UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

(Mark One)

For the transition period from                                     to                       

Commission file number:  0-8641

SELECTIVE INSURANCE GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]         No [  ]

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

Yes [X]         No [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes [  ]         No [X]

As of September 30, 2005, there were 28,215,763 shares of common stock, par value $2, outstanding.

SELECTIVE INSURANCE GROUP, INC.

Table of Contents

PART 1.  FINANCIAL INFORMATION

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

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The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

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Selective Insurance Group, Inc. also has authorized and unissued, 5 million shares of preferred stock, without par value of which 300,000 shares have been designated as Series A junior preferred stock without par value.

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

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The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

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NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.         Organization
Selective Insurance Group, Inc., ("Selective") offers property and casualty insurance products and diversified insurance services products through its various subsidiaries.  Selective classifies its businesses into three operating segments:  (i) Insurance Operations; (ii) Investments; and (iii) Diversified Insurance Services.  Selective was incorporated in New Jersey in 1977 and its main offices are located in Branchville, New Jersey.  Selective common stock is publicly traded on the NASDAQ National Market® under the symbol, "SIGI."

NOTE 2.         Basis of Presentation
These interim unaudited consolidated financial statements include the accounts of Selective and its subsidiaries, and have been prepared in conformity with (i) generally accepted accounting principles in the United States of America ("GAAP") and (ii) the rules and regulations of the United States Securities and Exchange Commission ("SEC") regarding interim financial reporting.  The preparation of the interim unaudited consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported financial statement balances, as well as the disclosure of contingent assets and liabilities.  Actual results could differ from those estimates.  All significant intercompany accounts and transactions between Selective and its subsidiaries are eliminated in consolidation. 

These interim unaudited consolidated financial statements reflect all adjustments that, in the opinion of management, are normal, recurring and necessary for a fair presentation of Selective's results of operations and financial condition.  These interim unaudited consolidated financial statements cover the third quarters ended September 30, 2005 ("Third Quarter 2005") and September 30, 2004 ("Third Quarter 2004") and the nine-month periods ended September 30, 2005 ("Nine Months 2005") and September 30, 2004 ("Nine Months 2004").  As interim unaudited consolidated financial statements, they do not include all of the information and disclosures required by GAAP and the SEC for complete financial statements.  Results of operations for any interim period are not necessarily indicative of results for a full year.  Consequently, these interim unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements contained in Selective's Annual Report on Form 10-K for the year ended December 31, 2004.

NOTE 3.         Adoption of Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment" ("FAS 123R"), requiring public companies to record share based (including employee stock options) compensation expense on the income statement at the fair value of the share award on the date of grant for fiscal years beginning after June 15, 2005.  As permitted, Selective early adopted FAS 123R as of January 1, 2005. See Note 5 below for further information regarding the adoption of FAS 123R.

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NOTE 4.         Reinsurance
The following table is a listing of direct, assumed and ceded amounts by income statement caption.  For more information concerning reinsurance, refer to Note 6, "Reinsurance" in Item 8 "Financial Statements and Supplementary Data" in Selective's Annual Report on Form 10-K for the fiscal year ended December 31, 2004.

Selective's Flood business is ceded 100% to the National Flood Insurance Program and is included in the above amounts as follows:

NOTE 5.         Share-Based Payments
Effective January 1, 2005, Selective adopted FAS 123R, using the modified prospective application method, to account for its share-based compensation plans. Previously, Selective applied Accounting Principles Board ("APB") Opinion No. 25 "Accounting for Stock Issued to Employees," ("APB 25") as was permitted by FASB Statement No. 123 "Accounting for Stock Based Compensation" ("FAS 123").

Selective's adoption of FAS 123R did not have a material effect on (i) income before cumulative effect of change in accounting principle and (ii) basic or diluted earnings per share before cumulative effect of change in accounting principle in Third Quarter 2005 or Nine Months 2005.  At adoption, Selective did recognize a cumulative effect of change in accounting principle resulting in a net income benefit of $0.5 million, which corresponded to the requirement of estimating forfeitures at the date of grant.  FAS 123R also eliminated the presentation of the contra-equity account, "Unearned Stock Compensation," from the face of the Consolidated Balance Sheets resulting in a reclassification of $14.7 million to "Additional Paid-in Capital."

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The following table shows a pro forma reconciliation of net income reported under APB 25 to pro forma net income and earnings per share under FAS 123 for the Third Quarter and Nine Months ended September 30, 2004:

In determining expense to be recorded for stock options granted under Selective's 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 utilized in applying Black Scholes: (i) risk-free interest rate, which is the implied yield currently available on U.S. Treasury zero-coupon issues with an equal remaining term; (ii) expected term, which is based on historical experience of similar awards; (iii) dividend yield, which is determined by dividing the expected per share dividend during the coming year by the grant date stock price; and (iv) expected volatility, which is based on the volatility of Selective's stock price over a historical period comparable to the expected term. In applying Black Scholes, Selective uses the weighted average assumptions illustrated in the following table:

The expense recorded for restricted stock awards and stock compensation for nonemployee directors, as described below, is determined utilizing the number of awards granted and the grant date fair value.

