Unassociated Document
Filed
pursuant to Rule 424(b)3
Registration
No. 333-110576
DATED
DECEMBER 7, 2010
PROSPECTUS
2,025,746
SHARES OF COMMON STOCK
OF
SELECTIVE
INSURANCE GROUP, INC.
SELECTIVE
INSURANCE GROUP, INC. DIVIDEND
REINVESTMENT
AND STOCK PURCHASE PLAN
This
prospectus relates to the shares of common stock, par value $2.00 per share
(“Common
Stock”), of Selective Insurance Group, Inc. (“Selective” or the
“Company”)
offered under the Dividend Reinvestment and Stock Purchase Plan (the “Plan”). The
Plan provides record holders of shares of Common Stock a convenient method of
reinvesting cash dividends and making optional cash payments to purchase shares
of Common Stock. Stockholders who do not wish to participate in the
Plan will continue to receive cash dividends, when, as and if declared and
paid.
Selective’s
Common Stock is listed on the NASDAQ Global Select Market under the symbol
“SIGI”. The purchase price of shares of Common Stock purchased by
each participant in the Plan with reinvested dividends on any dividend payment
date and the purchase price of shares purchased with any optional cash payment
on a dividend payment date is the average of the daily high and low sales prices
of Common Stock as reported on the NASDAQ Global Select Market for the period of
five trading days ending with the dividend payment date (or the period of five
trading days immediately preceding the dividend payment date, if the NASDAQ
Global Select Market is closed on the dividend payment date). The
last price of shares of Common Stock issued under the Plan was
$16.692.
Shares of
Common Stock purchased by participants in the Plan will be newly issued
shares. Selective will use the proceeds from sales of Common Stock
for general corporate purposes. Selective cannot estimate the number
of shares that will be purchased under the Plan or the prices at which shares
will be purchased.
You
should carefully consider the risks of an investment in Selective’s Common
Stock. Risk Factors begin on page 2.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a
criminal offense.
This
prospectus is qualified in its entirety by reference to the Plan. All
capitalized terms used but not defined herein will have the meanings ascribed to
them in the Plan.
The date
of this prospectus is December 7, 2010
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1
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USE
OF PROCEEDS
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2
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RISK
FACTORS
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2
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THE
PLAN
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17
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DESCRIPTION
OF CAPITAL STOCK
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27
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PLAN
OF DISTRIBUTION
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28
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LEGAL
MATTERS
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28
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EXPERTS
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28
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WHERE
YOU CAN FIND MORE INFORMATION
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29
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SUMMARY
This
summary highlights selected information from this prospectus and may not contain
all of the information that is important to you. You should read all of the
information in this prospectus along with the other information and financial
statements Selective refers you to in the section “Where You Can Find More
Information” appearing at the end of this document. Unless otherwise stated, all
references in this prospectus to “Selective,” the “Company,” “we,” “us,” and
“our” mean Selective Insurance Group, Inc.
Selective
Insurance Group, Inc.
Selective
offers property and casualty insurance products and services through its various
subsidiaries. Selective classifies its businesses into two operating
segments:
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Insurance
Operations, which sells property and casualty insurance policies and
products; and
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Investment
Operations, which invests the premiums collected by the Insurance
Operations.
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Selective
eliminated its third operating segment, Diversified Insurance Services in two
steps in 2009: In the first quarter, the Company reclassified its federal flood
insurance administrative services business into Insurance Operations because of
changes in the way Selective managed the business; and (ii) in the fourth
quarter, the Company sold its human resource administration outsourcing
business.
Selective
offers its insurance products and services through the following
subsidiaries:
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Selective
Insurance Company of America;
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Selective
Way Insurance Company;
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Selective
Auto Insurance Company of New
Jersey;
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Selective
Insurance Company of the Southeast;
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Selective
Insurance Company of South
Carolina;
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Selective
Insurance Company of New York; and
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Selective
Insurance Company of New England.
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Selective
was incorporated in New Jersey in 1977 to acquire all of the shares of Selective
Insurance Company of America, formerly named “Selected Risks Insurance
Company.”
Because
Selective is a holding company, Selective relies on its subsidiaries for cash to
pay its obligations and dividends to its stockholders. State insurance laws and
regulations, as administered by state insurance departments, restrict how much
money its insurance subsidiaries may distribute to the Company.
Selective’s
principal executive offices are located at 40 Wantage Avenue, Branchville, New
Jersey 07890 and Selective’s telephone number is (973) 948-3000.
The
Selective Insurance Group, Inc. Dividend Reinvestment and Stock Purchase
Plan
Eligibility
and Administration
All
stockholders of record of shares of our Common Stock are eligible to participate
in the Plan.
Selective
has designated Wells Fargo Bank, N.A. (“Wells Fargo”), as
administrator of the Plan to maintain records, send statements of account, and
perform other duties relating to the Plan. Shares purchased under the Plan will
be registered in your name and credited in book-entry form to your Plan
account.
Purchases
If you
are eligible to participate in the Plan, you may join the Plan at any time. If
you enroll in the Plan on or before the record date for a dividend, or, if you
are a beneficial owner of shares, your broker, bank or nominee appropriately
advises Wells Fargo of your participation before the record date for a dividend,
that dividend will be reinvested in shares of Common Stock beginning with that
dividend payment date. Typically, we have fixed dividend record dates generally
on or about the fifteenth day of each February, May, August, and November, and
dividend payment dates generally on or about the first day of each March, June,
September and December. All optional cash payments received prior to any
dividend payment date will be invested, together with any reinvested dividends,
on the next dividend payment date. The Plan does not guarantee the payment of
future dividends.
Stockholders
of record can make optional cash payments to purchase our Common Stock. Wells
Fargo will apply optional cash payments received before a dividend payment date
to the purchase of additional shares on the dividend payment date. Only
stockholders of record may make optional cash payments to purchase Common Stock.
The minimum optional cash payment is $100 per purchase and the maximum is $1,000
per calendar quarter.
Terms
of Purchase
The
purchase price of shares purchased by each participant in the Plan is the
average of the daily high and low sales prices of our Common Stock as reported
on the NASDAQ Global Select Market for the period of five trading days ending
with the dividend payment date.
USE
OF PROCEEDS
We cannot
estimate either the number of shares of Common Stock that will ultimately be
sold under the Plan or the prices at which shares will be sold. We intend to use
the net proceeds from sales of Common Stock under the Plan for general corporate
purposes. The amounts and timing of the application of proceeds will depend upon
our funding requirements and the availability of other funds.
RISK
FACTORS
Certain
risk factors exist that can have a significant impact on Selective’s business,
results of operations, and financial condition. The impact of these risk factors
could also affect certain actions that Selective takes as part of its long-term
capital strategy including, but not limited to, contributing capital to
subsidiaries in its insurance operations and diversified insurance services
segments, issuing additional debt and/or equity securities, repurchasing shares
of the Common Stock, or increasing stockholders’ dividends.
The
following list of risk factors is not exhaustive and others may exist. Selective
operates in a continually changing business environment, and new risk factors
emerge from time to time. Consequently, Selective can neither predict new risk
factors nor assess the impact, if any, they might have on its business in the
future.
Risks Related to Insurance
Operations
The
failure of Selective’s risk management strategies could have a material adverse
effect on the Company’s financial condition or results of
operations.
Selective employs a number of risk
management strategies to reduce the Company’s exposure to risk that include, but
are not limited to the following:
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Being
disciplined in the Company’s underwriting
practices;
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Being
prudent in the Company’s claims management practices and establishing
adequate loss and loss expense
reserves;
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Continuing
to develop and implement predictive models to analyze historical
statistical data regarding Selective’s insureds and their loss experience
and to apply that information to risks of current insureds and prospective
insureds so the Company can better predict the likely profitability of the
account; and
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Purchasing
reinsurance.
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All of these strategies have inherent
limitations. Selective cannot be certain that an event or series of
unanticipated events will not occur and result in losses greater than the
Company expects and have a material adverse effect on the Company’s liquidity,
capital resources, results of operations, and financial condition.
Selective’s loss reserves may not be
adequate to cover actual losses and expenses.
Selective is required to maintain loss
reserves for the Company’s estimated liability for losses and loss expenses
associated with reported and unreported insurance claims. Selective’s estimates
of reserve amounts are based on known facts and circumstances, including the
Company’s 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 the Company’s insurance policies in
force. There is no method for precisely estimating the ultimate liability for
settlement of claims. From time-to-time, Selective adjusts reserves and
increases them if they are inadequate or reduces them if they are redundant.
Selective cannot be certain that the reserves the Company establishes 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 deficiency in
reserves is identified; and (ii) could have a material adverse effect on the
Company’s results of operations, liquidity, financial condition, and financial
strength and debt ratings.
Selective
is subject to losses from catastrophic events.
Selective’s 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 numerous events. For further discussion regarding man-made catastrophes
that relate to terrorism see the risk factor directly below this one regarding
the potential for significant losses from acts of terrorism. Furthermore,
scientists, legislators, and regulators are among a broad spectrum of the public
which have a heightened interest in the effect that greenhouse gas emissions
have on the environment in particular to a change in climate. If greenhouse
gases continue to shift the climate, more devastating catastrophic events may
occur. Catastrophe losses are determined by the severity of the event and the
total amount of insured exposures in the area affected by the event. Selective’s
insurance operations business is concentrated geographically in the Eastern and
Midwestern regions of the U.S. New Jersey accounted for 27% of the Company’s
total NPW during the year ended December 31, 2009 and therefore catastrophes in
these areas could adversely impact Selective’s business more so than in other
geographic areas. Although catastrophes can cause losses in a variety of
property and casualty lines, most of Selective’s historic catastrophe-related
claims have been from commercial property and homeowners coverages. In an effort
to reduce the Company’s exposure to catastrophe losses Selective purchases
catastrophe reinsurance. Despite acquiring this protection, reinsurance could
prove inadequate if: (i) the modeling software the Company uses to analyze the
Insurance Subsidiaries’ risk results in an inadequate purchase of reinsurance by
Selective; (ii) a major catastrophe loss exceeds the reinsurance limit or the
reinsurers’ financial capacity; and (iii) the frequency of catastrophe losses
results in the Insurance Subsidiaries exceeding their one reinstatement. Even
after considering Selective’s reinsurance protection, the Company’s exposure to
catastrophe risks could have a material adverse effect on Selective’s results of
operations or financial condition.
Selective is subject to potential
significant losses from acts of terrorism.
The Terrorism Risk Insurance Act, as
amended, (“TRIA”) requires
private insurers and the United States government to share the risk of loss on
future acts of terrorism that are certified by the U.S. Secretary of the
Treasury. As a Commercial Lines writer, Selective is required to participate in
TRIA. Under TRIA, terrorism coverage is mandatory for all primary workers
compensation policies. However, insureds with non-workers compensation
commercial policies have the option to accept or decline Selective’s terrorism
coverage or negotiate with the Company for other terms. In 2009, approximately
87% of Selective’s Commercial Lines non-workers compensation policyholders
purchased terrorism coverage.
