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 Amended and Restated Selective Insurance Group, Inc. Stock Purchase Plan for Independent
Insurance Agencies (2010), Amended and Restated as of February 1, 2017 (the “
Plan
”). Selective’s independent
retail and wholesale insurance agencies and their principals, general partners, officers, stockholders, designated key employees,
and their individual retirement accounts, Keogh plans, and employee benefit plans are eligible to participate in the Plan as described
in this prospectus. Participants in the Plan may use cash or electronic funds through Automated Clearing House (“
ACH
”),
or a portion of their distributions earned under Selective’s profit sharing program for agents to purchase shares under the
Plan, as described further below. The agency principal determines what portion of that agency’s maximum contribution amount
each participant affiliated with that agency may contribute.
The Common Stock is listed on the NASDAQ Global Select Market under
the trading symbol “SIGI”. The purchase price for shares offered under the Plan is the closing selling price for the
Common Stock reported on the NASDAQ Global Select Market on the applicable Purchase Date, at a 10% discount. The last sale price
of the Common Stock on the NASDAQ on February 17, 2017 was $43.55.
Shares purchased under the Plan will be restricted for a period of
one year. During this period, a participant in the Plan may not sell, transfer, pledge, assign, or dispose of its shares in any
way.
Neither the U.S. 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 the terms in the Plan.
RISK FACTORS
Any of the following risk factors could cause our actual results to differ materially
from historical or anticipated results. They could have a significant impact on our business, liquidity, capital resources, results
of operations, financial condition, and debt ratings. These risk factors might affect, alter, or change actions that we might take
in executing our long-term capital strategy, including, but not limited to, contributing capital to any or all of the insurance
subsidiaries, issuing additional debt and/or equity securities, repurchasing our equity securities, redeeming our fixed income
securities, or increasing or decreasing stockholders’ dividends. This list of risk factors is not exhaustive, and others
may exist.
In an effort to highlight recent trends that may impact our business, we have identified
risk factors impacted by: (i) potential changes to the U.S. federal tax code; (ii) other impacts of the Presidential election
and Republican Congress; and (iii) other evolving legislation. Following these sections are the ongoing risks that continue to
impact our business segments, as well as our corporate structure and governance.
U.S. Federal Tax Code
Changes in tax legislation initiatives could adversely affect our results of operations
and financial condition.
We are subject to the tax laws and regulations of U.S. federal, state, and local governments,
which may be amended in ways that adversely impact us. Recently, there has been significant debate about reform of the current
U.S. federal tax code. Although some reform proposals may be beneficial to the insurance industry overall, we cannot predict what
impact any enacted reform proposals could have on our results of operations, liquidity, financial condition, financial strength,
and debt ratings. For example, if the existing U.S. federal corporate income tax rate is reduced from its current 35%, any deferred
tax assets would be reduced and we would likely be required to recognize a reduction of a previously-recognized federal tax benefit
in the period when enacted. This and other potential tax rule changes may increase or decrease our actual tax expense and could
materially and adversely affect our results of operations. If the corporate tax rate is reduced to between 15% and 20%, we would
be required to record a non-cash write off of deferred tax assets to income of approximately $36 million to $49 million.
Recent tax reform proposals have included border adjustment provisions that could tax
imports of products and services from foreign states. Some proposals call for significant tariffs. We have agreements for products
and services with foreign domiciled companies, such as information technology services. In addition, risk transfer may or may not
be included in the definition of products and services; therefore, our reinsurance treaties, many of which are with non-U.S. reinsurance
companies, may be impacted by any new proposals. If new taxes are imposed on these products and services, it is possible that our
expenses for these items could increase, perhaps significantly. We cannot predict the impact such proposals could have on our products
and services supplier relationships, results of operations, liquidity, financial condition, financial strength, and debt ratings
if enacted.
Changes in tax legislation initiatives could adversely affect our investments results.
Amendments to the tax laws and regulations of U.S. federal, state, and local governments
may adversely impact us. Our investment portfolio has benefited from tax exemptions and certain other tax laws, including, but
not limited to, those governing dividends received deductions and tax-advantaged municipal bond interest. Future federal and/or
state tax legislation could be enacted to lessen or eliminate some or all of these favorable tax advantages. This could negatively
impact the value of our investment portfolio and, in turn, materially and adversely impact our results of operations.
If the recent renewed debate about revamping the current U.S. federal tax code results
in enacted changes, it is possible that some changes may be beneficial to the insurance industry overall. We, however, cannot predict
what impact such enacted proposals could have on our results of operations, liquidity, financial condition, financial strength,
and debt ratings.
If we experience difficulties with outsourcing relationships, our ability to conduct
our business might be negatively impacted.
We outsource certain business and administrative functions to third parties for efficiencies
and cost savings, and may do so increasingly in the future. If we fail to develop and implement our outsourcing strategies or our
third-party providers fail to perform as anticipated, we may experience operational difficulties, increased costs, and a loss of
business that may have a material adverse effect on our results of operations or financial condition. Currently, we have agreements
with multiple consulting, information technology, and service providers for supplemental staffing services. Collectively, these
providers supply approximately 54% of our skilled technology capacity and are principally based in the U.S., although we do contract
with some service providers who are based, or utilize resources, outside of the U.S. As mentioned above, the availability and cost
of these services may be impacted by potential tax reform proposals.
Other Potential Impacts of the Presidential Election and the Republican
Majority Congress
We are subject to the risk that legislation will be passed that significantly changes
insurance regulation and adversely impacts our business, financial condition, and/or the results of operations.
In 2009, the Dodd-Frank Act was enacted to address corporate governance and control issues
identified in the financial markets crises in 2008 and 2009 and issues identified in the operations of non-insurance subsidiaries
of American International Group, Inc. The Dodd-Frank Act created the Federal Insurance Office as part of the U.S. Department of
Treasury to advise the Federal Government on insurance issues. The Dodd-Frank Act also requires the Federal Reserve, through the
Financial Services Oversight Council (“
FSOC
”), to supervise financial services firms designated as systemically
important financial institutions (“
SIFI
”). The FSOC has not designated us as a SIFI. The Dodd-Frank Act also
included a number of corporate governance reforms for publicly traded companies, including proxy access, say-on-pay, and other
compensation and governance issues. Critics of the Dodd-Frank Act are proposing various reforms to the act, and it is possible
that some provisions of the law may be modified to lessen regulatory burdens.
In general, the Trump Administration and the Republican Majority in Congress favor less
federal involvement in insurance. It is possible, however, that there may be legislative proposals in Congress that could result
in the Federal Government directly regulating the business of insurance. President Trump and the Republican Majority in Congress
favor the repeal of the Affordable Care Act (“
ACA
”). Repeal of the law raises some legal and practical challenges.
Some reform proposals include a provision to permit sales of insurance across state lines, which under current federal law cannot
be sold across state lines without the approval of the respective state insurance regulators. As part of some ACA reform proposals,
there are calls for the elimination of the anti-trust exemptions for health insurers under the McCarran-Ferguson Act. While we
are not a health insurer, we and the property and casualty industry operate under anti-trust exemptions that permit the aggregation
of claims and other data necessary under the law of large numbers to price insurance. If similar proposals related to the property
and casualty industry were made and enacted, we would have to seek a business practices exemption from the Department of Justice
to share information with other insurers. We cannot predict the impact such proposals, if enacted, could have on our product and
services supplier relationships, results of operations, liquidity, financial condition, financial strength, and debt ratings.