Under FAS 123R the compensation expense for the share-based compensation plans charged against income before cumulative effect of change in accounting principle before tax was $2.5 million in Third Quarter 2005 and $8.5 million in Nine Months 2005 with a corresponding income tax benefit of $0.7 million in Third Quarter 2005 and $2.6 million in Nine Months 2005.  In accordance with APB 25, Selective had compensation expense that was charged against income before tax of $1.6 million in Third Quarter 2004 and $5.5 million in Nine Months 2004 with a corresponding income tax benefit of $0.6 million for Third Quarter 2004 and $1.9 million in Nine Months 2004.

2005 Omnibus Stock Plan
The Selective Insurance Group, Inc. 2005 Omnibus Stock Plan ("Stock Plan") was adopted and approved by the Board of Directors effective as of April 1, 2005, and approved by stockholders' on April 27, 2005. With the Stock Plan's approval, no further grants are available under the (i) Selective Insurance Stock Option Plan III ("Stock Option Plan III"); (ii) Selective Insurance Group, Inc. Stock Option Plan for Directors ("Stock Option Plan for Directors"); or (iii) Selective Insurance Group, Inc. Stock Compensation Plan for Nonemployee Directors, as Amended (Stock Compensation Plan for Nonemployee Directors"), but awards outstanding under these plans and the Selective Insurance Group, Inc. Stock Option Plan II ("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. 

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Under the Stock Plan, the Board of Directors' Salary and Employee Benefits Committee ("SEBC") may grant stock options, stock appreciation rights, restricted stock, 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 Stock Plan.  The Corporate Governance and Nominating Committee makes such determinations for any grants, other than automatic Director grants, made to nonemployee Directors.  Each award granted under the Stock Plan (except unconditional stock bonuses and the cash component of Director compensation) shall be evidenced by an agreement containing such restrictions as the SEBC or the Corporate Governance and Nominating Committee, as applicable, may in its sole discretion deem necessary or desirable and which are not in conflict with the terms of the Stock Plan.  During Third Quarter 2005 and Nine Months 2005, Selective granted 7,000 restricted shares and granted options to purchase 2,000 shares. As of September 30, 2005, 1,752,028 shares of Selective's common stock remain available for issuance pursuant to outstanding stock options and restricted stock awards granted under the Stock Plan.

Stock Option Plan II
As of September 30, 2005, 435,199 shares of Selective's common stock remain available for issuance pursuant to outstanding stock options and restricted stock awards granted under Stock Option Plan II, under which future grants ceased being available on May 22, 2002. Under this plan, employees were granted qualified and nonqualified stock options, with or without stock appreciation rights ("SARs"), and restricted or unrestricted stock at (i) 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 is ten years from the date of the grant.  Selective experienced restricted forfeitures under the plan of 950 shares during Nine Months 2005 and 13,388 shares during Nine Months 2004.

During the vesting period, dividends are earned on the restricted shares and held in escrow subject to the same vesting period and conditions set forth in the award agreement.  Effective September 3, 1996, dividends earned on the restricted shares were reinvested in Selective's common stock at fair value.  Selective issued, net of forfeitures, 2,609 restricted shares from the dividend reinvestment plan reserves during Nine Months 2005 and 5,201 during Nine Months 2004.

Stock Option Plan III
As of September 30, 2005, there were 270,799 shares of Selective's common stock available for issuance pursuant to outstanding stock options and restricted stock awards granted under Stock Option Plan III, under which future grants ceased being available with the approval of the Stock Plan.  Under this plan, 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 is ten years from the date of the grant.  Under this plan, Selective granted options to purchase 105,663 shares without SARS during Nine Months 2005 and options to purchase 104,600 shares without SARS during Nine Months 2004.

Selective also granted 313,108 restricted shares during Nine Months 2005 and 328,684 restricted shares during Nine Months 2004 and experienced forfeitures of 3,529 shares during Nine Months 2005 and 24,559 shares during Nine Months 2004.  During the vesting period, dividends earned on restricted shares are reinvested in Selective's common stock at fair value.  Selective issued, net of forfeitures, 10,697 restricted shares from the dividend reinvestment plan reserves during Nine Months 2005 and 7,599 restricted shares during Nine Months 2004. 

