLBI collateral discussion above, we retain all rights regarding these investments.
The fixed maturity securities are included in the "Municipal," "Corporate," "U.S. government and government agencies,"
"RMBS," and "ABS" classifications of our AFS fixed maturity securities portfolio.
In addition, certain bonds with a carrying value of $26.5 million were on deposit with various state and regulatory agencies to
comply with insurance laws. We retain all rights regarding these securities, which are primarily included in the "U.S.
government and government agencies" classification of our AFS fixed maturity securities portfolio.
(h) The components of net investment income earned were as follows:
($ in thousands)
Fixed maturity securities
Equity securities, dividend income
Short-term investments
Other investments
Miscellaneous income
Investment expenses
Net investment income earned
$
107
2013
2012
2011
$
121,582
124,687
129,710
6,140
117
15,208
—
(8,404)
134,643
6,215
151
8,996
—
(8,172)
131,877
4,535
160
20,539
133
(7,634)
147,443
(i) The following tables summarize OTTI by asset type for the periods indicated:
2013
($ in thousands)
HTM fixed maturity securities:
ABS
Total HTM fixed maturity securities
AFS fixed maturity securities:
RMBS
Total AFS fixed maturity securities
Equity securities
Total AFS securities
Other investments
OTTI losses
2012
($ in thousands)
AFS fixed maturity securities:
ABS
CMBS
RMBS
Total AFS fixed maturity securities
Equity securities
OTTI losses
2011
($ in thousands)
AFS fixed maturity securities
Obligations of state and political subdivisions
Corporate securities
ABS
CMBS
RMBS
Total AFS fixed maturity securities
Equity securities
OTTI losses
Gross
Included in OCI
Earnings
Recognized in
$
(44)
(44)
16
16
3,747
3,763
1,847
(47)
(47)
(30)
(30)
—
(30)
—
$
5,566
$
(77) $
3
3
46
46
3,747
3,793
1,847
5,643
Gross
Included in OCI
Earnings
Recognized in
98
(1,525)
(35)
(1,462)
3,173
1,711
—
(2,335)
(218)
(2,553)
—
(2,553)
98
810
183
1,091
3,173
4,264
Gross
Included in OCI
Earnings
Recognized in
17
244
175
(149)
346
633
11,365
11,998
—
—
(546)
(843)
201
(1,188)
—
(1,188)
17
244
721
694
145
1,821
11,365
13,186
$
$
$
The majority of the OTTI charges in 2013, 2012, and 2011 were primarily comprised of charges on our equity portfolio. In
2013, $2.0 million related to securities that we did not believe would recover in the near term and $1.7 million related to
securities for which we had the intent to sell. In 2012, $1.0 million related to securities that we did not believe would recover
in the near term and $2.2 million related to securities for which we had the intent to sell. In 2011, $8.5 million related to
securities that we did not believe would recover in the near term and $2.9 million related to securities for which we had the
intent to sell. Also contributing to the OTTI charges in 2013 were $1.8 million of charges that relate to an investment in a
limited liability company within our other investments portfolio that has sustained significant losses for which we do not
anticipate recovery.
108
The following table sets forth, for the periods indicated, credit loss impairments on fixed maturity securities for which a portion
of the OTTI charge was recognized in OCI, and the corresponding changes in such amounts:
($ in thousands)
Balance, beginning of year
2013
2012
2011
$
7,477
6,602
17,723
Credit losses remaining in retained earnings after adoption of OTTI accounting guidance
Addition for the amount related to credit loss for which an OTTI was not previously recognized
Reductions for securities sold during the period
Reductions for securities for which the amount previously recognized in OCI was recognized in
earnings because of intention or potential requirement to sell before recovery of amortized cost
Reductions for securities for which the entire amount previously recognized in OCI was
recognized in earnings due to a decrease in cash flows expected
Additional increases to the amount related to credit loss for which an OTTI was previously
recognized
Accretion of credit loss impairments previously recognized due to an increase in cash flows
expected to be collected
—
—
—
—
—
11
—
Balance, end of year
$
7,488
(j) The components of net realized gains (losses), excluding OTTI charges, were as follows:
—
—
—
—
—
875
—
7,477
($ in thousands)
HTM fixed maturity securities
Gains
Losses
AFS fixed maturity securities
Gains
Losses
AFS equity securities
Gains
Losses
Short-term investments
Losses
Other investments
Gains
Losses
Total other net realized investment gains
Total OTTI charges recognized in earnings
Total net realized gains
$
$
2013
2012
2011
195
(95)
3,340
(373)
24,776
(408)
—
—
(1,060)
26,375
(5,643)
20,732
194
(217)
4,452
(472)
10,901
(1,205)
(2)
1
(400)
13,252
(4,264)
8,988
—
—
—
—
(11,672)
551
—
6,602
4
(564)
9,385
(70)
6,671
—
—
—
—
15,426
(13,186)
2,240
Realized gains and losses on the sale of investments are determined on the basis of the cost of the specific investments sold.
Proceeds from the sale of AFS securities were $135.9 million in 2013, $205.3 million in 2012, and $206.5 million in 2011. Net
realized gains in 2013, excluding OTTI charges, were driven by the sale of AFS equity securities due to the rebalancing of our
high-dividend yield strategy holdings within our equity portfolio.
Net realized gains in 2012, excluding OTTI charges, were driven by: (i) calls and maturities; and (ii) the sale of AFS equity
securities related to rebalancing of our high-dividend yield strategy holdings within our equity portfolio.
Net realized gains in 2011, excluding OTTI charges, were driven by: (i) calls and maturities; (ii) the sale of AFS fixed maturity
securities, primarily corporate, municipal, and government holdings; and (iii) the sale of AFS equity securities to facilitate the
reallocation of the equity portfolio to a high-dividend yield strategy.
109
Note 6. Stockholders’ Equity and Comprehensive Income
(a) Stockholders’ Equity
As of December 31, 2013, we had 10.6 million shares reserved for various stock compensation and purchase plans, retirement
plans and dividend reinvestment plans. As a convenience to our employees and directors, we repurchase the Parent’s stock
from time-to-time as permitted under our stock-based compensation plans. The Parent has not had an authorized stock
repurchase program since 2009. The following table provides information regarding the purchase of the Parent’s common
stock during the 2011 through 2013 reporting periods:
($ in thousands)
Period
2013
2012
2011
Shares Purchased in Connection with
Restricted Stock Vestings and Stock Option
Exercises
Cost of Shares Purchased in Connection with
Restricted Stock Vestings and Stock Option
Exercises
167,846
$
194,575
149,997
3,716
3,495
2,741
Our ability to declare and pay dividends on the Parent's common stock is dependent on liquidity at the Parent coupled with the
ability of the Insurance Subsidiaries to declare and pay dividends, if necessary, and/or the availability of other sources of
liquidity to the Parent. See Note 20. “Statutory Financial Information, Capital Requirements, and Restrictions on Dividends
and Transfers of Funds” for information regarding these dividend restrictions.
(b) The components of comprehensive income, both gross and net of tax, for 2013, 2012, and 2011 were as follows:
2013
($ in thousands)
Net income
Components of OCI:
Unrealized losses on investment securities:
Unrealized holding losses during the period
Non-credit OTTI recognized in OCI
Amounts reclassified into net income:
HTM securities
Non-credit OTTI
Realized gains on AFS securities
Net unrealized losses
Defined benefit pension and post-retirement plans:
Net actuarial gain
Amounts reclassified into net income:
Net actuarial loss
Prior service cost
Curtailment expense
Defined benefit pension and post-retirement plans
Other comprehensive loss
Comprehensive income
Gross
Tax
Net
$
142,267
35,849
106,418
(83,934)
77
(1,577)
14
(23,540)
(108,960)
(29,377)
27
(552)
5
(8,239)
(38,136)
(54,557)
50
(1,025)
9
(15,301)
(70,824)
59,654
20,879
38,775
4,374
10
16
64,054
(44,906)
97,361
$
1,531
4
5
22,419
(15,717)
20,132
2,843
6
11
41,635
(29,189)
77,229
110
2012
($ in thousands)
Net income
Components of OCI:
Unrealized gains on investment securities:
Unrealized holding gains during the period
Non-credit OTTI recognized in OCI
Amounts reclassified into net income:
HTM securities
Non-credit OTTI
Realized gains on AFS securities
Net unrealized gains
Defined benefit pension and post-retirement plans:
Net actuarial loss
Amounts reclassified into net income:
Net actuarial loss
Prior service cost
Defined benefit pension and post-retirement plans
Other comprehensive income
Comprehensive income
2011
($ in thousands)
Net income
Components of OCI:
Unrealized gains on investment securities:
Unrealized holding gains during the period
Non-credit OTTI recognized in OCI
Amounts reclassified into net income:
HTM securities
Non-credit OTTI
Realized gains on AFS securities
Net unrealized gains
Defined benefit pension and post-retirement plans:
Net actuarial loss
Amounts reclassified into net income:
Net actuarial loss
Prior service cost
Defined benefit pension and post-retirement plans
Other comprehensive income
Comprehensive income
Gross
Tax
Net
$
37,635
(328)
37,963
47,594
2,554
(2,432)
280
(9,412)
38,584
16,657
894
(851)
98
(3,294)
13,504
30,937
1,660
(1,581)
182
(6,118)
25,080
(26,566)
(9,298)
(17,268)
5,903
150
(20,513)
18,071
55,706
2,066
53
(7,179)
6,325
5,997
3,837
97
(13,334)
11,746
49,709
Gross
Tax
Net
10,400
(11,633)
22,033
70,140
1,188
(2,283)
494
(2,801)
66,738
24,548
416
(799)
173
(980)
23,358
45,592
772
(1,484)
321
(1,821)
43,380
(16,799)
(5,880)
(10,919)
4,172
150
(12,477)
54,261
64,661
1,460
53
(4,367)
18,991
7,358
2,712
97
(8,110)
35,270
57,303
$
$
$
111
(c) The balances of, and changes in, each component of AOCI (net of taxes) as of December 31, 2013 and 2012 were as
follows:
($ in thousands)
OTTI Related
HTM Related
All Other
Investments
Subtotal
Defined Benefit
Pension and Post-
retirement Plans
Total AOCI
Net Unrealized (Loss) Gain
Balance, December 31, 2011
$
(3,500)
OCI before reclassifications
Amounts reclassified from AOCI
Net current period OCI
Balance, December 31, 2012
OCI before reclassifications
Amounts reclassified from AOCI
Net current period OCI
1,660
182
1,842
(1,658)
50
9
59
Balance, December 31, 2013
$
(1,599)
4,622
(447)
(1,581)
(2,028)
2,594
(102)
(1,025)
(1,127)
1,467
96,125
31,384
(6,118)
25,266
121,391
(54,455)
(15,301)
(69,756)
51,635
97,247
32,597
(7,517)
25,080
122,327
(54,507)
(16,317)
(70,824)
51,503
(54,953)
(17,268)
3,934
(13,334)
(68,287)
38,775
2,860
41,635
(26,652)
42,294
15,329
(3,583)
11,746
54,040
(15,732)
(13,457)
(29,189)
24,851
The reclassifications out of AOCI for 2013 are as follows:
($ in thousands)
OTTI related
Year ended
December 31, 2013
Affected Line Item in the Consolidated Statement of Income
Amortization of non-credit OTTI losses on HTM securities
14 Net investment income earned
14
Income from continuing operations, before federal income tax
(5) Total federal income tax expense (benefit)
9 Net income
HTM related
Unrealized gains and losses on HTM disposals
390 Net realized investment gains
Amortization of net unrealized gains on HTM securities
(1,967) Net investment income earned
(1,577)
Income from continuing operations, before federal income tax
552 Total federal income tax expense (benefit)
(1,025) Net income
Realized gains and losses on AFS
Realized gains and losses on AFS disposals
(23,540) Net realized investment gains
Defined benefit pension and post-retirement life plans
Net actuarial loss
Prior service cost
Curtailment expense
(23,540)
Income from continuing operations, before federal income tax
8,239 Total federal income tax expense (benefit)
(15,301) Net income
909 Losses and loss expenses incurred
3,465
Policy acquisition costs
4,374
Income from continuing operations, before federal income tax
7 Losses and loss expenses incurred
3
Policy acquisition costs
10
Income from continuing operations, before federal income tax
16
16
Policy acquisition costs
Income from continuing operations, before federal income tax
Total defined benefit pension and post-retirement life
4,400
Income from continuing operations, before federal income tax
(1,540) Total federal income tax expense (benefit)
2,860 Net income
Total reclassifications for the period
$
(13,457) Net income
112
Note 7. Fair Value Measurements
The following table presents the carrying amounts and estimated fair values of our financial instruments as of December 31,
2013 and 2012:
($ in thousands)
Financial Assets
Fixed maturity securities:
HTM
AFS
Equity securities, AFS
Short-term investments
Receivable for proceeds related to sale of Selective HR Solutions
("Selective HR")
Financial Liabilities
Notes payable:
2.90% borrowings from the Federal Home Loan Bank of
Indianapolis ("FHLBI")
1.25% borrowings from FHLBI
7.50% Junior Notes
7.25% Senior Notes
6.70% Senior Notes
5.875% Senior Notes
Total notes payable
December 31, 2013
December 31, 2012
Carrying
Amount
Fair Value
Carrying
Amount
Fair Value
392,879
3,715,536
192,771
174,251
416,981
3,715,536
192,771
174,251
554,069
3,296,013
151,382
214,479
594,661
3,296,013
151,382
214,479
—
—
2,705
2,705
13,000
45,000
—
49,916
99,498
185,000
392,414
13,319
45,259
—
50,887
98,247
146,298
354,010
13,000
45,000
100,000
49,912
99,475
—
307,387
13,595
45,590
101,480
52,689
107,707
—
321,061
$
$
For discussion regarding the fair value techniques of our financial instruments, refer to Note 2. "Summary of Significant
Accounting Policies" in this Form 10-K.
The following tables provide quantitative disclosures of our financial assets that were measured at fair value at December 31,
2013 and 2012:
December 31, 2013
Fair Value Measurements Using
($ in thousands)
Description
Measured on a recurring basis:
AFS:
U.S. government and government agencies
Foreign government
Obligations of states and political subdivisions
Corporate securities
ABS
CMBS
RMBS
Total fixed maturity securities
Equity securities
Total AFS securities
Short-term investments
Total assets
Assets Measured
at Fair Value
12/31/13
Quoted Prices in
Active Markets for
Identical Assets/
Liabilities
(Level 1)1
Significant Other
Observable Inputs
(Level 2)1
Significant
Unobservable
Inputs
(Level 3)
52,153
—
—
—
—
—
—
52,153
189,871
242,024
174,251
416,275
121,222
30,615
951,624
1,734,883
140,896
171,284
512,859
3,663,383
—
3,663,383
—
3,663,383
—
—
—
—
—
—
—
—
2,900
2,900
—
2,900
$
$
173,375
30,615
951,624
1,734,883
140,896
171,284
512,859
3,715,536
192,771
3,908,307
174,251
4,082,558
113
December 31, 2012
Fair Value Measurements Using
($ in thousands)
Description
Measured on a recurring basis:
AFS:
Assets Measured at
Fair Value 12/31/12
Quoted Prices in
Active Markets for
Identical Assets/
Liabilities
(Level 1)1
Significant Other
Observable Inputs
(Level 2)1
Significant
Unobservable
Inputs
(Level 3)
U.S. government and government agencies
$
Foreign government
Obligations of states and political subdivisions
Corporate securities
ABS
CMBS
RMBS
Total fixed maturity securities
Equity securities
Total AFS securities
Short-term investments
Receivable for proceeds related to sale of Selective HR
259,092
30,229
818,024
1,450,247
128,640
137,119
472,662
3,296,013
151,382
3,447,395
214,479
2,705
Total assets
$
3,664,579
1 There were no transfers of securities between Level 1 and Level 2.
115,861
—
—
—
—
—
—
115,861
147,775
263,636
214,479
—
478,115
123,442
30,229
818,024
1,447,301
122,572
129,957
472,662
3,144,187
—
3,144,187
—
—
3,144,187
19,789
—
—
2,946
6,068
7,162
—
35,965
3,607
39,572
—
2,705
42,277
The following table provides a summary of the changes in the fair value of securities measured using Level 3 inputs and related
quantitative information for the years ended December 31, 2013 and 2012:
2013
($ in thousands)
Government
Corporate
ABS
CMBS
Equity
Fair value, December 31, 2012
$
19,789
2,946
6,068
7,162
3,607
Receivable for
Proceeds
Related to Sale
of Selective HR
2,705
Total
42,277
Total net (losses) gains for the
period included in:
OCI1
Net income2,3
Purchases
Sales
Issuances
Settlements
Transfers into Level 3
Transfers out of Level 3
(537)
(76)
—
—
—
(1,847)
—
(17,329)
Fair value, December 31, 2013
$
—
(7)
—
—
—
—
(168)
—
(2,771)
—
(74)
—
—
—
—
—
—
(5,994)
—
772
361
—
—
—
(2,420)
—
(5,875)
—
3,935
—
—
—
—
—
—
(4,642)
2,900
—
(1,480)
—
—
—
(225)
—
(1,000)
—
4,089
(1,195)
—
—
—
(4,660)
—
(37,611)
2,900
114
2012
($ in thousands)
Government
Corporate
ABS
CMBS
Equity
Fair value, December 31, 2011
$
21,741
2,603
Total net (losses) gains for the
period included in:
OCI1
Net income2,3
Purchases
Sales
Issuances
Settlements
Transfers into Level 3
Transfers out of Level 3
(22)
(193)
—
—
—
(1,737)
—
—
Fair value, December 31, 2012
$
19,789
185
—
—
—
—
(630)
788
—
2,946
—
68
—
7,300
—
—
—
—
(1,300)
6,068
354
858
(51)
5,611
—
—
(624)
8,247
(7,233)
7,162
—
—
—
—
—
—
—
3,607
—
3,607
Receivable for
Proceeds
Related to Sale
of Selective HR
Total
3,212
27,910
—
244
—
—
—
(751)
—
—
2,705
1,089
—
12,911
—
—
(3,742)
12,642
(8,533)
42,277
1 Amounts are reported in “Unrealized holding (losses) gains arising during period” on the Consolidated Statements of Comprehensive Income.
2 Amounts are reported in “Net realized gains” for realized gains and losses and “Net investment income earned” for amortization of securities on the
Consolidated Statements of Income.
3For the receivable related to the sale of Selective HR, amounts in “Loss on disposal of discontinued operations, net of tax” relate to an impairment charge and
amounts in “Other income” relate to interest accretion on the Consolidated Statements of Income.
As discussed in Note 2. "Summary of Significant Accounting Policies," in this Form 10-K, the fair value of our Level 3 fixed
maturity securities are typically obtained through non-binding broker quotes, which we review for reasonableness. At
December 31, 2013, there were no fixed maturity securities that were measured using Level 3 inputs. However during 2013,
securities with a fair value of $32.0 million were transferred out of level 3 due to the availability of Level 2 pricing at
December 31, 2013 that was not available previously.
In 2012, fixed maturity securities with a fair value of $9.0 million were transferred into Level 3 during the year. These
transfers were primarily related to securities that had been previously priced using Level 2 inputs, but due to the availability
and nature of the pricing used at the valuation dates, were priced using Level 3 inputs at December 31, 2012. In addition,
certain of these transfers related to securities that had previously been classified as HTM, and therefore not measured at fair
value, for which available pricing at December 31, 2012 used Level 3 inputs. Fixed maturity securities with a fair value of $8.5
million were transferred out of Level 3 due to the availability of Level 2 pricing at December 31, 2012 that was not available
previously.