There also are legislative and regulatory proposals in various states that seek to limit
the ability of insurers to assess insurance risk. From time-to-time, proposals in various states seek to limit the ability of insurers
to use certain factors or predictive measures in the underwriting of property and casualty risks. Among the proposed legislation
and regulation have been limits on the use of insurance scores and marketplace considerations. These proposals, if enacted, could
impact underwriting pricing and results.
We cannot predict what federal and state rules or legislation will be proposed and adopted,
or what impact, if any, such proposals or the cost of compliance with such proposals, could have on our results of operations,
liquidity, financial condition, financial strength, and debt ratings if enacted.
Deterioration in the public debt and equity markets, the private investment marketplace,
uncertainty regarding political developments and the economy could lead to investment losses, which may adversely affect our results
of operations, financial condition, liquidity, and debt ratings.
Like most property and casualty insurance companies, we depend on income from our investment
portfolio for a significant portion of our revenue and earnings. Our investment portfolio is exposed to significant financial and
capital market risks, both in the U.S. and abroad, and volatile changes in general market or economic conditions could lead to
a decline in the market value of our portfolio as well as the performance of the underlying collateral of our structured securities.
Concerns over weak economic growth globally, elevated unemployment, volatile energy and commodity prices, and geopolitical issues,
among other factors, contribute to increased volatility in the financial markets, increased potential for credit downgrades, and
decreased liquidity in certain investment segments. In addition, President Trump has proposed significant changes in United States
domestic and foreign policy. The uncertainty regarding these proposed changes, and whether they will be implemented, may elevate
the volatility of the financial markets and adversely impact our investment portfolio.
Our notes payable and line of credit are subject to certain debt-to-capitalization restrictions
and net worth covenants, which could be impacted by a significant decline in investment value. Further other than temporary impairment
(“
OTTI
”) charges could be necessary if there is a significant future decline in investment values. Depending
on market conditions going forward, and in the event of extreme prolonged market events, such as the global credit crisis, we could
incur additional realized and unrealized losses in future periods, which could have an adverse impact on our results of operations,
financial condition, debt and financial strength ratings, and our ability to access capital markets as a result of realized losses,
impairments, and changes in unrealized positions.
For more information regarding market interest rate, credit, and equity price risk, see
Item 7A. “Quantitative and Qualitative Disclosures About Market Risk.” of our Annual Report on Form 10-K for the fiscal
year ended December 31, 2016 (“
Annual Report
”).
Other Evolving Legislation
We face risks regarding our flood business because of uncertainties regarding the
NFIP.
We are the sixth largest insurance group participating in the WYO arrangement of the
NFIP, which is managed by the Mitigation Division of the Federal Emergency Management Agency (“
FEMA
”) in the
U.S. Department of Homeland Security. For WYO participation, we receive an expense allowance for policies written and a servicing
fee for claims administered. Under the program, all losses are 100% reinsured by the Federal Government. Currently, the expense
allowance is 30.9% of direct premium written (“
DPW
”). The servicing fee is the combination of 0.9% of DPW and
1.5% of incurred losses.
As a WYO carrier, we are required to follow certain NFIP procedures when administering
flood policies and claims. Some of these requirements may differ from our normal business practices and may present a reputational
risk to our brand. Insurance companies are regulated by states and the NFIP requires WYO carriers to be licensed in the states
in which they operate. The NFIP, however, is a federal program and WYO carriers are fiscal agents of the U.S. Government and must
follow the directives of the NFIP. Consequently, we have the risk that directives of the NFIP and a state regulator on the same
issue may conflict.
There has been significant public policy and political debate regarding the NFIP and
its outstanding debt, including the obtainment of reinsurance coverage for NFIP losses. In 2016, FEMA secured its first placement
of reinsurance for the NFIP. In January 2017, FEMA expanded its September 2016 placement and transferred $1 billion of the NFIP's
financial risk to reinsurers through January 1, 2018. In addition, there are several legislative proposals in Congress regarding
NFIP reauthorization. The NFIP statute will expire on September 30, 2017, unless reauthorized by Congress. While it is possible
that the NFIP program will be reauthorized with limited changes to the underlying structure, there is substantial uncertainty about
the future of the program given the changing political environment. Our flood business could be impacted by: (i) any mandate for
primary insurance carriers to provide flood insurance; or (ii) private writers becoming more prevalent in the marketplace. The
uncertainty created by the public policy debate and politics of flood insurance reform make it difficult for us to predict the
future of the NFIP and our continued participation in the program.
We are subject to attempted cyber-attacks and other cybersecurity risks.
Our business heavily relies on various information technology and application systems
that are connected to, or may be accessed from, the Internet and may be impacted by a malicious cyber-attack. Our systems also
contain confidential and proprietary information regarding our operations, our employees, our agents, and our customers and their
employees and property, including personally identifiable information. We have developed and invested, and expect to continue to
do both, in a variety of controls to prevent, detect, and appropriately react to such cyber-attacks, including frequently testing
our systems' security and access controls. Cyber-attacks continue to become more complex and broad ranging and our internal controls
provide only a reasonable, not absolute, assurance that we will be able to protect ourselves from significant cyber-attack incidents.
By outsourcing certain business and administrative functions to third parties, we may be exposed to enhanced risk of data security
breaches. Any breach of data security could damage our reputation and/or result in monetary damages, which, in turn, could have
a material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings. Although
we have not experienced a material cyber-attack, it is possible that might occur. We have insurance
coverage for certain cybersecurity
risks, including privacy breach incidents, that provides protection up to $20 million above a deductible of $250,000.
Given the increased number of identity thefts from cyber-attacks, federal and state policymakers
have proposed, and will likely continue to propose, increased regulation of the protection of personally identifiable information
and the steps to be followed after a related cybersecurity breach. Compliance with these regulations and efforts to address continuingly
developing cybersecurity risks may result in a material adverse effect on our results of operations, liquidity, financial condition,
financial strength, and debt ratings.
Risks Related to our Insurance Segments
Our loss and loss expense reserves may not be adequate to cover actual losses and
expenses
.
We are required to maintain loss and loss expense reserves for our estimated liability
for losses and loss expenses associated with reported and unreported insurance claims. Our estimates of reserve amounts are based
on facts and circumstances that we know, including our expectations of the ultimate settlement and claim administration expenses,
including inflationary trends particularly regarding medical costs, predictions of future events, trends in claims severity and
frequency, and other subjective factors relating to our insurance policies in force. There is no method for precisely estimating
the ultimate liability for settlement of claims. We cannot be certain that the reserves we establish are adequate or will be adequate
in the future. From time-to-time, we increase reserves if they are inadequate or reduce them if they are redundant. An increase
in reserves: (i) reduces net income and stockholders’ equity for the period in which the reserves are increased; and (ii)
could have a material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt
ratings.
We are subject to losses from catastrophic events.
Our results are subject to losses from natural and man-made catastrophes, including,
but not limited to: hurricanes, tornadoes, windstorms, earthquakes, hail, terrorism, explosions, severe winter weather, floods,
and fires, some of which may be related to climate changes. The frequency and severity of these catastrophes are inherently unpredictable.
One year may be relatively free of such events while another may have multiple events. For further discussion regarding man-made
catastrophes that relate to terrorism, see the risk factor directly below regarding the potential for significant losses from acts
of terrorism.
There is widespread interest among scientists, legislators, regulators, and the public
regarding the effect that greenhouse gas emissions may have on our environment, including climate change. If greenhouse gasses
continue to impact our climate, it is possible that more devastating catastrophic events could occur.