TRIA rescinded all previously approved
coverage exclusions for terrorism. Many of the states in which Selective writes
commercial property insurance, however, mandate that the Company cover fire
following an act of terrorism. Under TRIA, 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 2009, the deductible would have
been approximately $189 million. For losses above the deductible, the federal
government will pay 85%, up to an industry limit of $100 billion, and the
insurer retains 15%. Although TRIA’s provisions will mitigate Selective’s loss
exposure to a large-scale terrorist attack, the Company’s deductible is
substantial and could have a material adverse effect on Selective’s results of
operations or financial condition.
TRIA legislation is in effect through
December 31, 2014. Currently, the Obama Administration’s proposed budget
includes provisions to scale back TRIA by removing coverage for domestically
inspired acts of terrorism, increasing private insurer deductibles and
co-payments, and allowing the program to expire at the end of 2014.
Selective’s
ability to reduce its risk exposure depends on the availability and cost of
reinsurance.
Selective transfers a portion of its
underwriting risk exposure to reinsurance companies. Through the Company’s
reinsurance arrangements, a specified portion of Selective’s losses and loss
adjustment 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. While reinsurance agreements
generally bind Selective’s reinsurers for the cost of reinsurance on existing
business reinsured, market conditions beyond the Company’s control determine the
availability and cost of the reinsurance for new business. In certain
circumstances, the price of reinsurance for business already reinsured may also
increase. Any decrease in the amount of Selective’s reinsurance will increase
the Company’s risk of loss. Any increase in the cost of reinsurance will, absent
a decrease in the amount of reinsurance, reduce Selective’s earnings.
Accordingly, Selective 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 the Company’s ability to write future
business or result in the assumption of more risk with respect to those policies
the Company issues.
Selective
is exposed to credit risk.
Selective is exposed to credit risk in
several areas of its Insurance Operations business, including from:
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Selective’s
reinsurers, who are obligated to the Company under reinsurance agreements.
The relatively small size of the reinsurance market and the Company’s
objective to maintain an average weighted rating of “A” by A.M. Best on
its current reinsurance programs constrains the Company’s ability to
diversify its exposure to “single issuer” credit risk. However, some of
Selective’s reinsurance credit risk is
collateralized;
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Some
of Selective’s independent agents, who collect premiums from insureds and
are required to remit the collected premium to the Company;
and
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Selective’s
pension plan investments, 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 the Company’s pension plan, the funded status of the pension
plan could be adversely impacted and as result could increase the cost of
the plan to Selective’s insurance
operations.
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It is possible that current economic
conditions could increase the Company’s credit risk. Selective’s exposure to
credit risk could have a material adverse effect on its results of operations or
financial condition.
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 significantly by prevailing general economic conditions.
The supply of insurance is related to prevailing prices, the levels of insured
losses and the levels of industry surplus which, in turn, may fluctuate in
response to changes in rates of return on investments being earned
in the
insurance industry. As a result, the insurance industry historically has been a
cyclical industry characterized by periods of intense price competition due to
excessive underwriting capacity as well as periods when shortages of capacity
permitted favorable premium levels. For example, competitors pricing business
below technical levels could force Selective to reduce its profit margin in
order to protect the Company’s best business.
The following is an example of pricing
and loss trends on the statutory combined ratio: Taking a pure price decline of
1.4% and removing the expense that directly varies with premium volume yields an
adverse combined ratio impact of approximately one point. In addition, a claims
inflation increase of 3% will cause the loss and loss adjustment expense ratio
to increase approximately two points, all else remaining equal. The combination
of claims inflation and price decreases could raise the combined ratio
approximately three points in this example, absent any initiatives targeted to
address these trends.
The industry’s profitability also is
affected by unpredictable developments, including:
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Natural
and man-made disasters;
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Fluctuations
in interest rates and other changes in the investment environment that
affect investment returns;
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Inflationary
pressures (medical and economic) that affect the size of
losses;
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Judicial,
regulatory, legislative, and legal decisions that affect insurers’
liabilities;
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Changes
in the frequency and severity of
losses;
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Pricing
and availability of reinsurance in the marketplace;
and
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Weather-related
impacts due to the effects of climate
changes.
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Any of the above developments could
cause the supply or demand for insurance to change, which could adversely affect
Selective’s results of operations and financial condition.
Difficult
conditions in global capital markets and the economy may adversely affect
Selective’s revenue and profitability and harm its business, and these
conditions may not improve in the near future.
General conditions in the United States
and world economies and volatility in financial and insurance markets materially
affect the Company’s results of operations. Concerns over the issues as the
availability and cost of credit, the stability of the U.S. mortgage market,
declining real estate markets, increased unemployment, volatile energy and
commodity prices, and geopolitical issues, also have led to declines in business
and consumer confidence and precipitated an economic slowdown.
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 Selective’s business. In an
economic downturn characterized by higher unemployment, lower family income,
lower corporate earnings, lower business investment, and lower consumer
spending, the demand for insurance products could be adversely affected. In
addition, Selective is impacted by the recent decrease in commercial and new
home construction and home ownership in 2009 because 39% of direct premiums
written in the Company’s Commercial Lines business were generated through
contractors business. In addition, 36% of direct premiums written in Selective’s
Commercial Lines business is based on payroll/sales of its underlying insureds.
The impact of the economic downturn on Commercial Lines can be seen in the
approximately $73 million of audit and endorsement premium the Company has
returned to its insureds during 2009. Further unfavorable economic developments
could adversely affect the Company’s earnings if its customers have less need
for insurance coverage, cancel existing insurance policies, modify coverage, or
choose not renew with the Company. These circumstances could have a material
adverse effect on Selective’s business, results of operations and financial
condition. Challenging economic conditions also may impair the ability of
Selective’s customers to pay premiums as they come due. Selective is unable to
predict the likely duration and severity of the current economic conditions in
the U.S. and other countries, which may have an adverse effect on the
Company.
A
downgrade or a potential downgrade in Selective’s financial strength or credit
ratings could result in a loss of business and could have a material adverse
effect on the Company’s financial condition and results of
operations.
Selective is rated on it financial
strength, primarily its ability to pay claims, by various Nationally Recognized
Statistical Rating Organizations ("NRSROs"). The
financial strength ratings on the Insurance Subsidiaries are as
follows:
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NRSRO
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Financial
Strength Rating
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Outlook
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A.M.
Best and Company
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“A+”
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Negative
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Standard
& Poor’s
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“A”
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Stable
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Fitch
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“A+”
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Stable
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Moody’s
Investor Service
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“A2”
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Stable
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A significant rating downgrade,
particularly from A.M. Best, could: (i) affect Selective’s ability to write new
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; or (ii) be an event of default under the Company’s line of
credit with Wachovia Bank, National Association (“Line of Credit”). The
Line of Credit requires the Company’s insurance subsidiaries to maintain an A.M.
Best rating of at least “A-” (two levels below the Company’s current rating) and
a default could lead to acceleration of any outstanding principal. Such an event
also could trigger default provisions under certain of Selective’s other debt
instruments and negatively impact its ability to borrow in the future. As a
result any significant downgrade in ratings could have a material adverse effect
on Selective’s financial condition and results of operations.
NRSROs also rate the Company’s
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
the Company’s overall funding profile and ability to access certain types of
liquidity. Selective’s current credit ratings are as follows:
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NRSRO
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Credit
Rating
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Long
Term Credit Outlook
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A.M.
Best and Company
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“a-”
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Negative
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Standard
& Poor’s
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“BBB”
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Stable
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Fitch
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“A-”
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Stable
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Moody’s
Investor Services
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“Baa2”
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Stable
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Downgrades in the Company’s credit
ratings could have a material adverse effect on its financial condition and
results of operations in many ways, including making it more expensive for the
Company to access capital markets.
Because of the difficulties recently
experienced by many financial institutions, including insurance companies, and
the public criticism of NRSROs, Selective believes it is possible that the
NRSROs: (i) will heighten their level of scrutiny of financial institutions;
(ii) will increase the frequency and scope of their reviews; and (iii) may
adjust upward the capital and other requirements employed in their models for
maintaining certain rating levels. Selective cannot predict possible actions
NRSROs may take regarding its ratings that could adversely affect the Company’s
business or the possible actions it may take in response to any such
action.
Selective’s
industry is very competitive and it has many competitors and potential
competitors.
The insurance industry is highly
competitive. The current economic environment has only served to further
increase competition. Selective competes 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
lower costs of capital. They may have the ability to absorb greater risk while
maintaining their financial strength ratings. Consequently, they may be able to
price their products more competitively. These competitive pressures could
result in increased pricing pressures on a number of Selective’s products and
services, particularly as competitors seek to win market share, and may impair
the Company’s ability to maintain or increase its profitability. Selective also
faces 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
business because they reinsure it, could enter the market to diversify their
operations. New competition could cause changes in the supply or demand for
insurance and adversely affect Selective’s business.
Selective
has less loss experience data than its larger competitors.
Selective believes 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 select profitable risks. With the consistent expansion of
computing power and the asymmetric decline in its cost, Selective believes that
data and analytics use will increase and become more complex and accurate. As a
regional insurance group, the loss experience from Selective’s Insurance
Operations is not large enough in all circumstances to analyze and project the
Company’s future costs. Selective uses data from ISO to obtain sufficient
industry loss experience data. While statistically relevant, that data is not
specific to the performance of risks the Company has underwritten. Larger
competitors, particularly national carriers, have sufficient data regarding the
performance of risks that they have underwritten. Their analytics of their loss
experience data may be more predictive of profitability of their underwritten
risks than the Company’s analysis using, in part, general industry loss
experience. For the same reason, should Congress repeal the McCarran-Ferguson
Act and Selective is unable to access data from ISO, the Company will be at a
competitive disadvantage to larger insurers who have more sufficient loss
experience data on their own insureds.
Selective
depends on independent insurance agents.
Selective markets and sells its
insurance products exclusively through independent insurance agents who are not
its employees. Selective believes that independent insurance 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 the
Company’s distribution channel and it must market its products and services to
its agents before they sell them to Selective’s mutual customers. The Company’s
financial condition and results of operations are tied to the successful
marketing and sales efforts of its products by its agents.
Selective
faces risks regarding its Flood business because of uncertainties regarding the
funding of the NFIP program.
Selective is the seventh largest
insurance group participating in the WYO arrangement of the NFIP, which is
managed by the Mitigation Division of FEMA in the U.S. Department of Homeland
Security. For WYO participation, Selective receives an expense allowance, or
servicing fee, for policies written and claims serviced. Currently, the expense
allowance is 30% of direct written premiums.
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
spending. At present, the funding for the program is set to expire on September
30, 2011. Some members of Congress have expressed a desire to explore a
comprehensive revision of the program, its costs, and its administration.
