PAGE UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended . . . . . . .June 30, 1997. . . . . . . OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from . . . . . . . . . .to . . . . . . . . . Commission file number: 0-8641 SELECTIVE INSURANCE GROUP, INC. ------------------------------- (Exact name of registrant as specified in its charter) New Jersey 22-2168890 ------------------------------ ---------------------------------- (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 40 Wantage Avenue, Branchville, New Jersey 07890 ------------------------------------------ ----------- (Address of principal executive offices) (Zip Code) 973-948-3000 ------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: Common stock, par value $2 per share, outstanding as of July 31, 1997: 4,666,178 -1- PAGE Item 1. Financial Statements. - ------------------------------ SELECTIVE INSURANCE GROUP, INC. ------------------------------- Consolidated Balance Sheets ------------------------------- (unaudited) (dollars in thousands) ASSETS June 30 December 31 - ------ 1997 1996 Investments: ------------ ---------- Debt securities, held-to-maturity - at amortized cost (fair value of $431,850-1997; $445,273-1996)......... $ 420,167 432,792 Debt securities, available-for-sale - at fair value (amortized cost of $998,615-1997; $965,965-1996)......... 1,015,122 985,372 Equity securities, available-for-sale - at fair value (cost of $110,164-1997; $99,383-1996).......... 200,072 161,096 Short-term investments (at cost which approximates fair value) 2,231 33,924 Other investments (at cost which approximates fair value)........................... 10,331 10,530 --------- --------- Total investments ...................... 1,647,923 1,623,714 Cash....................................... 22,584 - Interest and dividends due or accrued ..... 24,243 24,167 Premiums and other receivables............. 189,666 152,008 Reinsurance recoverable on paid losses and loss expenses..................... 9,810 7,863 Reinsurance recoverable on unpaid losses and loss expenses......................... 131,579 150,208 Prepaid reinsurance premiums............... 28,708 30,813 Deferred Federal income tax................ 19,502 30,771 Real estate, furniture and equipment....... 47,766 48,993 Deferred policy acquisition costs.......... 93,299 83,150 Excess of cost over fair value of net assets acquired....................... 9,661 9,894 Other assets............................... 28,806 22,058 --------- --------- Total assets............................ $ 2,253,547 2,183,639 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Liabilities: - ----------- Reserve for losses......................... $ 995,166 1,015,601 Reserve for loss expenses.................. 176,149 174,192 Unearned premiums.......................... 362,545 332,040 Convertible subordinated debentures........ 6,879 6,912 Short-term debt ........................... 16,775 - Notes payable.............................. 96,857 96,857 Current Federal income tax................. 3,199 3,729 Other liabilities ......................... 77,940 80,009 --------- --------- Total liabilities....................... 1,735,510 1,709,340 --------- --------- Stockholders' Equity: - -------------------- Common stock of $2 par value per share: Authorized shares-90,000,000 Issued: 18,106,199-1997; 17,911,087-1996 . 36,212 35,822 Additional paid-in capital................. 62,697 53,882 Net unrealized gains on available-for-sale securities, net of deferred income tax effect............................ 69,170 52,728 Retained earnings.......................... 412,198 386,601 Treasury stock - at cost (shares: 3,445,682-1997; 3,366,631-1996) (54,147) (50,680) Deferred compensation expense and notes receivable from stock sales................ (8,093) (4,054) --------- --------- Total stockholders' equity ............. 518,037 474,299 --------- --------- Total liabilities and stockholders' equity $ 2,253,547 2,183,639 ========= ========= See accompanying notes to unaudited consolidated financial statements. -2- PAGE SELECTIVE INSURANCE GROUP, INC. ================================ Consolidated Statements of Income (unaudited) (in thousands, except per share data) Quarter ended Six Months Ended June 30 June 30 1997 1996 1997 1996 ------ ------ ------ ------ Revenues: - -------- Net premiums written.................$ 197,262 174,767 372,446 348,214 Decrease (increase) in unearned premiums, net of prepaid reinsurance premiums ........... (28,007) 1,307 (32,610) 4,547 ------- ------- ------- ------- Net premiums earned ................. 169,255 176,074 339,836 352,761 Net investment income earned......... 24,694 23,783 49,126 47,794 Net realized gains on investments.... 991 934 1,969 1,363 Other income......................... 1,097 1,273 2,272 2,031 ------- ------- ------- ------- Total revenues.................... 