The magnitude of catastrophe losses is determined by the severity of the event and the
total amount of insured exposures in the area affected by the event as determined by Insurance Services Officer’s (“
ISO's
”)
Property Claim Services unit. Most of the risks underwritten by our insurance segments are concentrated geographically in the Eastern
and Midwestern regions of the country. In 2016, approximately 20% of NPW were related to insurance policies written in New Jersey.
Catastrophes in the Eastern and Midwestern regions of the United States could adversely impact our financial results, as was the
case in 2010, 2011, and 2012.
Although catastrophes can cause losses in a variety of property and casualty insurance
lines, most of our historical catastrophe-related claims have been from commercial property and homeowners coverages. In an effort
to limit our exposure to catastrophe losses, we purchase catastrophe reinsurance. Catastrophe reinsurance could prove inadequate
if: (i) the various modeling software programs that we use to analyze the insurance subsidiaries’ risk result in an inadequate
purchase of reinsurance by us; (ii) a major catastrophe loss exceeds the reinsurance limit or the reinsurers’ financial capacity;
or (iii) the frequency of catastrophe losses results in our insurance subsidiaries exceeding the aggregate limits provided by the
catastrophe reinsurance treaty. Even after considering our reinsurance protection, our exposure to catastrophe risks could have
a material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings.
We are subject to potentially significant losses from acts of terrorism.
As a Standard Commercial Lines and E&S Lines writer, we are required to participate
in Terrorism Risk Insurance Program Reauthorization Act (“
TRIPRA
”), which was extended by Congress to December
31, 2020. TRIPRA requires private insurers and the United States government to share the risk of loss on future acts of terrorism
certified by the U.S. Secretary of the Treasury. Under TRIPRA, insureds with non-workers compensation commercial policies have
the option to accept or decline our terrorism coverage or negotiate with us for other terms. In 2016, 89% of our Standard Commercial
Lines non-workers compensation policyholders purchased terrorism coverage that included nuclear, biological, chemical, and radioactive
events. Terrorism coverage is mandatory for all primary workers compensation policies, so the TRIPRA back-stop applies to these
policies. A risk exists that, if the U.S. Secretary of Treasury does not certify certain future terrorist events, we would be required
to pay related covered losses without TRIPRA's risk sharing benefits. Examples of this potential risk are the 2013 Boston Marathon
bombing and the 2015 shootings in San Bernardino, California, neither of which were certified as terrorism events.
Under TRIPRA, each participating insurer is responsible for paying a deductible of specified
losses before federal assistance is available. This deductible is based on a percentage of the prior year’s applicable Standard
Commercial Lines and E&S Lines premiums. In 2017, our deductible is approximately $304 million. For losses above the deductible,
the Federal Government will pay 83% of losses to an industry limit of $100 billion, and the insurer retains 17%. The federal share
of losses will be reduced by 1% each year to 80% by 2020. Although TRIPRA’s provisions will mitigate our loss exposure to
a large-scale terrorist attack, our deductible is substantial and could have a material adverse effect on our results of operations,
liquidity, financial condition, financial strength, and debt ratings.
TRIPRA rescinded all previously approved coverage exclusions for terrorism. Many of the
states in which we write commercial property insurance mandate that we cover fire following an act of terrorism regardless of whether
the insured specifically purchased terrorism coverage. Likewise, terrorism coverage cannot be excluded from workers compensation
policies in any state in which we write.
Personal lines of business have never been covered under TRIPRA. Homeowners policies
within our Standard Personal Lines exclude nuclear losses, but do not exclude biological or chemical losses.
Our ability to reduce our risk exposure depends on the availability and cost of
reinsurance.
We transfer a portion of our underwriting risk exposure to reinsurance companies. Through
our reinsurance arrangements, a specified portion of our losses and loss expenses are assumed by the reinsurer in exchange for
a specified portion of premiums. The availability, amount, and cost of reinsurance depend on market conditions, which may vary
significantly. Most of our reinsurance contracts renew annually and may be impacted by the market conditions at the time of the
renewal that are unrelated to our specific book of business or experience. Any decrease in the amount of our reinsurance will increase
our risk of loss. Any increase in the cost of reinsurance that cannot be included in renewal price increases will reduce our earnings.
Accordingly, we may be forced to incur additional expenses for reinsurance or may not be able to obtain sufficient reinsurance
on acceptable terms. Either could adversely affect our ability to write future business or result in the assumption of more risk
with respect to those policies we issue.
We are exposed to credit risk.
We are exposed to credit risk in several areas of our insurance segments, including from:
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Our reinsurers, who are obligated to us under our reinsurance agreements. Amounts recoverable from our reinsurers can increase
quickly and significantly during periods of high catastrophe loss activity, such as in the fourth quarter of 2012 due to losses
incurred from Superstorm Sandy, and thus our credit risk to our reinsurers can increase significantly and will fluctuate over time.
The relatively small size of the reinsurance market and our objective to maintain an average weighted rating of “A”
by A.M. Best on our current reinsurance programs constrains our ability to diversify this credit risk. However, some of our reinsurance
credit risk is collateralized.
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Certain life insurance companies that are obligated to our customers, as we have purchased annuities from them under structured
settlement agreements.
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Some of our distribution partners, who collect premiums from our customers and are required to remit the collected premium
to us.
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Some of our customers, who are responsible for payment of premiums and/or deductibles directly to us.
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The invested assets in our defined benefit plan, which partially serve to fund our liability associated with this plan. To
the extent that credit risk adversely impacts the valuation and performance of the invested assets within our defined benefit plan,
the funded status of the defined benefit plan could be adversely impacted and, as result, could increase the cost of the plan to
us.
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Our exposure to credit risk could have a material adverse effect on our results of operations,
liquidity, financial condition, financial strength, and debt ratings.
Difficult conditions in global capital markets and the economy may adversely affect
our revenue and profitability and harm our business, and these conditions may not improve in the near future.
General economic conditions in the United States and throughout the world and volatility
in financial and insurance markets may materially affect our results of operations. Factors such as business and consumer confidence,
unemployment levels, consumer spending, business investment, government spending, the volatility and strength of the capital markets,
and inflation all affect the business and economic environment and, indirectly, the amount and profitability of our business. During
2016, 34% of DPW in our Standard Commercial Lines business were based on payroll/sales of our underlying customers. An economic
downturn in which our customers decline in revenue or employee count can adversely affect our audit and endorsement premium in
our Standard Commercial Lines.
Unfavorable economic developments could adversely affect our earnings if our customers
have less need for insurance coverage, cancel existing insurance policies, modify coverage, or choose not to renew with us. Challenging
economic conditions may impair the ability of our customers to pay premiums as they come due. Adverse economic conditions may have
a material effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings.
A downgrade or a potential downgrade in our financial strength or credit ratings
could result in a loss of business and could have a material adverse effect on our financial condition and results of operations.
A significant financial strength rating downgrade, particularly from A.M. Best, would
affect our ability to write new or renewal business with customers, some of whom are required under various third party agreements
to maintain insurance with a carrier that maintains a specified minimum rating. In addition, our $30 million line of credit (“
Line
of Credit
”) requires our insurance subsidiaries to maintain an A.M. Best rating of at least “A-” (one level
below our current rating) and a default could lead to acceleration of any outstanding principal. Such an event could trigger default
provisions under certain of our other debt instruments and negatively impact our ability to borrow in the future. As a result,
any significant downgrade in our financial strength ratings could have a material adverse effect on our results of operations,
liquidity, financial condition, financial strength, and debt ratings. Refer to Item 1. “Business” of our Annual Report
for our current financial strength ratings.