Selective is actively monitoring developments in Washington regarding reform
proposals to the NFIP, particularly regarding any changes to the fee structure.
Selective cannot predict whether proposals will be adopted or, if adopted, what
impact their adoption could have on the Company’s business, financial condition,
or results of operations.
Selective
is heavily regulated and changes in regulation may reduce its profitability and
limit its growth.
Selective’s Insurance Operations are
heavily regulated and subject to extensive laws and regulations that are subject
to change. By virtue of the McCarran-Ferguson Act, Congress has traditionally
ceded insurance regulation to the various states. Selective, however, is subject
to federal regulators, such as the SEC, for securities issues, and the Federal
Trade Commission, for privacy issues. The Company also is subject to
non-governmental regulators, such as the NASDAQ Stock Market and the New York
Stock Exchange, where it lists its securities. Many of these regulators, to some
degree, have 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,
Selective
has 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,
Selective also is subject to the risk that interpretations will change over
time.
The primary public policy behind state
insurance regulation is the protection of policyholders and claimants over all
other constituencies, including shareholders. By virtue of the McCarran-Ferguson
Act, Congress has traditionally delegated insurance regulation to the various
states. For 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. The broad regulatory, administrative, and
supervisory powers of the various state departments of insurance
include:
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Related
to Selective’s 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 expenses, reinsurance,
payment of dividends and other distributions to shareholders, periodic
financial examinations and annual and other report
filings.
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Related
to Selective’s 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 the Company’s
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.
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Related
to Selective’s ownership of the Insurance Subsidiaries, the Company is
required to register as an insurance holding company system and report
information concerning all of its 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 Selective or its insurance subsidiaries at any time; (ii)
require disclosure or prior approval of material transactions of any of
the insurance subsidiaries with Selective or each other; and (iii) require
prior approval or notice of certain transactions, such as payment of
dividends or distributions to the
Company.
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Although the federal government
traditionally has not regulated insurance, federal legislation and
administrative policies do affect us, including the Terrorism Risk Insurance Act
of 2002 and the Terrorism Risk Insurance Program Reauthorization Act of 2007,
Office of Foreign Assets Control, and various privacy laws, including the
Gramm-Leach-Bliley Act, the Fair Credit Reporting Act, the Drivers Privacy
Protection Act, and the Health Insurance Portability and Accountability Act. 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.
In July 2010, President Obama signed
into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the
"Dodd-Frank Act"). Among other things, the Dodd-Frank Act, created a Financial
Stability and Oversight Council that may designate certain insurance companies
and insurance holding companies as nonbank financial companies subject to
prudential regulation by the Board of Governors of the U.S. Federal Reserve (the
"Federal Reserve Board of Governors") on a variety of issues, including capital
requirements, leverage limits, liquidity requirements, and examinations. If the
Federal Reserve Board of Governors deems any nonbank financial company under its
supervision to pose a grave threat to the financial stability of the United
States, it may limit the company's ability to enter into merger transactions,
restrict its ability to offer financial products, require it to terminate one or
more activities, or impose conditions on the manner in which it conducts
activities.
The Dodd-Frank Act also established a
Federal Insurance Office in the U.S. Treasury Department to monitor all aspects
of the insurance industry and lines of business other than certain health
insurance, certain long-term care insurance, and crop insurance. The director of
the Federal Insurance Office will have the ability to recommend that an
insurance company or an insurance holding company be subject to heightened
prudential standards. The Dodd-Frank Act also provides in certain instances for
the pre-emption of state laws regulating reinsurance and other limited insurance
matters. At this time, it is not possible to predict with any degree of
certainty whether any other proposed legislation or regulatory changes will be
adopted or what impact, if any, the
Dodd-Frank
Act or any other such legislation or changes could have on Selective’s business,
financial condition or results of operations.
Selective
is subject to the risk that legislation will be passed significantly changing
insurance regulation and adversely impacting Company business, financial
condition, and results of operations.
In 2009,
Dodd-Frank was enacted to address the financial markets crises in 2008 and 2009,
the issues regarding the AIG scandal. Dodd-Frank created the Federal Insurance
Office (FIO) as part of the U.S. Department of Treasury to advise the federal
government regarding insurance issues. Dodd-Frank also requires the Federal
Reserve through the Financial Services Oversight Council (FSOC) to supervise
financial services firms designated as systemically risky. Selective is not
considered one of these firms. Dodd-Frank also included a number of corporate
governance reforms for publicly traded companies, including proxy access,
say-on-pay, and other governance issues requiring shareholder action. Selective
anticipates 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:
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Repeal of the
McCarran-Ferguson Act. While proposals for McCarran-Ferguson Act
repeal recently have been primarily directed at health insurers, if
enacted and applicable to property and casualty insurers, such repeal
would significantly reduce Selective’s ability to compete and materially
affect Company results of operations because Selective relies on the
anti-trust exemptions the law provides to obtain loss data from third
party aggregators such as ISO to predict future losses.
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National Catastrophe
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. While homeowners' insurance is primarily
handled at the state level, there are important roles for the federal
government to play, including the establishment of a national catastrophic
fund.
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Reform of the
NFIP. There have been legislative proposals to reform the NFIP by:
(i) expanding coverage to include coverage for losses from wind damage;
and (ii) forgiving the nearly $20 billion in debt amassed by the NFIP from
the catastrophic storms of 2004 and 2005. Selective believes that the
expansion of coverage to include wind losses would significantly increase
the cost and availability of NFIP insurance.
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Selective
expects the debate about the role of the federal government in regulating
insurance to continue. Selective cannot predict whether any of these or any
related proposal will be adopted, or what impact, if any, such proposals, could
have on Company business, financial condition or results of operations if
enacted.
There may
be increased oversight by state regulators of company holding companies due to
an objective by the National Association of Insurance Commissioners (NAIC) to
amend the Model Holding Company Act and Regulation to require insurance holding
companies to report certain information related to financial risk to their
domiciliary state regulators and the NAIC.
Class
action litigation could affect Selective’s business practices and financial
results.
Selective’s
industries have been the target of class action litigation in areas including
the following:
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Urban
homeowner insurance underwriting
practices;
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Credit
scoring and predictive modeling
pricing;
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Managed
care practices;
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Timing
and discounting of personal injury protection claims
payments;
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Direct
repair shop utilization practices;
and
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Shareholder
class action suits.
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Changes
in accounting guidance could impact the results of Selective’s operations and
financial condition.
In October 2010, the Financial
Accounting Standards Board (“FASB”) issued ASU
Update 2010-26, Financial Services-Insurance (Topic
944) – Accounting for Costs Associated with Acquiring or Renewing Insurance
Contracts. This guidance 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 would
include, 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. This guidance is effective, either with a prospective or
retrospective application, for interim and annual periods beginning after
December 15, 2011, with early adoption permitted. Although Selective is
currently evaluating the impact of this guidance, Company anticipates that a
significant portion of Selective’s deferred policy acquisition costs balance may
be eliminated under the newly issued guidance, resulting in a reduction to GAAP
equity. Deferred policy acquisition cost totaled $218.6 million as of September
30, 2010.
FASB also is involved with the
International Accounting Standards Board in a joint project that could
significantly impact today’s insurance model. Potential changes include, but are
not limited to: (i) redefining the revenue recognition process; and (ii)
requiring loss reserve discounting. Selective’s premiums are earned over the
period that coverage is provided and it does not discount its loss reserves.
Final guidance from this joint project could have a material impact on the
Company’s operations.
Risks Related to Selective’s
Investment Operations
The
failure of the Company’s risk management strategies could have a material
adverse effect on its financial condition or results of operations.
Selective employs a number of risk
management strategies to reduce its exposure to risk that include, but are not
limited to the following:
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Being
prudent in establishing Selective’s investment policy and appropriately
diversifying its investments;
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Using
complex financial and investment models to analyze historic investment
performance and to predict future investment performance under a variety
of scenarios using asset concentration, asset volatility, asset
correlation, and systematic risk;
and
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Closely
monitor investment performance, general economic and financial conditions,
and other relevant factors.
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All of these strategies have inherent
limitations. Selective cannot be certain that an event or series of
unanticipated events will not occur and result in losses greater than it expects
and have a material adverse effect on the Company’s liquidity, capital
resources, results of operations, and financial condition.
Difficult
conditions in global capital markets and the economy may adversely affect
Selective’s revenue and profitability and harm its business, and these
conditions may not improve in the near future.
Selective’s 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 declining real estate market in the U.S.,
increased unemployment, volatile energy and commodity prices, and geopolitical
issues, among other factors, have contributed to increased volatility for the
economy and the financial and insurance markets. These concerns have also led to
declines in business and consumer confidence, which have precipitated an
economic slowdown.
Selective
is exposed to risk in its investment portfolio.
The market
for fixed income securities has experienced decreased liquidity, increased price
volatility, credit downgrade events, and increased probability of default.
Securities that are less liquid are more difficult to value and may be hard to
sell. Domestic and international equity markets have also been experiencing
heightened volatility and turmoil, with issuers (such as Selective) exposed to
the mortgage securities and credit markets particularly
affected.
These factors and the continued potential for market disruption may have an
adverse effect on Selective’s investment portfolio, revenues, and profit
margins.
Credit
risk
Selective is exposed to credit risk in
its investment portfolio from issuers of securities, insurers of certain
securities, and certain other investment portfolio counterparties. The value of
the Company’s 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 and, where applicable, an
issuer’s guarantor, insurer, or other counterparties regarding any of
Selective’s investments could reduce its net investment income and net realized
investment gains or result in investment losses.
Interest
rate risk
Selective’s 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 the Company’s existing fixed maturity investments and declines
in interest rates may result in an increase in the fair value of its existing
fixed maturity investments. Selective’s fixed income investment portfolio, which
currently has a duration of 3.5 years, 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 the Company’s
control. A rise in interest rates would decrease the net unrealized gain
position of the investment portfolio, offset by the Company’s 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, offset by lower rates of return on funds reinvested and
new investments. Selective seeks to mitigate its interest rate risk associated
with holding fixed maturity investments by monitoring and maintaining the
average duration of its portfolio with a view toward achieving an adequate
after-tax return without subjecting the portfolio to an unreasonable level of
interest rate risk. Although the Company takes measures to manage the economic
risks of investing in a changing interest rate environment, it may not be able
to mitigate the interest rate risk of its assets relative to its
liabilities.
Selective’s
statutory surplus may be materially affected by rating downgrades on investments
held in its portfolio.
Selective is exposed to significant
financial and capital markets risks, primarily relating to interest rates,
credit spreads, equity price risks, and the change in market value of its
alternative investment portfolio. A decline in both income and the Company’s
investment portfolio’s 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 its portfolio, a decline in the performance of the
underlying collateral of its structured securities, reduced returns on its
alternative investment portfolio, or general market conditions.