196,037 202,064 393,203 403,949 ------- ------- ------- ------- Expenses: - -------- Losses incurred ..................... 96,114 105,399 195,655 220,795 Loss expenses incurred............... 20,486 19,072 39,549 38,844 Policy acquisition costs............. 51,055 52,702 102,708 105,408 Dividends to policyholders........... 1,088 1,317 2,293 2,745 Interest expense..................... 2,453 2,323 4,739 4,646 Other expenses....................... 2,492 1,402 4,380 2,123 ------- ------- ------- ------- Total expenses.................... 173,688 182,215 349,324 374,561 ------- ------- ------- ------- Income before Federal income tax 22,349 19,849 43,879 29,388 ------- ------- ------- ------- Federal income tax expense: Current.............................. 4,202 3,569 7,660 4,636 Deferred............................. 1,044 710 2,415 292 ------- ------- ------- ------- Total Federal income tax expense......................... 5,246 4,279 10,075 4,928 ------- ------- ------- ------- Net income...........................$ 17,103 15,570 33,804 24,460 ======= ======= ======= ======= Earnings per share: - ------------------ Net income-primary................$ 1.17 1.07 2.31 1.69 Net income-fully diluted .........$ 1.14 1.04 2.25 1.64 Dividends to stockholders............$ 0.28 0.28 0.56 0.56 See accompanying notes to unaudited consolidated financial statements. -3- PAGE SELECTIVE INSURANCE GROUP, INC. Consolidated Statements of Cash Flows (unaudited) Six months ended June 30 (in thousands) 1997 1996 ---- ---- Operating Activities - -------------------- Net income $ 33,804 24,460 Adjustments to reconcile net income to net cash provided by operating activities: Increase in interest and dividends due or accrued (76) (266) Increase in premiums and other receivables (37,658) (2,259) Increase in reinsurance recoverable on paid losses and loss expenses (1,947) (1,922) Increase in reserves for losses and loss expenses, net of reinsurance recoverable on unpaid losses and loss expenses 151 31,010 Increase (decrease) in unearned premiums, net of prepaid reinsurance premiums 32,610 (4,547) Decrease in net Federal income tax asset 1,886 1,474 Decrease (increase) in deferred policy acquisition costs (10,149) 100 Depreciation and amortization 4,102 2,501 Net realized gains on investments (1,969) (1,363) Other - net (16,143) (16,275) ------ ------ Net adjustments (29,193) 8,453 ------ ------ Net cash provided by operating activities 4,611 32,913 ------ ------ Investing Activities Purchase of debt securities, held-to-maturity (16,070) (56,968) Purchase of debt securities, available-for-sale (71,077) (51,841) Purchase of equity securities, available-for-sale (14,502) (20,905) Sale of debt securities, available-for-sale 29,058 11,200 Redemption and maturities of debt securities, held-to-maturity 28,568 41,792 Redemption and maturities of debt securities, available-for-sale 9,410 20,819 Sale of equity securities, available-for-sale 6,061 3,639 Proceeds from other investments 207 63 Increase in net payable from security transactions 7,277 12,430 Net additions to real estate, furniture and equipment (1,391) (1,919) ------ ------ Net cash used in investing activities $ (22,459) (41,690) ------ ------ See accompanying notes to unaudited consolidated financial statements. -4- PAGE SELECTIVE INSURANCE GROUP, INC. Consolidated Statements of Cash Flows, continued (unaudited) Six months ended June 30 (in thousands) 1997 1996 ---- ---- Financing Activities - -------------------- Dividends to stockholders $ (8,207) (8,124) Acquisition of treasury stock (3,467) (68) Proceeds from short-term debt 16,775 - Net proceeds from dividend reinvestment plan 564 579 Net proceeds from stock purchase and compensation plans 8,608 4,810 Increase in deferred compensation expense and proceeds received on notes receivable from stock sales (5,534) (2,659) ------ ------ Net cash provided by (used in) financing activities 8,739 (5,462) ------ ------ Net decrease in short-term investments and cash (9,109) (14,239) Short-term investments at beginning of year 33,924 47,306 ------ ------ Short-term investments and cash at end of period $ 24,815 33,067 ====== ====== Supplemental disclosures of cash flow information Cash paid during the period for: Interest $ 4,301 4,966 Federal income tax 8,189 3,455 Supplemental schedule of non-cash financing activity: Conversion of convertible subordinated debentures 33 10 See accompanying notes to unaudited consolidated financial statements. -5- PAGE Notes to Unaudited Consolidated Financial Statements - ---------------------------------------------------- 1. Basis of Presentation The interim financial statements are unaudited but reflect all adjustments which, in the opinion of management, are necessary to provide a fair presentation of the results of the Selective Insurance Group, Inc. and its consolidated subsidiaries (collectively, the "Company") for the interim periods presented. References herein to "Selective" are to Selective Insurance Group, Inc. All such adjustments are of a normal recurring nature. The results of operations for any interim period are not necessarily indicative of results for the full year. These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 2. Recent Accounting Pronouncements The Financial Accounting Standards Board ("FASB") has issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FASB 128"). FASB 128 supersedes Accounting Principles Board Opinion No. 15 "Earnings per Share" ("APB 15") and specifies the computation, presentation, and disclosure requirements for earnings per share ("EPS") for entities with publicly held common stock or potential common stock (that is, securities such as options, warrants, convertible securities, or contingent stock agreements). The objective of FASB 128 is to simplify the computation of EPS and to make the United States standard for computing EPS more compatible with the EPS standards of other countries and with that of the International Accounting Standards Committee. FASB 128 will be effective for financial statements for both interim and annual periods ending after December 15, 1997. The adoption of FASB 128 is not expected to have a material effect on the Company's EPS disclosures. The FASB issued Statement of Financial Accounting Standards No. 129, "Disclosure of Information about Capital Structure" ("FASB 129"). FASB 129 specifies required disclosures about capital structure that had already been included in a number of previously existing separate statements and opinions and applies to all entities, public and non-public. FASB 129 will be effective for financial statements for periods ending after December 15, 1997. The FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FASB 130"). FASB 130 establishes tandards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distribution to owners. Under FASB 130 an enterprise will continue to display an amount for net income, but will also be required to report other items that are included in comprehensive income. FASB 130 will be effective for financial statements for periods beginning after December 15, 1997. Early application is permitted. The FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("FASB 131"). FASB 131 establishes standards for the way that public business enterprises report information about operating segments in -6- PAGE their annual financial statements and requires that those enterprises report selected financial information about operating segments in interim financial reports issued to shareholders. Currently there is an "industry approach" to segment disclosures whereas in FASB 131 segment disclosures are operating segments. Operating segments are components of an enterprise that; (i) engage in business activities from which it may earn revenues and incur expenses; (ii) generate operating results which are regularly reviewed by the enterprise's chief operating decision maker and (iii) have financial information available. FASB 131 will be effective for financial statements for periods beginning after December 15, 1997, although earlier application is encouraged. The Company's primary operating subsidiaries write property and casualty insurance, and the Company presently classifies its business into two operating segments, personal insurance and commercial insurance. The business of the commercial insurance segment is conducted by seven customer- focused Strategic Business Units ("SBUs"), which are contractors, habitational and recreational, mercantile and service, manufacturing and processing, public entities, bonding and selective risk managers. When FASB 131 is adopted, the Company will include SBUs in all its operating segment disclosures. 3. Lines of Credit During the quarter ended June 30, 1997, the Company increased its existing revolving line of credit with a bank from $10 million to $25 million. Selective itself may only borrow up to $20 million of the line. A commitment fee of .12%, or $30,000, on the $25 million is payable annually. The agreement provides that the principal outstanding on the revolving line shall bear interest as selected by the Company under either a daily prime rate quoted by the bank, the London Interbank Offer Rate ("Libor") plus .28%, Libor loans may be made for interest periods of one, two, three, or six months, or a daily money market rate quoted by the bank. During the first quarter of 1997, the Company entered into an additional revolving line of credit agreement with a bank under which it may borrow up to $25 million, of which Selective itself may only borrow up to $20 million. A commitment fee of .12% on the $25 million is payable annually. The agreement provides that the principal outstanding on the revolving line shall bear interest as selected by the