Equity securities with fair values of $2.9 million and $3.6 million were measured using Level 3 inputs at December 31, 2013
and 2012, respectively. During 2012, two non-publicly traded equity securities were transferred into Level 3 due
to the nature of the quotes used at the valuation date. One of these securities was transferred out of Level 3 and into Level 2 at
March 31, 2013, as the pricing as of that date was based on a quoted price in an inactive market. This security was
subsequently sold in the second quarter of 2013 for an amount that approximated the March 31, 2013 value. At each reporting
date, we review the fair value of the remaining Level 3 security for reasonableness.
At December 31, 2012, the receivable related to the sale of Selective HR was contingent on the purchaser's ability to retain
business subsequent to the sale. At that time, the fair value of this receivable was measured using unobservable inputs, the
most significant of which was our assumption regarding the retention of business. In the first quarter of 2013, we reached an
agreement with the purchaser to settle this receivable for an aggregate of $1.0 million, which was paid in two installments. As
a result, the receivable was transferred out of Level 3. See Note 12. "Discontinued Operations" of this Form 10-K for a
discussion of the impairment charge that was recorded on this receivable in the first quarter of 2013.
115
The following tables provide quantitative information regarding our financial assets and liabilities that were disclosed at fair
value at December 31, 2013 and 2012:
December 31, 2013
Fair Value Measurements Using
($ in thousands)
Financial Assets
HTM:
Foreign government
Obligations of states and political subdivisions
Corporate securities
ABS
CMBS
Total HTM fixed maturity securities
Financial Liabilities
Notes payable:
2.90% borrowings from FHLBI
1.25% borrowings from FHLBI
7.25% Senior Notes
6.70% Senior Notes
5.875% Senior Notes
Total notes payable
December 31, 2012
($ in thousands)
Financial Assets
HTM:
Foreign government
Obligations of states and political subdivisions
Corporate securities
ABS
CMBS
Total HTM fixed maturity securities
Financial Liabilities
Notes payable:
2.90% borrowings from FHLBI
1.25% borrowings from FHLBI
7.50% Junior Notes
7.25% Senior Notes
6.70% Senior Notes
Total notes payable
Assets/Liabilities
Disclosed at
Fair Value
12/31/2013
Quoted Prices in
Active Markets
for Identical
Assets/Liabilities
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
$
5,591
369,756
30,274
3,415
7,945
416,981
13,319
45,259
50,887
98,247
146,298
354,010
—
—
—
—
—
—
—
—
—
—
146,298
146,298
5,591
369,756
30,274
3,415
7,945
416,981
13,319
45,259
50,887
98,247
—
207,712
—
—
—
—
—
—
—
—
—
—
—
—
Fair Value Measurements Using
Assets/Liabilities
Disclosed at
Fair Value
12/31/2012
Quoted Prices in
Active Markets
for Identical
Assets/Liabilities
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
$
5,871
526,922
42,121
7,097
12,650
594,661
13,595
45,590
101,480
52,689
107,707
321,061
—
—
—
—
—
—
—
—
101,480
—
107,707
209,187
5,871
526,922
37,289
5,698
12,650
588,430
13,595
45,590
—
52,689
—
111,874
—
—
4,832
1,399
—
6,231
—
—
—
—
—
—
116
Note 8. Reinsurance
Our Financial Statements reflect the effects of assumed and ceded reinsurance transactions. Assumed reinsurance refers to the
acceptance of certain insurance risks that other insurance entities have underwritten. Ceded reinsurance involves transferring
certain insurance risks (along with the related written and earned premiums) that we have underwritten to other insurance
companies that agree to share these risks. The primary purpose of ceded reinsurance is to protect the Insurance Subsidiaries
from potential losses in excess of the amount that we are prepared to accept.
The Insurance Subsidiaries remain liable to policyholders to the extent that any reinsurer becomes unable to meet their
contractual obligations. We evaluate and monitor the financial condition of our reinsurers under voluntary reinsurance
arrangements to minimize our exposure to significant losses from reinsurer insolvencies. On an ongoing basis, we review
amounts outstanding, length of collection period, changes in reinsurer credit ratings, and other relevant factors to determine
collectability of reinsurance recoverables. The allowance for uncollectible reinsurance recoverables was $5.1 million at
December 31, 2013 and $4.8 million at December 31, 2012.
The following table represents our total reinsurance balances segregated by reinsurer to depict our concentration of risk
throughout our reinsurance portfolio:
($ in thousands)
Total reinsurance recoverables
Total prepaid reinsurance premiums
Less: collateral1
Net unsecured reinsurance balances
Federal and state pools2:
NFIP
NJ Unsatisfied Claim Judgment Fund
Other
Total federal and state pools
Remaining unsecured reinsurance
Hannover Ruckversicherungs AG (A.M. Best rated “A+”)
Munich Re Group (A.M. Best rated “A+”)
Swiss Re Group (A.M. Best rated “A+”)
AXIS Reinsurance Company (A.M. Best rated “A+”)
Partner Reinsurance Company of the U.S. (A.M. Best rated “A+”)
QBE Reinsurance Corporation (A.M. Best rated "A")
All other reinsurers
Total
1 Includes letters of credit, trust funds, and funds withheld.
2 Considered to have minimal risk of default.
Note: Some amounts may not foot due to rounding.
As of December 31, 2013
As of December 31, 2012
Reinsurance
Balances
% of Net
Unsecured
Reinsurance
$
550,897
143,000
(119,732)
574,165
Reinsurance
Balances
$
1,421,109
132,637
(139,335)
1,414,411
% of Net
Unsecured
Reinsurance
177,637
71,732
3,034
252,403
321,762
72,565
69,749
48,234
45,114
25,730
15,665
44,705
31
12
1
44
56
13
12
8
8
4
3
8
1,028,685
68,655
5,749
1,103,089
311,322
60,358
66,283
52,189
35,064
20,074
13,871
63,483
$
321,762
56% $
311,322
73
5
—
78
22
4
5
4
3
1
1
4
22
The decrease in the reinsurance recoverable balance as of December 31, 2013 compared to December 31, 2012 is driven by the
impact of Hurricane Sandy on the 2012 balance, including: (i) a $809.6 million decrease related to NFIP flood claims; and (ii)
a $55.8 million decrease related to claims covered under our catastrophe excess of loss treaty.
Under our reinsurance arrangements, which are prospective in nature, reinsurance premiums ceded are recorded as prepaid
reinsurance and amortized over the remaining contract period in proportion to the reinsurance protection provided, or recorded
periodically, as per the terms of the contract, in a direct relationship to the gross premium recording. Reinsurance recoveries
are recognized as gross losses are incurred.
117
The following table contains a listing of direct, assumed, and ceded reinsurance amounts for premiums written, premiums
earned, and losses and loss expenses incurred:
($ in thousands)
Premiums written:
Direct
Assumed
Ceded
Net
Premiums earned:
Direct
Assumed
Ceded
Net
Losses and loss expenses incurred:
Direct
Assumed
Ceded
Net
2013
2012
2011
$
$
$
$
$
$
2,133,793
43,650
(367,284)
1,810,159
2,048,530
44,464
(356,922)
1,736,072
1,370,293
32,678
(281,233)
1,121,738
1,955,667
50,938
(339,722)
1,666,883
1,873,007
65,884
(354,772)
1,584,119
2,394,640
29,175
(1,302,825)
1,120,990
1,725,396
51,515
(291,559)
1,485,352
1,693,021
29,011
(282,719)
1,439,313
1,499,340
20,788
(445,141)
1,074,987
The growth in direct premium written (“DPW”) for the Insurance Subsidiaries in both 2013 and 2012 compared to the prior
years reflects: (i) pure price increases that we have achieved in our Standard Insurance Operations; (ii) strong retention in our
Standard Insurance Operations; and (iii) premium from our newly acquired E&S business. Direct premium earned increases in
2013 and 2012 were consistent with the fluctuation in DPW for 2013 and 2012 compared to the prior year.
Assumed premium levels were high in 2011 as we began writing E&S business through a fronting arrangement in August 2011.
This arrangement continued through April 2012, causing an increase in assumed premiums earned in 2012. The subsequent
runoff of these earnings in 2013 caused the reduction in assumed net premiums earned in 2013.
Direct losses and loss expenses decreased significantly in 2013, primarily due to the impact of Hurricane Sandy in 2012 which
included the following: (i) $136.0 million in gross losses, of which $89.4 million were covered under our catastrophe excess of
loss treaty, resulting in a net impact of $46.6 million; and (ii) $1 billion in gross flood losses that are 100% ceded to the federal
government, resulting in no net loss to us. Partially offsetting these direct losses were flood claims handling fees of $18.3
million in 2012.
The ceded premiums and losses related to our involvement with the NFIP, in which all of our flood premiums, losses and loss
expenses are ceded to the NFIP, are as follows:
($ in thousands)
Ceded premiums written
Ceded premiums earned
Ceded losses and loss expenses incurred
2013
2012
2011
$
(236,309)
(228,650)
(183,142)
(221,094)
(212,177)
(1,119,303)
(206,711)
(198,153)
(352,619)
118
Note 9. Reserves for Losses and Loss Expenses
The table below provides a roll forward of reserves for losses and loss expenses for beginning and ending reserve balances:
($ in thousands)
Gross reserves for losses and loss expenses, at beginning of year
Less: reinsurance recoverable on unpaid losses and loss expenses, at beginning of year
Net reserves for losses and loss expenses, at beginning of year
Incurred losses and loss expenses for claims occurring in the:
Current year
Prior years
Total incurred losses and loss expenses
Paid losses and loss expenses for claims occurring in the:
Current year
Prior years
Total paid losses and loss expenses
Acquisition of Mesa Underwriters Specialty Insurance Company ("MUSIC") losses and loss
expense reserves
Net reserves for losses and loss expenses, at end of year
Add: Reinsurance recoverable on unpaid losses and loss expenses, at end of year1
Gross reserves for losses and loss expenses at end of year
1 Includes $44.0 million related to the acquisition of MUSIC at December 31, 2011.
2013
4,068,941
1,409,755
2,659,186
1,147,263
(25,525)
1,121,738
399,559
572,434
971,993
—
2,808,931
540,839
3,349,770
$
$
2012
2011
3,144,924
549,490
2,595,434
1,146,591
(25,601)
1,120,990
424,496
632,742
1,057,238
—
2,659,186
1,409,755
4,068,941
2,830,058
313,739
2,516,319
1,113,733
(38,746)
1,074,987
440,786
569,944
1,010,730
14,858
2,595,434
549,490
3,144,924
The net losses and loss expense reserves increased by $149.7 million in 2013, $63.8 million in 2012, and $79.1 million in 2011.
The losses and loss expense reserves are net of anticipated recoveries for salvage and subrogation claims, which amounted to
$61.0 million for 2013, $62.2 million for 2012, and $67.6 million for 2011. The changes in the net losses and loss expense
reserves were the result of growth in exposures, particularly associated with our E&S line of business, anticipated loss trends,
changes in reinsurance retentions, and normal reserve changes inherent in the uncertainty in establishing reserves for losses and
loss expenses. As additional information is collected in the loss settlement process, reserves are adjusted accordingly. These
adjustments are reflected in the Consolidated Statements of Income in the period in which such adjustments are recognized.
These changes could have a material impact on the results of operations of future periods when the adjustments are made.
In 2013, we experienced overall favorable loss development of approximately $25.5 million, compared to $25.5 million in
2012 and $38.5 million in 2011. The following table summarizes the prior year development by line of business:
Favorable/(Unfavorable) Prior Year Development
($ in millions)
General Liability
Commercial Automobile
Workers Compensation
Businessowners' Policies
Commercial Property
Homeowners
Personal Automobile
E&S
Other
Total
2013
2012
2011
$
20.0
4.5
(23.5)
9.5
7.5
2.5
3.0
2.0
—
$
25.5
(2.5)
8.5
(2.5)
9.0
3.5
9.0
(0.5)
—
1.0
25.5
11.5
13.0
(6.5)
11.0
5.5
4.5
(1.0)
—
0.5
38.5
119
The 2013 prior year favorable development of $25.5 million includes $14.5 million of favorable casualty development and
$11.0 million of favorable property development. The property development was primarily related to favorable non-
catastrophe loss activity, mostly in the 2012 accident year. The casualty lines were driven largely by favorable development in
accident years 2006 through 2010, partially offset by unfavorable development in accident year 2012. The favorable
development was driven primarily by lower than expected severities in general liability and commercial automobile, which
represents a continued trend in these lines of business. The unfavorable development in accident year 2012 was driven by
higher than expected severities in the general liability, commercial automobile, and workers compensation lines of business.
The 2012 prior year favorable development of $25.5 million includes $18.0 million of casualty development and $7.5 million
of property development. The property development was primarily related to the favorable non-catastrophe loss activity that
occurred in the first quarter of 2012 mostly in the 2011 accident year. The casualty lines were driven by favorable
development in the 2007 through 2009 accident years partially offset by unfavorable development in accident year 2011. The
favorable development was driven by lower than expected severities in all of the major casualty lines, which represents a
consistent trend in recent years. The unfavorable development in accident year 2011 was driven by: (i) higher than expected
severities in the workers compensation and general liability lines; and (ii) higher than expected frequencies in the commercial
auto line. This was partially offset by continued favorable development in the homeowners liability line, due to lower expected
severity for this year.
The 2011 prior year favorable development of $38.5 million includes $29.5 million of casualty development and $9.0 million
of property development. Overall, the prior year development was driven by accident years 2006, 2008, and 2009, partially
offset by the 2010 accident year. The favorable development was driven by the following: (i) premises and operations
coverages on our general liability line; (ii) lower frequencies in the commercial automobile line; and (iii) continued favorable
reported loss emergence on the liability coverage in our businessowners' policy line. The unfavorable development in accident
year 2010 was driven by the following: (i) increased severities experienced in our workers compensation line; and (ii) products
coverage on our general liability line.
Reserves established for liability insurance include exposure to asbestos and environmental claims. These claims have arisen
primarily from insured exposures in municipal government, small non-manufacturing commercial risk, and homeowners
policies. The emergence of these claims is slow and highly unpredictable. There are significant uncertainties in estimating our
exposure to asbestos and environmental claims (for both case and IBNR reserves) resulting from lack of relevant historical
data, the delayed and inconsistent reporting patterns associated with these claims, and uncertainty as to the number and identity
of claimants and complex legal and coverage issues. Legal issues that arise in asbestos and environmental cases include federal
or state venue, choice of law, causation, admissibility of evidence, allocation of damages and contribution among joint
defendants, successor and predecessor liability, and whether direct action against insurers can be maintained. Coverage issues
that arise in asbestos and environmental cases include the interpretation and application of policy exclusions, the determination
and calculation of policy limits, the determination of the ultimate amount of a loss, the extent to which a loss is covered by a
policy, if at all, the obligation of an insurer to defend a claim, and the extent to which a party can prove the existence of
coverage. Courts have reached different and sometimes inconsistent conclusions on these legal and coverage issues. We do not
discount to present value that portion of our losses and loss expense reserves expected to be paid in future periods.
The following table details our losses and loss expense reserves for various asbestos and environmental claims:
($ in millions)
Asbestos
Landfill sites
Leaking underground storage tanks
Total
2013
Gross
Net
$
$
8.9
12.3
11.6
32.8
7.5
7.4
10.3
25.2
Estimating IBNR reserves for asbestos and environmental claims is difficult because of the delayed and inconsistent reporting
patterns associated with these claims. In addition, there are significant uncertainties associated with estimating critical
assumptions, such as average clean-up costs, third-party costs, potentially responsible party shares, allocation of damages,
litigation and coverage costs, and potential state and federal legislative changes. Normal historically based actuarial
approaches cannot be applied to asbestos and environmental claims because past loss history is not indicative of future
potential asbestos and environmental losses. In addition, while certain alternative models can be applied, such models can
produce significantly different results with small changes in assumptions.
120
The following table provides a roll forward of gross and net asbestos and environmental incurred losses and loss expenses and
related reserves thereon:
($ in thousands)
Asbestos
2013
2012
2011
Gross
Net
Gross
Net
Gross
Net
Reserves for losses and loss expenses at beginning of
year
$
Incurred losses and loss expenses
Less: losses and loss expenses paid
Reserves for losses and loss expenses at the end of year
$
9,170
—
(273)
8,897
Environmental
Reserves for losses and loss expenses at beginning of
year
$
26,405
Incurred losses and loss expenses
Less: losses and loss expenses paid
347
(2,885)
Reserves for losses and loss expenses at the end of year
$
23,867
Total Asbestos and Environmental Claims
Reserves for losses and loss expenses at beginning of
year
$
35,575
Incurred losses and loss expenses
Less: losses and loss expenses paid
347
(3,158)
Reserves for losses and loss expenses at the end of year
$
32,764
7,791
—
(273)
7,518
19,978
68
(2,397)
17,649
27,769
68
(2,670)
25,167
8,412
1,696
(938)
9,170
27,600
1,363
(2,558)
26,405
36,012
3,059
(3,496)
35,575
6,586
2,000
(795)
7,791
21,330
1,000
(2,352)
19,978
27,916
3,000
(3,147)
27,769
9,979
2,014
(3,581)
8,412
33,630
(4,285)
(1,745)
27,600
43,609
(2,271)
(5,326)
36,012
8,167
2,000
(3,581)
6,586
27,599
(4,750)
(1,519)
21,330
35,766
(2,750)
(5,100)
27,916
Note 10. Indebtedness
(a) Notes Payable
(1) In the first quarter of 2013, we issued $185 million of 5.875% Senior Notes due 2043. These notes pay interest on February
15, May 15, August 15, and November 15 of each year, beginning on May 15, 2013, and at maturity. The notes are callable by
us on or after February 8, 2018, at a price equal to 100% of their principal outstanding amount, plus accrued and unpaid interest
to, but excluding, the date of redemption. A portion of the proceeds from this debt issuance was used to fully redeem the $100
million aggregate principal amount of our 7.5% Junior Subordinated Notes due 2066, which had an associated $3.3 million pre-
tax write-off for the remaining capitalized debt issuance costs on these notes. Of the remaining net proceeds, $57.1 million was
used to make capital contributions to the Insurance Subsidiaries, while the balance was used for general corporate purposes.
There are no financial debt covenants to which we are required to comply in regards to these Senior Notes.
(2) In the first quarter of 2009, Selective Insurance Company of the Southeast and Selective Insurance Company of South
Carolina (“Indiana Subsidiaries”) joined and invested in the FHLBI, which provides them with access to additional liquidity.
The Indiana Subsidiaries’ aggregate investment was $2.9 million at December 31, 2013 and December 31, 2012, respectively.
Our investment provides us the ability to borrow up to 20 times the total amount of the FHLBI common stock purchased with
additional collateral, at comparatively low borrowing rates. All borrowings from FHLBI are required to be secured by certain
investments.
The following is a summary of the Indiana Subsidiaries’ borrowings from the FHLBI:
•
•
In 2011, the Indiana Subsidiaries borrowed $45 million in the aggregate from the FHLBI. The unpaid principal
amount accrues interest of 1.25% and is paid on the 15th of every month. The principal amount is due on
December 16, 2016. These funds were loaned to the Parent for use in the acquisition of MUSIC on December 31,
2011.