With economic uncertainty, the credit
quality and ratings of securities in the Company’s portfolio could be adversely
affected. The NAIC could potentially apply a lower class code on a security than
was originally assigned which could adversely affect statutory surplus because
securities with NAIC class codes 3 through 6 require securities to be
marked-to-market for statutory accounting purposes as compared to securities
with NAIC class codes of 1 or 2 that are carried at amortized cost.
Selective is also subject to the risk
that the issuers, or guarantors, of fixed maturity securities it owns may
default on principal and interest payments due under the terms of the
securities. At September 30, 2010, the Company’s fixed maturity securities
portfolio represented approximately 88% of its total invested assets.
Approximately 56% of the Company’s fixed maturity securities are state,
municipality, or U.S. Government obligations. 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 Selective’s fixed maturity securities
portfolio and its net income to decline and the default rate of its 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 the Company’s
portfolio could also cause the value of its fixed maturity securities portfolio
and its net income to decrease. For example,
rating
agency downgrades of monoline insurance companies during 2009 contributed to a
decline in the carrying value and the market liquidity of the Company’s
municipal bond investment portfolio. A reduction in the value of Selective’s
investment portfolio could have a material adverse effect on its business,
results of operations, and financial condition. Levels of write down are
impacted by Selective’s assessment of the impairment, including a review of the
underlying collateral of structured securities, and the Company’s intent and
ability to hold securities which have declined in value until recovery. If the
Company determines to reposition or realign portions of the portfolio where it
determines not to hold certain securities in an unrealized loss position to
recovery, then the Company will incur an other-than-temporary impairment (“OTTI”)
charge.
The current economic crisis has also
raised the possibility of future legislative and regulatory actions, in addition
to the enactment of Emergency Economic Stabilization Act of 2008 (the “EESA”), which could
further impact Selective’s business. Selective discusses government action
further in this section. Selective cannot predict whether or when such actions
may occur, or what impact, if any, such actions could have on its business,
results of operations and financial condition.
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
Selective’s results of operations, financial condition, and
liquidity.
Like many other property and casualty
insurance companies, Selective depends on income from its investment portfolio
for a significant portion of its revenue and earnings. Selective is exposed to
significant financial and capital markets risks, primarily relating to interest
rates, credit spreads, equity price risks, and the changes in market value of
its alternative investment portfolio. A decline could occur as a results 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 the Company’s portfolio, a decline in the
performance of the underlying collateral of Selective’s structured securities,
reduced returns on the Company’s other investments, including its portfolio of
alternative investments, or general market conditions.
Selective’s note payable and line of
credit are subject to certain debt-to-capitalization restrictions and net worth
covenants, which could also be impacted by a significant decline in investment
value, and 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, Selective could incur additional realized and unrealized losses
in future periods, which could have an adverse impact on the Company’s results
of operations, financial condition, debt and financial strength ratings, and its
ability to access capital markets as a result of realized losses, impairments,
and changes in unrealized positions.
There
can be no assurance that the Dodd-Frank Act or any other actions of the U.S.
Government, Federal Reserve, and other governmental and regulatory bodies to
reform the financial markets and provide future financial stability, will
achieve their intended effect.
A primary objective of the Dodd-Frank
Act, which was signed into law on July 21, 2010, is to reform the financial
markets and provide future financial stability. Among other things, the
Dodd-Frank Act heightens supervision and regulation of financial institutions,
requires strengthened capital levels, tightens oversight of credit rating
agencies, requires an overhaul of the regulation of the derivatives market, and
reforms and requires more transparency in governance and executive compensation.
The Dodd-Frank Act covers almost every aspect of financial regulation and
analysis of its practical implications is in its early stages. Implementation of
the Dodd-Frank Act will require an extraordinary amount of rulemaking and
regulators are given significant discretion. Consequently, its final shape and
practical impact are, in many respects, still to be determined. As a result, it
is presently unclear the full impact this legislation will have on Selective’s
operations.
However, if, even in the short-term,
the Dodd-Frank Act is not perceived by the investing public as a means to
effectively reform and provide stability to the financial markets, it could
result in a further deterioration of investor confidence in the U.S. economy and
financial markets, which could further increase constraints on the liquidity
available in the banking system and financial markets and increase pressure on
the price of Selective’s fixed income securities and equity portfolios. These
results could materially and adversely affect Company results of operations,
financial condition, liquidity, and the trading price of the Parent’s Common
Stock. In the event of
future
material deterioration in business conditions, Selective may need to raise
additional capital or consider other transactions to manage its capital position
and liquidity.
In addition, Selective is 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 intended to restore confidence in financial institutions and reduce
the future economic events like those of the recent past. These authorities may
also seek to exercise their supervisory and enforcement authority in new or more
robust ways. Such events could affect the way the Company conducts our business
and manages its capital, and may require Selective to satisfy increased capital
requirements. These developments, if they occurred could materially affect
Company results of operations, financial conditions, and liquidity.
Selective
is subject to the types of risks inherent in making alternative investments in
private limited partnerships.
Selective’s other investments 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 September 30, 2010, these types of investments represented 4% of
the Company’s total invested assets. The amount and timing of income from these
partnerships tends to be variable as a result of the performance and investment
state of the underlying investments. The timing of the distributions from the
partnerships, which depends on particular events relating to the underlying
investments, as well as the partnerships’ schedules for making distributions and
their need for cash, can be difficult to predict. As a result, the amount of
income that Selective records from these investments can vary substantially from
quarter-to-quarter. Pursuant to the various limited partnership agreements of
these partnerships, Selective is committed for the full life of each fund and
cannot redeem its investment with the general partner. Liquidation is only
triggered by certain clauses within the limited partnership agreements or at the
funds’ stated end date, at which time Selective will receive its final
allocation of capital and any earned appreciation of the underlying investments.
In addition, Selective is also subject to potential future capital calls in the
aggregate amount of approximately $92.1 million as of September 30,
2010.
Selective is also subject to the 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 are subject to a higher level of subjectivity and
unobservable inputs than substantially all of Selective’s other investments.
Pursuant to guidance under the FASB Accounting Standards Codification each of
these general partners are 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. Since Selective records its investments in these various
partnerships under the equity method of accounting, any decreases in the
valuation of these investments would negatively impact its results of
operations.
The
valuation of Selective’s investments include methodologies, estimations, and
assumptions which are subject to differing interpretations and could result in
changes to investment valuations that may adversely affect its results of
operations or financial condition.
Fixed maturity, equity, and short-term
investments, which are reported at fair value on the consolidated balance sheet,
represented the majority of Selective’s total cash and invested assets as of
September 30, 2010. As required under accounting rules, Selective has
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 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) and the lowest priority 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. Selective generally uses a combination of
independent pricing services and broker quotes to price its investment
securities. At September 30, 2010, approximately 18% and 82% of these securities
represented Level 1 and Level 2, respectively. However, prices provided by
independent pricing services 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 the Company’s consolidated financial statements and the
period-to-period changes in value could vary significantly. Decreases in value
may have a material adverse effect on Selective’s financial condition and may
result in an increase in non-cash OTTI charges.
The
determination of the amount of impairments taken on Selective’s investment is
highly subjective and could materially impact its results of operations or
financial position.
The determination of the amount of
impairments taken on Selective’s investments is based on its periodic evaluation
and assessment of its 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 the evaluations are
revised. There can be no assurance that Selective’s management has accurately
assessed the level of impairments taken as reflected in its financial
statements. Furthermore, additional impairments may need to be taken in the
future. Historical trends may not be indicative of future
impairments.
An investment in a fixed maturity or
equity security, is impaired if its fair value falls below its carrying value
and the decline is considered to be other-than-temporary. Selective regularly
reviews its entire investment portfolio for declines in value. Management’s
assessment of a decline in value includes, but is not limited to, current
judgment as to the financial position and future prospects of the security
issuer as well as general market conditions. For fixed maturity securities, if
the Company believes that a decline in the value of a particular investment is
temporary, and it does not have the intent to sell these securities and doer not
believe it will be required to sell these securities before recovery, Selective
records the decline as an unrealized loss in accumulated other comprehensive
income for those securities that are designated as available-for-sale.
Selective’s assessment of whether an equity security is
other-than-temporarily-impaired also includes its intent-to-hold the security in
the near term. If the Company believes the decline is other-than-temporary it
writes down the carrying value of the investment and record a realized loss in
its consolidated statements of income.
Additionally, Selective’s management
considers a wide range of factors about the security issuer and uses its best
judgment in evaluating the cause of the decline in the estimate fair value of
the security and in assessing the prospects for near-term recovery. Inherent in
management’s evaluation of the security are assumptions and estimates about the
operations of the issuer and its future earnings potential. Consideration in the
impairment evaluation process include, but are not limited to: (i) whether the
decline appears to be issuer or industry specific; (ii) the relationship of
market prices per share to book value per share at the date of acquisition and
date of evaluation; (iii) the price-earnings ratio at the time of acquisition
and date of evaluation; (iv) the financial condition and near-term prospects of
the issuer, including any specific events that may influence the issuer’s
operations; (v) the recent income or loss of the issuer; (vi) the independent
auditors’ report on the issuer’s recent financial statements; (vii) the dividend
policy of the issuer at the date of acquisition and the date of evaluation;
(viii) any buy/hold/sell recommendations or price projections published by
outside investment advisors; (ix) any rating agency announcements; (x) the
length of time and the extent to which the fair value has been less than
cost/amortized cost; and (xi) the evaluation of projected cash flows under
various economic and default scenarios.
Changes
in tax laws impacting marginal tax rates and/or the preferred tax treatment of
municipal obligations could adversely impact Selective’s business.
Tax legislation which changes the tax
preference of municipal obligations under current law could adversely affect the
market value of municipal obligations. At December 31, 2009, 40% of Selective’s
investment portfolio was invested in tax-exempt municipal obligations; as such,
the value of its investment portfolio could be adversely affected by any such
legislation. Additionally, any such changes in tax law could reduce the
difference between tax-exempt interest rates and taxable rates.
Risks Related to Selective’s
General Operations
Operational
risks, including human or systems failures, are inherent in Selective’s
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.
Selective believes that its modeling,
underwriting and information technology and application systems are critical to
its business. Selective expects its information technology and application
systems to remain an important part of its underwriting process and its ability
to compete successfully. Selective has also licensed certain systems and data
from third parties. The Company cannot be certain that it will have access to
these, or comparable, service providers, or that its information technology or
application systems will continue to operate as intended. A major defect or
failure in the Company’s internal controls or information technology and
application systems could result in management distraction; harm its reputation,
or increases in expenses. Selective believes appropriate controls and mitigation
procedures are in place to prevent significant risk of defect in its internal
controls, 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 the Company’s business.
Selective
depends on key personnel.
To a large extent, the success of
Selective’s businesses is dependent on its ability to attract and retain key
employees, in particular its senior officers, key management, sales, information
systems, underwriting, claims, and corporate personnel. Competition to attract
and retain key personnel is intense. While Selective has employment agreements
with a number of key managers, all of its employees are at-will employees and it
cannot ensure that it will be able to attract and retain key personnel. As of
December 31, 2009, Selective’s workforce had an average age of approximately 46
and approximately 20% of its workforce was retirement eligible under the
Company’s retirement and benefit plans.