Company under either a daily prime rate quoted by the bank, Libor plus .28% (Libor loans may be made for interest periods of one, two, three, or six months), or a daily money market rate quoted by the bank. At June 30, 1997, there was $16,775,000 of short-term debt outstanding under the two lines of credit and the weighted average interest rate on these borrowings was 5.96%. -7- PAGE 4. Reinsurance The following is a table of assumed and ceded amounts by income statement caption: Quarter ended Six months ended June 30 June 30 (in thousands) 1997 1996 1997 1996 - ------------------------------------------------------------------------ Net premiums written: Assumed $ 3,425 6,897 11,112 14,647 Ceded (20,466) (24,484) (38,696) (47,453) Net premiums earned: Assumed $ 5,125 8,186 10,920 21,353 Ceded (20,274) (25,065) (40,800) (50,435) Losses incurred: Assumed $ 2,523 4,081 5,644 7,476 Ceded(1) (6,295) (11,130) (9,728) (41,165) Loss expenses incurred: Assumed $ 451 521 940 1,039 Ceded (486) (706) (870) (2,122) (1) The significant decrease in ceded losses incurred for the six months ended June 30, 1997 reflected the lower level of flood and winter storm claims and one severe liability claim, which affected results in the six months ended June 30, 1996, and which generated reinsurance loss recoveries of $13 million, $5 million and $3 million, respectively. The flood business is ceded 100% to the National Flood Insurance Program and therefore, the Company is a servicer and not an underwriter of this type of insurance and bears no risk of policyholder loss. 5. Reclassifications Certain amounts in the Company's prior year consolidated financial statements have been reclassified to conform with the 1997 presentation. Such reclassifications had no effect on the Company's net income or stockholders' equity. -8- PAGE Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion relates to the Company's results of operations, financial condition and liquidity for the interim periods indicated. References herein to the "Company" are references to Selective Insurance Group, Inc. and its consolidated subsidiaries, collectively. References herein to "Selective" are to Selective Insurance Group, Inc. The statements, other than historical information, contained in this Form 10-Q including, without limitation, the statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" are, or may be deemed to be, forward-looking statements. Such statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially. Such factors include, without limitation: (i) the competitive nature of the insurance industry, (ii) the effects of changes in insurance laws and regulations, particularly New Jersey personal automobile insurance, (iii) the frequency and scope of storms and other casualties, and (iv) changes in self-insurance and other alternatives to traditional insurance. Results of Operations - --------------------- Comparison of Second Quarter and Six Months Ended June 30, 1997, to Second Quarter and Six Months Ended June 30, 1996: Revenues Net premiums written for the second quarter and six months ended June 30, 1997 increased by 13%, or $22 million, and 7%, or $24 million, respectively, over the same periods in 1996. Most of the growth in net premiums written was in the personal lines Strategic Business Unit ("SBU"), which reflected an increase in premium volume of 33%, or $18 million, for the quarter ended June 30, 1997 and 19%, or $21 million, for the first six months of 1997. This growth in net premiums written occurred in the New Jersey personal automobile line of insurance. New Jersey personal automobile net premiums written included the results of a conversion of six-month term policies to one-year policies (the "Conversion"), effective April 1, 1997. The Conversion increased net premiums written, unearned premiums and premiums and other receivables by approximately $20 million for the quarter and six months ended June 30, 1997, but had no effect on net premiums earned or cash flow. The commercial SBUs net premiums written for the second quarter and six months ended June 30, 1997, increased by 3%, or $4 million, and 1%, or $3 million, respectively, over the same periods in 1996. The increase for the quarter and six months ended June 30, 1997, was due to an approximately $15 million and $27 million increase, respectively, in new business written and a $4 million and $9 million increase, respectively, due to the increased retention of premiums written resulting from changes in the Company's reinsurance programs. These increases were significantly offset by a reduction in net premiums written in most commercial SBUs for the quarter and six months ended June 30, 1997 due to: (i) agency terminations of approximately $6 million and $10 -9- PAGE million, respectively; (ii) rate reductions of approximately $5 million and $10 million, respectively, mainly in