Nationally recognized statistical rating organizations (“
NRSROs
”)
also rate our long-term debt creditworthiness. Credit ratings indicate the ability of debt issuers to meet debt obligations in
a timely manner and are important factors in our overall funding profile and ability to access certain types of liquidity. Our
current senior credit ratings are as follows:
NRSRO
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Credit Rating
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Long Term Credit Outlook
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A.M. Best
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bbb+
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Stable
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S&P
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BBB
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Stable
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Moody’s
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Baa2
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Stable
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Fitch
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BBB+
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Stable
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Downgrades in our credit ratings could have a material adverse effect on our financial
condition and results of operations in many ways, including making it more expensive for us to access capital markets. We cannot
predict possible actions NRSROs may take regarding our ratings that could adversely affect our business or the possible actions
we may take in response to any such actions.
We have many competitors and potential competitors.
Demand for insurance is influenced by prevailing general economic conditions. The supply
of insurance is related to prevailing prices, the levels of insured losses and the levels of industry capital which, in turn, may
fluctuate in response to changes in rates of return on investments being earned in the insurance industry. In addition, pricing
is influenced by the operating performance of insurers, as increased pricing may be necessary to meet return on equity objectives.
As a result, the insurance industry historically has had cycles characterized by periods of intense price competition due to excessive
underwriting capacity and periods when shortages of capacity and poor insurer operating performance drove favorable premium levels.
If competitors price business below technical levels, we might reduce our profit margin to retain our best business.
Pricing and loss trends impact our profitability. For example, assuming retention and
all other factors remain constant:
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A pure price decline of approximately 1% would increase our statutory combined ratio by approximately 0.75 points;
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A 3% increase in our expected claim costs for the year would cause our loss and loss expense ratio to increase by approximately
1.75 points; and
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A combination of the two could raise the combined ratio by approximately 2.5 points.
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We compete with regional, national, and direct-writer property and casualty insurance
companies for customers, distribution partners, and employees. Some competitors are public companies and some are mutual companies.
Many competitors are larger and may have lower operating costs and/or lower cost of capital. They may have the ability to absorb
greater risk while maintaining their financial strength ratings. Consequently, some competitors may be able to price their products
more competitively. These competitive pressures could result in increased pricing pressures on a number of our products and services,
particularly as competitors seek to win market share, and may impair our ability to maintain or increase our profitability. Because
of its relatively low cost of entry, the Internet has emerged as a significant place of new competition, both from existing competitors
and new competitors. New competitors emerging under this digital platform include, but are not limited to, Lemonade, Attune, and
Coverwallet. Additionally, reinsurers have entered certain primary property casualty insurance markets to diversify their operations
and compete with us. Further new competition could cause changes in the supply or demand for insurance and adversely affect our
business.
We have less loss experience data than our larger competitors.
We believe that insurers are competing and will continue to compete on their ability
to use reliable data about their customers and loss experience in complex analytics and predictive models to assess the profitability
of risks, as well as the potential for adverse claim development, recovery opportunities, fraudulent activities, and customer
buying habits. With the consistent expansion of computing power and the decline in its cost, we believe that data and analytics
use will continue to increase and become more complex and accurate. As a regional insurance group, the loss experience from our
insurance operations is not large enough in all circumstances to analyze and project our future costs. In addition, we have more
limited experience data related to our E&S business, which we purchased in 2011. We use data from ISO, American Association
of Insurance Services, Inc. (“
AAIS
”), and National Council on Compensation Insurance (“
NCCI
”)
to obtain industry loss experience to supplement our own data. While statistically relevant, that data is not specific to the
performance of risks we have underwritten. Larger competitors, particularly national carriers, have a significantly larger volume
of data regarding the performance of risks that they have underwritten. The analytics of their loss experience data may be more
predictive of profitability of their risks than our analysis using, in part, general industry loss experience. For the same reason,
should Congress repeal the McCarran-Ferguson Act, which provides an anti-trust exemption for the aggregation of loss data, and
we are unable to access data from ISO, AAIS, and NCCI, we will be at a competitive disadvantage to larger insurers who have more
loss experience data on their own customers and may not need aggregated industry loss data.
We depend on distribution partners.
We market and sell our insurance products through distribution partners who are not our
employees. We believe that these partners will remain a significant force in overall insurance industry premium production because
they can provide customers with a wider choice of insurance products than if they represented only one insurer. That, however,
creates competition in our distribution channel and we must market our products and services to our distribution partners before
they sell them to our mutual customers. Additionally, there has been a trend towards increased levels of consolidation of these
distribution partners in the marketplace, which increases competition among fewer distributors. Our Standard Personal Lines production
is further limited by the fact that independent retail insurance agencies only write approximately 35% of this business in the
United States. Our financial condition and results of operations are tied to the successful marketing and sales efforts of our
products by our distribution partners. In addition, under insurance laws and regulations and common law, we potentially can be
held liable for business practices or actions taken by our distribution partners.
We are heavily regulated and changes in regulation may reduce our profitability,
increase our capital requirements, and/or limit our growth.
Our insurance subsidiaries are heavily regulated by extensive laws and regulations that
may change on short notice. The primary public policy behind insurance regulation is the protection of policyholders and claimants
over all other constituencies, including shareholders. Historically by virtue of the McCarran-Ferguson Act, our insurance subsidiaries
are primarily regulated by the states in which they are domiciled and licensed. State insurance regulation is generally uniform
throughout the U.S. by virtue of similar laws and regulations required by the NAIC to accredit state insurance departments so their
examinations can be given full faith and credit by other state regulators. Despite their general similarity, various provisions
of these laws and regulations vary from state to state. At any given time, there may be various legislative and regulatory proposals
in each of the 50 states and District of Columbia that, if enacted, may affect our insurance subsidiaries.
The broad regulatory, administrative, and supervisory powers of the various state departments
of insurance include the following:
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Related to our financial condition, review and approval of such matters as minimum capital and surplus requirements, standards
of solvency, security deposits, methods of accounting, form and content of statutory financial statements, reserves for unpaid
losses and loss adjustment 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 our general business, review and approval of such matters as certificates of authority and other insurance company
licenses, licensing and compensation of distribution partners, premium rates (which may not be excessive, inadequate, or unfairly
discriminatory), policy forms, policy terminations, reporting of statistical information regarding our premiums and losses, periodic
market conduct examinations, unfair trade practices, participation in mandatory shared market mechanisms, such as assigned risk
pools and reinsurance pools, participation in mandatory state guaranty funds, and mandated continuing workers compensation coverage
post-termination of employment.
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Related to our ownership of the insurance subsidiaries, we are required to register as an insurance holding company system
in each state where an insurance subsidiary is domiciled and report information concerning all of our operations that may materially
affect the operations, management, or financial condition of the insurers. As an insurance holding company, the appropriate state
regulatory authority may: (i) examine our insurance subsidiaries or us at any time; (ii) require disclosure or prior approval of
material transactions of any of the insurance subsidiaries with its affiliates; and (iii) require prior approval or notice of certain
transactions, such as payment of dividends or distributions to us.
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Although Congress has largely delegated insurance regulation to the various states by
virtue of the McCarran-Ferguson Act, we are also subject to federal legislation and administrative policies, such as disclosure
under the securities laws, including the Sarbanes-Oxley Act and the Dodd-Frank Act, TRIPRA, 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,
the Health Insurance Portability and Accountability Act, and the policies of the Federal Trade Commission. As a result of issuing
workers compensation policies, we are subject to Mandatory
Medicare Secondary Payer Reporting under the Medicare, Medicaid, and
State Children’s Health Insurance Program Extension Act of 2007.