If
Selective experiences difficulties with outsourcing relationships, its ability
to conduct its business might be negatively impacted.
Selective outsources certain business
and administrative functions to third parties and may do so increasingly in the
future. If Selective fails to develop and implement its outsourcing strategies
or its third party providers fail to perform as anticipated, it may experience
operational difficulties, increased costs and a loss of business that may have a
material adverse effect on the Company’s results of operations or financial
condition. By outsourcing certain business and administrative functions to third
parties, Selective may be exposed to enhanced risk of data security breaches.
Any breach of data security could damage the Company’s reputation and/or result
in monetary damages, which, in turn, could have a material adverse effect on the
Company’s results of operations or financial condition.
Selective
is subject to a variety of modeling risks which could have a material adverse
impact on its business results.
Selective relies on complex financial
models, such as predictive modeling, Risk Management Solutions, Enterprise Risk
Management, and the ALGO risk tool, 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 and/or faulty
assumptions used by these financial models, could lead to increased losses. For
example, the ALGO risk tool uses value-at-risk (“VaR”) as a method to
evaluate portfolio risk. VaR is a probabilistic method of measuring the
potential loss in portfolio value over a given time period and for a given
distribution of historical returns. Portfolio risk, as measured by VaR, is
affected by four primary risk factors: asset concentration, asset volatility,
asset correlation, and systematic risk. While VaR models are relatively
sophisticated, the quantitative market risk information generated is limited by
the assumptions and parameters established in creating the related models.
Selective believes that
statistical
models alone do not provide a reliable method of monitoring and controlling
market risk. Therefore, the models are tools and do not substitute for the
experience or judgment of senior management.
Selective
has significant deferred tax assets which it may be unable to use if it does not
generate sufficient future taxable income.
Selective has no net operating loss
carryforward, capital loss carryforward, and tax credit carryforward as of
December 31, 2009. The Company has sufficient capital loss carryback capacity as
of December 31, 2009 to absorb the current realized capital losses. In the
future, the Company would be required to establish a valuation allowance if: (i)
it runs out of capital loss carryback capacity; (ii) there are no valid tax
planning strategies to generate taxable income of the appropriate character
(i.e. ordinary loss or capital loss); and (iii) it is determined that it is more
likely than not that sufficient future income of the appropriate character will
be generated. The establishment of a valuation allowance would have an adverse
effect on Selective’s financial condition and results of
operations.
Risks Related to Selective’s
Corporate Structure and Governance
Selective
is a holding company and its ability to declare dividends to its shareholders
and pay indebtedness may be limited because its insurance subsidiaries are
regulated.
Restrictions on the ability of the
Insurance Subsidiaries to pay dividends, loans, or advances to the Company may
materially affect its ability to pay dividends on its Common Stock or repay its
indebtedness.
Dividends, loans, or advances to the
Company from its insurance subsidiaries are subject to the approval and/or
review of the insurance regulators in the states where the subsidiaries are
organized. The standards for review of the 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
the Company from its insurance subsidiaries historically have been approved,
Selective can make no assurance that future dividends and loans will be
approved.
Because
Selective is an insurance holding company and a New Jersey corporation,
potential acquirers may be discouraged and the value of its Common Stock could
be adversely affected.
Because Selective is an insurance
holding company that owns insurance subsidiaries, anyone who seeks to acquire
10% or more of Company stock must seek prior approval from the insurance
regulators in the states in which Selective’s subsidiaries are organized and
must file extensive information regarding its business operations and
finances.
Because Selective is organized under
New Jersey law, provisions in its certificate of incorporation (as amended) also
may discourage, delay, or prevent it from being acquired,
including:
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·
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Supermajority
voting requirements and fair price to approve business
combinations;
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·
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Supermajority
voting requirements to amend the foregoing provisions;
and
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·
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The
ability of the Board to issue “blank check” preferred
stock.
|
Under the New Jersey Shareholders’
Protection Act, Selective may not engage in specified business combinations with
a shareholder having indirect or direct beneficial ownership of 10% or more of
the voting power of the Company’s outstanding stock (an “interested
shareholder”) for a period of five years after the date the shareholder
became an interested shareholder, unless the business combination is approved by
Selective’s Board before the date they became an interested shareholder.
Selective also may never engage in any business combination with any interested
shareholder except: (i) a business combination approved by the Board prior to
the date they became an interested shareholder; (ii) a business combination
approved by two-thirds of its shareholders (other than the interested
shareholder); or (iii) a business combination that satisfies certain price
criteria.
These provisions of Selective’s
certificate of incorporation and New Jersey law could have the effect of
depriving its stockholders of an opportunity to receive a premium over its
Common Stock’s prevailing market price in the event of a hostile takeover and
may adversely affect the value of the Company’s Common Stock.
THE
PLAN
The
following is a question and answer description of the Plan:
Purpose
|
1.
|
What is the purpose of the
Plan?
|
The
purpose of the Plan is to provide holders of record of shares of our Common
Stock with a convenient method of investing cash dividends and making optional
cash payments to purchase additional shares of our Common Stock without paying
any brokerage commissions or service charges. Since shares will be purchased
from us, we will receive additional funds for general corporate
purposes.
Administration
|
2.
|
Who administers the
Plan?
|
We have
designated Wells Fargo Bank, N.A., a federally chartered institution, as
administrator of the Plan. As Plan administrator, Wells Fargo maintains records,
sends statements of account and performs other duties relating to the Plan. If
Wells Fargo resigns or otherwise ceases to act as Plan administrator, we will
appoint a new administrator or make other arrangements as we deem appropriate
for administration of the Plan. All questions concerning your Plan account
should be directed to:
Wells
Fargo Shareowner Services
P.O.
64854
St. Paul,
Minnesota 55164-0854
You may
also contact Wells Fargo via the Internet at www.shareowneronline.com or by
telephone at 1-866-877-6351. If you are calling from outside the United States
and Canada, please call 651-450-4064.
|
3.
|
How will shares be held under
the Plan?
|
Shares
purchased under the Plan will be registered in your name and credited in
book-entry form to your Plan account. However, you may request that certificates
be issued to you for any number of whole shares credited to your Plan account
(see Question 22).
Features
|
4.
|
What are the features of the
Plan?
|
Participants
in the Plan may:
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·
|
elect
to have cash dividends on all or part of their Common Stock automatically
reinvested in additional shares of Common
Stock.
|
|
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·
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purchase
additional shares of Common Stock by making voluntary cash payments of a
minimum of $100 per purchase up to a maximum of $1,000 per calendar
quarter.
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·
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avoid
commissions and service fees in connection with purchases of shares under
the Plan.
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·
|
invest
the full amount of dividends and any optional cash payments, because
fractional shares are credited to participants’
accounts.
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·
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avoid
the need for safekeeping of certificates for shares credited to their Plan
accounts.
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·
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simplify
record-keeping by receiving quarterly statements of
accounts.
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5.
|
What are some disadvantages of
the Plan?
|
Disadvantages
of the Plan include:
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·
|
if
you purchase shares through the Plan, the purchase date will be the
applicable dividend payment date and the purchase price will be the
average of the daily high and low sales prices of our Common Stock as
reported on the NASDAQ Global Select Market for the period of five trading
days ending with the applicable dividend payment date. Consequently, you
will not be able to direct the purchase price and you may pay a higher
price for shares purchased under the Plan than for shares purchased
outside of the Plan on the purchase
date.
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·
|
if
you elect to sell any shares credited to your Plan account through Wells
Fargo, you will not be able to choose the broker/dealer or the time or
price at which Wells Fargo sells your shares. The price of our Common
Stock could decline before the sale is
made.
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·
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no
interest is paid on optional cash payments pending
investment.
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Participation
|
6.
|
Who is eligible to participate
in the Plan?
|
All
stockholders of record of shares of our Common Stock are eligible to participate
in the Plan. You are a stockholder of record if your shares of Common Stock are
registered in your own name. If your shares are registered in a name other than
your own (e.g., in the name of a broker, bank or nominee) you are considered a
beneficial owner of shares and you must either become a stockholder of record by
having the number of shares you wish to have in the Plan transferred into your
name or make appropriate arrangements with your broker, bank or nominee to
participate in the Plan on your behalf. If you participate in the Plan through
your broker, bank or nominee, your participation may be on terms and conditions
which differ from the terms and conditions described in the Plan, and the terms
and conditions set by your broker, bank or nominee will govern. We reserve the
right to terminate the participation of beneficial owners through brokers, banks
and nominees. Optional cash payments are not available to beneficial
owners.
|
7.
|
How does an eligible
stockholder join the Plan?
|
If you
are a stockholder of record of shares of our Common Stock, you may join the Plan
through the Internet at www.shareowneronline.com or by completing and signing an
Enrollment Authorization Form and returning it to Wells Fargo. You may obtain an
Enrollment Authorization Form at any time by written request to Wells Fargo, by
telephone at 1-866-877-6351 or contacting Wells Fargo via the Internet at
www.shareowneronline.com. If your shares are registered in the name of a broker,
bank or nominee, you may join the Plan by becoming a stockholder of record and
completing an Enrollment Authorization Form or by making appropriate
arrangements with your broker, bank or nominee to participate in the Plan on
your behalf.
|
8.
|
When may an eligible
stockholder join the Plan?
|
If you
are eligible to participate in the Plan, you may join the Plan at any time. If
Wells Fargo receives your completed Enrollment Authorization Form on or before
the record date for a dividend, or, if you are a beneficial owner of shares,
your broker, bank or nominee appropriately advises Wells Fargo of your
participation before the record date for a dividend, that dividend will be
reinvested in shares of Common Stock beginning with that dividend payment date.
If Wells Fargo receives the Enrollment Authorization Form or appropriate notice
from a broker, bank or nominee of a beneficial owner of shares after the record
date, that dividend will be paid in cash, and reinvestment of dividends under
the Plan will begin on the succeeding dividend payment date. Historically, we
have fixed dividend record dates generally on or about the fifteenth day of each
February, May, August and November, and dividend payment dates generally on or
about the first day of each March, June, September and December. All optional
cash payments received prior to any dividend payment date (see Questions 16, 17,
18, and
19) will
be invested, together with any reinvested dividends, on the next dividend
payment date. The Plan does not guarantee the payment of future dividends, which
will be paid only if, as and when declared by our board of directors in its sole
discretion.