the workers' compensation line of insurance, principally due to the impact of improving loss trends; and (iii) a reduction in existing business (renewal retention) attributable to a highly competitive commercial insurance market place. In addition the public entities SBU net premiums written was impacted by a trend towards self-insurance mechanisms and other alternative markets, which reduced net premiums written during the six months ended June 30, 1997, by approximately $6 million. Excluding the effects of the Conversion, the modest growth of approximately 1%, or $2 million, and 1%, or $4 million, in net premiums written, for the quarter and six months ended June 30, 1997, respectively, and the 9% decrease in net premiums written recorded during 1996, resulted in a decline in total net premiums earned of 4%, or $7 million, and 4%, or $13 million, for the quarter and six months ended June 30, 1997, respectively. Net investment income earned for the second quarter and six months ended June 30, 1997 increased 4%, or $1 million, and 3%, or $1 million, respectively, over the same period in 1996. The modest increases in the second quarter and six months ended June 30, 1997, were primarily due to income generated from investments acquired from cash provided by operating activities during 1996 and the investment of proceeds from short-term borrowings during 1997. The Company was able to invest the proceeds from the short-term borrowings at a higher rate than the borrowing rate. The Company's overall annualized investment yield was 6.1% for the six months ended 1997 and 1996. Expenses The ratio of losses and loss expenses incurred to net premiums earned for the second quarter ended June 30, 1997 was 68.9%, a 1.8 point decrease from 70.7% for the same period in 1996. The decrease in the net loss and loss expense ratio reflected an overall improvement in both the mercantile and service and public entities SBUs. These improvements were partially offset by less favorable property results in the habitational and recreational and manufacturing and processing SBUs. The ratio of losses and loss expenses incurred to net premiums earned for the six months ended June 30, 1997, was 69.2%, a 4.4 point decrease from 73.6% for the six months ended June 30, 1996. The decrease in 1997 in the loss and loss expense ratio was primarily attributable to the numerous 1996 winter storm claims which primarily impacted the personal lines, mercantile and service, public entities, and habitational and recreational SBUs in the prior year. These weather-related claims, which amounted to $11 million (net of $5 million of reinsurance), increased the six months ended June 30, 1996 loss and loss expense ratio by 3.0 points. In addition most of the commercial SBUs ratios improved in the workers compensation line of insurance. These improvements were partially offset by the less favorable results from the manufacturing and processing SBU. The personal lines SBU loss and loss expense ratio of 74.3% for the quarter ended June 30, 1997, was fairly consistent compared to the same period in -10- PAGE 1996. The six months ended June 30, 1997, loss and loss expense ratio was 73.5%, a decrease of 2.1 points from 75.6% for the same period in 1996. Absent the effects of the winter storms of 3.1 points, there was a 1.0 point increase for the six months ended June 30, 1997, which was due to an increase in the personal automobile loss and loss expense ratio which included a provision for the New Jersey excess profits calculation. This was partially offset by an improvement in the homeowners line of insurance mainly due to rate increases and lower reinsurance costs. The commercial SBU's loss and loss expense ratio improved 3 points to 66.4% for the quarter ended June 30, 1997. The commercial SBUs with the most significant improvements in their loss and loss expense ratio for the quarter ended June 30, 1997, were the mercantile and service and public entities SBUs throughout most of their business classes and lines of insurance. Favorable loss experience in the workers compensation line of insurance impacted most of the commercial SBUs, with significant improvement in the public entities SBU. The improved workers compensation results reflect positive loss trends primarily attributable to: (i) lower average medical costs due to managed care; (ii) programs which permit employees to return to work earlier; and (iii) various favorable legislative reforms. These improvements were partially offset by less favorable results in the manufacturing and processing SBU. For the six months ended June 30, 1997, the loss and loss expense ratio for the commercial SBUs decreased 5.8 points to 67.2% compared to 73.0% for the same period in 1996. Absent the effects of the 1996 winter storms of 3.0 points, the loss and loss expense ratio decreased 2.8 points with the most notable