In 2009, the Indiana Subsidiaries borrowed $13 million in the aggregate from the FHLBI. The unpaid principal
amount accrues interest of 2.9% and is paid on the 15th of every month. The principal amount is due on December
15, 2014. These funds were loaned to the Parent to be used for general corporate purposes.
121
(3) In the fourth quarter of 2005, we issued $100 million of 6.70% Senior Notes due 2035. These notes were issued at a
discount of $0.7 million resulting in an effective yield of 6.754% and pay interest on May 1 and November 1 each year
commencing on May 1, 2006. Net proceeds of approximately $50 million were used to fund an irrevocable trust to provide for
certain payment obligations in respect of our outstanding debt. The remainder of the proceeds was used for general corporate
purposes. The agreements covering these notes contain a standard default cross-acceleration provision that provides the 6.70%
Senior Notes will enter a state of default upon the failure to pay principal when due or upon any event or condition that results
in an acceleration of principal of any other debt instrument in excess of $10 million that we have outstanding concurrently with
the 6.70% Senior Notes. There are no financial debt covenants to which we are required to comply in regards to these notes.
(4) In the fourth quarter of 2004, we issued $50 million of 7.25% Senior Notes due 2034. These notes were issued at a discount
of $0.1 million, resulting in an effective yield of 7.27% and pay interest on May 15 and November 15 each year. We
contributed $25 million of the bond proceeds to the Insurance Subsidiaries as capital. The remainder of the proceeds was used
for general corporate purposes. The agreements covering these notes contain a standard default cross-acceleration provision
that provides the 7.25% Senior Notes will enter a state of default upon the failure to pay principal when due or upon any event
or condition that results in an acceleration of principal of any other debt instrument in excess of $10 million that we have
outstanding concurrently with the 7.25% Senior Notes. There are no financial debt covenants to which we are required to
comply in regards to these notes.
(b) Short-Term Debt
Our Line of Credit was renewed effective September 26, 2013, with Wells Fargo Bank, National Association, as administrative
agent, and Branch Banking and Trust Company, with a borrowing capacity of $30 million, which can be increased to $50
million with the approval of both lending partners. The Line of Credit provides the Parent with an additional source of short-
term liquidity. The interest rate on our Line of Credit varies and is based on, among other factors, the Parent’s debt ratings.
The Line of Credit expires on September 26, 2017. There have been no balances outstanding under this Line of Credit or the
previous credit facility at December 31, 2013 or at any time during Twelve Months 2013.
The Line of Credit agreement contains representations, warranties, and covenants that are customary for credit facilities of this
type, including, without limitation, financial covenants under which we are obligated to maintain a minimum consolidated net
worth, minimum combined statutory surplus, and maximum ratio of consolidated debt to total capitalization, and covenants
limiting our ability to: (i) merge or liquidate; (ii) incur debt or liens; (iii) dispose of assets; (iv) make investments and
acquisitions; and (v) engage in transactions with affiliates. The Line of Credit permits collateralized borrowings by the Indiana
Subsidiaries from the FHLBI so long as the aggregate amount borrowed does not exceed 10% of the respective Indiana
Subsidiary’s admitted assets from the preceding calendar year.
The table below outlines information regarding certain of the covenants in the Line of Credit:
Consolidated net worth
Statutory surplus
Debt-to-capitalization ratio1
A.M. Best financial strength rating
1 Calculated in accordance with Line of Credit agreement.
Required as of
December 31, 2013
$800 million
Not less than $750 million
Not to exceed 35%
Minimum of A-
Actual as of
December 31, 2013
$1.2 billion
$1.3 billion
25.5%
A
In addition to the above requirements, the Line of Credit agreement contains a cross-default provision that provides that the
Line of Credit will be in default if we fail to comply with any condition, covenant, or agreement (including payment of
principal and interest when due on any debt with an aggregate principal amount of at least $20 million), which causes or
permits the acceleration of principal.
122
Note 11. Segment Information
The disaggregated results of our three operating segments are used by senior management to manage our operations. These
segments are evaluated based on the following:
• Our Standard Insurance Operations segment and our E&S Insurance Operations segment 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; and
• Our Investments segment is evaluated based on after-tax net investment income and net realized gains and losses.
Our combined insurance operations are subject to certain geographic concentrations, particularly in the Northeast and Mid-
Atlantic regions of the country. In 2013, approximately 23% of net premiums written were related to insurance policies written
in New Jersey.
The goodwill balance for our operating segments was $7.8 million at December 31, 2013 and 2012 related to our Standard
Insurance Operations segment.
In computing the results of each segment, we do not make adjustments for interest expense or net general corporate expenses.
While we do not fully allocate taxes to all segments, we do allocate taxes to our investments segment as we manage that
segment on after-tax results. We do not maintain separate investment portfolios for the segments and therefore, do not allocate
assets to the segments.
The following summaries present revenues from continuing operations (net investment income and net realized losses on
investments in the case of the Investments segment) and pre-tax income from continuing operations for the individual
segments:
Revenue by Segment
Years ended December 31,
($ in thousands)
Standard Insurance Operations:
Net premiums earned:
Commercial automobile
Workers compensation
General liability
Commercial property
Businessowners’ policies
Bonds
Other
Total standard Commercial Lines
Personal automobile
Homeowners
Other
Total standard Personal Lines
Total Standard Insurance Operations net premiums earned
Miscellaneous income
Total Standard Insurance Operations revenue
E&S Insurance Operations:
Net premiums earned
Investments:
Net investment income
Net realized investment gains
Total investment revenues
Total all segments
Other income
2013
2012
2011
$
310,994
267,612
405,322
224,412
77,097
19,000
12,182
288,010
262,108
373,381
202,340
68,462
18,891
12,143
279,610
259,354
344,682
192,989
66,225
18,910
9,177
1,316,619
1,225,335
1,170,947
152,005
127,991
14,336
294,332
1,610,951
12,201
1,623,152
152,142
113,850
13,563
279,555
1,504,890
8,827
1,513,717
148,824
102,764
12,864
264,452
1,435,399
8,069
1,443,468
125,121
79,229
3,914
134,643
20,732
155,375
1,903,648
93
131,877
8,988
140,865
1,733,811
291
1,734,102
147,443
2,240
149,683
1,597,065
410
1,597,475
Total revenues from continuing operations
$
1,903,741
123
Segment Income
Years ended December 31,
($ in thousands)
Standard Insurance Operations:
Commercial Lines underwriting gain (loss)
Personal Lines underwriting gain (loss)
Total Standard Insurance Operations underwriting gain (loss), before federal income tax
GAAP combined ratio
Statutory combined ratio
E&S Insurance Operations:
Underwriting loss, before federal income tax
GAAP combined ratio
Statutory combined ratio
Investments:
Net investment income
Net realized investment gains
Total investment income, before federal income tax
Tax on investment income
Total investment income, after federal income tax
Reconciliation of Segment Results to Income from Continuing Operations, before
Federal Income Tax
Years ended December 31,
($ in thousands)
Standard Insurance Operations underwriting gain (loss), before federal income tax
E&S Insurance Operations underwriting loss, before federal income tax
Investment income, before federal income tax
Total all segments
Interest expense
General corporate and other expenses
Income from continuing operations, before federal income tax
2013
2012
2011
33,856
8,645
42,501
97.4%
97.1%
(3,735)
103.0%
102.9%
134,643
20,732
155,375
40,489
114,886
(40,935)
(3,514)
(44,449)
103.0
102.5
(19,558)
124.7
118.8
131,877
8,988
140,865
34,758
106,107
(49,952)
(46,971)
(96,923)
106.8
106.4
(6,661)
270.2
131.3
147,443
2,240
149,683
37,139
112,544
2013
2012
2011
42,501
(3,735)
155,375
194,141
(22,538)
(27,801)
143,802
(44,449)
(19,558)
140,865
76,858
(18,872)
(20,351)
37,635
(96,923)
(6,661)
149,683
46,099
(18,259)
(16,440)
11,400
$
$
$
$
Note 12. Discontinued Operations
In the fourth quarter of 2009, we sold 100% of our interest in Selective HR for proceeds to be received over a 10-year period.
These proceeds were based on the ability of the purchaser to retain and generate new worksite lives though the independent
agents who distribute the products. In 2013, we settled the remaining receivable for an aggregate of $1.0 million, which was
received in two installments during the second quarter of 2013, in full and final settlement of the contingent purchase price. An
impairment of $1.5 million was recorded in the first quarter of 2013 and is included in "Loss on disposal of discontinued
operations, net of tax" in the Consolidated Statements of Income.
124
Note 13. Earnings per Share
The following table provides a reconciliation of the numerators and denominators of basic and diluted earnings per share
("EPS"):
2013
($ in thousands, except per share amounts)
Basic EPS:
Net income from continuing operations
Net loss from discontinued operations
Net income available to common stockholders
Effect of dilutive securities:
Stock compensation plans
Diluted EPS:
Net income from continuing operations
Net loss from discontinued operations
Net income available to common stockholders
2012
($ in thousands, except per share amounts)
Basic EPS:
Net income available to common stockholders
Effect of dilutive securities:
Stock compensation plans
Diluted EPS:
Net income available to common stockholders
2011
($ in thousands, except per share amounts)
Basic EPS:
Net income from continuing operations
Net loss from discontinued operations
Net income available to common stockholders
Effect of dilutive securities:
Stock compensation plans
Diluted EPS:
Net income from continuing operations
Net loss from discontinued operations
Net income available to common stockholders
Income
(Numerator)
Shares
(Denominator)
Per Share
Amount
107,415
(997)
106,418
55,638
55,638
55,638
—
1,172
107,415
(997)
106,418
56,810
56,810
56,810
$
$
$
$
1.93
(0.02)
1.91
1.89
(0.02)
1.87
Income
(Numerator)
Shares
(Denominator)
Per Share
Amount
37,963
54,880
$
0.69
—
1,053
37,963
55,933
$
0.68
Income
(Numerator)
Shares
(Denominator)
Per Share
Amount
22,683
(650)
22,033
54,095
54,095
54,095
—
1,126
22,683
(650)
22,033
55,221
55,221
55,221
$
$
$
$
0.42
(0.01)
0.41
0.41
(0.01)
0.40
$
$
$
$
$
$
$
$
$
$
125
Note 14. Federal Income Taxes
(a) A reconciliation of federal income tax on income at the corporate rate to the effective tax rate is as follows:
($ in thousands)
Tax at statutory rate of 35%
Tax-advantaged interest
Dividends received deduction
Nonqualified deferred compensation
Amortization of intangible assets
Other
2013
2012
2011
$
50,331
(12,718)
(1,174)
(425)
(101)
474
13,172
(13,285)
(1,260)
(262)
687
620
(328)
3,990
(14,381)
(870)
7
—
(29)
(11,283)
Federal income tax expense (benefit) from continuing operations
$
36,387
(b) The tax effects of the significant temporary differences that give rise to deferred tax assets and liabilities are as follows:
($ in thousands)
Deferred tax assets:
Net loss reserve discounting
Net unearned premiums
Employee benefits
Long-term incentive compensation plans
Temporary investment write-downs
Net operating loss
Tax credits
Other
Total deferred tax assets
Deferred tax liabilities:
Deferred policy acquisition costs
Unrealized gains on investment securities
Other investment-related items, net
Accelerated depreciation and amortization
Total deferred tax liabilities
Net deferred federal income tax asset
2013
2012
87,967
64,167
19,912
12,904
7,586
2,818
17,042
10,088
97,561
58,981
39,752
10,078
8,236
12,120
14,150
9,056
222,484
249,934
59,164
31,345
618
8,744
99,871
122,613
53,187
67,501
2,488
7,622
130,798
119,136
$
$
After considering all evidence, both positive and negative, with respect to our federal tax loss carryback availability, expected
levels of pre-tax financial statement income, and federal taxable income, we believe it is more likely than not that the existing
deductible temporary differences will reverse during periods in which we generate net federal taxable income or have adequate
federal carryback availability. As a result, we have no valuation allowance recognized for federal deferred tax assets at
December 31, 2013 or 2012. The carryforward availability of our net operating loss will begin to expire in 2029 with the
remainder expiring through 2031. Our alternative minimum tax credits, which are available to offset future regular taxable
income, can be carried forward for an unlimited period of time.
Stockholders' equity reflects tax benefits related to compensation expense deductions for share-based compensation awards of
$19.2 million at December 31, 2013, $17.7 million at December 31, 2012, and $16.6 million at December 31, 2011.
We have analyzed our tax positions in all open tax years, which as of December 31, 2013 were 2007 through 2012. The
Internal Revenue Service (“IRS”) recently completed a limited scope examination of the 2007 through 2010 tax years, which
resulted in no material changes. We do not have unrecognized tax expense or benefit as of December 31, 2013.
In addition, we believe our tax positions will more likely than not be sustained upon examination, including related appeals or
litigation. In the event we had a tax position that did not meet the more likely than not criteria, any tax, interest, and penalties
incurred related to such a position would be reflected in "Total federal income tax expense (benefit)" on our Consolidated
Statements of Income.
126
Note 15. Retirement Plans
(a) Selective Insurance Retirement Savings Plan (“Retirement Savings Plan”)
SICA offers a voluntary defined contribution 401(k) plan to employees who meet eligibility requirements. Participants can
contribute 2% to 50% of their defined compensation to the Retirement Savings Plan not to exceed limits established by the IRS.
Employees age 50 or older who are contributing the maximum may also make additional contributions not to exceed the
additional amount permitted by the IRS. Subject to IRS limits, the following table presents information regarding plan terms:
SICA match
Non-elective contribution
As of January 1, 2011
As of April 5, 2013
100% of participant contributions up to the first 3% of
defined compensation and 50% up to the next 3%
100% of participant contributions up to the first 3% of
defined compensation and 50% up to the next 3%
Non-elective contributions of 4% of defined compensation
for employees not eligible to participate in the Retirement
Income Plan due to a date of hire after December 31, 2005
Non-elective contributions of 4% of defined compensation
expanded to include employees impacted by the
curtailment of the Retirement Income Plan
Vesting of match/non-elective
contribution
Immediately vested
Immediately vested
Employer contributions to the Retirement Savings Plan amounted to $12.2 million in 2013, $8.2 million in 2012, and $7.0
million in 2011.
(b) Deferred Compensation Plan
SICA offers a nonqualified deferred compensation plan ("Deferred Compensation Plan") to a group of management or highly
compensated employees (the "Participants") as a method of recognizing and retaining such employees. The Deferred
Compensation Plan provides the Participants the opportunity to elect to defer receipt of specified portions of compensation and
to have such deferred amounts deemed to be invested in specified investment options. A Participant in the Deferred
Compensation Plan may, subject to certain limitations, elect to defer compensation or awards to be received, including up to: (i)
50% of annual base salary; (ii) 100% of annual bonus; and/or (iii) all or a percentage of such other compensation as otherwise
designated by the administrator of the Deferred Compensation Plan.
In addition to the deferrals elected by the Participants, SICA may also choose to make matching contributions to the deferral
accounts of some or all Participants to the extent a Participant did not receive the maximum matching or non-elective
contributions permissible under the Retirement Savings Plan due to limitations under the Internal Revenue Code or the
Retirement Savings Plan. SICA may also choose at any time to make discretionary contributions to the deferral account of any
Participant in our sole discretion. No discretionary contributions were made in 2013, 2012, or 2011. SICA contributed $0.2
million in 2013, a nominal amount in 2012, and $0.1 million in 2011 to the Deferred Compensation Plan.
(c) Retirement Income Plan and Retirement Life Plan
The Retirement Income Plan for Selective Insurance Company of America and the Supplemental Excess Retirement Plan
(jointly referred to as the "Retirement Income Plan" or the "Plan") is a noncontributory defined benefit plan covering SICA
employees who met each Plan's eligibility requirements prior to January 1, 2006. As of such date, the Plan was amended to
eliminate eligibility for participation by employees first hired on or after January 1, 2006. In addition, the Plan was further
amended in the first quarter of 2013 to curtail the accrual of additional benefits for all eligible employees after March 31, 2016.
This curtailment resulted in a net actuarial gain recognized in OCI of $44.0 million on a pre-tax basis as of March 31, 2013.
As a result of the curtailment, the Retirement Income Plan was re-measured as of March 31, 2013. When determining the most
appropriate discount rate to be used in the valuation, we considered, among other factors, our expected payout patterns of the
Retirement Income Plan's obligations, as well as our investment strategy. We ultimately selected the rate that we believe best
represents our estimate of the inherent interest rate at which the Retirement Income Plan's liabilities can be effectively settled.
The expected rate of return on plan assets at March 31, 2013 remained at 7.40%, consistent with our December 31, 2012
assumption. For re-measurement, we determined that the most appropriate discount rate was 4.66%, up slightly from 4.42%
determined as of December 31, 2012.
127
The Retirement Income Plan was amended as of July 1, 2002 to provide for different calculations based on service with SICA
as of that date. Monthly benefits payable under the Retirement Income Plan at normal retirement age are computed under the
terms of those calculations. The earliest retirement age is age 55 with 10 years of service or the attainment of 70 points (age
plus years of service). If a participant chooses to begin receiving benefits before their 65th birthday, the amount of the
participant's monthly benefit would be reduced in accordance with the provisions of the plan. At retirement, participants
receive monthly pension payments and may choose among five payment options, including joint and survivor options.
The funding policy provides that payments to the pension trust shall be equal to the minimum funding requirements of the
Employee Retirement Income Security Act, plus additional amounts that the Board of Directors of SICA may approve from
time to time.
The funded status of the Retirement Income Plan and Retirement Life Plan was recognized in the Consolidated Balance Sheets
for 2013 and 2012, the details of which are as follows:
December 31,
($ in thousands)
Change in Benefit Obligation:
Benefit obligation, beginning of year
Service cost
Interest cost
Actuarial (gains) losses
Benefits paid
Impact of curtailment
Benefit obligation, end of year
Change in Fair Value of Assets:
Fair value of assets, beginning of year
Actual return on plan assets, net of expenses
Contributions by the employer to funded plans
Contributions by the employer to unfunded plans
Benefits paid
Fair value of assets, end of year
Funded status
Amounts Recognized in the Consolidated Balance Sheet:
Liabilities
Net pension liability, end of year
Amounts Recognized in AOCI:
Prior service cost
Net actuarial loss
Total
Other Information as of December 31:
Accumulated benefit obligation
Weighted-Average Liability Assumptions as of December 31:
Discount rate
Rate of compensation increase
Retirement Income Plan
2013
2012
Retirement Life Plan
2013
2012
302,647
7,517
12,477
(29,656)
(6,978)
(29,603)
256,404
207,150
15,925
9,600
120
(6,978)
225,817
254,009
8,091
12,981
33,596
(6,030)
—
302,647
182,614
21,896
8,550
120
(6,030)
207,150
6,471
—
283
(224)
(329)
—
6,201
—
—
—
—
—
—
5,897
—
302
660
(388)
—
6,471
—
—
—
—
—
—
(30,587)
(95,497)
(6,201)
(6,471)
(30,587)
(30,587)
(95,497)
(95,497)
(6,201)
(6,201)
(6,471)
(6,471)
—
39,640
39,640
26
103,365
103,391
250,546
265,899
5.16%
4.00%
4.42
4.00
—
1,363
1,363
—
4.85
—
—
1,667
1,667
—
4.42
—
$
$
$
$
$
$
$
$
$
128
($ in thousands)
Components of Net Periodic Benefit Cost and Other Amounts
Recognized in Other Comprehensive Income:
Net Periodic Benefit Cost:
Service cost
Interest cost
Expected return on plan assets
Amortization of unrecognized prior service cost
Amortization of unrecognized actuarial loss
Curtailment expense
Total net periodic cost
Other Changes in Plan Assets and Benefit Obligations
Recognized in Other Comprehensive Income:
Net actuarial (gain) loss
Reversal of amortization of net actuarial loss
Reversal of amortization of prior service cost
Curtailment expense
Retirement Income Plan
Retirement Life Plan
2013
2012
2011
2013
2012
2011
$
7,517
12,477
8,091
12,981
7,575
12,349
(15,755)
(14,206)
(13,924)
10
4,294
16
8,559
150
5,863
—
150
4,154
—
12,879
10,304
(59,430)
(4,294)
(10)
(16)
25,906
(5,863)
(150)
—
16,575
(4,154)
(150)
—
—
283
—
—
80
—
363
(224)
(80)
—
—
(304)
—
302
—
—
40
—
342
660
(40)
—
—
620
—
306
—
—
18
—
324
224
(18)
—
—
206
Total recognized in other comprehensive income
(63,750)
19,893
12,271
Total recognized in net periodic benefit cost and other
comprehensive income
$
(55,191)
32,772
22,575
59
962
530
The amortization of prior service cost related to the Retirement Income Plan and Retirement Life Plan is determined using a
straight-line amortization of the cost over the average remaining service period of employees expected to receive benefits under
the Plans.