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9.
|
Does the Plan permit partial
dividend reinvestment?
|
Yes. You
may elect to have dividends on only a portion of your shares of Common Stock
reinvested in Common Stock under the Plan. You can elect to reinvest dividends
on less than all of your shares of Common Stock by making an election on the
Enrollment Authorization Form under “Partial Dividend
Reinvestment.”
|
10.
|
What does the Enrollment
Authorization Form provide?
|
The
Enrollment Authorization Form provides eligible stockholders of record a method
to purchase additional shares of our Common Stock through the following
investment options:
A. “FULL
DIVIDEND REINVESTMENT.” If you elect the “Full Dividend Reinvestment” option on
your Enrollment Authorization Form, Wells Fargo will reinvest for the purchase
of additional shares of Common Stock in accordance with the Plan all cash
dividends on all of the shares of Common Stock registered in your name,
including shares credited to your Plan account. Shares purchased with reinvested
dividends will be credited to your Plan account.
B. “PARTIAL
DIVIDEND REINVESTMENT.” If you elect the “Partial Dividend Reinvestment”
option on your Enrollment Authorization Form, you will receive cash dividends on
the number of shares you designate from those shares registered in your name,
including shares credited to your Plan account. Wells Fargo will reinvest
for the purchase of additional shares of Common Stock in accordance with the
Plan dividends paid on any remaining shares. Shares purchased with
reinvested dividends will be credited to your Plan account.
C. “VOLUNTARY
CASH PAYMENTS ONLY” (NO DIVIDEND REINVESTMENT). You may elect the
“Voluntary Cash Payments Only” option on your Enrollment Authorization Form to
purchase additional shares of Common Stock by making optional cash payments of a
minimum of $100 per purchase up to a maximum of $1,000 per calendar quarter in
accordance with the Plan. Dividends will be paid in cash under this
option.
You can have your cash dividends not
being reinvested transferred directly to your bank for deposit. For electronic
direct deposit of dividend funds, contact Wells Fargo to request a Direct
Deposit of Dividends Authorization Form, complete the form, and return the form
to Wells Fargo. Be sure to include a voided check for checking accounts or
savings deposit slip for savings accounts. If your stock is jointly owned, all
owners must sign the form.
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11.
|
How can a participant change
elections under the Plan?
|
You may
change your election by signing a new Enrollment Authorization Form and
forwarding it to Wells Fargo, as Plan administrator. You may also change your
election or discontinue reinvesting dividends at any time by accessing your Plan
account at www.shareowneronline.com, by calling Wells Fargo at 1-866-877-6351 or
by writing to Wells Fargo at the address listed in Question 2. Wells Fargo needs
to receive your request on or before the record date for any applicable dividend
payment date in order for the requested change to be effective for that
dividend. If your request is received after the record date, then the requested
change will not be effective until the next dividend payment date. If your
shares are held of record by a broker, bank or nominee, you must make
appropriate arrangements with that institution to change your
election.
Costs
|
12.
|
Are there any out-of-pocket
costs to participants in the
Plan?
|
We will
pay all costs of administration of the Plan. There are no service fees or
brokerage commissions charged to participants in connection with the purchase of
shares under the Plan. If you request that Wells Fargo sell whole shares of
Common Stock held by you under the Plan or if any fractional shares are sold for
your account you
will be
responsible for any service fees, brokerage commissions and other costs of sale
and those costs will be deducted from the proceeds of the sale.
As of the
date of this prospectus, the service fees and brokerage commissions charged by
Wells Fargo for each sale of shares under the Plan are fifteen dollars ($15) per
sale, plus twelve cents ($0.12) per share sold and if selected to have the net
sale proceeds direct deposited, a five dollar ($5) per transaction fee. Wells
Fargo may change from time to time the amount of service fees and brokerage
commissions charged to participants. Please contact Wells Fargo for the amount
of service fees and brokerage commissions which are in effect from time to time.
We presently do not charge service fees to participate in the Plan, but we
reserve the right to establish service fees in connection with the Plan in the
future, and you will be notified before any changes take effect.
Purchases
|
13.
|
What is the source of Common
Stock purchased through the
Plan?
|
Shares
purchased by participants under the Plan are purchased directly from us from our
newly issued Common Stock.
|
14.
|
What is the purchase price of
shares purchased under the
Plan?
|
The
purchase price of shares of our Common Stock purchased by each participant in
the Plan with reinvested dividends on any dividend payment date and the purchase
price of shares purchased with any optional cash payment on a dividend payment
date is the average of the daily high and low sales prices of our Common Stock
as reported on the NASDAQ Global Select Market for the period of five trading
days ending with the dividend payment date (or the period of five trading days
immediately preceding the dividend payment date, if the NASDAQ Global Select
Market is closed on the dividend payment date).
|
15.
|
How many shares will be
purchased for participants?
|
The
number of shares purchased for you depends on the amount of dividends you choose
to reinvest under the Plan and the amount of any optional cash payments and the
purchase price of the shares. Your Plan account will be credited with that
number of shares, including fractions computed to three decimal places, equal to
the total amount invested by you divided by the purchase price per share of
Common Stock.
Optional
Cash Payments
|
16.
|
How does the optional cash
payment option work?
|
Stockholders
of record can make optional cash payments to purchase our Common Stock. Wells
Fargo will apply optional cash payments received before a dividend payment date
(see Question 18) to the purchase of additional shares on the dividend payment
date. Purchases will be made at the price determined in accordance with the
procedure described in Question 14. If you elect to make optional cash purchases
only and do not wish to have dividends on those shares reinvested, you must so
specify by checking the box marked “Voluntary Cash Payments Only” on your
Enrollment Authorization Form. Only stockholders of record may make optional
cash payments to purchase Common Stock. Consequently, if your shares are
registered in the name of a broker, bank or nominee and you wish to make
optional cash purchases, you must become a stockholder of record by having
shares transferred into your name.
|
17.
|
How do I make an optional cash
payment?
|
You can
make optional cash payments to purchase additional shares of our Common Stock
when enrolling in the Plan by enclosing a check payable to “Wells Fargo” with
the Enrollment Authorization Form. Optional cash payments must be at least $100
per purchase and may not exceed $1,000 in any calendar quarter. All payments
must be in United States dollars and drawn on a United States bank. Do not send
cash, money orders, or travelers checks. Each optional cash purchase after
enrollment must be made by completing a transaction form. You can find
a
transaction form on your quarterly statement of account or obtain the form from
Wells Fargo. There is no obligation to make any optional cash purchase.
Dividends or shares purchased with optional cash payments made after enrollment
will be invested in additional shares or paid in cash depending upon the
election you last made.
During
the period that an optional cash payment is pending, the collected funds in the
possession of Wells Fargo may be invested in certain Permitted Investments. For
purposes of this Plan, “Permitted Investments” means any money market mutual
funds registers under the Investment Company Act (including those affiliated
with Wells Fargo or for which Wells Fargo or any of its affiliates provides
management advisory or other services) consisting entirely of: (i) direct
obligations of the United States of America; or (ii) obligations fully
guaranteed by the United States of America. The risk of any loss from Permitted
Investments will be the responsibility of Wells Fargo. Investment income from
Permitted Investments will be retained by Wells Fargo.
If any
optional cash contribution is returned for any reason, Wells Fargo will remove
from the participant’s account any shares purchases upon prior credit of the
funds, and will sell these shares. Wells Fargo may sell other shares in the
account to recover a thirty five dollar ($35) returned funds fee for each
optional cash contribution returned unpaid for any reason and may sell
additional shares as necessary to cover any market loss incurred by Wells
Fargo.
|
18.
|
When will optional cash
payments be invested?
|
Optional
cash payments are invested once each quarter on the dividend payment date for
that quarter. Under no circumstances will interest be paid on optional cash
payments. Dividend payment dates historically have been on or about the first
day of March, June, September and December (see Question 8). Wells Fargo will
return to you any optional cash payment before it is invested to purchase shares
upon written request, but only if Wells Fargo receives your written request at
least two business days before the purchase date.
|
19.
|
What are the minimum and
maximum amounts for optional cash
payments?
|
The
minimum optional cash payment is $100 per purchase and the maximum is $1,000 per
calendar quarter.
Reports
to Participants
|
20.
|
What kind of reports will be
sent to participants in the
Plan?
|
Following
the end of each calendar quarter, Wells Fargo will send to each participant a
quarterly statement of account showing dividends paid, amounts invested,
purchase price, shares purchased, and other information. These statements are
your continuing record of the cost of purchases and should be retained for
income tax purposes. In addition, each participant will receive copies of the
communications sent to all record holders of our Common Stock, and Internal
Revenue Service information for reporting dividend income paid and any Federal
income tax withheld under the Plan. You may also view year-to-date transaction
activity as well as activity in prior years by accessing your Plan account via
the Internet at www.shareowneronline.com.
Dividends
on Fractions of Shares
|
21.
|
Will I be credited with
dividends on fractions of
shares?
|
Yes.
Dividends on fractions of shares of Common Stock, as well as whole shares will
be credited to your account. (see Question 15).
Certificates
for Shares
|
22.
|
Will certificates be issued
for shares purchased under the
Plan?
|
The
number of shares credited to your Plan account in book-entry form will be shown
on your quarterly statement of account. You will not receive certificates for
your Plan account shares unless you request Wells Fargo to deliver certificates
to you. You may obtain a certificate for some or all of the whole shares
credited to your Plan account at any time by:
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|
·
|
accessing
your Plan account via the Internet at
www.shareowneronline.com;
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|
|
·
|
calling
Wells Fargo at 1-866-877-6351;
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|
|
·
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indicating
your request on a transaction form and mailing it to Wells Fargo;
or
|
|
|
·
|
writing
to Wells Fargo at the address listed in Question
2.
|
Any
remaining whole shares and fractions of shares will continue to be credited to
your account. Certificates for fractions of shares are not issued under any
circumstances.
|
23.
|
In whose name will
certificates be registered when issued to
participants?
|
A Plan
account is maintained in the name in which the certificates or Direct
Registration (“DRS”) shares of the participant were registered at the time the
participant joined the Plan. Unless you otherwise direct, whole DRS shares will
be issued in the same name in which the account is maintained. Should you want
certificates issued in any name other than that of the holder of record
participating in the Plan, you must send a written request to Wells Fargo to
that effect, together with a transfer of ownership form with all signatures
having a “medallion signature guarantee.” A medallion signature guarantee is a
signature by an institution, generally commercial banks, trust companies and New
York Stock Exchange member broker/dealers, that participate in the medallion
guarantee program. No other form of signature verification will be accepted. You
may obtain a transfer of ownership form via the Internet at
www.shareowneronline.com, by calling Wells Fargo at 1-866-877-6351 or by writing
to Wells Fargo at the address listed in Question 2. In the event of
re-registration, a participant will be responsible for compliance with any
applicable transfer requirements.
Deposit
of Certificates
|
24.
|
Does the Plan provide for
deposit of certificates for
safekeeping?
|
You may
deposit with Wells Fargo for safekeeping any certificates for shares of our
Common Stock which are registered in your name. Your certificate shares will
then be credited to your Plan account in book-entry form. The advantages of
holding shares in book-entry form in your Plan account are protection against
certificate loss, theft and damage. There is no charge for this service. If you
desire to deposit any of your certificates for safekeeping, you should send the
certificates to Wells Fargo at the address listed in Question 2, together with a
completed transaction form or written instructions indicating the deposit. You
should send these certificates by registered mail, return receipt requested, and
insure them for an amount sufficient to cover the indemnification bond premium
that you would be charged if the certificates were lost or destroyed before
Wells Fargo receives them. You should not endorse the certificates.