The European Union enacted Solvency II, which was implemented in 2016 and sets out new
requirements for capital adequacy and risk management for insurers operating in Europe. The strengthened regime is intended
to reduce the possibility of consumer loss or market disruption in insurance. In addition, in 2014, the International Association
of Insurance Supervisors proposed Basic Capital Standards for Global Systemically Important Insurers as well as a uniform capital
framework for internationally active insurers. Although Solvency II does not govern domestic American insurers, and we do not have
international operations, we believe that development of global capital standards will influence the development of similar standards
by domestic regulators. The NAIC has recently adopted the Own Risk and Solvency Assessment (“
ORSA
”), which requires
insurers to maintain a framework for identifying, assessing, monitoring, managing, and reporting on the “material and relevant
risks” associated with the insurer's (or insurance group's) current and future business plans. ORSA, which has been adopted
by the state insurance regulators of our insurance subsidiaries, requires companies to file an internal assessment of their solvency
with insurance regulators annually. Although no specific capital adequacy standard is currently articulated in ORSA, it is possible
that such a standard will be developed over time and may increase insurers' minimum capital requirements, which could adversely
impact our growth and return on equity.
We are subject to non-governmental regulators, such as the NASDAQ Stock Market and the
New York Stock Exchange where we list our securities. Many of these regulators, to some degree, overlap with each other on various
matters. They have different regulations on the same legal issues that are subject to their individual interpretative discretion.
Consequently, we have the risk that one regulator’s position may conflict with another regulator’s position on the
same issue. As compliance is generally reviewed in hindsight, we are subject to the risk that interpretations will change over
time.
We believe we are in compliance with all laws and regulations that have a material effect
on our results of operations, but the cost of complying with various, potentially conflicting laws and regulations, and changes
in those laws and regulations could have a material adverse effect on our results of operations, liquidity, financial condition,
financial strength, and debt ratings.
Class action litigation could affect our business practices and financial results.
Our industry has been the target of class action litigation, including the following
areas:
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Urban homeowner insurance underwriting practices, including those related to architectural or structural features and attempts
by federal regulators to expand the Federal Housing Administration's guidelines to determine unfair discrimination;
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Credit scoring and predictive modeling pricing;
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Cybersecurity breaches;
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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;
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Flood insurance claim practices; and
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Shareholder class action suits.
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If we were to be named in such class action litigation, we could suffer reputational
harm with purchasers of insurance and have increased litigation expenses that could have a materially adverse effect on our operations
or results.
Risks Related to Our Investment Segment
We are exposed to interest rate risk in our investment portfolio.
We are exposed to interest rate risk primarily related to the market price, and cash
flow variability, associated with changes in interest rates. A rise in interest rates may decrease the fair value of our existing
fixed income investments and declines in interest rates may result in an increase in the fair value of our existing fixed income
investments. Our fixed income investment portfolio, which currently has an effective duration of 3.8 years excluding short-term
investments, contains interest rate sensitive instruments that may be adversely affected by changes in interest rates resulting
from governmental monetary policies, domestic and international economic and political conditions, and other factors beyond our
control. A rise in interest rates would decrease the net unrealized gain position of the investment portfolio, partially offset
by our ability to earn higher rates of return on funds reinvested in new investments. Conversely, a decline in interest rates would
increase the net unrealized gain position of the investment portfolio, partially offset by lower rates of return on new and reinvested
cash in the portfolio. Changes in interest rates have an effect on the calculated duration of certain securities in the portfolio.
We seek to mitigate our interest rate risk associated with holding fixed income investments by monitoring and maintaining the average
duration of our portfolio with a view toward achieving an adequate after-tax return without subjecting the portfolio to an unreasonable
level of interest rate risk. This may include investing in floating rate securities and other shorter duration securities that
exhibit low effective duration and interest rate risk, but expose the portfolio to other risks, including the risk of a change
in credit spreads, liquidity spreads, and other factors that may adversely impact the value of the portfolio. Although we take
measures to manage the economic risks of investing in a changing interest rate environment, we may not be able to mitigate the
interest rate risk of our assets relative to our liabilities, particularly our loss reserves. In addition, our pension and post-retirement
benefit obligations include a discount rate assumption, which is an important element of expense and/or liability measurement.
Changes in the discount rate assumption could materially impact our pension and post-retirement life valuation.
We are exposed to credit risk in our investment portfolio.
The value of our investment portfolio is subject to credit risk from the issuers and/or
guarantors of the securities in the portfolio, other counterparties in certain transactions and, for certain securities, insurers
that guarantee specific issuer’s obligations. Defaults by the issuer or an issuer’s guarantor, insurer, or other counterparties
regarding any of our investments, could reduce our net investment income and net realized investment gains or result in investment
losses. We are subject to the risk that the issuers, or guarantors, of fixed income securities we own may default on principal
and interest payments due under the terms of the securities. At December 31, 2016, our fixed income securities portfolio
represented approximately 92% of our total invested assets, of which approximately 97% were investment grade and 3% were below
investment grade rated, resulting in an average credit rating of AA- of the fixed income securities portfolio. Over time, our
exposure to below investment grade securities and other credit sensitive risk assets may fluctuate as we continue to diversify
the portfolio and take advantage of opportunities to add or reduce risk commensurate with our risk-taking capacity and market
conditions. The occurrence of a major economic downturn, acts of corporate malfeasance, widening credit spreads, budgetary deficits,
municipal bankruptcies spurred by, among other things, pension funding issues, or other events that adversely affect the issuers
or guarantors of these securities could cause the value of our fixed income securities portfolio and our net income to decline
and the default rate of our fixed income securities portfolio to increase.
With economic uncertainty, credit quality of issuers or guarantors could be adversely
affected and a ratings downgrade of the issuers or guarantors of the securities in our portfolio could cause the value of our
fixed income securities portfolio and our net income to decrease. As our stockholders' equity is leveraged at 3.5:1 to our investment
portfolio, a reduction in the value of our investment portfolio could have a material adverse effect on our business, results
of operations, financial condition, and debt ratings. Levels of write-downs are impacted by our assessment of the impairment,
including a review of the underlying collateral of structured securities, and our intent and ability to hold securities that have
declined in value until recovery. If we reposition or realign portions of the portfolio so that we determine not to hold certain
securities in an unrealized loss position to recovery, we will incur an OTTI charge. For further information regarding credit
and interest rate risk, see Item 7A. “Quantitative and Qualitative Disclosures About Market Risk.” of our Annual Report.
Our statutory surplus may be materially affected by rating downgrades on investments
held in our portfolio.
We are exposed to significant financial and capital markets risks, primarily relating
to interest rates, credit spreads, equity prices, and the change in market value of our alternative investment portfolio. A decline
in both income and our investment portfolio asset values could occur as a result of, among other things, a decrease in market liquidity,
fluctuations in interest rates, decreased dividend payment rates, negative market perception of credit risk with respect to types
of securities in our portfolio, a decline in the performance of the underlying collateral of our structured securities, reduced
returns on our alternative investment portfolio, or general market conditions. A global decline in asset values will be more amplified
in our financial condition, as our statutory surplus is leveraged at a 3.4:1 ratio to our investment portfolio.
With economic uncertainty, the credit quality and ratings of securities in our portfolio
could be adversely affected. The NAIC could potentially apply a more adverse class code on a security than was originally assigned,
which could adversely affect statutory surplus because securities with NAIC class codes three through six require securities to
be marked-to-market for statutory accounting purposes, as compared to securities with NAIC class codes of one or two that are carried
at amortized cost.