The estimated net actuarial loss for the Retirement Income Plan and Retirement Life Plan that will be amortized from AOCI
into net periodic benefit cost during the 2014 fiscal year are $1.5 million and $0.1 million, respectively.
Retirement Income Plan
Retirement Life Plan
2013
2012
2011
2013
2012
2011
Weighted-Average Expense Assumptions for the years ended
December 31:
Discount rate 1
Expected return on plan assets
Rate of compensation increase
4.66%
7.40%
4.00%
5.16
7.75
4.00
5.55
8.00
4.00
4.42
—
—
5.16
—
—
5.55
—
—
1
Discount rate for the Retirement Income Plan changed from 4.42% as of December 31, 2012 to 4.66% as of March 31, 2013 due to the remeasurement that
was performed with the curtailment of the Plan.
Our latest measurement date was December 31, 2013 and we lowered our expected return on plan assets to 6.92%, reflecting
the lower interest rate environment, coupled with our investment strategy to closer match the duration of the assets and
liabilities of the Retirement Income Plan. Our expected return is within a reasonable range considering the lower interest rate
environment, as well as our actual 8.1% annualized return achieved since plan inception for all plan assets.
Our 2013 discount rate used to value the liability was 5.16% for the Retirement Income Plan and 4.85% for the Retirement Life
Plan. When determining the most appropriate discount rate to be used in the valuation, we consider, among other factors, our
expected payout patterns of the plans' obligations as well as our investment strategy and we ultimately select the rate that we
believe best represents our estimate of the inherent interest rate at which our pension and post-retirement life benefits can be
effectively settled.
129
Plan Assets
Assets of the Retirement Income Plan are invested to ensure that principal is preserved and enhanced over time. In addition,
the Retirement Income Plan is expected to perform above average relative to comparable funds without assuming undue risk,
and to add value through active management. Our return objective is to exceed the returns of the plan's policy benchmark,
which is the return the plan would have earned if the assets were invested according to the target asset class weightings and
earned index returns. The Retirement Income Plan's exposure to a concentration of credit risk is limited by the diversification
of investments across varied financial instruments, including common stocks, mutual funds, non-publicly traded stocks,
investments in limited partnerships, fixed income securities, and short-term investments. Allocations to these instruments may
vary from time to time. In 2014, we will continue to phase in adjustments to the asset allocation of the Retirement Income Plan
to steadily close the gap between the duration of the assets and the duration of the liabilities.
The Retirement Income Plan’s equity investments may not contain investments in any one security greater than 8% of the
portfolio value, nor have more than 5% of the outstanding shares of any one corporation. The use of derivative instruments is
permitted under certain circumstances, but shall not be used for unrelated speculative hedging or to apply leverage to portfolio
positions. Within the alternative investments portfolio, some leverage is permitted as defined and limited by the partnership
agreements.
The plan’s allocated target and ranges, as well as the actual weighted average asset allocation by investment categories, at
December 31 was as follows:
Equity:
International
Large Capitalization
Small and mid capitalization
Global asset allocation
Alternative investments
Fixed maturity:
Extended duration fixed maturity
Domestic core1
Global bond/high yield/emerging markets1
Cash and short-term investments
Target
Percentage
2013
Range
Percentage
Actual
Percentage
2012
Actual
Percentage
10
15
5
10
10
50
—
4 - 18
8 - 32
3 - 15
0 - 15
0 - 15
20 - 80
0 - 5
8
13
5
12
5
42
—
12
3
7
15
7
10
6
24
14
13
4
Total
1The Retirement Income Plan currently has fixed maturity security exposures that do not have target and range percentages since these exposures will be
phased out over time as we opportunistically migrate from intermediate to long duration fixed maturity security strategies.
100
100
The Retirement Income Plan had no investments in the Parent’s common stock as of December 31, 2013 or 2012.
The fair value of our Retirement Income Plan investments is generated using various valuation techniques. We follow the
methodology discussed in Note 2. “Summary of Significant Accounting Policies,” regarding pricing and valuation techniques,
as well as the fair value hierarchy, for equity and fixed maturity securities and short-term investments held in the Retirement
Income Plan.
The techniques used to determine the fair value of the Retirement Income Plan’s remaining invested assets are as follows:
• Valuations for the majority of the investment funds utilize the market approach wherein the quoted prices in the
active market for identical assets are used. These investment funds are traded in active markets at their net asset
value per share. There are no restrictions as to the redemption of these investments nor do we have any contractual
obligations to further invest in any of the individual mutual funds. These investments are classified as Level 1 in
the fair value hierarchy. Valuations of non-publicly traded investment funds are based upon the observable and
verifiable market values of the underlying publicly traded securities and therefore are classified as Level 2 within
the fair value hierarchy.
• The deposit administration contract is carried at cost, which approximates fair value. Given the liquid nature of the
underlying investments in overnight cash deposits and other short term duration products, we have determined that a
correlation exists between the deposit administration contract and other short-term investments such as money
market funds. As such, this investment is classified as Level 2 in the fair value hierarchy.
130
•
For valuations of the investments in limited partnerships, fair value is based on the Retirement Income Plan’s
ownership interest in the reported net asset values as a practical expedient. The majority of the net asset values are
reported to us on a one quarter lag. We assess whether these reported net asset values are indicative of market
activity that has occurred since the date of their valuation by the investees: (i) by reviewing the overall market
fluctuation and whether a material impact to our investments' valuation could have occurred; and (ii) through
routine conversations with the underlying funds' general partners/managers discussing, among other things,
conditions or events having significant impacts to their portfolio assets that have occurred subsequent to the
reported date, if any. Our limited partnership investments cannot be redeemed with the investees as our partnership
agreements require our commitment for the duration of the underlying funds’ lives. There is no active plan to sell
any of our remaining interests in the limited partnership investments; however, we may continue to entertain
potential opportunities to limit our exposure to these investments through the use of the secondary market. These
limited partnerships have been fair valued using Level 3 inputs.
The following tables provide quantitative disclosures of the Retirement Income Plan’s invested assets that are measured at fair
value on a recurring basis:
December 31, 2013
Fair Value Measurements at 12/31/13 Using
($ in thousands)
Description
Investment funds:
International equity
Domestic large capitalization
Small and mid capitalization
Global asset allocation fund
Extended duration fixed maturity
Global bond/high yield/emerging markets fixed maturity
Total investment funds
Limited partnership investments:
Equity long/short hedge
Private equity
Real estate
Total limited partnerships
Common stocks:
Small and mid capitalization
Total common stocks
Short-term investments
Deposit administration contracts
Total invested assets
Assets Measured at
Fair Value
At 12/31/13
Quoted Prices in
Active Markets for
Identical Assets/
Liabilities
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
17,548
30,436
6,326
27,257
96,920
26,984
5,574
30,436
6,326
27,257
96,920
26,984
11,974
—
—
—
—
—
205,471
193,497
11,974
41
9,899
2,219
12,159
6,350
6,350
963
1,023
—
—
—
—
6,350
6,350
963
—
$
225,966
200,810
—
—
—
—
—
—
—
1,023
12,997
—
—
—
—
—
—
—
41
9,899
2,219
12,159
—
—
—
—
12,159
131
December 31, 2012
Fair Value Measurements at 12/31/12 Using
($ in thousands)
Description
Investment funds:
International equity
Domestic large capitalization
Small and mid capitalization
Global asset allocation
Extended duration fixed maturity
Domestic core fixed maturity
Global bond/high yield/emerging markets fixed maturity
Total investment funds
Limited partnership investments:
Equity long/short hedge
Private equity
Real estate
Total limited partnerships
Common stocks:
Domestic large capitalization
Small and mid capitalization
Total common stocks
Short-term investments
Deposit administration contracts
Total invested assets
Assets Measured at
Fair Value
At 12/31/12
Quoted Prices in
Active Markets for
Identical Assets/
Liabilities
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
$
15,751
22,910
6,805
20,778
50,556
29,984
27,230
6,025
22,910
6,805
20,778
50,556
29,984
27,230
9,726
—
—
—
—
—
—
174,014
164,288
9,726
41
10,385
2,205
12,631
9,938
7,897
17,835
1,629
979
$
207,088
—
—
—
—
9,938
7,897
17,835
1,629
—
183,752
—
—
—
—
—
—
—
—
979
10,705
—
—
—
—
—
—
—
—
41
10,385
2,205
12,631
—
—
—
—
—
12,631
The following tables provide a summary of the changes in fair value of securities using significant unobservable inputs (Level
3):
Investments in Limited Partnerships
($ in thousands)
Fair value, beginning of year
Total gains (realized and unrealized)
included in changes in net assets
Purchases
Sales
Issuances
Settlements
Transfers into Level 3
Transfers out of Level 3
Fair value, end of year
2013
2012
$
$
12,631
2,131
560
—
—
(3,163)
—
—
12,159
15,180
1,118
434
—
—
(4,142)
41
—
12,631
The following table outlines a summary of our alternative investment portfolio by strategy and the remaining commitment
amount associated with each strategy:
Alternative Investments
($ in thousands)
Equity long/short hedge
Private equity
Real estate
Total alternative investments
Carrying Value
2013
December 31,
December 31,
Remaining
2013
2012
Amount
$
$
41
9,899
2,219
12,159
41
10,385
2,205
12,631
—
3,293
558
3,851
132
For a description of our private equity and real estate strategies, refer to Note 5. “Investments.” Our equity long/short hedge
strategy invests opportunistically in equities and equity-related instruments in companies generally in the financial services
sector. Investments within this strategy are permitted to be sold short in order to: (i) prospectively benefit from a correction in
overvalued equities; and (ii) partially hedge portfolio assets due to the strategy’s heavy weighting toward the financial sector.
At December 31, 2013, the Retirement Income Plan had contractual obligations that expire at various dates through 2022 to
further invest up to $3.9 million in alternative investments. There is no certainty that any such additional investment will be
required. The Retirement Income Plan currently receives distributions from these alternative investments through the
realization of the underlying investments in the limited partnerships. We anticipate that the general partners of these alternative
investments will liquidate their underlying investment portfolios through 2022.
Contributions
We presently anticipate contributing $9.6 million to the Retirement Income Plan in 2014, none of which represents minimum
required contribution amounts.
Benefit Payments
($ in thousands)
Benefits Expected to be Paid in Future
Fiscal Years:
2014
2015
2016
2017
2018
2019-2023
Retirement
Income Plan
Retirement
Life Plan
$
8,424
9,263
10,226
11,245
12,336
76,244
372
382
391
400
407
2,108
Note 16. Share-Based Payments
The following is a brief description of each of our share-based compensation plans:
2005 Omnibus Stock Plan
The Parent's 2005 Omnibus Stock Plan ("Stock Plan") was approved effective as of April 1, 2005 by stockholders on April 27,
2005. With the Stock Plan's approval, no further grants were available under the: (i) Parent's Stock Option Plan III, as
amended ("Stock Option Plan III"); (ii) Parent's Stock Option Plan for Directors, as amended ("Stock Option Plan for
Directors"); or (iii) Parent's Stock Compensation Plan for Non-employee Directors, as amended ("Stock Compensation Plan for
Non-employee Directors"), but awards outstanding under these plans and the Parent's Stock Option Plan II, as amended ("Stock
Option Plan II"), under which future grants ceased being available on May 22, 2002, shall continue in effect according to the
terms of those plans and any applicable award agreements.
Stockholders approved the amendment and restatement of the Stock Plan effective as of May 1, 2010 (the “Amended Stock
Plan”) on April 28, 2010. Under the Amended Stock Plan, the Parent's Board of Directors' Salary and Employee Benefits
Committee ("SEBC") may grant stock options, stock appreciation rights ("SARs"), restricted stock, restricted stock units
("RSUs"), phantom stock, stock bonuses, and other awards in such amounts and with such terms and conditions as it shall
determine, subject to the provisions of the Amended Stock Plan. Each award granted under the Amended Stock Plan (except
unconditional stock grants and the cash component of Director compensation) shall be evidenced by an agreement containing
such restrictions as the SEBC may, in its sole discretion, deem necessary or desirable and which are not in conflict with the
terms of the Amended Stock Plan. The maximum exercise period for an option grant under this plan is 10 years from the date
of the grant. During 2013, we granted, net of forfeitures, 376,163 RSUs. During 2012, we granted, net of forfeitures, 326,213
RSUs. During 2011, we granted, net of forfeitures, 402,925 RSUs. No options to purchase common stock were granted in
2013, 2012, or 2011. As of December 31, 2013, 4,233,305 shares of the Parent's common stock were authorized under the
Amended Stock Plan, and 3,445,663 shares remained available for issuance pursuant to outstanding stock options and RSUs
granted under the Stock Plan and the Amended Stock Plan.
During the vesting period, dividend equivalent units ("DEUs") are earned on RSUs. The DEUs are reinvested in the Parent's
common stock at fair value on each dividend payment date. We accrued 23,505 DEUs in 2013; 32,558 DEUs in 2012; and
41,469 DEUs in 2011. In addition, 39,296 DEUs were vested in 2013, 48,224 DEUs were vested in 2012, and 33,532 were
vested in 2011. The DEUs are subject to the same vesting period and conditions set forth in the award agreements for the
related RSUs.
133
Cash Incentive Plan
The Parent's Cash Incentive Plan (“Cash Incentive Plan”) was approved effective April 1, 2005 by stockholders on April 27,
2005. Stockholders approved the amendment and restatement of the Cash Incentive Plan effective as of May 1, 2010 (the
“Amended Cash Incentive Plan”) on April 28, 2010. Under the Amended Cash Incentive Plan, the SEBC may grant cash
incentive units in such amounts and with such terms and conditions as it shall determine, subject to the provisions of the
Amended Cash Incentive Plan. The initial dollar value of these grants will be adjusted to reflect the percentage increase or
decrease in the total shareholder return on the Parent's common stock over a specified performance period. In addition, for
certain grants, the number of units granted will be adjusted to reflect our performance on specified indicators as compared to
targeted peer companies. Each award granted under the Amended Cash Incentive Plan shall be evidenced by an agreement
containing such restrictions as the SEBC may, in its sole discretion, deem necessary or desirable and which are not in conflict
with the terms of the Amended Cash Incentive Plan. We granted, net of forfeitures, 55,365 cash incentive units during 2013,
46,961 cash incentive units during 2012, and 46,879 cash incentive units during 2011.
Stock Option Plan II
As of December 31, 2013, 298,680 shares of the Parent's common stock remained available in the reserve for Stock Option
Plan II, under which future grants ceased being available on May 22, 2002. Under Stock Option Plan II, employees were
granted qualified and nonqualified stock options, with or without SARs, and restricted or unrestricted stock: (i) at not less than
fair value on the date of grant; and (ii) subject to certain vesting periods as determined by the SEBC. Restricted stock awards
also could be subject to the achievement of performance objectives as determined by the SEBC. The maximum exercise period
for an option grant under this plan was 10 years from the date of the grant.
Stock Option Plan III
As of December 31, 2013, there were 275,244 shares of the Parent's common stock in the reserve for Stock Option Plan III,
under which future grants ceased being available with the approval of the Stock Plan. Under Stock Option Plan III, employees
were granted qualified and nonqualified stock options, with or without SARs, and restricted or unrestricted stock: (i) at not less
than fair value on the date of grant, and (ii) subject to certain vesting restrictions determined by the SEBC. Restricted stock
awards also could be subject to achievement of performance objectives as determined by the SEBC. The maximum exercise
period for an option grant under this plan was 10 years from the date of the grant.
Stock Option Plan for Directors
As of December 31, 2013, 114,000 shares of the Parent's common stock remained in the reserve for the Stock Option Plan for
Directors, under which future grants ceased being available with the approval of the Stock Plan. Non-employee directors
participated in this plan and automatically received an annual nonqualified option to purchase 6,000 shares of the Parent's
common stock at not less than fair value on the date of grant, which is typically on March 1. Options under this plan vested on
the first anniversary of the grant and must be exercised by the tenth anniversary of the grant.
Stock Compensation Plan for Non-employee Directors
As of December 31, 2013 there were 94,290 shares of the Parent's common stock available for issuance pursuant to outstanding
stock option awards under the Stock Compensation Plan for Non-employee Directors, under which future grants ceased being
available with the approval of the Stock Plan. Under the Stock Compensation Plan for Non-employee Directors, Directors
could elect to receive a portion of their annual compensation in shares of the Parent's common stock. There were no issuances
under this plan in 2013, 2012, and 2011.
Employee Stock Purchase Plan
On April 29, 2009, the Parent’s stockholders approved the Parent’s Employee Stock Purchase Plan (2009) (“ESPP”). This plan
replaced the previous employee stock purchase savings plan under which no further purchases could be made as of July 1,
2009. Under the ESPP, there were 870,930 shares of the Parent's common stock available for purchase as of December 31,
2013. The ESPP is available to all employees who meet the plan's eligibility requirements. The ESPP provides for the issuance
of options to purchase shares of common stock. The purchase price is the lower of: (i) 85% of the closing market price at the
time the option is granted; or (ii) 85% of the closing price at the time the option is exercised. Shares are generally issued on
June 30 and December 31 of each year. Under the ESPP, we issued 122,951 shares to employees during 2013, 129,081 shares
during 2012, and 131,705 shares during 2011.
134
Agent Stock Purchase Plan
On July 27, 2010, the SEBC approved the Parent’s Amended and Restated Stock Purchase Plan for Independent Insurance
Agencies ("Agent Plan") which made immaterial amendments to the plan approved by stockholders on April 26, 2006. Under
the Agent Plan, there were 2,098,020 shares of the Parent’s common stock available for purchase as of December 31, 2013.
The Agent Plan provides for quarterly offerings in which our independent retail insurance agencies and wholesale general
agencies, and certain eligible persons associated with the agencies, with contracts with the Insurance Subsidiaries can purchase
the Parent's common stock at a 10% discount with a one year restricted period during which the shares purchased cannot be
sold or transferred. Under the Agent Plan, we issued 86,388 shares in 2013, 89,723 shares in 2012, and 111,427 shares in 2011,
and charged to expense $0.2 million in each year, with a corresponding income tax benefit of $0.1 million in each year.