improvement in the mercantile and service SBU. This improvement was in most business segments and commercial lines of insurance in this SBU. This improvement was partially offset by less than favorable results in the manufacturing and processing SBU. The ratio of policy acquisition costs to net premiums earned for the quarter and six months ended June 30, 1997, increased to 30.2% from 29.9% for the same periods in 1996. Operating expenses that do not directly vary with changes in premium volume, (ie; labor costs, rent and equipment expense) increased slightly; however, this ratio increased mainly due to the lower levels of net premiums earned. Total Federal income tax expense increased by approximately $1 million to $5 million for the quarter ended June 30, 1997, compared to $4 million for the same period of 1996. For the six months ended June 30, 1997, the Federal income tax expense increased approximately $5 million to $10 million, compared to $5 million for the first six months in 1996. The Company's effective tax rate was 23.0% for the six months ended June 30, 1997, compared with 16.8% for the first six months of 1996. The effective tax rate for the six months ended June 30, 1997, was higher than the six months ended June 30, 1996, due primarily to the tax relief from the higher level of underwriting losses due to the winter storms in 1996. The Company's effective tax rate differs from the Federal corporate rate of 35% primarily as a result of the tax-exempt investment income. -11- PAGE Income The table below shows operating income, net realized gains, and net income, including per share amounts for the quarter and six months ended June 30, 1997 and 1996. - -------------------------------------------------------------------------- ($ in thousands, Quarter ended June Six months ended June except for per share data) 1997 1996 1997 1996 - --------------------------------------------------------------------------- Operating income, excluding net realized gains (net of tax) (1) $16,459 14,963 32,524 23,574 Net realized gain, net of tax 644 607 1,280 886 Net income (1) 17,103 15,570 33,804 24,460 Per Primary Share: Operating income (1) 1.12 1.03 2.22 1.63 Net realized gain .05 .04 .09 .06 Net income (1) 1.17 1.07 2.31 1.69 (1) Operating and net income for the six months ended June 30, 1996, include $6.9 million of weather-related winter storm losses, or $.48 per primary share. Financial Condition, Liquidity and Capital Resources Selective is an insurance holding company whose principal assets are its investments in its insurance subsidiaries. As an insurance holding company, Selective meets its cash requirements through proceeds from the sales of the Company's common stock and dividends from its insurance subsidiaries, the payments of which are subject to state regulatory requirements. Total assets increased 3%, or $70 million from December 31, 1996 to June 30, 1997. The growth was due to: (i) an increase in total investments, including cash, of $47 million which included cash provided by operating activities of $5 million, the draw of $17 million on the Company's lines of credit, and a $25 million increase in net unrealized gains on available-for- sale securities; and (ii) an increase in premiums and other receivables of $38 million and deferred acquisition costs of $10 million mainly due to the Conversion. This was offset by an $11 million decrease in deferred Federal income taxes which mainly reflected the associated deferred taxes on the increase in unrealized gains on available-for-sale securities. The rise in total liabilities of 2%, or $26 million, from December 31, 1996 to June 30, 1997 was primarily attributable to additional borrowings of $17 million on the two lines of credit which the Company had outstanding at June -12- PAGE 30, 1997. During the second quarter, the Company expanded its available lines of credit from $35 million to $50 million by expanding its line of credit agreement with a bank (see note 3). The lines of credit complement the cash provided by operating activities and provide the Company with increased flexibility in its cash management. Unearned premiums increased primarily due to the Conversion of New Jersey personal automobile. These increases were partially offset by an $18 million decrease in outstanding loss and loss expense reserves mainly due to a decrease of $12 million in the flood line of insurance, an increased volume of outstanding claim files being closed with final settlements, as well as lower exposure due to the reduced net premium earned in 1996 and 1997. The rate at which outstanding claims are being closed has increased due, in part, to the implementation of claims management specialists (CMSs) in the field and improved litigation management. In preparation of placing CMSs in the field, the Company actively settled certain of its liability claims in order that each