There can be no assurance that the actions of the U.S. Government, Federal Reserve,
and other governmental and regulatory bodies will achieve their intended effect.
Over the past several years, the Federal Reserve has taken a number of actions related
to interest rates and purchasing of financial instruments intended to spur economic recovery. The Federal Reserve's policy of quantitative
easing and low interest rates since the financial crisis of 2008 have had an adverse effect on our investment income, as higher
yielding securities mature and we reinvest the proceeds at lower yields. In December 2015 and again in December 2016, the Federal
Reserve increased the Federal Fund Rate by 25 basis points each. It is unclear whether the Federal Reserve's economic stimulus
actions will produce the desired results. The impact of these actions could materially and adversely affect our financial condition
and the trading price of our common stock. In the event of future material deterioration in business conditions, we may need to
raise additional capital or consider other transactions to manage our capital position.
In addition, our investment activities are subject to extensive laws and regulations
that are administered and enforced by a number of different governmental authorities and non-governmental self-regulatory agencies.
In light of the current economic conditions, some of these authorities have implemented, or may in the future implement, new or
enhanced regulatory requirements, such as those included in the Dodd-Frank Act, intended to restore confidence in financial institutions
and reduce the likelihood of similar economic events in the future. These authorities may seek to exercise their supervisory and
enforcement authority in new or more robust ways. Such events could affect the way we conduct our business and manage our capital,
and may require us to satisfy increased capital requirements. These developments, if they occurred, could have a material adverse
effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings.
We are subject to the types of risks inherent in investing in private limited partnerships.
Our other investments include investments in private limited partnerships that invest
in various strategies, such as private equity, private credit, and real assets. Since these partnerships’ underlying investments
consist primarily of assets or liabilities for which there are no quoted prices in active markets for the same or similar assets,
the valuation of interests in these partnerships is subject to a higher level of subjectivity and unobservable inputs than substantially
all of our other investments and as such, is subject to greater scrutiny and reconsideration from one reporting period to the next.
As these investments are recorded under the equity method of accounting, any decreases in the valuation of these investments would
negatively impact our results of operations. We currently expect to increase our allocation to these investments, which may result
in additional variability in our net investment income.
We value our investments using methodologies, estimations, and assumptions that
are subject to differing interpretations. Changes in these interpretations could result in fluctuations in the valuations of our
investments that may adversely affect our results of operations or financial condition.
Fixed income, equity, and short-term investments, which are reported at fair value on
our consolidated balance sheet included within our Annual Report, represented the majority of our total cash and invested assets
as of December 31, 2016. As required under accounting rules, we have categorized these securities into a three-level hierarchy,
based on the priority of the inputs to the respective valuation technique. The fair value hierarchy gives the highest priority
to quoted prices in active markets for identical assets or liabilities (Level 1). The next priority is to quoted prices in markets
that are not active or inputs that are observable either directly or indirectly, including quoted prices for similar assets or
liabilities or in markets that are not active and other inputs that can be derived principally from, or corroborated by, observable
market data for substantially the full term of the assets or liabilities (Level 2). The lowest priority in the fair value hierarchy
is to unobservable inputs supported by little or no market activity and that reflect the reporting entity’s own assumptions
about the exit price, including assumptions that market participants would use in pricing the asset or liability (Level 3).
An asset or liability’s classification within the fair value hierarchy is based
on the lowest level of significant input to its valuation. We generally use an independent pricing service and broker quotes to
price our investment securities. At December 31, 2016, approximately 7% and 92% of these securities represented Level 1 and
Level 2, respectively. However, prices provided by independent pricing services and brokers can vary widely even for the same security.
Rapidly changing and unprecedented credit and equity market conditions could materially impact the valuation of securities as reported
within our consolidated financial statements (“
Financial Statements
”) and the period-to-period changes in value
could vary significantly. Decreases in value may result in an increase in non-cash OTTI charges, which could have a material adverse
effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings.
The determination of the amount of impairments taken on our investments is highly
subjective and could materially impact our results of operations or our financial position.
The determination of the amount of impairments taken on our investments is based on our
periodic evaluation and assessment of our investments and known and inherent risks associated with the various asset classes. Such
evaluations and assessments are revised as conditions change and new information becomes available. Management updates its evaluations
regularly and reflects changes in impairments as such evaluations are revised. There can be no assurance that management has accurately
assessed the level of impairments taken as reflected in our Financial Statements. Furthermore, additional impairments may need
to be taken in the future. It is possible that interest rates, which are at historic lows, will increase which will result in a
reduction in net unrealized gains and may result in net unrealized losses associated with declines in value strictly related to
such interest rate movements. It is possible that this could result in realized losses if we sell such securities or possibly more
OTTI if we determine we do not have the ability and intent to hold those securities until they recover in value. In addition, we
recently hired several new investment managers and expect them to take a more active approach to managing our fixed income securities
portfolio. As a result, we expect our OTTI to increase in coming periods based on an increase in securities that we may intend
to sell despite being in an unrealized loss position. Historical trends may not be indicative of future impairments. For further
information regarding our evaluation and considerations for determining whether a security is other-than-temporarily impaired,
please refer to “Critical Accounting Policies and Estimates” in Item 7. “Management’s Discussion and Analysis
of Financial Condition and Results of Operations.” of our Annual Report.
Risks Related to Our Corporate Structure and Governance
We are a holding company and our ability to declare dividends to our shareholders,
pay indebtedness, and enter into affiliate transactions may be limited because our insurance subsidiaries are regulated.
Restrictions on the ability of the insurance subsidiaries to pay dividends, make loans
or advances to us, or enter into transactions with affiliates may materially affect our ability to pay dividends on our common
stock or repay our indebtedness.
As of December 31, 2016, Selective had retained earnings of $1.5 billion. Of this
amount, $1.4 billion was related to investments in our insurance subsidiaries. The insurance subsidiaries have the ability to provide
for $193 million in annual ordinary dividends to us in 2017 under applicable state regulation; however, as they are regulated entities,
their ability to pay dividends or make loans or advances to us is subject to the approval or review of the insurance
regulators
in the states where they are domiciled. The standards for review of such transactions are whether: (i) the terms and charges are
fair and reasonable; and (ii) after the transaction, the Insurance Subsidiary's surplus for policyholders is reasonable in relation
to its outstanding liabilities and financial needs. Although dividends and loans to us from our insurance subsidiaries historically
have been approved, we can make no assurance that future dividends and loans will be approved. For additional details regarding
dividend restrictions, see Note 19. “Statutory Financial Information, Capital Requirements, and Restrictions on Dividends
and Transfers of Funds” in Item 8. “Financial Statements and Supplementary Data.” of our Annual Report.
Because we are an insurance holding company and a New Jersey corporation, we may
be less attractive to potential acquirers and the value of our common stock could be adversely affected.
Because we are an insurance holding company that owns insurance subsidiaries, anyone
who seeks to acquire 10% or more of our stock must seek prior approval from the insurance regulators in the states in which the
subsidiaries are organized and file extensive information regarding their business operations and finances.
Provisions in our Amended and Restated Certificate of Incorporation may discourage, delay,
or prevent us from being acquired, including:
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Supermajority shareholder voting requirements to approve certain business combinations with interested shareholders (as defined
in the Amended and Restated Certificate of Incorporation) unless certain other conditions are satisfied; and
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Supermajority shareholder voting requirements to amend the foregoing provisions in our Amended and Restated Certificate of
Incorporation.