A summary of the stock option transactions under our share-based payment plans is as follows:
Outstanding at December 31, 2012
Granted in 2013
Exercised in 2013
Forfeited or expired in 2013
Outstanding at December 31, 2013
Exercisable at December 31, 2013
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life in Years
Aggregate
Intrinsic Value
($ in thousands)
19.36
—
16.98
26.59
19.75
19.75
3.92
3.92
$
$
6,705
6,705
Number
of Shares
1,096,754
$
—
182,201
11,114
903,439
903,439
$
$
The total intrinsic value of options exercised was $1.3 million during 2013, and $0.8 million in 2012 and 2011.
A summary of the RSU transactions under our share-based payment plans is as follows:
Unvested RSU awards at December 31, 2012
Granted in 2013
Vested in 2013
Forfeited in 2013
Unvested RSU awards at December 31, 2013
Number
of Shares
1,137,370
$
396,713
416,753
20,550
1,096,780
$
Weighted
Average
Grant Date
Fair Value
16.54
21.03
15.01
17.24
18.73
As of December 31, 2013, total unrecognized compensation expense related to unvested RSU awards granted under our stock
plans was $4.5 million. That expense is expected to be recognized over a weighted-average period of 1.8 years. The total
intrinsic value of RSU vested was $9.1 million for 2013, $8.4 million for 2012, and $6.6 million for 2011. In connection with
the vested RSUs, the total value of the DEU shares that also vested was $0.9 million during both 2013 and 2012, and $0.6
million in 2011.
At December 31, 2013, the liability recorded in connection with our Cash Incentive Plan was $20.8 million. The fair value of
the liability is re-measured at each reporting period through the settlement date of the awards, which is three years from the
date of grant based on an amount expected to be paid. A Monte Carlo simulation is performed to approximate the projected fair
value of the cash incentive units that, in accordance with the Cash Incentive Plan, is adjusted to reflect our performance on
specified indicators as compared to targeted peer companies. The remaining cost associated with the cash incentive units is
expected to be recognized over a weighted average period of 1.2 years. The cash incentive unit payments made were $4.7
million in 2013, and $3.0 million in 2012 and 2011.
135
In determining expense to be recorded for stock options granted under our share-based compensation plans, the fair value of
each option award is estimated on the date of grant using the Black Scholes option valuation model ("Black Scholes"). The
following are the significant assumptions used in applying Black Scholes: (i) the risk-free interest rate, which is the implied
yield currently available on U.S. Treasury zero-coupon issues with an equal remaining term; (ii) the expected term, which is
based on historical experience of similar awards; (iii) the dividend yield, which is determined by dividing the expected per
share dividend during the coming year by the grant date stock price; and (iv) the expected volatility, which is based on the
volatility of the Parent's stock price over a historical period comparable to the expected term. In applying Black Scholes, we
use the weighted average assumptions illustrated in the following table:
Risk-free interest rate
Expected term
Dividend yield
Expected volatility
2013
0.11%
6 months
2.4%
19%
ESPP
2012
0.12
6 months
2.9
24
2011
0.13
6 months
3.0
19
The grant date fair value of RSUs is based on the market price of our common stock on the grant date, adjusted for the present
value of our expected dividend payments. The expense recognized for share-based awards is based on the number of shares or
units expected to be issued at the end of the performance period and the grant date fair value, and is amortized over the
requisite service period.
The weighted-average fair value of options and stock per share, including RSUs granted for the Parent's stock plans, during
2013, 2012, and 2011 is as follows:
RSUs
ESPP:
Six month option
Discount of grant date market value
Total ESPP
Agent Plan:
Discount of grant date market value
2013
2012
2011
$
21.03
17.62
17.17
0.97
3.24
4.21
2.40
1.05
2.70
3.75
1.76
0.76
2.62
3.38
1.62
Share-based compensation expense charged against net income before tax was $19.9 million for the year ended December 31,
2013 with a corresponding income tax benefit of $6.8 million. Share-based compensation expense that was charged against net
income before tax was $13.8 million for the year ended December 31, 2012 and $10.1 million for the year ended December 31,
2011 with corresponding income tax benefits of $4.8 million and $3.5 million, respectively.
Note 17. Related Party Transactions
William M. Rue, a Director of the Parent, is Chairman of, and owns more than 10% of the equity of, Chas. E. Rue & Son, Inc.,
t/a Rue Insurance, a general independent retail insurance agency ("Rue Insurance"). Rue Insurance is an appointed independent
retail agent of the Insurance Subsidiaries on terms and conditions similar to those of our other agents. Rue Insurance also
places insurance for our business operations. Our relationship with Rue Insurance has existed since 1928.
The following is a summary of transactions with Rue Insurance:
• Rue Insurance placed insurance policies with the Insurance Subsidiaries. Direct premiums written associated with
these policies were $8.2 million in 2013, $7.7 million in 2012, and $7.8 million in 2011. In return, the Insurance
Subsidiaries paid standard market commissions to Rue Insurance of $1.3 million in 2013, $1.3 million in 2012, and
$1.2 million in 2011 including supplemental commissions.
• Rue Insurance placed insurance coverage for us with other insurance companies for which Rue Insurance was paid
commission pursuant to its agreements with those carriers in 2012 and 2011. We paid premiums for such insurance
coverage of $0.2 million in 2012 and 2011.
In 2005, we established a private foundation, The Selective Group Foundation (the "Foundation"), under Section 501(c)(3) of
the Internal Revenue Code. The Board of Directors of the Foundation is comprised of some of the Parent's officers. We made
contributions to the Foundation in the amount of $0.4 million in each of 2013, 2012, and 2011.
136
Note 18. Commitments and Contingencies
(a) We purchase annuities from life insurance companies to fulfill obligations under claim settlements that provide for periodic
future payments to claimants. As of December 31, 2013, we had purchased such annuities with a present value of $4.9 million
for settlement of claims on a structured basis for which we are contingently liable. To our knowledge, there are no material
defaults from any of the issuers of such annuities.
(b) We have various operating leases for office space and equipment. Such lease agreements, which expire at various times, are
generally renewed or replaced by similar leases. Rental expense under these leases amounted to $13.2 million in 2013, $13.1
million in 2012, and $11.6 million in 2011. We also lease computer hardware and software under capital lease agreements
expiring at various dates through 2018. See Note 2(p) for information on our accounting policy regarding leases.
In addition, certain leases for rented premises and equipment are non-cancelable, and liability for payment will continue even
though the space or equipment may no longer be in use. At December 31, 2013, the total future minimum rental commitments
under non-cancelable leases were $49.0 million and such yearly amounts are as follows:
($ in millions)
2014
2015
2016
2017
2018
After 2018
Total minimum payment required
Capital Leases
Operating Leases
Total
1.4 $
11.4 $
1.4
0.6
0.1
—
—
3.5 $
9.2
6.3
4.7
3.8
10.1
45.5 $
$
$
12.8
10.6
6.9
4.8
3.8
10.1
49.0
(c) At December 31, 2013, we have contractual obligations that expire at various dates through 2026 to invest up to an
additional $56.5 million in alternative and other investments. There is no certainty that any such additional investment will be
required. For additional information regarding these investments, see item (f) of Note 5. "Investments" in this Form 10-K.
Note 19. Litigation
In the ordinary course of conducting business, we are named as defendants in various legal proceedings. Most of these
proceedings are claims litigation involving our Insurance Subsidiaries as either: (i) liability insurers defending or providing
indemnity for third-party claims brought against insureds; or (ii) insurers defending first-party coverage claims brought against
them. We account for such activity through the establishment of unpaid loss and loss expense reserves. We expect that the
ultimate liability, if any, with respect to such ordinary course claims litigation, after consideration of provisions made for
potential losses and costs of defense, will not be material to our consolidated financial condition, results of operations, or cash
flows.
Our Insurance Subsidiaries are also from time to time involved in other legal actions, some of which assert claims for
substantial amounts. These actions include, among others, putative class actions seeking certification of a state or national
class. Such putative class actions have alleged, for example, improper reimbursement of medical providers paid under workers
compensation and personal and commercial automobile insurance policies. Our Insurance Subsidiaries also are involved from
time to time in individual actions in which extra-contractual damages, punitive damages, or penalties are sought, such as claims
alleging bad faith in the handling of insurance claims. We believe that we have valid defenses to these cases. We expect that
the ultimate liability, if any, with respect to such lawsuits, after consideration of provisions made for estimated losses, will not
be material to our consolidated financial condition. Nonetheless, given the large or indeterminate amounts sought in certain of
these actions, and the inherent unpredictability of litigation, an adverse outcome in certain matters could, from time to time,
have a material adverse effect on our consolidated results of operations or cash flows in particular quarterly or annual periods.
137
Note 20. Statutory Financial Information, Capital Requirements, and Restrictions on Dividends and Transfers of Funds
(a) Statutory Financial Information
The Insurance Subsidiaries prepare their statutory financial statements in accordance with accounting principles prescribed or
permitted by the various state insurance departments of domicile. Prescribed statutory accounting principles include state laws,
regulations, and general administrative rules, as well as a variety of publications of the National Association of Insurance
Commissioners (“NAIC"). Permitted statutory accounting principles encompass all accounting principles that are not
prescribed; such principles differ from state to state, may differ from company to company within a state and may change in the
future. The Insurance Subsidiaries do not utilize any permitted statutory accounting principles that materially affect the
determination of statutory surplus, statutory net income, or risk-based capital (“RBC”). As of December 31, 2013, the various
state insurance departments of domicile have adopted the March 2013 version of the NAIC Accounting Practices and
Procedures manual in its entirety, as a component of prescribed or permitted practices.
The following table provides statutory data for each of our Insurance Subsidiaries:
State of
Domicile
Unassigned
Surplus
Statutory Surplus
Statutory Net Income
2013
2012
2013
2012
2013
2012
2011
New Jersey
New Jersey
$ 309.2
201.3
246.2
167.6
369.9
211.2
53.1
27.5
29.8
10.1
15.2
7.8
($ in millions)
SICA
Selective Way Insurance Company ("SWIC")
Selective Insurance Company of South Carolina
("SICSC")
Indiana
Selective Insurance Company of the Southeast ("SICSE")
Indiana
Selective Insurance Company of New York ("SICNY")
New York
Selective Insurance Company of New England ("SICNE") New Jersey
Selective Auto Insurance Company of New Jersey
("SAICNJ")
MUSIC
Selective Casualty Insurance Company ("SCIC")
Selective Fire and Casualty Insurance Company
("SFCIC")
New Jersey
New Jersey
New Jersey
New Jersey
463.4
250.3
111.9
81.8
79.3
34.9
57.0
62.3
80.5
91.4
69.7
72.6
32.5
45.9
53.6
72.2
70.1
50.1
45.3
2.7
7.6
(14.9)
(2.2)
80.7
56.2
51.5
4.7
14.2
(6.2)
6.1
3.1
Total
$ 720.8
571.6
1,256.4
1,050.1
122.2
(0.9)
35.0
31.1
8.2
6.0
6.9
3.1
2.5
5.2
6.6
3.1
2.8
1.6
2.7
0.6
1.5
0.9
0.2
0.7
0.3
1.5
0.3
0.7
—
—
0.2
50.4
—
26.5
(b) Capital Requirements
The Insurance Subsidiaries are required to maintain certain minimum amounts of statutory surplus to satisfy the requirements
of their various state insurance departments of domicile. RBC requirements for property and casualty insurance companies are
designed to assess capital adequacy and to raise the level of protection that statutory surplus provides for policyholders. The
Insurance Subsidiaries combined total adjusted capital exceeded the authorized control level RBC, as defined by the NAIC, by
4.5:1 based on their 2013 statutory financial statements. The negative unassigned surplus balance for MUSIC existed prior to
our acquisition of this company in 2011. This company has not generated sufficient net income as of yet to offset negative
surplus items, such as non-admitted assets. In addition to statutory capital requirements, we are impacted by various rating
agency requirements related to certain rating levels. These required capital levels may be more than statutory requirements.
(c) Restrictions on Dividends and Transfers of Funds
The Parent pays dividends to stockholders from funds available at the holding company level. As of December 31, 2013, the
Parent had a $71.2 million investment portfolio available to fund future dividends and interest payments. This portfolio is not
subject to any regulatory restrictions, whereas our consolidated retained earnings of $1.2 billion is predominately restricted due
to the regulation associated with our Insurance Subsidiaries. In 2014, the Insurance Subsidiaries have the ability to provide for
$126.7 million in annual dividends to the Parent; however, as regulated entities these dividends are subject to certain
restrictions as is further discussed below. The Parent also has available to it other potential sources of liquidity, such as: (i)
borrowings from our Indiana-domiciled Insurance Subsidiaries; (ii) debt issuances; (iii) common stock issuances; and (iv)
borrowings under our Line of Credit. Borrowings from SICSE and SICSC are governed by approved intercompany lending
agreements with the Parent that provide for additional capacity of $29.7 million as of December 31, 2013, after considering that
borrowings under these lending agreements are restricted to 10% of the admitted assets of these respective subsidiaries. For
additional restrictions on the Parent's debt, see Note 10. "Indebtedness" in this Form 10-K.
138
Insurance Subsidiaries Dividend Restrictions
As noted above, the restriction on our net assets and retained earnings is predominantly driven by our Insurance Subsidiaries'
ability to pay dividends to the Parent under applicable law and regulations. Under the insurance laws of the domiciliary states
of the Insurance Subsidiaries, New Jersey, Indiana, and New York, an insurer can potentially make an ordinary dividend
payment if its statutory surplus following such dividend is reasonable in relation to its outstanding liabilities, is adequate to its
financial needs, and the dividend does not exceed the insurer's unassigned surplus. In general, New Jersey defines an ordinary
dividend as a dividend whose fair market value, together with other dividends made within the preceding 12 months, is less
than the greater of 10% of the insurer's statutory surplus as of the preceding December 31, or the insurer's net income
(excluding capital gains) for the 12-month period ending on the preceding December 31. Indiana's ordinary dividend
calculation is consistent with New Jersey's, except that it does not exclude capital gains from net income. In general, New York
defines an ordinary dividend as a dividend whose fair market value, together with other dividends made within the preceding
12 months, is less than the lesser of 10% of the insurer's statutory surplus, or 100% of adjusted net investment income. New
Jersey and Indiana require notice of the declaration of any ordinary dividend distribution. During the notice period, the
relevant state regulatory authority may disallow all or part of the proposed dividend if it determines that the dividend is not
appropriate given the above considerations. New York does not require notice of ordinary dividends. Dividend payments
exceeding ordinary dividends are referred to as extraordinary dividends and require review and approval by the applicable
domiciliary insurance regulatory authority prior to payment.
The following table provides quantitative data regarding all Insurance Subsidiaries' dividends paid to the Parent in 2013 for
debt service, shareholder dividends, and general operating purposes:
Dividends
($ in millions)
SICA
SWIC
SICSC
SICSE
SICNY
SICNE
SAICNJ
Total
Twelve Months ended December 31, 2013
State of Domicile
Ordinary Dividends
Paid
Extraordinary
Dividends Paid
Total Dividends
Paid
New Jersey
New Jersey
Indiana
Indiana
New York
New Jersey
New Jersey
$
$
6.0
6.3
1.0
1.5
2.4
2.0
1.9
21.1
11.0
—
—
—
—
—
—
11.0
The extraordinary dividends paid in 2013 were part of the capitalization plan for the formation of SFCIC and SCIC.
Based on the 2013 statutory financial statements, the maximum ordinary dividends that can be paid to the Parent by the
Insurance Subsidiaries in 2014 are as follows:
($ in millions)
State of Domicile
2014
Maximum Ordinary
Dividends Paid
SICA
SWIC
SICSC
SICSE
SICNY
SICNE
SAICNJ
MUSIC
SCIC
SFCIC
Total
$
$
New Jersey
New Jersey
Indiana
Indiana
New York
New Jersey
New Jersey
New Jersey
New Jersey
New Jersey
139
17.0
6.3
1.0
1.5
2.4
2.0
1.9
32.1
46.3
25.0
11.2
8.2
7.9
3.5
6.8
6.2
8.1
3.5
126.7
Note 21. Quarterly Financial Information
(unaudited, $ in thousands,
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
except per share data)
Net premiums earned
Net investment income earned
Net realized gains (losses)
Underwriting profit (loss)
Net income from continuing
operations
Loss on disposal of discontinued
operations, net of tax
Net income
Other comprehensive income (loss)
Comprehensive income (loss)
Net income per share:
Basic
Diluted
Dividends to stockholders1
Price range of common stock:2
High
Low
2013
2012
2013
2012
2013
2012
2013
2012
420,940
378,829
32,870
3,355
12,161
32,628
4,358
(1,363)
426,252
34,003
5,154
4,483
392,212
34,006
178
(26,962)
22,305
18,093
27,122
(997)
21,308
27,881
49,189
0.38
0.38
0.13
24.13
19.53
—
18,093
10,690
28,783
0.33
0.33
0.13
19.00
16.64
—
27,122
(62,643)
(35,521)
0.49
0.48
0.13
24.75
19.58
288
—
288
5,520
5,808
0.01
0.01
0.13
17.99
16.22
437,568
406,225
451,312
406,853
32,457
13,431
10,151
30,650
(1,088)
861
35,313
(1,208)
11,971
32,653
18,274
25,335
—
32,653
(2,195)
30,458
0.59
0.57
0.13
25.95
22.61
—
18,274
26,507
44,781
0.33
0.33
0.13
19.37
16.64
—
25,335
7,768
33,103
0.45
0.44
0.13
28.31
23.55
34,593
5,540
(36,543)
1,308
—
1,308
(30,971)
(29,663)
0.02
0.02
0.13
20.31
17.17
The addition of all quarters may not agree to annual amounts on the Financial Statements due to rounding.
1 See Note 20. “Statutory Financial Information, Capital Requirements, and Restrictions on Dividends and Transfers of Funds” for a discussion of dividend
restrictions.
2 These ranges of high and low prices of the Parent’s common stock, as reported by the NASDAQ Global Select Market, represent actual transactions. Price
quotations do not include retail markups, markdowns, and commissions. The range of high and low prices for common stock for the period beginning January
2, 2014 and ending February 14, 2014 was $21.38 to $26.99.
Note 22. Subsequent Events
As a result of severe weather conditions, our preliminary estimate for January catastrophe losses is between $28 million and
$32 million. The losses were primarily from extreme cold caused by the polar vortex that impacted our entire 22 state
footprint.
140
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. 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 (the "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.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal
control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) is a process designed by,
or under the supervision of, a company's principal executive and principal financial officers and effected by the Board,
management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:
•
•
•
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and
dispositions of the assets of the company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company's assets that could have a material effect on the financial statements.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2013. In
making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control-Integrated Framework in 1992.
Based on its assessment, our management believes that, as of December 31, 2013, our internal control over financial reporting
is effective.
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 the fourth quarter of 2013 that materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Attestation Report of the Independent Registered Public Accounting Firm
Our independent registered public accounting firm, KPMG, LLP has issued their attestation report on our internal control over
financial reporting which is set forth below.
141
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Selective Insurance Group, Inc.:
We have audited Selective Insurance Group, Inc. and its subsidiaries’ (the “Company”) internal control over financial reporting
as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Selective Insurance Group, Inc.’s
management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal
Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Selective Insurance Group, Inc. and its subsidiaries maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated
Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheets of Selective Insurance Group, Inc. and subsidiaries as of December 31, 2013 and December 31,
2012, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each
of the years in the three-year period ended December 31, 2013, and our report dated February 28, 2014 expressed an
unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
New York, New York
February 28, 2014
142
Item 9B. Other Information.