Transfer
and Sale of Shares in Plan Accounts
|
25.
|
Can a participant transfer
Plan shares?
|
If you
desire to change the ownership of all or part of your shares credited to your
Plan account by gift or otherwise, you may effect the transfer by mailing a
properly completed and executed transaction form to Wells Fargo. Transaction
forms for share transfers can be found in quarterly statements of account and
also may be obtained from Wells Fargo. Transfers of less than all of your shares
must be made in whole share amounts. Your signature on a share transfer request
must contain a “medallion signature guarantee.” A medallion signature guarantee
is a signature by an institution, generally commercial banks, trust companies
and New York Stock
Exchange
member broker/dealers, that participate in the medallion guarantee program. No
other form of signature verification will be accepted.
Shares
transferred will be credited to the transferee’s Plan account in book-entry
form. If the transferee is not already a participant, Wells Fargo will open a
Plan account in the name of the transferee and the account will be enrolled
under the full dividend reinvestment option unless you specify otherwise. All
dividends on shares transferred to the transferee’s Plan account will be
reinvested in accordance with the terms of the Plan.
You may
not pledge, assign or grant a security interest in any shares held in your
account under the Plan and any attempted action will be void. If you wish to
pledge, assign or grant a security interest, you must first request shares
credited to DRS or a certificate representing the shares to be issued in your
name.
|
26.
|
How does a participant sell
shares held in the Plan?
|
You can
sell some or all of your shares of Common Stock credited to your Plan account
by:
|
|
·
|
accessing
your Plan account via the Internet at
www.shareowneronline.com;
|
|
|
·
|
calling
Wells Fargo at 1-866-877-6351;
|
|
|
·
|
completing
a transaction form and mailing it to Wells Fargo;
or
|
|
|
·
|
providing
clear written instructions to Wells Fargo, including the signature of all
persons in whose name the account is
maintained.
|
All sale
requests having an anticipated market value of $25,000 or more must be submitted
in writing. Also, all sale requests made within thirty (30) days of a
participant’s address change must be submitted in writing.
Wells
Fargo will sell shares for you through brokers or dealers selected by it in its
sole discretion. Shares being sold for you may be aggregated with those shares
of other participants who have requested sales. The proceeds you will receive
are based on the weighted average price at which the shares were sold, less
applicable service fees, brokerage commissions and any other costs of sale, and
any applicable taxes. After settlement of the sale, Wells Fargo will send you a
check for the proceeds. You will not be able to choose the broker/dealer or the
time or price at which your shares are sold. Wells Fargo will seek to effect
sales promptly after it receives sale instructions. Wells Fargo will make every
effort to process your sale order on the next business day following receipt of
your properly completed request (sale requests involving multiple transactions
may experience a delay). Wells Fargo will not be liable for any claim arising
out of failure to sell stock on a certain date or at a specific price. This risk
should be evaluated by the participant and is a risk that is borne solely by the
participant. Consequently, the price of our Common Stock could decline between
the time you send your request to sell and the time your shares are sold. You
should carefully consider this risk, a risk that you bear solely.
If you
are submitting a request to sell all or part of your shares, and you are
requesting net proceeds to be automatically deposited to a bank checking or
savings account, you must provide a voided blank check for a checking account or
blank savings deposit slip for a savings account. If you are unable to provide a
voided check or deposit slip, your written request must have your signature(s)
medallion guaranteed by an eligible financial institution for direct deposit.
Requests for automatic deposit of sale proceeds that do not provide the
requested documentation will no be honored and a check for the net proceeds will
be issued.
Alternatively,
if you elect to sell shares through your own broker, you can request that Wells
Fargo send you a stock certificate representing the whole number of shares you
want to sell (see Question 22).
You may
not pledge, assign or grant a security interest in any shares held in your
account under the Plan and any attempted action will be void. If you wish to
pledge, assign or grant a security interest in your shares, you must request
shares credited to DRS or a certificate representing the shares be issued in
your name.
Termination
of Participation
|
27.
|
How do I terminate my
participation in the Plan?
|
You may
terminate your participation in the Plan at any time by:
|
|
·
|
accessing
your Plan account via the Internet at
www.shareowneronline.com;
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·
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calling
Wells Fargo at 1-866-877-6351;
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·
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completing
a transaction form indicating a full withdrawal and mailing it to Wells
Fargo; or
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·
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writing
to Wells Fargo at the address listed in Question
2.
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Upon
terminating your participation, you may elect to:
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·
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receive
shares credited to DRS or a certificate for all of the whole shares
credited to your account and a check for the proceeds from the sale of any
fractional share (less applicable service fees, brokerage commissions and
other costs of sale, and applicable taxes);
or
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·
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instruct
Wells Fargo to sell all shares credited to your account and receive a
check for the proceeds (less applicable service fees, brokerage
commissions and other costs of sale, and applicable
taxes).
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All
provisions of the Plan relating to the sale of shares through the Plan apply in
terminating your participation in the Plan. If a request to terminate
participation is received after a record date for a dividend payment but before
the dividend payment date, the dividend on shares in your account will be paid
in cash. Wells Fargo will continue to hold any stock certificates deposited with
it for safekeeping unless you request otherwise. After termination, you may
re-enroll in the Plan by submitting a new Enrollment Authorization Form and
complying with all other enrollment procedures.
Certain
Federal Income Tax Consequences
CIRCULAR
230 DISCLOSURE: INTERNAL REVENUE SERVICE (“SERVICE”) REGULATIONS PROVIDE THAT,
FOR THE PURPOSE OF AVOIDING CERTAIN PENALTIES UNDER THE INTERNAL REVENUE CODE OF
1986, AS AMENDED (THE “CODE”), TAXPAYERS MAY RELY ONLY ON OPINIONS OF COUNSEL
THAT MEET SPECIFIC REQUIREMENTS SET FORTH IN THE REGULATIONS, INCLUDING, WITHOUT
LIMITATION, A REQUIREMENT THAT SUCH OPINIONS CONTAIN EXTENSIVE FACTUAL AND LEGAL
DISCUSSION AND ANALYSIS. ANY TAX ADVICE THAT MAY BE CONTAINED IN THIS PROSPECTUS
DOES NOT CONSTITUTE AN OPINION THAT MEETS THE REQUIREMENTS OF THE REGULATIONS.
ANY SUCH TAX ADVICE THEREFORE CANNOT BE USED, AND WAS NOT INTENDED OR WRITTEN TO
BE USED, FOR THE PURPOSE OF AVOIDING ANY U.S. FEDERAL TAX PENALTIES THAT THE
SERVICE MAY ATTEMPT TO IMPOSE. BECAUSE ANY SUCH TAX ADVICE COULD BE VIEWED AS A
“MARKETED OPINION” UNDER THE SERVICE REGULATIONS, THOSE REGULATIONS REQUIRE US
TO STATE THAT ANY SUCH TAX ADVICE WAS WRITTEN TO SUPPORT THE “PROMOTION OR
MARKETING” OF THE MATTERS SET FORTH IN THIS PROSPECTUS. YOU SHOULD SEEK ADVICE
BASED ON YOUR PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX
ADVISOR.
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28.
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What are the federal income
tax consequences of participation in the
Plan?
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The
following information summarizes certain federal income tax consequences of
participation in the Plan. The information is not intended to be a complete
description of all federal income tax consequences, nor is it intended to be a
description of any state, local or foreign tax consequences, and it does not
discuss all aspects of federal income taxation that may be relevant to you in
light of your personal investment circumstances or if you are subject to special
treatment under the Code. The description of federal income tax consequences may
be affected by
future
changes in laws, Treasury regulations and rulings and court decisions, possibly
with retroactive effect. You should consult your own tax advisor regarding the
income tax consequences of participation in the Plan.
Under
federal tax law, you will be considered to have received a taxable dividend in
an amount equal to the fair market value of the shares purchased with reinvested
dividends on the dividend payment date. The tax basis of shares purchased with
reinvested dividends will also equal the fair market value of the shares
acquired with the reinvested dividends. For purposes of this paragraph, the
“fair market value” of shares acquired with reinvested dividends generally will
be determined under applicable Treasury regulations. This amount may be higher
or lower than the actual purchase price of the shares. Under those regulations,
if the Common Stock traded on the dividend payment date, the fair market value
is the average of the high and low sales prices as reported on the NASDAQ Global
Select Market for that date. If the Common Stock did not trade on the dividend
payment date, the fair market value is the weighted average of the mean of the
high and low sales prices on the nearest trading dates before and after the
dividend payment date. Furthermore, under proposed Treasury regulations, the
basis of your stock held in a Plan account and acquired after January 1, 2011 by
the reinvestment of dividends may be determined under the average basis method.
These rules are complicated and you should consult your own tax advisor
regarding the income tax consequences of participation in the Plan.
Your tax
basis in shares purchased with optional cash payments will be the actual
purchase price of the shares. Your holding period for shares acquired under the
Plan will begin on the day following the date of purchase. If the purchase price
of shares purchased with optional cash payments is less than the fair market
value of those shares for federal income tax purposes, as described above, you
will be deemed to have received a dividend equal to the difference between the
purchase price and the fair market value.
You will
not realize any taxable income merely from the receipt of certificates for
shares in your account. You will realize gain or loss when shares are sold or
exchanged, whether the sale or exchange is requested or takes place after
withdrawal from, or termination of, the Plan and, in the case of a fractional
share, when you receive a cash payment for a fraction of a share credited to
your account. The amount of the realized gain or loss is the difference between
the amount you receive for the shares or fraction of a share and the tax basis
of the shares or fraction of a share.
You will
be subject to federal income tax withholding on dividends paid or reinvested if
you fail to properly furnish your social security number or other taxpayer
identification number, or furnish an incorrect social security number or
taxpayer identification number, or fail to properly report interest and
dividends. If federal income taxes are required to be withheld, we will withhold
the required taxes from dividends or proceeds from the sale of shares. Dividends
reinvested will be equal to the dividends paid, less the amount of tax
withheld.
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29.
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How are income tax withholding
provisions applied to foreign
stockholders?
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If you
are a foreign stockholder whose dividends are subject to United States income
tax withholding, the amount of the tax to be withheld will be deducted from the
amount of dividends to determine the amount to be reinvested.
Optional
cash payments received from foreign stockholders must be in United States
dollars and drawn on a United States bank and will be invested in the same
manner as payments from other participants.
Other
Information
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30.
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What happens when a
participant sells or transfers all of the shares registered in the
participant’s name (not including shares credited to a participant’s Plan
account)?