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In addition to the requirements in our Amended and Restated Certificate of Incorporation,
the New Jersey Shareholders’ Protection Act also prohibits us from engaging in certain business combinations with interested
stockholders (as defined in the statute), in certain instances for a five-year period, and in other instances indefinitely, unless
certain conditions are satisfied. These conditions may relate to, among other things, the interested stockholder’s acquisition
of stock, the approval of the business combination by disinterested members of our Board of Directors and disinterested stockholders,
and the price and payment of the consideration proposed in the business combination. Such conditions are in addition to those requirements
set forth in our Amended and Restated Certificate of Incorporation.
These provisions of our Amended and Restated Certificate of Incorporation and New Jersey
law could have the effect of depriving our stockholders of an opportunity to receive a premium over our common stock’s prevailing
market price in the event of a hostile takeover and may adversely affect the value of our common stock.
Risks Related to Our General Operations
The failure of our risk management strategies could have a material adverse effect
on our financial condition or results of operations.
As an insurance provider, it is our business to take on risk from our customers. Our
long-term strategy includes the use of above average operational leverage, which can be measured as the ratio of NPW to our equity
or policyholders surplus. We balance operational leverage risk with a number of risk management strategies within our insurance
operations to achieve a balance of growth and profit and to reduce our exposure. These strategies include, but are not limited
to, the following:
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Being disciplined in our underwriting practices;
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Being prudent in our claims management practices, establishing adequate loss and loss expense reserves, and placing appropriate
reliance on our claims analytics;
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Continuing to develop and implement various underwriting tools and automated analytics to examine historical statistical data
regarding our customers and their loss experience to: (i) classify such policies based on that information; (ii) apply that information
to current and prospective accounts; and (iii) better predict account profitability;
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Continuing to develop our customer experience platform as we grow in our understanding of customer segmentation;
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Purchasing reinsurance and using catastrophe modeling; and
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Being prudent in our financial planning process, which supports our underwriting strategies.
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We also maintain a conservative approach to our investment portfolio management and employ
risk management strategies that include, but are not limited to:
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Being prudent in establishing our investment policy and appropriately diversifying our investments, which supports our liabilities
and underwriting strategies;
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Using complex financial and investment models to analyze historical investment performance and 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 monitoring investment performance, general economic and financial conditions, and other relevant factors.
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All of these strategies have inherent limitations. We cannot be certain that an event
or series of unanticipated events will not occur and result in losses greater than we expect and have a material adverse effect
on our results of operations, liquidity, financial condition, financial strength, and debt ratings.
Operational risks, including human or systems failures, are inherent in our business.
Operational risks and losses can result from, among other things, fraud, errors, failure
to document transactions properly or to obtain proper internal authorization, failure to comply with regulatory requirements, information
technology failures, or external events.
We believe that our predictive models for underwriting, claims, and catastrophe losses,
as well as our business analytics and our information technology and application systems are critical to our business. We expect
our information technology and application systems to remain an important part of our underwriting process and our ability to compete
successfully. A major defect or failure in our internal controls or information technology and application systems could: (i) result
in management distraction; (ii) harm our reputation; or (iii) increase our expenses. We believe appropriate controls and mitigation
procedures are in place to prevent significant risk of a defect in our internal controls around our information technology and
application systems, but internal controls provide only a reasonable, not absolute, assurance as to the absence of errors or irregularities
and any ineffectiveness of such controls and procedures could have a significant and negative effect on our business.
Rapid development of new technologies may result in an unexpected impact on our
business and insurance industry overall.
Development of new technologies continues to impact all aspects of business and individuals’
lives at rapid speed. Often such developments are positive and gradually improve standards of living and speed of communications,
and allow for the development of more efficient processes. The rapid development of new technologies, however, also presents
challenges and risks. Examples of such emerging risks include, but are not limited to:
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Change in exposures and claims frequency and/or severity due to unanticipated consequences of new technologies and their use.
For example, technologies have been developed and are being tested for autonomous self-driving automobiles. It is unclear
and we cannot predict the corresponding severity or cost of automobile claims. It is possible that these technological developments
will affect the profitability and demand for automobile insurance.
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Changes in how insurance products are marketed and purchased due to the availability of new technologies and changes in customer
expectations. For example, comparative rating technologies, which are widely used in personal lines insurance, facilitate
the process of efficiently generating quotes from multiple insurance companies. This technology makes differentiation other
than on pricing more difficult and has increased price comparison and resulted in a higher level of quote activity with a lower
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percentage of quotes becoming new business written. These trends may continue
to accelerate and may affect other lines of business, which could put pressure on our future profitability.
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New technologies may require the development of new insurance products without the support of sufficient historical claims
data for us to continue to compete effectively for our distribution partners' business and customers.
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We depend on key personnel.
To a large extent, our business' success depends on our ability to attract and retain
key employees. Competition to attract and retain key personnel is intense. While we have employment agreements with certain key
managers, all of our employees are at-will employees and we cannot ensure that we will be able to attract and retain key personnel.
As of December 31, 2016, our workforce had an average age of approximately 47 and approximately 17% of our workforce was retirement
eligible.
We are subject to a variety of modeling risks, which could have a material adverse
impact on our business results.
We rely on complex financial models, such as predictive underwriting models, a claims
fraud model, third party catastrophe models, an enterprise risk management capital model, and modeling tools used by our investment
managers, which have been developed internally or by third parties to analyze historical loss costs and pricing, trends in claims
severity and frequency, the occurrence of catastrophe losses, investment performance, and portfolio risk. Flaws in these financial
models, or faulty assumptions used by these financial models, could lead to increased losses. We believe that statistical models
alone do not provide a reliable method for monitoring and controlling risk. Therefore, such models are tools and do not substitute
for the experience or judgment of senior management.
THE PLAN
General
The Board of Directors of Selective Insurance Group, Inc. (the “
Board
”)
adopted the Selective Insurance Group, Inc. Stock Purchase Plan for Independent Insurance Agencies, Amended and Restated as of
February 1, 2017 (the “
Plan
”) to motivate independent insurance agencies that sell products and services for
the insurance subsidiaries by enabling them to participate in Selective’s long-term growth and success and to help align
their success with those interests of Selective’s stockholders. The Plan was adopted at Selective’s 2006 Annual Meeting
of Stockholders, held on April 26, 2006. The Plan was amended and restated effective July 27, 2010 and February 1, 2017.
The Plan allows Selective’s independent insurance agencies
and their eligible principals, key employees, and benefit plans, as described further below, to purchase shares of its Common Stock
at a discount. Participants in the Plan may purchase shares with cash or electronic funds through the Automated Clearing House
(“
ACH
”) or may elect to apply all or a portion of their distributions from Selective’s profit sharing
program for agents to the purchase of shares of Common Stock under the Plan. Each eligible insurance agency, together with its
eligible persons, may invest up to the maximum contribution amount (as described in the chart below) per calendar quarter under
the Plan. Selective offers shares of its Common Stock under the Plan at a 10% discount from market value on the date of purchase,
and participants pay no brokerage commissions or other charges on their purchases of shares under the Plan.