There is no other information that was required to be disclosed in a report on Form 8-K during the fourth quarter of 2013 that
we did not report.
PART III
Because we will file a Proxy Statement within 120 days after the end of the fiscal year ending December 31, 2013, this Annual
Report on Form 10-K omits certain information required by Part III and incorporates by reference certain information included
in the Proxy Statement.
Item 10. Directors, Executive Officers and Corporate Governance.
Information regarding our executive officers appears in Item 1. "Business." of this Form 10-K under "Executive Officers of the
Registrant." Information about the Board and all other matters required to be disclosed in Item 10. "Directors, Executive
Officers and Corporate Governance." appears under "Information About Proposal 1, Election of Directors" in the Proxy
Statement. That portion of the Proxy Statement is hereby incorporated by reference.
Section 16(a) Beneficial Ownership Reporting Compliance
Information about compliance with Section 16(a) of the Exchange Act appears under "Section 16(a) Beneficial Ownership
Reporting Compliance" in the "Information About Proposal 1, Election of Directors" section of the Proxy Statement and is
hereby incorporated by reference.
Item 11. Executive Compensation.
Information about compensation of our named executive officers appears under "Executive Compensation" in the "Election of
Directors" section of the Proxy Statement and is hereby incorporated by reference. Information about compensation of the
Board appears under "Director Compensation" in the "Information About Proposal 1, Election of Directors" section of the
Proxy Statement and is hereby incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information about security ownership of certain beneficial owners and management appears under "Security Ownership of
Management and Certain Beneficial Owners" in the "Information About Proposal 1, Election of Directors" section of the Proxy
Statement and is hereby incorporated by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information about certain relationships and related transactions, and director independence appears under “Transactions with
Related Persons” in the "Information About Proposal 1, Election of Directors" section of the Proxy Statement and is hereby
incorporated by reference.
Item 14. Principal Accounting Fees and Services.
Information about the fees and services of our principal accountants appears under "Audit Committee Report" and "Fees of
Independent Registered Public Accounting Firm" in the "Ratification of Appointment of Independent Registered Public
Accounting Firm" section of the Proxy Statement and is hereby incorporated by reference.
143
PART IV
(a) The following documents are filed as part of this report:
(1) Financial Statements:
The consolidated financial statements ("Financial Statements") listed below are included in Item 8. "Financial Statements and
Supplementary Data."
Consolidated Balance Sheets as of December 31, 2013 and 2012
Consolidated Statements of Income for the Years ended December 31, 2013, 2012, and 2011
Consolidated Statements of Comprehensive Income for the Years ended December 31, 2013, 2012, and 2011
Consolidated Statements of Stockholder's Equity for the Years Ended December 31, 2013, 2012, and 2011
Consolidated Statements of Cash Flow for the Years ended December 31, 2013, 2012, and 2011
Notes to Consolidated Financial Statements, December 31, 2013, 2012, and 2011
(2) Financial Statement Schedules:
Form 10-K
Page
87
88
89
90
91
92
The financial statement schedules, with Independent Auditors' Report thereon, required to be filed are listed below by page
number as filed in this report. All other schedules are omitted as the information required is inapplicable, immaterial, or the
information is presented in the Financial Statements or related notes.
Schedule I
Summary of Investments – Other than Investments in Related Parties at December 31, 2013
Schedule II
Condensed Financial Information of Registrant at December 31, 2013 and 2012 and for the years ended
December 31, 2013, 2012, and 2011
Schedule III
Supplementary Insurance Information for the years ended December 31, 2013, 2012, and 2011
Schedule IV
Reinsurance for the years ended December 31, 2013, 2012, and 2011
Schedule V
Allowance for Uncollectible Premiums and Other Receivables for the years ended December 31, 2013, 2012,
and 2011
Form 10-K
Page
147
148
151
153
154
(3) Exhibits:
The exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index, which is incorporated by reference and
immediately precedes the exhibits filed with or incorporated by reference in this Form 10-K.
144
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly authorized.
SELECTIVE INSURANCE GROUP, INC.
By: /s/ Gregory E. Murphy
Gregory E. Murphy
Chairman of the Board and Chief Executive Officer
By: /s/ Dale A. Thatcher
Dale A. Thatcher
Executive Vice President and Chief Financial Officer
(principal accounting officer and principal financial officer)
February 28, 2014
February 28, 2014
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the date indicated.
145
By: /s/ Gregory E. Murphy
Gregory E. Murphy
Chairman of the Board and Chief Executive Officer
*
Paul D. Bauer
Director
*
Annabelle G. Bexiga
Director
*
A. David Brown
Director
*
John C. Burville
Director
*
Joan M. Lamm-Tennant
Director
*
Michael J. Morrissey
Director
*
Cynthia S. Nicholson
Director
*
Ronald L. O’Kelley
Director
*
William M. Rue
Director
*
J. Brian Thebault
Director
* By: /s/ Michael H. Lanza
Michael H. Lanza
Attorney-in-fact
146
February 28, 2014
February 25, 2014
February 25, 2014
February 25, 2014
February 25, 2014
February 25, 2014
February 25, 2014
February 25, 2014
February 25, 2014
February 25, 2014
February 25, 2014
February 28, 2014
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUMMARY OF INVESTMENTS-OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 2013
SCHEDULE I
Types of investment
($ in thousands)
Fixed maturity securities:
Held-to-maturity:
Foreign government obligations
Obligations of states and political subdivisions
Public utilities
All other corporate securities
Asset-backed securities
Commercial mortgage-backed securities
Total fixed maturity securities, held-to-maturity
Available-for-sale:
U.S. government and government agencies
Foreign government obligations
Obligations of states and political subdivisions
Public utilities
All other corporate securities
Asset-backed securities
Commercial mortgage-backed securities
Residential mortgage-backed securities
Total fixed maturity securities, available-for-sale
Equity securities:
Common stock:
Public utilities
Banks, trust and insurance companies
Industrial, miscellaneous and all other
Total equity securities, available-for-sale
Short-term investments
Other investments
Total investments
Amortized Cost
or Cost
Fair Value
Carrying
Amount
$
5,292
348,109
12,294
15,880
3,413
5,634
5,591
369,756
13,234
17,040
3,415
7,945
5,423
352,122
12,250
15,578
2,758
4,748
390,622
416,981
392,879
163,218
29,781
946,455
146,792
173,375
30,615
951,624
146,453
173,375
30,615
951,624
146,453
1,561,136
1,588,430
1,588,430
140,430
172,288
515,877
140,896
171,284
512,859
140,896
171,284
512,859
3,675,977
3,715,536
3,715,536
7,939
26,884
120,527
155,350
174,251
107,875
$
4,504,075
7,934
31,446
153,391
192,771
174,251
7,934
31,446
153,391
192,771
174,251
107,875
4,583,312
147
SELECTIVE INSURANCE GROUP, INC.
(Parent Corporation)
Balance Sheets
($ in thousands, except share amounts)
Assets:
Fixed maturity securities, available-for-sale – at fair value (amortized cost: $55,447 – 2013; $40,701 - 2012)
$
Short-term investments
Cash
Investment in subsidiaries
Current federal income tax
Deferred federal income tax
Other assets
Total assets
Liabilities:
Notes payable
Intercompany notes payable
Other liabilities
Total liabilities
Stockholders’ Equity:
Preferred stock at $0 par value per share:
Authorized shares 5,000,000; no shares issued or outstanding
Common stock of $2 par value per share:
Authorized shares: 360,000,000
Issued: 99,120,235 – 2013; 98,194,224 – 2012
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Treasury stock – at cost (shares: 43,198,622 – 2013; 43,030,776 – 2012)
Total stockholders’ equity
Total liabilities and stockholders’ equity
SCHEDULE II
December 31,
2013
2012
55,623
15,399
193
41,202
26,787
210
1,493,996
1,356,701
28,471
15,122
9,410
8,133
19,840
9,695
1,618,214
1,462,568
334,414
102,721
27,151
464,286
249,387
103,443
19,146
371,976
—
—
$
$
$
$
198,240
288,182
1,202,015
24,851
(559,360)
1,153,928
$
1,618,214
196,388
270,654
1,125,154
54,040
(555,644)
1,090,592
1,462,568
Information should be read in conjunction with the Notes to Consolidated Financial Statements of Selective Insurance Group, Inc. and its subsidiaries in Item
8. “Financial Statements and Supplementary Data.” of this Form 10-K.
148
SELECTIVE INSURANCE GROUP, INC.
(Parent Corporation)
Statements of Income
SCHEDULE II (continued)
Year ended December 31,
2013
2012
2011
$
32,129
196,091
585
55
495
464
32,769
197,050
24,309
27,888
52,197
20,711
20,632
41,343
63,025
231
362
63,618
20,203
16,832
37,035
($ in thousands)
Revenues:
Dividends from subsidiaries
Net investment income earned
Other income
Total revenues
Expenses:
Interest expense
Other expenses
Total expenses
(Loss) income from continuing operations, before federal income tax
(19,428)
155,707
26,583
Federal income tax benefit:
Current
Deferred
Total federal income tax benefit
(22,779)
4,835
(17,944)
(4,602)
(9,347)
(13,949)
(12,785)
490
(12,295)
Net (loss) income from continuing operations before equity in undistributed income of
subsidiaries
(1,484)
169,656
38,878
Equity in undistributed income of continuing subsidiaries, net of tax
Dividends in excess of continuing subsidiaries’ current year earnings
108,899
—
—
(131,693)
—
(16,195)
Net income from continuing operations
107,415
37,963
22,683
Loss on disposal of discontinued operations, net of tax of $(538) - 2013; and $(350) - 2011
(997)
—
(650)
Net income
$
106,418
37,963
22,033
Information should be read in conjunction with the Notes to Consolidated Financial Statements of Selective Insurance Group, Inc. and its subsidiaries in Item
8. “Financial Statements and Supplementary Data.” of this Form 10-K.
149
SELECTIVE INSURANCE GROUP, INC.
(Parent Corporation)
Statements of Cash Flows
SCHEDULE II (continued)
($ in thousands)
Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed income of subsidiaries, net of tax
Dividends in excess of continuing subsidiaries’ current year income
Stock-based compensation expense
Loss on disposal of discontinued operations
Realized gain
Amortization – other
Changes in assets and liabilities:
Increase in accrued salaries and benefits
(Increase) decrease in net federal income taxes
Other, net
Net adjustments
Net cash provided by operating activities
Investing Activities:
Purchase of fixed maturity securities, available-for-sale
Redemption and maturities of fixed maturity securities, available-for-sale
Redemption and maturities of fixed maturity securities, held-to-maturity
Purchase of short-term investments
Sale of short-term investments
Capital contribution to subsidiaries
Purchase of subsidiary, net of cash acquired
Sale of subsidiary
Net cash used in investing activities
Financing Activities:
Dividends to stockholders
Acquisition of treasury stock
Proceeds from notes payable, net of debt issuance costs
Net proceeds from stock purchase and compensation plans
Excess tax benefits (expense) from share-based payment arrangements
Repayment of notes payable
Borrowings from subsidiaries
Principal payment on borrowings from subsidiaries
Net cash provided by (used in) financing activities
Net (decrease) increase in cash
Cash, beginning of year
Cash, end of year
Year ended December 31,
2013
2012
2011
$
106,418
37,963
22,033
(108,899)
—
8,630
997
—
4,353
6,791
(14,968)
1,204
(101,892)
4,526
(21,708)
6,432
—
(241,748)
253,136
(57,125)
—
1,225
—
131,693
6,939
—
(219)
450
5,221
4,897
(7,014)
141,967
179,930
(148,604)
127,344
—
(106,539)
113,700
(139,122)
255
751
(59,788)
(152,215)
(27,416)
(3,716)
178,435
7,119
1,545
(100,000)
—
(722)
55,245
(17)
210
193
$
(26,944)
(3,495)
—
4,840
1,060
—
—
(3,688)
(28,227)
(512)
722
210
—
16,195
7,422
650
—
229
330
742
(2,234)
23,334
45,367
(19,643)
—
796
(128,378)
144,538
—
(51,728)
1,152
(53,263)
(26,513)
(2,741)
—
5,011
(90)
—
45,000
(12,654)
8,013
117
605
722
Information should be read in conjunction with the Notes to Consolidated Financial Statements of Selective Insurance Group, Inc. and its subsidiaries in Item
8. “Financial Statements and Supplementary Data.” of this Form 10-K.
150
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
Year ended December 31, 2013
SCHEDULE III
Deferred
policy
acquisition
costs
Reserve
for loss
and loss
expenses
Unearned
premiums
Net
premiums
earned
Net
investment
income1
Losses
and loss
expenses
incurred
Amortization
of deferred
policy
acquisition
costs2
Other
operating
expenses3
Net
premiums
written
$
156,546
3,189,498
995,830
1,610,951
— 1,037,711
303,540
227,199
1,678,497
16,435
160,272
63,325
125,121
—
84,027
28,288
16,541
131,662
($ in thousands)
Standard Insurance
Operations Segment
E&S Insurance
Operations Segment
Investments Segment
—
—
—
—
155,375
—
—
—
—
Total
$
172,981
3,349,770
1,059,155
1,736,072
155,375
1,121,738
331,828
243,740
1,810,159
1Includes “Net investment income earned” and “Net realized investment gains” on the Consolidated Statements of Income.
2The total of “Amortization of deferred policy acquisition costs” of $331,828 and “Other operating expenses” of $243,740 reconciles to the Consolidated
Statements of Income as follows:
Policy acquisition costs
Other income3
Other expenses3
Total
$
$
579,977
(12,201)
7,792
575,568
3 In addition to amounts related to the Standard and E&S Insurance Operations segments, “Other income” and “Other expenses” on the Consolidated
Statements of Income includes holding company income and expense amounts of $93 and $27,894, respectively.
Year ended December 31, 2012
Deferred
policy
acquisition
costs
Reserve
for loss
and loss
expenses
Unearned
premiums
Net
premiums
earned
Net
investment
income1
Losses
and loss
expenses
incurred
Amortization
of deferred
policy
acquisition
costs2
Other
operating
expenses3
Net
premiums
written
$ 141,551
3,948,638
917,918
1,504,890
— 1,057,787
280,700
210,852
1,553,586
13,972
120,303
56,788
79,229
—
63,203
17,847
17,737
113,297
($ in thousands)
Insurance Operations
Segment
E&S Insurance
Operations Segment
Investments Segment
—
—
—
—
140,865
—
—
—
—
Total
$ 155,523
4,068,941
974,706
1,584,119
140,865
1,120,990
298,547
228,589
1,666,883
1Includes “Net investment income earned” and “Net realized investment gains” on the Consolidated Statements of Income.
2 The total of “Amortization of deferred policy acquisition costs” of $298,547 and “Other operating expenses” of $228,589 reconciles to the Consolidated
Statements of Income as follows:
Policy acquisition costs
Other income3
Other expenses3
Total
$
$
526,143
(8,827)
9,820
527,136
3 In addition to amounts related to the Standard and E&S Insurance Operations segments, “Other income” and “Other expenses” on the Consolidated
Statements of Income includes holding company income and expense amounts of $291 and $20,642, respectively.
151
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
Year ended December 31, 2011
SCHEDULE III (continued)
($ in thousands)
Insurance Operations
Segment
E&S Insurance
Operations Segment
Investments Segment
Deferred
policy
acquisition
costs
Reserve
for loss
and loss
expenses
Unearned
premiums
Net
premiums
earned
Net
investment
income1
Losses
and loss
expenses
incurred
Amortization
of deferred
policy
acquisition
costs2
Other
operating
expenses3
Net
premiums
written
$ 131,043
3,083,359
885,850
1,435,399
— 1,071,815
265,009
195,498
1,461,216
4,718
—
61,565
21,141
3,914
—
—
—
—
149,683
3,172
—
1,052
—
6,351
—
24,133
—
Total
$ 135,761
3,144,924
906,991
1,439,313
149,683
1,074,987
266,061
201,849
1,485,349
1 Includes “Net investment income earned” and “Net realized investment gains” on the Consolidated Statements of Income.
2 The total of “Amortization of deferred policy acquisition costs” of $266,061 and “Other operating expenses” of $201,849 reconciles to the Consolidated
Statements of Income as follows:
Policy acquisition costs
Other income3
Other expenses3
Total
$
$
466,404
(8,069)
9,575
467,910
3 In addition to amounts related to the Insurance Operations segment, “Other income” and “Other expenses” on the Consolidated Statements of Income
includes holding company income and expense amounts of $410 and $16,850, respectively.
152
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
REINSURANCE
Years ended December 31, 2013, 2012, and 2011
SCHEDULE IV
($ thousands)
2013
Premiums earned:
Accident and health insurance
Property and liability insurance
Total premiums earned
2012
Premiums earned:
Accident and health insurance
Property and liability insurance
Total premiums earned
2011
Premiums earned:
Accident and health insurance
Property and liability insurance
Total premiums earned
Direct Amount
Assumed From
Other
Companies
Ceded to Other
Companies
Net Amount
% of Amount
Assumed
To Net
$
$
$
55
2,048,475
2,048,530
58
1,872,949
1,873,007
62
1,692,959
1,693,021
—
44,464
44,464
—
65,884
65,884
—
29,011
29,011
55
356,867
356,922
—
1,736,072
1,736,072
58
354,714
354,772
—
1,584,119
1,584,119
62
282,657
282,719
—
1,439,313
1,439,313
—
3%
3%
—
4 %
4 %
—
2 %
2 %
153
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
ALLOWANCE FOR UNCOLLECTIBLE PREMIUMS AND OTHER RECEIVABLES
Years ended December 31, 2013, 2012, and 2011
SCHEDULE V
($ in thousands)
Balance, January 1
Additions
Deductions
Balance, December 31
2013
2012
2011
$
$
8,706
3,733
(2,897)
9,542
7,668
4,536
(3,498)
8,706
8,091
4,990
(5,413)
7,668
154
EXHIBIT INDEX
Exhibit
Number
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
10.1
10.1a
10.2
Amended and Restated Certificate of Incorporation of Selective Insurance Group, Inc., filed May 4, 2010
(incorporated by reference herein to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2010, File No. 001-33067).
By-Laws of Selective Insurance Group, Inc., effective December 3, 2010 (incorporated by reference herein to
Exhibit 3.2 of the Company’s Current Report on Form 8-K filed December 3, 2010, File No. 001-33067).
Indenture, dated as of September 24, 2002, between Selective Insurance Group, Inc. and National City Bank,
as Trustee, relating to the Company's 1.6155% Senior Convertible Notes due September 24, 2032
(incorporated by reference herein to Exhibit 4.1 of the Company's Registration Statement on Form S-3 No.
333-101489).
Indenture, dated as of November 16, 2004, between Selective Insurance Group, Inc. and Wachovia Bank,
National Association, as Trustee, relating to the Company's 7.25% Senior Notes due 2034 (incorporated by
reference herein to Exhibit 4.1 of the Company's Current Report on Form 8-K filed November 18, 2004, File
No. 000-08641).
Indenture, dated as of November 3, 2005, between Selective Insurance Group, Inc. and Wachovia Bank,
National Association, as Trustee, relating to the Company’s 6.70% Senior Notes due 2035 (incorporated by
reference herein to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed November 9, 2005, File
No. 000-08641).