CMS would have a more manageable number of claims to handle in the field. In addition, the Company is utilizing its litigation managers to more actively settle claims. For the most part, this increased claim settlement was experienced in the general liability, personal and commercial automobile lines of insurance. The overall obligations and cash outflow of the Company include: claim settlements; commissions; labor costs; premium taxes; general and administrative expenses; investment purchases; interest expenses; ongoing capital expenditures with respect to the Company's automation programs; principal payments on the senior notes and dividends to policyholders and stockholders. The insurance subsidiaries satisfy their obligations and cash outflow through premium collections, interest and dividend income and maturities. The Company has authorized a share repurchase program under which Selective may repurchase up to one million shares of its common stock, depending on market conditions, through available cash and lines of credit. Through this program, Selective has repurchased approximately 195,000 shares at a total cost of $7 million; of which 67,000 shares, at a cost of $3 million, were acquired during the six months ended June 30, 1997. For the six months ended June 30, 1997 and 1996, cash provided by operating activities amounted to $5 million and $33 million, respectively. The decrease in cash provided by operating activities was mainly a result of the higher level of claim and claim expense payments (approximately $7 million) associated with the aforementioned CMS deployment and increased litigation settlement activity. In addition, the lower levels of premiums written in 1996 and modest growth in 1997 (excluding the effects of the Conversion) has also impacted the cash flow from operations during the first six months of 1997. The Conversion does not have any impact on cash flow. The Company expects to continue to generate cash from operations over the balance of the year. On June 30, 1997, the Governor of New Jersey signed into law an automobile insurance reform bill. This legislation would (i) eliminate automatic approval of cost-of-living increases in favor of "expedited rate filings" of 3% or less, which do not require prior approval from the insurance commissioner; (ii) prohibiting insurers from non-renewing good drivers (good drivers being defined as "no more than one at fault accident or four insurance point moving violations within a five year period"); and (iii) eliminate the bad driver surcharge system, in favor of a tier rating system. In addition to the automobile insurance reform bill, on August 11, 1997, Governor Whitman -13- PAGE announced she will be introducing in the legislature a program where the insured may choose from four options encompassing varying levels of coverage, so as to reduce their personal automobile rates. The Company believes that there may be further legislative initiatives in New Jersey with respect to personal automobile insurance reform. The Company cannot presently predict the form or timing of any such initiatives, nor can the Company estimate the financial effects, if any, that such initiatives may have on the Company and its operations. -14- PAGE Part II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: The exhibits required by Item 601 of Regulation SK are listed in the Exhibit Index, which immediately precedes the exhibits filed with this Form 10-Q. (b) Reports on Form 8-K: There were no reports on Form 8-K filed during the period covered by this report. -15- PAGE SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SELECTIVE INSURANCE GROUP, INC. Registrant Date: August 14, 1997 By: /s/James W. Entringer --------------------- James W. Entringer, Chairman of the Board, and Chief Executive Officer Date: August 14, 1997 By: /s/Gregory E. Murphy -------------------- Gregory E. Murphy, President and Chief Operating Officer -16- PAGE SELECTIVE INSURANCE GROUP, INC. INDEX TO EXHIBITS Exhibit No. 10.1 Amendment, dated June 30, 1997, to the Promissory Note of $25,000,000 Revolving Line of Credit with State Street Bank and Trust Company, filed herewith. 10.2 Commercial Loan Note of $25,000,000 Line of Credit with Summit Bank as amended through May 31, 1998, filed herewith. 10.3 Employment Agreement, dated May 2, 1997, between Selective Insurance Company of America and James W. Coleman, Jr., filed herewith. 10.4 Termination Agreement, dated May 2, 1997, between Selective Insurance Company of America and James W. Coleman, Jr., filed herewith. 10.5 Amendment, dated May 2, 1997, to the 1987 Employee Stock Purchase Savings Plan, filed herewith. 10.6 Amendment No. 1, dated May 2, 1997, to the Selective Insurance Retirement Savings Plan, filed herewith. 11 Statement Re Computation of Per Share Earnings, filed herewith. 27 Financial Data Schedule, filed herewith. -17-