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If you
dispose of all shares of Common Stock registered in your name (not including
shares credited to your Plan account), Wells Fargo will continue to reinvest the
dividends on shares credited to your Plan account, subject to your right to
terminate your participation in the Plan at any time.
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31.
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What happens when a
participant sells or transfers a portion of the shares registered in the
participant’s name (not including shares held under the
Plan)?
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If you
are reinvesting the cash dividends on all of the Common Stock registered in your
name (not including shares credited to your Plan account) and dispose of a
portion of those shares, Wells Fargo will continue to reinvest the dividends on
the remainder of the shares, subject to your right to terminate your
participation in the Plan at any time.
If you
are reinvesting the cash dividends on less than all of the Common Stock
registered in your name, and dispose of a portion of those shares, Wells Fargo
will pay cash dividends on the same number of shares you previously designated
before the disposition. If the number of remaining shares is less than the
number of shares you previously designated for cash dividends Wells Fargo will
pay cash dividends on all of your remaining shares.
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32.
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lf we have a rights offering,
how will the rights on the Plan shares be
handled?
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In the
case of a rights offering to holders of our Common Stock, if you are entitled to
participate in the offering, you will receive rights based upon the whole shares
of the Common Stock registered in your name as of the record date for that
rights offering.
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33.
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What happens if we issue a
dividend payable in stock or declare a stock
split?
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Any
shares distributed by us in connection with a stock dividend or stock split on
shares of Common Stock registered in your name, including shares credited to
your Plan account, will be credited to your Plan account.
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34.
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How will a participant’s
shares be voted at a meeting of
stockholders?
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Shares of
Common Stock credited to your Plan account are voted as you direct. You will
receive proxy materials, including a proxy card, in connection with any annual
or special meeting of stockholders. The proxy will apply to all whole shares
registered in your name, including all whole shares credited to your Plan
account. The proxy will be voted as you direct. If no instructions are indicated
on a properly signed and returned proxy card, all of your whole shares — those
registered in your name, including those shares credited to your Plan account —
will be voted in accordance with the recommendations of Selective’s
Board.
If you
are a beneficial owner of shares who participates in the Plan through a broker,
bank or nominee, you must make appropriate arrangements with the broker, bank or
nominee regarding the voting of those shares.
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35.
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What are the responsibilities
of Selective and Wells Fargo under the
Plan?
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Wells Fargo is acting solely as agent
of Selective and owes no duties, fiduciary or otherwise, to any other person by
reason of the Plan, and no implied duties, fiduciary or otherwise, will be read
into the Plan.
Wells Fargo undertakes to perform the
duties and only the duties as are expressly set forth in this prospectus, to be
performed by it, and no implied covenants or obligations will be read into the
Plan against the Plan, Wells Fargo or the Company.
In the absence of negligence or willful
misconduct on its part, Wells Fargo, whether acting directly or through agents
or attorneys will not be liable for any action taken, suffered or omitted or for
any error in judgment made by it in the performance of its duties under the
Plan. In no event will Wells Fargo be liable for special, indirect or
consequential loss or damage of any kind whatsoever (including but not limited
to lost profit), even if Wells Fargo has been advised of the likelihood of the
loss or damage and regardless of the form of action.
Wells Fargo will: (i) not be required
to and will make no representations and have no responsibilities as to the
validity, accuracy, value or genuineness of any signatures or endorsements,
other than its own; and (ii) not be obligated to take any legal action under the
Plan that might, in its judgment, involve any expense or liability, unless it
has been furnished with reasonable indemnity.
Wells Fargo will not be responsible or
liable for any failure or delay in the performance of its obligations under the
Plan arising out of or caused, directly or indirectly, by circumstances beyond
its reasonable control, including, without limitations, acts of God;
earthquakes; fires; floods; wars; civil or military disturbances; sabotage;
epidemics; riots; interruptions, loss or malfunctions of utilities; computer
(hardware or software) or communications services; accidents; labor disputes;
acts of civil or military authority or governmental actions; it being understood
that Wells Fargo will use reasonable efforts which are consistent with accepted
practices in the banking industry to resume performance as soon as practicable
under the circumstances.
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36.
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Can the Plan be changed or
discontinued?
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We
reserve the right to amend, suspend, modify or terminate the Plan at any time.
We will send notice of any amendment, suspension, modification or termination to
all participants. Upon a termination of the Plan, any uninvested optional cash
payments will be returned. Any amendment, suspension, modification or
termination of the Plan will not affect your rights as a
stockholder.
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37.
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Who regulates and interprets
the Plan?
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Selective
regulates and interprets the Plan in its absolute discretion as it deems
necessary or desirable and may direct Wells Fargo regarding the resolution of
questions concerning the operation of the Plan.
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38.
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Is the Plan subject to ERISA?
Is it a tax-qualified plan?
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The Plan is not subject to any
provisions of the Employee Retirement Income Security Act of 1974, as amended.
The Plan is not a “qualified plan” within the meaning of Section 401(a) of the
Code.
DESCRIPTION
OF CAPITAL STOCK
General
The
authorized capital stock of Selective consists of 360,000,000 shares of Common
Stock, $2.00 par value, and 5,000,000 shares of preferred stock, without par
value. As of September 30, 2010, there were issued and outstanding 53,512,025
shares of Common Stock. Selective had no preferred stock issued and
outstanding.
The
following is a description of the material terms of Selective’s capital
stock:
Common
Stock
All
shares of Common Stock have equal rights. The holders of shares of Common Stock,
subject to the preferential rights of the holders of any shares of the Company’s
preferred stock, are entitled to dividends when and as declared by the Board.
The holders of Common Stock have one vote per share on all matters submitted to
a vote of Selective’s stockholders and the right to its net assets in
liquidation after payment of any amounts due to creditors and any amounts due to
the holders of the Company’s preferred stock. Holders of shares of Common Stock
are not entitled as a matter of right to any preemptive or subscription rights
and are not entitled to cumulative voting for directors. All outstanding shares
of Common Stock are, and the shares of Common Stock issued under the Plan will
be, fully paid and nonassessable.
Selective’s
By-laws provide that the annual meeting of stockholders will be held a business
day and at a time to be affixed by the Board during the last week in April in
each year at Selective’s principal office or at another time, date and place as
is designated by the Board. A written notice of meeting must be given to each
stockholder at least ten (10) days before the meeting.
The
transfer agent and registrar for Selective’s Common Stock is Wells Fargo
Shareowner Services, P.O. Box 64854, St. Paul, Minnesota
55164-0854.
Preferred
Stock
Under
Selective’s certificate of incorporation, the Company is authorized to issue up
to 5,000,000 shares of preferred stock in one or more series with the
designations and the relative voting, dividend, liquidation, conversion,
redemption, and other rights and preferences fixed by the Board. The Board can
issue preferred stock without any approval by Selective’s
stockholders.
Antitakeover
Provisions
Under
Selective’s certificate of incorporation, a merger, consolidation, sale of all
or substantially all of the Company’s assets, or other business combination
involving an interested stockholder holding 10% or more of the voting power of
its capital stock requires the affirmative vote of two-thirds of its outstanding
voting stock unless the transaction has been approved by a majority of those
members of the Board who are not affiliated with the interested stockholder or
unless the interested stockholder offers a fair price and reasonably uniform
terms to all other stockholders, as described in Selective’s certificate of
incorporation. The vote of two-thirds of the Company’s outstanding voting stock
is required to amend or repeal these provisions.
The
foregoing provisions may have the effect of discouraging, delaying, or
preventing attempts to take over Selective.
Regulation
of Insurance Company Takeovers
Selective owns, directly or indirectly,
all of the shares of stock of its insurance company subsidiaries domiciled in
Maine, New Jersey, New York and Indiana. State insurance laws require prior
approval by state insurance departments of any acquisition of control of an
insurance company domiciled in the state or a company which controls an
insurance company domiciled in the state. For this purpose, control generally
includes ownership of 10% or more of the voting securities of, or the possession
of proxies representing 10% or more, of an insurance company or insurance
holding company, unless the state insurance commissioner determines otherwise.
As such, any purchase of 10% or more of the Common Stock of Selective could
require approval of the insurance departments in the states mentioned
above.
PLAN
OF DISTRIBUTION
The
shares of Common Stock registered under this registration statement will be
offered as described in this prospectus or, if applicable, as provided in any
prospectus supplement. The shares of Common Stock will be offered by Selective
to participants as described in this prospectus or a prospectus supplement. The
last price of shares of Common Stock issued under the Plan was
$16.692.
LEGAL
MATTERS
Drinker
Biddle & Reath LLP has passed upon the validity of the shares of Common
Stock issuable under the Plan for Selective.
EXPERTS
The
consolidated financial statements and related schedules of Selective as of
December 31, 2009 and 2008, and for each of the years in the three-year period
ended December 31, 2009, have been incorporated by reference herein and in the
registration statement in reliance upon the reports of KPMG LLP, independent
registered public accounting firm, incorporated by reference herein, and upon
the authority of said firm as experts in accounting and
auditing.
WHERE
YOU CAN FIND MORE INFORMATION
Available
Information
Selective files its annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy
statements, and other required information with the SEC. The public may read and
copy any materials on file with the SEC at the SEC’s Public Reference Room at
100 F Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC also maintains an Internet site, www.sec.gov, that
contains reports, proxy and information statements, and other information
regarding issuers, including Selective, that file electronically with the
SEC.
Incorporation
by Reference
The SEC
allows Selective to “incorporate by reference” the information the Company files
with them, which means that it can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be a part of this Prospectus, and information that Selective files
later with the SEC will automatically update and supersede this information.
Selective incorporates by reference the documents listed below and any future
filings it will make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934:
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·
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our
Annual Report on Form 10-K for the fiscal year ended December 31, 2009
filed with the SEC on February 24,
2010;
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·
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our
Quarterly Reports on Form 10-Q for the quarters ended March 31, 2010, June
30, 2010, and September 30, 2010 filed with the SEC on April 29, 2010,
July 29, 2010, and October 28, 2010,
respectively;
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·
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our
Current Reports on Form 8-K filed on April 2, 2010, December 2, 2010, and
December 3, 2010; and
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·
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the
description of our Common Stock set forth in Selective’s registration
statement filed with the SEC pursuant to Section 12 of the Exchange Act,
and any amendments or reports filed for the purpose of updating that
description.
|
You may
request a copy of these filings, at no cost, by calling or writing
to:
Selective
Insurance Group, Inc.
40
Wantage Avenue
Branchville,
New Jersey 07890
Attention:
Michael H. Lanza, Executive Vice President and General
Counsel
(973)
948-3000
This
Prospectus is part of a registration statement Selective filed with the
SEC. You should rely only on the information or representations
provided in this prospectus. Selective has authorized no one to
provide you with different information. Selective is not making an
offer of these securities in any state where the offer is not
permitted. You should not assume that the information in this
prospectus is accurate as of any date other than the date on the front of the
document.