Registration Rights Agreement, dated as of November 16, 2004, between Selective Insurance Group, Inc. and
Keefe, Bruyette & Woods, Inc. (incorporated by reference herein to Exhibit 4.2 of the Company’s Current
Report on Form 8-K filed November 18, 2004, File No. 000-08641).
Registration Rights Agreement, dated as of November 3, 2005, between Selective Insurance Group, Inc. and
Keefe, Bruyette & Woods, Inc. (incorporated by reference herein to Exhibit 4.2 of the Company’s Current
Report on Form 8-K filed November 9, 2005, File No. 000-08641).
Form of Junior Subordinated Debt Indenture between Selective Insurance Group, Inc. and U.S. Bank National
Association (incorporated by reference herein to Exhibit 4.3 of the Company’s Registration Statement on Form
S-3 No. 333-137395).
Indenture, dated as of February 8, 2013, between Selective Insurance Group, Inc. and U.S. Bank National
Association, as Trustee (incorporated by reference herein to Exhibit 4.1 of the Company's Current Report on
Form 8-K filed February 8, 2013, File No. 001-33067).
First Supplemental Indenture, dated as of February 8, 2013, between Selective Insurance Group, Inc. and U.S.
Bank National Association, as Trustee, relating to the Company’s 5.875% Senior Notes due 2043 (incorporated
by reference herein to Exhibit 4.2 of the Company’s Current Report on Form 8-K filed February 8, 2013, File
No. 001-33067).
Selective Insurance Supplemental Pension Plan, As Amended and Restated Effective January 1, 2005
(incorporated by reference herein to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2008, File No. 001-33067).
Amendment No. 1 to Selective Insurance Supplemental Pension Plan, As Amended and Restated Effective
January 1, 2005 (incorporated by reference herein to Exhibit 10.1 of the Company's Current Report on Form 8-
K filed March 25, 2013, File No. 001-33067).
Selective Insurance Company of America Deferred Compensation Plan (2005) As Amended and Restated
Effective as of January 1, 2010 (incorporated by reference herein to Exhibit 10.2 of the Company’s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2011, File No. 001-33067).
155
Exhibit
Number
10.2a
10.2b
10.3a+
10.4+
10.4a+
10.5+
10.6+
10.7+
10.8+
10.9+
10.10+
10.11+
10.12+
10.13+
Amendment No 1. to Selective Insurance Company of America Deferred Compensation Plan (2005)
(incorporated by reference herein to Exhibit 10.2a of the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2011, File No. 001-33067).
Amendment No. 2 to Selective Insurance Company of America Deferred Compensation Plan (2005), As
Amended and Restated Effective as of January 1, 2010 (incorporated by reference herein to Exhibit 10.2 of the
Company's Current Report on Form 8-K filed March 25, 2013, File No. 001-33067).
Amendment to the Selective Insurance Stock Option Plan II, as amended, effective as of July 26, 2006
(incorporated by reference herein to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2006, File No. 000-08641).
Selective Insurance Stock Option Plan III (incorporated by reference herein to Exhibit A to the Company’s
Definitive Proxy Statement for its 2002 Annual Meeting of Stockholders filed April 1, 2002, File No.
000-08641).
Amendment to the Selective Insurance Stock Option Plan III, effective as of July 26, 2006 (incorporated by
reference herein to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June
30, 2006, File No. 000-08641).
Selective Insurance Group, Inc. 2005 Omnibus Stock Plan As Amended and Restated Effective as of May 1,
2010 (incorporated by reference herein to Appendix C of the Company’s Definitive Proxy Statement for its
2010 Annual Meeting of Stockholders filed March 25, 2010, File No. 001-33067).
Selective Insurance Group, Inc. 2005 Omnibus Stock Plan Stock Option Agreement (incorporated by reference
herein to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31,
2006, File No. 000-08641).
Selective Insurance Group, Inc. 2005 Omnibus Stock Plan Director Restricted Stock Agreement (incorporated
by reference herein to Exhibit 10.8 of the Company’s Annual Report on Form 10-K for the year ended
December 31, 2005, File No. 000-08641).
Selective Insurance Group, Inc. 2005 Omnibus Stock Plan Director Restricted Stock Unit Agreement
(incorporated by reference herein to Exhibit 10.8 of the Company’s Annual Report on Form 10-K for the year
ended December 31, 2009, File No. 001-33067).
Selective Insurance Group, Inc. 2005 Omnibus Stock Plan Director Stock Option Agreement (incorporated by
reference herein to Exhibit 10.9 of the Company’s Annual Report on Form 10-K for the year ended December
31, 2005, File No. 000-08641).
Selective Insurance Group, Inc. 2005 Omnibus Stock Plan Restricted Stock Agreement (incorporated by
reference herein to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March
31, 2006, File No. 000-08641).
Selective Insurance Group, Inc. 2005 Omnibus Stock Plan Restricted Stock Agreement (incorporated by
reference herein to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March
31, 2006, File No. 000-08641).
Selective Insurance Group, Inc. 2005 Omnibus Stock Plan Restricted Stock Unit Agreement (incorporated by
reference herein to Exhibit 10.12 of the Company’s Annual Report on Form 10-K for the year ended December
31, 2009, File No. 001-33067).
Selective Insurance Group, Inc. 2005 Omnibus Stock Plan Restricted Stock Unit Agreement (incorporated by
reference herein to Exhibit 10.13 of the Company’s Annual Report on Form 10-K for the year ended December
31, 2009, File No. 001-33067).
156
Exhibit
Number
10.14+
10.15+
10.16+
10.17+
10.18+
10.19+
10.20
10.21+
10.22+
10.23+
10.24+
10.25+
10.26+
Selective Insurance Group, Inc. 2005 Omnibus Stock Plan Automatic Director Stock Option Agreement
(incorporated by reference herein to Exhibit 2 of the Company’s Definitive Proxy Statement for its 2005
Annual Meeting of Stockholders filed April 6, 2005, File No. 000-08641).
Deferred Compensation Plan for Directors (incorporated by reference herein to Exhibit 10.5 to the Company’s
Annual Report on Form 10-K for the year ended December 31, 1993, File No. 000-08641).
Selective Insurance Group, Inc. Employee Stock Purchase Plan (2009), amended and restated effective July 1,
2009 (incorporated by reference herein to Appendix A to the Company’s Definitive Proxy Statement for its
2009 Annual Meeting of Stockholders filed March 26, 2009, File No. 001-33067).
Selective Insurance Group, Inc. Cash Incentive Plan As Amended and Restated as of May 1, 2010
(incorporated by reference herein to Appendix D to the Company’s Definitive Proxy Statement for its 2010
Annual Meeting of Stockholders filed March 25, 2010, File No. 001-33067).
Selective Insurance Group, Inc. Cash Incentive Plan Cash Incentive Unit Award Agreement (incorporated by
reference herein to Exhibit 10.14c of the Company’s Annual Report on Form 10-K for the year ended
December 31, 2007, File No. 001-33067).
Selective Insurance Group, Inc. Cash Incentive Plan Cash Incentive Unit Award Agreement (incorporated by
reference herein to Exhibit 10.14d of the Company’s Annual Report on Form 10-K for the year ended
December 31, 2007, File No. 001-33067).
Amended and Restated Selective Insurance Group, Inc. Stock Purchase Plan for Independent Insurance
Agencies (2010) (incorporated by reference herein to Exhibit 10.1 of the Company’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2010, File No. 001-33067).
Selective Insurance Group, Inc. Stock Option Plan for Directors (incorporated by reference herein to Exhibit B
of the Company’s Definitive Proxy Statement for its 2000 Annual Meeting of Stockholders filed March 31,
2000, File No. 000-08641).
Amendment to the Selective Insurance Group, Inc. Stock Option Plan for Directors, as amended, effective as
of July 26, 2006, (incorporated by reference herein to Exhibit 10.3 of the Company’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2006, File No. 000-08641).
Selective Insurance Group, Inc. Stock Compensation Plan for Nonemployee Directors, (incorporated by
reference herein to Exhibit A of the Company’s Definitive Proxy Statement for its 2000 Annual Meeting of
Stockholders filed March 31, 2000, File No. 000-08641).
Amendment to Selective Insurance Group, Inc. Stock Compensation Plan for Nonemployee Directors, as
amended (incorporated by reference herein to Exhibit 10.22a of the Company’s Annual Report on Form 10-K
for the year ended December 31, 2008, File No. 001-33067).
Employment Agreement between Selective Insurance Company of America and Gregory E. Murphy, dated as
of December 23, 2008 (incorporated by reference herein to Exhibit 10.1 of the Company’s Current Report on
Form 8-K filed December 30, 2008, File No. 001-33067).
Employment Agreement between Selective Insurance Company of America and Dale A. Thatcher, dated as of
December 23, 2008 (incorporated by reference herein to Exhibit 10.2 of the Company’s Current Report on
Form 8-K filed December 30, 2008, File No. 001-33067).
157
Exhibit
Number
10.27+
10.28+
10.29+
10.30+
10.31+
10.32
10.33
10.34
10.35
10.36
10.37
10.38+
10.39+
Employment Agreement between Selective Insurance Company of America and Michael H. Lanza, dated as of
December 23, 2008 (incorporated by reference herein to Exhibit 10.23e of the Company’s Annual Report on
Form 10-K for the year ended December 31, 2008, File No. 001-33067).
Employment Agreement between Selective Insurance Company of America and Ronald J. Zaleski, dated as of
December 23, 2008 (incorporated by reference herein to Exhibit 10.23i of the Company’s Annual Report on
Form 10-K for the year ended December 31, 2008, File No. 001-33067).
Employment Agreement between Selective Insurance Company of America and Kimberly J. Burnett, dated as
of March 5, 2012 (incorporated by reference herein to Exhibit 10.1 of the Company’s Form 10-Q for the
quarter ended March 31, 2012, File No. 001-33067).
Employment Agreement between Selective Insurance Company of America and Gordon J. Gaudet, dated as of
May 6, 2013 (incorporated by reference herein to Exhibit 10.1 of the Company's Form 10-Q for the quarter
ended June 30, 2013, File No. 001-33067).
Employment Agreement between Selective Insurance Company of America and John J. Marchioni, dated as of
September 10, 2013 (incorporated by reference herein to Exhibit 10.1 of the Company’s Current Report on
Form 8-K filed September 11, 2013, File No. 001-33067).
Credit Agreement among Selective Insurance Group, Inc., the Lenders Named Therein and Wells Fargo Bank,
National Association, as Administrative Agent, dated as of September 26, 2013 (incorporated by reference
herein to Exhibit 10.1 of the Company’s Form 10-Q for the quarter ended September 30, 2013, File No.
001-33067).
Form of Indemnification Agreement between Selective Insurance Group, Inc. and each of its directors and
executive officers, as adopted on May 19, 2005 (incorporated by reference herein to Exhibit 10.1 of the
Company’s Current Report on Form 8-K filed May 20, 2005, File No. 000-08641).
Stock and Asset Purchase Agreement, dated as of October 27, 2009, by and among Selective Insurance Group,
Inc., Selective HR Solutions, Inc. and its subsidiaries, and AlphaStaff Group, Inc. and certain of its
subsidiaries (incorporated by reference herein to Exhibit 2.1 of the Company’s Current Report on Form 8-K
filed October 30, 2009, File No. 001-33067).
Amendment No. 1 to the Stock Purchase Agreement, dated December 23, 2009 (incorporated by reference
herein to Exhibit 10.26a of the Company’s Annual Report on Form 10-K for the year ended December 31,
2009, File No. 001-33067).
Amendment No. 2 to the Stock and Asset Purchase Agreement, dated December 14, 2010 (incorporated by
reference herein to Exhibit 10.26b of the Company’s Annual Report on Form 10-K for the year ended
December 31, 2010, File No. 001-33067).
Amendment No. 3 to the Stock and Asset Purchase Agreement, dated June 3, 2013 (incorporated by reference
herein to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2013,
File No. 001-33067).
Selective Insurance Group, Inc. Non-Employee Directors’ Deferred Compensation Plan (incorporated by
reference herein to Exhibit 10.27 of the Company’s Annual Report on Form 10-K for the year ended December
31, 2009, File No. 001-33067).
Amendment No. 1 to the Selective Insurance Group, Inc. Non-Employee Directors’ Deferred Compensation
Plan (incorporated by reference herein to Exhibit 10.27a of the Company’s Annual Report on Form 10-K for
the year ended December 31, 2010, File No. 001-33067).
158
Exhibit
Number
10.40
*21
Stock Purchase Agreement by and between Montpelier Re U.S. Holdings Ltd. and Selective Insurance Group,
Inc., dated September 19, 2011 (incorporated by reference herein to Exhibit 10.1 of the Company’s Current
Report on Form 8-K filed September 20, 2011, File No. 001-33067).
Subsidiaries of Selective Insurance Group, Inc.
*23.1
Consent of KPMG LLP.
*24.1
Power of Attorney of Paul D. Bauer.
*24.2
Power of Attorney of Annabelle G. Bexiga.
*24.3
Power of Attorney of A. David Brown.
*24.4
Power of Attorney of John C. Burville.
*24.5
Power of Attorney of Joan M. Lamm-Tennant.
*24.6
Power of Attorney of Michael J. Morrissey.
*24.7
Power of Attorney of Cynthia S. Nicholson.
*24.8
Power of Attorney of Ronald L. O'Kelley.
*24.9
Power of Attorney of William M. Rue.
*24.10
Power of Attorney of J. Brian Thebault.
*31.1
*31.2
**32.1
Certification of Chief Executive Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002.
**32.2
Certification of Chief Financial Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002.
*99.1
Glossary of Terms.
XBRL Instance Document.
** 101.INS
** 101.SCH XBRL Taxonomy Extension Schema Document.
** 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.
** 101.LAB XBRL Taxonomy Extension Label Linkbase Document.
** 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.
** 101.DEF XBRL Taxonomy Extension Definition Linkbase Document.
* Filed herewith.
** Furnished and not filed herewith.
+ Management compensation plan or arrangement
159
SELECTIVE INSURANCE GROUP, INC.
SUBSIDIARIES AS OF DECEMBER 31, 2013
Name
Jurisdiction
in which
organized
Parent
Mesa Underwriters Specialty Insurance Company
New Jersey
Selective Insurance Group, Inc.
Selective Auto Insurance Company of New Jersey
New Jersey
Selective Insurance Group, Inc.
Selective Casualty Insurance Company
New Jersey
Selective Insurance Group, Inc.
Selective Fire and Casualty Insurance Company
New Jersey
Selective Insurance Group, Inc.
Selective Insurance Company of America
New Jersey
Selective Insurance Group, Inc.
Selective Insurance Company of New England
New Jersey
Selective Insurance Group, Inc.
Selective Insurance Company of New York
New York
Selective Insurance Group, Inc.
Selective Insurance Company of South Carolina
Indiana
Selective Insurance Group, Inc.
Selective Insurance Company of the Southeast
Indiana
Selective Insurance Group, Inc.
Selective Way Insurance Company
New Jersey
Selective Insurance Group, Inc.
SRM Insurance Brokerage, LLC.
New Jersey
Selective Way Insurance Company
Stonecreek Specialty Underwriters, LLC
Delaware
Selective Insurance Group, Inc.
Wantage Avenue Holding Company, Inc.
New Jersey
Selective Insurance Group, Inc.
Selective Insurance Company of the Southeast
Exhibit 21
Percentage
voting
securities
owned
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
75%
25%
100%
100%
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Selective Insurance Company, Inc.:
We consent to the incorporation by reference in the registration statements of Selective Insurance Group, Inc. (“Selective”) on
Form S-8 (Nos. 333-168765, 333-125451, 333-14620, 333-147383, 333-41674, 333-10465, 333-88806, 333-97799,
333-37501, 333-87832, and 333-31942) and Form S-3 (Nos. 333-182166, 333-160074, 333-137395, 333-136578, 333-136024,
333-110576, 333-101489, and 333-71953) of our reports dated February 28, 2014, which appear in Selective’s Annual Report
on Form 10-K for the year ended December 31, 2013, with respect to the consolidated balance sheets of Selective and its
subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income,
stockholders’ equity, and cash flow for each of the years in the three-year period ended December 31, 2013, and all related
financial statement schedules, and the effectiveness of internal control over financial reporting as of December 31, 2013.
/s/ KPMG LLP
New York, New York
February 28, 2014
POWER OF ATTORNEY
Exhibit 24.1
KNOW ALL BY THESE PRESENTS THAT I, the undersigned, a Director of Selective Insurance Group, Inc. (the
“Company”), do hereby appoint Gregory E. Murphy, Chairman and Chief Executive Officer of the Company, Dale A.
Thatcher, Executive Vice President and Chief Financial Officer of the Company, and Michael H. Lanza, Executive Vice
President and General Counsel of the Company, as my true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution for me and in my name, place and stead, and in any and all capacities, to execute on my behalf
the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, and any amendments and
supplements thereto, and to file the same with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, and hereby grant to such attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as I might do or
could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or their substitute or substitutes
may lawfully do or cause to be done by virtue hereof.
Date: February 25, 2014
/s/ Paul D. Bauer
POWER OF ATTORNEY
Exhibit 24.2
KNOW ALL BY THESE PRESENTS THAT I, the undersigned, a Director of Selective Insurance Group, Inc. (the
“Company”), do hereby appoint Gregory E. Murphy, Chairman and Chief Executive Officer of the Company, Dale A.
Thatcher, Executive Vice President and Chief Financial Officer of the Company, and Michael H. Lanza, Executive Vice
President and General Counsel of the Company, as my true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution for me and in my name, place and stead, and in any and all capacities, to execute on my behalf
the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, and any amendments and
supplements thereto, and to file the same with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, and hereby grant to such attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as I might do or
could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or their substitute or substitutes
may lawfully do or cause to be done by virtue hereof.
Date: February 25, 2014
/s/ Annabelle G. Bexiga
POWER OF ATTORNEY
Exhibit 24.3
KNOW ALL BY THESE PRESENTS THAT I, the undersigned, a Director of Selective Insurance Group, Inc. (the
“Company”), do hereby appoint Gregory E. Murphy, Chairman and Chief Executive Officer of the Company, Dale A.
Thatcher, Executive Vice President and Chief Financial Officer of the Company, and Michael H. Lanza, Executive Vice
President and General Counsel of the Company, as my true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution for me and in my name, place and stead, and in any and all capacities, to execute on my behalf
the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, and any amendments and
supplements thereto, and to file the same with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, and hereby grant to such attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as I might do or
could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or their substitute or substitutes
may lawfully do or cause to be done by virtue hereof.
Date: February 25, 2014
/s/ A. David Brown
POWER OF ATTORNEY
Exhibit 24.4
KNOW ALL BY THESE PRESENTS THAT I, the undersigned, a Director of Selective Insurance Group, Inc. (the
“Company”), do hereby appoint Gregory E. Murphy, Chairman and Chief Executive Officer of the Company, Dale A.
Thatcher, Executive Vice President and Chief Financial Officer of the Company, and Michael H. Lanza, Executive Vice
President and General Counsel of the Company, as my true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution for me and in my name, place and stead, and in any and all capacities, to execute on my behalf
the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, and any amendments and
supplements thereto, and to file the same with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, and hereby grant to such attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as I might do or
could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or their substitute or substitutes
may lawfully do or cause to be done by virtue hereof.
Date: February 25, 2014
/s/ John C. Burville
POWER OF ATTORNEY
Exhibit 24.5
KNOW ALL BY THESE PRESENTS THAT I, the undersigned, a Director of Selective Insurance Group, Inc. (the
“Company”), do hereby appoint Gregory E. Murphy, Chairman and Chief Executive Officer of the Company, Dale A.