Stock Option Plan for Directors
As of September 30, 2005, 291,000 shares of Selective's common stock were available for issuance pursuant to outstanding stock option awards under the Stock Option Plan for Directors, under which future grants ceased being available with the approval of the Stock Plan.  All non-employee directors participated in this plan and automatically received an annual nonqualified option to purchase 3,000 shares of common stock at not less than fair value on the date of grant, which is on March 1.  Options under this plan vest on the first anniversary of the grant and must be exercised by the tenth anniversary of the grant.  Under this plan, Selective granted 33,000 options during Nine Months 2005, and 30,000 options during Nine Months 2004.

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Stock Compensation Plan for Nonemployee Directors
As of September 30, 2005, there were 47,625 shares of the common stock available for issuance pursuant to outstanding stock option awards under the Stock Compensation Plan for Nonemployee Directors, under which future grants ceased being available with the approval of the Stock Plan.  Under this plan, Directors could elect to receive a portion of their annual compensation in shares of Selective's common stock.  Selective issued 10,919 shares during Nine Months 2005 and 12,624 shares during Nine Months 2004 under this plan.

Employee Stock Purchase Plan
Under Selective's Employee Stock Purchase Plan ("ESPP"), there are 244,231 shares of common stock available for purchase. The ESPP is available to all employees who meet its 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, Selective issued 24,051 shares to employees during Nine Months 2005 and 26,043 shares during Nine Months 2004.

The weighted-average fair value of options and stock granted per share for Selective's stock plans, during Nine Months 2005 and Nine Months 2004 is as follows:

A summary of the stock option transactions under Selective's share-based payment plans is as follows:

The total intrinsic value of options exercised was $5.4 million during Nine Months 2005 and $4.0 million during Nine Months 2004.

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A summary of the restricted stock transactions under Selective's share-based payment plans is as follows:

As of September 30, 2005, total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under Selective's stock plans was $16.4 million.  That cost is expected to be recognized over a weighted-average period of 1.9 years.  The total fair value of restricted stock vested was $9.5 million for Nine Months 2005 and $5.1 million for Nine Months 2004.  In connection with the restricted stock vestings, the total fair value of the dividend reinvestment plan shares that also vested was $0.9 million during Nine Months 2005 and $0.6 million during Nine Months 2004.

NOTE 6.         Segment Information
Selective classifies its businesses into three operating segments, the disaggregated results of which are used by senior management to manage Selective's operations:

• Insurance Operations (commercial lines and personal lines), which are evaluated based on GAAP underwriting results (net premiums earned, incurred losses and loss expenses, policyholders dividends, policy acquisition costs and other underwriting expenses) and statutory combined ratios;

• Investments, which are evaluated based on after-tax net investment income and net realized gains and losses; and

• Diversified Insurance Services (flood insurance, human resource administration outsourcing and managed care), which, because they are not dependent on insurance underwriting cycles, are evaluated based on several measures including, but not limited to, results of operations in accordance with GAAP.

Selective does not aggregate any of its operating segments.

The Insurance Operations and Diversified Insurance Services segments share either complementary (common marketing or distribution system) or vertical (one business uses another's products or services in its own product or supply output) services. Selective's commercial and personal lines property and casualty insurance products, flood insurance, and human resource administration outsourcing products are principally sold through Selective's appointed independent insurance agents.  Selective's managed care business provides services to its property and casualty insurance claims operations and to other insurance carriers.  Selective and its subsidiaries also provide services to each other in the normal course of business.  These transactions totaled $7.5 million for Third Quarter 2005 and $21.6 million for Nine Months 2005 compared with $7.8 million for Third Quarter 2004 and $21.3 million for Nine Months 2004.  These transactions are eliminated in all consolidated statements.

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In computing the results of each segment, Selective does not make adjustments for interest expense, net general corporate expenses or federal income taxes.  Selective does not maintain separate investment portfolios for the segments and, therefore, does not allocate assets to the segments.  The following summaries present revenues (net investment income and net realized gains on investments in the case of the Investments segment) and pre-tax income for the individual segments:

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NOTE 7.         Retirement Plans
The following tables relate to the costs of the Retirement Income Plan for Selective Insurance Company of America ("Retirement Income Plan") and the retirement life insurance component ("Retirement Life Plan") of the Welfare Benefits Plan for Employees of Selective Insurance Company of America.  For more information concerning these plans, refer to Note 15, "Retirement Plans" in Item 8 "Financial Statements and Supplementary Data" in Selective's Annual Report on Form 10-K for the fiscal year ended December 31, 2004.

Selective disclosed in Note 15 of the Notes to Consolidated Financial Statements, included in Item 8. "Financial Statements and Supplementary Data" of its Annual Report on Form 10-K for the fiscal year ended December 31, 2004, that it expected to contribute $8.0 million to its Retirement Income Plan in 2005.  Such contribution occurred during the first quarter of 2005 and Selective is currently not required to make any further contributions to the Retirement Income Plan during 2005.