Written Premiums
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Maximum Contribution Amounts
|
Less than $2,000,000
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$30,000
|
$2,000,000 or more but less than $5,000,000
|
$50,000
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$5,000,000 or more
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$75,000
|
Written Premiums include all written premiums, less cancellations
and returns, recorded by the Company and the insurance subsidiaries, but do not include:
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Premiums for policies written through pools, associations, or syndicates;
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Premiums for insurance written in any reinsurance facility, joint underwriting association, or other insurance program required
by law;
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Policyholder dividends, expense fees, surcharges, and other like charges;
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Premiums from any accident and health, systems breakdown, and flood policies;
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Premiums for alternative market business, including, but not limited to, retrospectively rated policies and assumed business;
and
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Premiums for policies, coverages, or plans that the Salary and Employee Benefits Committee of the Board (the “
Committee
”)
may exclude from the Plan.
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A $100 minimum purchase amount is required for purchases under the
Plan by a participant per calendar quarter. If a participant does not purchase $100 of Common Stock in a calendar quarter, any
amounts below the minimum will be refunded, without interest, to the participant by check as soon as practicable after the end
of the quarter.
Shares are purchased under the Plan generally on the first day of
March, June, September, and December of each year or the next succeeding business day. Selective does not guarantee that dividends
will be paid, and Selective can designate other dates as purchase dates. Selective does not pay any interest on cash payments it
receives under the Plan.
Participation in the Plan
Eligibility
Each independent insurance agency under contract with any of the
insurance subsidiaries to promote and sell Selective’s insurance products, other than agencies that promote and sell only
the insurance subsidiaries’ flood insurance products, is eligible to participate in the Plan and to purchase shares of Common
Stock under the Plan. Also eligible to purchase shares under the Plan are:
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The principals, general partners, officers and stockholders of, and designated by, an eligible agency (collectively, “
Principals
”);
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Key employees of eligible agencies designated by an eligible agency (“
Key Employees
”); and
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Individual retirement plans of Principals and Key Employees, Keogh plans of Principals and Key Employees; and employee benefit
plans of, and designated by, an eligible agency (collectively with Principals and Key Employees, “
Eligible Persons
”).
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The administrator of the Plan will determine whether any insurance
agency, or any entity, individual person, or employee benefit plan designated by an agency is eligible to participate in the Plan.
Eligible agencies, entities, and individual persons are under no obligation to participate in the Plan or to purchase shares of
the Common Stock under the Plan. The Plan is for the benefit only of independent insurance agencies under contract with the insurance
subsidiaries and their Eligible Persons. No other persons can be direct or indirect beneficiaries or participants in the Plan.
Selective will not be obligated under any arrangements between an agency and its producers or other employees.
How to Enroll in the Plan
Selective provides to each eligible insurance agency the following
documents and materials:
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An enrollment/purchase form;
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A copy of this prospectus and any prospectus supplements; and
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A copy of Selective’s most recent Annual Report.
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If an agency or its Eligible Persons wish to participate in the Plan,
the agency must complete and sign the enrollment/purchase form and return it to Selective at:
Selective Insurance Group, Inc.
40 Wantage Avenue
Branchville, New Jersey 07890
Attention: Agency Development
(973) 948-1990
Completed and signed enrollment/purchase forms for participants paying
with electronic funds through ACH or through the profit sharing program may be emailed to agentstockplan@selective.com.
Agencies can obtain additional forms on eSelect
®
,
in the “My Agency” tab, or by writing or calling Selective at the above address and telephone number, or via email
at agentstockplan@selective.com.
An eligible agency or its Eligible Persons will become a participant
in the Plan: (i) after the entity or person has received a copy of the Plan, this prospectus, any applicable prospectus supplement
or supplements, and Selective’s most recent Annual Report; (ii) after Selective has received a properly completed enrollment/purchase
form signed by the Eligible Person and on behalf of the agency; and (iii) if the person or entity has not been determined to be
ineligible by the Plan’s administrators.
How to Purchase Shares of the Common Stock
Once each calendar quarter and prior to each purchase date, Selective
provides enrollment/purchase forms to each agency. There is a place on the form for each agency to designate the amount to be invested
on the next purchase date (i) in cash or paid with electronic funds delivered through ACH; and (ii) to be deducted from distributions
under Selective’s profit sharing program for agents, based on a dollar amount or percentage of profit sharing distributions.
A participant’s designation will remain in effect until revoked
or modified in writing by the participant as set forth above.
Changes to, or revocation of, a participant’s deduction from
a distribution under the profit sharing program must be received in writing by the Company by the 7th day of February, or the previous
business day if the 7th is not a business day, to be applied to the contribution amount for the next March purchase date. Such
changes to the profit sharing deductions will remain in effect until revoked or modified in writing by the participant. The contribution
amount designation regarding cash or electronic funds shall only remain in effect for the next purchase date.
The enrollment/purchase form must also be completed by each Eligible
Person who wishes to participate in the Plan, and must include:
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The participant’s full name and address;
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The participant’s social security or taxpayer identification number;
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If cash contribution or payment with electronic funds through ACH, the dollar amount to be invested in shares of the Common
Stock; and
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If distributions from the profit sharing program, the percentage of the total amount of profit sharing to be invested in shares
of Common Stock.
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In addition, participants must sign their enrollment/purchase form
certifying to Selective receipt of a copy of the Plan, this prospectus and any prospectus supplements, and a copy of Selective’s
most recent Annual Report. Enrollment in the Plan for a particular purchase date is irrevocable after the applicable Contribution
Date (as defined below). The form must be signed by the agency and each eligible person participant shown on the form.
Properly completed forms and necessary payments must be received
by Selective at least 10 business days prior to the applicable purchase date (the “
Contribution Date
”). If necessary
payments are not received by the applicable Contribution Date, the purchase will not be effected and any payments received after
the Contribution Date will be returned.
Purchased Shares and Accounts
Selective uses a book-entry system for shares purchased under the
Plan. When a participant makes its first purchase of shares under the Plan, Selective establishes an account for the participant
with Wells Fargo Shareowner Services, Selective’s transfer agent. Each time a participant purchases shares, the shares are
credited to the participant’s account and Selective registers the shares on the Company’s stock records. Participants
will receive a written account statement from Wells Fargo Shareowner Services each time the participant purchases shares.
Restrictions on Shares Purchased under the Plan
Shares purchased under the Plan will be restricted for a period of
one year beginning on the purchase date and expiring on the first anniversary of that purchase date. During this one-year restricted
period, a participant cannot sell, transfer, pledge, assign, or dispose of its shares in any way. During this period, a participant’s
shares will be held in the participant’s account at Wells Fargo Shareowner Services. However, the participant will be able
to vote its shares during this period and will receive any dividends declared by the Board. Participants will own all of the shares
in their account and none of the shares will be subject to forfeiture.
Following the expiration of the one-year restricted period, a participant
can request, in writing to Wells Fargo Shareowner Services, that its shares be transferred or sold, or that the participant’s
account be closed.
If an eligible agency or person closes its account, it can re-enroll
in the Plan at any time that it is eligible to participate in the Plan by sending a new completed enrollment/purchase form to Selective.
Shares Available under the Plan
The maximum number of shares of Common Stock issuable under the Plan
is 3,000,000, subject to adjustment as described below. Selective makes the shares available from Selective’s authorized
but unissued shares or from treasury stock, including shares purchased by the Company in the open market.
In the event that the Board determines that any stock dividend or
other distribution, extraordinary cash dividend, stock split or reverse stock split, recapitalization, reorganization, merger,
consolidation, split-up, spin-off, combination, exchange of shares, warrants, rights offering to purchase shares of Common Stock
at a price substantially below fair market value, or other similar corporate transaction or event affects the Common Stock so that
an adjustment is required in order to preserve the benefits or potential benefits intended to be made available
under the Plan,
then the Board may, in its sole and absolute discretion, adjust any or all of the number and type of shares which may be available
under the Plan.