Thatcher, Executive Vice President and Chief Financial Officer of the Company, and Michael H. Lanza, Executive Vice
President and General Counsel of the Company, as my true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution for me and in my name, place and stead, and in any and all capacities, to execute on my behalf
the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, and any amendments and
supplements thereto, and to file the same with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, and hereby grant to such attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as I might do or
could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or their substitute or substitutes
may lawfully do or cause to be done by virtue hereof.
Date: February 25, 2014
/s/ Joan M. Lamm-Tennant
POWER OF ATTORNEY
Exhibit 24.6
KNOW ALL BY THESE PRESENTS THAT I, the undersigned, a Director of Selective Insurance Group, Inc. (the
“Company”), do hereby appoint Gregory E. Murphy, Chairman and Chief Executive Officer of the Company, Dale A.
Thatcher, Executive Vice President and Chief Financial Officer of the Company, and Michael H. Lanza, Executive Vice
President and General Counsel of the Company, as my true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution for me and in my name, place and stead, and in any and all capacities, to execute on my behalf
the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, and any amendments and
supplements thereto, and to file the same with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, and hereby grant to such attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as I might do or
could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or their substitute or substitutes
may lawfully do or cause to be done by virtue hereof.
Date: February 25, 2014
/s/ Michael J. Morrissey
POWER OF ATTORNEY
Exhibit 24.7
KNOW ALL BY THESE PRESENTS THAT I, the undersigned, a Director of Selective Insurance Group, Inc. (the
“Company”), do hereby appoint Gregory E. Murphy, Chairman and Chief Executive Officer of the Company, Dale A.
Thatcher, Executive Vice President and Chief Financial Officer of the Company, and Michael H. Lanza, Executive Vice
President and General Counsel of the Company, as my true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution for me and in my name, place and stead, and in any and all capacities, to execute on my behalf
the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, and any amendments and
supplements thereto, and to file the same with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, and hereby grant to such attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as I might do or
could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or their substitute or substitutes
may lawfully do or cause to be done by virtue hereof.
Date: February 25, 2014
/s/ Cynthia S. Nicholson
POWER OF ATTORNEY
Exhibit 24.8
KNOW ALL BY THESE PRESENTS THAT I, the undersigned, a Director of Selective Insurance Group, Inc. (the
“Company”), do hereby appoint Gregory E. Murphy, Chairman and Chief Executive Officer of the Company, Dale A.
Thatcher, Executive Vice President and Chief Financial Officer of the Company, and Michael H. Lanza, Executive Vice
President and General Counsel of the Company, as my true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution for me and in my name, place and stead, and in any and all capacities, to execute on my behalf
the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, and any amendments and
supplements thereto, and to file the same with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, and hereby grant to such attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as I might do or
could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or their substitute or substitutes
may lawfully do or cause to be done by virtue hereof.
Date: February 25, 2014
/s/ Ronald L. O’Kelley
POWER OF ATTORNEY
Exhibit 24.9
KNOW ALL BY THESE PRESENTS THAT I, the undersigned, a Director of Selective Insurance Group, Inc. (the
“Company”), do hereby appoint Gregory E. Murphy, Chairman and Chief Executive Officer of the Company, Dale A.
Thatcher, Executive Vice President and Chief Financial Officer of the Company, and Michael H. Lanza, Executive Vice
President and General Counsel of the Company, as my true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution for me and in my name, place and stead, and in any and all capacities, to execute on my behalf
the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, and any amendments and
supplements thereto, and to file the same with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, and hereby grant to such attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as I might do or
could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or their substitute or substitutes
may lawfully do or cause to be done by virtue hereof.
Date: February 25, 2014
/s/ William M. Rue
POWER OF ATTORNEY
Exhibit 24.10
KNOW ALL BY THESE PRESENTS THAT I, the undersigned, a Director of Selective Insurance Group, Inc. (the
“Company”), do hereby appoint Gregory E. Murphy, Chairman and Chief Executive Officer of the Company, Dale A.
Thatcher, Executive Vice President and Chief Financial Officer of the Company, and Michael H. Lanza, Executive Vice
President and General Counsel of the Company, as my true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution for me and in my name, place and stead, and in any and all capacities, to execute on my behalf
the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, and any amendments and
supplements thereto, and to file the same with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, and hereby grant to such attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as I might do or
could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or their substitute or substitutes
may lawfully do or cause to be done by virtue hereof.
Date: February 25, 2014
/s/ J. Brian Thebault
Exhibit 31.1
Certification pursuant to Rule 13a–14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, GREGORY E. MURPHY, Chairman of the Board and Chief Executive Officer of Selective Insurance Group, Inc. (the
“Company”), certify, that:
1. I have reviewed this annual report on Form 10-K of the Company;
2. Based on my knowledge, this annual report on Form 10-K does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report on Form 10-
K, fairly present in all material respects the financial condition, results of operations, comprehensive income and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and
report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant's internal control over financial reporting.
Date: February 28, 2014
By: /s/ Gregory E. Murphy
Gregory E. Murphy
Chairman of the Board and Chief Executive Officer
Certification pursuant to Rule 13a-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2
I, DALE A. THATCHER, Executive Vice President and Chief Financial Officer of Selective Insurance Group, Inc. (the
“Company”), certify, that:
1. I have reviewed this annual report on Form 10-K of the Company;
2. Based on my knowledge, this annual report on Form 10-K does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report on Form 10-
K, fairly present in all material respects the financial condition, results of operations, comprehensive income and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: February 28, 2014
By: /s/ Dale A. Thatcher
Dale A. Thatcher
Executive Vice President and Chief Financial Officer
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1
I, GREGORY E. MURPHY, the Chairman of the Board and Chief Executive Officer of Selective Insurance Group, Inc.
(the “Company”), hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, that the annual report on Form 10-K of the Company for the period ended December 31, 2013, which this
certification accompanies, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934, and the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and
results of operations of the Company.
Date: February 28, 2014
By: /s/ Gregory E. Murphy
Gregory E. Murphy
Chairman of the Board and Chief Executive Officer
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2
I, DALE A. THATCHER, the Executive Vice President and Chief Financial Officer of Selective Insurance Group, Inc. (the
“Company”), hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that the annual report on Form 10-K of the Company for the period ended December 31, 2013, which this certification
accompanies, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the
information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations
of the Company.
Date: February 28, 2014
By: /s/ Dale A. Thatcher
Dale A. Thatcher
Executive Vice President and Chief Financial Officer
Glossary of Terms
Accident Year - accident year reporting focuses on the cost of the losses that
occurred in a given year regardless of when reported. These losses are
calculated by adding all payments that have been made for those losses
occurring in a given calendar year (regardless of the year in which they were
paid) to any current reserve that remains for losses that occurred in that given
calendar year. For example, at December 31, 2013, the losses incurred for
the 2002 accident year would be the payments made in years 2002 through
2013 relating to the losses that occurred in 2002 plus the reserve for 2002
occurrences remaining to be paid as of December 31, 2013.
Agent (Independent Retail Insurance Agent) - an insurance consultant
who recommends and markets insurance to individuals and businesses;
usually represents several insurance companies. Insurance companies pay
agents for business production.
Alternative Market - any risk transfer mechanism where the customer
assumes some or all financial responsibility for an insurable exposure.
Audit Premium - premiums based on data from an insured’s records, such
as payroll data. The insured’s records are subject to periodic audit for
purposes of verifying premium amounts.
Catastrophe Loss - a severe loss, as defined by the Insurance Services
Office property claims service (PCS), either natural or man-made, usually
involving, but not limited to, many risks from one occurrence such as fire,
hurricane, tornado, earthquake, windstorm, explosion, hail, severe winter
weather, and terrorism.
Combined Ratio - a measure of underwriting profitability determined by
dividing the sum of all GAAP expenses (losses, loss expenses, underwriting
expenses, and dividends to policyholders) by GAAP net premiums earned for
the period. A ratio over 100% is indicative of an underwriting loss, and a
ratio below 100% is indicative of an underwriting profit.
Contract Binding Authority - business that is written in accordance with a
well-defined underwriting strategy that clearly delineates risk eligibility,
rates, and coverages. It is generally distributed through wholesale general
agents.
Credit Risk - the risk that a financially-obligated party will default on any
type of debt by failing to make payment obligations. Examples of credit risk
include: (i) a bond issuer does not make a payment on a coupon or principal
payment when due; or (ii) a reinsurer does not pay a policy obligation.
Diluted Weighted Average Shares Outstanding - represents weighted-
average common shares outstanding adjusted for the impact of dilutive
common stock equivalents, if any.
Earned Premiums - the portion of a premium that is recognized as income
based on the expired portion of the policy period. For example, a one-year
policy sold January 1 would produce just three months’ worth of “earned
premium” in the first quarter of the year.
Excess and Surplus Lines - functions as a supplemental market for risks
that often do not fit the underwriting criteria of standard market insurance
carriers due to loss history, complex exposure, or minimal business
experience.
Frequency - the likelihood that a loss will occur. Expressed as low
frequency (meaning the loss event is possible, but the event has rarely
happened in the past and is not likely to occur in the future), moderate
frequency (meaning the loss event has happened once in a while and can be
expected to occur sometime in the future), or high frequency (meaning the
loss event happens regularly and can be expected to occur regularly in the
future).
Generally Accepted Accounting Principles (GAAP) - accounting practices
used in the United States of America determined by the Financial Accounting
Standards Board. Public companies use GAAP when preparing financial
statements to be filed with the United States Securities and Exchange
Commission.
Incurred But Not Reported (IBNR) Reserves - reserves for estimated
losses that have been incurred by insureds but not yet reported to the insurer.
Interest Rate Risk - exposure to interest rate risk relates primarily to the
market price and cash flow variability associated with changes in interest
rates. A rise in interest rates may decrease the fair value of our existing fixed
maturity investments and declines in interest rates may result in an increase
in the fair value of our existing fixed maturity investments.
Losses and Loss Expense Ratio - the ratio of net losses and loss expenses to
net premiums earned.
Loss and Loss Expense Reserves - the amount of money an insurance
company expects to pay for claim obligations and related expenses resulting
from losses that have occurred and are covered by insurance policies it has
sold.
Exhibit 99.1
Loss Expenses - expenses incurred in the process of evaluating, defending,
and paying claims.
Operating Income - a non-GAAP measure that is comparable to net income
with the exclusion of capital gains and losses and the results of discontinued
operations. Operating income is used as an important financial measure by
us, analysts, and investors, because the realization of investment gains and
losses on sales in any given period is largely discretionary as to timing. In
addition, these realized investment gains and losses, as well as other-than-
temporary impairment charges that are included in earnings, and the results
of discontinued operations, could distort the analysis of trends.
Operating Return on Average Equity - a measurement of profitability that
reveals the amount of operating income that is generated by dividing
operating income by the average stockholders’ equity during the period.
Reinsurance - an insurance company assuming all or part of a risk
undertaken by another insurance company. Reinsurance spreads the risk
among insurance companies to reduce the impact of losses on individual
companies. Types of reinsurance include proportional, excess of loss, treaty,
and facultative.
Premiums Written - premiums written refer to premiums for all policies
sold during a specific accounting period.
Renewal Pure Price - estimated average premium change on renewal
policies (excludes exposure changes).
Retention - retention ratios measure how well an insurance company retains
business by count and is expressed as a ratio of renewed over expired
policies. Year on year retention measures retained business based on
business issued one year ago.
Risk - has the following two distinct and frequently used meanings in
insurance: (i) the chance that a claim loss will occur; or (ii) an insured or the
property covered by a policy.
Severity - the amount of damage that is (or that may be) inflicted by a loss or
catastrophe.
Statutory Accounting Principles (SAP) - accounting practices prescribed
and required by the National Association of Insurance Commissioners
(“NAIC”) and state insurance departments that stress evaluation of a
company’s solvency. Insurance companies follow these practices when
preparing annual statutory statements to be submitted to the NAIC and state
insurance departments.
Statutory Combined Ratio - a measurement commonly used within the
property and casualty insurance industry to measure underwriting profit or
loss. It is a combination of the underwriting expense ratio, loss and loss
expense ratio, and dividends to policyholders ratio. A ratio over 100% is
indicative of an underwriting loss, and a ratio below 100% is indicative of an
underwriting profit.
Statutory Premiums to Surplus Ratio - a statutory measure of solvency
risk that is calculated by dividing the net statutory premiums written for the
year by the ending statutory surplus. For example, a ratio of 1.5:1 means
that for every dollar of surplus, the company wrote $1.50 in premiums.
Statutory Surplus - the amount left after an insurance company’s liabilities
are subtracted from its assets. Statutory surplus is not a figure based upon
GAAP. Rather, it is based upon SAP prescribed or permitted by state and
foreign insurance regulators.
Statutory Underwriting Expense Ratio - measures the ratio of statutory
underwriting expenses (salaries, commissions, premium taxes, etc.) to net
premiums written.
Underwriting - the insurer’s process of reviewing applications submitted for
insurance coverage, deciding whether to provide all or part of the coverage
requested, and determining the applicable premiums and terms and
conditions of coverage.
Underwriting Result - underwriting profit or loss and represents premiums
earned less insurance losses and loss expenses, underwriting expenses, and
dividends to policyholders (determined on a GAAP or SAP basis). Also
referred to as the GAAP underwriting result or the statutory underwriting
result. This measure of performance is used by management and analysts to
evaluate the profitability of underwriting operations and is not intended to
replace GAAP net income.
Unearned Premiums - the portion of a premium that a company has written
but has yet to earn because a portion of the policy is unexpired. For
example, a one-year policy sold January 1 would record nine months of
unearned premium as of the end of the first quarter of the year.
Wholesale General Agent - an insurance consultant authorized to
underwrite on behalf of a surplus lines insurer through binding authority
agreements. Insurance companies pay wholesale general agents for business
production.
Directors
Paul D. Bauer 1998
Lead Independent Director,
Selective Insurance Group, Inc.
Retired, former Executive Vice President and
Chief Financial Officer, Tops Markets, Inc.
Annabelle G. Bexiga 2012
Executive Vice President and
Chief Information Officer, TIAA-CREF
A. David Brown 1996
Retired, former Executive Vice President and
Chief Administrative Officer, Urban Brands, Inc.
John C. Burville, Ph.D. 2006
Retired, former Insurance Consultant
to the Bermuda Government
Joan M. Lamm-Tennant, Ph.D. 1993
Global Chief Economist and Risk Strategist,
Guy Carpenter & Company, LLC
Michael J. Morrissey 2008
President and Chief Executive Officer,
International Insurance Society, Inc.
Gregory E. Murphy 1997
Chairman and Chief Executive Officer,
Selective Insurance Group, Inc.
Cynthia (Cie) S. Nicholson 2009
Chief Marketing Officer, Isis®
Ronald L. O’Kelley 2005
Chairman and Chief Executive Officer,
Atlantic Coast Venture Investments Inc.
William M. Rue 1977
Chairman, Chas. E. Rue & Son, Inc.,
t/a Rue Insurance
J. Brian Thebault 1996
Partner, Thebault Associates
2013 AnnuAl RepoRt
officers
Chairman and
Chief Executive Officer
Gregory E. Murphy 1,2
President and
Chief Operating Officer
John J. Marchioni 1,2
Executive Vice Presidents
Kimberly J. Burnett 2
Chief Human Resources Officer
Gordon J. Gaudet 2
Chief Information Officer
Michael H. Lanza 1,2
General Counsel
Dale A. Thatcher 1,2
Chief Financial Officer
Ronald J. Zaleski, Sr. 1,2
Chief Actuary
2013 AnnuAl RepoRt
Senior Vice Presidents
Charles C. Adams 2
Regional Manager
Mid-Atlantic Region
Allen H. Anderson 2
Chief Underwriting Officer,
Personal Lines
Jeffrey F. Beck 2
Government and Regulatory Affairs
Andrew S. Becker 2
Director of Commercial Lines
Pricing and Research
Sarita G. Chakravarthi 1,2
Tax and Assistant Treasurer
Thomas M. Clark 2
Claims General Counsel
Jennifer W. DiBerardino 1,2
Investor Relations and Treasurer
Edward F. Drag, II 2
Regional Manager
New Jersey Region
Brenda M. Hall 2
Director of Field Underwriting
and Business Intelligence
Anthony D. Harnett 1,2
Corporate Controller
Kevin L. Jenkins 2
Information Technology
Infrastructure
Jeffrey F. Kamrowski 2
Commercial Line of Business
Underwriting and Business Services Unit
Robert J. McKenna, Jr. 2
Enterprise Architecture and
Information Security
James McLain 2
Regional Manager
Southern Region
Richard W. Mohr 2
Enterprise Infrastructure,
Information and Shared Services
Bruce B. Monahan 1,2
Chief Audit Executive
Yanina Montau-Hupka 2
Chief Risk and
Reinsurance Officer
Charles A. Musilli, III 2
Chief Field Operations Officer
George A. Neale 2
Chief Claims Officer
Richard R. Nenaber 2
MUSIC
Thomas S. Purnell 2
Regional Manager
Northeast Region
Erik A. Reidenbach 2
Regional Manager
Heartland Region
Brian C. Sarisky 2
Chief Underwriting Officer,
Commercial Lines
Vincent M. Senia 2
Director of Actuarial Reserving
Susan B. Sweeney 1,2
Chief Investment Officer
Scott A. Wilson 2
MUSIC
1 Selective Insurance Group, Inc.
2Selective Insurance Company of America
Shareholder Relations
Robyn P. Turner
Corporate Secretary
Telephone (973) 948-1766
shareholder.relations@selective.com
Common Stock Information
Selective Insurance Group, Inc.’s
common stock trades on the
NASDAQ Global Select Market
under the symbol: SIGI.
At February 14, 2014, there were
approximately 2,136 registered
stockholders.
Form 10-K
Selective’s Form 10-K, as filed with
the U.S. Securities and Exchange
Commission, is provided as part of
this 2013 Annual Report.
Website
Visit us at www.selective.com
for information about Selective,
including our latest financial news.
investor inFormAtion
Annual Meeting
Wednesday, April 23, 2014
Selective Insurance Group, Inc.
40 Wantage Avenue
Branchville, New Jersey 07890
Investor Relations
Jennifer W. DiBerardino
Senior Vice President,
Investor Relations and Treasurer
Telephone (973) 948-1364
investor.relations@selective.com
Dividend Reinvestment Plan
Selective Insurance Group, Inc.
makes available to holders of
its common stock an automatic
dividend reinvestment and stock
purchase plan.
For Information Contact:
Wells Fargo Shareowner Services
P.O. Box 64854
St. Paul, Minnesota 55164-0854
Telephone (866) 877-6351
Registrar and Transfer Agent
Wells Fargo Shareowner Services
P.O. Box 64854
St. Paul, Minnesota 55164-0854
Telephone (866) 877-6351
Auditors
KPMG LLP
345 Park Avenue
New York, New York 10154-0102
Internal Audit Department
Chief Audit Executive
Bruce B. Monahan
internal.audit@selective.com
Executive Office
40 Wantage Avenue
Branchville, New Jersey 07890
Telephone (973) 948-3000
2013 AnnuAl RepoRt
S
E
L
E
C
T
I
V
E
—
2
0
1
3
A
N
N
U
A
L
R
E
P
O
R
T
SELECTIVE INSURANCE GROUP, INC.
40 Wantage Avenue
Branchville, New Jersey 07890
www.selective.com