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NOTE 8.         Comprehensive Income
The components of comprehensive income, both gross and net of tax, for Third Quarter 2005 and Third Quarter 2004 are as follows:

The components of comprehensive income, both gross and net of tax, for Nine Months 2005 and Nine Months 2004 are as follows:

NOTE 9.         Stockholders' Equity

Effective April 26, 2005, the Board of Directors (i) approved a new plan to repurchase up to 5.0 million shares of Selective common stock through April 26, 2007, and (ii) cancelled the existing stock repurchase program, under which Selective could have repurchased 2.4 million shares through November 30, 2005. Under the new plan, Selective repurchased approximately 265,000 shares at a cost of $13.0 million during Third Quarter 2005 and 335,000 shares at a cost of $16.3 million during Nine Months 2005.

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Note 10.          Commitments and Contingencies
Included in Other Investments are investments in limited partnerships of approximately $55.9 million as of September 30, 2005, and $44.1 million as of December 31, 2004.  At December 31, 2004, Selective had additional investment commitments of up to $47.1 million, of which $10.9 million were paid during Nine Months 2005.  At September 30, 2005, Selective has contractual obligations that expire at various dates through 2016 to further invest up to $52.5 million in these limited partnerships.  There is no certainty that any such additional investment will be required.

Note 11.          Litigation
In the ordinary course of conducting business, Selective and its subsidiaries are named as defendants in various legal proceedings.  Some of these lawsuits attempt to establish liability under insurance contracts issued by our insurance subsidiaries.  Plaintiffs in these lawsuits are seeking money damages that, in some cases, are extra-contractual in nature or they are seeking to have the court direct the activities of Selective's operations in certain ways.  Although the ultimate outcome of these matters is not presently determinable, Selective does not believe that the total amounts that it will ultimately have to pay, if any, in all of these lawsuits in the aggregate will have a material adverse effect on its financial condition, results of operations, or liquidity.

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ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

In this Quarterly Report on Form 10-Q, Selective and its management discuss and make statements regarding their intentions, beliefs, current expectations, and projections regarding Selective's future operations and performance.  Such statements are "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements are often identified by words such as "anticipates," "believes," "expects," "will," "should" and "intends" and their negatives. Selective and its management caution prospective investors that such forward-looking statements are not guarantees of future performance.  Risks and uncertainties are inherent in Selective's future performance. Factors that could cause actual results to differ materially from those indicated by such forward-looking statements include, but are not limited to, those discussed under "Risk Factors" in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Selective's Annual Report on Form 10-K for the fiscal year ended December 31, 2004 ("Annual Report").  Those portions of the Annual Report are incorporated by reference into this report.  Selective and its management make forward-looking statements based on currently available information and assume no obligation to update these statements due to changes in underlying factors, new information, future developments, or otherwise.

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

• the frequency and severity of catastrophic events, including, but not limited to, hurricanes, tornadoes, windstorms, earthquakes, hail, severe winter weather, fires, explosions and terrorism;

• adverse economic, market, regulatory, legal or judicial conditions;

• the concentration of our business in a number of east coast and midwestern states;

• the adequacy of our loss reserves;

• the adequacy of our loss expense reserves;

• the cost and availability of reinsurance;

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

• uncertainties related to insurance premium rate increases and business retention;

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

• our ability to maintain favorable ratings from rating agencies;

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

• our entry into new markets and businesses; and

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

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Introduction
Selective Insurance Group, Inc., ("Selective") offers property and casualty insurance products and diversified insurance services through its various subsidiaries.  Selective classifies its businesses into three operating segments: (i) Insurance Operations, (ii) Investments, and (iii) Diversified Insurance Services. 

The purpose of the 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. Consequently, investors should read the MD&A in conjunction with Selective's consolidated financial statements in Selective's Annual Report on Form 10-K for the fiscal year ended December 31, 2004.  For convenience and reading ease, we have written the MD&A in the first person plural.

In the MD&A, we will discuss and analyze the following:

• Highlights of results for third quarters ended September 30, 2005 ("Third Quarter 2005") and September 30, 2004 ("Third Quarter 2004") and the nine-month periods ended September 30, 2005 ("Nine Months 2005") and September 30, 2004 ("Nine Months 2004"). 

• Results of Operations and Related Information by Segment

• Financial Condition, Liquidity, and Capital Resources

• Federal Income Taxes

• Critical Accounting Policies and Estimates

• Adoption of Accounting Pronouncement

• Off-Balance Sheet Arrangements, Contractual Obligations and Contingent Liabilities and Commitments

Highlights of Third Quarter 2005 and Nine Months 2005 Results